Bitcoin Forum

What is a deflationary spiral?

Deflationary spiral is an economic argument that propose that a runaway deflation would eventually lead to the collapse of the currency. It is one of the most common criticism made against the viability of Bitcoin.

Deflationary spiral occurs when the price of a commodity increases at some given rate which causes people to hoard it. As people horde the commodity, less and less of it is available thus causing the price to go down even more.This means even more people hoard the commodity. Thus, the 'spiral' occurs, which is a feedback loop.

Deflation, like inflation, includes winners and losers. The losers are borrowers, especially those who would have to pay principle plus interest rate. Since the value of loan increase due to inflation, that means they will have to pay more in real term.

The winners include anybody who had saved. Thus, an deflationary environment would automatically encourage more people to save for the expectation of increasing purchasing power.

What are your thoughts on Bitcoin and deflation?

My theory is Bitcoin has worse things to worry about then deflation due to the pressure the government is putting on businesses that buy/sell it.

A deflationary spiral is bad not because it would lead to economic collapse, but because it means people are starving to death waiting for the price of food to go down. But it turns out that people are willing to buy things they need anyway, even if prices are constantly dropping. Look at computer sales, for example. You'd be crazy to buy a computer today - if you wait a year or so you can buy the exact same model for half the price. Yet people still buy computers. As long as people have a need or desire to buy things now rather than later, a deflationary spiral is impossible.

The great depression would like to have a word with you.

The Great Depression was mostly caused by a banking panic when the Fed stopped lending money to insolvent banks. The resulting bank runs caused around a third of all banks in the U.S. to go bankrupt, and the loss of liquidity caused massive deflation. There was never a deflationary spiral, and the deflation was a result, not a cause, of the depression.