"Money is the bubble that doesn’t need to pop. As long as there is demand for indirect exchange, at least one asset will be stockpiled by hoarders, hence experience demand that is not a consequence of any direct utility, hence be overvalued. As long as the storage cost for this asset is zero and the supply in existence is fixed, you have a perfect Nash equilibrium - using any other asset as a medium of indirect exchange provides no advantage, and runs the risk of buying into a bubble which will subsequently pop as punters revert back to the stable standard." (source: http://www.interfluidity.com/posts/1233118501.shtml)
The story of the past ten years is that people started trading dollars for substitute stores of value ( houses, stocks, oil futures, etc). But those substitutes were not stable Nash equilibriums. In the long run, supply of housing is elastic and bubble prices cannot be sustained. Prices crashed, and people rushed back to using dollars as a store of value. When demand for dollars increases, it becomes harder to trade goods and labor for dollars, so the price of goods and labor in dollars decreases ( deflation). However, employment contracts and debts are denominated assuming a higher price level. Thus businesses are unable to meet payroll and pay creditors. Businesses fire workers or go out of business. That's the stage we are at now. The solution is to simply renominate the currency by mailing everyone checks, in order to restore/maintain the 2007 price level. This eliminates the frictional problem without creating massive transfers of resources from the private sector to the government.
"Money is the bubble that doesn’t need to pop. As long as there is demand for indirect exchange, at least one asset will be stockpiled by hoarders, hence experience demand that is not a consequence of any direct utility, hence be overvalued. As long as the storage cost for this asset is zero and the supply in existence is fixed, you have a perfect Nash equilibrium - using any other asset as a medium of indirect exchange provides no advantage, and runs the risk of buying into a bubble which will subsequently pop as punters revert back to the stable standard." (source: http://www.interfluidity.com/posts/1233118501.shtml)
The story of the past ten years is that people started trading dollars for substitute stores of value ( houses, stocks, oil futures, etc). But those substitutes were not stable Nash equilibriums. In the long run, supply of housing is elastic and bubble prices cannot be sustained. Prices crashed, and people rushed back to using dollars as a store of value. When demand for dollars increases, it becomes harder to trade goods and labor for dollars, so the price of goods and labor in dollars decreases ( deflation). However, employment contracts and debts are denominated assuming a higher price level. Thus businesses are unable to meet payroll and pay creditors. Businesses fire workers or go out of business. That's the stage we are at now. The solution is to simply renominate the currency by mailing everyone checks, in order to restore/maintain the 2007 price level. This eliminates the frictional problem without creating massive transfers of resources from the private sector to the government.