Topic: Mish on deflation - page 2. (Read 8599 times)

The problem is that we don't know if deflation is really that bad a problem.  The only modern example available to us is Japan where deflation has been around for 20 years now.  Japanese society is having a demographic crisis caused by low birth rates.  If your population is going to fall by over a third over the next generation, the value of houses and land will also fall since there is too much.  So the Japanese domestic economy is theoretically screwed and empirically we can see deflation has taken root there.  

Yet the Japanese have low unemployment and a great standard of living.  For example, there are more Michelin star restaurants on Tokyo than most other cities.  I don't know of any way in which life in Japan could be said to be worse than life in the UK or US.  

One could be forgiven for wondering whether deflation is really such a bad thing?

You are close to realising it is ridiculous to pursue price stability.

As I am catching up. I come to another question. If currency amount is stable, then inflation and deflation (in currency value) will mainly be function of growth of total economy, no? As economy grows, more goods chase less money, so money goes up in value. If true, does this not mean that if there is too much deflation, it is because economy is growing fast, and if deflation makes businesses fail and jobs go away, then economy will slow down, and so will deflation?

I am wondering who is really entrepreneur in our economy, people with good ideas, or banks? It is banks with money who give loans who do all investing, not entrepreneurs. So I am wondering why banks, or in deflationary, savers with lots of money, can not themselves be entrepreneurs. This is like difference in customers borrowing to spend versus saving to spend.

Inflationary (pay = pay for loan)

buy --- buy --- buy --- buy --- buy --- buy
        pay --- pay --- pay --- pay --- pay


Deflationary (pay = put money into saving)

        buy --- buy --- buy --- buy --- buy
pay --- pay --- pay --- pay --- pay --- pay


At beginning there is difference, but after it is same buy and pay.

Sometimes I want things now, and this magical buying power could take a year to double.

I want to know,
right now, business B buys product from business C, and promises to pay back business C in 30 days. Then business B sells product to business A, and A promises to pay back business B in 30 days.

So we have product front loaded, and money settled at end of 30 days

Why can it not be in other direction?
Business B pays business C, C promises to deliver product within some days. Business A pays business B, business B promises to deliver product to business A within some days.

I know there is argument that business A, which sells directly to customers, does not need to have money first, and can make money from customers, but this means that business B is investing (speculating) in business A success, and business C, and all before it, have to invest in business A too. Also, first money from product has to come from somewhere, since business C can not just make product from nothing. So really this chain is
Bank (where money is borrowed) -> Business C (uses money to make product) -> Business B -> Business A -> Customers
then 30 days later, money goes from customers to A to B to C to bank.
If this was in other direction, money would be saved or borrowed by A, which would buy from B, then B would buy from C, and B and C are not investing or speculating. They have money, and A, which is selling to customers, is only one doing the borrowing or saving.

Sorry if this is hard to read. I hope you understand. Can you tell me why this won't work, or will work but is worse?

If argument is that in deflation, people will wait to spend, then why would people not wait to spend if they know tomorrow they can buy newer more efficient technology? Is there difference between waiting to buy because of new more efficient technology, and waiting to buy because of falling prices? Your statement implies lower price is bigger incentive to wait than new more efficient technology.

My mindset, before, was that buying the same stuff that I did (~650$ of gifts) would have cost me an entire quarter of my holdings in Bitcoins. Now, that 650$ was barely even a fourtieth of it. The thought that it might go up has nothing to do with it, as right now I full expect my holdings to be worth atleast ten times what they are now within a few years, and possibly ten times that in a few more.

See you are just proving the point... you spent your coins because they went up in value, which means you didnt spend them when you believed that there was gonna be a run up in the price. Economies can function like that, people cant seize up the economy because they think that the currency is going to increase in purchasing power. Currency is the medium of exchange it is not the exchange itself. It is just a piece of paper, or a digit in a computer it has no value. 
 

I admit that may have been a little vague. The recent rises in prices have increased the value of my holdings and therefore allow me to buy things with smaller percentages of my holdings. It's substantially more convenient for me to buy certain things using Bitcoin versus USD, and because my buying power with Bitcoin has gone up I don't need to use as much of my total stash to buy, say, gifts for xmas.

Impaler, I appreciate your explanation on the entrepreneur's view and getting more money in his hands. Could you also explain why the 'loss' of others (savers, etc) seems to be ignored? Second, should investing not be backed by savings? If so, would lowering interest rates not lower savings while, contradictionary, entrepeneurs think there are abundent savings?

Etlase2 and I have a history of misrepresenting one another.  I'm trying to catch up here.


