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Author Topic: Is Deflation Necessarily Bad?  (Read 3570 times)
genjix
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November 04, 2010, 08:27:49 PM
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When I first discovered Bitcoin, my reaction was "Ohhh, deflation. Bad.". Having thought about this, is that really the case?

Sure inflation encourages spending, but mostly the willy nilly impulsive consumerism. If people were encouraged to save, then people would have large amounts of capital to spend on larger worthwhile projects.

And people always need to pay for *something*. Trade still continues. Micropayments for insignificant amounts aren't stopped because Person X's currency is slightly deflationary rather than inflationary.

Can anyone correct me if I'm wrong? This is a biased place to ask but what the hell Smiley

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kiba
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November 04, 2010, 08:31:02 PM
 #2

When I first discovered Bitcoin, my reaction was "Ohhh, deflation. Bad.". Having thought about this, is that really the case?

Sure inflation encourages spending, but mostly the willy nilly impulsive consumerism. If people were encouraged to save, then people would have large amounts of capital to spend on larger worthwhile projects.

And people always need to pay for *something*. Trade still continues. Micropayments for insignificant amounts aren't stopped because Person X's currency is slightly deflationary rather than inflationary.

Can anyone correct me if I'm wrong? This is a biased place to ask but what the hell Smiley

I asked the same question: http://bitcointalk.org/index.php?topic=1471.0

genjix
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November 04, 2010, 08:46:02 PM
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I just read all of that but wanted to make a new post to address my specific point about people being able to build up large bases of capital to make worthwhile investments.

1 Good investment vs 1000000x shitty ones

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kiba
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November 04, 2010, 08:50:34 PM
 #4

Well, just by holding on to your saving mean you can buy more with your investment. However, you better make a profit fast to pay off your investment.

It's a double edged sword.

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November 04, 2010, 09:02:40 PM
 #5

I will say the same as in the previous deflation-related topic:

Currency inflation encourages both wise investments and stupid investments, while currency deflation encourages only smart investments.

With deflating currency it is not beneficial to take big risks while one can earn more with just keeping money in his socks.

The question is: is that good or bad ? I personally think it is good, because :

1. If people stop doing stupid investments, there will be less of poor people.
2. People will be able to get richer just by keeping money in a safe. So anybody can invest easily, poor & stupid people too.
3. Less stupid investments = less financial crisises.

So the conclusion is that difference between rich and poor will decrease. Everyone will get richer. Deflationary economy IMHO should be more stable than inflationary economy.

hugolp
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November 04, 2010, 09:02:47 PM
 #6

Its really all about coordination through the natural market interest rates.

If you create monetary inflation you push the interest rates downwards. That leads to entrepreneurs thinking that they can start more long term projects than consumer really want. Therefore when those projects finish they are revealed as unsusteinable. Its a bubble.

If you create monetary deflation you push the interest rates upwards. That leads to entrepreneurs thinking that long term projects that consumers are looking for are not viable and therefore the economy is not really expanding as it should.

The interest rates transmit the consumer needs to the entrepreneurs. If you artificially change them you will create a distortion on the market.


So its not really that price inflation or price deflation is good or bad. In reality what you really need is the natural interest rates. What happens is that if you dont manipulate the interest rates by creating inflation, as new technologies and new capital appear there is more production and that leads to prices going down. But falling prices its only a consequence of a healthy system, not really the objective or the cause. The really important thing is to have the natural interest rates. If you artificially manipulate it, like central banks do by printing money, then you are distorting the market.
ribuck
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November 04, 2010, 09:09:51 PM
 #7

It's so refreshing that people here understand this.

Outside of this forum, I don't know anyone who hasn't swallowed the rhetoric about how wonderful inflation (i.e. price inflation) is.
grondilu
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November 04, 2010, 09:11:00 PM
 #8

I don't know if it's bad or not.  That's not the point, imo.

Is a storm a good thing ?  Is the wind a bad thing ?

Whether deflation is a good or bad thing, when market forces want it, it has to happen.  The government should not interfere to prevent deflation.  It can only make things worse.
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November 15, 2010, 12:59:48 PM
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The question is not really what is good in deflation vs inflation.
Both are introducing some complication into business planning.

The worst thing to happen is sudden and unplanned inflation or deflation spike.
If it is not goes as expected, then it requires the economic to painfully adapt itself,
for example by instantly changing interest rates, prices, demands etc.

That is a painful thing to happen, since it breaks most of the otherwise stable business plans and processes.

But if you have a stable economic process, then no matter, what it is: deflation or inflation,
since it only matters when you calculate your interest rate to accomodate it.
If you and everybody else get assured about the stability of the economics,
then why would you care at all?
ribuck
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November 15, 2010, 01:05:12 PM
 #10

But if you have a stable economic process, then no matter...

