Why such agreement that Deflationary currency is a bad thing

[bitchess]

As somebody who has studied economics, can I just state that stable low inflation is the BEST course for any currency (whether virtual or fiat)?

but with my economics background, I am just echoing what major economists have communicated about the drawbacks of deflation.

I am reiterating economic theory.

You failed to mention that all of your economics teachers likely have memorized Keynes' books and worship his every word. Which is ironic because Keynes is no longer stating theories because he is dead, and thus there is no more supply of his theories and thus no inflation of further theories. So Keynes should be ignored by anyone who supports inflation.

Come back when you understand Hayek, Mises and Friedman.

I actually think that both Keynes and Friedman would have the view that deflation breeds recession and spiral.  They just explained it in different ways.  Here is support for Friedman:

http://en.wikipedia.org/wiki/Monetarism

"Within mainstream economics, the rise of monetarism accelerated from Milton Friedman's 1956 restatement of the quantity theory of money. Friedman argued that the demand for money could be described as depending on a small number of economic variables. Thus, where the money supply expanded, people would not simply wish to hold the extra money in idle money balances; i.e., if they were in equilibrium before the increase, they were already holding money balances to suit their requirements, and thus after the increase they would have money balances surplus to their requirements. These excess money balances would therefore be spent and hence aggregate demand would rise. Similarly, if the money supply were reduced people would want to replenish their holdings of money by reducing their spending. In this, Friedman challenged a simplification attributed to Keynes suggesting that "money does not matter."[5] Thus the word 'monetarist' was coined...It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch."

[bitchess]

I don't mean fractional reserve.   I have no problem with fractional reserve, as long as the fractional nature, and the risks behind it, are made plain and clear to all depositors.

Do a quick google for "debt backed money" and you'll see what I'm saying.  Try to weed out the nutters and look for the facts behind it.  The vast majority of money in our currency systems are borne from debt - You go to the bank and ask for a loan, and the promise from you to repay that money is all that is needed for the bank to effectively conjure that money into existence.

Even in a monetary system that isn't backed by debt, severe deflation can still cause problems.  And what we're seeing in Bitcoin right now is probably some of the most severe deflation (and volatility) that you can imagine in a currency.  (And yet people are still doing their level best to make a go of it - interpret that as stupidity or optimism as you prefer).

The reason deflation causes disaster in a debt-backed system is that deflation causes the money supply to shrink, because loans dry up, leading to the deflationary death spiral.  In a system where money isn't backed by debt, the drying up of credit doesn't affect the actual supply of money, so you don't have that vicious feedback cycle.

That is the reason central banks try very, very hard to avoid deflation and actually target mild inflation - they know that their monetary system would verge on collapse in the presence of persistent deflation.  However they don't publicise the reasons behind, merely trotting out the "deflation is bad" line so often that it's become accepted truth.  Problem is, it's become accepted as a universal truth, rather than what it really is - the truth for the current system which they are charged with maintaining.

You concede that credit drying up is a trigger for a spiral.  I agree credit is one factor, but also the simple "spend versus put under mattress" question is a big factor but let's leave that aside for another post.

What category of debt relates to "debt backed money" which you are talking about?  I think you mean that gov't creates debt which (indirectly) creates money when the Fed buys it like they are doing now.  This is actually not correct through all stages of the cycle (Fed sells debt during good times) but let's leave that aside for now.  This means you are only taking the impact of government debt off the table with a non-debt based currency (actually this statement is tenuous but I'll give you the benefit of the doubt.)  

Not all of debt is issued by the government.

How will non-gov't debt be affected by the same phenomena when there is "stable deflation"?  How will corporations/individuals think about obtaining loans in this environment?  You can get a $100,000 loan today to buy that house you wanted but actually in the course of paying the mortgage, you pay back an amount which is actually way more valuable on the day you pay it back.  $100,000 in 24 years would be able to buy 2 of the same houses in a stable 3% deflationary environment.  So the environment means that either a) you can lend money to buy 1 house today but the contract states you need to pay back with money which can buy 2 houses in the future or b) wait until you can afford the house in full at its market price.  Would you take out this loan?  If you can't afford one now, what makes you think you can afford two in 24 years?  And this math assumes that the bank will lend you money at 0% interest rate!  

