Deflation and Bitcoin, the last word on this forum

[Nefario]

There has been a huge amount of tatter by the masses about how bitcoin is deflationary, how it's the next satan, and will end the world etc. I myself was interviewed by a freelance reporter (read, unemployed jouralism major) and he just wouldn't stop banging on about deflation, even after I'd said it doesn't matter. Throw in the recent threads on hackernews and Quora posts, it's getting really annoying to the point of distraction.

So I'm going to lay it down here, and I don't want to hear another peep about it.

Firstly this is the bitcoin project, it is primarily about bitcoin the software, the services around etc. One aspect of bitcoin is that it is deflationary.

The arguments are always about whether deflation is a good thing or not, so this is actually not a bitcoin issue (it's just something that effects bitcoin, because it's deflationary).

Firstly I must point out that economics is a SOCIAL SCIENCE, this means that there are many contradicting theories, it's not math, so there are many MANY things which tend to be plain wrong. Social sciences are the fields of scholarship that study society.

Hard science like math, physics, some biology and chemistry are ....well...hard. 1+1=2, gravity stops us floating away, take away our oxigen and we tend to die. These things are provable, you can run test after test and get the same result.

This is not so with economics where there are no tests, just some (often poor quality) data, and theories trying to explain that data. And from these theories predictions are made. It's very very shakey ground.

Who thinks what about Deflation

There are two schools of thought on deflation and inflation.
Keynesian economics, which favors government intervention and money supply inflation. This not surprisingly is the most popular school of thought with world governments (if someone told you to just print money and spend it you'd like them too).

This school not only supports inflation, but believes it to be essential to growth.

Then there is the Austrian school, which is is for a free market, against government intervention, and generally think inflation is bad and deflation is good. Again unsurprisingly these people are not popular in government circles around the world.

For more about why they think deflation is good see these links.
http://mises.org/daily/1241
http://blog.mises.org/3362/inflation-or-deflation/
http://mises.org/daily/4623

This is an argument between these two theories of economics, not bitcoin. At best bitcoin could be thought of as a modern experiment in deflation.

If you think deflation is just the devil, then fine, don't use bitcoin, just watch, you'll see soon enough whether it causes the bitcoin economy to stall, and you'll be in the position to gloat or eat your words. If deflation doesn't bother you then forget about it and continue living your life and spending your bitcoin.

But let me be clear, no more pointless natter about deflation worries. If you're a bitcoiner don't allow yourself to be drawn into a discussion about deflation, point them to this thread and say thats all you've got to say about it.

Nefario.

[grondilu]

If you think deflation is just the devil, then fine, don't use bitcoin, just watch, you'll see soon enough whether it causes the bitcoin economy to stall, and you'll be in the position to gloat or eat your words. If deflation doesn't bother you then forget about it and continue living your life and spending your bitcoin.

+1

please lock this topic now before trolls pop out.

[kiba]

I am an opportunist.   

http://bitcoinweekly.com/articles/one-apple-today-two-apples-tomorrow-or-how-i-stopped-being-afraid-and-learned-to-love-deflation

[ene]

Even if bitcoin will deflate, bitcoins are still being added to the supply at a fast rate until about 2017 at least. So if you don't want to use a deflationary currency, just sell all your bitcoins in 2017 before deflation kicks into effect. It's not that difficult. 

[Reikoku]

By the logic of the anti-deflationary crowd:

Gold is deflationary, nobody should buy gold.

[jtimon]

The end of this discussion is here.
http://forum.bitcoin.org/index.php?topic=11627.0

Have you locked that thread?

I think I could convince him that bitcoin won't die because of deflation.
I've also learned recently (with the help of some people of this forum) the dangers of a flexible monetary base (beyond the transfer of wealth which is used now by central banks to tax) and maybe I could help him to understand them.
Like him (and unlike most bitcoiners), I want an interest free money. I think that thread would be a better place to talk about it than this one.

I've sent him a message, but others who think like him won't be able to read it.
Should I post my reply to that thread here?

TOPIC:

There are two schools of thought on deflation and inflation.

There's more economic thinkers different from Mises and Keynes.
I think that price deflation can cause financial problems that are "bad to society" and I don't like Keynes's solutions at all.

If you're a bitcoiner don't allow yourself to be drawn into a discussion about deflation, point them to this thread and say thats all you've got to say about it.

