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Topic: Beware of the deflation monster!!!1 (not really..) (Read 5047 times)

legendary
Activity: 1106
Merit: 1004
This is just a matter of definition. Originally the words inflation and deflation were used only for the monetary offer, but eventually people started to confuse it with price changes, and today it is the most common meaning of the word.
Trying to fight that is like trying to fight the distortion the word "liberal" has suffered in US, saying that leftists are not liberals.

Just specify "monetary inflation" when you're talking and avoid issues.
full member
Activity: 126
Merit: 100
One tricky thing with knowing if it's inflation or not is to know whether the currency has been diluted or that the commodity has increased in actual value.

For example, here are the prices for a Big Mac from 1986 to 2011:



Most of that price increase must be dollar inflation, but is it ONLY inflation that has caused the increase in price?  Huh

Different products have different change in price. The Big Mac is probably a fairly good reflection of inflation. Flat screen TVs are not. Then there is the quadrillion dollars of derivatives floating around in the financial markets having problem 'landing'. Now, THAT's inflation! Cheesy
copper member
Activity: 105
Merit: 4
It is completely irrelevant what some of you believe what inflation/deflation are. They are what they are regardless of your belief (that you learned from someone else). And wishing them to be as you want them to be will not make them so.

Are you saying that "deflation," a word made up by man, has an immutable, wholly correct definition?

Also, it seems to me that you are the one wishing that the definition of "deflation" be changed to what you agree with.
full member
Activity: 126
Merit: 100
One tricky thing with knowing if it's inflation or not is to know whether the currency has been diluted or that the commodity has increased in actual value.

For example, here are the prices for a Big Mac from 1986 to 2011:



Most of that price increase must be dollar inflation, but is it ONLY inflation that has caused the increase in price?  Huh
newbie
Activity: 35
Merit: 0
Personally, I don't think monetary inflation is a reasonable metric at all.  It's a second-order effect which has been given more importance than it deserves.  Price inflation tells us much more about the actual state of the economy than the total number of dollars, which is almost completely arbitrary, given the amount of credit, fractional reserves, derivatives, quantitative easing, etc. 

Well, I'm in complete disagreement. Mathematically speaking price deflation is just a weighted sum of individual prices. Well, one can include all prices if weights are equal to zero for most of them. And the problem?

The weighting is completely arbitrary, that's the problem. The can be lots and lots of price inflations depending on distribution on weights, but somehow one of them is picked and called The Inflation. (Of course, there already are inflation and core inflation)

Say what you want about the old definition of inflation, but it wasn't arbitrary.

Quote
The important thing to pay attention to is the price of basic goods and commodities. 

Yes, but, I'd rather have supply and demand take care of it not the Central Banks, thank you very much. Also there are more than just monetary reasons why the prices of basics can go up/down. Bad/good weather, technological progress/regress, resource availability, new goods, shifts in preferences. Choosing price deflation as The Measure you just choose to ignore all those factors.
kjj
legendary
Activity: 1302
Merit: 1026
The problem with inflation, is that if you ask 5 different economists to define it, you'll get 13 different answers.
hero member
Activity: 812
Merit: 1001
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sorry my bad, let's delete last few posts
member
Activity: 98
Merit: 10
Much like "liberalism", "inflation" (and its antonym, "deflation") had their meanings change during a particularly unpleasant period of human history (viz. the first three quarters or so of the 20th century).  Probably best to accept that the definitions have moved on and stake out new terminology for the former definitions (e.g. "libertarianism"/"market liberalism", "debasement"/"monetary inflation", and HuhHuh/"monetary deflation").
full member
Activity: 126
Merit: 100
Inflation or deflation is used to describe the change in the supply of a currency. If the supply grows, the value of each unit decreases, if it falls the value of each unit increases.

Isn't that a too simplistic view? What was the total value of cell phones in the world 1000 years ago? What I'm trying to say that there is also the creation of new kinds of products that never have existed before.
member
Activity: 126
Merit: 10
Will do so hazek.
legendary
Activity: 1078
Merit: 1003
Nice explanation cloud9.

Deflation will also come down when the value B above stabilizes and the novelty wears off at some time in the distant / not so distant future.

One minor thing though. Don't call it deflation but rather at least price deflation or price appreciation.

You know:
A superior man, in regard to what he does not know, shows a cautious reserve. If names be not correct, language is not in accordance with the truth of things. If language be not in accordance with the truth of things, affairs cannot be carried on to success. When affairs cannot be carried on to success, proprieties and music do not flourish. When proprieties and music do not flourish, punishments will not be properly awarded. When punishments are not properly awarded, the people do not know how to move hand or foot. Therefore a superior man considers it necessary that the names he uses may be spoken appropriately, and also that what he speaks may be carried out appropriately. What the superior man requires is just that in his words there may be nothing incorrect.

– Confucius
legendary
Activity: 1078
Merit: 1003
I really don't understand what you have such a big problem with for to be able to better explain it to you.

Inflation or deflation is used to describe the change in the supply of a currency. If the supply grows, the value of each unit decreases, if it falls the value of each unit increases.

Value in this case is not necessarily equal to the price. The price is always the function of supply and demand, where inflation or deflation is only used to describe the supply end of that equation.

And please do not confuse credit with supply because in a commodity currency such as Bitcoin is, fractional reserve banking is not possible. So lending cannot affect the supply of money. Also do not confuse the volatility with the supply.

