Mish on deflation

[MoonShadow]

This is a fallacy. People will always buy what they need, which puts a floor under any deflationary spiral. In the current system people are encouraged to consume for the sake of consumption, buying what they don't need, and worse, borrowing to do it. With a sound monetary system borrowing would be done for purposes of new and increased production - driven by legitimate market forces (not excessive FRB and CB-spiked money creation).

Further. Bitcoin is not even a deflationary currency. It just inflates at a smaller and smaller rate. The inflation rate in Bitcoin right now is about 11%, which is larger than any real GDP growth! Eventually it will be less than real GDP growth, but even then, lower prices and wages will not reduce living standards.

All you are doing is thumping on the same bitcoin bible. People can't buy what they need if they don't have jobs. Consumerism, as I stated, is mostly irrelevant and is only good for distracting from the real topic regarding what effects deflation will have on investment and job creation. And arguing about what the word deflation means is the typical bitcoinomics cherry on top.

This is a modern myth as well.  There are other means to an income than what might be called a "job".  A great many people still make their own way in this country without ever submitting to an hourly wage.  This is a small minority of people, mind you, but a much larger minority of people are well accustomed to earning some portion of their income outside of the hourly wage paradigm. Furthermore, what he says is technically true, Bitcoin won't be remotely deflationary within any of our expected natural lifespans.  It's dramatic price increases are due entirely to a speculative assumption of future economic growth upon a fairl ridgid monetary base, but one that isn't properly called deflationary.  This is a growth stage, not a feature of Bitcoin itself.

[MoonShadow]

I would make the point that saving assets that appreciate in value is not immoral, while saving a currency and gaining purchasing power is.

Assets and money (not currency) have value

Currency has no value, but is a representation of value. Similar to the way that an inch has no length but represents length. Holding currency and gaining value is like holding an inch and gaining length.     

The author of Cryptocromicon put it another way that I think is better.  Paraphrasing, currency is not wealth, but the corpse of wealth.

[MoonShadow]

MoonShadow:  Your straying into a petulant tone which is uncalled for, when you misrepresent what someone is saying you apologize, you don't try to blame them and throw down the gauntlet as you just did.  Debate people respectfully and you'll get a lot more fruitful of a discussion.

Etlase2 and I have a history of misrepresenting one another.  I'm trying to catch up here.

P.S.  The 'mild deflation' definition being the reciprocal of what we consider mild inflation ~2% seems reasonable.  I don't have any faith that BTC would every reach that rate, but I'm sure it would never have any real economic usage until it DOSE reach that level or less.

Okay, your perspectives are your own, and should inform your actions.  Mine are different on this topic, and I will have different actions as a result.  Both of us can't be right, but neither of us can know that we are correct until the future is past.  As has been noted, however, Bitcoin isn't deflationary by any fundamental feature for at least 100 years; and it's current price growth is limited to it's potential market size, which cannot exceed the whole of the Earth.  At some point it must reach maturity, and once it does it's year on year price variance shouldn't exceed +-2%.  At least, it's no more likely to do so than any large national fiat system, for those fiat currencies vary so much as a direct result of their inflationary target goals.

[Wekkel]

Impaler, I appreciate your explanation on the entrepreneur's view and getting more money in his hands. Could you also explain why the 'loss' of others (savers, etc) seems to be ignored? Second, should investing not be backed by savings? If so, would lowering interest rates not lower savings while, contradictionary, entrepeneurs think there are abundent savings?

[Kreigyr]

I've been rather happy to buy things with my finite amount of Bitcoins simply because of the deflation. I used them on the ride up at around 400$. I used them near the peak at 1200$. I used them at the bottom at about 500$. I used them yesterday at 700$.

Would I in a bear market? Possibly. It all depends on how much of my total wealth I'm expending to buy an album or seven. It has nothing to do where the price is going, but only where it is.

My 8$ and some change.

I have no clue what you are trying to say. When you say "simply because of the deflation" what are you talking about? Are you saying you used your coins because the price went down? 

I admit that may have been a little vague. The recent rises in prices have increased the value of my holdings and therefore allow me to buy things with smaller percentages of my holdings. It's substantially more convenient for me to buy certain things using Bitcoin versus USD, and because my buying power with Bitcoin has gone up I don't need to use as much of my total stash to buy, say, gifts for xmas.

