Bitcoin Forum

Disinflation has been covered to some extent. What would an economy look like if the only currency was one with built in deflation.

Would people live in smaller homes since their currency would generally appreciate relative to their home? Would companies need to outperform the general level of productivity increases and population growth in order to get their first dollar of investment capital? I believe that if the entire word used only a deflationary currency then deflation would be a function of productivity increases, population increases and the shrinking of the supply of currency (e.g. lost passwords); is this a correct view?

What other implications/problems or benefits are there with a potential worldwide adoption of Bitcoins and a ubiquitous rejection of fiat currency?

The whole point of deflation is that it's causing the price of everything to fall that can have a price tag attached to it, things will still be more expensive but you won't have to work as long in your life because you require less deflationary currency in order to buy something. A perfect example is houses, we all know how expensive they can be, they're pretty big purchases, if I for instance wanted to get a nice big house it would cost me easily £100,000 - £200,000 that's a hell of a lot, in fact, chances are if you know anything about mortgages you're average person is going to have to work their whole lives just to pay it off. However if you look at a deflationary currency it's currently only 2000 Bitcoins, that's it, in fact, the value of Bitcoins is rising so much now I'll probably be able to afford a house at 1000 Bitcoins if I look around on the market enough because that's going for £80,000 - £90,000 now. What this means as well if you're a for instance selling goods to people for a living you need less sales in order to hit the price tag that you're aiming for and of course as an employee you need to work less hours because of that too.

It's not just the large purchases either that's effected by this of course, all the cheaper items will be even cheaper, things will still technically be valued the same as before, but it just means you don't have to work your whole life to pay any of it off like an inflationary currency. I really can't understand why people support these kind of systems because by all accounts deflationary is just far better and the more I see people screaming about it being a bad thing I can only think it must be a good thing people like that are getting so pissed off.

Its because some people want you to work for them to the end of your life. And its good for them. Not for us.

Bitcoin is not Deflationary currency. Current yearly inflation of Bitcoin is higher than fiat. In your whole life Bitcoin will be inflation currency, though the inflation rate decreases every year.

How can it be inflated when the supply of Bitcoins cannot be changed? People like you need to look up the dictionary definition of inflation, this is to do with money supply, not speculation, which are both entirely different things.

ehm, 144*25 BTCs are created daily, thats why inflation

That's the amount of Bitcoins being mined, you can only mine a certain amount, the overall money supply is actually limited to 21 million, do your research, eventually miners will run out of coins to create.

Current Bitcoin yearly inflation is approximately
144*25*365/11000000 = 12%
Current fiat yearly inflation is approximately 5%

Of course we mine the Bitcoins out of thin air, today mined Bitcoins were not in supply yesterday. Also by your flawed logic if we limit supply of fiat to 10^30 times current fiat amount wich could goverments sign because it will never go to this scale then mysteriously fiat is no longer inflationary currency because no more than 10^30 times current fiat amount can be created

Basic mathematics can't be wrong, ignoring it is how our economies got so bad in the first place.

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.

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?

+100

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

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.

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).

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.

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.

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.

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.

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.

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?

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?)

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.

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.

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  :-*

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. 

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

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

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.

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

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.

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.

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

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.

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.

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.

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...

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.

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.

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

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".

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.

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...

Absolutely, every price by definition (on average) goes down in a deflationary environment, even the price of labor.  This makes people hoard money and when you stuff it under your mattress it is like stopping the bloodflow in your veins.

You are right in saying that the optimal value of inflation is 0%.  I absolutely agree.  The problem is that if an economy somehow encounters .1% deflation, the effects are disastrous.  Any deflation breeds more deflation and it's like getting shot in the head immediately.

Central banks do everything in their possibility to avoid any risk of deflation by creation a buffer or margin of safety with inflation.  (in this case the buffer = 2%).

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.

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.

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."

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.

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

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?

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.

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.

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.

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.  :D

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.

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.

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.

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.

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

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."

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?

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.

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

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?

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

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

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?

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.

aggregate deflation is worse than aggregate inflation.  any aggregate deflation is ridiculously dangerous.  Each period of aggregate deflation has usually been associated with economic recession or depression.  

Stable low inflation has been experienced for a vast majority of US history.  Throughout all the good times and all the relatively mild bad times including now.