I expect bitcoin to lead the worldwide monetary revolution that will define the century but not to be the best we will see.
Should I be out of bitcoin because of that?
In fact, I expect ripple to be more revolutionary than bitcoin.
Can I be a bitcoiner and read Gesell?

[afterburner229]

Even if bitcoin will deflate, bitcoins are still being added to the supply at a fast rate until about 2017 at least. So if you don't want to use a deflationary currency, just sell all your bitcoins in 2017 before deflation kicks into effect. It's not that difficult.  

Deflation in bitcoin society starts when mining difficulty starts to be too high for profitable mining to average miner. It has already started!

Dollar-based economy is growing (between crisises) inflationarily, because people around a world DO mine gold-equvivalent in NEW goods, services, technologies, etc., in rate at least constant (but actually exponential). For this new THINGS, US goverment DO print new 'paper' dollars.

In bitcoin, mining difficulty DOES exponentially DEPRESS the profit for sell/buy NEW goods, services, technologies, etc., for BTC.

Just keep, accumulate bitcoins & play on BTC exchanges - it simply MORE profitable than ANY business that uses bitcoin as currency, including even mining itself.

Why don't you all guys understand it?

[afterburner229]

Bitcoin's deflation has been starteed 2 months ago. And nearly constant number of bitcoin users DOES maintain bitcoin currency 'on the fly'.
Bitcoin IS already stable, but very tiny economics. With no change to grow.

So I agree,  Bitcoin is just modern deflation experiment in one tiny Bitcoin society.

[Findeton]

Even if bitcoin will deflate, bitcoins are still being added to the supply at a fast rate until about 2017 at least. So if you don't want to use a deflationary currency, just sell all your bitcoins in 2017 before deflation kicks into effect. It's not that difficult.  

Deflation in bitcoin society starts when mining difficulty starts to be too high for profitable mining to average miner. It has already started!

Dollar-based economy is growing (between crisises) inflationarily, because people around a world DO mine gold-equvivalent in NEW goods, services, technologies, etc., in rate at least constant (but actually exponential). For this new THINGS, US goverment DO print new 'paper' dollars.

In bitcoin, mining difficulty DOES exponentially DEPRESS the profit for sell/buy NEW goods, services, technologies, etc., for BTC.

Just keep, accumulate bitcoins & play on BTC exchanges - it simply MORE profitable than ANY business that uses bitcoin as currency, including even mining itself.

Why don't you all guys understand it?

Mining difficulty changes every 2 weeks, so that's not a problem. It's just that difficulty has to follow price, otherwise a bubble will be created (and it will explode).

You could see accumulating bitcoins more profitable than mining, but mining gets you actual brand new bitcoins and you don't have to sell them all just when you get them.

[afterburner229]

Mining difficulty changes every 2 weeks, so that's not a problem. It's just that difficulty has to follow price, otherwise a bubble will be created (and it will explode).

You could see accumulating bitcoins more profitable than mining, but mining gets you actual brand new bitcoins and you don't have to sell them all just when you get them.

It is true but nothing to do with. Difficulty is normalized BY DESIGN for number of miners with current hardware to be constant and small FOREVER.

So that various new goods, services, technologies, etc, that people sell/buy for $, in real world, -> become just NEW ATI GPU cards in bitcoin world. Because in deflation scenario with constant number of society members, $/BTC exchange playing is always more profitable than ANY business, including even mining.

[jtimon]

Deflation in bitcoin society starts when mining difficulty starts to be too high for profitable mining to average miner. It has already started!

No.
What causes price deflation in bitcoin is the increasing demand. That demand is based on business acceptance (and expectations of future acceptance).
Mining is driven by demand and not the other way around. Well, difficulty increases security and that increases business acceptance, but deflation won't stop mining.    

Dollar-based economy is growing (between crisises) inflationarily, because people around a world DO mine gold-equvivalent in NEW goods, services, technologies, etc., in rate at least constant (but actually exponential). For this new THINGS, US goverment DO print new 'paper' dollars.

In bitcoin, mining difficulty DOES exponentially DEPRESS the profit for sell/buy NEW goods, services, technologies, etc., for BTC.

Just keep, accumulate bitcoins & play on BTC exchanges - it simply MORE profitable than ANY business that uses bitcoin as currency, including even mining itself.

Why don't you all guys understand it?

