Topic: Will deflation be the fatal weakness of bitcoin? (Read 10669 times)

That's what a fallacy is. It's a failure to make a well reasoned argument.

*sigh*

I guess you didn't bother reading from the ad hominem link provided. Let me explain it for you:

Abusive ad hominem (also called personal abuse or personal attacks) usually involves insulting or belittling one's opponents in order to attack their claims or invalidate their arguments ...

You seem to be stuck on my mentioning that I designed a theoretical monetary system, which I did in response to your quote:

Any system using hard currency has to be partially debt-based as well.

What you failed to consider is that I never said how much merit I felt my design had. It so happens I believe the concepts need refinement should it have merit overall.


As I alluded to earlier, I've lost interest in carrying on this discussion with you.

I think in this case it was a Moving the Goalposts fallacy. But it may only be a matter of perspective.

Unfortunately for you, I did not make an argument against anything in that sentence, so there is no ad hominem fallacy.

You, however, have twice now used a red herring.


mm hmm, carry on.

Advice on how to debate more effectively is to avoid using fallacies as you have just done:

Ad Hominem Fallacy

As you don't even seem to know that basic convention I didn't bother reading the rest of your reply.

For the benefit, however, of any that may be interested in following this line of discussion I'll add one more response I consider important.

I realized where you may be confused as to how deflation can make people richer, and result in more car sales.

I think you have a misunderstanding of deflation as I mean it.

Deflation is a shortage of money supply to the ratio of people in an economic system. Inflation of course is the opposite - an abundance of money supply to the ratio of people, which causes rising prices.

There are two ways to arrive at a shortage of money supply, or deflation... Either more people enter an economic system without corresponding rise in the money supply, OR the number of people stays about the same, but money leaves the system.

In my BoomTown example I'm obviously talking about people entering the system to cause the deflation. However, I think you are talking about what I consider a more unconventional form of deflation: money leaving the system.

Ironically, that's the exact situation we have with the world's dollar based system, which has become the convention. Generally speaking it's not possible for money to leave an economic system. The only way that happens is if participants lose the money physically or perhaps bury it with them, mimicking ancient Egyptian kings. Of course that's not to be expected on a widespread basis.

Unfortunately, the dollar based system does provide another way for money to leave the system. Dollars come into existence as debt; IOUs. Therefore, anytime someone defaults on repayment that money effectively evaporates, disappears, or deflates from the system; it was never really money in the first place.

This form of deflation certainly is to be supremely feared, and I can see why you would rail against it, because deflation of money that way takes away wealth with it.

It's also important to note, you can have both forms of deflation happen at the same time, people entering the system and money leaving the system. We experience this in our dollar based system with population growth (birth, immigration, etc.). And you can have deflation and inflation happening at the same time; this is also currently happening in our dollar based system.

Deflation as I mean it does not remove wealth from the system, and that's why products like cars become more affordable to people.

He was sarcastic.

Already - https://bitcointalk.org/index.php?board=7.0

Damn, I wish we had an economics forum here. Deflation is such an important topic, maybe there should be a sticky thread about it there.

Ask Wall Street.

I personally think it is pretty damn rude to call the OP an idiot for just asking a question, that why I had to really stop and think before doing the following...
"+1"

I didn't realize that you were a nutjob and pontificating on something that had no relation whatsoever to the discussion.


Right because for some reason I was obscure in my meaning of hard currency so you gave me an irrelevant wikipedia link and went off on a tangent rather than respond to what I had said in that paragraph. Not that it was anything that important.


Where again is this perfect world you speak of? We can make lots of things sound nice when it's a perfect world, but it's not reality.


Based on what evidence? That bankers didn't exist during pre-government gold currencies? Maybe in that perfect world that we don't live in.


This is your response? The point is that the value of those peoples' production does not hinge on currency. Value exists regardless of currency. Currency is only a means to trade value easily. All BoomTowners did was mine gold, and it's worth something because it's rare and they got lucky. They didn't do anything productive to get it except mine, which in the grand scheme of things is rather unproductive.


All these new peasants moved in and we just happen to be richer! Free money! Oh wait, existing money is just worth more it's totally different! You may think deflation is a fairer system, but it is still a system that takes advantage of people. These simplistic arguments that fly in the face of the history of gold and what was done with it should not carry much weight with people who have studied that history. It is not the governments that started this wealth siphoning, it was the bankers. With 50% of all the bitcoins in existing to be mined by the end of this year, loans are going to be a big part of the bitcoin economy if it is to go anywhere. Rather than actually fixing the problem of wealth transfer, bitcoiners would just prefer that they be the receivers rather than the existing bourgeoisie. Maybe a larger part of the economy will benefit, but probably not.

