Economics questions

[sisenor]

While bitcoin is deflationary over the long-term, is it appropriate to say there is inflation in the short-term?  That is, while new bitcoins are being generated until 2140, is this addition to the money supply causing a degree of inflation?  This is my friend's question.  I told him I believe that any level of inflation is just slightly slowing the price increase of bitcoin and that, even during this period, the net effect is still that bitcoin is deflationary.  I don't have the economics background to answer him better.  That's why I'm hoping for someone with more econ background to help me out here.

Actually, this leads me to ask a second question: what is the general defense to economists' general argument against deflation as it relates to bitcoin.  How are people incentivized to spend, rather than hoard bitcoins?  Thanks!

[jpdoctor]

Actually, this leads me to ask a second question: what is the general defense to economists' general argument against deflation as it relates to bitcoin.  How are people incentivized to spend, rather than hoard bitcoins? 

It's pretty analogous to gold.  Gold & silver used to be valid currencies, then gold-backed and silver-backed currencies, and now plain fiat currencies are the method of daily exchange.

So in short, people are not incentivized, which is why economists on balance don't believe it is a currency that is worth a damn.

The usual quote that goes along with this is Gresham's Law:  http://en.wikipedia.org/wiki/Gresham's_law

[Mastergerund]

I think Gresham's Law is a valid point, and may explain a great deal of the rampant hoarding. Bitcoin is by far a better currency than anything else out there (as a store of value), so you hoard that and spend the lesser currencies, like dollar, euro, etc.

[DannyHamilton]

While bitcoin is deflationary over the long-term, is it appropriate to say there is inflation in the short-term?  That is, while new bitcoins are being generated until 2140, is this addition to the money supply causing a degree of inflation?  This is my friend's question.

Yes.  At the moment the total currency SUPPLY is inflationary, while prices continue to be deflationary.  Deflation in pricing can be caused by a decrease in supply OR by an increase in demand.  In this case that deflation in pricing is being caused by an increase in adoption and demand.  This is where there is confusion.  Unfortunately the terms inflation and deflation can be used both to mean a change in supply (printing more money is an inflation in supply), or a change in demand.  The inflation of the bitcoin supply is dampening the deflationary forces on pricing.  In other words, if the supply wasn't inflating as much, we'd see even higher deflation of pricing.

At some point the quantity of newly created bitcoin will be less than the quantity of bitcoin lost and destroyed in any given timeframe.  At that point we can consider the supply to be deflationary.  This *may* lead to deflationary pricing, but there is potential that various technologies and economic forces could lead to inflation in pricing even while the supply is deflating.  It will be interesting to see how it all plays out.  It will probably be a decade or two before we start to see any sort of deflation of supply.  Perhaps even longer.

Actually, this leads me to ask a second question: what is the general defense to economists' general argument against deflation as it relates to bitcoin.  How are people incentivized to spend, rather than hoard bitcoins?  Thanks!

You need to spend to survive.  You buy things when you want them regardless of what future prices are likely to be. I don't buy bread today because I'm afraid it will cost more tomorrow.  I buy bread today because I need to eat and I'm out of bread.  New technologies frequently drop in price over time, and yet people still buy the various products knowing that they will be cheaper later, because they want it now.