Okay, your perspectives are your own, and should inform your actions.  Mine are different on this topic, and I will have different actions as a result.  Both of us can't be right, but neither of us can know that we are correct until the future is past.  As has been noted, however, Bitcoin isn't deflationary by any fundamental feature for at least 100 years; and it's current price growth is limited to it's potential market size, which cannot exceed the whole of the Earth.  At some point it must reach maturity, and once it does it's year on year price variance shouldn't exceed +-2%.  At least, it's no more likely to do so than any large national fiat system, for those fiat currencies vary so much as a direct result of their inflationary target goals.

The author of Cryptocromicon put it another way that I think is better.  Paraphrasing, currency is not wealth, but the corpse of wealth.

This is a modern myth as well.  There are other means to an income than what might be called a "job".  A great many people still make their own way in this country without ever submitting to an hourly wage.  This is a small minority of people, mind you, but a much larger minority of people are well accustomed to earning some portion of their income outside of the hourly wage paradigm. Furthermore, what he says is technically true, Bitcoin won't be remotely deflationary within any of our expected natural lifespans.  It's dramatic price increases are due entirely to a speculative assumption of future economic growth upon a fairl ridgid monetary base, but one that isn't properly called deflationary.  This is a growth stage, not a feature of Bitcoin itself.

I have no clue what you are trying to say. When you say "simply because of the deflation" what are you talking about? Are you saying you used your coins because the price went down? 

I've been rather happy to buy things with my finite amount of Bitcoins simply because of the deflation. I used them on the ride up at around 400$. I used them near the peak at 1200$. I used them at the bottom at about 500$. I used them yesterday at 700$.

Would I in a bear market? Possibly. It all depends on how much of my total wealth I'm expending to buy an album or seven. It has nothing to do where the price is going, but only where it is.

My 8$ and some change.

All you are doing is thumping on the same bitcoin bible. People can't buy what they need if they don't have jobs. Consumerism, as I stated, is mostly irrelevant and is only good for distracting from the real topic regarding what effects deflation will have on investment and job creation. And arguing about what the word deflation means is the typical bitcoinomics cherry on top.

This is a fallacy. People will always buy what they need, which puts a floor under any deflationary spiral. In the current system people are encouraged to consume for the sake of consumption, buying what they don't need, and worse, borrowing to do it. With a sound monetary system borrowing would be done for purposes of new and increased production - driven by legitimate market forces (not excessive FRB and CB-spiked money creation).

Further. Bitcoin is not even a deflationary currency. It just inflates at a smaller and smaller rate. The inflation rate in Bitcoin right now is about 11%, which is larger than any real GDP growth! Eventually it will be less than real GDP growth, but even then, lower prices and wages will not reduce living standards.

I would make the point that saving assets that appreciate in value is not immoral, while saving a currency and gaining purchasing power is.

Assets and money (not currency) have value

Currency has no value, but is a representation of value. Similar to the way that an inch has no length but represents length. Holding currency and gaining value is like holding an inch and gaining length.     

In his defense this error is the NORM in the BTC universe and the broader gold-buggery communities.  It's repeated like a kind of mantra by the deflationary faithful.  Part of the error lies in the gold-bugs refusal to look at economic choices and incentives from the perspective of ANY other person in the economy other then speculators like themselves.  When your holding a deflating currency, and really any asset that is rising in value (such as homes in the housing bubble) you DO experience a kind of 'wealth effect' in which you feel wealthier and become a bit looser with discretionary spending.  The individual will logically adopt a 'shaving' policy of selling off a % of their asset LESS then the yearly appreciation rate so they can milk it indefinitely.  So gold-bugs then blithely claim this wealth-effect spending will make the economy prosperous and all opposing arguments can be dismissed out of hand.

But when you look from the perspective of the entrepreneur you see how this falls apart.  The entrepreneur in a capitalist society has to borrow money to make purchases of capitol goods and that means the interest rate is a KEY factor in determining how much money entrepreneur will be lent.  Some entrepreneur will have highly profitable ideas/opportunities some will have less, a whole spectrum will exist but only the entrepreneur with an expected return above the rate of interest will be funded.  In addition the entrepreneur will keep a higher percentage of their return because the entrepreneur share is the real rate minus the interest rate, so lower rates encourage more people to take the risk and commit the great personal investment of time and energy to BE entrepreneurs and seek out and create the ideas/opportunities that are the basis for entrepreneurial-ism.

This is why we lower interest rates to stimulate the economy, it causes more money to flow into the hands of entrepreneurs and more to be invested.  Deflation raises interest rates because potential lenders are happy to just hold money and the prospective investment has to have a real rate of return greater then the interest rate.  An idea that promises to return 4% is not funded when interest rates are 5%, and an idea that promises 6% will yield only 1% left over for the entrepreneur after interest has been payed back, hardly much incentive for the entrepreneur to try the idea or even seek a loan.