Topic: Why such agreement that Deflationary currency is a bad thing - page 5. (Read 4460 times)

I'm not saying deflation doesn't benefit savers at the expense of borrowers.  It does, just like inflation benefits borrowers at the expense of savers.  And just like deflation causes malinvestment, so does inflation.  Your arguments here hold no water.
 
What I'm saying is that the deflation => deflationary spiral => the end of the world is not a given in a monetary system that isn't debt backed.  In a debt-backed monetary system that is totally the case, and we all know why.

I guess the disconnect here is the cause of deflation.  In a static monetary system, the level of deflation would be relatively close to the level of growth.  More goods and services chasing the same amount of money.  However in a debt-backed system, deflation causes a contraction in the money supply, so you've got more goods and services chasing a shrinking money supply - a double whammy, if you will.

I find it curious that you have never once addressed my assertion that the money system not being debt backed means that its fundamental behaviour, especially in the face of deflation, at least _could_ be different.  Despite my constant assertions that this difference is the reason for my differing opinions.  Which makes me think you're not really interested in an argument or a discussion, merely in spouting the same old Keynesian/fiat lines that we keep hearing from the likes of Krugman.

can we look at the past periods of deflation? 

http://en.wikipedia.org/wiki/Deflation#Effects

"Deflation was present during most economic depressions in US history[22] Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency, and because confused pricing signals[citation needed] cause malinvestment, in the form of under-investment."

OK, time to be pedantic here.  Your use of the word "theory" is that of the common usage (ie. an idea, more scientifically a hypothesis).

My "theory" is that the deflationary spiral is only an almost-guaranteed outcome in a system where debt and money are one-and-the-same.

The argument that all deflation is bad is rubbish.  In the economy right now, there are items deflating greatly in value.  My phone, two years old, is worth new today half what I paid for it.  I bought it knowing it would be half price in two years, because I needed a phone. 

Yet somehow, if the "average" level of inflation (by whatever particular weighting and adjustments that men paid more than I am are paid to make) is below zero, the economy will collapse.

But like I said - so much hot air, but only time will tell for sure.  And in the long run we are all dead.

No I am not stating my opinion, I am reiterating economic theory.  In a monetary system of fixed supply (let's say 21 million units in 2140) which encounters rising demand for money velocity driven by REAL economic growth, by definition, increases the price of the monetary unit.

Once people observe or expect to observe this, a deflationary spiral takes hold and destroys the REAL economy which depends on this monetary unit of transaction.  

Please start here
http://en.wikipedia.org/wiki/Quantity_theory_of_money

Reading that won't bring you completely up to speed but it's a start.  Sorry, I can't help but be pedantic on this topic.

A:  Because they get the money first, while it is literally more valuable than by the time it reaches us plebes.

B:  Because they're not consumers and are largely unaffected by inflation, except through A, which benefits them.

The thing I question about a deflationary economy is... do people take pay cuts every year in such an economy?  It is customary in many businesses to give "cost of living" raises on a regular basis... but in a deflationary economy, the business will receive less and less money per unit sold, so it would have to give its employees less and less money to avoid going bankrupt.  It matters not that the money on a per-unit basis is more valuable -- if it receives less units, and has to give less of those units to its employees.  So... in BTC-world, you take yearly pay-cuts.  I'm going to agree with another poster here -- the best currency is one that neither inflates nor deflates. 


"Encouraging investment" as you use it is trying to impose one's will over others.  Investment involves risk.  Risk-takers will invest regardless in order to make more money.  "Encourage investment" in this context is a euphemism for "steal value from savers so that saving becomes a net loss activity and investment becomes the lower-risk activity."  Note that you didn't decrease the risks of investment, you just increased the risk of saving.  The whole scheme is based on negative feedback.  A better system of "encouraging investment" would be to either lower the risk or increase the return.  A currency that doesn't inflate or deflate does just that.  It lowers the risk, because the company you're investing in won't be subject to the increasing costs of production, thus will have a better chance of surviving.  It increases return both due to the factor I just mentioned, and the fact that the money you receive from such an investment isn't devalued.  If you make 2% on an investment when there is no inflation, you actually made 2%.  If there was 2% inflation... you didn't make jack.  Good thing some a**hole decided for you that you should risk your hard-earned money just so you could break even...

You're looking at the "problem" wrong.  You're looking through the glasses that have been coloured by the current fiat monetary systems.  In our fiat systems, debt is money.  In these instances deflation causes the real value of debt to increase, reducing the willingness of people to lend, reducing the availability of debt, reducing the supply of money, and there you have your deflationary spiral. 

