Hey, where did I suggest that this was an indictment of gold?
What I said was: “That is not an argument against a true gold standard, but a vindication of it. For it is precisely the insurmountable limit on the quantity of gold which stops credit getting out of hand. Everyone who has a long position in credit has a short position in cash, and is therefore vulnerable to a short squeeze. Speculators start hoarding gold and the runaway expansion of credit is eventually stopped dead and forced into reverse. Contrast the present system, in which everyone knows that the Fed will step in to relieve any shortage of cash, which fuels the credit boom.”
Although I spoke of speculators as vultures, I did not mean that in a derogatory sense. Vultures perform an essential recycling role in the ecosystem. And so with speculators - they help puncture the bubble, they cushion the blow, they hasten the return to normality, and they get well rewarded for it.
Getting back to the OP’s original concern that the rate of price deflation (in an economy with little or no expansion of the money supply) could exceed the pure rate of interest (real rate of return), it occurred to me that there’s a more obvious explanation as to why this can never happen.
In an economy with a stable money supply, the rate of price deflation is equivalent to the rate of growth. So to rephrase the concern; it is that the rate of growth might exceed the pure rate of interest.
Let’s say the pure rate of interest (real rate of return) was 5% pa. That would mean, that based on time-preference, capitalists are willing to give up 100 units of a good now to obtain 105 units of a good a year from now. Each capitalist’s “personal rate of growth” is therefore 5% pa.
But capitalists cannot invest 100% of their income, They have to consume something. That being the case, if you take all the capitalists in the economy and add up their “personal rates of growth”, the total rate of growth for the economy must be less than 5%. The total rate of growth can never be greater than the pure rate of interest.
Maybe this is a statement of the obvious, but it seemed like a different way of looking at it.