Bitcoin Forum

Deflationary currency

who is using that definition ?
board search points only to you.

The monetary deflation of both gold and Bitcoin is (will be) insignificant. What people are talking about is falling prices from economic growth which has nothing to do with deflating the money supply but is still confusingly called "price deflation".

By contrast, currencies that are based on the value of debt, like the U.S. Dollar, are inherently inflationary. This is because, in a debt based monetary system, there must always be more money owed than is in circulation. If there were no net debt there would be no money. A currency such as this must be continually inflated in order to remain operational.

Deflation is the enemy to this type of monetary system

The problem with this scenario is that it depends on exponential growth forever, which is not possible with finite resources.

This is the way Bitcoin works. Since there is a limited supply, and it can not be inflated by 'fiat' it will limit the rate of growth of it's economy to the rate at which new value can be discovered.

The money supply is not expanded by printing money, but by issuing credit. This is what the Fed does when it does Quantitative Easing, it issues credit.

This has been going on for a long time... And we have recycled only a tiny portion of the same stuff, mostly it was all just wasted, and so we have the problem that we have now.

You do need energy. Only right now the amount of energy that is takes to extract energy resources is higher than it has ever been in our history.

Disinflation is a decrease in the rate of inflation

This is significant. Especially if you disagree with this statement, I highly recommend watching this series (http://www.youtube.com/view_play_list?p=6A1FD147A45EF50D) of videos - "The greatest shortcoming of the human race is our inability to understand the exponential function".

"Disinflationary" would be a more fitting adjective to describe the Bitcoin model.
http://en.wikipedia.org/wiki/Disinflation

Resource usage not so much. It is limited by available materials and the energy from the sun. It would be stupid to bet on exponentially increasing amounts of for example copper, so don't. Prices will make sure most people won't.

If there is disinflation there is still inflation, only less. Bitcoin leads to the opposite of inflation, which is deflation (provided there is economic growth and the population stays the same or increases).

I think there is some confusion here depending on what one considers as 'deflating'. In the sense that Bitcoin is a 'deflationary currency' it is the price of goods compared to BTC that would be deflating, even as more BTC are being introduced to the economy. As long as the value of a single BTC continues to rise in relation to other commodities (say U.S. Dollars) it is a 'deflationary currency'. Once the maximum number of BTC is in circulation it would be essentially free of inflation, but until then this designation properly depends on the market forces relative to BTC compared to other commodities. In this respect it behaves as other limited commodities, such as gold or oil. Even though gold and oil continue to be introduced into the economy this now happens at a slower rate then it once did, this being irrespective of demand. Even when there is additional demand the rate of extraction of these resources lags that demand. Were gold and oil to be considered 'currency' in this respect they would also be deflationary.

By contrast, currencies that are based on the value of debt, like the U.S. Dollar, are inherently inflationary. This is because, in a debt based monetary system, there must always be more money owed than is in circulation. If there were no net debt there would be no money. A currency such as this must be continually inflated in order to remain operational. Deflation is the enemy to this type of monetary system, so is too much inflation because this would mean an inevitable deflationary correction which may be difficult to fix. The problem with this scenario is that it depends on exponential growth forever, which is not possible with finite resources. And this is fundamentally the problem with the world economy now. We already got all the easy stuff, now it requires more resources to extract more resources... Placing a limit on growth. And I don't think we are smart enough or have the will to fix that fast enough to keep the system of an inflationary currency going indefinitely.

So, why would a 'deflationary currency' be any better than an 'inflationary currency'? An 'inflationary currency' encourages consumption because the longer you hang onto it the less stuff you can buy with it, in this way it also discourages resource efficiency. OTOH a 'deflationary currency' encourages resource efficiency because the longer you hold onto it the more it is worth. The only time it makes economic sense to spend a 'deflationary currency' is when you have an opportunity to arbitrage it for something of greater value to you. This is the way Bitcoin works. Since there is a limited supply, and it can not be inflated by 'fiat' it will limit the rate of growth of it's economy to the rate at which new value can be discovered.

So, why would a 'deflationary currency' be any better than an 'inflationary currency'? An 'inflationary currency' encourages consumption because the longer you hang onto it the less stuff you can buy with it, in this way it also discourages resource efficiency.

With inflation you should buy what you need early, but that doesn't mean you should consume it.

Division and distribution is the same as consumption.  They are absolutely equivalent.

I guess we live in different worlds, then. In mine you can't eat the cake and have it.

I've seen this term used more and more to describe Bitcoin, and I really don't think it fits.

The supply of Bitcoins is inflating, though the rate of inflation is decreasing. Once ~21 million coins have been created, it is true that the currency will only experience monetary deflation.

However, gold is deflationary in exactly the same way. The supply of gold in the ground is finite, and as the easy gold is found and mined, the cost of mining the same amount of gold increases. The circulated supply of gold also deflates over time, due to natural processes causing minute amounts of gold to separate from the coin or bar.

Yet, does anyone refer to gold as a "deflationary currency"?

The Bitcoin "monetary base" (number of outstanding Bitcoins) is deflationary in the long term and their supply will, given enough time, approach 0. This is because once a wallet is lost the Bitcoins associated with it are no longer transferable and effectively forever removed from the Bitcoin supply. This is a terrible flaw in the Bitcoin paradigm as it currently implemented.

The gold supply is not in deflation and likely never has been for any significant period in history. Total supplies of gold have increased every year since gold has been considered valuable.