In a non-debt-based system, at lease one link in that chain (reduction in supply of money) is broken, so deflation doesn't need to lead to a deflationary spiral.

And as for your arguments in favour of fiat... you say "inflation encourages investment".... who says that a monetary system needs to either encourage or discourage investment?  One could argue that inflation encourages malinvestment, as it lowers the cost of debt, and lowers the return required for investment to be considered worthwhile.   Productive investment is good for all, malinvestment is not.

But you know what - your opinion, my opinion, all worthless.  We live in interesting times, and with some luck in my lifetime a significant number of people are going to be proven so incredibly, ridiculously wrong that future generations will look back upon that group as we currently look upon those who believe the earth is flat.  Which group that is remains to be seen, and in the meantime all else is hot air.

As somebody who has studied economics, can I just state that stable low inflation is the BEST course for any currency (whether virtual or fiat)?

Why else do the largest most established central banks try to achieve inflation rates of around 2%?

To slightly go into detail but not too much because I don't want to be pedantic.

Inflation encourages investment.  If on average you expect your holdings to be worth less in the future you will logically invest it to hedge against value loss.  Investment leads to economic stimulation in the real economy.  That is a positive cycle.  

Also, there is probably an optimal number for inflation that economies target to balance everything out.

I would include a link to a random article for support but I'm lazy.  Just google "optimal monetary policy".

I think that in moderation, stable inflation and deflation are both manageable in an economy.

I like your idea but if your follow that line the money supply should not grow in proportion to the population but in proportion to the productivity which is a very different thing.

I see the problem of a deflation spirale with BTC too but in my opinion there are a couple of reasons why with BTC this will not play out:

- BTC are not a government issued currency or the only currency used in an economy and never will be. So an increased exchange rate over time e.g. in relation to the USD will not be a problem for the economy because people can always go back to their local currencies if they despite the deflationary nature of the currencies. At least as long as we don't enter a phase of hyper inflation in the USD.
- In the future, BTC will have to compete with other crypto currencies. This will indirectly decrease the demand for BTC because there will be popular crypto currencies with similar properties (GoogleCoins, iDollar ?).
- In the area of payment, current payment solutions make it possible to buy something with BTC which can be cashed in the local currency in a matter of minutes, circumventing any developments in the exchange rate.
- When the exchange rate of BTC would go up too fast, the system would regulate itself for too many market players would fear a bubble and would start with panic selling. As seen around April 8, 2013.

Though I see that the exchange rate for BTC will generally go up in the future, I think that the self energizing effect that would lead to a deflation spirale will be compensated because of the reasons state above.

Ideally a monetary system should be neither inflationary nor deflationary. As someone pointed out, in general, one hurts savers, the other hurts producers. Not only that, inflation or deflation doesn't hit every sector of an economy at the same time, so for example inflation would not only hurt savers, but earners also, as the cost of goods rise sooner than people's wages. It helps the ones who get to use the money sooner, like borrowers.

Inflation and deflation are two sides of the same coin so to speak. Both are bad because they change the value of money, and since an economy isn't a homogenous spread of purely equal roles, this change in the value of money up or down is going to unfairly hurt some sectors and help others. It's not like inflation hurts all players in an economy and deflation helps all players in an economy. It doesn't work like that.

The best way to maintain a stable money supply is to have it grow in proportion to the population.

Money is a promise of compensation.

Someone does something for you, you promise to do something similar for someone.

Deflation means the whole system has no honor and you must expect everybody to give less back. The less you give, the less is stolen.

Inflation means the system honors your action by making people give a little extra back. The more you give, the more you get.

Then you study the Prisoner's Dilemma and see that the first option sends the whole civilization back to the stone age, while the second maximizes progress. Actually, because the second strategy is fragile versus greed, the optimal strategy is to adjust it intelligently, giving less back to people that hoards and giving more back to people that gives more.

This used to matter a little when falling behind in progress made you a slave of foreign nuclear powers...

The only valid line of reasoning for deflation as a problem is that it makes life easy and you get rusty.
Another argument that could be used... but isn't could be if it was referred to like a tax and the proceeds were used to defend the country making a bit less of an obvious theft.

Never believe this ridiculous crap that somehow taking money away from people makes us richer. All it can do is skew the stats short term as people panic to try to escape the threat by converting savings into houses, cars & debt, anything to shelter the abuse. Your common sense was right all along.

It doesn't stimulate an economy - it just creates an illusion of this in the short term as people scramble to escape the problem, moving into asset bubbles.

Some say that people hoard in deflation. Preparing and saving is a good thing to be encouraged! People still have to eat and live so they still have to spend those coins at some point.