Concisely, a stable deflation environment incentives you NOT to purchase big ticket items now.

I would never apply for ANY loans in a deflationary environment.  Hoping that other people are logical like me, what happens is non-gov't credit demand dries up.  Less homes are sold, less corporations fund projects, the system grinds to a halt.

Do you agree?  Or are you also saying we need to abolish debt altogether to make deflation (and BTC) work?

[Rodyland]

Leaving off the table (for now) that which you stated as such.  Agree we're not merely talking governement debt - all debt.  Happy to leave gov't debt to the side.

How will non-gov't debt be affected by the same phenomena when there is "stable deflation"?  How will corporations/individuals think about obtaining loans in this environment?  You can get a $100,000 loan today to buy that house you wanted but actually in the course of paying the mortgage, you pay back an amount which is actually way more valuable on the day you pay it back.  $100,000 in 24 years would be able to buy 2 of the same houses in a stable 3% deflationary environment.  So the environment means that either a) you can lend money to buy 1 house today but the contract states you need to pay back with money which can buy 2 houses in the future or b) wait until you can afford the house in full at its market price.  Would you take out this loan?  If you can't afford one now, what makes you think you can afford two in 24 years?  And this math assumes that the bank will lend you money at 0% interest rate!  

Concisely, a stable deflation environment incentives you NOT to purchase big ticket items now.

I would never apply for ANY loans in a deflationary environment.  Hoping that other people are logical like me, what happens is non-gov't credit demand dries up.  Less homes are sold, less corporations fund projects, the system grinds to a halt.

Do you agree?  Or are you also saying we need to abolish debt altogether to make deflation (and BTC) work?

If you don't go into debt to buy a house, either you rent or you live on the street.  Someone has to own the house, and chances are there will be some debt attached.

Just because the environment is generally deflationary doesn't mean everything goes down in price - just like in our current inflationary environment, some things don't go up in price.  If you go into debt to buy a depreciating asset, or an asset that doesn't produce income, then that is bad debt - the problem with our current inflationary and debt-backed fiat environment is that such debt is outright encouraged. 

Up until, what, the 20th century, money was backed by gold, which was arguably deflationary.  The world worked "just fine" up until we abandoned gold.  The monetary systems of the 20th century are an aberration, and future history will mark it as such.  Chances are none of us reading this will be around when the matter is decided once and for all, although the success of bitcoin over the next years and decades will certainly make my assertions more likely than yours.

[bitchess]

Leaving off the table (for now) that which you stated as such.  Agree we're not merely talking governement debt - all debt.  Happy to leave gov't debt to the side.

How will non-gov't debt be affected by the same phenomena when there is "stable deflation"?  How will corporations/individuals think about obtaining loans in this environment?  You can get a $100,000 loan today to buy that house you wanted but actually in the course of paying the mortgage, you pay back an amount which is actually way more valuable on the day you pay it back.  $100,000 in 24 years would be able to buy 2 of the same houses in a stable 3% deflationary environment.  So the environment means that either a) you can lend money to buy 1 house today but the contract states you need to pay back with money which can buy 2 houses in the future or b) wait until you can afford the house in full at its market price.  Would you take out this loan?  If you can't afford one now, what makes you think you can afford two in 24 years?  And this math assumes that the bank will lend you money at 0% interest rate!  

Concisely, a stable deflation environment incentives you NOT to purchase big ticket items now.

I would never apply for ANY loans in a deflationary environment.  Hoping that other people are logical like me, what happens is non-gov't credit demand dries up.  Less homes are sold, less corporations fund projects, the system grinds to a halt.

Do you agree?  Or are you also saying we need to abolish debt altogether to make deflation (and BTC) work?

If you don't go into debt to buy a house, either you rent or you live on the street.  Someone has to own the house, and chances are there will be some debt attached.

