Topic: Mish on deflation (Read 8600 times)

If the growth is happening elsewhere, perhaps the capital owner should consider scrapping the equipment and recycling it into a more productive industry.  (Note that this is a restatement of my previous post.  Recycling equipment is an example of "leaving that capital available to those who can [at least match the global growth rate]".)

Just as an aside, in the situation where capital is idle and literally rotting in place, where is the growth coming from that is causing deflation?  You do remember that when the money supply is fixed, deflation comes from the growth of wealth (which includes capital), right?  And that growth isn't delivered by angels or storks, but by the application of capital.

In that situation, growth would be low, and thus deflation would be low.  People would have an incentive to lend at low rates during those times.  I really do wish that you had paid more attention in high school chemistry class so that you could see dynamic equilibrium as a thing of beauty.  It must be hell seeing the world through your eyes as the struggle between various external ghosts and spirits.

This statement is easily disprovable.  Just because some resources are economicly 'idle' doesn't mean that they are in decay, some improve with the wait for increased demand.  A great example is that of contruction quality timber, a field that I have recently aquired better than a layman's education due to a move of mine to a large piece of rural propery with a great deal of (mostly) wild woods.  While there are some things that a tree-herder could do to improve the marketable yield of a few acres of woodland, forestry does pretty well as a zero-intervention resource, happily growing without humankind.  Obviously, as those trees age and grow, they become more economicly valuable for construction timber.  I can think of several situations that an 'idle' resource is economicly best to wait.  Another is wine, for well known reasons.  Bourbon is another for similar reasons.  Even beekeeping falls into this catagory under certain conditions, since both honey and wax have no known spoiling rate while inside of a living hive and, so long as the hive has room to grow, the hive won't consume more than they need whether or not they have it.  Some hobby beekeepers have been known to let hives grow for many years before taking any honey or wax, and both can keep inside jars for centuries.

Another, more modern, example is likely one that you have not even considered.
http://en.wikipedia.org/wiki/Yucca_Mountain_nuclear_waste_repository

Yucca Mountain Repository is claimed to be designed to house spent nuclear fuel rods from US light water reactors for thousands of years, but no one who is involved with it's design actually expects them to be there that long.  The reason for this is, 1) the technology exists to recycle spent fuel and is already in service in Europe and 2) the US has no natural uranium mines.  Almost all of US fuel supplies come from Austrailia.  US law requires spent fuel to be stored; not because it can't be recycled, but because it can and storing the spent fuel just in case we (as in the US govenrment, military, etc) are cut off politically or economicly from Austrailia and can no longer buy more fuel (either commercial or military) internationally.  Such a "waste" storage facility could literally pay dividends, both by keeping hazardous materials away from geologically unstable regions with high groundwater tables (i.e. where most of the human population actually lives) in the short term, but potentially to become a primary source for uranium 235 during periods of extreme scarcity.

Japans GINI value blows your argument out of the water, it is NOT a winner take all society in which all wealth goes to the 1%, how many times do I have to point this out for you to get it through your thick skull.  Just because that is what we in the US and UK and other unfortunate places get dealt dose not mean it is a universal quality of all society.  Show me a scrap of data that actually supports your argument and I'll reconsider but right now your just massive projecting your view of your own society onto a foreign one.

Even if I agreed with your 'capitol' statement your interpretation probably neglects Human capitol which is a huge portion of any societies capitol stock and which is spread quite widely through the population.

And if their are idle resource and people then your argument falls apart because idle resource simply decay (both human and machine) and produce ZERO returns, any positive return is better then that.  The history of interest rates clearly shows that interest dose not ONLY reflect an average of growth rates or even the average return on investment activity (which is what you meant to say).

You are both right, but I don't think that you would agree on what 'capital' actually is.

Selection bias, I'm afraid.  Hyperinflation has always been a political act, not solely a monetary one.  There is no obvious economic lesson to be learned from hyperinflationary events such as Zimbabwe or the Weimar Republic, but plenty of political lessons.

If your enterprise can't at least match the global growth rate, perhaps the world would be better off without you doing it, leaving that capital available to those who can.

http://www.nationsonline.org/oneworld/human_development.htm - the Japanese are about the same as the rest of us.  If GDP were higher, the Japanese rich would have bigger yachts. 