Here's someone who speaks with genuine authority on the matter .... Hayek

"If we start on this soon we may indeed achieve a position in which at last capitalism is in a position to provide itself with the money it needs in order to function properly, a thing which it has always been denied. Ever since the development of capitalism it has never been allowed to produce for itself the money it needs; and if I had more time I could show you how the whole crazy structure we have as a result, this monopoly originally only of issuing gold money, is very largely the cause of the great fluctuations in credit, of the great fluctuations in economic activity, and ultimately of the recurring depressions. I think if the capitalists had been allowed to provide themselves with the money which they need, the competitive system would have long overcome the major fluctuations in economic activity and the prolonged periods of depression. At the present moment we have of course been led by official monetary policy into a situation where it has produced so much misdirection of resources that you must not hope for a quick escape from our present difficulties, even if we adopted a new monetary system."

http://mises.org/daily/3204 (linked from here http://monetaryfreedom.org/... found some excellent reading under "Resources" link btw)

NB: many people confuse/conflate the terms deflation and depression (when they actually want to refer to a deflationary depression), dyodd.

The theoretical fiat-currency system I came up with, which I haven't shared with anyone, including you, you believe is not theoretical?  


What is awfully lofty? The system I came up with? How would you know? It might be completely illogical and/or unworkable.


I don't know what you're trying to convey here.


Yes, I agree the gold standard can be thought of as hard currency.



Yes, I'm quite sure.


No, it's not the exact same result. If you notice in my BoomTown example, all of the residents had equal amounts of money. And obviously all of them were not bankers; also they equally worked for the money they obtained.



Ding, ding, ding!!! Yep, exactly.

This is why deflation is preferred. Your economic exchange is more based on value than debt.


Yes, that's why I gave it as an example.



Now, when do you think a government will "award" people 500 gold nuggets?


That's not taking advantage of anyone. If you can't see that, you've missed the point.

lolwut? It's not theoretical, and you were simply stating what could happen if currency were created that way. You call that "designing a theoretical fiat-currency that is debt-based for citizens but not the government"? Awfully lofty.


Uhh, deflect much? And I was referring to the gold standard, so it seems we are in agreement unless you are of the purist non-FRB gold standard as the only hard money.


Sure buddy.


Well anti-inflationists whine that the bankers get the "new" wealth, but somehow this is absolutely not a problem when existing wealth increases in value even though it is the exact same result.


This is because value is added to the system. New producers are in the economy, and that is what presumably would drive the deflation rate. This, however, exists just the same with any currency. If the government awarded all those new people with 500 gold nuggets too, then the price of everything would remain the same and no one would benefit disproportionately (and some of them would buy cars!). But instead, the people who save get to take advantage of those who are new or who don't save, not because of their own production, but only because of the attributes of the currency. While bitcoin isn't government-managed, neither was gold in the gold smith money lending days. People still did many awful things then revolving around the manipulation of money. There is nothing inherent in deflation that is going to make car sales increase over a stable currency or an inflationary one, it only changes who might be purchasing those cars.

Hold on a second. We need to clarify a couple of your terms.

First, debt-based for whom, the government, or citizens? I designed a theoretical fiat-currency system that is debt-based for citizens but not the government.

Second, when you say "hard currency" I must say I don't like that term at all. To me you can't say hard currency if you're not talking about hard backed, as in backed by a precious metal.

The Wikipedia definition for hard currency even points out this danger:

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


I designed a theoretical system where neither bankers or corporations is at the helm.


The effects of the Great Depression came from inflating before (the roaring 20s) culminating in the crash of 1929. Deflation in that case had a cleansing effect on the market allowing it to move on.

Deflation has no shame in saying those who have money benefit... What are you saying exactly? There shouldn't be a benefit to having money? What use would money be then? As least with deflation even if you have little money you can rest assured the value you have will be the value you expect, at a minimum.


No, it's not a falsehood.

*sigh*

Let me break it down for you.

Say you have a town, call it BoomTown. In BoomTown there are 100 residents and all they have is the clothes on their back and the houses they built.

One day somebody discovers gold in a nearby mountain and a mining rush begins. As it happens there are only 5,000 gold nuggets total in that mountain, and every resident is only resourceful enough to mine about the same as others. After time each resident has 500 gold nuggets.

These residents have different skills. Some are seamstresses, some are farmers, some dentists, etc. They begin trading the gold as currency for other valuable goods and services - economic exchange.