Just because the environment is generally deflationary doesn't mean everything goes down in price - just like in our current inflationary environment, some things don't go up in price.  If you go into debt to buy a depreciating asset, or an asset that doesn't produce income, then that is bad debt - the problem with our current inflationary and debt-backed fiat environment is that such debt is outright encouraged.  

Up until, what, the 20th century, money was backed by gold, which was arguably deflationary.  The world worked "just fine" up until we abandoned gold.  The monetary systems of the 20th century are an aberration, and future history will mark it as such.  Chances are none of us reading this will be around when the matter is decided once and for all, although the success of bitcoin over the next years and decades will certainly make my assertions more likely than yours.

why did they abolish gold standard in your interpretation?  What short term issues did they cite before making the change?

[bitchess]

If you don't go into debt to buy a house, either you rent or you live on the street.  Someone has to own the house, and chances are there will be some debt attached.

So in aggregate how many people would take out mortgages the year that somebody institutes a policy that guarantees constant deflation for the foreseeable future?  After that date, who would ever take out a mortgage?  How bout the aggregate level of debt in the entire economy?  It crashes.

To be even more explicit the correct theoretical cost for loans to be enticing to apply for would be at negative interest rates.  this is where the credit market equilibrium would be achieved.

Unfortunately, the banks would think to themselves a) should I loan this random person $100,000 and get back less than $100,000 in the future or b) just hoard the $100,000 and be guaranteed to still have $100,000 which will be worth double in real value in 24 years?

[Rodyland]

why did they abolish gold standard in your interpretation?  What short term issues did they cite before making the change?

The really short answer - so governments could print money to pay for war.

[bitchess]

why did they abolish gold standard in your interpretation?  What short term issues did they cite before making the change?

The really short answer - so governments could print money to pay for war.

What attributes of the prewar period necessitated higher money supply which was not achievable by gold bullion?

[bitchess]

Just because the environment is generally deflationary doesn't mean everything goes down in price

I'm just talking about price of one thing.  The currency unit.  By definition, the value of the currency unit goes up 3% in a constant 3% deflationary environment.

If I am to borrow this currency unit (purely just asking somebody for cash) at the prevailing interest rate why shouldn't I look directly at it's expected average future purchasing power?

[alyssa85]

The whole point of deflation is that it's causing the price of everything to fall that can have a price tag attached to it, things will still be more expensive but you won't have to work as long in your life because you require less deflationary currency in order to buy something.

Remember that in deflationary systems, wages fall as well as prices. So you'll still have to work as long! We're in a semi-deflationary period now, with minimum wages frozen and zero hours contracts and juicy salaries only available to the elites.

There have been only two real periods of sustained deflation that we know of. One was during the Long Depression of the 19th century. That depression lasted from 1873 to 1896 - over twenty years. It caused massive movement across teh globe of desperate people - that was when the huge movement of people from Europe to the United States happened - people already in America didn't like it and at the end of it, passports were introduced, to prevent mass migration. So one result of the deflationary period was social - free movement of people across the globe (which had been enjoyed since human beings first evolved 170,000 years ago) stopped and came under the control of governments. A big loss of freedom if you subscribe to libertarian views. The second result was an upsurge of anti-semitism in Germany, Austria and Eastern European countries - that deflationary period in the late 19th C was when it started.

The second deflationary period was the Great Depression of the 1930's. That caused movement of people too, eg from Oklahoma to California, but not as much as during the long depression, as passports had been introduced, which reduced international movement. For example desperate Jews were turned away from America and shipped back to their deaths. And we know how this played out in Europe - we got another world war.

So deflation can result in some sinister stuff. Inflation results in sinister stuff too. Some people think that if you are against inflation you must be for deflation. Actually we should all be aiming for the sweet spot where prices hold rock steady, with neither inflation nor deflation.

[bitchess]

The whole point of deflation is that it's causing the price of everything to fall that can have a price tag attached to it, things will still be more expensive but you won't have to work as long in your life because you require less deflationary currency in order to buy something.

Remember that in deflationary systems, wages fall as well as prices. So you'll still have to work as long! We're in a semi-deflationary period now, with minimum wages frozen and zero hours contracts and juicy salaries only available to the elites.

