Topic: Why such agreement that Deflationary currency is a bad thing - page 4. (Read 4415 times)

Remember that in deflationary systems, wages fall as well as prices. So you'll still have to work as long! We're in a semi-deflationary period now, with minimum wages frozen and zero hours contracts and juicy salaries only available to the elites.

There have been only two real periods of sustained deflation that we know of. One was during the Long Depression of the 19th century. That depression lasted from 1873 to 1896 - over twenty years. It caused massive movement across teh globe of desperate people - that was when the huge movement of people from Europe to the United States happened - people already in America didn't like it and at the end of it, passports were introduced, to prevent mass migration. So one result of the deflationary period was social - free movement of people across the globe (which had been enjoyed since human beings first evolved 170,000 years ago) stopped and came under the control of governments. A big loss of freedom if you subscribe to libertarian views. The second result was an upsurge of anti-semitism in Germany, Austria and Eastern European countries - that deflationary period in the late 19th C was when it started.

The second deflationary period was the Great Depression of the 1930's. That caused movement of people too, eg from Oklahoma to California, but not as much as during the long depression, as passports had been introduced, which reduced international movement. For example desperate Jews were turned away from America and shipped back to their deaths. And we know how this played out in Europe - we got another world war.

So deflation can result in some sinister stuff. Inflation results in sinister stuff too. Some people think that if you are against inflation you must be for deflation. Actually we should all be aiming for the sweet spot where prices hold rock steady, with neither inflation nor deflation.

I'm just talking about price of one thing.  The currency unit.  By definition, the value of the currency unit goes up 3% in a constant 3% deflationary environment.

If I am to borrow this currency unit (purely just asking somebody for cash) at the prevailing interest rate why shouldn't I look directly at it's expected average future purchasing power?

What attributes of the prewar period necessitated higher money supply which was not achievable by gold bullion?

The really short answer - so governments could print money to pay for war.

So in aggregate how many people would take out mortgages the year that somebody institutes a policy that guarantees constant deflation for the foreseeable future?  After that date, who would ever take out a mortgage?  How bout the aggregate level of debt in the entire economy?  It crashes.

To be even more explicit the correct theoretical cost for loans to be enticing to apply for would be at negative interest rates.  this is where the credit market equilibrium would be achieved.

Unfortunately, the banks would think to themselves a) should I loan this random person $100,000 and get back less than $100,000 in the future or b) just hoard the $100,000 and be guaranteed to still have $100,000 which will be worth double in real value in 24 years?

why did they abolish gold standard in your interpretation?  What short term issues did they cite before making the change?

Leaving off the table (for now) that which you stated as such.  Agree we're not merely talking governement debt - all debt.  Happy to leave gov't debt to the side.


If you don't go into debt to buy a house, either you rent or you live on the street.  Someone has to own the house, and chances are there will be some debt attached.

Just because the environment is generally deflationary doesn't mean everything goes down in price - just like in our current inflationary environment, some things don't go up in price.  If you go into debt to buy a depreciating asset, or an asset that doesn't produce income, then that is bad debt - the problem with our current inflationary and debt-backed fiat environment is that such debt is outright encouraged. 

Up until, what, the 20th century, money was backed by gold, which was arguably deflationary.  The world worked "just fine" up until we abandoned gold.  The monetary systems of the 20th century are an aberration, and future history will mark it as such.  Chances are none of us reading this will be around when the matter is decided once and for all, although the success of bitcoin over the next years and decades will certainly make my assertions more likely than yours.

You concede that credit drying up is a trigger for a spiral.  I agree credit is one factor, but also the simple "spend versus put under mattress" question is a big factor but let's leave that aside for another post.

What category of debt relates to "debt backed money" which you are talking about?  I think you mean that gov't creates debt which (indirectly) creates money when the Fed buys it like they are doing now.  This is actually not correct through all stages of the cycle (Fed sells debt during good times) but let's leave that aside for now.  This means you are only taking the impact of government debt off the table with a non-debt based currency (actually this statement is tenuous but I'll give you the benefit of the doubt.)  

Not all of debt is issued by the government.

How will non-gov't debt be affected by the same phenomena when there is "stable deflation"?  How will corporations/individuals think about obtaining loans in this environment?  You can get a $100,000 loan today to buy that house you wanted but actually in the course of paying the mortgage, you pay back an amount which is actually way more valuable on the day you pay it back.  $100,000 in 24 years would be able to buy 2 of the same houses in a stable 3% deflationary environment.  So the environment means that either a) you can lend money to buy 1 house today but the contract states you need to pay back with money which can buy 2 houses in the future or b) wait until you can afford the house in full at its market price.  Would you take out this loan?  If you can't afford one now, what makes you think you can afford two in 24 years?  And this math assumes that the bank will lend you money at 0% interest rate!  

Concisely, a stable deflation environment incentives you NOT to purchase big ticket items now.

I would never apply for ANY loans in a deflationary environment.  Hoping that other people are logical like me, what happens is non-gov't credit demand dries up.  Less homes are sold, less corporations fund projects, the system grinds to a halt.

Do you agree?  Or are you also saying we need to abolish debt altogether to make deflation (and BTC) work?

I actually think that both Keynes and Friedman would have the view that deflation breeds recession and spiral.  They just explained it in different ways.  Here is support for Friedman:

http://en.wikipedia.org/wiki/Monetarism

"Within mainstream economics, the rise of monetarism accelerated from Milton Friedman's 1956 restatement of the quantity theory of money. Friedman argued that the demand for money could be described as depending on a small number of economic variables. Thus, where the money supply expanded, people would not simply wish to hold the extra money in idle money balances; i.e., if they were in equilibrium before the increase, they were already holding money balances to suit their requirements, and thus after the increase they would have money balances surplus to their requirements. These excess money balances would therefore be spent and hence aggregate demand would rise. Similarly, if the money supply were reduced people would want to replenish their holdings of money by reducing their spending. In this, Friedman challenged a simplification attributed to Keynes suggesting that "money does not matter."[5] Thus the word 'monetarist' was coined...It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch."