[sublime5447]

I've been rather happy to buy things with my finite amount of Bitcoins simply because of the deflation. I used them on the ride up at around 400$. I used them near the peak at 1200$. I used them at the bottom at about 500$. I used them yesterday at 700$.

Would I in a bear market? Possibly. It all depends on how much of my total wealth I'm expending to buy an album or seven. It has nothing to do where the price is going, but only where it is.

My 8$ and some change.

I have no clue what you are trying to say. When you say "simply because of the deflation" what are you talking about? Are you saying you used your coins because the price went down? 

I admit that may have been a little vague. The recent rises in prices have increased the value of my holdings and therefore allow me to buy things with smaller percentages of my holdings. It's substantially more convenient for me to buy certain things using Bitcoin versus USD, and because my buying power with Bitcoin has gone up I don't need to use as much of my total stash to buy, say, gifts for xmas.

See you are just proving the point... you spent your coins because they went up in value, which means you didnt spend them when you believed that there was gonna be a run up in the price. Economies can function like that, people cant seize up the economy because they think that the currency is going to increase in purchasing power. Currency is the medium of exchange it is not the exchange itself. It is just a piece of paper, or a digit in a computer it has no value. 
 

[Kreigyr]

I've been rather happy to buy things with my finite amount of Bitcoins simply because of the deflation. I used them on the ride up at around 400$. I used them near the peak at 1200$. I used them at the bottom at about 500$. I used them yesterday at 700$.

Would I in a bear market? Possibly. It all depends on how much of my total wealth I'm expending to buy an album or seven. It has nothing to do where the price is going, but only where it is.

My 8$ and some change.

I have no clue what you are trying to say. When you say "simply because of the deflation" what are you talking about? Are you saying you used your coins because the price went down? 

I admit that may have been a little vague. The recent rises in prices have increased the value of my holdings and therefore allow me to buy things with smaller percentages of my holdings. It's substantially more convenient for me to buy certain things using Bitcoin versus USD, and because my buying power with Bitcoin has gone up I don't need to use as much of my total stash to buy, say, gifts for xmas.

See you are just proving the point... you spent your coins because they went up in value, which means you didnt spend them when you believed that there was gonna be a run up in the price. Economies can function like that, people cant seize up the economy because they think that the currency is going to increase in purchasing power. Currency is the medium of exchange it is not the exchange itself. It is just a piece of paper, or a digit in a computer it has no value. 
 

My mindset, before, was that buying the same stuff that I did (~650$ of gifts) would have cost me an entire quarter of my holdings in Bitcoins. Now, that 650$ was barely even a fourtieth of it. The thought that it might go up has nothing to do with it, as right now I full expect my holdings to be worth atleast ten times what they are now within a few years, and possibly ten times that in a few more.

[Hideyoshi]

+100 you gotta be a special kinda retard to equate falling prices that are result of greater efficacy and new technology with falling prices that are a result of a deflationary currency..

If argument is that in deflation, people will wait to spend, then why would people not wait to spend if they know tomorrow they can buy newer more efficient technology? Is there difference between waiting to buy because of new more efficient technology, and waiting to buy because of falling prices? Your statement implies lower price is bigger incentive to wait than new more efficient technology.

[Hideyoshi]

Would you care to provide any evidence to back this up rather than idle and wanton speculation? Because small businesses tend to operate on very strict amounts of capital, cash flow that is almost universally derived from credit. Small businesses tend to balance a very fine line between profitability and bankruptcy. Mild deflation (you imply here that bitcoin would have mild deflation, based on what? and what do you consider to be mild?) that is just a smidgen more than expected can and will cause a slew of bankruptcies. There is simply no other way. You cannot have credit in a deflationary economy without bankruptcy being the equalizer. There simply will not be sufficient money to pay off debts without an equivalent and unsustainable increase in velocity. You could argue then that those businesses did not deserve to survive, and in effect you are arguing against small business and for large business where costs can be reduced as economies of scale take precedence. You could argue that small businesses should not run on credit, but then I'd just have to laugh at how little you understand the real world.

I want to know,
right now, business B buys product from business C, and promises to pay back business C in 30 days. Then business B sells product to business A, and A promises to pay back business B in 30 days.

