Inflation is bad, but it is an necessary evil in order to keep economies going at a reasonable pace. I am talking about low/mild inflation, Venezuela level, or even high level inflation is very bad and should be avoided at all costs.
The alternative to inflation is deflation, that is when prices of goods and services fall over time. This sounds good, but it creates a spiral effect of ever decreasing prices and economic contraction. For example, with deflation, if a refrigerator costs $2,000 today, and is estimated to cost $1975 in six months, and $1950 in a year, if your refrigerator is old, and should be replaced soon, and you can afford to replace it today, you will wait as long as you can to replace it so you can save the $25 or $50. The delayed purchase means less work for the people in the refrigerator factory, and for the refrigerator salesmen. The decreased amount of work will often exceed the amount of savings a customer would realize by delaying his purchase. This means in addition to delaying purchases due to anticipated future price declines, those in the refrigerator industry will spend even less to be additionally frugal out of necessity.
When an economy sees deflation, all goods and services as a whole see declining prices, so the above example would be expanded into the entire economy.
The alternative to inflation is deflation, that is when prices of goods and services fall over time. This sounds good, but it creates a spiral effect of ever decreasing prices and economic contraction. For example, with deflation, if a refrigerator costs $2,000 today, and is estimated to cost $1975 in six months, and $1950 in a year, if your refrigerator is old, and should be replaced soon, and you can afford to replace it today, you will wait as long as you can to replace it so you can save the $25 or $50. The delayed purchase means less work for the people in the refrigerator factory, and for the refrigerator salesmen. The decreased amount of work will often exceed the amount of savings a customer would realize by delaying his purchase. This means in addition to delaying purchases due to anticipated future price declines, those in the refrigerator industry will spend even less to be additionally frugal out of necessity.
When an economy sees deflation, all goods and services as a whole see declining prices, so the above example would be expanded into the entire economy.
Thats exactly what the problem is though, it is a necessary evil in an unnecessary system. Being as close to the actual reserves is a better alternative, and our best shot at that seems to arise from a proper use of Decentralized Blockchain Technology which aims to eradicate the current unnecessary system all together by eliminating the need for trusted third parties which includes Central Banks which effectively eliminates their control over the money supply and by extension, Inflation.
In general, investors and savers can earn a rate of return that exceeds the rate of inflation. If inflation is 2% per year, you might be able to earn 3% on money in your savings account, so your real rate of return is 1%. Or if inflation is 2%, you might be able to earn 11% in the stock market, making your real return 9%. According to world bank data, and St Louis Fed data, real interest rates have been positive, meaning after accounting for inflation, someone with money in the bank in the beginning of the year will have additional buying power at the end of the year with that same money plus interest.
One drawback to real interest rates is that nominal interest payments and nominal capital gains are taxed. This means if inflation is 2%, nominal interest on my savings account is 3%, I will have to pay taxes on the entire 3% I earn, and this will put my after tax real interest rate just above 0%. If inflation is too high, taxes may push my real interest rate to below zero if I do not keep my savings in a tax advantaged account.
Not having a central bank will not guarantee there to be no inflation. If there is no central bank to conduct monetary policy, and a fixed money supply, supply shocks may still cause prices to increase, and excess capacity may cause prices to decline (deflation). If there is excess capacity, the economy may experience deflation, and this is hard to stop, even with a central bank. In the 90's Japan had a deflation problem, and its economy contracted (shrank) by almost 20%, and according to wikipedia, real wages fell by 5% from 1995 to 2007.
Money being used with blockchain technology will not stop any bank from using a fractional reserve system. Neither will a fixed amount of currency units in circulation. In fact, there are a fixed amount of dollars in circulation today, but this does not stop banks from using a fractional reserve system. Coinbase for example, could choose to pay interest on bitcoin deposits, and use bitcoin deposits to make loans. As long as coinbase does a good job at pricing loans, and not making loans to too many people who do not repay what they borrowed, the value of their total assets will exceed the liabilities of their bitcoin deposits they owe customers. In this example, coinbase could offer CD-like products that match the maturity of longer term loans they make, and make short term loans against "demand deposits". In this example, coinbase could owe more bitcoin to deposit holders than it has in its various wallets, but has enough assets, in the form of loans to cover all its deposits. The interest paid to deposit holders give customers incentives to not withdraw their bitcoin. Some companies have tried this in the past, and failed because they were not prudent in underwriting their loans, were run by scammers, or both.
