Arguing Against Inflationary Currency by Famous Example

During the last Liberty on The Rocks meeting about Bitcoin, I found myself in an argument with a fellow that claimed that a deflationary currency would harm the economy, because it discourages spending. I quickly countered this opinion by stating that I believed the opposite: that without an encouragement of savings, the economy would collapse.

Alas, he could not say why we would want to privilege spending over saving, other than to state that without spending we wouldn't have exchange. So I pointed out that spending occurs regardless: I need food, water, housing, fuel for my car, clothing, etc. No matter how the underlying currency fluctuates relative to these goods and services, I and everyone else will continue spending. The only effect that promoting discretionary spending over savings has is to promote some industries (such as entertainment) over others. Why does the economy need artificial, and preferential encouragement of these more consumerist industries?

Still, in the face of these questions, my partner in argument had not yet changed his opinion, so I tried a different approach, arguing by analogy.

Suppose that there existed an industry where consumers expected a substantially better product each year, and at a lower price! Would you, as a producer, ever choose to enter this industry, or would you instead decide on something more mundane and stable? A different industry, where you wouldn't have to work as hard at improving product and where sales kept a high price. If customers can expect to purchase a better product at a cheaper price every 6 months or so, then why would they buy today? Surely even sales in this industry would experience low volume. From looking at both sides, and in keeping with your argument about a deflationary currency, would you then predict that this industry remains quite small compared to others, because of the continuously devaluing wares?

Well, devious debater that I am, I just described the electronics/computer industry which has experienced explosive growth unlike any other, in every year since 1960! One of my favorite examples, specifically for knocking down the "we won't have spending without inflation" argument. As if the compulsive, grasshopper consumers need an additional, abstract reason not to save for the future.

Far from discouraging spending, the continuously increased quality has instead generated recurring sales. Rather than saving their ever more valuable dollar, the consumers in this market exhibit strong time preference: they don't want to wait a newer, better, fancier product 6 months hence. They want the latest and greatest RIGHT NOW! Every year a saved dollar can buy more processing power, more memory, lower power consumption, smaller device size, etc. But that incentive for saving hasn't halted the spending. Instead, the rapid pace of change drives sales: once their existing wares become obsolete (which happens quickly) consumers go out and purchase anew.



Unfortunately, I was unable to penetrate the Keynesian mythology that fogged his mind, and my colleague remained unconvinced by what I consider a remarkably compelling example.