For completeness, hyperinflation is very dangerous but is hard to achieve without huge issues with the central bank.

what if satoshi is an alien sent from his planet to conquer the earth and bitcoin is basically.... like a memetic virus created to destroy civilization with a tulup bubble that never crashes, it just inflates and inflates until everyone dies.

that alien will fail because btc would simply never reach widespread use in that scenario and everone continues to use fiat.  the prevention for "being tricked" is people like me and many economists raise the deflationary spiral concern.

the endgame with a deflationary currency is that its value grows exponentially and then explodes to zero.  just like tulip mania.

this might be why btc is so volatile these days.

Anyway it's not at zero now because the jury is still out on if btc can address the fixed 21million supply in 2140.  it might be addressable by instituting a fractional reserve/lending system.  of course, the ability to create one in a decentralized environment has yet to be proven.

rofl. Sure the deflationary nature creates wild swings but thats only because speculators have no experience with a deflationary currency. They will eventually learn how to price this stuff in. and sure bitcoin may explode into a value of 0 a hundred years from now but so what, think of how many trades it will have facilitated by then.

how do you price a deflationary currency?  let's be very clear with an example

For simplicity sake, it is defined to rise 3% in real value each year.  how many apples would you trade for it today?  it is defined, that you'll be able to buy more apples in the future. conversely would anybody ever accept a 0% interest loan from you?  in short, you wouldn't trade, you wouldn't lend, you would stop transacting, and that would create a reinforcing feedback cycle, then nobody transacts at which point the ccy is explodes to 0.

Something tells me you don't really know what you're talking about and I found the answer with the history you cited, the depressions experienced during that time were a result of massive hyper-inflation of the likes you saw in the great depression later on towards World War 2 both involved massive amounts of money printing of the kind that you saw the Weimar Republic churn out in the hopes of fixing the economy. The problem is money printing does nothing, it temporarily causes prices to rise and wages to rise and then everything comes crashing down. While this is deflation it is deflation and inflation that has been artificially created by central banks which because of the scale causes the massive and total collapses that you see of economies because rather than letting the poorly run companies etc. go out of business they steal everyone else's wealth to keep them going and of course because they are poorly run everyone ends up losing out entirely and the paper becomes worthless.

The idea of deflation is that prices go low and you guy buy things with much less currency than you would normally have to if the currency was inflationary, with deflationary economies you shouldn't be able to have prices going so low they are worth nothing because in a deflationary currency like with Bitcoin there is a limited supply so they will be valued to someone at a given time, gold and silver is also like this which is why they have been used as currencies for centuries. As for wages in general, if the wages go that low and the employer is forcing their employees to work for longer than that is a bit like what central banks are currenctly doing with inflation and interest rates, anyone with sense is going to find someone else to work for in that situation but unless they banded together there is no way the wages in a deflationary economy could go that low people would have to work much longer without them noticing.

Adding to that, deflationary wise I can start providing examples of deflation with real life examples, I calculated that if I sold silver Jewellery I'm making in Bitcoin I would be able to make far more profit than if I did it in paper and it was because Bitcoin, after all the fuss and rants of neo-keynesians is still having much more value than paper. For sure, inflationary paper money causes nothing but grief and is nothing more than an extremely clever way devised by ultra rich central bankers to steal other peoples wealth without getting into trouble.

In short, your history is wrong, you need to study what isn't just in school textbooks and told to you by teachers.

the outcome of the deflationary ccy issue is volatility in the ccy.  sorry your post is not concise enough to address point by point, can you highlight your main idea?

with regard to your last paragraph, you are stating a trivial truth which i agree with, if ccy1 (BTC) experiences deflation, while ccy2 (USD) experiences inflation, it will take more of cc2 to obtain the same amount of cc1

TLDR:

. Some people here need to read up on history that isn't from the point of views of government sponsored/regulated schools and texbooks ( seriously, they lie to your face )

. In an unregulated and deflationary economy employers couldn't drop the wages so low that people would be forced to work for longer without consequences to them personally, that and the limited nature of deflationary currencies wouldn't allow for it mathematics wise

I'd argue that they lie to your "ass", since that seems to be the origin of most "facts" produced here ;)

I guess you have less trust in economics textbooks (and wikipedia) than I do.  or pehaps you have a significant level of distrust that you are biased toward ideas that conflict with such textbooks.  to each their own.  I suppose the recent macroeconomic instability has contributed toward your distrust, but in my view that is somewhat short term reactionary

are you talking about real or nominal wage?  if BTC can buy 2 apples instead of one.  your employer will pay you half the BTC after deflation.  in the end he's still paying you one apple.  The important caveat is why would he buy your labor anyway if hoarding his BTC can give him/her a better return?  it's not a switch, but this effect starts small, then snowballs

I had to actually look up what you meant by real and nominal there, I guess if I had to put it in those terms it would be individual, now you've made me even more suspicious of what's being taught to us at a young age because the kind of calculations can be calculated in such a way to benefit a certain side of an argument like with politics.

