Topic: Why such agreement that Deflationary currency is a bad thing - page 2. (Read 4460 times)

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.

Only if BTC is the only possible crypto-coin avenue for people to reinvest in, that's not been the case for some time now, BTC is still preeminent over the alts in its hype generating ability and thus network size, but network size is not the only source of utility, the other source is technical improvement as these accumulate under a competing coins banner they can eventually surpass the utility of BTC and outgrow it's network.  It's the old myspace vs Facebook story all over again.  I'd also wager that coins that can solve stable valuation (or at least reduce volatility significantly) will also have an edge.

The inflationary nature of bitcoin seems like a drawback to me.  Stability would be optimal, however even with a gold standard there is some inflation (unless aliens steal the gold!).  So less inflation is better than more.

When once very expensive things go down enough orders of magnitude, demand will rise since more people will be buying the stuff they never had a chance of having before, and with demand rising they can raise the price against the deflation. Where exactly is the problem?

The only thing is you can apply the same argument against btc spending as you can with btc loans.

Why spend your btc now if you know you can hoard BTC instead while spending fiat?

In the end btc goes into deflationary spiral and explodes to zero even while assuming usd exists.

I think that your assertion is likely how things will develop. The Fiats won't disappear, rather BTC will act as a check on a currently unchecked group of central banks. People will no longer stand for negative savings rates. People will take their loans in fiat and keep their savings in BTC.

If  company wants a loan they certainly won't want it in BTC, they will ask for it in Dollars, Yen etc. The return on investments will be competing with the return on savings (read BTC) just as it always has. This will serve as a winnowing process with the less attractive investments failing to achieve funding. This may also have the effect of reducing the endless phenomenon of recurring bubbles as excess money sloshing around looks for a home. People will flock to a store of value that is much more liquid than gold; BTC.

In the end, BTC won't be the only currency in existence; the likely position of BTC will be to take over a large portion of what economists call M1 - the most liquid portion of the entire money supply.

once you pay back the loan, nobody will take out another loan, based on the preceding argument.  the drying up of all lending activity starts the spiral.

i am assuming that BTC is the only currency that exists.  in the real world, people would just continue to loan in USD, which we trust the banks to keep at stable low inflation rates.

the point of the conversation is to highlight why BTC needs to address the limited supply issue before it will achieve stability and potential to truly become a widespread currency like the dollar.

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

And that is where I believe you are wrong.  In bitcoin land, paying back a loan does not reduce the supply of money, so there is no deflationary spiral.  In bitcoin land, paying back a loan simply means that those bitcoins are once again available to be loaned out. 

Just plain old deflation, which is good for savers and bad for debtors (the exact opposite of inflation, which is good for debtors and bad for savers).

Computers are more efficient than humans, they can make more mistakes faster than any human.

I feel like the solution is an intermediary body that assesses the supply and demand in the economy and sets a digital exchange rate in bitcoins for regular transactions.  Until recently, inflation and deflation were much trickier in my opinion because you had to price things in dollars (or other currencies), not in X good or service worth of $.  Dollars (for instance) are based on all kinds of elements of supply and demand and manipulation and regulation.  The price of dollars fluctuates wildly.  But they are considered to be the baseline of how we figure the price of other things?  

The classic question is... what else?  Money can be traded freely with all other goods and services, so it is meant to kind of average out to some sort of equilibrium on it's own.  That is capitalism.  The invisible hand controls the economy so that nobody else has to.

However.  The invisible hand does a kind of terrible job a lot of the time.  But that doesn't mean that people could do a better job, and indeed they can't.  But computers... Computers have never had the opportunity to try.  Now I am not saying that we should abandon the market system.  But maybe instead of the Federal reserve (in America) trying to figure out what is best for the country and how the 1 or 2 things they can actually do will change the state of affairs, we could adopt a unit of currency that is more flexible and that can accurately and quickly adjust to things that happen.  Because bitcoin is digital and open source and divisible into tiny pieces, it is reasonable to apply other digital techniques to them that just simply wouldn't be possible or practical to use with dollars.  So in one way, we could have a bitcoin backed economy in the way we currently have a debt backed economy.  But just like people don't pay their bills in treasury bonds, there is no reason to figure the current value of goods and services in bitcoins themselves.  Rather we could have a standard unit of bitcoin that changed constantly based on the supply, demand, and value of goods and services in the economy.  Just like the value of dollars changes constantly based on the supply and demand for treasury bonds, and the US economy as a whole.

