The problem of a depreciating currency

[Dr.Steve]

As a savings vehicle, depreciating currency (i.e. bitcoin) is an ideal place to park assets. Why in the world would I, or any other sane person spend the coins, knowing that tomorrow, they will have greater value.

There are 2 factors going on here.

One would be Gresham's Law where "Bad money drives out good", in that all the world's fiat (the bad money) drives the good money into hiding.

The second factor is that bitcoin appears to be a giffen good. As its price continues to escalate, more people will want to own it.

As a business owner, I'm thrilled to be paid in bitcoin. As a saver, I'm loathe to part with these precious gems.

[qxzn]

Good lord man. This is the most discussed topic on the forum.

I will die of starvation before I spend a single bitcoin.

lol

[JusticeForYou]

Until the Lights go out in Georgia.

Yes, yes, why spend?  Well, you will reach a point in the curve where saving doesn't do you much good. The flow into and out of bitcoin will make more sense based on what other fiats are doing.

The Gresham Law Attack is just a consequence of time, the war comes much later on.

The biggest challenge is to increase the user base and put pressure on the blockchain to force adaptation to a large amount of transactions.

Just an opinion.

[Dr.Steve]

Ah, confirmation. Thank you. Clearly BTC is a store of value.

[Vladimir]

One would be Gresham's Law where "Bad money drives out good", in that all the world's fiat (the bad money) drives the good money into hiding.

I am not an economist or philosopher but I will be bold enough to disagree with Gresham on this one. If the above postulate was indeed true then we all would be using Zimbabwe dollars and I would be filthy reach because I have 100 000 000 000 000 Zimbabwe dollar bank note pinned on my cork board.

If I am mistaken and misunderstand things, please explain how.

[nonlinear]

As a savings vehicle, depreciating currency (i.e. bitcoin) is an ideal place to park assets. Why in the world would I, or any other sane person spend the coins, knowing that tomorrow, they will have greater value.

As a savings vehicle, apppreciating currency (i.e. dollars) is an poor place to park assets. Why in the world would I, or any other sane person sell you something for dollars, knowing that tomorrow, they will have less value.

[dave111223]

So what you're saying is:

Bitcoins are a bad currency because everyone wants them in their pocket.
Dollars are a good currency because no one wants them in their pocket.

As nonlinear shows, you just need to flip the equation and look it from the other end of the transaction.

Currently everyone wants to spend dollars, but no one wants to receive dollars
In future no one wants to spend bitcoins, but everyone wants to receive bitcoins

End result = no change

And at the end of the day people have to spend whatever currency they use eventually, as they need to eat, a place to sleep, a mode of transportation etc...

[robamichael]

One would be Gresham's Law where "Bad money drives out good", in that all the world's fiat (the bad money) drives the good money into hiding.

I am not an economist or philosopher but I will be bold enough to disagree with Gresham on this one. If the above postulate was indeed true then we all would be using Zimbabwe dollars and I would be filthy reach because I have 100 000 000 000 000 Zimbabwe dollar bank note pinned on my cork board.

If I am mistaken and misunderstand things, please explain how.

Gresham's Law only applies when monies are fixed to each other.

http://wiki.mises.org/wiki/Gresham's_Law

Gresham's Law does not apply to this situation.

[Vladimir]

thank you robamichael

[Melbustus]

The conclusion that a deflationary currency will cause an economic heart-attack stems from the fact that we all have only lived through inflationary times. When you compare PERIODS of deflation against a backdrop of long-term INflation, *of course* you'd be dis-incented to spend during such periods.

But consider a monetary system using bitcoin and nothing else. The money supply dynamics are perfectly known to EVERY player in the economy. They *credibly* cannot be changed. This is a first in human history.

The money supply is simply a tool to value things relative to other things. It is NOT KNOWING how it will expand and contract over time that change someone's default pricing, consumption, saving, and investment preferences. If the supply dynamics are perfectly known, things will be priced to match your natural consumption behavior, and you will not save when you should spend or spend when you should save.

Perfect, credible, information about the money supply dynamics are key. Humans have NEVER operated under such an environment, hence it's a little hard to mentally put ourselves in such a context. Even some Nobel Laureates have a problem with this.

