Topic: Can someone explain how deflation wouldn't negatively effect productivity? - page 2. (Read 4001 times)

It will be fine. We will have robust equity investments in bitcoin. There will be less debt based investments. For the foreseeable future, the bitcoin economy will be expanding at a much greater pace than the global economy. In this environment, debt based bitcoin investments won't make much sense. Hopefully, we forget about debt based investments altogether. Hopefully, we understand the destabilising effects of debt after the Great Depression, the tech bubble of 2000 and the Great Recession of 2008. That is my great hope.

Wait, I am saying that there is still a lot of incentive to invest a deflationary currency - for safety reasons and higher returns. I believe you are saying that there is zero incentive and that everyone would hoard Bitcoin, and comapnies cannot get funded, loans cannot be made out, etc. Where am I mis-understanding you?

Where do you stand on NXT then?

I may have written it incorrectly. I was referring to any deflationary currency and how it would provide 0 incentive to invest as a consequence of being deflationary. I agree with your post except for the first sentence.

I mean it's a negative feedback loop. Nothing to get nervous about. Negative feedback loops exist everywhere, even in your own body. It's not some pre-programmed condition in Bitcoin.

This is completely false. At a minimum, even if Bitcoin were the greatest store of wealth ever known, it would still be irresponsible to keep all your money in there, just for safety reasons. Same if you thought GOOG was the best stock ever, you still wouldn't (or shouldn't) risk all your money it. People will have to invest in other assets just to keep their money safe.

Secondly, the returns on Bitcoin appreciation are going to be far from the highest yielding returns. Bitcoin will only appreciate at about 2-3% per year in the long term, making a wide variety of stocks, bonds, loans, commodities, much more attractive investments to include in your portfolio.

Finally, today we have savings accounts. Recently interest rates have been at historical lows, but generally you could earn 2-3% interest on your fiat. This applies similar pressure to the economy as Bitcoin will apply in the future.

There will definitely be some adjustments here and there, but I don't think the situation will be as different as people are making it out to be.

Deflation will reduce consumption of luxury goods at the outset but at some point, people will still want those goods and those purchases will be made.

Bitcoin isn't inherently inflationary/deflationary. It's demand/supply that determines that.

So long as demand is higher than supply it will be deflationary. During times where supply is higher than demand, it inflates.

I actually agree with the first sentence but later when you use the word automatic it makes me nervous. Do you mean automatic as in programmed variables working their way through the world or in a mystical invisible hand way? If the first then "Deflationary isn't necessarily bad. I see a small amount of deflation being no worse than a small amount of inflation." becomes possible.

Deflationary isn't necessarily bad. I see a small amount of deflation being no worse than a small amount of inflation.

I believe there's as much incentive to invest in a deflationary environment as there is in an inflationary one. I just believe the conditions for investment aren't right yet and will only be suitable a long time away. In the meantime, Bitcoin is at risk of failing.

My example is once deflation stabilises to the growth of the economy, deflation will match that rate. Your investments just have to outperform the current deflation.

What this means is that it's automatically regulates economic growth because when economic conditions are good, investments will slow down (harder to outperform economic growth during these periods) and when economic conditions are bad, it will be a good time to invest (as it's easier to outperform economic growth).

Deflation does not reduce consumption if you have enough money. Deflation gradually reduces consumers by centralizing more and more of the money. An example everyone knows is the purchase of technology. Everyone knows that ipad will have a better screen in 2 years for the same price. Is anyone who has enough waiting to buy it?

Also, bitcoin is inflationary as thousands of coins are being created daily. This won't happen forever and then it will become deflationary. that will be as nice as the current inflation is. Bitcoin is great as itself but when applied to national currencies it just won't cut it. Look at NXT if that is what you are looking for.

When there is a need that people will pay for that need will be filled. Doesn't matter what kind of economic model is in use, it is going to happen. It may simply be that it doesn't happen through investment as we now know it.

Right now Bitcoin is appreciating at a furious rate because it is sucking value from other asset classes (primarily fiat holdings). This year it went from $14 to $1000, which is a 7,100% appreciation in value, causing a 7,100% *deflation* in prices. Eventually people will have accumulated enough Bitcoin, that value appreciation (or price deflation), will no longer come from easy conversion of wealth between assets. The value of Bitcoin will come purely from demand to own it and exchange it (and speculation). If the world economy magically remains static after Bitcoin takes over, and the number of transaction do not change, or the wealth transferred between individuals remains equal every year, then Bitcoin's value will also be static - you will be able to purchase the same basket of goods for the same amount of Bitcoin forever. Unfortunately, this is unlikely to happen for the simple reason that historically human populations grow, and along with it so does the size of the economy and therefore the demand for Bitcoin. If only we had a measure of how much exactly the economy grows every year... Oh yeah we do! It's called GDP - and it measures total economic output. Here is the chart of the last 10 years: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries?display=graph

Once Bitcoin becomes saturated, broad economic growth will be the primary driver of its value. Typically the world economy grows at about 2-3-4% per year, but sometimes it doesn't, like in 2009 when it shrunk by 2% (see linked chart). If Bitcoin were the world currency in 2009 there would have been price *inflation* that year, not deflation.

Less inflationary is good. Deflationary is bad. The reasons are many and very obvious. Among them the most important one is 0 incentive to invest. People who use computer equipment purchases as an example (I bought a cpu last year that costs 1/4 today) don't make the connection between buying computer equipment and an expense. Expenses are investments that expect negative value returns. Investors will not invest if they expect negative returns. Entrepreneurs will quickly disappear if their best effort leads to ever negative returns. Good luck trying to get either the average bitfan or the average joe to see this.

Sounds like a plan. Choices have consequences. Even the founding fathers were not nearly as naive as a lot of people here.

But how would we manage that transition? Just let half the world starve to death so that the ones that have been sensible with their spending can live on?

Deflation would reduce consumption and encourage saving as you say.
This is desirable as we are destroying the world through artificially pumped consumption, and failing to save for our long lives. Thus deflation would incentivise us to lead a life reflecting the underlying fundamentals of our world, not the fundamentals that suit the political and bankster masters.

I agree, but what about in the long term, that is when (if) bitcoin reaches global acceptance? Then, no more users are joining and inflation is presumably not controlled by a central agency. (Also in a longer term, there will be a point when the population is no longer growing either due to lack of space or resources or naturally, for whatever reason, as is occurring today in Japan and many European countries.)

What happens if there is no growth because Bitcoin never gets to that stage due to its deflationary nature?

By assuming 3% growth (in your example) you've assumed we overcome the initial stages of Bitcoin adoption which may never happen due to it's deflationary nature.

This we already understand but once the world has stabilised on Bitcoin and the economy is growing at 3% (this is an unfounded assumption), it'll be possible to make loans at say, 0%. This would be the equivalent of a 3% loan.

As has been repeated a million times before, even in a deflationary world, you'll have to buy food. You'll have to buy a car for work so you're still going to spend what you have to to survive.

What's 'dead money'? Do you mean lost Bitcoins?

The day you can do that is the day you can take anybody's/everybody's Bitcoins.