It is true that price deflation encourages hoarding. But that's why merchants will have to accept other currencies to keep on selling.
That currency competition will decrease the value of bitcoin as a medium of exchange, decreasing demand, decreasing deflation.
Since bitcoin is not the only currency on earth, deflation can't kill it.  

[Suggester]

Firstly this is the bitcoin project, it is primarily about bitcoin the software, the services around etc. One aspect of bitcoin is that it is deflationary.

The arguments are always about whether deflation is a good thing or not, so this is actually not a bitcoin issue (it's just something that effects bitcoin, because it's deflationary).

You're talking like it's a God-given rule which cannot be changed. But it can. Just roll out Bitcoin 0.4 and we're all set!

Firstly I must point out that economics is a SOCIAL SCIENCE, this means that there are many contradicting theories, it's not math, so there are many MANY things which tend to be plain wrong. Social sciences are the fields of scholarship that study society.

Hard science like math, physics, some biology and chemistry are ....well...hard. 1+1=2, gravity stops us floating away, take away our oxigen and we tend to die. These things are provable, you can run test after test and get the same result.

This is not so with economics where there are no tests, just some (often poor quality) data, and theories trying to explain that data. And from these theories predictions are made. It's very very shakey ground.

Really? So why don't we generate a totally random number of bitcoins every minute and give it to a random user and see what happens? Or maybe we should just square the number of coins in everybody's wallet and see if it helps or not. Did you also consider playing with the hash difficulty to make it a function of the temperature in Mumbai? Hey, it's just a social science. Nobody can predict what will happen so why don't we try it and see?

There are two schools of thought on deflation and inflation.
Keynesian economics, which favors government intervention and money supply inflation. This not surprisingly is the most popular school of thought with world governments (if someone told you to just print money and spend it you'd like them too).

This school not only supports inflation, but believes it to be essential to growth.

I hope you understand the correct definition of inflation here. If the population (thus the economy) doubles with the money supply also doubling there will be no inflation. Everything just goes x2. The workers earn the same salaries and the goods/services cost the exact same prices.

Then there is the Austrian school, which is is for a free market, against government intervention, and generally think inflation is bad and deflation is good. Again unsurprisingly these people are not popular in government circles around the world.

I'm all for a stable currency. That's exactly what my proposed model is all about. But a perpetually deflating currency? That's called a pyramid scheme. Had that been the case in any internationally-recognized currency like the US dollar (and I'm talking about double-digits deflation here like in Bitcoin's case), everyone in the world would be hoarding that currency essentially forever only to be sold to another investor/hoarder when they badly need money. Come on Nefario, we all know that. You know that. Stop hiding behind the it's a social science so nobody really knows anything argument. And if you don't believe me, check out the price history so far https://mtgox.com/trade/history

If you think deflation is just the devil, then fine, don't use bitcoin, just watch

I wish for deflation to increase even more because I mined quite a bit of coins last year and I'm sitting on them. The only problem is that it's too good to be true. Nothing keeps rising forever, period. You're committing the same sin of modern governments who keep borrowing and think it can go on forever, just in reverse. Stability is the keyword here. The hell with deflation AND INFLATION. Nobody takes a currency which skyrockets ten-fold in a month then drops to half in 10 days seriously.

[niklas_a]

If you think deflation is just the devil, then fine, don't use bitcoin, just watch, you'll see soon enough whether it causes the bitcoin economy to stall, and you'll be in the position to gloat or eat your words. If deflation doesn't bother you then forget about it and continue living your life and spending your bitcoin.

´nuff said.

[goatpig]

Come on Nefario, we all know that. You know that.

No, you're just completely blind to the fact that even though the price of Bitcoin is 15 times what it was in early March, we're still seeing lots of days with high volume. Trade history on Gox directly contradicts your wishful thinking.

[Findeton]

If you think deflation is just the devil, then fine, don't use bitcoin, just watch

I wish for deflation to increase even more because I mined quite a bit of coins last year and I'm sitting on them. The only problem is that it's too good to be true. Nothing keeps rising forever, period. You're committing the same sin of modern governments who keep borrowing and think it can go on forever, just in reverse. Stability is the keyword here. The hell with deflation AND INFLATION.

It's not deflation what is rising $/BTC right now.

BTC deflation has a 20% rate, not a 10000% rate. What is bullying the market is especulation.