So we have product front loaded, and money settled at end of 30 days

Why can it not be in other direction?
Business B pays business C, C promises to deliver product within some days. Business A pays business B, business B promises to deliver product to business A within some days.

I know there is argument that business A, which sells directly to customers, does not need to have money first, and can make money from customers, but this means that business B is investing (speculating) in business A success, and business C, and all before it, have to invest in business A too. Also, first money from product has to come from somewhere, since business C can not just make product from nothing. So really this chain is
Bank (where money is borrowed) -> Business C (uses money to make product) -> Business B -> Business A -> Customers
then 30 days later, money goes from customers to A to B to C to bank.
If this was in other direction, money would be saved or borrowed by A, which would buy from B, then B would buy from C, and B and C are not investing or speculating. They have money, and A, which is selling to customers, is only one doing the borrowing or saving.

Sorry if this is hard to read. I hope you understand. Can you tell me why this won't work, or will work but is worse?

[Kreigyr]

+100 you gotta be a special kinda retard to equate falling prices that are result of greater efficacy and new technology with falling prices that are a result of a deflationary currency..

If argument is that in deflation, people will wait to spend, then why would people not wait to spend if they know tomorrow they can buy newer more efficient technology? Is there difference between waiting to buy because of new more efficient technology, and waiting to buy because of falling prices? Your statement implies lower price is bigger incentive to wait than new more efficient technology.

Sometimes I want things now, and this magical buying power could take a year to double.

[Hideyoshi]

But when you look from the perspective of the entrepreneur you see how this falls apart.  The entrepreneur in a capitalist society has to borrow money to make purchases of capitol goods and that means the interest rate is a KEY factor in determining how much money entrepreneur will be lent.  Some entrepreneur will have highly profitable ideas/opportunities some will have less, a whole spectrum will exist but only the entrepreneur with an expected return above the rate of interest will be funded.

I am wondering who is really entrepreneur in our economy, people with good ideas, or banks? It is banks with money who give loans who do all investing, not entrepreneurs. So I am wondering why banks, or in deflationary, savers with lots of money, can not themselves be entrepreneurs. This is like difference in customers borrowing to spend versus saving to spend.

Inflationary (pay = pay for loan)

buy --- buy --- buy --- buy --- buy --- buy
        pay --- pay --- pay --- pay --- pay


Deflationary (pay = put money into saving)

        buy --- buy --- buy --- buy --- buy
pay --- pay --- pay --- pay --- pay --- pay


At beginning there is difference, but after it is same buy and pay.

[Hideyoshi]

Bitcoin isn't deflationary by any fundamental feature for at least 100 years; and it's current price growth is limited to it's potential market size, which cannot exceed the whole of the Earth.  At some point it must reach maturity, and once it does it's year on year price variance shouldn't exceed +-2%. 

As I am catching up. I come to another question. If currency amount is stable, then inflation and deflation (in currency value) will mainly be function of growth of total economy, no? As economy grows, more goods chase less money, so money goes up in value. If true, does this not mean that if there is too much deflation, it is because economy is growing fast, and if deflation makes businesses fail and jobs go away, then economy will slow down, and so will deflation?

[Wekkel]

As I am catching up. I come to another question.

You are close to realising it is ridiculous to pursue price stability.

[Hawker]

+100 you gotta be a special kinda retard to equate falling prices that are result of greater efficacy and new technology with falling prices that are a result of a deflationary currency..

If argument is that in deflation, people will wait to spend, then why would people not wait to spend if they know tomorrow they can buy newer more efficient technology? Is there difference between waiting to buy because of new more efficient technology, and waiting to buy because of falling prices? Your statement implies lower price is bigger incentive to wait than new more efficient technology.

The problem is that we don't know if deflation is really that bad a problem.  The only modern example available to us is Japan where deflation has been around for 20 years now.  Japanese society is having a demographic crisis caused by low birth rates.  If your population is going to fall by over a third over the next generation, the value of houses and land will also fall since there is too much.  So the Japanese domestic economy is theoretically screwed and empirically we can see deflation has taken root there.  

Yet the Japanese have low unemployment and a great standard of living.  For example, there are more Michelin star restaurants on Tokyo than most other cities.  I don't know of any way in which life in Japan could be said to be worse than life in the UK or US.  

