RFC: Deflationary Spiral Wiki Article

[kiba]

I created an article for a common criticism of bitcoin, which is the deflation going to explode the currency. https://en.bitcoin.it/wiki/Deflationary_spiral

I would like some comments on something I got wrong, or perhaps how I got the argument wrong. I also would like other users to contribute their knowledge about this debate.

[1715219380]

1715219380

[1715219380]

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[grondilu]

I created an article for a common criticism of bitcoin, which is the deflation going to explode the currency. https://en.bitcoin.it/wiki/Deflationary_spiral

I would like some comments on something I got wrong, or perhaps how I got the argument wrong. I also would like other users to contribute their knowledge about this debate.

This article will probably be removed, for it has no reference whatsoever.  It very much looks like original work, which is forbidden in wikipedia.

You might consider write it in an other wiki, such as wikiberal.

[kiba]

This article will probably be removed, for it has no reference whatsoever.  It very much looks like original work, which is forbidden in wikipedia.

Um, it's a bitcoin wiki article, not wikipedia.

[grondilu]

Um, it's a bitcoin wiki article, not wikipedia.

Oh, my bad    :embarassed:

[MoonShadow]

I have a gripe.

The 'deflationary spiral' cannot lead to the destruction of a currency, regardless of the theory of time preferences.  Because, by definition, if the currency is a continuing state of deflation, the relative per unit value is increasing compared to it's per unit purchasing power.  This can only happen if the faith in the value is high and increasing.  Currencies never collapse this way, at least they never have in the past.  Currencies fail due to a general loss of faith in the promises of the issuing agency of a given currency, and by proxy the currency itself.  This results in the condition commonly called 'hyperinflation', because everyone has lost faith in the future of the currency, and will attempt to spend what of it that they have in exchange for whatever real goods are available.

[da2ce7]

Often coupled with 'stagflation' when the economy is stagnating, so the economy cannot support the the new printed currency.

Providing the bitcoin economy size is directly related to the price of bitcoin, the fundamentals are sound.  There isn't any chance of this so-called 'Deflationary Spiral.'

[kiba]

Blah, I don't make that argument. Silly people who think bitcoin is going to collapse because of deflationary growth do. So, there's the article.

Feel free to add your content to the counterargument section.

[grondilu]

Blah, I don't make that argument. Silly people who think bitcoin is going to collapse because of deflationary growth do. So, there's the article.

Feel free to add your content to the counterargument section.

Recently I heard an interesting point of view concerning the Hunt brothers's attempt to corner silver.

So they were carefully hoarding silver in switzerland.  At the beginning, everything went fine.  Silver price was surging from a few dollars to about 30$ an once.

Problem was that at some point, silver was beginning to be scarce in the world, and the Hunt brothers were trapped because everybody understood what was happening.  They had a huge amount of silver that was theoretically priced at 30$/once.  But they just could not sell it at this price, because if they want to do so, they'd have to give their silver away and then the price would drop dramatically.

That's the good thing about fixed aggregate money :  in order to benefit from it, you have to give it away.  Therefore a corner is generaly harmless.

[hugolp]

Usually proponents of the deflationary spiral argue that the problem is the debt, as explained by Fisher in its debt deflation paper (which by the way I found quite infantile). I dont think anybody is arguing that decrease in prices due to increase productivity is a problem (well some fanatics might, but not any serious economist).

About the debt problem is quite obvious that if a recession comes and the companies or individuals are highly leveraged, the downturn is going to be harder than if they dont have debt or have little debt. You really dont need a 20 pages paper to explain that. Also, there is the issue of the debt being used as money and when disappearing creating monetary deflation, but this strengthens the currency, it does not collapse it. It can create problems in he economy, mainly because there is usually an increase in the demand for cash, but since bitcoin is a voluntary currency, and not a monopoly with a oligopolistic credit system like the government currency, the deflationary presures can be dealt by the market.

[cartman]

Providing the bitcoin economy size is directly related to the price of bitcoin, the fundamentals are sound.  There isn't any chance of this so-called 'Deflationary Spiral.'

Totally agree.
I think the Deflationary Spiral is a problem of fractional reserve banking. There might be deflation (or inflation) (without a spiral!) if expectations about the bitcoin economy size (or growth) change. Expectations about the amount (and growth) of bitcoins are fix.
Also note, that there is at the moment no inflation due to the generation of bitcoins, since the speed of generation and the maximum number is known and therefore already "priced in" at present.
Likewise, the distant future "deflation" is already priced in today.

[morpheus]

I've expanded the explanation of deflationary spiral, and cleaned up the grammar a bit.

https://en.bitcoin.it/wiki/Deflationary_spiral

[kiba]

Thanks for the contribution, Morpheus. With all the effort taken to write replies here, maybe some of that can be contributed back to the wiki article?