This "deflation" argument is bullshit and propped up by people who are still seeped in Keynesianism and Monetarism, which are the same thing. If people understood Austrian economics they would realize that these terminologies (deflation and inflation) only mean something because of the central planning phase that the world is currently undergoing.
If people want to learn economics, they should read http://library.mises.org/books/Gene%20Callahan/Economics%20for%20Real%20People.pdf, David Stockman's "The Great Deformation", and https://mises.org/journals/qjae/pdf/qjae14_3_3.pdf.
Topic: Why such agreement that Deflationary currency is a bad thing (Read 4415 times)
I don't think it would put much pressure on commerce. As people need money (bitcoins) they will offer a higher and higher price for it (or, for example, they will offer to work for cheaper and cheaper wages). As with any market, there is an equilibrium that will balance this, not a positive feedback loop that makes it worse.
In the positive feedback loop scenario, everyone sees that there is deflation so they decide to withhold their purchases because they are "profiting" from holding money. However this is the greater fool theory - if I don't spend my money now, someone will pay even more for it in the future. This type of thinking can crash back in the opposite direction. Ie, someone cashes in which cheapens the price of money, which triggers fear in all the hoarders who race to spend their money as inflation comes back.
The value of money will be priced according to the demand for money. This will be kept in check through supply/demand equilibrium. Of course there will always be speculation, bubbles etc, but in the end the fundamentals of supply/demand will determine the purchasing power of a bitcoin.
Thats why in my opinion, a steady growth in population, causing a steady appreciation in the purchasing power of a money, is not going to disrupt the economy.
In the positive feedback loop scenario, everyone sees that there is deflation so they decide to withhold their purchases because they are "profiting" from holding money. However this is the greater fool theory - if I don't spend my money now, someone will pay even more for it in the future. This type of thinking can crash back in the opposite direction. Ie, someone cashes in which cheapens the price of money, which triggers fear in all the hoarders who race to spend their money as inflation comes back.
The value of money will be priced according to the demand for money. This will be kept in check through supply/demand equilibrium. Of course there will always be speculation, bubbles etc, but in the end the fundamentals of supply/demand will determine the purchasing power of a bitcoin.
Thats why in my opinion, a steady growth in population, causing a steady appreciation in the purchasing power of a money, is not going to disrupt the economy.
Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times.
It will always be pretty deflationary because the population is always growing, there is going to be a hard cap on the quantity, and over time inevitibly coins will be lost at more or less a steady rate. All those things together will put pressure on commerce. I'm not saying it's guaranteed to be useless, but other currencies will be favored as a medium of exchange, IMO. Hopefully other decentralized currencies
Bitcoin is not inherently deflationary. It is in fact inflationary until it reaches 21M coins and then it's stable. Deflation occurs when the money supply *shrinks*, which doesn't happen with bitcoin unless people lose their private keys.
Prices in bitcoin will fall as it becomes more popular and valuble, but this is just a result of the demand for bitcoins increasing. Once it reaches maturity and 21M coins, hopefully the growth in adoption has reached saturation, at which point the supply/demand for bitcoins (and hence price) will be determined by the demand for money. Monday has a utility value (it is needed to facilitate business) so as the economy grows, the demand for money will increase and so bitcoin becomes more valuable (encouraging people to be less speculative with their spending/investments). If the economy goes into recession then the demand for money decreases and prices go up (inflation) encouraging people to spend more and be more speculative. Overall it forms a nice equilibrium where the price of money is determined by the business cycle.
Prices in bitcoin will fall as it becomes more popular and valuble, but this is just a result of the demand for bitcoins increasing. Once it reaches maturity and 21M coins, hopefully the growth in adoption has reached saturation, at which point the supply/demand for bitcoins (and hence price) will be determined by the demand for money. Monday has a utility value (it is needed to facilitate business) so as the economy grows, the demand for money will increase and so bitcoin becomes more valuable (encouraging people to be less speculative with their spending/investments). If the economy goes into recession then the demand for money decreases and prices go up (inflation) encouraging people to spend more and be more speculative. Overall it forms a nice equilibrium where the price of money is determined by the business cycle.
Another mechanism which breaks the above: if a currency system experienced such dramatic appreciation on an ongoing basis and for so long as to convince people it would never end it will be supplemented with other means of exchange and would basically be a store of value and not a means of exchange AT ALL.. So what? Other currencies will be used...
That's my point. Other currencies will be used. You aren't motivated to spend or do anything except hoard when the value of the money is constantly rising. I'm not saying everybody is going to quit their jobs, they'll probably just use a different currency to buy stuff with, like you said. What good is that for bitcoin?