One could be forgiven for wondering whether deflation is really such a bad thing?

[solex]

Bitcoin isn't deflationary by any fundamental feature for at least 100 years; and it's current price growth is limited to it's potential market size, which cannot exceed the whole of the Earth.  At some point it must reach maturity, and once it does it's year on year price variance shouldn't exceed +-2%.  

As I am catching up. I come to another question. If currency amount is stable, then inflation and deflation (in currency value) will mainly be function of growth of total economy, no? As economy grows, more goods chase less money, so money goes up in value. If true, does this not mean that if there is too much deflation, it is because economy is growing fast, and if deflation makes businesses fail and jobs go away, then economy will slow down, and so will deflation?

With a stable monetary base GDP growth causes deflation in prices and wages (although I suspect that in 50 to 100 years technology will have eliminated most jobs). I think this will cause a balanced economy which functions far smoother than the world economy we see today with massive systemic dislocations.

Another point is that although bitcoins are finite, cryptocurrency is infinite. So, market forces would compel litecoin and others to fill the gap in the monetary base if bitcoin is insufficient and the deflationary pressures really are as doom and gloom as some predict.

[MoonShadow]

Bitcoin isn't deflationary by any fundamental feature for at least 100 years; and it's current price growth is limited to it's potential market size, which cannot exceed the whole of the Earth.  At some point it must reach maturity, and once it does it's year on year price variance shouldn't exceed +-2%. 

As I am catching up. I come to another question. If currency amount is stable, then inflation and deflation (in currency value) will mainly be function of growth of total economy, no? As economy grows, more goods chase less money, so money goes up in value. If true, does this not mean that if there is too much deflation, it is because economy is growing fast, and if deflation makes businesses fail and jobs go away, then economy will slow down, and so will deflation?

Well, it depends upon on which definition of deflation you're using.  But you are certainly thinking correctly about the general mechanisms at play.

[MoonShadow]

So, market forces would compel litecoin and others to fill the gap in the monetary base if bitcoin is insufficient and the deflationary pressures really are as doom and gloom as some predict.

Added to this, the upper bound of Bitcoin's velocity is quite high, which can have a similar effect to inflation as the average velocity increases.

[Impaler]

Impaler, I appreciate your explanation on the entrepreneur's view and getting more money in his hands. Could you also explain why the 'loss' of others (savers, etc) seems to be ignored? Second, should investing not be backed by savings? If so, would lowering interest rates not lower savings while, contradictionary, entrepeneurs think there are abundent savings?

I'm not sure what 'loss' on the part of savers your asking about?  You might be assuming that because I'm against deflation I'm FOR inflation, a common misconception.  I am for a something a bit different a demurrage concept that reduces all money held nominally rather then in value, this keeps prices stable while still providing a similar cost to holding money.  Now why should money have a holding cost you say?

Liquidity, money by it's nature has the ability to immediately become any other asset and we call that liquidity, it is a VERY valuable quality and when you hold money you enjoy this 'wild card' up the sleeve, you can take advantage of almost any opportunity in the market and avert most calamities.  People will even PAY you to borrow that liquidity for a period of time.  Savers don't create liquidity, that's created by the people who are still doing transactions or in a modern state the legal tender laws mandate the liquidity of the national currency.  As savers aren't creating value I don't believe they are entitled to receive payments.  Thus the demurrage payment which should ideally equal the gain from interest, thus the saver will have their original purchasing power preserved but not increased.

As for investment through savings, I have nothing against this and didn't even mention it because it really is no different from borrowing to invest.  If I have money already (lets say $100) and an idea then I'm a self capitalized entrepreneur and I don't pay anyone interest.  But I still have the Opportunity Cost of not having collected interest on that money I used.  If interest rates are 5% I could have put my money in a bank and collected $5 in a year to have $105.  If my $100 investment return 6% then I now have $106 and my whole investment has only made me $1 richer then if I had done the best alternative.  Now if I have nothing and borrow the money, make the same return and pay the interest back I'd have made in the end $1, exactly the same profit and the same incentives.