You look at Japan and think that they could be so much better off if they had higher GDP.  I look at Japan and see that they have a fine standard of living with full employment, a fine health system and long lifespans.

I don't think we will agree as you think that growth can improve living standards for all of society and I think growth can only benefit those who have capital. 

Indeed. We can still consider the general macro-evidence...

Japan: deflation = stable living standards, wealth preservation.
Venezuela, Argentina: inflation = decreasing living standards, destruction of wealth.
Zimbabwe: hyperinflation = destruction of living standards, endemic subsistence poverty.

I disagree with the premise that Japan's deflationary environment for the past 20 years or so was a bad thing, just because a majority of the formerly 3rd world nations around their region are now nipping at their collective heels economicly.  Regardless, I don't think that Japan's experience with deflation is particularly instructive in any sense with regard to Bitcoin's own experiences.  I don't think that Japan can be generalized, since the culture and economy is both so complex and so unique.  Even if there is something instructive with Japan's example, I don't think that it would be obvious nor without cavets.  I'm not sure that any existing example would be instructive for Bitcoin, because the economy that can be expected around Bitcoin is entirely voluntary, and that might make it rather unique as well.  Some things are universal, of course, but applying the macro lessons from nations using fiat is bound to be fraught with error.

Again your refusing to either understand or acknowledge my main point, that Japan lost RELATIVE to everyone else.  And that profoundly DOSE matter.  If were watching a race and the lead runner is 100 yard ahead of the pack and someone shoots him in the leg and he falls down and starts crawling and the pack of other runners start rapidly closing the 100 yard distance but haven't yet over taken the now crippled runner.  You can not rationally claim that because the shoot runner hasn't fallen behind (yet) that being shot 'wasn't so bad'.

Yes our growth in the US/UK has been going all to the 1% POST REAGAN/THATCHER, before that growth got distributed a lot better.  Japan though has always had higher equality both Before AND After it's lost decades, it is simply a part of their culture.  CEO's of huge Japaneese companies make only 10x what a line-worker makes, inheritance taxes are up in the 90% range and their Gini values are one of the best outside of Europe.  But their is nothing to suggest a link between a nations income-inequality and it's growth or lack of growth.

You argument that deflation doesn't matter is absurd particularly when applied to Japan, IF that economy had continued to grow the 99% would have been the primary beneficiaries, they would have seen living standards grow to perhaps the highest in the world.  The disaster is the difference in what could have been and what actually happened.

Now apply the same deflationary economy to an highly UN-equal society and you will actually ratchet DOWN the wealth and standard of living of the 99% as every downward dip will pick the pocket of the worker and every recovery is funneled to the 1%.  An unequal society only lets the common man improve his living standards when their is an all out BOOM, that's why we have such a huge emphasis on achieving high growth.

The Japanese standard of living hasn't fallen behind.  They have as many iPhones as we do.  They have lower unemployment than we do.  Deflation didn't hurt them.

The US and UK have experienced growth but its been growth for the 1%.  Ordinary workers have seen their standards of living improve but not more than the Japanese workers have.  Our rich are richer and have more yachts than they used to.

Again, we are disagreeing about whether or not it matters, not about whether or not deflation happened.  It appears to me that the Japanese case shows that deflation doesn't matter that much for most people.

I didn't say the Japanese standard of living declined, I said it stagnated.

Your confusion seem to be that your not willing to accept that stagnation and 'lost decades' are not actually losses because material standards of living did not decline in absolute terms.  If THAT is what you need to see to consider it a 'bad' economy your demanding full on Great Depression or Civil-war levels of collapse.

But real people make their assessments of economics by comparison with their region or the world, and the last 20 years have seen growing GDP and rising standards of living in virtually every country on EARTH, particularly in Asia, hell even most countries in Africa have seen substantial rises in PCGDP and material standards of living.  For ONE nation to see virtually no growth in that period puts them at the bottom of the barrel and shows that their economy is very sick.

Everything you say is true except for the fact that Japanese people have not been affected that much.  Their living standards compared to the rest of us are the same now as they were 20 years ago.  Individual hard cases must exist but overall the Japanese people have a fine lifestyle.  The fact that the Koreans worked their way out of abject poverty doesn't detract from this point.