If you're curious, the reason I have such a distrust of textbooks ( I personally don't mind wikipedia that much because at least that relies on consensus most of the time, you just have to cross check it with other stuff ) is because I experienced the lies they hammer into your head when I was younger, a lot. Ever since then I've been reading up more and more all the different points of view countries put forward, particularly governments and it's amazing how much they fuck with even basic history. While it's at times subtle and they sometimes get the facts right, you'll find they often give different reasons behind what they did at the time but when it comes to stuff like the economy they'll blatantly bullshit you and change the topic rather than go into any detail of what happened, like with money printing or William of orange, William of orange is my personal favourite because it's pretty simple, the British think they were there because they were peacefully colonizing the Irish and the Irish just see them as bunch of invaders trying to take their land.

From http://philebersole.wordpress.com/2010/11/17/inflation-through-the-ages/
"Ideally, according to monetarists, there should be a money supply expanding at exactly the same rate that the economy as a whole expands.  This would be impossible in practice, because nobody can know how fast the economy is expanding until after the fact.  So monetarists advocate increasing the money supply at a constant rate – say 2 percent a year – which is consistent with the long-term growth rate of the economy."

We have far too many inflationary currencies. So it feels right to have something different for people who believe that reasonable deflation is in fact a good thing. Spending and investment is not always good. It can lead to malvestment or spending "just for the spending". People will think twice, maybe three times before spending and they will buy only goods they really need. Loans would be possible but naturally discouraged.
If bitcoin gains wider adoption then there surely will be projects how to inflate it. There will be fractional reserve, loans and therefore "false bitcoins" in the form of "promises of real bitcoins". There will be far more promises than bitcoins used in backing. I have no problem with that as long as th following works:
If the BTCbank issuing false BTC goes bankrupt (unable to provide real BTC for the promises) then no one will be able to reimburse people by creating some new real BTC for them. Those people will have to decrease their standard of living (some of them might even lose their houses). And they will have to face the consequences of their mistargeted trust into BTCbank. So will all the merchants accepting false BTC from them. If this works and more reasonable "hoarders" are not forced to help them by a single bitcent then I am OK with all that. It might be that the BTCbank will never go bankrupt. Then the people and merchants will of course benefit from increased money supply. I am also OK with that as long as no one is forced (nor forbidden) to accept false bitcoins.

This fight between Keynesian/classical view on economics and Austrian school seems like neverending story. Such as fight between supporters of "giving people more freedom" and "doing right things for the people and perpetrate good even if it means forcing them".

Depends on "what the consequences are to them personally".

Deflation simply means that prices fall. Therefore it's not worth spending money today because things will be cheaper tomorrow. In other words, it encourages hoarding of money.

Now consider that one person's spending is another person's income. Say you are a business. You've made some goods and incurred some costs doing that (cost of materials, cost of labor). But no-one is buying, they are waiting for the price to drop. So you shave your margins. Soon you are selling at cost just to release the money locked in the inventory. But what if people refuse to buy goods at cost? Then you go bust. Your staff are fired. Forget decreasing wages, they have no wages, because there is no business, because no one will buy. As the numbers of people getting laid off increases, sales fall further because these people have nothing to spend. Prices get cut even further to try to attract the remaining business - but no-one is buying because a) they are waiting for the price to drop even further and b) they are scared they'll lose their precious job - so you get even more hoarding and even more businesses going bust and even more people laid off. In a downward spiral.

Eventually, after about twenty years, there are some goods that people absolutely have to have (medicine for example), and people will pay for that, but elsewhere the economy is a wasteland. People emigrate, but they find problems wherever they go because other people resent them moving onto their territory (they've become immigrants). You get starvation, you get riots, you get anti-semitism and racism, and you get people trying to exploit popular anger.