There have been only two real periods of sustained deflation that we know of. One was during the Long Depression of the 19th century. That depression lasted from 1873 to 1896 - over twenty years. It caused massive movement across teh globe of desperate people - that was when the huge movement of people from Europe to the United States happened - people already in America didn't like it and at the end of it, passports were introduced, to prevent mass migration. So one result of the deflationary period was social - free movement of people across the globe (which had been enjoyed since human beings first evolved 170,000 years ago) stopped and came under the control of governments. A big loss of freedom if you subscribe to libertarian views. The second result was an upsurge of anti-semitism in Germany, Austria and Eastern European countries - that deflationary period in the late 19th C was when it started.

The second deflationary period was the Great Depression of the 1930's. That caused movement of people too, eg from Oklahoma to California, but not as much as during the long depression, as passports had been introduced, which reduced international movement. For example desperate Jews were turned away from America and shipped back to their deaths. And we know how this played out in Europe - we got another world war.

So deflation can result in some sinister stuff. Inflation results in sinister stuff too. Some people think that if you are against inflation you must be for deflation. Actually we should all be aiming for the sweet spot where prices hold rock steady, with neither inflation nor deflation.

aggregate deflation is worse than aggregate inflation.  any aggregate deflation is ridiculously dangerous.  Each period of aggregate deflation has usually been associated with economic recession or depression.  

Stable low inflation has been experienced for a vast majority of US history.  Throughout all the good times and all the relatively mild bad times including now.

For completeness, hyperinflation is very dangerous but is hard to achieve without huge issues with the central bank.

[Anon136]

Bitcoin would continue to appreciate to infinity while an economy would shrink because nobody spends.

what if satoshi is an alien sent from his planet to conquer the earth and bitcoin is basically.... like a memetic virus created to destroy civilization with a tulup bubble that never crashes, it just inflates and inflates until everyone dies.

[bitchess]

Bitcoin would continue to appreciate to infinity while an economy would shrink because nobody spends.

what if satoshi is an alien sent from his planet to conquer the earth and bitcoin is basically.... like a memetic virus created to destroy civilization with a tulup bubble that never crashes, it just inflates and inflates until everyone dies.

that alien will fail because btc would simply never reach widespread use in that scenario and everone continues to use fiat.  the prevention for "being tricked" is people like me and many economists raise the deflationary spiral concern.

the endgame with a deflationary currency is that its value grows exponentially and then explodes to zero.  just like tulip mania.

this might be why btc is so volatile these days.

Anyway it's not at zero now because the jury is still out on if btc can address the fixed 21million supply in 2140.  it might be addressable by instituting a fractional reserve/lending system.  of course, the ability to create one in a decentralized environment has yet to be proven.

[Anon136]

Bitcoin would continue to appreciate to infinity while an economy would shrink because nobody spends.

what if satoshi is an alien sent from his planet to conquer the earth and bitcoin is basically.... like a memetic virus created to destroy civilization with a tulup bubble that never crashes, it just inflates and inflates until everyone dies.

that alien will fail because btc would simply never reach widespread use and everone continues to use fiat.

the endgame with a deflationary currency is that its value grows exponentially and then explodes to zero.  just like tulip mania.

this might be why btc is so volatile these days.

Anyway it's not at zero now because the jury is still out on if btc can address the fixed 21million supply in 2140.  it might be addressable by instituting a fractional reserve/lending system.  of course, the ability to create one in a decentralized environment has yet to be proven.

rofl. Sure the deflationary nature creates wild swings but thats only because speculators have no experience with a deflationary currency. They will eventually learn how to price this stuff in. and sure bitcoin may explode into a value of 0 a hundred years from now but so what, think of how many trades it will have facilitated by then.

[bitchess]

Bitcoin would continue to appreciate to infinity while an economy would shrink because nobody spends.

what if satoshi is an alien sent from his planet to conquer the earth and bitcoin is basically.... like a memetic virus created to destroy civilization with a tulup bubble that never crashes, it just inflates and inflates until everyone dies.

that alien will fail because btc would simply never reach widespread use and everone continues to use fiat.

the endgame with a deflationary currency is that its value grows exponentially and then explodes to zero.  just like tulip mania.

this might be why btc is so volatile these days.

