DEFLATION GETS A BAD NAME

[dynodog]

I am still trying to figure out why deflation is so bad. My understanding is that the late 1800s were deflationary and times were considered very good. The Depression was caused by huge borrowing and leverage during the 1920s, which caused problems naturally when unwound. My biggest problem with even a 2% annual inflation is that it literally transfers wealth from the middle class and poor to the rich. If you own assets like stocks and real estate, you literally make money for nothing. The middle class and poor, who don't have wealth, lose money every year for no reason simply bc now they have to pay more for daily living expenses. Why is it fair to transfer that wealth to the rich? No one has ever provided a satisfactory answer to that basic question. It seems a slightly deflationary environment would be best for society as a whole. I don't buy the idea that people will hoard money bc the price will be lower. So you're not going to buy a $1000 tv today bc you can buy it for $990 next year? That would mean that no one was buying computers and flat screen tvs as the prices declined in value.

[Kungfucheez]

No ones provided the answer you seek because there is no answer. It's a debatable topic that has been discussed since before you were born.

But usually inflation indicates an economy is growing, however too much inflation or hyperinflation is of course very bad. But it's such a broad topic that it can be discussed in length. Deflation is not necessarily a good thing either. Generally the accepted agreement is to keep inflation and deflation on an even keel, usually around the 2%-3% inflation per year and same with deflation. But inflation effects different people in different ways

[Lloydie]

I am still trying to figure out why deflation is so bad. My understanding is that the late 1800s were deflationary and times were considered very good. The Depression was caused by huge borrowing and leverage during the 1920s, which caused problems naturally when unwound. My biggest problem with even a 2% annual inflation is that it literally transfers wealth from the middle class and poor to the rich. If you own assets like stocks and real estate, you literally make money for nothing. The middle class and poor, who don't have wealth, lose money every year for no reason simply bc now they have to pay more for daily living expenses. Why is it fair to transfer that wealth to the rich? No one has ever provided a satisfactory answer to that basic question. It seems a slightly deflationary environment would be best for society as a whole. I don't buy the idea that people will hoard money bc the price will be lower. So you're not going to buy a $1000 tv today bc you can buy it for $990 next year? That would mean that no one was buying computers and flat screen tvs as the prices declined in value.

You are right, it is not fair to transfer wealth to the rich. Deflation is the cure to that outcome.

The problem is that central banks and banks in general have profited from the current inflationary system. They keep everyday inflation at around 2% so the masses don't revolt but they inflate asset prices by as much as possible. Last year share prices in the US was inflated up by over 20%!

This widens the gap between the rich and poor, PERMANENTLY.  The gini coefficient for inflationary monetary systems is rising all the time. The banking sector is growing as a percentage of GDP and has done so for the last two decades.

Gen Ys are getting completely screwed. This is why Bitcoin is such a great monetary system if you are young and don't own significant assets in the fiat money system. With Bitcoin, your spending power cannot be inflated away.

Although fiat money systems are less volatile over short periods, they produce massive crashes after a few years due to credit imbalances. That is no way to run stable economies. Avoiding short term economic pain by increasing debt is tremendously short sighted and counterproductive in the long run.

I choose to save in Bitcoin because central banks and fiat money cannot be trusted.  Every such system in history has eventually collapsed. I much prefer a decentralised monetary system with predictable outcomes.

[Lloydie]

The op is also 100% right about cheaper goods making people wanting to spend more.

The velocity of money has been falling in the US despite the US Fed Reserve printing $4 Trillion and creating 2% inflation.

Cheaper goods are a good thing because it means society is more productive.

Useless speculation in assets such as property and shares are not productive and should not be counted as part of real economic growth. It is speculation.

The current monetary system forces people to borrow money and speculate on useless economic activities. This is a huge waste of our economic resources.

[Kungfucheez]

The op is also 100% right about cheaper goods making people want to spend more.

The velocity of money has been falling in the US despite the US Fed Reserve printing $4 Trillion and creating 2% inflation.

Cheaper goods are a good thing because it means society is more productive.

Useless speculation in assets such as property and shares are not productive and should not be counted as part of real economic growth. It is speculation.

The current monetary system forces people to borrow money and speculate on useless economic activities. This is a huge waste of our economic resources.

Well now that all depends on who we're talking about in this situation. Sure, the consumer has stronger purchasing power and they might benefit, but businesses rely on profit margins to operate and maintain themselves. Stronger purchasing power means the value of a good or service must go down, limiting the profits a company can make from selling a good or a service.

[Lloydie]

Well now that all depends on who we're talking about in this situation. Sure, the consumer has stronger purchasing power and they might benefit, but businesses rely on profit margins to operate and maintain themselves. Stronger purchasing power means the value of a good or service must go down, limiting the profits a company can make from selling a good or a service.

