Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable?

[SgtSpike]

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

I just gave you an example in the post above. Give a loan, get back a larger amount of currency at the end of the loan.

Sorry, yes, that is true.  Then though, the effective loan rate would be 5% for the loanee, which means, he may decide not to take it because the interest is too high.  This would result in lower amounts of lending than would be seen with a currency that doesn't deflate.

Ahh, ok.  You are saying that you'd end up with X*1.02³*0.97³, which is of course lower.  And no one would do that.

But that seems to be a straw man.  The numbers 2% and 3% aren't dictated by the market, you just made them up.  Saying that 2% < 3% is hardly controversial.  What you need to do is show that the market causes x% to be necessarily less than y%, where x% is the market rate of return on investments (beta) and y% is the rate of deflation.

No one would make the purchase that you are using as an example.  They would either purchase things with a yield higher than the deflation rate, or they would make loans where they get interest in addition to the return of the principle.  Or they would do nothing.

I am glad we finally agree that no one would make an investment made to return 2% in an economy where the currency is deflating at a rate of 3%.

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

[1714472826]

1714472826

[2_Thumbs_Up]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

Ah, I was afraid I wasn't explaining it well enough.

To put it simply, the investment value does NOT rise with the 3% purchasing power increase.

If I buy a building for 10,000 BTC, and deflation hits at a rate of 3%/year, then my building is only worth 9,700 BTC the next year (and maybe the rental income was the 2%, so I'd have 9,900 BTC instead).  If I had held that BTC instead, I'd still have 10,000 BTC.

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

But really, what good do you do to society by simply buying and holding assets (which is deteriorating by time btw)?

When austrians speak of investments they generally speak of value improvement. That is, you buy resources for X amount of bitcoins and then transform it into a more valuable form and sell it for Y amount of bitcoins. If you can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC then that's an investment. If you simply buy aluminum in the hopes of an increase in price you are speculating (which is totally fine sometimes, but that is the exception rather than the norm).

Simply holding resources will generally be a bad investment in a deflationary economy. And that is a good scenario. It means the resource hoarders will stay away from the market, and the price will keep going down to the point where those who actually see a way to improve on the resource find a viable way to do so. In your scenario where the rent is worth 200 BTC the price of the building simply wont be 10.000 BTC. Rational market agents will see that as a losing investment and stay away from the market. That means the price will go down to the point where it actually becomes viable to buy it and rent it out for 200 BTC (and most likely add some value by improvements to the asset).

The price of resources will go down by time in a deflationary economy. That means you actually need to improve on it if you want to profit. If you don't have an idea on how to do that you should stay out of the market rather than keeping other people out of it.

[Roger_Murdock]

SgtSpike, I'd be interested to hear your reaction to my previous comment.

[SgtSpike]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

Ah, I was afraid I wasn't explaining it well enough.

To put it simply, the investment value does NOT rise with the 3% purchasing power increase.

If I buy a building for 10,000 BTC, and deflation hits at a rate of 3%/year, then my building is only worth 9,700 BTC the next year (and maybe the rental income was the 2%, so I'd have 9,900 BTC instead).  If I had held that BTC instead, I'd still have 10,000 BTC.

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

But really, what good do you do to society by simply buying and holding assets (which is deteriorating by time btw)?

When austrians speak of investments they generally speak of value improvement. That is, you buy resources for X amount of bitcoins and then transform it into a more valuable form and sell it for Y amount of bitcoins. If you can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC then that's an investment. If you simply buy aluminum in the hopes of an increase in price you are speculating (which is totally fine sometimes, but that is the exception rather than the norm).

Simply holding resources will generally be a bad investment in a deflationary economy. And that is a good scenario. It means the resource hoarders will stay away from the market, and the price will keep going down to the point where those who actually see a way to improve on the resource find a viable way to do so. In your scenario where the rent is worth 200 BTC the price of the building simply wont be 10.000 BTC. Rational market agents will see that as a losing investment and stay away from the market. That means the price will go down to the point where it actually becomes viable to buy it and rent it out for 200 BTC (and most likely add some value by improvements to the asset).

The price of resources will go down by time in a deflationary economy. That means you actually need to improve on it if you want to profit. If you don't have an idea on how to do that you should stay out of the market rather than keeping other people out of it.

I'm not talking specifically about holding resources.  I am talking about every investment (besides loans) that a person could make.

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

SgtSpike, I'd be interested to hear your reaction to my previous comment.

Your post proves my point (unless I am missing something, which very well could be the case, as I am rather hurriedly looking over these posts).  The green widget is not produced or purchased, the green widget worker is not paid, and thus, less economic activity has been created.  This is the nature of a deflationary economy.