That sort-of misses the point.

People who have a large amount saved don't have "a stable economic process". When there is price inflation, their purchasing power decreases. When there is price deflation, their purchasing power increases.

People who owe a lot of money don't have "a stable economic process". When there is wage inflation, their effective debt decreases. When there is wage deflation, their effective debt increases.
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November 15, 2010, 02:07:44 PM
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But if you have a stable economic process, then no matter...

That sort-of misses the point.

People who have a large amount saved don't have "a stable economic process". When there is price inflation, their purchasing power decreases. When there is price deflation, their purchasing power increases.

People who owe a lot of money don't have "a stable economic process". When there is wage inflation, their effective debt decreases. When there is wage deflation, their effective debt increases.

1. For people, who owes a lot of money during a stable economic process, it will always be preferable to invest their savings
into low-risk enterprise.

2. Can deflation have no end? It is not possible for 100$ in your mattress to eventually become an economic equivalent of universe during a stable economic process. Only that is possible after an horrific changes in the world, like destruction of all world's money.
grondilu
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November 15, 2010, 02:12:21 PM
 #12

2. Can deflation have no end? It is not possible for 100$ in your mattress to eventually become an economic equivalent of universe during a stable economic process. Only that is possible after an horrific changes in the world, like destruction of all world's money.


My guess is : deflation ends when even rich people have no choice but spending their money.  But when this appends, I don't know what poor people would habe been passed through...
hugolp
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November 15, 2010, 04:41:46 PM
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My guess is : deflation ends when even rich people have no choice but spending their money.  But when this appends, I don't know what poor people would habe been passed through...

Not really. But even if this was the case, the poor people would pass through... lower prices. Oh the horror!! Imagine having to pay less for the food. Unacceptable! The poor have to pay more for the food! Its (somehow) for their own good.
grondilu
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November 15, 2010, 05:39:19 PM
 #14

My guess is : deflation ends when even rich people have no choice but spending their money.  But when this appends, I don't know what poor people would habe been passed through...

Not really. But even if this was the case, the poor people would pass through... lower prices. Oh the horror!! Imagine having to pay less for the food. Unacceptable! The poor have to pay more for the food! Its (somehow) for their own good.

Oh yeah that was silly what I was writing.  Forget it.  I need to get more sleep Wink
M.I.
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December 03, 2010, 03:09:15 PM
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Is it a good thing ? It might be if it encourages more people to join earlier, rather than later. But we need more real auction sites, porn sites ;-) etc. accepting bitcoins as currency or the project will end up as just another financial pyramid

right now anyone can get 50BTC for free (well not including electricity) but as soon as the number of ppl using it as currency increases from X to 100000X, 50BTC will have the same value as, let say 1mln $.
RHorning
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December 03, 2010, 05:19:14 PM
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Is it a good thing ? It might be if it encourages more people to join earlier, rather than later. But we need more real auction sites, porn sites ;-) etc. accepting bitcoins as currency or the project will end up as just another financial pyramid

right now anyone can get 50BTC for free (well not including electricity) but as soon as the number of ppl using it as currency increases from X to 100000X, 50BTC will have the same value as, let say 1mln $.

The reason this isn't really a financial pyramid is that the foundations of the concept of Bitcoins are pretty solid and based upon scarcity.  By definition a single Bitcoin is a rare item that is uniquely identified (it comes from a specific block number generated by a specific user and can only be owned by a single person).

I should also note that not everybody or anybody can get 50 BTC "for free".  All that is happening right now is a very steady and controlled process where bitcoins are gradually being added to the system.  Satoshi could have been in the situation where he and he only controlled all 21 million bitcoins and then handed them out to others freely to conduct transactions.  Perhaps that might have been a better way to start out as well, but it would have concentrated a whole bunch of the wealth in the hands of just a few people.  What the current mining activity does is both give an incentive to be active in the protection of the network and provides a currency distribution model that places more coins into the hands of more people.  Those people who are currently running miners are essentially playing a lottery game to try and win additional bitcoins where they are entering thousands of "tickets" (called "hashes" by miners) to see if they can possibly "win" the next group of 50 BTC that will be generated with the next block.

I've been successful at winning a block of 50 bitcoins exactly once, and I consider myself to have been very lucky to have done that.

I consider it wrong to even think of bitcoins to be a form of electricity but rather than a bitcoin simply is a unit of luck.  You can "buy" that luck or simply have the universe align itself to give you that luck.  What it means to have luck turn out to be a quantifiable value can have some profound philosophical questions if you really think about it.

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