2012-12-23 forbes.com - Fear Not Deflation

[julz]

Fear Not Deflation

Jon Matonis
2012-12-23

http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-deflation/

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Deflation in the context of bitcoin has been cited frequently in the popular press as a detriment to its widespread adoption.
...

Krugman could not be more wrong. Deflation is not a problem in the traditional monetary system and it will not be a problem in the bitcoin economy.
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[TraderTimm]

Kickin' ass, Jon! I always find it funny when people bring up the deflation problem - someone just is too lazy to do the math. Considering that there are 2.1 QUADRILLION units at the maximum divisor, even if we have lost coins, etc.., that number will handily take care of it.

Wolfram Alpha, for instance, says that number is approximately 100 x The total number of human blood cells in the average person. That's how divisible bitcoin is. (2 x 10^13, where bitcoin is 2.1 x 10^15)

[Stephen Gornick]

The deflation argument is that a person with the currency is not spending because that person is expecting the value of the currency to be higher in the future and thus the same amount of money will buy more in the future and thus current spending is deferred.

When a decision to spend has already been made (e.g., for food, or purchases that are necessary) a person with bitcoins will be making a decision on whether to spend with bitcoins or to spend with fiat money.  

But bitcoin transactions have lower costs for a merchant than that merchant has when the customer pays using a payment network card (e.g, 3% for payment card transaction, versus no cost whatsoever to a merchant to receive bitcoins as the transaction fee is paid by the sender, and is so small -- under a penny, that it isn't a factor in the consumer's decision on payment method).

We are already seeing merchants passing along these savings by giving a discount for purchases that are paid using bitcoins, and other merchants are becoming low-cost leaders by accepting only bitcoins (e.g., BitcoinStore.com).  (Incidentally, with high-risk merchants, e.g., Travel, paying 8% payment network costs should be where Bitcoin sees the greatest initial traction as a result of this).

Because I can easily replenish my bitcoins that I am using for spending (e.g., send a bank transfer / Dwolla / etc to an exchange), I as a consumer am financially better off paying with bitcoin now and taking the discount (and replenishing the number of bitcoins spent) than I will gain by simply sitting on my bitcoins.

So when the decision is simply to spend bitcoins or to spend dollars, the payment network costs have a bigger impact on that spending decision than does the anticipation of even lower prices in the future (when priced in terms of bitcoins that would be spent).

[FreeMoney]

It's June 2011, bitcoin prices will rise forever and everyone knows it so everyone hoards and no one uses their coins, but wait, what's happening, are people being enticed by the high market values to release their grip? How can this be? I'm such a confused deflationation-haterator.

[da2ce7]

Deflation IS a problem if all your money is DEBT, that must be repaid.

[knight22]

Deflation IS a problem if all your money is DEBT, that must be repaid.

Exact
Deflation is merly impossible for a debt base currency

[da2ce7]

Deflation IS a problem if all your money is DEBT, that must be repaid.

Exact
Deflation is merly impossible for a debt base currency

That isn't technically true.  If the reserve bank issues out less debt than what is expiring. (aka getting repaid). The total monetary supply will be contracting.  If the total value in the economy is not contracting at the same rate there will be deflation.

This is why deflation is such a bad thing in a debt based federal reserve system.  If such a system enters a deflationary period; everyone has to fight each other for the remaining money to pay off their debt. (thus destroying the money, and removing it from circulation).

Since the amount of debt is significantly larger than the available money.  This will force many many people to sell, and that will take value out of the productive economy.  A $1M debt is $1M no matter how much $1 buys.

With bitcoin... If bitcoin goes into a deflationary period.  When debt is repaid, that money is still free to used again. (not destroyed, like with debt-based fiat).  Additionally, the cost of experiences are generally liquid, when the value of bitcoin goes up, the cost of expected expenses goes down proportionally.  This is the key reason why deflation has no (negative) effect on bitcoin.

[HorseRider]

Deflation IS a problem if all your money is DEBT, that must be repaid.

Exact
Deflation is merly impossible for a debt base currency

Deflation has a number called "deflation rate", it is effectively the same thing as interest rate.

[hazek]

Jon, I don't think a market equilibrium can ever be reached, instead what I think actually happens is the market continuously readjusting to what in any moment is perceived to be an equilibrium meaning it can never be reached instead there is a gap which can be wider or narrower which depends on how wide the gap is between the perceived equilibrium and what the actual equilibrium in a specific moment would be.