A lot of people here are drunk on the deflationary koolaid because they feel like they are getting richer for doing nothing (and they are, even with the current inflation until 2040) and they love it and want to rationalize it.
There is nothing else to do with bitcoins other than sit on them currently, but them being used as currency is going to be hampered by people saying stuff like "I'm not paying that much for item X, it's worth it for me to wait it out until item X is cheaper". Meanwhile, producer of item X is going broke, and will accept other currencies instead that won't make him go crazy.
Some people get hurt by inflation, the opposite people get hurt by deflation. If you're going to say one is bad, you have to say the other is bad if you want to be impartial. You could also say both are great! (for some people, and opposite people)
I just don't understand where you guys take the idea that "in a deflationary world, free market will make interests negative"
Would you loan 100 BTC today, for the promise of 95 next year?
(if the answer is yes -we have a deal!)
In a deflationary world, you would have much less investment. No credit bubbles; but for that purpose, also all our current wealth is "bubble" -it has been made possible by debit expansion and state deficit spending. We would settle down to where a "solid" growth would have led us -that is, to a much poorer economy. Maybe then we would start growing "healthly" (albait for sure, much more slowly), but the transaction would be incredibly painful, destroying much of our productive system that simply cannot exist without easy credit and the compulsion to consume created by inflation.
Would you loan 100 BTC today, for the promise of 95 next year?
(if the answer is yes -we have a deal!)
In a deflationary world, you would have much less investment. No credit bubbles; but for that purpose, also all our current wealth is "bubble" -it has been made possible by debit expansion and state deficit spending. We would settle down to where a "solid" growth would have led us -that is, to a much poorer economy. Maybe then we would start growing "healthly" (albait for sure, much more slowly), but the transaction would be incredibly painful, destroying much of our productive system that simply cannot exist without easy credit and the compulsion to consume created by inflation.
This would only happen in a fixed fractional reserve situation whereas you have 100 BTC in your reserves and so you can loan out 500 BTC based on those reserves. Your 100 BTC would be worth 103% at end of year (deflation) and your 500 BTC worth of loans will be worth 110% (of 100BTC) as you loaned them out at a -1% rate (3% - 1%). So you now have 113 BTC (103 + 10 BTC) in reserve at end of year. You then can loan out 65 more BTC.
Otherwise you are correct, you would be better just to hang on to the coin.
I just don't understand where you guys take the idea that "in a deflationary world, free market will make interests negative"
Would you loan 100 BTC today, for the promise of 95 next year?
(if the answer is yes -we have a deal!)
In a deflationary world, you would have much less investment. No credit bubbles; but for that purpose, also all our current wealth is "bubble" -it has been made possible by debit expansion and state deficit spending. We would settle down to where a "solid" growth would have led us -that is, to a much poorer economy. Maybe then we would start growing "healthly" (albait for sure, much more slowly), but the transaction would be incredibly painful, destroying much of our productive system that simply cannot exist without easy credit and the compulsion to consume created by inflation.
Would you loan 100 BTC today, for the promise of 95 next year?
(if the answer is yes -we have a deal!)
In a deflationary world, you would have much less investment. No credit bubbles; but for that purpose, also all our current wealth is "bubble" -it has been made possible by debit expansion and state deficit spending. We would settle down to where a "solid" growth would have led us -that is, to a much poorer economy. Maybe then we would start growing "healthly" (albait for sure, much more slowly), but the transaction would be incredibly painful, destroying much of our productive system that simply cannot exist without easy credit and the compulsion to consume created by inflation.
think about it this way
if you promised me to give me 95 of [whatever 2014's major CPU is] in exchange for 100 of [whatever today's major CPU is] I'd take it
Of course we are strictly postulating something which is pretty unlikely for reasons which I have stated above (where you think money itself is GUARANTEED to buy more and more and more with no investment).
I just don't understand where you guys take the idea that "in a deflationary world, free market will make interests negative"
Would you loan 100 BTC today, for the promise of 95 next year?
(if the answer is yes -we have a deal!)
In a deflationary world, you would have much less investment. No credit bubbles; but for that purpose, also all our current wealth is "bubble" -it has been made possible by debit expansion and state deficit spending. We would settle down to where a "solid" growth would have led us -that is, to a much poorer economy. Maybe then we would start growing "healthly" (albait for sure, much more slowly), but the transaction would be incredibly painful, destroying much of our productive system that simply cannot exist without easy credit and the compulsion to consume created by inflation.
