Why such agreement that Deflationary currency is a bad thing

[Rodyland]

 (& that action contributes to decreasing overall money supply which propagates a deflationary spiral.)

And that is where I believe you are wrong.  In bitcoin land, paying back a loan does not reduce the supply of money, so there is no deflationary spiral.  In bitcoin land, paying back a loan simply means that those bitcoins are once again available to be loaned out. 

Just plain old deflation, which is good for savers and bad for debtors (the exact opposite of inflation, which is good for debtors and bad for savers).

[shadypepe]

i think it's not so much about "deflationary spiral" as it is about the simple fact that there is going to be significantly less investment in a deflationary economy. every project would have to have an enormous return on investment in order to be feasible

[bitchess]

 (& that action contributes to decreasing overall money supply which propagates a deflationary spiral.)

And that is where I believe you are wrong.  In bitcoin land, paying back a loan does not reduce the supply of money, so there is no deflationary spiral.  In bitcoin land, paying back a loan simply means that those bitcoins are once again available to be loaned out. 

Just plain old deflation, which is good for savers and bad for debtors (the exact opposite of inflation, which is good for debtors and bad for savers).

once you pay back the loan, nobody will take out another loan, based on the preceding argument.  the drying up of all lending activity starts the spiral.

i am assuming that BTC is the only currency that exists.  in the real world, people would just continue to loan in USD, which we trust the banks to keep at stable low inflation rates.

the point of the conversation is to highlight why BTC needs to address the limited supply issue before it will achieve stability and potential to truly become a widespread currency like the dollar.

[Billy3]

(& that action contributes to decreasing overall money supply which propagates a deflationary spiral.)

And that is where I believe you are wrong.  In bitcoin land, paying back a loan does not reduce the supply of money, so there is no deflationary spiral.  In bitcoin land, paying back a loan simply means that those bitcoins are once again available to be loaned out. 

Just plain old deflation, which is good for savers and bad for debtors (the exact opposite of inflation, which is good for debtors and bad for savers).

once you pay back the loan, nobody will take out another loan, based on the preceding argument.  the drying up of all lending activity starts the spiral.

i am assuming that BTC is the only currency that exists.  in the real world, people would just continue to loan in USD, which we trust the banks to keep at stable low inflation rates.

the point of the conversation is to highlight why BTC needs to address the limited supply issue before it will achieve stability and potential to truly become a widespread currency like the dollar.

I think that your assertion is likely how things will develop. The Fiats won't disappear, rather BTC will act as a check on a currently unchecked group of central banks. People will no longer stand for negative savings rates. People will take their loans in fiat and keep their savings in BTC.

If  company wants a loan they certainly won't want it in BTC, they will ask for it in Dollars, Yen etc. The return on investments will be competing with the return on savings (read BTC) just as it always has. This will serve as a winnowing process with the less attractive investments failing to achieve funding. This may also have the effect of reducing the endless phenomenon of recurring bubbles as excess money sloshing around looks for a home. People will flock to a store of value that is much more liquid than gold; BTC.

In the end, BTC won't be the only currency in existence; the likely position of BTC will be to take over a large portion of what economists call M1 - the most liquid portion of the entire money supply.

[bitchess]

(& that action contributes to decreasing overall money supply which propagates a deflationary spiral.)

And that is where I believe you are wrong.  In bitcoin land, paying back a loan does not reduce the supply of money, so there is no deflationary spiral.  In bitcoin land, paying back a loan simply means that those bitcoins are once again available to be loaned out. 

Just plain old deflation, which is good for savers and bad for debtors (the exact opposite of inflation, which is good for debtors and bad for savers).

once you pay back the loan, nobody will take out another loan, based on the preceding argument.  the drying up of all lending activity starts the spiral.

i am assuming that BTC is the only currency that exists.  in the real world, people would just continue to loan in USD, which we trust the banks to keep at stable low inflation rates.

the point of the conversation is to highlight why BTC needs to address the limited supply issue before it will achieve stability and potential to truly become a widespread currency like the dollar.

I think that your assertion is likely how things will develop. The Fiats won't disappear, rather BTC will act as a check on a currently unchecked group of central banks. People will no longer stand for negative savings rates. People will take their loans in fiat and keep their savings in BTC.