Anyway it's not at zero now because the jury is still out on if btc can address the fixed 21million supply in 2140.  it might be addressable by instituting a fractional reserve/lending system.  of course, the ability to create one in a decentralized environment has yet to be proven.

rofl. Sure the deflationary nature creates wild swings but thats only because speculators have no experience with a deflationary currency. They will eventually learn how to price this stuff in. and sure bitcoin may explode into a value of 0 a hundred years from now but so what, think of how many trades it will have facilitated by then.

how do you price a deflationary currency?  let's be very clear with an example

For simplicity sake, it is defined to rise 3% in real value each year.  how many apples would you trade for it today?  it is defined, that you'll be able to buy more apples in the future. conversely would anybody ever accept a 0% interest loan from you?  in short, you wouldn't trade, you wouldn't lend, you would stop transacting, and that would create a reinforcing feedback cycle, then nobody transacts at which point the ccy is explodes to 0.

[Lethn]

Remember that in deflationary systems, wages fall as well as prices. So you'll still have to work as long! We're in a semi-deflationary period now, with minimum wages frozen and zero hours contracts and juicy salaries only available to the elites.

Something tells me you don't really know what you're talking about and I found the answer with the history you cited, the depressions experienced during that time were a result of massive hyper-inflation of the likes you saw in the great depression later on towards World War 2 both involved massive amounts of money printing of the kind that you saw the Weimar Republic churn out in the hopes of fixing the economy. The problem is money printing does nothing, it temporarily causes prices to rise and wages to rise and then everything comes crashing down. While this is deflation it is deflation and inflation that has been artificially created by central banks which because of the scale causes the massive and total collapses that you see of economies because rather than letting the poorly run companies etc. go out of business they steal everyone else's wealth to keep them going and of course because they are poorly run everyone ends up losing out entirely and the paper becomes worthless.

The idea of deflation is that prices go low and you guy buy things with much less currency than you would normally have to if the currency was inflationary, with deflationary economies you shouldn't be able to have prices going so low they are worth nothing because in a deflationary currency like with Bitcoin there is a limited supply so they will be valued to someone at a given time, gold and silver is also like this which is why they have been used as currencies for centuries. As for wages in general, if the wages go that low and the employer is forcing their employees to work for longer than that is a bit like what central banks are currenctly doing with inflation and interest rates, anyone with sense is going to find someone else to work for in that situation but unless they banded together there is no way the wages in a deflationary economy could go that low people would have to work much longer without them noticing.

Adding to that, deflationary wise I can start providing examples of deflation with real life examples, I calculated that if I sold silver Jewellery I'm making in Bitcoin I would be able to make far more profit than if I did it in paper and it was because Bitcoin, after all the fuss and rants of neo-keynesians is still having much more value than paper. For sure, inflationary paper money causes nothing but grief and is nothing more than an extremely clever way devised by ultra rich central bankers to steal other peoples wealth without getting into trouble.

In short, your history is wrong, you need to study what isn't just in school textbooks and told to you by teachers.

[bitchess]

Remember that in deflationary systems, wages fall as well as prices. So you'll still have to work as long! We're in a semi-deflationary period now, with minimum wages frozen and zero hours contracts and juicy salaries only available to the elites.

Something tells me you don't really know what you're talking about and I found the answer with the history you cited, the depressions experienced during that time were a result of massive hyper-inflation of the likes you saw in the great depression later on towards World War 2 both involved massive amounts of money printing of the kind that you saw the Weimar Republic churn out in the hopes of fixing the economy. The problem is money printing does nothing, it temporarily causes prices to rise and wages to rise and then everything comes crashing down. While this is deflation it is deflation and inflation that has been artificially created by central banks which because of the scale causes the massive and total collapses that you see of economies because rather than letting the poorly run companies etc. go out of business they steal everyone else's wealth to keep them going and of course because they are poorly run everyone ends up losing out entirely and the paper becomes worthless.

