Inflation and Deflation of Price and Money Supply

[yafus]

It's just like the law of supply and demand.

+1

[ShareAccepted]

I'm  looking forward to an in-depth discussion on the subject! I've noticed  that confusion between the two seems to come up quite a bit on the blog, and thought it may be reasonable to dedicate a post on the  matter.

It is a critical issue really, the rate of emission is quite fixed and would be difficult to change even with a really hard hard fork. Demand however can be actuated upon and manipulation is surely there.

[Mr.Shady]

Excellent topic Sir. Now, I understand more about how fast the bitcoin changes time to time. As a business student graduate. It's also the same as inflation and deflation of prices in the market. I almost see that our world is near to be a cashless world although there are some countries that has already cashless transactions. More power bitcoin. 

[Komobit]

Keynesian economics is a horrible system, but so far it works the best until we have another implemented

Keynesian economics is not science, it's just form of propaganda. You receive money from government to justify big government and call this economics, ecology etc.

So you mean the Keynesian economics is not exactly as what they said because they're under control of the goverment?

Well if your income are 100% depended on the government you wouldn't say anything to harm it. You don't bite the hand that feeds you. And that alone is enough to really be cautious about information coming from that source.

Also the only modern active alternative school is austrian and they are proven to predict things way better and they have a radically different approach(and the one that actually makes some logical sense).

These are unfair and incorrect views of the Keynesian economics.

Keynes pioneered the study of the economy as an aggregate. It also introduces the idea of disequilibrium and price stickiness, which are occurring themes if you conduct any serious macroeconomic analysis. He also introduced behavioral elements in his formal analysis e.g. money demand equation and term "Animal Spirit". He would have incorporated expectation but the mathematics at his time was not advanced enough to handle that.

The policy prescriptions from Keynes's theory are natural implications of his theory, which remains revolutionary even to this day. The great depression in the late 20s dealt a huge blow to the Austrian school as well as western capitalism in general. It beckoned a response outside the box and Keynes' demand management really was the answer until the 70s. You have to remember that even liberals in the west placed a lot of hope on Communism during the great depression, the vibe was certainly very different from now.

While it is unfortunate that Keynesian economic theories have been politicized to benefit the state power, it is also nature that for a long period of human history big states and institutions exist. The Austrian school was too ahead in its time and the technology was not there until more than a hundred years later. The free market is still an imperfect institution (as correctly realized by Keynes) that is not really free and transparent, central authority is needed to enforce property rights.

So contrary to what you have said, it is Keynesian economics that was radical to the traditional Austrian school. Hell, it is even radical in this day as the neo-liberalism (a politicized descendant of the Austrian School) took over the world from the 90s that led to the tremendous growth of wealth and income inequality.

Nah, that's not right. Keynes used to say in radio that people should buy more and not do any savings... becouse! He may be a great mind for this time but spend without without any concerns about future prices embased on government printing or debt is just creative accountability. I really would like to read your sources about Keynes being this true Keynes thoughts, could you plz share? Regardless of that, in true, learn macroeconomic is a process that shuld go through Keynes - his description of economic forces is truly remarcable and easy to understand.

Perhaps ppl should consider a little bit more of the government involment over the 29's. As Freedman says: when the government, by laws or incentives, creates a false price, the whole market act on falses premisses. For example: If a Government gives money to build roads, buildings and etcs, more students would seek to be engineers, becouse the market claim for them. By the time they get their degree if the roads/buildings policy stops there will be a lot for unemployed engenieers. They act on a false premisse and this 'bubble' of unemployment is more or less the same of 29's. Not saiyng that the free market does not have part on this. But plz consider the Govenrment more on this.

[mebeforeyou2411]

Deflation is a decrease in general price levels of throughout an economy. If there is a higher supply of goods and services but there is not enough money supply to combat this, deflation can occur..
Disinflation, on the other hand, shows the rate of change of inflation over time. The inflation rate is declining over time, but it remains positive.

[vuvuvu1]

deflation, it is opposite of inflation, whereby prices of goods and services fall and people can purchase more goods with the limited money. It is the decrease in the general price level, in the country’s economy.

A certain percentage of inflation is good, but beyond that, is worse for every economy. Moreover, deflation is the worst condition for an economy.

[hott_staff]

Let's consider the following scenario: The world is 2100, everyone is using bitcoin as a global money and all prices will be expressed in bitcoins. It seems obvious that in a scenario like this there will be just a few things that will be priced in bitcoin and have a value of 1 BTC. Most of the goods and services that will be sold then will use maybe satoshi as the currency that they will be priced in. And there could even be the need to go even lower, and price things in milisathosi's.

But being a digital money, there could be a protocol upgrade to support more than 8 decimals, so that you could buy a cup of coffee or something. If such an upgrade occurs, isn't it akin to an increase in the money supply by a factor of ten (in the case of one more decimal)? And continuing our train of thought, in another 50 years when the economy will be even more productive, you will need another decimal for small transactions. And so you can basically inflate the money supply ad infinitum, based on the "needs of commerce".

