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Author Topic: RFC: Deflationary Spiral Wiki Article  (Read 1761 times)
kiba
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December 17, 2010, 01:49:30 AM
 #1

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.

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grondilu
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December 17, 2010, 02:14:14 AM
 #2

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
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December 17, 2010, 02:22:41 AM
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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
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December 17, 2010, 02:24:03 AM
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Um, it's a bitcoin wiki article, not wikipedia.

Oh, my bad  Smiley  :embarassed:
MoonShadow
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December 17, 2010, 05:53:52 AM
 #5

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.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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December 17, 2010, 05:57:04 AM
 #6

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.'

One off NP-Hard.
kiba
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December 17, 2010, 06:02:26 AM
 #7

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
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December 17, 2010, 06:23:05 AM
 #8

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
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December 17, 2010, 09:28:47 AM
 #9

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
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December 18, 2010, 04:45:42 PM
 #10

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
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December 18, 2010, 05:58:46 PM
 #11

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

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

I'm selling Mt. Gox USD and Bitcoin for cash, check or money order in the mail: http://bitcoinmorpheus.tumblr.com/

Check out my 100% decentralized P2P exchange: https://github.com/macourtney/Dark-Exchange
kiba
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December 18, 2010, 09:48:15 PM
 #12

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?

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