The idea of deflation is that prices go low and you guy buy things with much less currency than you would normally have to if the currency was inflationary, with deflationary economies you shouldn't be able to have prices going so low they are worth nothing because in a deflationary currency like with Bitcoin there is a limited supply so they will be valued to someone at a given time, gold and silver is also like this which is why they have been used as currencies for centuries. As for wages in general, if the wages go that low and the employer is forcing their employees to work for longer than that is a bit like what central banks are currenctly doing with inflation and interest rates, anyone with sense is going to find someone else to work for in that situation but unless they banded together there is no way the wages in a deflationary economy could go that low people would have to work much longer without them noticing.

Adding to that, deflationary wise I can start providing examples of deflation with real life examples, I calculated that if I sold silver Jewellery I'm making in Bitcoin I would be able to make far more profit than if I did it in paper and it was because Bitcoin, after all the fuss and rants of neo-keynesians is still having much more value than paper. For sure, inflationary paper money causes nothing but grief and is nothing more than an extremely clever way devised by ultra rich central bankers to steal other peoples wealth without getting into trouble.

In short, your history is wrong, you need to study what isn't just in school textbooks and told to you by teachers.

the outcome of the deflationary ccy issue is volatility in the ccy.  sorry your post is not concise enough to address point by point, can you highlight your main idea?

with regard to your last paragraph, you are stating a trivial truth which i agree with, if ccy1 (BTC) experiences deflation, while ccy2 (USD) experiences inflation, it will take more of cc2 to obtain the same amount of cc1

[Lethn]

TLDR:

. Some people here need to read up on history that isn't from the point of views of government sponsored/regulated schools and texbooks ( seriously, they lie to your face )

. In an unregulated and deflationary economy employers couldn't drop the wages so low that people would be forced to work for longer without consequences to them personally, that and the limited nature of deflationary currencies wouldn't allow for it mathematics wise

[AlphaWolf]

TLDR:

. Some people here need to read up on history that isn't from the point of views of government sponsored/regulated schools and texbooks ( seriously, they lie to your face )

I'd argue that they lie to your "ass", since that seems to be the origin of most "facts" produced here

[bitchess]

TLDR:

. Some people here need to read up on history that isn't from the point of views of government sponsored/regulated schools and texbooks ( seriously, they lie to your face )

. In an unregulated and deflationary economy employers couldn't drop the wages so low that people would be forced to work for longer without consequences to them personally, that and the limited nature of deflationary currencies wouldn't allow for it mathematics wise

I guess you have less trust in economics textbooks (and wikipedia) than I do.  or pehaps you have a significant level of distrust that you are biased toward ideas that conflict with such textbooks.  to each their own.  I suppose the recent macroeconomic instability has contributed toward your distrust, but in my view that is somewhat short term reactionary

are you talking about real or nominal wage?  if BTC can buy 2 apples instead of one.  your employer will pay you half the BTC after deflation.  in the end he's still paying you one apple.  The important caveat is why would he buy your labor anyway if hoarding his BTC can give him/her a better return?  it's not a switch, but this effect starts small, then snowballs

[Lethn]

I had to actually look up what you meant by real and nominal there, I guess if I had to put it in those terms it would be individual, now you've made me even more suspicious of what's being taught to us at a young age because the kind of calculations can be calculated in such a way to benefit a certain side of an argument like with politics.

If you're curious, the reason I have such a distrust of textbooks ( I personally don't mind wikipedia that much because at least that relies on consensus most of the time, you just have to cross check it with other stuff ) is because I experienced the lies they hammer into your head when I was younger, a lot. Ever since then I've been reading up more and more all the different points of view countries put forward, particularly governments and it's amazing how much they fuck with even basic history. While it's at times subtle and they sometimes get the facts right, you'll find they often give different reasons behind what they did at the time but when it comes to stuff like the economy they'll blatantly bullshit you and change the topic rather than go into any detail of what happened, like with money printing or William of orange, William of orange is my personal favourite because it's pretty simple, the British think they were there because they were peacefully colonizing the Irish and the Irish just see them as bunch of invaders trying to take their land.