Exponentially falling prices due to productivity growth don't lead to hoarding.
Most people look to Bitcoin's current price activity as a counterargument. Bitcoin is not a good counterargument because this phenomenon is a different type of deflation; it's a short-run effect that occurs while bitcoin is being monetized. If people expect that Bitcoin will increase in value faster than they can get return on their capital, they will certainly hoard.
Again, the only reason this is happening is because bitcoin adoption is still in the initial phases and hasn't reached equilibrium. This is a sigmoid trend and will not continue forever.
Why don't falling prices encourage hoarding?
Because even if the gold/bitcoin quantities are not increasing faster than the growth rate of the economy, it will always be prudent to invest your money because the nominal interest rate will not be negative. The real interest rate will always be higher in absolute value than the deflation rate.
I am glad you raised this point for clarification. My prior logic was spread across several disjoint posts in the Peter Schiff thread in the Economics forum and the Mini-block chain thread debate with bitfreak!.
Perhaps you don't understand if you have not yet grasped fully the depth of my understanding of macro economic efficiency (or can point out a flaw in that understanding). Or if you take my declining price comment out-of-context of the prior stipulation of constant or declining M, then I would be incorrect. Or perhaps you understood already and wanted me to explain further for the benefit of us all.
With a constant or declining M, then at-risk (not dumb, mayonnaise debt spread) investment and productivity of supply Q can't increase due to hoarding as explained in the following paragraph.
Refer to my prior post today and the explanation of how dividends and interest rates aggregate to those who can capture the public backstop of taxation, because otherwise without insurance and a government enforcement of debts, then default risk will cause these dumb (because they can't intelligently choose stocks or business ventures) investors to fail over time, especially relative to those at-risk in stocks and business ventures with higher potential gains relative to the actual risk of failure of investment. See dividends and interest rate "investing" is really socialism because all the capital will end up with those who capture the government (i.e. the smaller banks failure and are eaten by the larger ones with complicit government), and remember insurance can't invest at-risk and thus does the same thing.
And don't tell me that limiting the supply of base money will limit debt. We have private bank gold certificate notes for fractional reserve banking in the 1800s as an example (and many others). Much better that the base money supply be expanded so the rich can't use the debt expansions and contractions as way to get ahead of the "smaller things grow faster" middle class. Much better we have an altcoin with perpetual debasement of 5% than (not as decentralized) colored coins Mastercoin and back on the same hamster wheel again.
Debt and loans based "invesment" is really about everyone doing the same dumb thing (for greater economies-of-scale for the rich such as Warren Buffet) without an expertise applied to the at-risk investment process of producing winners and losers. Guarantee success == guaranteed failure. Without investment risk, there is no intelligence incentivized.
So with constant or declining money supply M either you increase the demand for socialism and failure and also my math in prior post becomes (x + decline in M) instead of (x - an increase in M), so capital is hoarded over time by the rich who capture the government, or the economy is in failure (causing the price declines of conspicuous consumption assets due to collapsing demand, but not decline in price of produced goods of things people must have because that supply can collapse but the demand can't because they are daily necessities) and money is hoarded into small private stashes.
Read my prior post as to why increasing the money supply with a decentralized proof-of-work is the only solution I see. We suddenly have the technology to fix this hamster wheel that has been on our backs since the Mesopotamia.
Think about the dynamics of the equilibrium: if people were better off hoarding their cash than investing it, there would be no investment and the economy would not grow, and they wouldn't be better off hoarding because there wouldn't be deflation.
Agreed the vicious cycle of failure that the global economy has entered since at least 2007. We have stagflation, i.e. increases in prices of things produced, and deflation of investment, relative wages, and demand for assets for which demand was pulled forward by 30 years with 30 year mortgages. If we don't break out of it, we could end up in a Madmax Dark Age.
I don't see any reason why something as immaterial as the inflation/deflation rate should influence the real interest rate. In other words, why should inflation/deflation affect the relative amount of people producing things for consumption vs. investing in future production?
Do you refer to the monetary M rate or the price P rate?
At least M need to be increasing for the economy to be healthy as I explained above. P could decline even with M increasing as investment leads to increased productivity of produced goods. Even assets might decline in price P as increases in productivity can increase supply Q (of houses, commodities, etc). This would be healthy.
Please note I stipulated the statement you quoted with the requirement that M was constant or declining, then I said declining P would not be stable in that case.
Remember smaller things grow faster (i.e. local actors are closer to the optimum local annealing gradients), so expanding M and Q are good for the middle class.
Tie this back into simulated annealing. Remember if cool ice too quickly, the local molecules don't have time to relax and find optimally distributed structures, thus we get cracks. Rapid global cooling is not available top-down. This analogy explains why smaller things grow faster.
Another angle:
In response to someone who claims that inflation is good for the economy because it encourages spending/investment,
That is not my reason for my claim as detailed in this and the prior post. Rather I am saying we have to continually dilute the large capitalists which want to use dumb fixed and guaranteed returns on usury with captured power vacuum of government to parasite and enslave "smaller things grow faster" investment.
I am 100% in favor of highly expert capitalists who invest (their effort, expertise, and money) at-risk in the highest returning ventures, not in usury and government capture. I am not the Marxist, but those who believe in dividends, bonds, and insurance are.