[Elwar]

That is why the deflationary currency, gold, was never used as money any time in history. It has always been the dollar.

[Cryptoman]

I keep spending Bitcoins, yet the value of what I have left keeps increasing.  I don't see a problem here.

On another note, we might do well to be a little less consumerist.  The planet will thank us.

Edit: OMG, post 666! 

[BTCINVESTOR]

The conclusion that a deflationary currency will cause an economic heart-attack stems from the fact that we all have only lived through inflationary times. When you compare PERIODS of deflation against a backdrop of long-term INflation, *of course* you'd be dis-incented to spend during such periods.

But consider a monetary system using bitcoin and nothing else. The money supply dynamics are perfectly known to EVERY player in the economy. They *credibly* cannot be changed. This is a first in human history.

The money supply is simply a tool to value things relative to other things. It is NOT KNOWING how it will expand and contract over time that change someone's default pricing, consumption, saving, and investment preferences. If the supply dynamics are perfectly known, things will be priced to match your natural consumption behavior, and you will not save when you should spend or spend when you should save.

Perfect, credible, information about the money supply dynamics are key. Humans have NEVER operated under such an environment, hence it's a little hard to mentally put ourselves in such a context. Even some Nobel Laureates have a problem with this.

Beautifully said.

[johnyj]

Level 1 action:
You take a consumer loan of 20K USD and spend it, next year you pay back that loan using a small part of your coin since they have appreciated 100% (2x) against USD. Keep doing this again and again

Level 2 action:
You take a consumer loan of 20K USD and spend it, next year you take a 40K USD loan to both payback the original loan and finance the new spending, and next year you take a 60K USD loan ... 80K, 100K ... And after 5 years, your bitcoin's USD exchange price has gained 32x so you eventually need much less coin to payback your loan

Level 3 action:
Someone please continue  

[odolvlobo]

As a savings vehicle, depreciating currency (i.e. bitcoin) is an ideal place to park assets. Why in the world would I, or any other sane person spend the coins, knowing that tomorrow, they will have greater value.

There are 2 factors going on here.

One would be Gresham's Law where "Bad money drives out good", in that all the world's fiat (the bad money) drives the good money into hiding.

The second factor is that bitcoin appears to be a giffen good. As its price continues to escalate, more people will want to own it.

As a business owner, I'm thrilled to be paid in bitcoin. As a saver, I'm loathe to part with these precious gems.

Well, instead of hoarding them, you could loan them, and then you have the best of both worlds. They are put to use and you get them back (with interest).

[romerun]

because when a currency is stable enough, ppl don't mind spending, coz they know that the price won't go up tomorrow.

Same thing with inflating currency, ppl are not going spend all they have just because next year the currency value will shrink.

[odolvlobo]

because when a currency is stable enough, ppl don't mind spending, coz they know that the price won't go up tomorrow.
Same thing with inflating currency, ppl are not going spend all they have just because next year the currency value will shrink.

Inflation can end up as hyper-inflation where, in fact, people do spend all their money as soon as they get it.

The anti-deflation argument assumes that even the smallest amount of deflation ultimately leads to hyper-deflation, in which nobody spends any money. I don't believe this is true. I don't think that hyper-deflation has ever occurred. The electronics industry is a good example of how deflation is an acceptable (and even desirable) condition.

[calian]

The electronics industry is a good example of how deflation is an acceptable (and even desirable) condition.

That's a good point. It's 2013 and I still have not bought a TV newer than the 7" B&W one I had as a kid because they just keep getting better and cheaper. Fortunately for the industry not everyone is like me.

[Ekaros]

This leads to question: Can deflating currency gain spenders? Ones that do spend their coins?

Slight deflation should be pretty normal in future, productivity is likely to increase still. If this rate is sufficiently low, there isn't too many incentives to move spending later. Though at current rates...

[Ekaros]

This newfangled BTC thingie is so deflationary that no-one will spend them. Apparently they need to increase the blocksize because no-one is spending them.

So what part of it isn't get rich schemes and gambling