The Japanese economy over the last 20 years is considered catastrophic for good reason.  That nation had a growth curve like a bat-out-of-hell and has now under performed so badly and for so long that it's GDP is now HALF what it was anticipated to be by now.  Neighboring nations like South Korea which were far behind Japan have nearly reached parity in PerCapita GDP and if things continue will PASS them.  That is like the US being Passed in PCGDP by MEXICO.  No person in Japan will describe the last 20 years as anything but an economic disaster.

Your correct that Japanese SOCIETY has not crumbled, but that is because the Japanese have one of the most resilient social structures on Earth and a VERY extensive welfare state that's kept people out of poverty.  Just because they haven't been broken dose not mean they are not stressed and 'in a bad place' with the present economy.

Lastly, if your arguing that deflation only occurs when a society is already 'screwed' by demographics or other calamities that eliminate or reduce the potential for future growth then why did the US experience it so frequently in periods that deflation defenders like yourself describe as high-growth such as after the CivilWar?  Japan had and still has an export based economy, NOT one based on internal consumption, their demographic problems present a challenge but they are not a fundamental limiter of their growth when automation is everywhere, the total world trade continued to grow after Japan stagnated, and their is no reason that Japan could not have continued to at least maintain if not grow it's share of that market had it continued to be healthy.

In a sense yes, bankers and entrepreneurs are together doing all investments and my earlier comments on opportunity cost show that it doesn't matter WHO is providing the money, the interest rate gives the same incentive to DO or not do the investment if it is with borrowed money or your own money because the interest rate is for EVERYONE in an economy including the entrepreneur, it is as they say the most important price in the whole economy.

Your whole description of inflation and deflation in terms of 'pay in advance' vs 'pay after' is missing the point.  Every possible investment activity involves turning liquid money into illiquid goods and then back into (hopefully) more money MANY MANY times in the course of a year, ideally as fast as you possibly can.  The distinction of starting with your own money from savings or with loaned money is irreverent.  What matters is your internal rate of return vs your interest rate.  You must exceed interest rates to be considered 'a good investment' even if your self capitalized.

I'm not sure what 'loss' on the part of savers your asking about?  You might be assuming that because I'm against deflation I'm FOR inflation, a common misconception.  I am for a something a bit different a demurrage concept that reduces all money held nominally rather then in value, this keeps prices stable while still providing a similar cost to holding money.  Now why should money have a holding cost you say?

Liquidity, money by it's nature has the ability to immediately become any other asset and we call that liquidity, it is a VERY valuable quality and when you hold money you enjoy this 'wild card' up the sleeve, you can take advantage of almost any opportunity in the market and avert most calamities.  People will even PAY you to borrow that liquidity for a period of time.  Savers don't create liquidity, that's created by the people who are still doing transactions or in a modern state the legal tender laws mandate the liquidity of the national currency.  As savers aren't creating value I don't believe they are entitled to receive payments.  Thus the demurrage payment which should ideally equal the gain from interest, thus the saver will have their original purchasing power preserved but not increased.

As for investment through savings, I have nothing against this and didn't even mention it because it really is no different from borrowing to invest.  If I have money already (lets say $100) and an idea then I'm a self capitalized entrepreneur and I don't pay anyone interest.  But I still have the Opportunity Cost of not having collected interest on that money I used.  If interest rates are 5% I could have put my money in a bank and collected $5 in a year to have $105.  If my $100 investment return 6% then I now have $106 and my whole investment has only made me $1 richer then if I had done the best alternative.  Now if I have nothing and borrow the money, make the same return and pay the interest back I'd have made in the end $1, exactly the same profit and the same incentives.

As for lower interest rates discouraging savings, and what entrepreneurs perceive the amount of savings to be.  This whole question seems to be premised on it being 'BAD' if their is some mismatch between the amount of money saved and the amount invested, when what we need to worry about is the absolute level of investment not investment relative to savings.  These two quantities saving and investments do not need to be equal and indeed are usually unequal.  In a modern economy invested money dose NOT come from savings, savings may help to determine interest rates but the lent money is usually credit, so it is perfectly possible for investments to exceed savings, just as it's possible for savings to exceed investment.

Added to this, the upper bound of Bitcoin's velocity is quite high, which can have a similar effect to inflation as the average velocity increases.