One day a stranger named Bill pulls into town towing a fleet of cars, left to him by a dying uncle (I guess). He sets up a car dealership on the edge of town. The only things Bill has are his clothes and his cars. He needs food from the farmers, he needs his hair cut, his teeth cleaned and worked on, etc. He has no gold so he figures he will trade cars for some, then he can purchase things he needs, including a house.

Bill has about 10 cars. A house costs about 500 gold nuggets - the entire wealth of a resident on average. Bill figures he will price his cars at 100 gold nuggets each, because that way he can afford approximately 2 houses, or maybe one luxuriant one (of course, then he'd be broke). At 100 gold nuggets per car many residents are hesitant to buy from Bill. They prefer to walk than part with 1/5th of their wealth.

Since this town is called BoomTown it draws in settlers. About 300 people arrive one day exploding the population 4 times higher.

Now we get deflation.

The same amount of currency exists but there is increased demand for it. That makes the value of the currency go up. People are willing to sew, or perform dental practice for fewer gold nuggets, because they need nuggets.

What does that have the effect of? The people with the gold nuggets are now richer. They can get goods and services, like buying groceries, for less. If you're suddenly richer you will probably spend money more freely... Don't have a car? Buy one. Even if it costs 100 gold nuggets, you can now afford it because everything else now is cheaper for you.

So, yes, more people can and will now buy cars. All of Bill's stock of 10 cars will sell overnight, and there will be demand for more!

Great post, by the way. You have definitely hit the heart of the matter of both traditional government currencies and bitcoin. Bitcoin isn't the final solution because other cryptocurrencies will crop up in droves (or ramp up in popularity) to solve financial crises. To me that means bitcoin is fundamentally flawed, but many seem to disagree.

Any system using hard currency has to be partially debt-based as well. The US has had mostly a debt-based currency through its history, though there were periods without it (scrip, greenbacks). The Federal Reserve was the "solution" to the problems of a fixed supply, it did not introduce the national debt.


But this is the way it works anyway, so the only difference it probably makes is one has bankers at the helm, the other has large corporations.


Because we witnessed the power of deflation with the great depression. Why this little nugget is so easy for deflationistas to forget is beyond me. Inflation saps purchasing power only because there is a preference to who receives new money first. Deflation doesn't have any shame in saying it is those who have money who benefit.


This doesn't address what I said and is just rhetoric.


One way or the other, "more people can buy cars" is a complete falsehood. Salaries reduce or people get fired. Assuming a healthy economy aware of the deflationary aspects, salaries would have to go down over time just like many now receive a typical 3% cost-of-living raise every year.

Short answer to OP: no.

Reason being deflation is by definition a shortage of money in the economy, i.e, demand exceeding supply. Since OS, p2p crypto-currencies like bitcoin can essentially be cloned and created at will, there will never be a self-imposed "shortage" of the money supply as happens within an economy based on a single, monopolised money supply. It is only central bank fiat money based economies that are uniquely prone to the deflationary death spiral brought about by errors or incompetence of the centralised planning, which over time are inevitable since no-one bats 100 forever. They even enforce these central planning mistakes with the full force of the law, (gold confiscation, imprisonment, propaganda etc) to prevent competing currencies from fulfilling the need in the market for more currency, it is pure evil. Basically, deflation can only take place at the end of the state gun backing up it's failed monetary policies.

Deflation is not an issue for bitcoin, of course you could have read the already archived hundreds of posts, and the sticky in the "Economics" section to know this but here you are ....

Well that depends on which government you're talking about.

In the U.S. the government is supposed to be the people... of the people, by the people, for the people...

However, the Federal Reserve bank was conceived of outside of Congress and brought into law dubiously - over a holiday when lawmakers were headed home, as opposed to being ardently debated.


No.


I agree debt-free fiat is far preferable to debt-based fiat. In fact, the U.S. Constitution does give Congress the power to coin money and regulate the value thereof. At the same time the States are to make nothing but gold or silver legal tender. The result is that legally the U.S. Congress can define how much silver, for example, goes into a dollar, in effect controlling the money supply (inflation/deflation). And states can accept that as legal tender.

What you mean by governments spending debt-free fiat into existence is, for example, if a government decided to build a bridge and other infrastructure for the public good. The government then paid contractors to hire workers and complete all the work. The money then enters the economy. Unfortunately, however, government is a natural magnet for corruption and abuse. So those with favorable influence over government can benefit disproportionately.


