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The Hoarding Myth

Many times we hear the modern academic economist lament about the detriments of sound currency concepts. This often occurs when discussing the topic of bitcoin with the uninitiated. Their disdain usually stems from two commonly held misconceptions regarding sound currencies and their effects.

The first misconception is that people will hoard an appreciating currency, and the second is that sound currencies have no elasticity. Normally the method attempted to eradicate these misconceptions is to explain the fallacy of both points of view individually by using evidence in the argument from effect, often with futility. However this is not as easy as exposing the the truth sitting in plain sight, as I learned while contemplating my failure to be convincing in a debate with an economist.

The hidden truth of the matter is that each of these problems is the solution to the other. The solution to the elasticity problem is savings, or hoarding as economists like to refer to people being prudent and saving for a rainy day. And the solution to the hoarding problem is elasticity, or the availability of currency for credit and loans. They key to these two issue joining forces to rid the world of economic evil doers is interest rates, or the price of money.

In an economic system using a sound currency these are not “problems” to be solved, but rather the two competing market forces acting to set the price of money. An over-abundance of savings will set people to either investing or loaning out that money to those who are trying to buy those hard to get savings, with of course the opposite being true. In a centralised system these problems do exist to be solved. In essence it is the centralised system that causes these problems to begin with.

A subsequent argument then may be “but people wont spend as much during recessions”. This argument is reduced to the principle of favouring a centrally planned use of currency elasticity in the event of economic problems. The first thing to point out in this circularity of logic is that central banks are the largest cause of recessions through interest rate manipulation, so it follows their actions do have an impact.

The main economic argument against the “spend till the end” theory is that you don’t actually want increased spending during an economic downturn or correction. No one who has financial troubles in their personal life starts spending like mad if they have a drop in income. No business tries to consume their way out of losses.

The central bank’s only solution is to support the very economic inefficiency that is causing the problem since that problem is viewed as the cause, not the result of these and even further underlying problems (ie. falling housing prices in the US). Its absurd to think that such actions would have benefit to the economy on a whole..

These is an actual problem here though. It is well understood that western economies have become so heavily weighted in service and financial related industries as a result of easy credit, that any decrease in spending or currency velocity causes exaggerated effects on the wider economy. This fact is either in favour of central planning or against it, depending on which side your interests lie. Of course the drug addict needs more drugs to prevent sickness.

Added all together a sound currency addresses both hoarding and elasticity by providing the mechanism which solves both, or rather it allows these forces to work together in creating a solution vastly superior to the current central banking model.

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