Deflation and Bitcoin, the last word on this forum

[molecular]

The deflation is meaningless. Predictable inflation and predictable deflation just get priced in.

+1, and: cool glasses!

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[hashman]

"Inflation is always and everywhere a monetary phenomenon." - Friedman, Milton. A Monetary History of the United States 1867-1960 (1963).


Perhaps some econ guru can clear something up for me. In 2008 the supply of dollars M0 most certainly went way up. However at the same time (in some cases before) the price in dollars of hard commodities such as silver, platinum, and crude oil (not gold) dropped significantly. That seems counter intuitive to me and contradicts the seemingly obvious idea that monetary inflation generally effects price inflation.

During that same time period that M0 was rising, consumer credit was collapsing.  Particularly with regard to housing loans.  Mortgage defaults (or any credit default, really) is deflationary.  As the market value of homes across American tanked, much of the monetary base ceased to exist, because much of the monetary base is digits these days, and not just paper.  As homeowners filed for bankruptcy, and got it, the digits that depended upon those debts simply ceased to exist; and so the real monetary base (could be M1, M-Prime, the Austrian Money metric; choose one, they all have faults) still contracted.

+1

see  http://www.shadowstats.com/charts/monetary-base-money-supply

 I think MoonShadow provided the main answer.  But another part may be that depending on how inflation is distributed it can take decades to filter into the economy and affect prices at certain markets.   

[MilkMan]

Thank God for Nefario. If he wasn't spending so much of his time explaining BTC and general economics to uneducated people, this would be a form full of ignorance. Inflation and deflation happen to all goods and commodities. Lets take gasoline for example. The price of gas fluctuates like crazy. Or you could consider a Bitcoin as a stock investment. Bitcoins due inflate/deflate, but so does everything else in this world, it's called supply and demand. This is not the fault of the Bitcoin. If you wanna have some real fun and see some real crazy price fluctuation, sign up for an Etrade account and invest in some penny stocks. That's what I was doing before this.

[MoonShadow]

Deflation actually favors the consumer, generally.  But inflation steals the gains due to increased productivity.

This is what you get when you have increases in productivity....

http://cafehayek.com/2011/07/stagnating-middle-class.html

[MilkMan]

Deflation actually favors the consumer, generally.  But inflation steals the gains due to increased productivity.

This is what you get when you have increases in productivity....

http://cafehayek.com/2011/07/stagnating-middle-class.html
[/quote

Where is the increase in productivity gonna come from?? Mining is becoming less and less profitable everyday, so an increase in productivity won't happen, especially since there is a cap on the number of Bitcoins that can be produced and I believe its 27,000,000 and that quota should be reached by 2040. That's why I save my Bitcoins and pray for inflation to happen.

[MilkMan]

Mmmm... Penny stocks. Played with those as a kid.

You're right mostly, but why do people insist on ragging on mining? It's obviously going to be less profitable eventually, but why do people think that time is already here. Watch me make 2000 BTC a month and tell me I lost money on it

Friend, you better check your math. How many G/hs is you system running? The difficulty is already at 1,690,906, which is outrageous. When I was mining a month ago the difficulty was like 500,000 and that was already to high. In addition to that, the Bitcoin network together is hashing at 16.283 Thash/s. Can you compete with that? Keep me posted tho

[jtimon]

Deflation actually favors the consumer, generally.

On the other hand, deflation hurts investors, entrepreneurs and the financial market.
You may say that growth motivated deflation is too low to matter, but you can't say deflation is good in general.
There's no doubt that a 50% deflation would destroy the economy that relies on that money.

Also...
1) breads cost you 1 btc and you earn 100
2) bread cost you 0.1 and you earn 10.
Equivalent.
The argument "deflation means low prices and therefore is good" is just as absurd as pretending you can make the world richer by printing money.

When you defend deflation, you should focus in growth caused deflation. But the gains of this growth doesn't have to go necessarily to workers.

[MoonShadow]

Deflation actually favors the consumer, generally.

On the other hand, deflation hurts investors, entrepreneurs and the financial market.
You may say that growth motivated deflation is too low to matter, but you can't say deflation is good in general.