The long depression of the late 19th century, which lasted twenty years spawned two responses - some countries introduced welfare states to prevent the masses from rioting and dying, and other countries had revolutions (Russia) or fell to evil dictators (Germany and Spain in the 1930's).

If there hadn't been deflation during the late 19th century, none of that would have happened - no welfare state, no revolutions and no mad dictators leading to a world war that saw about 30 million dead.

That's why the ideal is keeping prices rock steady - not inflating but not deflating either.

I think people on here are romanticising the desperation, starvation and sheer madness of the late 19th century and early 20th century simply because it has passed out of living memory and there is no family member left to speak of it's horrors. But read up accounts of people who were actually there. It was not a fun time to be alive.

Going back to your comment that "In an unregulated and deflationary economy employers couldn't drop the wages so low that people would be forced to work for longer without consequences to them personally" - it's happened before where people worked for a loaf of three days old stale bread, because the alternative was death. Don't be naive, of course employers can drop wages that low!!! They've done it countless times in history. The only time they haven't was during the Roman empire when the Emperor forced his law on wayward employers and in the last fifty years, which have been a bit of a golden age in the history of man.

Is bitcoin a deflationary currency? I hope it's just a steady one that allows commerce so we don't have to deal with banks. However, I can already see the hoarding tendency become dominant - the most developed parts of the bitcoin economy are those that encourage people to trade bitcoins for dollars - i.e. just like a stock rather than like a means of commerce.

I thought you were just being ignorant of history but now you're just outright making it up and using hypotheticals to get your way like a neo-keynesian does, I also love the hoarding argument, that's a classic one and has been argued to death, you seem to be completely ignoring all the businesses and people that are trading Bitcoin amongst each other.

How many businesses are trading with each other? I can't buy my groceries with bitcoins or even hosting for my domains. The most developed part of the bitcoin economy is trading exchanges - one springs up every day. In other words, there is a tendency to hoard, and then change back money into fiat. That's not a good sign - if bitcoin was the future why on earth would people want to check the price against the dollar or even change it into dollars, complete with regretting that they spent their coins because they'd have made so much money if they'd hoarded it and yup, changed into dollars. The dollar should be irrelevant - but it's not...

https://en.bitcoin.it/wiki/Trade

And at least one reputable host/domain registrar (who for some reason is not on the trade list) who accepts BTC is namecheap.com.  They're also the 4th Google result:

http://lmgtfy.com/?q=web+hosting+bitcoin

If you can't find a host who accepts BTC, it's because you haven't looked.

I'm aware of namecheap - the issue for me (ironic seeing as we're discussing prices!!!) is that their prices are too expensive. For unlimited domain hosting they charge $14.95 a month, whereas hostgator charges $9.99. Namecheap's bitcoin price is the market exchange for dollars. So in order to use my bitcoins to buy hosting I'd have to accept INFLATION of 50%. Like I said - I don't want deflation, but I don't want inflation either. I want prices to be rock steady. Is that too much to ask?

I think this is just not possible. There are so many variables underlying a price, that you simply cannot hold all your variables constant. 

I also want prices to be "rock steady"... but it may actually be "too much to ask".  The 21 BTC limit is as arbitrary as any governmental monetary policy, just designed to have the opposite effect.  What may happen in the long term is that BTC and fiat strike a sort of mutualistic symbiosis, where the deflation of BTC counteracts the steady inflation of fiat money and people shift their money back and forth as needed to maintain balance.  That may be just a pipe dream though...

I've not used namecheap's hosting, I'm just aware that they're a reputable company and I have registered domains with them.  In general I shy away from "unlimited" services in favor of those with specific service guarantees.  Perhaps I'm a pessimist, but I always take "unlimited" to mean  "We've oversold this service by a factor of infinity... and btw, there is a limit, we're just not going to tell you what it is until you reach it, then we're kicking you to the curb without warning in accordance with the fine print you didn't bother to read".  But, yeah, I might just be a pessimist ;)

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

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.

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.

I make some decent money by loaning out bitcoins.

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

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

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

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.

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.

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

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.

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

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).

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

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 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.

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.

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 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.

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 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.

This is completely wrong. the % return is presumably unaffected by this in Real terms. One can be more sure that projects undertaken are likely the right ones because this 'deflationary' currency is not subject to interest rate manipulations of central planners, which likely result in mal-investment due to incorrect signals (i.e. interest rates that do not reflect individual preferences and are therefore unsustainable).