So when you say "Ultimately, the market will reach an equilibrium between investment and savings" what you really mean is that ultimately the gap between the perceived equilibrium and what actual equilibrium in any moment would be will shrink and become a lot narrower compared to how out of whack because of all the central planing manipulation it is right now.

[Roger_Murdock]

I'd never read that Sept. 2011 Krugman post on Bitcoin that Matonis links to.

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

It is shockingly bad.  And I'm not just talking about the "deflation is bad" / "hoarding" angle.  That was dumb, but it was a predictable kind of dumb.  I'm talking about this:

My first reaction to Bitcoin was to say, what’s new? We have lots of ways of making payments electronically; in fact, a lot of the conventional monetary system is already virtual, relying on digital accounting rather than green pieces of paper. But it turns out that there is a difference: Bitcoin, rather than fixing the value of the virtual currency in terms of those green pieces of paper, fixes the total quantity of cybercurrency instead, and lets its dollar value float. In effect, Bitcoin has created its own private gold standard world, in which the money supply is fixed rather than subject to increase via the printing press.

He thinks Bitcoin's fixed supply is its only new and noteworthy feature? (And of course, he thinks that feature is a bug.) A first-of-its-kind, global-in-scale, decentralized, digital currency and payment network that enables direct, peer-to-peer, borderless, anonymous, nearly-instantaneous, nearly-free, and irreversible cash-like transfers of value?  The first currency and money system in the world which has no counter-party risk to hold and to transfer? The most potentially disruptive technological innovation since the invention of the Internet? And Krugman's reaction is (essentially) "yeah, but how is that any different than Chase Online Bill Pay?" Wow. Talk about missing the point.

[TraderTimm]

I'd never read that Sept. 2011 Krugman post on Bitcoin that Matonis links to.

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

It is shockingly bad.  And I'm not just talking about the "deflation is bad" / "hoarding" angle.  That was dumb, but it was a predictable kind of dumb.  I'm talking about this:

My first reaction to Bitcoin was to say, what’s new? We have lots of ways of making payments electronically; in fact, a lot of the conventional monetary system is already virtual, relying on digital accounting rather than green pieces of paper. But it turns out that there is a difference: Bitcoin, rather than fixing the value of the virtual currency in terms of those green pieces of paper, fixes the total quantity of cybercurrency instead, and lets its dollar value float. In effect, Bitcoin has created its own private gold standard world, in which the money supply is fixed rather than subject to increase via the printing press.

He thinks Bitcoin's fixed supply is its only new and noteworthy feature? (And of course, he thinks that feature is a bug.) A first-of-its-kind, global-in-scale, decentralized, digital currency and payment network that enables direct, peer-to-peer, borderless, anonymous, nearly-instantaneous, nearly-free, and irreversible cash-like transfers of value?  The first currency and money system in the world which has no counter-party risk to hold and to transfer? The most potentially disruptive technological innovation since the invention of the Internet? And Krugman's reaction is (essentially) "yeah, but how is that any different than Chase Online Bill Pay?" Wow. Talk about missing the point.

Krugman is yet another bearded-money printing keynesian-believer who can't wrap his mind around a constrained supply. I would expect no less, as his entire world depends on the thesis being 'true'. He's an expert at talking his position, even if his thesis is flawed.

I look forward to bitcoin shaming him in the future, most notably when the USA has to default on their debt - or they devalue the currency, or both. That is the only end-game here regarding what is going on with the insane monetary policy in place today.

Perhaps a fitting epitaph for his theories would read "Beware bearded fools".

[Piper67]

I'd never read that Sept. 2011 Krugman post on Bitcoin that Matonis links to.

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

It is shockingly bad.  And I'm not just talking about the "deflation is bad" / "hoarding" angle.  That was dumb, but it was a predictable kind of dumb.  I'm talking about this:

My first reaction to Bitcoin was to say, what’s new? We have lots of ways of making payments electronically; in fact, a lot of the conventional monetary system is already virtual, relying on digital accounting rather than green pieces of paper. But it turns out that there is a difference: Bitcoin, rather than fixing the value of the virtual currency in terms of those green pieces of paper, fixes the total quantity of cybercurrency instead, and lets its dollar value float. In effect, Bitcoin has created its own private gold standard world, in which the money supply is fixed rather than subject to increase via the printing press.