I won't claim that deflation is good in general.  Having said that, your statement that deflation hurst investors and entrepreneurs is faulty.  It may be true, or it may not be true.  5000 years of gold deflation implies that it's not true, since investory and entrepreneurs alike tend to adjust to the conditions just fine.  It's only in the period of crossing the zero that tends to screw things up.  The financial markets, as they are, would certainly be harmed, but that is because they were built upon the foundation of continuous inflation.  They, in turn, were built upon the institutions destroyed when the gold standard ceased to exist.  I'm sure that they will adapt, eventually.

There's no doubt that a 50% deflation would destroy the economy that relies on that money.

Again, an assumption for which you cannot support.  Nor can I, but I'd say that your assumption is incorrect.  50% deflation over what kind of time period?  Certainly 50% deflation has be experienced before, and over long enough time frames that those who lived during those times considered it as normal as inflation is considered today.

[johnyj]

Given anything valueable, people want more and more, and they want the price to be stable at meantime

People seldom want less and less, when the price is rising. If the price rise, they want more

I think this is just pure human nature, you can twist this and think in another way, but majority of human is thinking in this way, because they can not do more than primary school mathematics. That's why keynesian economics is popular

[jtimon]

Deflation actually favors the consumer, generally.

On the other hand, deflation hurts investors, entrepreneurs and the financial market.
You may say that growth motivated deflation is too low to matter, but you can't say deflation is good in general.

I won't claim that deflation is good in general. 

Very good.
Is it bad in some cases?

Having said that, your statement that deflation hurst investors and entrepreneurs is faulty.  It may be true, or it may not be true. 

It hurts entrepreneurs because they don't get financing.
It hurts investors because their investments (so called real capital) don't yield as expected.

5000 years of gold deflation implies that it's not true, since investory and entrepreneurs alike tend to adjust to the conditions just fine.

There has also been inflation with gold-money. There have been economic crises with gold-money.
If entrepeneurs not getting funds is adapting just fine...

It's only in the period of crossing the zero that tends to screw things up. 

I don't know what zero you mean.

The financial markets, as they are, would certainly be harmed, but that is because they were built upon the foundation of continuous inflation.  They, in turn, were built upon the institutions destroyed when the gold standard ceased to exist.  I'm sure that they will adapt, eventually.

I don't mean as they are now, I mean always, because less loans are made.

There's no doubt that a 50% deflation would destroy the economy that relies on that money.

Again, an assumption for which you cannot support.  Nor can I, but I'd say that your assumption is incorrect.  50% deflation over what kind of time period?  Certainly 50% deflation has be experienced before, and over long enough time frames that those who lived during those times considered it as normal as inflation is considered today.

I meant 50% annual deflation.

[MoonShadow]

Deflation actually favors the consumer, generally.

On the other hand, deflation hurts investors, entrepreneurs and the financial market.
You may say that growth motivated deflation is too low to matter, but you can't say deflation is good in general.

I won't claim that deflation is good in general. 

Very good.
Is it bad in some cases?

I would have to say yes, but the answer depends upon who you are.  Like anything else, including inflation, there are always those who benefit.

Having said that, your statement that deflation hurst investors and entrepreneurs is faulty.  It may be true, or it may not be true. 

It hurts entrepreneurs because they don't get financing.
It hurts investors because their investments (so called real capital) don't yield as expected.

The entrepreneurs who couldn't get financing were likely not a good bet.  The investors who lost profits because of deflation were betting on inflation.  No harm was done to the economy at large in either case, since the last thing an economy needs is more bad investments and failed entreprenuers.

5000 years of gold deflation implies that it's not true, since investory and entrepreneurs alike tend to adjust to the conditions just fine.

There has also been inflation with gold-money. There have been economic crises with gold-money.

That's true, but not particularly relevant.  Those two types of events are not actually related to one another.  The vast majority of economic crises that occured before 1913 (When fractional reserve banking was pased, allowing a loosening of the gold standard) were business cycle related, not monetary events.  The two exceptions that I can think off were SPain when they stole tons from the Incas and flooded Europe with gold, crushing economies around them including Britian and France; and the California Gold Rush, which experienced huge inflation West of the Rockies but still managed to spur industry in the Eastern states, particularly in the manufacture of tools.

If entrepeneurs not getting funds is adapting just fine...