I don't know what else to tell you.
member
Activity: 126
Merit: 10
Hazek, I agree with you that there are only a 50BTC / 10minute Bitcoin units inflation built into the Bitcoin algorithm.  I agree that sharp increase in demand for goods / services / other are causing an increase in BTC price / (goods, service, other)     - because supply is fairly fixed. I agree that attributing this sharp increase in demand for goods / services being called BTC deflation is not correct.  However, with

A = %Change in BTC    =   very small value
B = %Change in (goods, services, other exchanged for BTC)     =   progressively larger value

The systems,
C = %Inflation/Deflation = A - B

with Systemic Deflation if C is negative, which is the case for a large value of B and a small value of A.

The above simplification of Inflation/Deflation assumes a constant BTC velocity - otherwise this would also had to be factored in as D.

http://en.wikipedia.org/wiki/Equation_of_exchange

Deflation however, rewards savings (automatically without interest rates applied) - which is not necesseraly bad for an economy - because it rewards early savers and bring about scarcity in BTC supply which causes more deflation - but ultimately you can not eat, drink, or use BTC for anything other than digital bookkeeping (like gold is for physical bookkeeping) - so at some stage you will be required to do an exchange - and the system will find this balance point.  Deflation will also come down when the value B above stabilises and the novelty wears off at some time in the distant / not so distant future.
legendary
Activity: 1330
Merit: 1000
Inflation has nothing to do with prices. Nothing.

Then we might as well be arguing about inflation of the Monopoly money supply.
legendary
Activity: 1078
Merit: 1003
I don't understand how you can miss the one point I tried my best to make as clear as possible.

Inflation has nothing to do with prices. Nothing.
legendary
Activity: 1330
Merit: 1000
No one is in need of any philosophy lectures.  You want to define inflation as strictly "monetary inflation".  Good for you.

In reality, however, there are such things as price inflation, wage inflation, along with monetary inflation.  Saying "all inflation is monetary inflation" might make a neat argument, but it doesn't tell you anything interesting, especially if that which you consider "money" really, well, isn't.

Because in reality, there is absolutely no way to measure the total money supply, even in a hypothetical "Bitcoin economy".  Money is made up of a lot of things besides just the official currency.  Businesses extend each other credit.  They barter.  They invest in liquid assets.  There are black markets.  There are currency exchanges.  There is a gift economy.  There are layers of derivative assets from stocks and bonds to rental agreements.  Even in a Bitcoin economy, which attempts to capture these arrangements by offering pseudo-anonymity, they will exist.  How much of the "Bitcoin economy" do you think is made up of MTGoxUSD?  And even if you could measure all these different forms of money, good luck valuing them in relation to each other.

Now, with regard to Bitcoin, let's go ahead and see what the facts are telling us.  You want to argue that the Bitcoin money supply is inflating.  And it is.  But the fact is that Bitcoin prices are deflating.  So monetary inflation isn't making prices go up, as it logically should.  Why?  Well, that's easy.  Merchants don't price their goods and services in Bitcoins;  they price them in dollars or pounds, and convert on the fly.  Miners don't spend the Bitcoins they create;  they "cash out" into some other currency.  Early adopters aren't using their Bitcoin fortunes to invest in productive capital;  they invest in mining more Bitcoins.  The value of Bitcoins is driven by speculation and hoarding.  So Bitcoin monetary inflation means nothing if no one actually uses Bitcoins as money.  The same is true for US and Zimbabwe Dollars and Monopoly money for that matter.

Your assertion that Bitcoins are undergoing inflation is based on the theory that Bitcoins constitute money.  And it only has value in so far as that theory is correct.  Using a single metric to determine the validity of this claim while ignoring all others is, quite frankly, naive.
donator
Activity: 1617
Merit: 1012
Personally, I don't think monetary inflation is a reasonable metric at all.  It's a second-order effect which has been given more importance than it deserves.  Price inflation tells us much more about the actual state of the economy than the total number of dollars ...
Conceptually that may seem to make sense, but what would you quote the prices of your goods in .... US dollars? That would make "price inflation" a third-order effect because the prices that you are measuring are now dependent on the money supply of the base currency (USD) as well as a whole bunch of other things such as the price of oil, market manipulation, government regulation, etc.).

legendary
Activity: 1078
Merit: 1003
Let me just add one more thing.

It is completely irrelevant what some of you believe what inflation/deflation are. They are what they are regardless of your belief (that you learned from someone else). And wishing them to be as you want them to be will not make them so.

The great Greek philosophers Socrates saw values as guides to excellence in thinking and action. In this context, values are standards which we strive to achieve. Values are practical habits that enable us as individuals to live, be successful and achieve happiness.

To be useful, values must be consciously held and be consistent (non-contradictory). Many people have conflicting values which prevent them from acting with clarity and self-confidence.

So please learn value nr.1:
1. Reality (Fact-Based)
What is, is. If we want to be better, we must act within the context of reality (the facts). People often make serious mistakes by making decisions based on what they "wish was so," or based on theories which are disconnected from reality. The foundation for quality decision making is a careful understanding of the facts.

There is a fundamental difference between the laws of nature (reality), which are immutable, and the man made. The law of gravity is the law of gravity. The existence of the law of gravity does not mean man can not create an airplane. However, an airplane must be created within the context of the law of gravity.


So please, learn the facts of inflation/deflation.
member
Activity: 126
Merit: 10
Thanks hazek, this is definitely the most basic, simplest, sensible, easily understood explanation for inflation/deflation that I've seen in a long time.

Inflation - Available money gets inflated
Deflation - Available money gets deflated

With no regards to goods and services traded with the money at all.

I always thought that % Change in Inflation (or Deflation if negative) = % Change in Money Supply - %Change in Goods or Services
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