Would you loan 100 BTC today, for the promise of 95 next year?
(if the answer is yes -we have a deal!)
In a deflationary world, you would have much less investment. No credit bubbles; but for that purpose, also all our current wealth is "bubble" -it has been made possible by debit expansion and state deficit spending. We would settle down to where a "solid" growth would have led us -that is, to a much poorer economy. Maybe then we would start growing "healthly" (albait for sure, much more slowly), but the transaction would be incredibly painful, destroying much of our productive system that simply cannot exist without easy credit and the compulsion to consume created by inflation.
Well in the case of BTConly enugh people have t trust in the usability of it then it could be used to save money. Which is beautiful. But i would assume we also need a cryptomoney that is designed for to be spend - Like many lokal currencys with demurrage http://www.digplanet.com/wiki/Demurrage_%28currency%29 or the brakteaten money in medieval times 12-15 century http://p2pfoundation.net/Brakteaten_Money.
Not sure why we would ever want demurrage - which is basically a tax on liquid monetary assets - unless we want even further expansion of the state? All that does, anyway, is make the keeping of cash a money losing proposition. One could still invest the money in savings instruments. What's the point of it all besides expanding government power, anyway?
I'd urge against it and would never avoid a currency which participated in such a tax system if I had a choice.
Having Gold or BTC's and not spending them is one way to "save" ... it means consumables that you could have consumed are either consumed by others or don't need to be created, freeing other resources up for capital investments. That's what your "savings" is in reality if you are talking strictly speaking about hoarding money itself. A [usually] more profitable mechanism for savings would be to loan your money to someone else who will build a lasting asset with it, that creates future consumables (capital investment). This can happen 1:1 or via a banking system. Either way you look at it (cash hoarding or investing) it is not a bad thing to save instead of spend. The best is if people are 100% free to spend and save their own monetary instruments as they see fit, thereby deciding what gets consumed now or later. I am 100% sure this is morally better as well as produces better outcomes than where some central planners try to favour spending over savings artificially.
Well in the case of BTConly enugh people have t trust in the usability of it then it could be used to save money. Which is beautiful. But i would assume we also need a cryptomoney that is designed for to be spend - Like many lokal currencys with demurrage http://www.digplanet.com/wiki/Demurrage_%28currency%29 or the brakteaten money in medieval times 12-15 century http://p2pfoundation.net/Brakteaten_Money.
Actually the above reminds me to point out ... because it will be so easy to compete in the world of crypto currencies, to 'win' - BTC must have the greatest acceptance in terms of actual goods and services that can be procured by it, the best transfer / payment acceptance software, and security as good as others with similar acceptance and transfer/payment ubiquity (although being "the perfectly secure" currency is not required at all).
So, many have been talking about deflation in terms of 'prices down 20% today since yesterday; and will probably be down again tomorrow'. This is reasonable based on the current moves BTC has been making.
In terms of a possible antithesis to the USD though, let's pretend BTC takes over about a trillion dollars worth of M1 - checking and savings accounts - and settles at $100,000 USD per BTC and begins moving up gently along a 3% uptrend. So, now we talk about buying rice today vs. starving to get it .25% cheaper next month; these purchases will obviously still happen.
I don't know if BTC could ever be the only currency in the world but think about if it, or something like it, was. In terms of this type of deflation, how would the world look? Would loans be made at negative rates? Could you borrow at a prime rate of -1%? If so, an interest-only loan might be reasonable. Would people borrow BTC and pay interest only to buy a nice house? Would renting make more sense?
Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times. Couldn't we still see temporary inflation during periods of a workforce decline (e.g. Baby Boomers)?
Maybe deflation like this could be a solution and not a problem. Would the world really end as we know it - like they tell us? Would we really spiral downward into oblivion? GDP would certainly take a big hit with that transition but how would we come out of that initial depression?
In terms of a possible antithesis to the USD though, let's pretend BTC takes over about a trillion dollars worth of M1 - checking and savings accounts - and settles at $100,000 USD per BTC and begins moving up gently along a 3% uptrend. So, now we talk about buying rice today vs. starving to get it .25% cheaper next month; these purchases will obviously still happen.
I don't know if BTC could ever be the only currency in the world but think about if it, or something like it, was. In terms of this type of deflation, how would the world look? Would loans be made at negative rates? Could you borrow at a prime rate of -1%? If so, an interest-only loan might be reasonable. Would people borrow BTC and pay interest only to buy a nice house? Would renting make more sense?
Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times. Couldn't we still see temporary inflation during periods of a workforce decline (e.g. Baby Boomers)?
Maybe deflation like this could be a solution and not a problem. Would the world really end as we know it - like they tell us? Would we really spiral downward into oblivion? GDP would certainly take a big hit with that transition but how would we come out of that initial depression?
A well put question. If this really happened (dubious scenario though which we'll return to), I would agree with your proposed implications. This would not be a problem. In fact, we *normally* experience deflation in certain markets all the time ... for example cost per unit of bandwidth, computing power, television quality, etc, where the pace of technological advancement and associated productivity improvements exceeds the insane growth rates in base money supplies. I would think, yes, that one would get mortgages involving the repayment of less BTC's than the quoted price over a period of time.
That all said ... I do not think this is a natural state of affairs over the long term. I believe if BTC's were such a store of value that they rose in value vs. pretty much everything for a pretty much guaranteed-to-be-long-time that other currencies would rise up to compete with BTC's in order to make exchange easier. This, unless I am vastly mistaken, would seem to be one of the conclusions of Gresham's law.
I hope none of the above is read as a critique of BTC's ... there's alot to be said for a currency that is fixed or near fixed in supply! But:
1. competition and freedom are good things. People will have numerous currencies and that's great. I am hopeful there will be multiple crypto currencies in addition to the base metals.
2. While base BTC count can be fixed credit instruments can actually increase the notional amount of money.... This is the same thing that can happen when bullion banks issue notes on a fractional reserve basis. There is nothing wrong with this as long as there is no government insurance to encourage moral hazard on the creditor side. This means that money supply is not notionally fixed persay when the underlying count of BTC's are fixed... because people will trade Letters of Credit (i.e. promises to deliver BTC's at later dates in whatever form and format) and will have real social credit between them... for this reason its hard to imagine a world where currency, globally, everywhere, all the time is actually fixed...
What I hope for is an end to legal tender laws and a free market for currencies and banking. Unlikely to happen, I know, but us libertarians must all have dreams.
So, many have been talking about deflation in terms of 'prices down 20% today since yesterday; and will probably be down again tomorrow'. This is reasonable based on the current moves BTC has been making.
In terms of a possible antithesis to the USD though, let's pretend BTC takes over about a trillion dollars worth of M1 - checking and savings accounts - and settles at $100,000 USD per BTC and begins moving up gently along a 3% uptrend. So, now we talk about buying rice today vs. starving to get it .25% cheaper next month; these purchases will obviously still happen.
I don't know if BTC could ever be the only currency in the world but think about if it, or something like it, was. In terms of this type of deflation, how would the world look? Would loans be made at negative rates? Could you borrow at a prime rate of -1%? If so, an interest-only loan might be reasonable. Would people borrow BTC and pay interest only to buy a nice house? Would renting make more sense?
Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times. Couldn't we still see temporary inflation during periods of a workforce decline (e.g. Baby Boomers)?
Maybe deflation like this could be a solution and not a problem. Would the world really end as we know it - like they tell us? Would we really spiral downward into oblivion? GDP would certainly take a big hit with that transition but how would we come out of that initial depression?
In terms of a possible antithesis to the USD though, let's pretend BTC takes over about a trillion dollars worth of M1 - checking and savings accounts - and settles at $100,000 USD per BTC and begins moving up gently along a 3% uptrend. So, now we talk about buying rice today vs. starving to get it .25% cheaper next month; these purchases will obviously still happen.
I don't know if BTC could ever be the only currency in the world but think about if it, or something like it, was. In terms of this type of deflation, how would the world look? Would loans be made at negative rates? Could you borrow at a prime rate of -1%? If so, an interest-only loan might be reasonable. Would people borrow BTC and pay interest only to buy a nice house? Would renting make more sense?
Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times. Couldn't we still see temporary inflation during periods of a workforce decline (e.g. Baby Boomers)?
Maybe deflation like this could be a solution and not a problem. Would the world really end as we know it - like they tell us? Would we really spiral downward into oblivion? GDP would certainly take a big hit with that transition but how would we come out of that initial depression?
Deflation is not bad.
It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.
Inflation is bad.
It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.
It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.
Inflation is bad.
It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.
Exactly.
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The same goes for borrowers. The cost of borrowing money is very high, even at 0% interest.
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If this ever becomes true, then interest rates in the free market will become negative.