More and more people think that it could be possible that this currency is going to get mainstream. They especulate about it.

Nobody takes a currency which skyrockets ten-fold in a month then drops to half in 10 days seriously.

If we just had discovered gold, wouldn't that happen too? I'm just saying. Right now BTC is a small very modest commodity that can be used to pay some things. Will BTC suceed as currency? We'll see. If it suceeds, it won't be without bumps on the road.

I mean, what if in 2-4 years Bitcoin  is worth 10 billion dollars maintaining the actual price/difficulty rate? what if it moves then more than 80 millions each day? Would you start to take it seriously? I would, for sure. And because I think it's possible, I'm willing to put my money where my mouth is.

[benjamindees]

I hope you understand the correct definition of inflation here. If the population (thus the economy) doubles with the money supply also doubling there will be no inflation. Everything just goes x2. The workers earn the same salaries and the goods/services cost the exact same prices.

I hope you understand that an economy is not proportional to the number of people in it.

[Suggester]

No, you're just completely blind to the fact that even though the price of Bitcoin is 15 times what it was in early March, we're still seeing lots of days with high volume. Trade history on Gox directly contradicts your wishful thinking.

Are you saying that stabilizing the price wouldn't increase the number of transactions and/or the percentage of real transactions (i.e the ones not aimed at hoarding and speculation)?

It's not deflation what is rising $/BTC right now.

BTC deflation has a 20% rate, not a 10000% rate. What is bullying the market is especulation.

And deflation. That 20% (19% to be exact) is built into the system assuming the number of users stays constant. If the number of users double, the demand doubles, and the price skyrockets. That's called deflation. My proposal was to increase supply with demand to prevent that.

More and more people think that it could be possible that this currency is going to get mainstream. They especulate about it.

That's also true. Which is why a flexible-supply system beats a fixed-supply one. The flexible supply doesn't give speculators any incentive because the price is constant anyway.

If we just had discovered gold, wouldn't that happen too? I'm just saying. Right now BTC is a small very modest commodity that can be used to pay some things. Will BTC suceed as currency? We'll see. If it suceeds, it won't be without bumps on the road.

Gold is a total different story. Had humanity run out of gold within 16 years of its discovery there would have been perpetual deflation. Nobody would've spent their gold except for emergencies. They would've used silver or seashells or grain while carefully keeping their gold under the mattress.

I mean, what if in 2-4 years Bitcoin  is worth 10 billion dollars maintaining the actual price/difficulty rate? what if it moves then more than 80 millions each day? Would you start to take it seriously? I would, for sure. And because I think it's possible, I'm willing to put my money where my mouth is.

Bitcoin isn't useless. But currently it's only good for "hit and run" transactions. You can't wait for too long (too long being about 12+ hours!) before liquidating your received coins lest the price dives down. You'd also be worried if you spent them now lest the price doubles in a month. What sort of currency is this? We need stability. Why do some people have a problem with that?

I hope you understand that an economy is not proportional to the number of people in it.

On average, it is. Sure, maybe 20% of users control 80% of transactions, but if the number of users double then on average the number of transactions will double accordingly with another 20/80.

[russelljohnson]

oxygen, not oxigen

[benjamindees]

I hope you understand that an economy is not proportional to the number of people in it.

On average, it is. Sure, maybe 20% of users control 80% of transactions, but if the number of users double then on average the number of transactions will double accordingly with another 20/80.

Well then I hope you learn that an economy is not proportional to the number of transactions.

[goatpig]

Are you saying that stabilizing the price wouldn't increase the number of transactions and/or the percentage of real transactions (i.e the ones not aimed at hoarding and speculation)?

everyone in the world would be hoarding that currency essentially forever only to be sold to another investor/hoarder when they badly need money.

This is your stance. Then you relay to the trade history on MtGox to maintain that stance. Yet that same trade history shows that since mid April, pretty much since the price spiked above $2, that MtGox has been experience a 30d volume consistently within 900,000 to 1 Million BTC, and now the price is on its way beyond $15. The 30d expected inflation through mining is anywhere between 200,000 and 300,000 BTC. This means that on a month and half span, about 1.5 millions "old" BTCs have changed hands (without accounting for the freshly mined coins in that period), which is over 1/4th of the total "old" BTC supply. According to your hoarding theory, this is impossible. Now I suggest you reflect on your stance.