Well, it depends upon on which definition of deflation you're using.  But you are certainly thinking correctly about the general mechanisms at play.

With a stable monetary base GDP growth causes deflation in prices and wages (although I suspect that in 50 to 100 years technology will have eliminated most jobs). I think this will cause a balanced economy which functions far smoother than the world economy we see today with massive systemic dislocations.

Another point is that although bitcoins are finite, cryptocurrency is infinite. So, market forces would compel litecoin and others to fill the gap in the monetary base if bitcoin is insufficient and the deflationary pressures really are as doom and gloom as some predict.

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.

+100 you gotta be a special kinda retard to equate falling prices that are result of greater efficacy and new technology with falling prices that are a result of a deflationary currency..

Falling prices are good inflation and deflation are bad.   

MoonShadow:  Your straying into a petulant tone which is uncalled for, when you misrepresent what someone is saying you apologize, you don't try to blame them and throw down the gauntlet as you just did.  Debate people respectfully and you'll get a lot more fruitful of a discussion.


P.S.  The 'mild deflation' definition being the reciprocal of what we consider mild inflation ~2% seems reasonable.  I don't have any faith that BTC would every reach that rate, but I'm sure it would never have any real economic usage until it DOSE reach that level or less.

So I think this thread is no longer about BTC and what rate it may/might ultimately have, but rather a discussion of a Central Bank POLICY of 2% deflation (and possibly a 0% policy of equal avoidance of both inflation and deflation) and if that is or is not better then the current orthodoxy of 2% inflation policy.  This may help you two to focus the discussion on JUST the merits of inflation and deflation.

I was paraphrasing my own interpretation of your statements.  I'd say that I was giving your viewpoints unearned credit out of kindness for your perspectives.  You'd be wise not to attempt to disprove that.

Why is my speculation "idle and wanton" while your's is not?  By mild deflation, I mean something very close to 0% APR, as in less than 2%, or closer to 0% than the normal inflationary "targets" of central bankers worldwide.  I was not implying that Bitcoin would necessarily achieve this anytime soon, but I do expect it to happen eventually should Bitcoin ever become an international reserve currency.  I have no better evidence to support that last position than you have for discounting it, which is to say nothing more than intuition.

Please direct me to where I wrote this. Otherwise that is twice in two posts you have (intentionally?) misrepresented what I've said.


Your entire premise is not defending deflation nor deriding inflation but deriding the financial system. We can both agree that there is *a lot* to be desired with the financial system. It, however, does not prove or argue any point regarding deflation's superiority.


Would you care to provide any evidence to back this up rather than idle and wanton speculation? Because small businesses tend to operate on very strict amounts of capital, cash flow that is almost universally derived from credit. Small businesses tend to balance a very fine line between profitability and bankruptcy. Mild deflation (you imply here that bitcoin would have mild deflation, based on what? and what do you consider to be mild?) that is just a smidgen more than expected can and will cause a slew of bankruptcies. There is simply no other way. You cannot have credit in a deflationary economy without bankruptcy being the equalizer. There simply will not be sufficient money to pay off debts without an equivalent and unsustainable increase in velocity. You could argue then that those businesses did not deserve to survive, and in effect you are arguing against small business and for large business where costs can be reduced as economies of scale take precedence. You could argue that small businesses should not run on credit, but then I'd just have to laugh at how little you understand the real world.

In general, it is a falacy, for the obvious reasons that the consumer doesn't delay purchases indefinately.  However, I have to admit that Elase2 does have a point here about the role of investors and speculators in the health of the modern economy.  What I don't believe that s/he understands, is that is a side effect of the outsized role of modern finance, not a requirement of a functioning economy.

The finance industry has become such a huge part of the US economy, that I would say that Elats2's claim that even mild deflation would result in a large pull back from major investment, and result in increased unemployment.  Still, I would consider this to be a symtom of the longstanding effect of mild inflationary policies, resulting in the growth of the finance industy itself.  The problem isn't that investment adviser and bankers can't make money doing what they do; the real problem is that they can make a great deal of money doing what they do, but that they work in the largest 'cost center' industry in the world.  Said another way, the finance industry (on net) does not produce anything of value, but instead offers only to move wealth around in the most efficent manner possible.  Whether or not they live up to that promise is a matter of opinion, but they actually cannot produce value in their own right.  This has much to do with why Mish has, and still does, consider what he does to be a fraud.  Not that he's personally fraudulant in giving advice, but that the entire freaking industry is a fraud; pretending to produce wealth, when mostly they just move it around and take a slice off the top.