[2_Thumbs_Up]

Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

No, it's the complete opposite. The point of interest rates according to austrians is not only to allocate resources to profitable investments, but to the most profitable investments.

The reason interest rates (and loans) even arise in an economy is becuase different people have different abilities and different opportunities for profits.

Lets say you and I are working in different sectors of the economy and earn different rates of returns on our invested capital. You make 5% returns on your investment and I make a 3% return. Rather than to keep this status quo we would both be better of if I simply lent you money for an interest rate between 3-5%. The interest rate would reasonably be in the 4% range.

From my perspective, my original investment is not actually a profit, it's an opportunity cost, and the same applies to the society as a whole. I'm allocating my resources in a suboptimal way and unless I can reallocate them to compete with you, the optimal thing to do is to simply hand them over to you (or your competitor).

If I lend you the money, then you can expand your output, which will drive down the price of the goods you produce and lower your profit margin. At the same time the output of the goods I was producing will decrease, which will raise the price for my competitors and their profit margin. The end result will be that the profit of both your and mine sector of the economy will get closer and closer to the interest rate i.e. 4%.

Banking according to austrian theory is simply an arbitrage business. They solve the case where lender and borrower of funds don't know each other. They give me the opportunity to lend you funds even though I don't know you so I can stop hogging resources that I employ in a suboptimal way. The rate of return where all investments even out is what austrians refer to as the "natural rate of interest". No investments below this should take place in an optimal economy (and though we never reach this point we should strive to get as close as possible).

Main point is, resources are limited. All value improvements cannot take place at the same time. This means that resources cannot simply be allocated to all profitable investments, but rather need to be rationed to only the most profitable investments. The purpose of the interest rate is to solve this rationing process as good as possible.

[justusranvier]

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

Why is this a bad investment?

If the currency is gaining purchasing power over time this means the cost of aluminium is going down, the cost of labor (overhead) is going down and the price you can charge is also going down. You won't be able to charge as much for it next year but your costs will be lower and you'll still make the same amount of profit.

[2_Thumbs_Up]

SgtSpike, I'm in a bit of a hurry. I have one more point to make at mind right now but it will be at a later time. But I believe my last post adresses some of the things you took up though even if it's not a direct response.

[SgtSpike]

@Thumbs - I am certain I am no expect in economics, much less those of the Austrian variety.  But while I certainly agree that resources should be allocated to the most valuable investments, are you saying that investments with a risk-adjusted return of 3% would receive no funding?  And this should be normal?

It seems to me that, regardless of how you reallocate monies according to the valuation of various investments, it still does not answer the question of, what happens to those who choose to save instead of invest as a result of "gaining" 3% on just holding their money instead of investing it?  That's still a reduction in the overall investment pool, no matter how you divvy up the investments themselves.  Lower overall investment = lower economic activity.

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

Why is this a bad investment?

If the currency is gaining purchasing power over time this means the cost of aluminium is going down, the cost of labor (overhead) is going down and the price you can charge is also going down. You won't be able to charge as much for it next year but your costs will be lower and you'll still make the same amount of profit.

It's a bad investment because of the maths I wrote out before.  I could, at maximum, only recover 83.33% (2.5/3) of my original investment if the net profit margin stayed at 2.5%.  Yes, the expenses and revenues are going down, but I would NOT make the same amount of profit.  2.5% of 19.42 is less than 2.5% of 20.00, and it would keep going down each year.  I'd only ever make back 83.33% of my original investment at that rate.

[Adrian-x]

The correct level of investment is the level which people choose in the absence of coercion.

It is so refreshing to read some facts distilled down to their essence.

I would like to comment, inflation in the economy is a lack of investment by the members in that economy. This is a result of one's actions and the encouraged behaviour is causal not coercion, and likewise deflation in a free market is the result of oversupply the encouraged behaviour causal not coercion.

In contrast inflation as a result of a centrally controlled bank is coercion. 

[SgtSpike]

The correct level of investment is the level which people choose in the absence of coercion.

It is so refreshing to read some facts distilled down to their essence.

I would like to comment, inflation in the economy is a lack of investment by the members in that economy. This is a result of one's actions and the encouraged behaviour is causal not coercion, and likewise deflation in a free market is the result of oversupply the encouraged behaviour causal not coercion.

In contrast inflation as a result of a centrally controlled bank is coercion. 

Yes, I agree with you, but inflation or deflation of currency supply per capita artificially encourages or discourages the free market choices.

[kjj]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

[SgtSpike]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

[kjj]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

[Dalkore]

Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

No, it's the complete opposite. The point of interest rates according to austrians is not only to allocate resources to profitable investments, but to the most profitable investments.