Basically.   Instead of spending-  a bitcoin-  We could spend a bitdollar worth of bitcoin.  A bitdollar IS X bitcoins where X is the price that reflects the current monetary situation.

I can't wait for the first robot Fed Chairman.

How do you know when exactly you are going to die?

It really does promote "spending only on what you need" as I made promise to myself not to spend any btc unless I'm going to die.

The definition of getting a loan is you receive not pay money on day 1.  If you expect the value of money to be higher in the future, that means your loan gets exponentially more expensive to pay back.

Also, one thing that I didn't mention is whenever the rate of deflation increases, the value of all your outstanding debt goes up in value accordingly.  What this means is if you already owe $100,000 on your mortgage (perhaps you took out the loan when there was steady inflation).  Then if the environment shifts toward deflation, you find that your wages are going down, buying houses now are much cheaper in nominal terms, eg the resale value of your house is dropping, yet you still owe the same $100,000.  Because of this event, your net worth decreases in real terms.  Furthermore, if you think more deflation is to come, you immediately do everything you can to pay off the loan now.  (& that action contributes to decreasing overall money supply which propagates a deflationary spiral.)

The main point is, in a deflationary environment, it is irrational to take out any loans or leave pre-existing loans outstanding.  In an inflationary environment or exact money stability, loans are ok to initiate or leave open.

If you won't be able to afford it in 24 years, how do you plan to pay the loan in the first place?

I agree with this way of approaching the thread.  Well stated and agree, moral hazard must be avoided in the solution

I make some decent money by loaning out bitcoins.

More of this theory stuff of people assuming things that in reality actually happen.

And it is not to say that it is a good or bad thing--I just believe in the free market and actual freedom. I think the choice of a deflationary currency--like gold has been for 1000s of years--is an intelligent investing choice. That is why I'm interesting in bitcoin.

Yes, deflation does cause for hording and causes for the velocity of money to plummet in times of crisis when there is only one currency--but we live in the real world, so a deflationary currency is great for saving. It's really shitty for doing loans--which is what 95% of the 'real economy' is based off of, so that is the greatest disadvantage in my mind. I'm am sure however someone brilliant is already working on an algorithm that could give bitcoin loans in a way that wouldn't totally fuck you on the payback later down the road.

You are making a lot of assumptions that are simply not true (very common assumptions though).

I use bittronic.net as my hosting service. I pay in bitcoins monthly.

You can buy just about anything on the Internet at bitspend.net

I spend my bitcoins all the time, I do not regret spending it any more than I would regret the amount of money I have spent on things throughout the year in dollars.

The key to a deflationary currency is that if you have the choice between having and spendng a deflationary currency or having and spending an inflationary currency, why would you choose to use inflationary currency?

Assume bitcoin gains 1% in value per day compared to the dollar (a conservative estimate).

I owe $66 per month for my dedicated hosting service on the 1st.

Dollars:
I get paid on the 15th, I decide to pay my hosting service early (since the value of my dollar goes down anyway, no need to wait). I pay $66 for the next month's service.

Bitcoins:
I get paid on the 15th, I convert those dollars to bitcoins. I wait until the 1st. I pay the equivalent bitcoin amount for $66.

For dollars, there is little change.

For Bitcoins, I have to wait 3 days to move my bitcoins to MtGox where I convert my dollars to bitcoins. Total cost: .5%. It sits in my wallet for 12 days. 12 days at 1% equals 12% gain in value minus the .5%. This gives me an 11.5% discount or $7.59.


My biggest regret with bitcoin is when I see my bank account and I have any dollars in there losing value.

Prices shouldn't be rock steady but subject to dead normal supply and demand.