A healthy economy does not require the dominate finance industry that has developed in the US and most modern "Western" nations.  We want a healty economy to develop around Bitcoin, and that means that nearly every consumer is also a producer, and that these huge 'cost center' industries never develop beyond a few percent of the gross.  Nor should it require tax benefits from governments to have economic incentives to build factories, nor these power broker parasites that tarvel around the world searching for investment bargins.  Small businesses have always been the bulk of business activity in the United States, and small businesses should be the bulk of the business with Bitcoin as well.  Under such a model, mild deflation is no more (and perhaps less) dangerous to the business climeate than mild inflation.  That is not to say that the significant deflation that we have experienced thus far is a favorable climate, it's certainly not.  So either Bitcoin will mature and stabilize on it's own merits, or fail epicly.  We al place our bets according to which outcome we deem more likely.

I think the basic argument is whether falling prices cause people to postpone purchase of items. I think that in general this is a fallacy. Regardless whether electronics is the best example and whether this can be compared to a deflating currency, I do not believe in the concept of people postponing purchase forever. Now is more valuable than next year. We humans all face an equal and rock solid constraint: time.

Because somewhere I stated or implied that the laws of supply and demand do not apply here.


He is considering prices in a vacuum, which the same mistake everyone who says "herp a derp look at electronics" makes. With wages increasing at the same time certain products' prices are decreasing, the marginal propensity to consume the products with falling prices can only increase as income becomes comparatively more disposable.

On the other hand, if wages are decreasing, as they must in a deflationary currency, the marginal propensity to consume is unaffected assuming that prices are falling at around the same rate. If prices on certain products are falling faster, then it is a wash to the scenario above.

Personally, I think the whole "people won't spend in the face of falling prices" is either misinterpreted or argued incorrectly. It is not the basic consumer that anyone has to worry about, it is the investor and job creator that one has to worry about stopping cash flow through the economy, causing job losses which then do cause less consumer spending, and spiraling downward economic output. Deflation vs. inflation will hardly affect those who spend the vast majority of their income, assuming wages and prices are reflected similarly. Basic arguments about consumption totally ignore the greater systemic risk posed by deflation.

I know what he thinks and he has been right about 8 years in a row already. The Big Picture, not investments.

Sorry, but I have to weigh in whenever Mish is cited as any kind of authority.

Mish is a fraud looking to get rich quick.  He is the Ron Hubbard of financial advisors.

I knew him back in the 1997-2003 timeframe when he was on silicoininvestor (talk.techstocks.com for the archives).  He often spouted about what a scam being a financial advisor was.  Later, the quit his job as an engineer and became a financial advisor.  He spent a lot of time developing himself as a pundit as a marketing ploy.

Go read the archives.  You will see what he really thinks (and he was a pretty lousy investor too).

I think you should read up on his blog posts from 2005 until now and ask yourself that question again. The guy is total common sense. Not that he is fault free, but he surely is intelligent.

In what way, Etlase2?  A currency is simply a market product with a well defined trade value, by whatever means that trade value is defined.  The laws of supply & demand most certainly do apply to currencies.  I know of no economic laws that do not apply to currencies.  If you do, feel free to share your insights.

I have to strongly question the intelligence of the author of that article as well as yourself Moonshadow for perpetrating bullshit like this.

A currency that is deflationary IS NOT EQUAL TO a specific product or industry that experiences deflation in an otherwise inflationary currency. They are COMPLETELY DIFFERENT economic situations.

This is in no way an argument for a deflationary currency. It is asinine to think so.

I am not economist expert but I will tell you why I am spending bitcoins and I am not concerned about deflation. Because I know, later I will have even more purchasing power which gives me sense of safety that I won't be left with fiat that loses value and items that are losing value also. That way I can go shopping now and don't have to wait for my situation to be more secure like better job or more stable world economy.

http://globaleconomicanalysis.blogspot.com/2013/12/economic-illiterate-proposal-inflation.html#rMYzZkAfFCzAbtyF.99