That's part of the 'creative destruction' of a (more or lesss) free market system.  So yes, some guy who invented the car powered by forward facing wind turbines or the water fueled engine not getting funding is a positive adaptation.

It's only in the period of crossing the zero that tends to screw things up. 

I don't know what zero you mean.

The zero line on an inflation/deflation percentage graph.  The line dives toward zero as the inflation rate is reduced until it crosses the zero, and is thus in deflation.

The financial markets, as they are, would certainly be harmed, but that is because they were built upon the foundation of continuous inflation.  They, in turn, were built upon the institutions destroyed when the gold standard ceased to exist.  I'm sure that they will adapt, eventually.

I don't mean as they are now, I mean always, because less loans are made.

Please refer to the above comments upon the guy who inventedthe water fuelled engine.  Some loans are best not issued.

There's no doubt that a 50% deflation would destroy the economy that relies on that money.

Again, an assumption for which you cannot support.  Nor can I, but I'd say that your assumption is incorrect.  50% deflation over what kind of time period?  Certainly 50% deflation has be experienced before, and over long enough time frames that those who lived during those times considered it as normal as inflation is considered today.

I meant 50% annual deflation.

50% in one year would be huge, and would likely destroy an economy.  As far as I am aware, however, such a huge deflation rate has never occured in the history of currencies.  The reverse certainly has, however, and inflation rates over 50% APR  have preceded the hyperinflationary destruction of a currency in every case that I know of.

Inflation rates that high are easy, it just requires that the institution in control of the currency run the printing presses to do it.  I can't even fathom a scenario wherein 50% APR deflation could occur, because once the currency has been issued even theat same issuing institution would have a hard time getting enough back to destroy.

[jtimon]

I won't claim that deflation is good in general. 

Very good.
Is it bad in some cases?

I would have to say yes, but the answer depends upon who you are.  Like anything else, including inflation, there are always those who benefit.

I don't mean for certain people, I meant "for the health of the economy". If you allow me to use that abstract concept.
You answer yes later, so I think you're more reasonable than many people in the thread.

Having said that, your statement that deflation hurst investors and entrepreneurs is faulty.  It may be true, or it may not be true. 

It hurts entrepreneurs because they don't get financing.
It hurts investors because their investments (so called real capital) don't yield as expected.

The entrepreneurs who couldn't get financing were likely not a good bet.  The investors who lost profits because of deflation were betting on inflation.  No harm was done to the economy at large in either case, since the last thing an economy needs is more bad investments and failed entreprenuers.

I don't think it is fair to say that all entrepreneurs that don't get financed don't deserve it. With deflation less enterprises are profitable. And some of them that are not financed could have been without deflation.
That's my point, but maybe you disagree.

5000 years of gold deflation implies that it's not true, since investory and entrepreneurs alike tend to adjust to the conditions just fine.

There has also been inflation with gold-money. There have been economic crises with gold-money.

That's true, but not particularly relevant.  Those two types of events are not actually related to one another.  The vast majority of economic crises that occured before 1913 (When fractional reserve banking was pased, allowing a loosening of the gold standard) were business cycle related, not monetary events.

What if business cycles were a monetary event?
I think is basic interest (a quality of most scarce moneys) what motivates economic cycles. Then they're are enhanced by monetary policies.

The two exceptions that I can think off were SPain when they stole tons from the Incas and flooded Europe with gold, crushing economies around them including Britian and France; and the California Gold Rush, which experienced huge inflation West of the Rockies but still managed to spur industry in the Eastern states, particularly in the manufacture of tools.

Yes, I was thinking in the Spanish example. But many other big discoveries had lead to inflation for sure. Also ships full of gold got buried in the ocean. I just wanted to demystify the goodness of gold-money. The monetary base had not been constant with gold.
Of course, it's probably better that the supply depends on random/nature factors than on the suppositions of the monetary policy maker of the day. 

If entrepeneurs not getting funds is adapting just fine...

That's part of the 'creative destruction' of a (more or lesss) free market system.  So yes, some guy who invented the car powered by forward facing wind turbines or the water fueled engine not getting funding is a positive adaptation.

As said before, that's not fair to say that all the business that go bankrupt within a crises deserve it. Maybe some of their suppliers or their clients deserved it and they're not able to adapt fast enough to the depression conditions. 

It's only in the period of crossing the zero that tends to screw things up. 

