That's an interesting point, Greg. I want to think about it some more; I'll try to get back to you soon.

Conrad, if I understand it correctly, I think that Static's point can be seen like this:

In a consistently deflationary economy, a person's purchasing power would increase over time simply for holding money. This would mean that individuals would have some incentive to hold their money instead of investing it. In an inflationary economy, on the other hand, people are constantly losing purchasing power by holding money. There is therefore an incentive to convert monetary instruments into non-monetary investments in order to protect oneself from inflation. Static's contention appears to be that people would hold money instead of investing in a deflationary economy, and this would hinder economic progress.

I'm not sure what I think of this. It seems to me that even though the price of a firm's products would be going down over time, the same would be true of the prices of its inputs. As long as outflows exceeded inflows, it seems like businesses could still be profitable. And profitable businesses would still be worth investing in.

But it also seems true that in a deflationary economy there is a positive incentive to hold money that does not exist in an inflationary economy. Adding time preference and risk premiums to this incentive would seemingly make it pretty difficult for any business venture to get off the ground.

And it also seems like we'd run into a serious public goods problem: everyone's money's purchasing power would rise from economic growth, and investments would be necessary to facilitate economic growth, but the investors would have no way of capturing the full value of their investments. Accordingly, there would be chronic underinvestment.

The thing is, though, there's an important sense in which printing new money is like...well I dunno...stealing or something. Right? I mean, who gets the new money? Who gets to decide how much new money is printed and what it gets used for? Why should they get to consume everyone else's products without contributing anything to the economy except printing a bunch of notes?

All value is subjective. Something is only worth what someone else will pay for it. There is no such thing as "inherent value."

Everything is constantly changing relative to everything else. This is simple reality. The universe is not static.

A piece of paper is worth what someone will pay for it.

A warehouse receipt is only a representation of something else, hence the value is in the item represented, not the paper making up the warehouse receipt.

Your company is only worth what the market (individual people) will pay for it. When a newer, better, cheaper item comes on the market, the value of your company will drop. Your company has no "inherent" value, no guaranteed value. It only has value if others are willing to buy it, and only to the level (price) that they determine.

Gold only has what value it has because throughout history it has show itself to be particularly rare and hard to mine as well as having durability. It does not rust or rot or dissolve nor evaporate nor spoil. If something came along and changed this, a person figured out how to make gold from lead, then it's value would plummet. So far history has shown people that gold is one of the very most stable forms of asset to own. That is why it has value. That can change, but it is not likely to. Unlike your company.

A piece of paper, the Zimbabwe dollar, for example, is a bit less stable. Just like your company in the face of a dynamic marketplace filled with entrepreuers.

If a piece of paper represents something else, a share in your company, a given quantity of gold, a promise made by a politician, then you must make a judgement as to the future probablity of claiming value on that something else.

Caveat emptor. If I take pieces of paper from someone who has a proven track record of creating pieces of paper with NO backing whatsoever other than the ignorance of other people's willingness to take them, then I am a fool.

The fact that people with guns DEMAND that I use these pieces of paper (legal tender laws) is a sticky moral question. Do I take them and pawn them off on others all the while KNOWING that they are worthless? Does the fact that someone is holding a gun to my head absolve me of my part in this crime? That is another question, not one of economics.

- NonE