So, to sum up, being able to divide the bitcoin in ever smaller denominations, isn't this a way to inflate the money supply?

[RealLetoAtreides]

A certain percentage of inflation is good, but beyond that, is worse for every economy. Moreover, deflation is the worst condition for an economy.

Good for whom? For those who receive the newly printed money first. Because they will be able to get out and buy things at the older prices, that were present before the money increase. And this drives up prices for everyone else. And the worst off will be those who are the last on the receiving ladder.

And now lets identify who are those who receive the money first: Banks and Governments. Who are those who receive the money last? Those on fixed income, employees mostly and those who save. It's called the Cantillon effect. It's a grand scheme of redistribution from the poor and low income earners to the rich and those connected to the money faucet.

[Hovhannes]

If bitcoin is perceived as a means of exchanging goods and services, then the drop in purchasing power is called inflation, the growth of purchasing power is deflation.

[btcwolf2018]

From the history of mankind, the carrier of money will always change. The earliest is the exchange of barter. Afterwards, shells, gems, gold, coins, banknotes and electronic money are the trend of the future. Security and stability are the basic characteristics of money. What is the terminator of the currency? Quantum calculation?

[KurtR90]

Excellent publication! Even though several years have passed, this information helps anyone to understand the constant exchange of securities figures within the market.

[RealLetoAtreides]

What will be the end point of "currency"? I suspect we will come full circle, round to barter once again ... enabled by Satoshi's amazing creation.

I don't think that barter is a situation that we should strive for. It only allows for a limited economic activity, because everyone has to know the barter rates of every good with every other good.

We only need currencies as a trusted medium that can be easily converted from work to, say, pizzas

I think money serves a bunch of needs and that they won't disappear soon, even though the medium they inhabit may change. You don't need money just so you can compare the value of goods between themselves, a task you will find very hard to do in a barter economy.  But also you need money to protect for future uncertainty. If somehow we all knew the future perfectly, then we won't need money anymore, because we could set up our income and expenses so that they match perfectly and we won't be in a need to have cash.

Other than that, money serve a role as a store of value (or at lease, it should serve this role. But fiat currencies failed at this role spectacularly), to move value created through time, not just through space.

When everyone on the planet is continuously online (2040 would be my guess, maybe earlier) fiat currencies, banks, and the rest of the current financial ecosystem will be superfluous.

I also think that fiat currencies will become superfluous, but I don't think the same thing can be said about the financial system. Yes, it will have to change, to use sound money and be responsible, but it does offer a function that is asked from the market, so I don't think it will disappear. Just my 2 cents

[amberlinni]

Far from inflation being the problem, the money supply has shrunk and we are in a deflationary bind. The money supply needs to be pumped back up to generate jobs and productivity; and in the system we have today, that is done by issuing bonds, or debt.

[Celine Ariola]

Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions, opposites of the same coin, is delicate, and an economy can quickly swing from one condition to the other.

Money supply is the quantity of money generating inside a country.

How does inflation and deflation relate to money supply?

As the discussion goes in the Law of Supply and demand. "The higher the demand, the lower the supply and vise versa" therefore if money supply goes up, its demand goes down. If the demand for money will go down, higher prices will be implemented. If the price of goods becomes higher, it is called inflation. But if the opposite happened, deflation will be the result.

[Celine Castillo]

Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions, opposites of the same coin, is delicate, and an economy can quickly swing from one condition to the other.

Inflation is caused when goods and services are in high demand, creating a drop in availability. Supplies can decrease for many reasons: A natural disaster can wipe out a food crop; a housing boom can exhaust building supplies, etc. Whatever the reason, consumers are willing to pay more for the items they want, causing manufacturers and service providers to charge more.


Deflation occurs when too many goods are available or when there is not enough money circulating to purchase those goods.



Read more: What is the difference between inflation and deflation? | Investopedia https://www.investopedia.com/ask/answers/111414/what-difference-between-inflation-and-deflation.asp#ixzz55g8TlgCw
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As the law of demand and supply goes, money supply has the same effect. Money supply is the quantity or number of money produced and circulating inside a country. As the supply of money increases, the demand for money decreases which make prices of goods rise up resulting to inflation. But when the supply of money decreases, the demand for money increases making the price of goods decrease resulting to deflation.

[STT]

If you go back one hundred years before the start of the Federal Reserve then the entry for inflation definition was an expansion of the money supply.     With QE this is clearly apparent

Far from inflation being the problem, the money supply has shrunk and we are in a deflationary bind. The money supply needs to be pumped back up to generate jobs and productivity; and in the system we have today, that is done by issuing bonds, or debt.

