Topic: The Deflationary Spiral Argument (Read 195 times)

I think that that would be assuming BTC ever becomes the primary unit of account.

Good stores of value, which I think BTC is aiming towards being, have always had a capped supply/been disinflationary/deflationary.

Also, it is important to realize that BTC is not deflationary, but rather disinflationary - in the sense that the emission rate is positive, but slowing.

Besides, a lot of conventional economic theory have been written during times when fiat is dominating the world order. It is not representative of what could happen with BTC as the main currency.

Bolded above assumes profits and gains made from increased productivity trickle down to poor and middle class earners. If trickle down economics MMT (modern monetary theory) pan out, the statement is accurate. Else trends could shift in the opposite direction. Taxation, regulation and other aspects also factor in to the overall effect.

One key aspect to economic theory is it does not acknowledge every relevant aspect of markets and finance. Most armchair economic philosophers are not investors or traders of assets. They do not take their economic theories to the real world to test them, with their own money.

Market traders who invest with their own money, usually have a better comprehension of markets, economics and finance than armchair philosophers IMO.




How many people "hoard currency"? I think most would prefer to have their currency in a bank account where it can earn interest. "Hoarding currency" is an urban legend, unless we're referring to international reserve currencies being hoarded in regions with high inflation.

I would contend: declines in consumption are more closely correlated with high taxes or wage stagnation than they are currency hoarding.




I think deflation can hamper borrowing, lending and credit in loan markets. But bitcoin isn't expanding into loan markets for real estate, student loans or cars. And so that negative aspect to deflationary models doesn't really apply to bitcoin market conditions.

If BTC becomes the only global currency and assuming the money supply stays the same (no private keys accidents, no second coming of Satoshi), it will be impossible to have an economical growth of decline without it also influencing the price by nearly the same margin. So the price will not go up or down in purchasing power unless something will happen in the economy as without this change there won't be any reason for the change price.

One more thing.
A lot of people think that money printing absolutely triggers inflation and that a limited currency will not. Everyone who thinks so should look at Japan, a country that is printing tons of money and is not managing to get inflation for more than a trimester even with a raging economical crisis.

inflation will not happen unless the prices of goods go up, if there is no demand and there is production, no matter how much you print these prices will not change, if people make a million a day but don't want to buy anything extra from condoms or cars there won't be any change in price. If the government hands everyone $100k but everyone who gets that money hides it under the mattress there won't be any change.

The central bank does not decide inflation, although it tries to engineer its course to a level that is deemed acceptable. We see currently in countries like the UK and US inflation approaching 10%, where in pre-covid years the target and actual level tended to stay around 2%. This created a relatively stable environment but at present the number is exceptionally high. Inflation can be effected by all sorts of external issues like supply chains, crop/commodity prices and even oil availability which are disrupted by big events like Covid and Ukraine.

People don't hoard if they're just fearful of the future, they do it because there's deflation; respectively when there's inflation. People consume by the belief that their purchasing power will decrease. Inflation harms the savers and deflation the spenders.

That's exactly what I'm saying. Bitcoin favors saving. I can't comprehend what's the "key difference".

This opens up another topic, regarding the stability of the price. I'll skip that and assume the price stabilizes with -2% to 2% yearly changes (which is a sci-fi scenario, but anyway); will it bring economic growth? Remains to be seen. Shouldn't there be little disincentive instead of little incentive?

BTW, the entire world using Bitcoin is, by far, the most sci-fi scenario, amongst all.

I say that if prices tend to decrease, you're more encouraged to keep your coins than to let them circulate in the economy.

But, if they tended to decrease perpetually, it would perpetually incentivize you to keep your coins as you'd perpetually be able to afford more.

Did you mean to say this? I don't quite get your point here. It seems you are comparing two similar bananas. If the prices of goods and services are decreasing, people won't be hoarding money. Spending would be encouraged because things are affordable. So there will be more circulation of money. On the other hand, another explanation would be that if the prices of goods and services are continuously falling, people would not be discouraged to hoard money. It's because buying in the future is better than buying at present. So there won't be circulation anymore.


To be honest, I am also confused. I think I will have to reread the entire explanation a few more times before its meaning will finally sink in. Because if this: "If the economy that uses Bitcoin grows, the per-unit value of Bitcoin proportionally increases also." then why this: "Bitcoins only deflate in value when the Bitcoin Economy is growing."

Lol, this probably was said while trying to ignore reality. I've seen enough topics here about a merchant adopting bitcoin with a ton of users cheering for it but at the same time saying that they will not spend their coins yet. Open one with the title "Would you buy a house/ car with bitcoin? " and you can already imagine the results, nobody is keen on doing so since they think next March they will be able to buy 5 with the same amount of BTC.

There is no "key difference", is the same reasoning as with fiat currencies, if I live in a poor country and I know the currency is going down the drain against the $, would I spend by $ for bread? No!  The actual reason why bitcoin won't contribute to deflation is that by the time it will reach the status of global currency and it's the only one left the value will be so big a 10% increase in purchasing power overnight will simply be impossible as there would be no economic growth to match that, so there will be little incentive to hold coins while making sacrifices on your shopping list.

What they are talking about is that bitcoin is an asset and the price will grow over time, if the price of bitcoin grows, that means the amount of bitcoin you used to purchase goods and services at a particular price will be decreasing because bitcoin price would have increased.

What I know is that inflation and deflationary have advantages and disadvantages, if there is local currency declination (inflation) which is helpful to protect the foreign reserves and to be able to pay government workers salaries, it is highly unlikely there will be deflation because deflation will significantly affect the economy except in certain conditions like a country that has increasing GDP following significantly decreasing dependency on imports and increasing export, but this is unlikely the cases in many countries. It has been otherwise and the reason for inflation.

Inflation is a move by the government to protect the economy to reduce the negative effect of low production and low income from outside the country.

Bitcoin can not function in an economy that depends only on bitcoin, its deflationary nature may cripple the economy because people will prefer to hold. The best is for a country to have fiat which we know would be inflationary. But people can buy bitcoin, hold it and make money but yet fiat remain the currency of nations which the government can control.

Government have agencies whose roles are tied to bringing solution to inflation in the economy system but they lack the implementation policy, such a way that we only know those offices saddled with the responsibility to exist without any significant impact felt on the economy.


This is perfectly how an economy should be run. because going by this no one will feels hoarding any currency is the next available option, we tend to hoard because of fear of the future outcome. nothing can bring down productivity as long as law of return on labour is effective.

In modern economies, there's a central authority that decides the currency's inflation. If there's much unemployment (and specifically cyclical unemployment), the government can lower the interest rates to strengthen private businesses financially. The opposite happens respectively. These tasks are done to make the symptoms of cyclic fluctuations less painful.

The deflationary spiral argument goes as following: Let's imagine an economy that only uses Bitcoin, solely, as currency. When the productivity rises, the price of goods and services decreases. But, this has a negative effect: People are more encouraged to hoard their currency, than to let it circulate. This stagnates the economy as consumption drops. And when consumption drops, so does the production, because the profit decreases along with the demand.

There's a nice writeup in our wiki regarding this matter, but I can't understand the following conclusion:

Bitcoins deflate in value when the Bitcoin economy is growing, but doesn't deflation often contribute to lower economic growth?