As for lower interest rates discouraging savings, and what entrepreneurs perceive the amount of savings to be.  This whole question seems to be premised on it being 'BAD' if their is some mismatch between the amount of money saved and the amount invested, when what we need to worry about is the absolute level of investment not investment relative to savings.  These two quantities saving and investments do not need to be equal and indeed are usually unequal.  In a modern economy invested money dose NOT come from savings, savings may help to determine interest rates but the lent money is usually credit, so it is perfectly possible for investments to exceed savings, just as it's possible for savings to exceed investment.

[Impaler]

But when you look from the perspective of the entrepreneur you see how this falls apart.  The entrepreneur in a capitalist society has to borrow money to make purchases of capitol goods and that means the interest rate is a KEY factor in determining how much money entrepreneur will be lent.  Some entrepreneur will have highly profitable ideas/opportunities some will have less, a whole spectrum will exist but only the entrepreneur with an expected return above the rate of interest will be funded.

I am wondering who is really entrepreneur in our economy, people with good ideas, or banks? It is banks with money who give loans who do all investing, not entrepreneurs. So I am wondering why banks, or in deflationary, savers with lots of money, can not themselves be entrepreneurs. This is like difference in customers borrowing to spend versus saving to spend.

Inflationary (pay = pay for loan)

buy --- buy --- buy --- buy --- buy --- buy
        pay --- pay --- pay --- pay --- pay


Deflationary (pay = put money into saving)

        buy --- buy --- buy --- buy --- buy
pay --- pay --- pay --- pay --- pay --- pay


At beginning there is difference, but after it is same buy and pay.

In a sense yes, bankers and entrepreneurs are together doing all investments and my earlier comments on opportunity cost show that it doesn't matter WHO is providing the money, the interest rate gives the same incentive to DO or not do the investment if it is with borrowed money or your own money because the interest rate is for EVERYONE in an economy including the entrepreneur, it is as they say the most important price in the whole economy.

Your whole description of inflation and deflation in terms of 'pay in advance' vs 'pay after' is missing the point.  Every possible investment activity involves turning liquid money into illiquid goods and then back into (hopefully) more money MANY MANY times in the course of a year, ideally as fast as you possibly can.  The distinction of starting with your own money from savings or with loaned money is irreverent.  What matters is your internal rate of return vs your interest rate.  You must exceed interest rates to be considered 'a good investment' even if your self capitalized.

[Impaler]

The problem is that we don't know if deflation is really that bad a problem.  The only modern example available to us is Japan where deflation has been around for 20 years now.  Japanese society is having a demographic crisis caused by low birth rates.  If your population is going to fall by over a third over the next generation, the value of houses and land will also fall since there is too much.  So the Japanese domestic economy is theoretically screwed and empirically we can see deflation has taken root there.  

Yet the Japanese have low unemployment and a great standard of living.  For example, there are more Michelin star restaurants on Tokyo than most other cities.  I don't know of any way in which life in Japan could be said to be worse than life in the UK or US.  

One could be forgiven for wondering whether deflation is really such a bad thing?

The Japanese economy over the last 20 years is considered catastrophic for good reason.  That nation had a growth curve like a bat-out-of-hell and has now under performed so badly and for so long that it's GDP is now HALF what it was anticipated to be by now.  Neighboring nations like South Korea which were far behind Japan have nearly reached parity in PerCapita GDP and if things continue will PASS them.  That is like the US being Passed in PCGDP by MEXICO.  No person in Japan will describe the last 20 years as anything but an economic disaster.

Your correct that Japanese SOCIETY has not crumbled, but that is because the Japanese have one of the most resilient social structures on Earth and a VERY extensive welfare state that's kept people out of poverty.  Just because they haven't been broken dose not mean they are not stressed and 'in a bad place' with the present economy.

Lastly, if your arguing that deflation only occurs when a society is already 'screwed' by demographics or other calamities that eliminate or reduce the potential for future growth then why did the US experience it so frequently in periods that deflation defenders like yourself describe as high-growth such as after the CivilWar?  Japan had and still has an export based economy, NOT one based on internal consumption, their demographic problems present a challenge but they are not a fundamental limiter of their growth when automation is everywhere, the total world trade continued to grow after Japan stagnated, and their is no reason that Japan could not have continued to at least maintain if not grow it's share of that market had it continued to be healthy.