The agreement we see everywhere is because we have had the idea of accepting inflation repeated to us for all our lives in the news and media. Eventually if we have no other viewpoint we come to believe it.

However, if we speak to locals when on holiday in high inflation countries we start to get a perspective - you've been lied to.

Watch out for the themes that are repeated again and again in the news. Notice how the volun on the TV goes up at news time. Look for the common themes (i.e common theme=family - for Paedos, gay rights, feminism) (common theme=violence, on tv,games,war,gun control). Now go the next step and tell me why. Then also you have to come to terms with it and know it's going to influence people... but you are too smart to go that way so let those young fools go to fight the good fight, let the women struggle balancing a career... and ignore all that and go your own way in success.

What would a Bitcoin be worth then? Nothing, you could have guessed it yourself. Meanwhile, the earth kept spinning with a lot of people living in the real world wanting things now instead of never as thought out by a very clever but unpractical scientist. Perhaps in a study room people have no immediate wants and will postpone their purchases until they die, but real life works just the other way around.

Massive deflation is quite a ride (as is hyperinflation) but mild deflation is nothing to worry about. Nobody will postpone a purchase because it will be 1% cheaper next year while more than 1% of your expected years of life is gone by then. Of course, deflation is a big problem if you permitted a bubble to build up which market forces try to wipe out exactly by deflation. But deflation is not the problem then, but the solution of free market forces. The real problem is blowing that bubble in the first place. Economist who keep ignoring this, drive me crazy.

Bitcoin would not stop the economy from going on. Things will magically stabilise between consumption and savings, depending on everchanging preferences. The price of money will adapt, solving fluctuations in that balance. That's the way free markets are supposed to operate. Don't let the argument of deflation scare you from thinking about it more thoroughly.

Can I make a couple points here... 

First let's clarify the definition of save.  If you "save" your $100 paycheck and invest in $100 google stock I don't consider this "save" (instead I would classify this as "invest" in the economy).  If you "save" and put it under your mattress I consider this "save".  The arbitrating logic of my definition of "save" is if you are "saving", you are decreasing the overall lending capacity of the overall economy.  This only occurs if you sit tight on the currency and don't allow some other person or person to use it.

On the other hand, if you don't "save", and "invest" or "loan", what this does is stimulate the economy overall.  It does so by increasing the money supply overall.  When people feel like their gold under their mattress is quickly losing value, they will pump it into value creating value and creating businesses.  This creates an overall positive to the real economy.

Going back to your comment, if you are a producer in a deflationary environment, you will also not sell your goods this year because it will be worth more in the future.  Why spend a fixed cost to produce this year when the profit for the same produce next year will be much more profitable?  Things will grind to a halt.

Point in case, if national economics departments accounted for real estate purchase prices in their price indexes, a lot of the countries in the current crisis would turn out to be massively deflationary.

http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index#The_hidden_change_in_prices_of_housing

It can become a spiral of death.

Let's say on Day #1 I sell Stuff for BTC100. You decide to wait because on Day #2 BTC10 will buy as much Stuff as BTC100 on Day #1. But I assume that too, so I give up, sell for BTC10 and postpone my purchases too. But then you still decide to wait, because it's still true that on Day #2 BTC1 will buy as much Stuff as BTC10 on Day #1.

Day #2 comes and prices have deflated to 1/10, but I still haven't sold any Stuff. So I drop my price again to BTC1. It sucks but as long as I believe on Day #3 BTC1 will buy the same as BTC100 on Day #1, I'm not that bad.

This keeps going on till I say, eff it! It's more profitable to rebrand myself as a luxury product. On Day #4 I'll sell the same Stuff for BTC100 again. I only need to sell 1 Stuff to compensate for losing 99 cheap sales.

So Day #4 comes and only a bunch of hoarders can buy Stuff. I fire most of my workers because now I only need to produce 1/100 of Stuff. There's also a lot less Stuff being produced, so non-rich people has to buy Cheapo instead.

Then you can repeat the same for Cheapo.

Everyone here can agree that inflation pick the pocket of the Saver (which I why you crazy Austrian zealots are so vehemently opposed to it).  Guess what Deflation dose, it picks the pocket of the PRODUCER.  How much do you think someone will produce when they are being robbed for doing it?  And not just a little, it's like 1000% a year deflation here in BTC land, their is virtually no legal business activity that can make enough profit to overcome that kind of deflation rate.  You may not like the Flood of inflation or the biblical flood of hyper-inflation will certainly kill an economy but that's no reason to wish for the Drought of deflation or this fly-into-the-sun hyper-deflation, the mean is ware the virtue lays.