I am not entirely sure where the idea that one would not grow rice in such an environment comes from. You are saying there is an implied increase in the value of cash money (whatever currency presumably not easily replicated - bitcoin, gold etc) and this increase is so big and fast one can live off of it while doing nothing. That assumes some interesting priors that do not seem actually possible in the real world ... for example, if such were true, the price of items that take actual "work" to make such as rice would go up so big and so fast as to make it worth doing again ... yes?
What I am trying to say and probably not doing so eloquently or succinctly (maybe some other newbs can help) is that it is pretty circular to say "assume a world where the value of money rises so fast its better to do nothing at all with one's life because you can get rich doing nothing" and then go on to say "in such a world people would do nothing." I do not think the former is possible. the scenario where deflation in a given currency is so strong for so long that everyone just quits their jobs is just not realistic.
Another mechanism which breaks the above: if a currency system experienced such dramatic appreciation on an ongoing basis and for so long as to convince people it would never end it will be supplemented with other means of exchange and would basically be a store of value and not a means of exchange AT ALL.. So what? Other currencies will be used...
Deflation is not bad.
It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.
Inflation is bad.
It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.
It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.
Inflation is bad.
It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.
I think they're both bad. They are essentially the same thing. That thing is the changing of the buying power of money. This is bad because the fundamental purpose of money is to accurately represent real stuff. It's not accurate if it's always changing. It forces the economy to run suboptimally.
One is good for some roles, bad for others. The other is bad for some roles, good for others. We could both accurately come up with good and bad things for each. They mirror each other in their effects.
For example, to use the rice analogy: If I am a producer of rice in a deflationary economy, I will be highly incented to sit on my ass and hoard my money instead of actually producing any rice. This is because say if it costs me 10 units to produce rice and by the time harvest time rolls around, the buying power of the currency is such that 10 units will buy all my rice, I won't have made any money at all. I should have just kicked back and relaxed.
The same goes for borrowers. The cost of borrowing money is very high, even at 0% interest.
For an economy to function optimally, the buying power of money needs to remain constant. Is that not the whole point of something that is used as a medium of exchange?
If you're talking stores of wealth to be hoarded, then that is something else.
Deflation is not bad.
It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.
Inflation is bad.
It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.
It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.
Inflation is bad.
It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.
The answer is simple. By definition a deflationary (what you mean by this is a currency that is relatively fixed in supply vs economic and technological progress, driving down prices and up the value of the currency) makes it difficult to fund government deficits because there is no option to create money out of thin air instead of taxation.
But the question is: how is that bad? In terms of regular people, would a deflationary currency be 'bad' for us? Many are writing about how loans would dry up. Inflation is good for loading up debt; deflation isn't. People would consume less and save more - this is generally bad for GDP but is it bad for the regular guy?
Implied in this question is: Should only the rich guys worry about deflation or would it be bad for us all?
i think it's not so much about "deflationary spiral" as it is about the simple fact that there is going to be significantly less investment in a deflationary economy. every project would have to have an enormous return on investment in order to be feasible
This is completely wrong. the % return is presumably unaffected by this in Real terms. One can be more sure that projects undertaken are likely the right ones because this 'deflationary' currency is not subject to interest rate manipulations of central planners, which likely result in mal-investment due to incorrect signals (i.e. interest rates that do not reflect individual preferences and are therefore unsustainable).
Thinking about the housing bubble as an example. In the absence of a credit-based flexible money supply would it have played out the way it had? i think the answer is obviously 'no' because 'yes you are right that interest rates probably would have been higher.'
That's different than saying that there would be less investment!! Probably capital would have been invested in more useful activities than building McMansions....
imo, the housing bubble was caused by 1. greenspan being overly generous and keeping interest rates too low for too long following the internet bubble burst 2. lack of regulation and craziness in the mortgage market through the early 2000s. this was in part due to the incorrect credit ratings given to cdos and clos by the ratings agency.
i think it's not so much about "deflationary spiral" as it is about the simple fact that there is going to be significantly less investment in a deflationary economy. every project would have to have an enormous return on investment in order to be feasible
This is completely wrong. the % return is presumably unaffected by this in Real terms. One can be more sure that projects undertaken are likely the right ones because this 'deflationary' currency is not subject to interest rate manipulations of central planners, which likely result in mal-investment due to incorrect signals (i.e. interest rates that do not reflect individual preferences and are therefore unsustainable).
Thinking about the housing bubble as an example. In the absence of a credit-based flexible money supply would it have played out the way it had? i think the answer is obviously 'no' because 'yes you are right that interest rates probably would have been higher.'
That's different than saying that there would be less investment!! Probably capital would have been invested in more useful activities than building McMansions....
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