He thinks Bitcoin's fixed supply is its only new and noteworthy feature? (And of course, he thinks that feature is a bug.) A first-of-its-kind, global-in-scale, decentralized, digital currency and payment network that enables direct, peer-to-peer, borderless, anonymous, nearly-instantaneous, nearly-free, and irreversible cash-like transfers of value?  The first currency and money system in the world which has no counter-party risk to hold and to transfer? The most potentially disruptive technological innovation since the invention of the Internet? And Krugman's reaction is (essentially) "yeah, but how is that any different than Chase Online Bill Pay?" Wow. Talk about missing the point.

Krugman is yet another bearded-money printing keynesian-believer who can't wrap his mind around a constrained supply. I would expect no less, as his entire world depends on the thesis being 'true'. He's an expert at talking his position, even if his thesis is flawed.

I look forward to bitcoin shaming him in the future, most notably when the USA has to default on their debt - or they devalue the currency, or both. That is the only end-game here regarding what is going on with the insane monetary policy in place today.

Perhaps a fitting epitaph for his theories would read "Beware bearded fools".

Unfortunately, for a country so given to invading others, those aren't the two only possible end-game outcomes.

[Rygon]

The deflation argument is that a person with the currency is not spending because that person is expecting the value of the currency to be higher in the future and thus the same amount of money will buy more in the future and thus current spending is deferred.

When a decision to spend has already been made (e.g., for food, or purchases that are necessary) a person with bitcoins will be making a decision on whether to spend with bitcoins or to spend with fiat money.  

But bitcoin transactions have lower costs for a merchant than that merchant has when the customer pays using a payment network card (e.g, 3% for payment card transaction, versus no cost whatsoever to a merchant to receive bitcoins as the transaction fee is paid by the sender, and is so small -- under a penny, that it isn't a factor in the consumer's decision on payment method).

We are already seeing merchants passing along these savings by giving a discount for purchases that are paid using bitcoins, and other merchants are becoming low-cost leaders by accepting only bitcoins (e.g., BitcoinStore.com).  (Incidentally, with high-risk merchants, e.g., Travel, paying 8% payment network costs should be where Bitcoin sees the greatest initial traction as a result of this).

Because I can easily replenish my bitcoins that I am using for spending (e.g., send a bank transfer / Dwolla / etc to an exchange), I as a consumer am financially better off paying with bitcoin now and taking the discount (and replenishing the number of bitcoins spent) than I will gain by simply sitting on my bitcoins.

So when the decision is simply to spend bitcoins or to spend dollars, the payment network costs have a bigger impact on that spending decision than does the anticipation of even lower prices in the future (when priced in terms of bitcoins that would be spent).

WOAH. I just checked out this website, and the prices are actually competitive. Up until now, every website that I've seen selling products in BTC hasn't been competitively priced against other online stores. I compared the prices of about a half dozen random electronics between this site and Newegg, and BitcoinStore had lower prices on everything, even though it might have just been a few percent. Finally looks like someone has figured out how to put together a legit competiticve business with BT. (Not intended to be an advertisement, lol)

[BkkCoins]

WOAH. I just checked out this website, and the prices are actually competitive. Up until now, every website that I've seen selling products in BTC hasn't been competitively priced against other online stores. I compared the prices of about a half dozen random electronics between this site and Newegg, and BitcoinStore had lower prices on everything, even though it might have just been a few percent. Finally looks like someone has figured out how to put together a legit competiticve business with BT. (Not intended to be an advertisement, lol)

Yes, amazing. I just checked for a battery charger I was going to order on Amazon and it's actually less in btc. I'd had previously just ignored this as stuff always costed more in btc before. Maybe I'll do this!

[BkkCoins]

From Doug Casey,

Whereas during an inflation, you want to get rid of the money. You want to consume. You want to spend. But you don’t become wealthy by spending and consuming; you become wealthy by producing and saving.

But that's exactly why the rich, who value money and save, need the poor to not value it and spend. Hence, the underlying reason why everyone must be convinced deflation is bad and spending is good.

And besides that, it's now essential Americans spend to export the inflation forced upon them. If that darn inflation doesn't get exported, via imported foreign goods and the resulting desire for foreign nations to devalue their currency to compete, then the US$ would plummet in value. This exporting of inflation is what has the world suffer for the profligate spending of the US govt on it's war machine.