Topic: Why such agreement that Deflationary currency is a bad thing - page 6. (Read 4415 times)

I respect your hero status, but with my economics background, I am just echoing what major economists have communicated about the drawbacks of deflation.  In my opinion, economists and central banks so fear this situation that they create a margin of error by targeting 2+% inflation.

Please respectfully read this wiki:
http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral

That simply isn't true, most people save to buy something they can't afford, what an inflationary system does is get rid of their savings and force them to get a loan which in turn means they have to work it off longer than if they just saved up, also Bitcoin is designed to be deflationary and the value of it is rising far faster than in a year, you'd have to have ignored all historical prices to have come to your conclusion.

When I first heard about bitcoins, my biggest concern was that the system stops creating BTC supply at 21 million.  This implies future deflation because prices are determined by the supply and demand of a currency.   If supply of the currency is flat while demand is growing, you get a massive deflation.  Deflation means that your BTC will buy more next year than it does this year.  For example, this means that a bitcoin today can buy one apple but next year can buy two apples. 

Deflation is toxic to an economy because it promotes people to save more/invest less.  This creates a downward spiral because when people save more/invest less, there is no money flow to economic growth.

This is why the Fed is so actively printing money with QE etc. to prevent a deflationary spiral for the US dollar.

In BTC's case, the only long term saving grace is if it can establish the fractional reserve system.  This would allow regulated entities (banks) to lend BTC to each other and continue increasing the BTC supply

Some thoughts why Bitcoins don't need a central banking system and how the deflation problem could be solved:

http://wordsinthecloud.blogspot.de/2013/04/do-bitcoins-need-central-banking-system.html

Very good point there. Why would I buy a new smartphone if I know there will be a better generation within just half a year? Because I need a new smartphone. All things which are considered necessary with our standard of life will still be bought while having a mild deflation. 

You are spreading the fallacy again. Of course I would wait a month if the price of that TV is expected to be 100% then. Probably the same with 10% a month price decrease. But now let's assume that Bitcoin matured and reaches a stable stadium. The annual deflation is about 2%

Would you hoard for 80 years of your life and never ever buy that TV until you die or will you finally put this bad thinking out of your system and realise that the only thing of value you have is : time. No one gets more time per second than anyone else. People will spend if deflation is mild. They spend now as well while technology improves by leaps every year. People cannot and will not wait their whole life to get a piece of the action.

But fair enough, if BTC remains there, our points will be tested and tried and there is nothing we can do about it  

Well said. The 'bad' is in terms of our current paradigm.

Over-consumption is encouraged by 5% inflation and 1% risk free returns on treasuries. I wonder if the world wouldn't be a better place with only BTC as currency. Saving would soar (hoarding) and we would all live within our means (no debt). Deflation would become a function of population increases and productivity gains; others' successes (e.g. new home built, new company, etc.) would make all BTC holders wealthier incrementally and pro rata.

Deflation is "bad" in the way that it postpones consumption.

Imagine you wanted to buy a new TV set and you knew that next month its price would be lower, it would be quite rational for you to postpone your shopping until next month.
But then again, next month, you would knew that the price will drop more if you wait more...

Deflation is good for hoarding, bad for consumption whereas
Inflation is good for consumption, bad for hoarding.

It really depends on how stable Bitcoin becomes as a world currency.  The whole 1BTC now == 60BTC later thing might look right now, but at some point I'd hope that the BTC:USD price would stabilize, either because BTC becomes big enough that the daily purchases and sales don't affect the price that much (more likely) or because governments drop their own currency in favour of BTC so there is no continual rebasing required (very unlikely but wouldn't it be nice?)

how much total money is in the world?
how much would the price of bitcoin have to be if it replaced only 5% of it?

While the 12%/yr distribution of BTC is inflationary, I do think that the final number of 21 million is the important point. It is well known and is what is causing the deflation in spite of the temporary and declining 12% inflationary force.

Also, IMHO price discovery would be more efficient and we'd have better liquidity if a decent trading platform were developed. I think I have read that a dark pool is in the works; maybe they will offer bracket orders with stops/limits.

While that is true, you would be paying a 'one pizza loan' back with the number of Bitcoins that would now buy 60 pizzas. It is the same deal as if you were doing dollar conversions. A mortgage, 10 years later, will be the amount of BTC that could now buy two of the very same home you borrowed for. See how borrowing is just a bad deal with deflation? People would start living within their means and spending/GDP would plummet. The current power structure would be upended (financially speaking) and a new system of economics/commerce would emerge.

The money stock is currently inflating at around 12% a year.  To offset this the bit coin economy would need to grow by that amount in order for prices to remain stable.  It is very difficult to get statistics about how many bitcoin transactions are actually used to purchase goods and services. We are currently seeing price deflation due to speculation that the bitcoin economy will expand rapidly in the near future.

