The problem of a depreciating currency

[justusranvier]

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

That question shares the same answer as this one: Do people buy products that deflate in price? Why would anyone spend money on something today that's going to cost less tomorrow?

[TTBit]

* inflationary currency encourages spending and debt (and speculating, gambling).
* deflationary currency encourages saving, working, production.

The premise that we need to encourage less saving, less working, more debt, more spending is preposterous.

[Stephen Gornick]

Why in the world would I, or any other sane person spend the coins, knowing that tomorrow, they will have greater value.

In the U.S. I can easily add USD funds to an exchange so that they are ready to be converted to BTCs at any time.   (E.g., sending funds using Mt. Gox using Dwolla, my costs are simply the $0.25 per-transaction fee.)

So I can replenish my stash of bitcoins at about the same time I make a purchase so that my net holdings (number of bitcoins) never decreases.

The reason I might do this is so that I can make purchases where Bitcoin's attributes as a payment network are superior.  For instance, my retailer may give me a discount when I purchase using bitcoins since there are no merchant payment network fees.  Or my supplier will only accept bitcoins due to it being a non-reversible payment method.  Or I wish to send internationally and the delays and/or fees are prohibitive.

Additionally, if I have all my savings in bitcoin, and I want to make a purchase, it costs me money to first convert those savings to fiat (e.g., USDs) and then to spend them.  So being able to spend them directly is advantageous.

The thing is though, it is all a moot point.

If there will be an economic decline because of Bitcoin, then there will be an economic decline because of Bitcoin.  Even if I am told that using bitcoins will cause some economic deflationary spiral, I will still listen to my personal ambition to acquire and use bitcoins versus to avoid them as the result of this prediction of doom.  After a whole bunch of decades watching our currency get devalued to protect us from negative economic cycles, the market is now making the decision to use a different currency -- one that doesn't get devalued.  Like it or not, that's what is happening.

[TangibleCryptography]

In the U.S. I can easily add USD funds to an exchange so that they are ready to be converted to BTCs at any time.   (E.g., sending funds using Mt. Gox using Dwolla, my costs are simply the $0.25 per-transaction fee.)

This.  If someone has bought all their Bitcoins and will never buy any more then they probably shouldn't spend any of them.  However if someone is spending 10 BTC and month and buying (by weekly/monthly currency conversion) 20 BTC a month they are getting the best of both worlds.

When someday billions of dollars worth of Bitcoins are held by millions of people one would have to suspend disbelief to think merchants aren't going to seek that out and given attractive deals and the ease of spending those coins people wouldn't do so.  In time it will be even easier to accumulate Bitcoins as services spring up that provide innovative ways to bridge the crypto-fiat barrier.

[mccoyspace]

A currency is both a store of value and a medium of exchange.
It isn't healthy for the bitcoin economy to be only about saving/hording.
There needs to also be people who spend the coins to foster exchange.

You could say that people who buy into bitcoin using fiat money create enough exchange effect, but I'm not convinced that that is enough.

[Elwar]

Someone must not have received the memo about not spending their depreciating currency.

http://blockchain.info/charts/n-transactions?timespan=all&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

[johnyj]

Someone must not have received the memo about not spending their depreciating currency.

http://blockchain.info/charts/n-transactions?timespan=all&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

Most of these are satoshi dice transactions

[lonelyminer (Peter Šurda)]

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.

Gresham's Law is a special type of price fixing effect. It occurs when the state fixes exchange rates of two monies at a level different from the market ratio. This creates an arbitrage opportunity (two markets with different exchange rates) and the overvalued money will push out the undervalued money abroad.

Without price fixing, this effect does not occur. It is also uncertain whether that would work if there are technological differences between the two.

[whitenight639]

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.


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.

Bitcoin isn't really a Giffen good because it has utility in that it is very good as a medium of exchange, and as the value increases it means larger amounts can be sent / recieved and converted to fiat without creating wild volatility on the exchanges.

If a really desirable swanky house is a giffin good, is it still a giffen good if it has a nuclear bunker and underground farm built underneath it?

[mrdavis]

You know, it doesn't make any sense to spend a currency that would be worth more tomorrow. Also it doesn't make any sense to buy an xbox or spend $20 at the movie theater or $5 on a cup of coffee when I could could put that into a number of investment vehicles and increase it's value. It REALLY wouldn't make sense to go spend money you don't have yet on something I don't need and lose 15-20%APY in interest...    but that's what we do. We don't want money, we want stuff and we want it now.

Delayed gratification... We're not very good at it.

[hazek]

Why in the world would I, or any other sane person spend the coins, knowing that tomorrow, they will have greater value.

So you don't have any bills to pay, any clothes to buy, rent to pay, food to buy and you just survive on air? 

[mccorvic]

You know, it doesn't make any sense to spend a currency that would be worth more tomorrow. Also it doesn't make any sense to buy an xbox or spend $20 at the movie theater or $5 on a cup of coffee when I could could put that into a number of investment vehicles and increase it's value. It REALLY wouldn't make sense to go spend money you don't have yet on something I don't need and lose 15-20%APY in interest...    but that's what we do. We don't want money, we want stuff and we want it now.

Delayed gratification... We're not very good at it.

This is the smartest answer to the question.  If you aren't sure why people would spend a "depreciating" currency, just reread that above post.  If you still aren't sure, read it again.