If  company wants a loan they certainly won't want it in BTC, they will ask for it in Dollars, Yen etc. The return on investments will be competing with the return on savings (read BTC) just as it always has. This will serve as a winnowing process with the less attractive investments failing to achieve funding. This may also have the effect of reducing the endless phenomenon of recurring bubbles as excess money sloshing around looks for a home. People will flock to a store of value that is much more liquid than gold; BTC.

In the end, BTC won't be the only currency in existence; the likely position of BTC will be to take over a large portion of what economists call M1 - the most liquid portion of the entire money supply.

The only thing is you can apply the same argument against btc spending as you can with btc loans.

Why spend your btc now if you know you can hoard BTC instead while spending fiat?

In the end btc goes into deflationary spiral and explodes to zero even while assuming usd exists.

[TiagoTiago]

When once very expensive things go down enough orders of magnitude, demand will rise since more people will be buying the stuff they never had a chance of having before, and with demand rising they can raise the price against the deflation. Where exactly is the problem?

[tripzero]

The inflationary nature of bitcoin seems like a drawback to me.  Stability would be optimal, however even with a gold standard there is some inflation (unless aliens steal the gold!).  So less inflation is better than more.

[Impaler]

When once very expensive things go down enough orders of magnitude, demand will rise since more people will be buying the stuff they never had a chance of having before, and with demand rising they can raise the price against the deflation. Where exactly is the problem?

Only if BTC is the only possible crypto-coin avenue for people to reinvest in, that's not been the case for some time now, BTC is still preeminent over the alts in its hype generating ability and thus network size, but network size is not the only source of utility, the other source is technical improvement as these accumulate under a competing coins banner they can eventually surpass the utility of BTC and outgrow it's network.  It's the old myspace vs Facebook story all over again.  I'd also wager that coins that can solve stable valuation (or at least reduce volatility significantly) will also have an edge.

[sgexpat]

The answer is simple. By definition a deflationary (what you mean by this is a currency that is relatively fixed in supply vs economic and technological progress, driving down prices and up the value of the currency) makes it difficult to fund government deficits because there is no option to create money out of thin air instead of taxation.

[sgexpat]

i think it's not so much about "deflationary spiral" as it is about the simple fact that there is going to be significantly less investment in a deflationary economy. every project would have to have an enormous return on investment in order to be feasible

This is completely wrong. the % return is presumably unaffected by this in Real terms. One can be more sure that projects undertaken are likely the right ones because this 'deflationary' currency is not subject to interest rate manipulations of central planners, which likely result in mal-investment due to incorrect signals (i.e. interest rates that do not reflect individual preferences and are therefore unsustainable).

Thinking about the housing bubble as an example. In the absence of a credit-based flexible money supply would it have played out the way it had?  i think the answer is obviously 'no' because 'yes you are right that interest rates probably would have been higher.' 

That's different than saying that there would be less investment!!  Probably capital would have been invested in more useful activities than building McMansions....

[bitchess]

i think it's not so much about "deflationary spiral" as it is about the simple fact that there is going to be significantly less investment in a deflationary economy. every project would have to have an enormous return on investment in order to be feasible

This is completely wrong. the % return is presumably unaffected by this in Real terms. One can be more sure that projects undertaken are likely the right ones because this 'deflationary' currency is not subject to interest rate manipulations of central planners, which likely result in mal-investment due to incorrect signals (i.e. interest rates that do not reflect individual preferences and are therefore unsustainable).

Thinking about the housing bubble as an example. In the absence of a credit-based flexible money supply would it have played out the way it had?  i think the answer is obviously 'no' because 'yes you are right that interest rates probably would have been higher.' 

That's different than saying that there would be less investment!!  Probably capital would have been invested in more useful activities than building McMansions....

imo, the housing bubble was caused by 1. greenspan being overly generous and keeping interest rates too low for too long following the internet bubble burst 2. lack of regulation and craziness in the mortgage market through the early 2000s.  this was in part due to the incorrect credit ratings given to cdos and clos by the ratings agency.