Thinking about the housing bubble as an example. In the absence of a credit-based flexible money supply would it have played out the way it had?  i think the answer is obviously 'no' because 'yes you are right that interest rates probably would have been higher.' 

That's different than saying that there would be less investment!!  Probably capital would have been invested in more useful activities than building McMansions....

imo, the housing bubble was caused by 1. greenspan being overly generous and keeping interest rates too low for too long following the internet bubble burst 2. lack of regulation and craziness in the mortgage market through the early 2000s.  this was in part due to the incorrect credit ratings given to cdos and clos by the ratings agency.

But the question is: how is that bad? In terms of regular people, would a deflationary currency be 'bad' for us? Many are writing about how loans would dry up. Inflation is good for loading up debt; deflation isn't. People would consume less and save more - this is generally bad for GDP but is it bad for the regular guy?

Implied in this question is: Should only the rich guys worry about deflation or would it be bad for us all?

Deflation is not bad.

It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.


Inflation is bad.

It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.

I think they're both bad. They are essentially the same thing. That thing is the changing of the buying power of money. This is bad because the fundamental purpose of money is to accurately represent real stuff. It's not accurate if it's always changing. It forces the economy to run suboptimally.

One is good for some roles, bad for others. The other is bad for some roles, good for others. We could both accurately come up with good and bad things for each. They mirror each other in their effects.

For example, to use the rice analogy: If I am a producer of rice in a deflationary economy, I will be highly incented to sit on my ass and hoard my money instead of actually producing any rice. This is because say if it costs me 10 units to produce rice and by the time harvest time rolls around, the buying power of the currency is such that 10 units will buy all my rice, I won't have made any money at all. I should have just kicked back and relaxed.

The same goes for borrowers. The cost of borrowing money is very high, even at 0% interest.

For an economy to function optimally, the buying power of money needs to remain constant. Is that not the whole point of something that is used as a medium of exchange?

If you're talking stores of wealth to be hoarded, then that is something else.

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The same goes for borrowers. The cost of borrowing money is very high, even at 0% interest.

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If this ever becomes true, then interest rates in the free market will become negative. 

I am not entirely sure where the idea that one would not grow rice in such an environment comes from.  You are saying there is an implied increase in the value of cash money (whatever currency presumably not easily replicated - bitcoin, gold etc) and this increase is so big and fast one can live off of it while doing nothing.  That assumes some interesting priors that do not seem actually possible in the real world ... for example, if such were true, the price of items that take actual "work" to make such as rice would go up so big and so fast as to make it worth doing again ... yes? 

What I am trying to say and probably not doing so eloquently or succinctly (maybe some other newbs can help) is that it is pretty circular to say "assume a world where the value of money rises so fast its better to do nothing at all with one's life because you can get rich doing nothing" and then go on to say "in such a world people would do nothing."  I do not think the former is possible.  the scenario where deflation in a given currency is so strong for so long that everyone just quits their jobs is just not realistic.

Another mechanism which breaks the above: if a currency system experienced such dramatic appreciation on an ongoing basis and for so long as to convince people it would never end it will be supplemented with other means of exchange and would basically be a store of value and not a means of exchange  AT ALL..  So what?  Other currencies will be used... 

Exactly.

So, many have been talking about deflation in terms of 'prices down 20% today since yesterday; and will probably be down again tomorrow'. This is reasonable based on the current moves BTC has been making.

In terms of a possible antithesis to the USD though, let's pretend BTC takes over about a trillion dollars worth of M1 - checking and savings accounts - and settles at $100,000 USD per BTC and begins moving up gently along a 3% uptrend. So, now we talk about buying rice today vs. starving to get it .25% cheaper next month; these purchases will obviously still happen.

I don't know if BTC could ever be the only currency in the world but think about if it, or something like it, was. In terms of this type of deflation, how would the world look? Would loans be made at negative rates? Could you borrow at a prime rate of -1%? If so, an interest-only loan might be reasonable. Would people borrow BTC and pay interest only to buy a nice house? Would renting make more sense?

Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times. Couldn't we still see temporary inflation during periods of a workforce decline (e.g. Baby Boomers)?

