Your understanding of money is seriously flawed. Fiat currencies don't lose purchasing power over time by design. Central banks have a public mandate to maintain price stability and to create a low level of inflation, and that's what central banks do. The rate of inflation/deflation isn't an intrinsic characteristic of any currency (including cryptocurrencies) but the result of a particular monetary policy. For example, a country could instruct its central bank to reduce the increase in the money supply at a constant rate, like bitcoin does, instead of maintaining price stability. Nobody does this because it's thought to be a terrible monetary policy (would be pro-cyclical, leading to large price swings and deeper boom-bust cycles), not because it can't be done.
> Fiat currencies don't lose purchasing power over time by design. and to create a low level of inflation.
Inflation of fiat currency = loss of purchasing power of fiat currency. So these two sentences contradict each other.
And I get the point that the idea is that this inflation should be constant and there's nothing wrong with it in theory. Sure. Fine.
But that doesn't change the fact that keeping x USD on a bank account for x years decreases the purchasing power of that amount of money. And that that decrease in purchasing power is not desirable. So people try to maintain that purchasing power by converting those USD into something else. We used to have saving accounts, but yeah... those ceased to function due to negative interest rates.
And that's all without going into the scenario where the central banks are failing at their mission to maintain price stability. Which arguably is happening right now and is arguably the reason why people are dumping fiat currency in exchange for anything else that can better preserve buying power.
Am I wrong here so far?
Am I arguing that crypto is inherently and permanently a better currency than fiat? No. Not at all. Am I arguing that fiat currencies are currently not a great store of value: absolutely. And in that situation to preserve your buying power, you buy things you think will retain purchasing power better. I personally (and obviously many others) believe crypto could serve as protection as well as other assets that "can't be printed by governments and central banks". Is it speculation? yes, of course. But so is keeping fiat cash as fiat cash.
Keeping cash balances is undesirable because of the opportunity cost not because of inflation. In other words, even if inflation was at -10% you still would want to keep as little cash as possible and invest the rest at the risk-free rate.
And I don't agree that central banks are failing to maintain price stability. Inflation data indicates otherwise [1] [2]. If anything, central banks are failing to create enough inflation to meet their inflation targets.
> Keeping cash balances is undesirable because of the opportunity cost not because of inflation.
I don't get this statement. IMO it's undesirable for both reasons.
From the point of view of holding USD on a savings account -10% inflation (aka: 10 deflation) is the same as 2% inflation with savings accounts that reek in 12% interest rates. You're arguing that nobody in the world should want to have such a savings account? Everybody should invest it in something at a risk-free rate? You mean a risk-free investment? I'm not sure what that means.
> And I don't agree that central banks are failing to maintain price stability.
I'm talking 2020 - 2021, as in: right now. The data you link goes until 2019 pre-corona, pre-helicopter-money times.
Here in Europe there's without a single doubt in my mind stagflation going on right now (prices that rise faster than the average income).
Holding cash in a bank account is IMO a guaranteed significant loss of purchasing power right now. If you take 1 look at past year's commodity prices, you'll see that the market agrees with me.
Year over year examples: lumber spot price up 300% up, silver 74% up, gold (the gold standard for measuring inflation) 5% up, housing prices 10 - 30% up, wheat price 25% up, and so on and so forth.
Does this mean all these things have all of a sudden become more desirable? No. Does it mean the USD/EUR/etc have lost buying power? IMO very big yes.
The opportunity cost of cash is the return that you would have earned if you had invested in a risk-free asset instead of keeping the cash. By keeping cash you incur such a cost, whether there is inflation of not, and this means you should always keep as little cash as possible regardless of inflation. For example, if the inflation rate is -10% and the return on a (risk-free) savings account is 1%, then you are incurring an opportunity cost of 1% annually by keeping cash balances. If the inflation rate is 10%, you are incurring the same exact cost. So while cash balances can absolutely depreciate as a result of inflation, cash balances should represent a small fraction of a household's net worth anyway, since it's not optimal to hold large amounts of cash. Therefore a modest rate of inflation, such as we observe in developed nations, is never going to have a significant impact on household balance sheets, compared to other forms of depreciation such as the normal depreciation of physical capital (e.g. houses and cars).
