To the degree that money is used as a store of value, the money supply available for ‘positive-sum’ trades decreases. Let us say that the supply of goods and services on the market stays the same, then with less money available to potentially purchase theses goods and services, the price of the goods and services decreases; microeconomics supply and demand curve. This incentivizes people who are not holding money as a store of value to participate in more positive-sum trades.
Of course, people might end up taking their store-of-value money and investing it, allowing the creation of capital goods that make more efficient production possible. But that’s another story.
Hence the standard belief that reluctance to lower nominal prices, or delay in lowering nominal prices, is key (along with nominal debt contracts) to explaining the observed fact that deflation is destructive of RGDP, which is why Scott Sumner’s blog is called “The Money Illusion”.
To the degree that money is used as a store of value, the money supply available for ‘positive-sum’ trades decreases. Let us say that the supply of goods and services on the market stays the same, then with less money available to potentially purchase theses goods and services, the price of the goods and services decreases; microeconomics supply and demand curve. This incentivizes people who are not holding money as a store of value to participate in more positive-sum trades.
Of course, people might end up taking their store-of-value money and investing it, allowing the creation of capital goods that make more efficient production possible. But that’s another story.
Specifically, then they wouldn’t be using money as a store of value anymore since they wouldn’t be holding money but securities.
Hence the standard belief that reluctance to lower nominal prices, or delay in lowering nominal prices, is key (along with nominal debt contracts) to explaining the observed fact that deflation is destructive of RGDP, which is why Scott Sumner’s blog is called “The Money Illusion”.