[ufmace]

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

Yeah, it was used as the primary global currency for centuries... and the world moved off of it because of the relatively fixed money supply and the deflation problems that caused. Not just a few countries with greedy, authoritarian governments, the entire world.

[ufmace]

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.

Nobody would want to hold the hyperinflating Zimbabwe dollars because they are dropping in value so fast. People who have no choice but to be paid in them will spend them as quickly as physically possible. But all that means is that hyperinflation is bad, not that all inflation is bad or all deflation is good.

My understanding has been that, in order to have a stable economy, you must have small but positive inflation at all times, no matter what the economy is doing. Because the economy is pretty much always growing, this means that you must increase the money supply at a controlled pace, meaning that some entity must be able to increase the money supply at a variable rate depending on what the economy is doing. In other words, Government-controlled fiat currency, which every nation in the world currently uses.

Small but positive inflation means that simply holding onto money long-term is not to your advantage. You have to either spend it, or invest it in something. Inflating faster than any business can profit or any real good can increase in value is bad, because nobody will want to invest when they can spend instead and get real goods that don't inflate. Deflating is bad because everybody will hold their currency instead of investing it unless they believe that the company they are investing in will profit enough to overwhelm the inflation.

Just purchasing daily necessities is not enough. How many people here work in a business that creates something that is strictly necessary? Probably almost nobody. You need investment at all levels for the economy to work. How much investment is there with Bitcoins? Would you invest a large sum in BTC in a company with a good business plan? Probably not, because they couldn't return more than you would earn by just holding the BTC.

This is what I believe will ultimately limit the growth of Bitcoin. It's useful and interesting, and all sorts of good products will probably be created using it, but I don't believe that it will ever take over the world, replace any national currencies, destroy governments, or otherwise become the primary currency for a large section of the economy. I do hold some bitcoin, and I would be interested in being proven wrong, but that's the way that I see it right now.

[odolvlobo]

... because of the relatively fixed money supply and the deflation problems that caused. ...

I see this claim occasionally, but I don't understand it. What exactly are the deflation problems that a fixed money supply has caused? Some economists (Bernanke, for example) believe that any deflation is worse than high inflation. I would like to understand the reasoning behind this belief. Some claim that even low deflation leads to hyper-deflation, but history has shown this to be false.

[The-Real-Link]

The arguments seem to be similar to "Why would I purchase a computer or laptop now when next year there'll be faster, higher capacity, and cheaper systems?"  Same with cars to an extent.  Extremely applicable to GPUs... 

Because we value the use or need the tool now, not tomorrow.  Or that we can value the productivity (or outright have the need) that the tool provides now instead of later.

I think Bitcoin has enough value as-is (ala Western Union market or greater) to not ever need a "killer app" but at the same time for it to grow and be used by hopefully the average person eventually, it does need to be exchanged for whatever things that people value more at that moment.

If it's the necessities of safe human livelyhood, then ok, would an example of a grocery store that'd take BTC be reason enough as an "extra"?

Not an ecconomist by any means but I do agree with the opinion that hey, if people suddenly feel BTC is the better money, that's where their fiat is going.

[Jaagu]

"Bitcoin will take over as the currency of the internet. It will also take over as a store of value; why earn a measly, less-than-inflation interest rate in a savings account when you can have steady appreciation of value if you just keep your money in bitcoin? People will spend less and save more because they know if only they do that, they will be richer in the future. Companies will no longer produce things of no value, because no one will buy them. The world will become more efficient, because there will be less waste. Everyone will realize how much they lose by spending money on valueless things. There will be a more equitable distribution of wealth, because no one can inflate (or, to use a less charitable term, counterfeit) bitcoin at their whim."
- Ryan Dickherber. Bitcoin is the Economic Singularity. 2011-06-04
http://themonetaryfuture.blogspot.com/2011/06/bitcoin-is-economic-singularity.html

[Ekaros]

"Bitcoin will take over as the currency of the internet. It will also take over as a store of value; why earn a measly, less-than-inflation interest rate in a savings account when you can have steady appreciation of value if you just keep your money in bitcoin? People will spend less and save more because they know if only they do that, they will be richer in the future. Companies will no longer produce things of no value, because no one will buy them. The world will become more efficient, because there will be less waste. Everyone will realize how much they lose by spending money on valueless things. There will be a more equitable distribution of wealth, because no one can inflate (or, to use a less charitable term, counterfeit) bitcoin at their whim."
- Ryan Dickherber. Bitcoin is the Economic Singularity. 2011-06-04
http://themonetaryfuture.blogspot.com/2011/06/bitcoin-is-economic-singularity.html

Wouldn't majority of people be worse off in that kind of society. I'm not entirely sure how large part of population is needed to sustain the food and minimal production of other must have services. Can't be very large.

Also, this does go for speding deflationary currency. Most people prefer to have pleasure now than much later.

[josiahgarber]

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.

I don't think bitcoin is a depreciating currency.  Greshams law basically says: if people have something they don't want, and they can give it to other people to get something they do want, then they will do do that before they give up something they want more.  It's quite good for Bitcoin's future in my opinion.

[odolvlobo]

I just realized that there is a mistake in the terminology in this thread. Bitcoin is an appreciating currency -- its value increases. I think the intended term is deflationary, not depreciating.