I don't know what zero you mean.

The zero line on an inflation/deflation percentage graph.  The line dives toward zero as the inflation rate is reduced until it crosses the zero, and is thus in deflation.

Mhmmm.
Deflation is only bad when there's negative inflation? Then, always.
I still don't get what you mean.

There's no doubt that a 50% deflation would destroy the economy that relies on that money.

50% in one year would be huge, and would likely destroy an economy.  As far as I am aware, however, such a huge deflation rate has never occured in the history of currencies.  The reverse certainly has, however, and inflation rates over 50% APR  have preceded the hyperinflationary destruction of a currency in every case that I know of.

Inflation rates that high are easy, it just requires that the institution in control of the currency run the printing presses to do it.  I can't even fathom a scenario wherein 50% APR deflation could occur, because once the currency has been issued even theat same issuing institution would have a hard time getting enough back to destroy.

It was an extreme case on purpose. I wasn't saying that it had happened, but maybe the people here that thinks a 5% deflation is good also think that a 50% would be ten times better.
As you point out, inflation is much more common, because monetary policy makers can create it at will.

[MoonShadow]

I won't claim that deflation is good in general. 

Very good.
Is it bad in some cases?

I would have to say yes, but the answer depends upon who you are.  Like anything else, including inflation, there are always those who benefit.

I don't mean for certain people, I meant "for the health of the economy". If you allow me to use that abstract concept.
You answer yes later, so I think you're more reasonable than many people in the thread.

"The economy" is a fiction, really.  There is only people.  Every scenario that we can imagine is going to favor those who could have predicted it, and profited from it, in the short term.  Gentle deflation favors the consumer & saver in the long term, while gentle inflation favors the debtor.  Catastrophic inflations favors no one, in the long run.  It would be safe to assume that is also true with catastrophic deflation, but there isn't much evidence that catastrophic deflation is a realistic possibility.

Having said that, your statement that deflation hurst investors and entrepreneurs is faulty.  It may be true, or it may not be true. 

It hurts entrepreneurs because they don't get financing.
It hurts investors because their investments (so called real capital) don't yield as expected.

The entrepreneurs who couldn't get financing were likely not a good bet.  The investors who lost profits because of deflation were betting on inflation.  No harm was done to the economy at large in either case, since the last thing an economy needs is more bad investments and failed entreprenuers.

I don't think it is fair to say that all entrepreneurs that don't get financed don't deserve it. With deflation less enterprises are profitable. And some of them that are not financed could have been without deflation.
That's my point, but maybe you disagree.

I do disagree.  On the average, the best investments and entrepreneurs will get funded, while the worst are the first to get dropped when the funds get scarce.

5000 years of gold deflation implies that it's not true, since investory and entrepreneurs alike tend to adjust to the conditions just fine.

There has also been inflation with gold-money. There have been economic crises with gold-money.

That's true, but not particularly relevant.  Those two types of events are not actually related to one another.  The vast majority of economic crises that occured before 1913 (When fractional reserve banking was pased, allowing a loosening of the gold standard) were business cycle related, not monetary events.

What if business cycles were a monetary event?
I think is basic interest (a quality of most scarce moneys) what motivates economic cycles. Then they're are enhanced by monetary policies.

Depends on what one considers a monetary event.  The business cycle is never solely caused by monetary events, and under a gold standard a monetary events was rarely (if ever) the primary cause of a business cycle downturn.

The two exceptions that I can think off were SPain when they stole tons from the Incas and flooded Europe with gold, crushing economies around them including Britian and France; and the California Gold Rush, which experienced huge inflation West of the Rockies but still managed to spur industry in the Eastern states, particularly in the manufacture of tools.

Yes, I was thinking in the Spanish example. But many other big discoveries had lead to inflation for sure. Also ships full of gold got buried in the ocean. I just wanted to demystify the goodness of gold-money. The monetary base had not been constant with gold.
Of course, it's probably better that the supply depends on random/nature factors than on the suppositions of the monetary policy maker of the day. 

If entrepeneurs not getting funds is adapting just fine...

That's part of the 'creative destruction' of a (more or lesss) free market system.  So yes, some guy who invented the car powered by forward facing wind turbines or the water fueled engine not getting funding is a positive adaptation.