Overall we have increased the production of money far above a normal rate.    Most new cash was used to buy government bonds which only distributes the cash gradually within the economy.
Only when government repays the debt will we see the return to a normal scenario and a nessecery higher interest rate on the Dollar, Euro or Yen.

Japan has been operating QE for 17 years so it is unlikely they will ever repay the debt or unwind QE programs.    In effect the bonds have defaulted but are being continually rebought by government itself to prevent that scenario.    Some clarity might appear if you look at Greece who are unable to rebuy their own bonds hence have neared a default scenario, this is the same for every country far past 100% GDP debt, Japan is 260% or so

[sontoloyo177]

Generally it can be said that inflation is a measure of a general increase of the price level in an economy, as represented typically by an inclusive price index, such as the Consumer Price Index in a nation. The term indicates many individual prices rising together rather than one or two isolated prices, such as the price of gas in an otherwise calm price environment. The inflation rate is typically expressed as an annual growth rate in prices (again, as measured by an index) even if measured over a shorter period of time. For example, if a radi o report states that "consumer prices rose at an inflation rate of six percent last quarter," that would typically mean than the Consumer Price Index for All Urban Consumers (the most quoted index) rose over the last three months at an annualized rate of around four percent, and the press would generally refer to the current inflation rate as around four percent. The term deflation refers to a general decline  in prices or the price level as measured by an inclusive price index and, again, is not a reference to isolated price declines, like natural gas declining in price, in an otherwise stable price environment. 

[flaviojr123]

Hello, this is my first post on this thread I couldn't read 50 pages of internet discussion so kindly correct me if anything I'm assuming is obviously wrong.

BTC main value proposition is to be a decentralized currency and/or value store.

I understand price inflation is considered bad because it unfairly damages savers vs consumers. On the other side, some people can handle inflation reasonably well by re-indexing contracts every so often. This is common behavior in countries with high inflation, and again I understand it still damages savers but the damage can be reasonably controlled. Additionally, some would argue that inflation is bad even for those prepared for it because it raises the cost of doing business.

The point that I want to discuss is, isn't bitcoin's price fluctuation equally bad to inflation in the fact it raises the cost of doing business?

If we all accept BTC as a volatile store of value, does it imply it can't be the decentralized currency most would use?

Now let me try to explain some of my assumptions: 1. BTC price will always be volatile.

The BTC supply increasing rate is positive, that rate is fixed looking in the short term (30-90 days). On the other side, demand is highly unpredictable. Fixed supply and highly unpredictable demands cause unpredictable prices.

Common counter arguments:
1 "BTC is volatile but it always rises in the long-term so it doesn't matter". Is it does, it increases the cost of business. I can't start a bakery with only BTC capital because in the first dip I will have to take loans to pay wages.
1.1 "Oh, but you can't see that happening because you can't see far enough." This sounds like a highly utopian view. Pragmatically, we need a path from here to there, I turn to you and ask, how can we get there?
1.2 "Okay, it doesn't matter for some people and that's all". Okay, then BTC will be a niche store of value.
2 "Demand will stabilize in the long term." How?
3 "Price stability is a myth, market demands always change them" Sure, it's a myth. Yet it is desirable. If we are designing the system, shouldn't we take that in account? "No, we shouldn't, if you want to do that go and create your own coin." Okay, then BTC will be a niche store of value.

Right now it looks to me that price instability prevents BTC wide adoption.

What incentives do savers have to buy-in on a inflationary money supply? The incentive of stability? That's one reason people agree being exposed to the USD. Am I defending inflation tax? No. I'm asking could there be benefits to having a transparent voluntary contract with varying money supply rate. And I'm leaning towards a yes to this question.

If the supply of a coin could be influenced by price then we would have a more stable coin, the cost we pay is inflation. The issue then becomes an optimization issue, on what would be a proper trade-off.

What are your thoughts?

[ChefBoyardeez]

Since we're both very excited about this, and to restrain our words from moving too far from the point, I think we should address one issue at a time.

My interpretation from the above definition related to economics:

1. Price Inflation refers to the "general increase in prices" part of that definition
2. Money Supply Inflation refers to the "fall in the purchasing value of money" part of that definition

Therefore, I can not agree that inflation "means the same thing as increase", as it conflicts with the "fall in the purchasing value of money" part of that definition.

Note: this is not an argument of what the "general increase in prices" or "fall in the purchasing value of money" means. We can get to that once your interpretation of the word inflation is understood.

I wish I had half the skill you do answering questions...So poised and professional.

[laevatein906]

Yes you could estimate future cash flows of you had contracts or sales data.

For example I worked for a bakery that made 20K per month.  Then I decided to model my business after theirs but in a different past of town that didn't have a good bakery.  I could estimate that within a few years my business could possibly genstate similar income

Or if I snuck behind their backs and offered the same baguette to a distributor for 20% less and stole their contract