Maybe deflation like this could be a solution and not a problem. Would the world really end as we know it - like they tell us? Would we really spiral downward into oblivion? GDP would certainly take a big hit with that transition but how would we come out of that initial depression?

A well put question.  If this really happened (dubious scenario though which we'll return to), I would agree with your proposed implications. This would not be a problem. In fact, we *normally* experience deflation in certain markets all the time ... for example cost per unit of bandwidth, computing power, television quality, etc, where the pace of technological advancement and associated productivity improvements exceeds the insane growth rates in base money supplies.  I would think, yes, that one would get mortgages involving the repayment of less BTC's than the quoted price over a period of time. 

That all said ... I do not think this is a natural state of affairs over the long term.  I believe if BTC's were such a store of value that they rose in value vs. pretty much everything for a pretty much guaranteed-to-be-long-time that other currencies would rise up to compete with BTC's in order to make exchange easier.  This, unless I am vastly mistaken, would seem to be one of the conclusions of Gresham's law. 

I hope none of the above is read as a critique of BTC's ... there's alot to be said for a currency that is fixed or near fixed in supply!  But:

1. competition and freedom are good things.  People will have numerous currencies and that's great.  I am hopeful there will be multiple crypto currencies in addition to the base metals.
2. While base BTC count can be fixed credit instruments can actually increase the notional amount of money....  This is the same thing that can happen when bullion banks issue notes on a fractional reserve basis.  There is nothing wrong with this as long as there is no government insurance to encourage moral hazard on the creditor side.  This means that money supply is not notionally fixed persay when the underlying count of BTC's are fixed... because people will trade Letters of Credit (i.e. promises to deliver BTC's at later dates in whatever form and format) and will have real social credit between them... for this reason its hard to imagine a world where currency, globally, everywhere, all the time is actually fixed... 

What I hope for is an end to legal tender laws and a free market for currencies and banking.  Unlikely to happen, I know, but us libertarians must all have dreams.

Actually the above reminds me to point out ... because it will be so easy to compete in the world of crypto currencies, to 'win' - BTC must have the greatest acceptance in terms of actual goods and services that can be procured by it, the best transfer / payment acceptance software, and security as good as others with similar acceptance and transfer/payment ubiquity (although being "the perfectly secure" currency  is not required at all). 

Well in the case of BTConly enugh people have t trust in the usability of it then it could be used to save money. Which is beautiful. But i would assume we also need a cryptomoney that is designed for to be spend - Like many lokal currencys with demurrage http://www.digplanet.com/wiki/Demurrage_%28currency%29 or the brakteaten money in medieval times 12-15 century http://p2pfoundation.net/Brakteaten_Money.

Not sure why we would ever want demurrage - which is basically a tax on liquid monetary assets - unless we want even further expansion of the state?  All that does, anyway, is make the keeping of cash a money losing proposition.  One could still invest the money in savings instruments.  What's the point of it all besides expanding government power, anyway?

I'd urge against it and would never avoid a currency which participated in such a tax system if I had a choice.

Having Gold or BTC's and not spending them is one way to "save" ... it means consumables that you could have consumed are either consumed by others or don't need to be created, freeing other resources up for capital investments.  That's what your "savings" is in reality if you are talking strictly speaking about hoarding money itself.  A [usually] more profitable mechanism for savings would be to loan your money to someone else who will build a lasting asset with it, that creates future consumables (capital investment).  This can happen 1:1 or via a banking system.  Either way you look at it (cash hoarding or investing) it is not a bad thing to save instead of spend. The best is if people are 100% free to spend and save their own monetary instruments as they see fit, thereby deciding what gets consumed now or later.  I am 100% sure this is morally better as well as produces better outcomes than where some central planners try to favour spending over savings artificially. 

I just don't understand where you guys take the idea that "in a deflationary world, free market will make interests negative"

Would you loan 100 BTC today, for the promise of 95 next year?
(if the answer is yes -we have a deal!)

In a deflationary world, you would have much less investment. No credit bubbles; but for that purpose, also all our current wealth is "bubble" -it has been made possible by debit expansion and state deficit spending. We would settle down to where a "solid" growth would have led us -that is, to a much poorer economy. Maybe then we would start growing "healthly" (albait for sure, much more slowly), but the transaction would be incredibly painful, destroying much of our productive system that simply cannot exist without easy credit and the compulsion to consume created by inflation.

think about it this way

if you promised me to give me 95 of [whatever 2014's major CPU is] in exchange for 100 of [whatever today's major CPU is] I'd take it

Of course we are strictly postulating something which is pretty unlikely for reasons which I have stated above (where you think money itself is GUARANTEED to buy more and more and more with no investment).