The reason interest rates (and loans) even arise in an economy is becuase different people have different abilities and different opportunities for profits.

Lets say you and I are working in different sectors of the economy and earn different rates of returns on our invested capital. You make 5% returns on your investment and I make a 3% return. Rather than to keep this status quo we would both be better of if I simply lent you money for an interest rate between 3-5%. The interest rate would reasonably be in the 4% range.

From my perspective, my original investment is not actually a profit, it's an opportunity cost, and the same applies to the society as a whole. I'm allocating my resources in a suboptimal way and unless I can reallocate them to compete with you, the optimal thing to do is to simply hand them over to you (or your competitor).

If I lend you the money, then you can expand your output, which will drive down the price of the goods you produce and lower your profit margin. At the same time the output of the goods I was producing will decrease, which will raise the price for my competitors and their profit margin. The end result will be that the profit of both your and mine sector of the economy will get closer and closer to the interest rate i.e. 4%.

Banking according to austrian theory is simply an arbitrage business. They solve the case where lender and borrower of funds don't know each other. They give me the opportunity to lend you funds even though I don't know you so I can stop hogging resources that I employ in a suboptimal way. The rate of return where all investments even out is what austrians refer to as the "natural rate of interest". No investments below this should take place in an optimal economy (and though we never reach this point we should strive to get as close as possible).

Main point is, resources are limited. All value improvements cannot take place at the same time. This means that resources cannot simply be allocated to all profitable investments, but rather need to be rationed to only the most profitable investments. The purpose of the interest rate is to solve this rationing process as good as possible.

Are we debating ideologies (Austrian theory) or actualities?   I am trying to figure out if we are dancing around this distinction?

[Adrian-x]

The correct level of investment is the level which people choose in the absence of coercion.

It is so refreshing to read some facts distilled down to their essence.

I would like to comment, inflation in the economy is a lack of investment by the members in that economy. This is a result of one's actions and the encouraged behaviour is causal not coercion, and likewise deflation in a free market is the result of oversupply the encouraged behaviour causal not coercion.

In contrast inflation as a result of a centrally controlled bank is coercion. 

Yes, I agree with you, but inflation or deflation of currency supply per capita artificially encourages or discourages the free market choices.

Yes I agree here too, and paradoxically even limiting the supply to 21M sometime in the future seems to have a coercive effect in free market choices.

[SgtSpike]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

Well, my argument is that the optimal amount of investment is made at the point where a currency neither deflates nor inflates.  An inflationary currency encourages too much investment - that is, investment in opportunities that lose money.  Over spending/over lending is also a problem, and ends up causing the sort of economic trouble that we see in the world economy today.

I am adding real and nominal interest rates together because both of them need to be considered from an investor standpoint.  Please provide more specific direction if you still believe I am confusing the two.  Show the maths. 

[kjj]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

Well, my argument is that the optimal amount of investment is made at the point where a currency neither deflates nor inflates.  An inflationary currency encourages too much investment - that is, investment in opportunities that lose money.  Over spending/over lending is also a problem, and ends up causing the sort of economic trouble that we see in the world economy today.

I am adding real and nominal interest rates together because both of them need to be considered from an investor standpoint.  Please provide more specific direction if you still believe I am confusing the two.  Show the maths. 

What math?  Just ignore the nominal return and concentrate on the real return.

[SgtSpike]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

Well, my argument is that the optimal amount of investment is made at the point where a currency neither deflates nor inflates.  An inflationary currency encourages too much investment - that is, investment in opportunities that lose money.  Over spending/over lending is also a problem, and ends up causing the sort of economic trouble that we see in the world economy today.

I am adding real and nominal interest rates together because both of them need to be considered from an investor standpoint.  Please provide more specific direction if you still believe I am confusing the two.  Show the maths. 

What math?  Just ignore the nominal return and concentrate on the real return.

Why?  The investor needs to take both returns into account to make a proper investment decision.  And when we're talking about economic growth, a large part of it is reliant on how investors invest.  Both rates are completely relevant to this discussion.

[Roger_Murdock]

SgtSpike, I'd be interested to hear your reaction to my previous comment.

Your post proves my point (unless I am missing something, which very well could be the case, as I am rather hurriedly looking over these posts).  The green widget is not produced or purchased, the green widget worker is not paid, and thus, less economic activity has been created.  This is the nature of a deflationary economy.