If nothing else, you made me smile today, and for that I thank you. 

You failed to mention that all of your economics teachers likely have memorized Keynes' books and worship his every word. Which is ironic because Keynes is no longer stating theories because he is dead, and thus there is no more supply of his theories and thus no inflation of further theories. So Keynes should be ignored by anyone who supports inflation.

Come back when you understand Hayek, Mises and Friedman.

In a deflationary currency producers can still profit by selling their goods for bitcoins. All you need to do is hold your bitcoins for a few days after receiving them before either cashing them out for fiat or using bitcoins to pay for the business expenses etc. Investors/producers still make more money than savers.

Also, a currency will only deflate if people are using the currency. Bitcoins won't hit $1000 if nobody is accepting bitcoins.

The masses run hot and cold. Bitcoins will act just like gold. Up for years then down for years. It was below $200 in the mid 70s now it is above $1450 but was several hundred dollars higher at the start of the year.  You have already seen one spike in Bitcoins just a few weeks ago. If it had stayed at that level for a few months and then dropped by 50% a lot of people that think it is so cool would be saying it is junk. The one thing I remember from public school is the Tulip Bulb Bubble. Everybody thought it was cool until the day it was not.
I am not putting Bitcoin down I am just saying when something is hot it goes up in price, when it not it drops in price. Merchants may have a problem if the price is volatile or rises too fast. The time delay between buying and selling could take all their profit just like the dollar in the currency market.  Only time will tell with Bitcoins. In some ways they are just like Apple stock it was the richest company in the world until the big boys took their profits. Who knows the Federal Government may come close to a balanced budget in a few years.
I agree that people should live within their means. Some debt can be good like buying a house to live in but not to flip. Or a car loan for 2 or 3 years but most credit card debt is bad if you are just buying stuff. If you are just buying stuff than you need to pay in cash or use your credit card like cash and pay it off at the end of the month.

As compared to a stable purchasing power money, it wouldnt as accurately reflect the will of consumers in their relative preference for savings vs consumption. It would skew it in favor of a higher savings rate than they would have otherwise practiced. In my opinion its better than the opposite but not as good as a stable currency.

also it would incent people to invest in money, which is a non productive asset. It would be much better if people invested in capital instead.

No, you wouldn't be stupid to invest in real assets - deflation merely raises the bar.  If you can get a risk-free 10% p.a. in a cold wallet, any investment must beat this benchmark to even be considered.  In my personal case, I've invested my bitcoins in bitcoin-producing investments, so the deflation vs fiat is not a concern.

Current bitcoin deflation is only a problem when compared to fiat.  WHich is unfortunately the world we live in right now.  In a bitcoin-only world, once we reach some semblance of steady-state, the deflation vs fiat would matter less if at all (for example, how much do you personally care that your country's currency moves by 1% or 2% a day against, say, the JPY or the Euro?)

Or maybe I misread what you posted. 

What difference does it make to the deflation argument whether BTC is a circulating currency or a store of value used alongside fiat etc? If BTC is continually appreciating against fiat faster than normal investments then the same argument applies: you'd be stupid to invest in real assets, stocks and bonds etc with your fiat when you can buy BTC.

I don't mean fractional reserve.   I have no problem with fractional reserve, as long as the fractional nature, and the risks behind it, are made plain and clear to all depositors.

Do a quick google for "debt backed money" and you'll see what I'm saying.  Try to weed out the nutters and look for the facts behind it.  The vast majority of money in our currency systems are borne from debt - You go to the bank and ask for a loan, and the promise from you to repay that money is all that is needed for the bank to effectively conjure that money into existence.

Even in a monetary system that isn't backed by debt, severe deflation can still cause problems.  And what we're seeing in Bitcoin right now is probably some of the most severe deflation (and volatility) that you can imagine in a currency.  (And yet people are still doing their level best to make a go of it - interpret that as stupidity or optimism as you prefer).

The reason deflation causes disaster in a debt-backed system is that deflation causes the money supply to shrink, because loans dry up, leading to the deflationary death spiral.  In a system where money isn't backed by debt, the drying up of credit doesn't affect the actual supply of money, so you don't have that vicious feedback cycle.

That is the reason central banks try very, very hard to avoid deflation and actually target mild inflation - they know that their monetary system would verge on collapse in the presence of persistent deflation.  However they don't publicise the reasons behind, merely trotting out the "deflation is bad" line so often that it's become accepted truth.  Problem is, it's become accepted as a universal truth, rather than what it really is - the truth for the current system which they are charged with maintaining.

This does not necessarily mean its inflationary.....  inflation also takes into account demand as well as supply, for instance if everyone in the world started using bit coin tomorrow even with all those shiny new coins you would see massive levels of deflation and this IMHO is why btc price is generally on the rise and will continue upward again soon, simply put the bit coin community is growing and very likely faster than new coins can accommodate right now.

In a consistently deflationary economy, wouldn't anyone that got enough money start to be less careful with how they spend their money, since what they have saved continues to sustain them just by sitting still?

Yes, I ignored that point my bad.  Let's talk through.  Can you explain your definition of debt-backed system?  Do you mean fractional reserve system?  Why does the double whammy in a debt backed system negate the single whammy of deflation in a non-debt back environment?

Also stable low inflation rates promotes growth.  I'll be more likely to buy something today than save to buy it tomorrow.  Or I'll invest my cash in goog stock.

I actually think creating a lending system for BTC will adress the deflationary spiral issue