This would only happen in a fixed fractional reserve situation whereas you have 100 BTC in your reserves and so you can loan out 500 BTC based on those reserves. Your 100 BTC would be worth 103% at end of year (deflation) and your 500 BTC worth of loans will be worth 110% (of 100BTC) as you loaned them out at a -1% rate (3% - 1%). So you now have 113 BTC (103 + 10 BTC) in reserve at end of year. You then can loan out 65 more BTC.

Otherwise you are correct, you would be better just to hang on to the coin.

That's my point. Other currencies will be used. You aren't motivated to spend or do anything except hoard when the value of the money is constantly rising. I'm not saying everybody is going to quit their jobs, they'll probably just use a different currency to buy stuff with, like you said. What good is that for bitcoin?

A lot of people here are drunk on the deflationary koolaid because they feel like they are getting richer for doing nothing (and they are, even with the current inflation until 2040) and they love it and want to rationalize it.

There is nothing else to do with bitcoins other than sit on them currently, but them being used as currency is going to be hampered by people saying stuff like "I'm not paying that much for item X, it's worth it for me to wait it out until item X is cheaper". Meanwhile, producer of item X is going broke, and will accept other currencies instead that won't make him go crazy.

Some people get hurt by inflation, the opposite people get hurt by deflation. If you're going to say one is bad, you have to say the other is bad if you want to be impartial. You could also say both are great! (for some people, and opposite people)

Bitcoin is not inherently deflationary.  It is in fact inflationary until it reaches 21M coins and then it's stable.  Deflation occurs when the money supply *shrinks*, which doesn't happen with bitcoin unless people lose their private keys.

Prices in bitcoin will fall as it becomes more popular and valuble, but this is just a result of the demand for bitcoins increasing.  Once it reaches maturity and 21M coins, hopefully the growth in adoption has reached saturation, at which point the supply/demand for bitcoins (and hence price) will be determined by the demand for money.  Monday has a utility value (it is needed to facilitate business) so as the economy grows, the demand for money will increase and so bitcoin becomes more valuable (encouraging people to be less speculative with their spending/investments).  If the economy goes into recession then the demand for money decreases and prices go up (inflation) encouraging people to spend more and be more speculative.  Overall it forms a nice equilibrium where the price of money is determined by the business cycle.

It will always be pretty deflationary because the population is always growing, there is going to be a hard cap on the quantity, and over time inevitibly coins will be lost at more or less a steady rate. All those things together will put pressure on commerce. I'm not saying it's guaranteed to be useless, but other currencies will be favored as a medium of exchange, IMO. Hopefully other decentralized currencies

I don't think it would put much pressure on commerce.  As people need money (bitcoins) they will offer a higher and higher price for it  (or, for example, they will offer to work for cheaper and cheaper wages).  As with any market, there is an equilibrium that will balance this, not a positive feedback loop that makes it worse.

In the positive feedback loop scenario, everyone sees that there is deflation so they decide to withhold their purchases because they are "profiting" from holding money.  However this is the greater fool theory - if I don't spend my money now, someone will pay even more for it in the future.  This type of thinking can crash back in the opposite direction. Ie, someone cashes in which cheapens the price of money, which triggers fear in all the hoarders who race to spend their money as inflation comes back.

The value of money will be priced according to the demand for money.  This will be kept in check through supply/demand equilibrium.  Of course there will always be speculation, bubbles etc, but in the end the fundamentals of supply/demand will determine the purchasing power of a bitcoin.

Thats why in my opinion, a steady growth in population, causing a steady appreciation in the purchasing power of a money, is not going to disrupt the economy.

This "deflation" argument is bullshit and propped up by people who are still seeped in Keynesianism and Monetarism, which are the same thing. If people understood Austrian economics they would realize that these terminologies (deflation and inflation) only mean something because of the central planning phase that the world is currently undergoing.

If people want to learn economics, they should read http://library.mises.org/books/Gene%20Callahan/Economics%20for%20Real%20People.pdf, David Stockman's "The Great Deformation", and https://mises.org/journals/qjae/pdf/qjae14_3_3.pdf.