I think it proves the opposite point.  Take another look at the first hypothetical:

Imagine that it's Jan. 1, 2020, and you're an investor in an economy where the currency is deflating 10% a year.  You're considering making an investment in a programmable widget-maker.  The widget-maker costs 100 BTC (naturally everyone uses Bitcoins in 2020).  To simplify things, assume that the widget maker is disposable and can only be used once, after which it has zero value.  Also assume that all you have to do to use the widget maker is to input two choices, e.g. color and shape, and then wait exactly one year.  Let's say that you know that you can make a green circle widget that will be worth 105 BTC in present 2020 BTC.  So it sounds like a smart (and wealth-creating) investment, right? Except there's a problem. You also know that when you can actually sell the widget on Jan. 1, 2021, it will only sell for 94.5 BTC as a result of deflation. So you're better off just sitting on your 100 BTC, and you certainly won't borrow money to make the investment.  Is that a bad result for society? I don't think so.  First, it should be noted that if the widget maker were only capable of making green circle widgets, it wouldn't sell for 100 BTC because no one would pay that much (everyone else would make the same calculation you did). In that case, the price would be adjusted downwards until it made economic sense.  But if it DOES sell for 100 BTC, what does that tell us? It tells us that there's someone else (who's presumably also aware of deflation) who knows that they can make, e.g., a yellow square widget worth at least 111.11 BTC in 2020 BTC (meaning it will sell for at least 100 BTC in 2021).  So there's no problem.  The asset goes to its most productive user and doesn't just sit on a shelf.

So either the green circle widget DOES get made (because the price of the widget maker is adjusted) or an even more valuable yellow square widget gets made instead.  Now, it might be objected that my hypothetical assumes that the widget maker already exists.  And so you might ask, well what if it costs 100 BTC to build a green circle widget maker?  Wouldn't the widget maker not get made in that case, and wouldn't that be bad?  I don't think so.  To make things simple, assume that a widget maker can be built by buying two components, A and B, and fitting them together.  (And that this only takes two seconds such that there are no real labor costs.)  Assume that each of those components cost 50 BTC.  If we use the same assumptions as before about the deflation rate, the year-long manufacturing time, and the present value of a green circle widget, that investment will not make sense.  But I still don't see a problem, and the analysis seems pretty similar to the previous one.  If the prices of components A and B are set at 50 BTC and the market will bear that price, there MUST be some other more valuable use to which they can be put (e.g., maybe they can also be used as inputs in a yellow square widget maker).  If making a green circle widget maker is their highest use, the market won't bear the 50 BTC price, and it would have to be adjusted accordingly.  So the bottom line is I'm just not seeing how deflation interferes with an efficient allocation of capital and other resources.  

On the other hand, when you simply print new money and distribute it unevenly (certain people get it first), those people are able to consume real additional resources without having produced anything of value. THAT seems like something that would limit economic growth. And that's true even if you're only printing enough new money to offset the natural process of deflation and maintain "stable prices."

[SgtSpike]

If making a green circle widget maker is their highest use, the market won't bear the 50 BTC price, and it would have to be adjusted accordingly.  So the bottom line is I'm just not seeing how deflation interferes with an efficient allocation of capital and other resources. 

You're only looking at a single point in time though, that's the problem.  Investments are weighed in how long they take to pay off - the Return On Investment.  Your example is bad, because there IS no long term investment.  All a person is doing is assembling two parts, and then immediately selling it.  There's no overhead, no buildings to purchase and depreciate, no tools needed to manufacture these items, nothing.  So if he buys the parts for 99.5 BTC, puts them together on his kitchen counter, and resells the completed version for 100 BTC, he'll still turn a profit every time.

Now, say I want to invest in a company that creates green widgets.  I want to buy a building for 100,000 BTC, and install an assembly line for 10,000, buying 100 of the green-widget-making-machine.  My overall capital investment is then 110,000 BTC.

Assume the deflation rate is 5%.

Assume my return on investment after depreciation of my building and manufacturing equipment is 3%.

When will I recover the 110,000 BTC I invested?

I NEVER would.  I would only recover 3/5 of it, maxing out at 69,300 BTC return on my investment.

Turning it around, if I had bought the building and equipment for $1.1M, and assumed an inflationary rate of 5%, when would I recover what I had invested?

I would recover it after just over 20 years.

So, if I had the option of investing in a green widget manufacturing facility expected to generate a 3% ROI in a 5% deflationary economy, I absolutely wouldn't do it.  If I had the same investment option in a 5% inflationary economy, I absolutely would do it.

I feel like I am just repeating myself here, but I'm not sure what else to do.  You aren't separating capital investments from variable costs in your analysis.  Your take on variable costs is exactly right - variable costs will change with the economic environment.  But capital expenditures, spent with the expectation of recovering those costs down the road, is where a deflationary or inflationary economy will affect investment decisions.