So in your world what do you do to consume things that is different from division and distribution?

What? The total number of Bitcoins will never decrease, but people will lose the means to access these coins. However, the rate at which access is lost will be inversely proportional to value. You have more of an incentive to protect your wallet when Bitcoins are worth $10 than when they are worth $1.

Really? Are you saying that there is an infinite amount of gold that we can extract from the planet? Gold is a soft metal, and wears easily. Are you saying that given a finite supply of gold, and that a coin loses some gold atoms every time it is touched, that Bitcoins are not the same as gold in this regard?

I have a very hard time imagining that the amount of Bitcoins that people simply lose will by anything more than a negligible amount

And even if people do lose them, the amount lost per year will trend towards zero far faster than the total supply of Bitcoin will trends toward zero. No matter the length of time they will not reach zero.

And they are divisible, anyway. The total amount is irrelevant. Even if it did approach zero it would never reach exactly zero and everything would work fine.

It is similar in this respect: Early on both BTC and Gold were easy to mine, it was not very energy intensive, but as time goes on and all the 'easy' BTC and gold has already been brought onto the market it becomes ever more resource intensive to produce. BTC is superior in this respect because everyone knows how much will be produce at any given time, with gold not so much.

I understand your point-of-view to a certain respect, certainly.

However regarding the early Gold rushers, what you find is that the constraint of unearthing Gold was physically limited. For example, if 100 people mined Gold in the early days, just because 3 people mine is 1000 years later, it doesn't increase their chance of finding gold.

However with BitCoin the frequency of unearthing fresh BitCoins is dependant on the amount of people mining for it. More people, less BitCoins distributed, less people, more BitCoins distributed. Of course, this is slowly decreasing every four years anyhow, I'm just saying that within the four years, it is down to the whim of the network.

Inherent in the design of Bitcoin is a tendency for BTC creation to behave as a P+I (proportional + integral) loop controller. Which means that, as the rate of block mining varies, the benefit derived from that will drive the capacity of block mining activity. This is by design, it will always be like this. So, over the long term mining difficulty will always follow price and not the other way around. Without an upper bound on the amount of currency created you can not guarantee controlled inflation, so this is also part of the economic design. Since there is only so much gold on the planet the two currencies will tend to resemble each other more over the long term.

Deflationary, inflationary, both are undesirable in a currency.

Can't we talk about having a STABLE currency, and what it would take to keep a currency reasonably stable?

Prices, ideally, should neither increase, nor should they decrease. The ideal for any currency is stability.

Bitcoin is a great step forward in the direction of having a stable currency, but it does not seem that its creation algorithm is directed towards obtaining stability. We will have gradually increasing difficulty of mining, until a few years from now, mining will practically come to a halt.

Deflationary, inflationary, both are undesirable in a currency.

Why is stability is a good thing compared to deflationary economic growth?

Stability an arbitrary goal, even as growth is an arbitrary goal. The difference is that an inflationary currency is inherently unstable, continual inflationary growth at any rate will ultimately become unsustainable. This unsustainable condition defines the limit of an inflationary economy. OTOH the limit of a deflationary economy is defined by the lowest price limit. With a currency that is not very divisible this is rather limited by the smallest divisible unit. For example it may be reasonable to pay one penny for a potato, but less reasonable to pay one penny for a ton of potato, transactions become unwieldy. This is not the case for a currency that is essentially infinitely divisible... which is something we have never had before.

Stability is something of a relative thing. There will always be market segments that are unstable and you can not fix this by managing a currency or a monetary system. What you would have to do, in effect, is to micromanage the availability and demand for each individual commodity... Ain't gonna happen...

why prefer eternally sliding prices until one day we (might) run into the physical limit where prices can no longer slide because they can't be expressed, as the unit has been subdivided by too many decimals?

- avoids continual change of prices of goods as expressed in a currency (think of having to change a price list frequently).

Bitcoin was designed for divisibility. Without any further technical measures one Bitcoin can be divided to a granularity of .00000001, which means that if one Bitocin were deflated to $1,000,000,000 it could still be divisible to one penny. At this rate a 21 million BTC economy would amount to 210 quadrillion Dollars. Other technical measures can extend this amount of divisibility practically indefinitely. This is a degree of divisibility that neither Dollars or gold enjoy. To attempt to apply such divisibility to a commodity currency such as gold involves increasing overhead to a point of infeasibility. The prospect of applying a layer of abstraction to gold or other commodity currencies also introduces the possibility of fractionalizing it to an arbitratry level.

I think you are right, and I think my math was actually off in a couple of places (so many fingers and toes and all that...)

It makes perfect sense to shift between different assets given different economic conditions (political upheaval, & etc...) but this is not an argument for/against Bitcoin, gold, dollars specifically. Rather, I see it as an argument for diversification, and an argument against some sort of mythical, universal currency.


If I could paraphrase (and possibly mangle) Robert Anton Wilson:

"Just give me a bag of Crack to keep my troops loyal and a sheet of Acid to keep myself crazy..."

I spend alot of money and I think I know a thing or two about money.

I spend alot of money and I think I know a thing or two about money. Ever since the recent economic crisis(which is caused by people spending money which doesn't exist) I think that people have in fact become more spiritually enriched. Losing money is not such a bad thing, people in the third world are in fact happier because they have their family and friends. Now that people are happier they will be encouraged to spend more and because people have less they will make what they have go further. I'm no mathematician but I think this is pretty obvious.   :P