As said before, that's not fair to say that all the business that go bankrupt within a crises deserve it. Maybe some of their suppliers or their clients deserved it and they're not able to adapt fast enough to the depression conditions. 

On the average, they did 'deserve' it, particular circumstances aside.  It may not be fair, but it is just.  Wal-mart is always blamed for running the mom&pop general stores out of business, but they went out of business because they weren't competitive anymore.

It's only in the period of crossing the zero that tends to screw things up. 

I don't know what zero you mean.

The zero line on an inflation/deflation percentage graph.  The line dives toward zero as the inflation rate is reduced until it crosses the zero, and is thus in deflation.

Mhmmm.
Deflation is only bad when there's negative inflation? Then, always.
I still don't get what you mean.

I mean that the shift across the zero point is when/what/how the system is confused.  Investors are either bulls or bears, and the rare few can manage both.  Same with inflation/deflation.  It is rare for an investor/business/whatever that does well under inflation to do well under deflation, and vice versa.  That doesn't mean that the companies that exist now deserve to continue to exist, nor that inflation should continue to exist so that the established companies can flourish.

There's no doubt that a 50% deflation would destroy the economy that relies on that money.

50% in one year would be huge, and would likely destroy an economy.  As far as I am aware, however, such a huge deflation rate has never occured in the history of currencies.  The reverse certainly has, however, and inflation rates over 50% APR  have preceded the hyperinflationary destruction of a currency in every case that I know of.

Inflation rates that high are easy, it just requires that the institution in control of the currency run the printing presses to do it.  I can't even fathom a scenario wherein 50% APR deflation could occur, because once the currency has been issued even theat same issuing institution would have a hard time getting enough back to destroy.

It was an extreme case on purpose. I wasn't saying that it had happened, but maybe the people here that thinks a 5% deflation is good also think that a 50% would be ten times better.
As you point out, inflation is much more common, because monetary policy makers can create it at will.

[Boussac]

Deflation is a problem only if it is too steep, causing price instability, preventing merchants from accepting bitcoins.
In the long run, as more and more people use bitcoins, deflation rate will settle to a predictable rate.
Since bitcoin is infinitely divisible (believe me I checked the code: it can be made infinite even though divisibility is limited today to a 100 milion times),deflation can go on for as long as the bitcoin economy grows.

[Murwa]

By the logic of the anti-deflationary crowd:

Gold is deflationary, nobody should buy gold.

When you buy product and services you are selling gold

According to your own logic nobody should sell gold .

Effects

[Boussac]

This thread seems to get sidetracked: gold is not a currency because it is not easily divisible.
How big is a piece of gold worth 1 BTC ?
People have to come to terms with the fact that bitcoin is something really new that cannot be compared to something else simply because it is the first ever universal currency.
It will take time before bitcoins gain universal acceptance but they will eventually.

[netrin]

gold is not a currency because it is not easily divisible.

Prior to computer networking, how did one easily divide a $100 bill?

[BitterTea]

gold is not a currency because it is not easily divisible.

Prior to computer networking, how did one easily divide a $100 bill?

By exchanging it for smaller denominations?

[MoonShadow]

This thread seems to get sidetracked: gold is not a currency because it is not easily divisible.
How big is a piece of gold worth 1 BTC ?
People have to come to terms with the fact that bitcoin is something really new that cannot be compared to something else simply because it is the first ever universal currency.
It will take time before bitcoins gain universal acceptance but they will eventually.

While I do agree with you, I feel the need to clarify your statements.  Gold is not a currency because it's not a standardized unit of measurement.  If it is minted into distinct coins of noted mass, then it's a currency as well as a money.

[jtimon]

This thread seems to get sidetracked: gold is not a currency because it is not easily divisible.
How big is a piece of gold worth 1 BTC ?
People have to come to terms with the fact that bitcoin is something really new that cannot be compared to something else simply because it is the first ever universal currency.
It will take time before bitcoins gain universal acceptance but they will eventually.

While I do agree with you, I feel the need to clarify your statements.  Gold is not a currency because it's not a standardized unit of measurement.  If it is minted into distinct coins of noted mass, then it's a currency as well as a money.

Gold is a currency in some places. Gold is money because it has monetary value.
Central banks don't store diamonds because they're not fungible and thus can't be used as money.