If you have inflation, the ones that get the money first always benefit more than ones getting it later. Inflation saps purchasing power, and I don't see how that can be argued to be a good thing.


I don't think bitcoins would have much problem competing against other currencies, especially inflationary ones. Just look at gold, for example. Gold is winning in value compared to fiat by a margin of about 1500 to 1. And bitcoins are better suited for currency exchange than gold.


No, salary doesn't go down in a deflationary economy. No boss will walk into your office and say, "Your groceries are going to cost you less this month, so I'm cutting your pay". That doesn't happen. Deflation means job opportunities decrease, but it doesn't affect people who have jobs, unless it gets to the point they lose them totally.

Governments are the ones that voluntarily signed on to debt-based money. Did they really need to? There are historic examples of somewhat successful government debt-free fiat. With debt-free fiat, governments spend money into existence; with debt fiat banks loan it into existence. In the end, there isn't much difference in the money supply. But in debt-free, producers receive the benefit of inflation; in debt-based, it is the banks.

It's a collaboration between the wealthy and government that has been going on for a long time. Inflation is not the root of the problem, it is a side effect.


If bitcoin became seen as a better currency than some of the typical reserve currencies, people may very well accept FRB, perhaps at a discount. It could be very dangerous not to considering the chunks of bitcoins that currently sit around unused.


Your logic here fails the giggle test. Everything goes down, including your salary in a deflationary economy. Sure, maybe the top 50% saves every month and deflation is a bonus, but these are the same people that lend money in an inflationary economy.

I haven't read this whole thread but here is my answer to this question.

There are two important things to consider for your example. I'll address both. The first thing you've overlooked is whether or not bitcoins are used by everyone or not. Consider this: there are consistent sellers on SilkRoad. Over the last few months bitcoins have gone from about $5 to more than $10 - double the price.

Let's say I'm a canabis dealer on SR and last month my price was 10 BTC for 1 ounce of premium canabis. With bitcoin value on the rise your argument is I would no longer sell on SR and simply sit back and hold onto the BTC I have, because this month I have to sell the same product for 5 BTC which was double that amount awhile ago.

Of course, SR sellers are still selling and SR isn't shutting down anytime soon. Why? Because sellers still rely on outside currencies, such as dollars, for most of their costs. Paying a canabis grower for their time and resources costs the same in dollars now as it did 3 months ago, so if I made a profit by selling at 10 BTC (value of $5 per BTC) then I make the same profit selling at 5 BTC (value of $10 per BTC).
___________

That's the first answer to your question. But there is something else to consider, which leads into the second part of the answer. If BTC prices have deflated then everyone holding BTC is richer. The same customers that were buying canabis before can now afford twice as much! Certainly good for business! That's assuming they had savings in BTC of course and don't convert from another currency like USD on demand.

In the second scenario we imagine the majority of people now use BTC as the world currently uses USD. Let's look again at your question:

why should I work hard as a car-dealer instead of hoarding?

You do so because you want to increase your BTC, like everyone else. That includes hoarding.

The purpose of being in business is to profit. It's that simple. If bitcoins are deflating and you're old and retired perhaps you might choose to sit at home and allow your BTC savings to become more valuable.

On the other hand, if you're young and ambitious you will probably want to amass as many BTC as you can, just as people do with dollars now, but more so since the currency is deflationary!

Here is the situation. You have 1,000 BTC and your goal is to increase that. You know you have that chance by selling cars. Everyone uses BTC including your supplier. Let's say it costs 100 BTC for 1 new car and BTC is deflating at a rate of 5% per month. It also takes 1 month on average to sell a car. That means you buy a car for 100 BTC but by the time you sell it you can only charge 95 BTC - deflation.

Your question is whether or not you can do better than a 5% return. Now, that's pretty good and many might live off that, but being in business you might be clever. If you see the trend is cars are becoming cheaper and cheaper in BTC every month what does that mean? Yep. More people can afford them. More buyers equals demand, and demand puts upward pressure on price. Wouldn't it make sense to try and profit with volume? Instead of going to your supplier and buying 1 car for 100 BTC why not ask how much of a discount would there be for 10 cars? Perhaps 5%?  That sounds possible, and if so you've just broken even with your problem of deflation provided you sell the 10 cars. Now you're a volume dealer. Bigger dealership means more customers as you have more selection, etc. Now you just need to make a profit, and you do that anytime you sell more than the 10 cars per month, or negotiate a better supplier discount, or put a slightly higher markup on cars. Does that sound impossible? Not at all.

In short: it's probably better to be in business when your product becomes more affordable to customers than more expensive (inflation).