No, because in a BTC only world you wouldn't be continually linking your BTC back to the price of the USD, as people do nowadays.  *That* is the true shift which needs to occur, and that is when Bitcoin will start to be truly interesting.

As more and more people reject their own fiat currency and exchange to Bitcoin fiat it seems that infinity is the direction Bitcoin will head. If the world has a 'next' financial crisis then it could be the case, one day, that this apolitical currency may have to absorb the value of all property. I don't know what that number is but it sure lives in infinity's neighborhood.

Infrastructure has a long way to go but I did just see an article in the WSJ regarding CIOs keeping a close eye on Bitcoin. I can only assume that is with regard to transacting business in it. [Suspicious link removed]j.com/story/latest-headlines/SS-2-63399/SS-2-206822/[/url]

I think one important development for liquidity and price discovery would be for a decent trading platform to emerge. As a former futures trader I'd like to see a platform with ability to enter bracketed orders with limits and stops. I suppose that borrowing BTC in order to sell it short should be possible, as well.

With regard to spending in a BTC only world: spending would plummet. Like I posted a day or two ago, imagine that you took a loan one year ago to buy a pizza; you borrowed three Bitcoins. You go to pay it back today and realize that you just paid $630 for that pizza! That is how loans would look in a deflationary world, albeit much tamer than in our last year. The point is that loans would grow larger over time vs our current system that minimizes them over time relative to our currency. As you know inflation encourages spending now and borrowing, deflation encourages the opposite. I think that reasoning is sound. I think that world may even be a better world.

That's incorrect. Bitcoin is NOT inflating at the moment, it is DEFLATING. It's true that the supply of Bitcoin is increasing through mining at the moment. This would normally decrease the buying power (value) of BTC. It's same as when central banks print fiat money. This is what you call inflation.

But due to the current hype and the growing awareness of more and more people about Bitcoin the BTC-demand is exploding and thus the value is increasing dramatically (=deflation). The inflation-factor is just so much smaller than the deflation-factors at the moment.

After all 21 million BTC have been mined, BTC will be still strongly deflating as long as it's still spreading around (big demand). And after it spread around the world (no big demand by people without BTC or there are no more people without BTC), Bitcoin will be still moderately deflating, because Bitcoins get lost. That's why you say Bitcoin has a built-in deflation. There is simply no possibility for inflation except a all-time BTC-price drop (and that will only happen if there is a proof that BTC doesn't work (technically, conceptionally or regulatorily -- I personaly don't think the latter will happen).


Inflation happens when money is created out of nothing. Fiat money is either created by printing money (exactly what is not possible with BTC in long-term) or by banks granting credits without holding reserve, also called credit money (both IS happening all the time).

This is a big part of it.  Bitcoin is finding its level, and it's at the beginning of a pretty long journey.  There is going to be a lot of pushing and shoving going on before it does so, with governments, asset holders and many others all weighing in and attempting to influence the outcome.

Will be an interesting, if not necessarily fun, ride.

+100

Thats why they invented this "deflation is bad" nonsense and programmed it into our minds.

Some interesting ideas here. While the Bitcoin creation process can be seen as inflation, I think that it is the expectation of the 21 million and no more that makes Bitcoin appreciate like it is. Even now, as coins are minted, the price to buy Bitcoin is soaring (deflation) because of the expectation of scarcity. This expectation will never go away.

Imagine taking a loan in Bitcoin one year ago. How painful would it be to pay that loan back now. You would have bought a pizza with a loan of 3 Bitcoin and say you chose to pay it back now, you'd have paid nearly $600 for that pizza. That is exactly how loans would look in a deflationary system.

If the world adopted Bitcoin exclusively then the value of all products, property and capitalized shares of ongoing businesses would have to cram into 21 million units with 8 decimal places. At that point, we would likely be working within that 7th or 8th decimal position for common, everyday purchases.

With a currency that appreciates over time and, literally, goes up a little along with everyone else's Bitcoin each time someone builds a new home or starts a successful company, it would be like owning common stock in the whole world. Everyone would root for everyone else's success. Gains for someone would be gains for all because something new, that has value, is being crammed into those 21 million units we'd call our money.

Am I making sense here? Could this be a uniting phenomenon and cure some of the problems plaguing our current system?

Eventually, demand and supply will balance. The balance is just a little bit different than with fiat currency, but its unsound reasoning to think that Bitcoin would continue to appreciate to infinity while an economy would shrink because nobody spends. That will simply not happen.

Of course, what will happen is that people currently in charge of fiat money cannot influence a Bitcoin economy that easy. Markets will set the demand and supply, not the beneficiaries of the current system. I'd like to try that new system for a change.