[Billy3]

The answer is simple. By definition a deflationary (what you mean by this is a currency that is relatively fixed in supply vs economic and technological progress, driving down prices and up the value of the currency) makes it difficult to fund government deficits because there is no option to create money out of thin air instead of taxation.

But the question is: how is that bad? In terms of regular people, would a deflationary currency be 'bad' for us? Many are writing about how loans would dry up. Inflation is good for loading up debt; deflation isn't. People would consume less and save more - this is generally bad for GDP but is it bad for the regular guy?

Implied in this question is: Should only the rich guys worry about deflation or would it be bad for us all?

[hayek]

Deflation is not bad.

It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.


Inflation is bad.

It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.

[townf]

Deflation is not bad.

It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.


Inflation is bad.

It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.

I think they're both bad. They are essentially the same thing. That thing is the changing of the buying power of money. This is bad because the fundamental purpose of money is to accurately represent real stuff. It's not accurate if it's always changing. It forces the economy to run suboptimally.

One is good for some roles, bad for others. The other is bad for some roles, good for others. We could both accurately come up with good and bad things for each. They mirror each other in their effects.

For example, to use the rice analogy: If I am a producer of rice in a deflationary economy, I will be highly incented to sit on my ass and hoard my money instead of actually producing any rice. This is because say if it costs me 10 units to produce rice and by the time harvest time rolls around, the buying power of the currency is such that 10 units will buy all my rice, I won't have made any money at all. I should have just kicked back and relaxed.

The same goes for borrowers. The cost of borrowing money is very high, even at 0% interest.

For an economy to function optimally, the buying power of money needs to remain constant. Is that not the whole point of something that is used as a medium of exchange?

If you're talking stores of wealth to be hoarded, then that is something else.

[sgexpat]

[/quote]

The same goes for borrowers. The cost of borrowing money is very high, even at 0% interest.

[/quote]

If this ever becomes true, then interest rates in the free market will become negative. 

I am not entirely sure where the idea that one would not grow rice in such an environment comes from.  You are saying there is an implied increase in the value of cash money (whatever currency presumably not easily replicated - bitcoin, gold etc) and this increase is so big and fast one can live off of it while doing nothing.  That assumes some interesting priors that do not seem actually possible in the real world ... for example, if such were true, the price of items that take actual "work" to make such as rice would go up so big and so fast as to make it worth doing again ... yes? 

What I am trying to say and probably not doing so eloquently or succinctly (maybe some other newbs can help) is that it is pretty circular to say "assume a world where the value of money rises so fast its better to do nothing at all with one's life because you can get rich doing nothing" and then go on to say "in such a world people would do nothing."  I do not think the former is possible.  the scenario where deflation in a given currency is so strong for so long that everyone just quits their jobs is just not realistic.

Another mechanism which breaks the above: if a currency system experienced such dramatic appreciation on an ongoing basis and for so long as to convince people it would never end it will be supplemented with other means of exchange and would basically be a store of value and not a means of exchange  AT ALL..  So what?  Other currencies will be used... 

[jasondrey13]

Deflation is not bad.

It encourages saving. If I know I can make more money holding on to my money than by spending it impulsively I am less likely to spend impulsively. Then I am likely to only make 'good' purchases. A good purchase being one that increases my standard of living/value/etc more than if i had just saved.


Inflation is bad.

It discourages saving. If I know that I can buy 10lbs of rice today and tomorrow I might not be able to I am more likely to buy 10lbs of rice today. Even if I don't need it.

Exactly.

[Billy3]

So, many have been talking about deflation in terms of 'prices down 20% today since yesterday; and will probably be down again tomorrow'. This is reasonable based on the current moves BTC has been making.

In terms of a possible antithesis to the USD though, let's pretend BTC takes over about a trillion dollars worth of M1 - checking and savings accounts - and settles at $100,000 USD per BTC and begins moving up gently along a 3% uptrend. So, now we talk about buying rice today vs. starving to get it .25% cheaper next month; these purchases will obviously still happen.

I don't know if BTC could ever be the only currency in the world but think about if it, or something like it, was. In terms of this type of deflation, how would the world look? Would loans be made at negative rates? Could you borrow at a prime rate of -1%? If so, an interest-only loan might be reasonable. Would people borrow BTC and pay interest only to buy a nice house? Would renting make more sense?

Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times. Couldn't we still see temporary inflation during periods of a workforce decline (e.g. Baby Boomers)?

Maybe deflation like this could be a solution and not a problem. Would the world really end as we know it - like they tell us? Would we really spiral downward into oblivion? GDP would certainly take a big hit with that transition but how would we come out of that initial depression?

[sgexpat]

So, many have been talking about deflation in terms of 'prices down 20% today since yesterday; and will probably be down again tomorrow'. This is reasonable based on the current moves BTC has been making.

In terms of a possible antithesis to the USD though, let's pretend BTC takes over about a trillion dollars worth of M1 - checking and savings accounts - and settles at $100,000 USD per BTC and begins moving up gently along a 3% uptrend. So, now we talk about buying rice today vs. starving to get it .25% cheaper next month; these purchases will obviously still happen.

I don't know if BTC could ever be the only currency in the world but think about if it, or something like it, was. In terms of this type of deflation, how would the world look? Would loans be made at negative rates? Could you borrow at a prime rate of -1%? If so, an interest-only loan might be reasonable. Would people borrow BTC and pay interest only to buy a nice house? Would renting make more sense?

Keep in mind, if BTC were the only currency then only productivity increases and workforce increases would deflate things, so deflation wouldn't be a sure thing at all times. Couldn't we still see temporary inflation during periods of a workforce decline (e.g. Baby Boomers)?

Maybe deflation like this could be a solution and not a problem. Would the world really end as we know it - like they tell us? Would we really spiral downward into oblivion? GDP would certainly take a big hit with that transition but how would we come out of that initial depression?

A well put question.  If this really happened (dubious scenario though which we'll return to), I would agree with your proposed implications. This would not be a problem. In fact, we *normally* experience deflation in certain markets all the time ... for example cost per unit of bandwidth, computing power, television quality, etc, where the pace of technological advancement and associated productivity improvements exceeds the insane growth rates in base money supplies.  I would think, yes, that one would get mortgages involving the repayment of less BTC's than the quoted price over a period of time. 

That all said ... I do not think this is a natural state of affairs over the long term.  I believe if BTC's were such a store of value that they rose in value vs. pretty much everything for a pretty much guaranteed-to-be-long-time that other currencies would rise up to compete with BTC's in order to make exchange easier.  This, unless I am vastly mistaken, would seem to be one of the conclusions of Gresham's law. 

I hope none of the above is read as a critique of BTC's ... there's alot to be said for a currency that is fixed or near fixed in supply!  But:

1. competition and freedom are good things.  People will have numerous currencies and that's great.  I am hopeful there will be multiple crypto currencies in addition to the base metals.
2. While base BTC count can be fixed credit instruments can actually increase the notional amount of money....  This is the same thing that can happen when bullion banks issue notes on a fractional reserve basis.  There is nothing wrong with this as long as there is no government insurance to encourage moral hazard on the creditor side.  This means that money supply is not notionally fixed persay when the underlying count of BTC's are fixed... because people will trade Letters of Credit (i.e. promises to deliver BTC's at later dates in whatever form and format) and will have real social credit between them... for this reason its hard to imagine a world where currency, globally, everywhere, all the time is actually fixed... 

What I hope for is an end to legal tender laws and a free market for currencies and banking.  Unlikely to happen, I know, but us libertarians must all have dreams.

[sgexpat]

Actually the above reminds me to point out ... because it will be so easy to compete in the world of crypto currencies, to 'win' - BTC must have the greatest acceptance in terms of actual goods and services that can be procured by it, the best transfer / payment acceptance software, and security as good as others with similar acceptance and transfer/payment ubiquity (although being "the perfectly secure" currency  is not required at all). 

[rik8119]

Well in the case of BTConly enugh people have t trust in the usability of it then it could be used to save money. Which is beautiful. But i would assume we also need a cryptomoney that is designed for to be spend - Like many lokal currencys with demurrage http://www.digplanet.com/wiki/Demurrage_%28currency%29 or the brakteaten money in medieval times 12-15 century http://p2pfoundation.net/Brakteaten_Money.