With corporate profits in the US at record levels as a percentage of GDP and relative to workers wages, I'm not too worried about corporates. Anyway, who ultimately owns corporates? The wealthy people who own shares. Please queue the sound of the world's tiniest violin if corporate profits go down.

Further, the financial sector as a percentage of US GDP is at all time high levels. How can this be after the biggest debt debacle since the Great Depression? Makes me sick to the stomach.

The price of goods and services need to come down so ordinary people can survive.

[FenixRD]

Whether inflation or deflation are inherently good or bad, and I suspect that there are times in a natural, unimpeded market where both may be necessary, here's all you need to know about the inflation we currently have:

"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some."

Who said that? John Maynard Keynes. Don't tell the Keynesians.

Keynes said this referring to his recommendation against return to the gold standard, where banknotes were not fiat just yet, but promissory: say, $25 in banknotes is a promise by the government to allow exchange for $25 in gold, and that was set too, at say 1 ounce. The trouble is, the government could also change the fix: $28 per ounce, $32 per ounce. Read about the dollar devaluation against gold in the Nixon administration. Keynes warned against it in the 20s. (They eventually gave up and said, screw it, the dollar is now pure fiat.)

Thus, contrary to popular "villain vs. hero" notions around Bitcoinland, Keynes' ideas weren't necessarily wrong. People who apply bits and pieces of his work often are. Bernanke likes Bitcoin. Bernanke's a Keynesian. There are no purely evil villains, and sadly no purely... pure heroes. The world is complicated, and often, so complicated that people can have seemingly contradictory beliefs without knowing it.

Anyway, inflation has been historically preferred to deflation because deflation could historically spiral out of control, whereas inflation could easily be managed (if the managers behaved nicely). A little bit like a car, you can powerslide going forward in a RWD car if you know what's up, but you cannot powerslide in reverse in a FWD car because you lose the ability to steer once you break traction. Yeah, that's my analogy. I've been watching House reruns. I'm in an analogy mood.

With all previous systems of value transfer, the the inertia of V was very high, and it resisted change, thus economic fluctuations manifested in lower-inertia variables first. If M quickly was rising, k rose and P fell. You had to go places, withdraw, spend, get change, carry gold or notes or coins, cheques take days to clear. With Bitcoin, the inertia of V is so low, that the deflationary spiral likely does not exist.

Like... Driving a car in a video game with a very choppy frame rate, vs. one with a fluid one. Maybe the car can drift in reverse after all, but it's tricky and you need a high frame rate and fast reaction time to pull it off.

But seriously, about the inertia: This is new stuff that isn't in the Cambridge equation, because I invented it. It's being analyzed and reviewed before being published. But, this is my contribution to the body of economics. I believe it is correct, and more accurate than its forbears.  

And I believe it explains with math, something we inherently know to be true: Deflation is not a flaw in the Bitcoin system.

[Lloydie]

Minsky might disagree. He posited that all debt based systems would eventually end in disequilibrium. So far, the evidence supports Minsky. In my view, he deserves the Nobel prize in econs (yes I know there isn't one really).

2% inflation in a fractional reserve banking system that is able to create credit money out of thin air is dangerous. The lobbying power of the financial sector will always push for more credit growth.

The results are plain to see: high asset prices. Widespread inequality. Financial crises every 7 to 10 years.

Now that the boomers are loaded up with assets for their retirement, you the Gen Ys will have to work your butt off to get a small slice of the action and in the process make the life of boomers more comfortable.

The boomers are a selfish generation. Bitcoin challenges this sick economic paradigm by decentralising the monetary system and removing the debt based inflation machinery.

Bitcoin is an option for those who aren't already invested in the old, sick system.

[FenixRD]

Minsky might disagree. He posited that all debt based systems would eventually end in disequilibrium. So far, the evidence supports Minsky. In my view, he deserves the Nobel prize in econs (yes I know there isn't one really).

2% inflation in a fractional reserve banking system that is able to create credit money out of thin air is dangerous. The lobbying power of the financial sector will always push for more credit growth.

The results are plain to see: high asset prices. Widespread inequality. Financial crises every 7 to 10 years.

Now that the boomers are loaded up with assets for their retirement, you the Gen Ys will have to work your butt off to get a small slice of the action and in the process make the life of boomers more comfortable.

The boomers are a selfish generation. Bitcoin challenges this sick economic paradigm by decentralising the monetary system and removing the debt based inflation machinery.

Bitcoin is an option for those who aren't already invested in the old, sick system.

No quoted response point so, I hope you don't mean me. I'd agree with Minsky. Further, debt-based systems as defined by Minsky cannot stably exist for the same reason that gravity must somehow propagate at high superluminal velocity: unstable orbits are predicted by a luminal propagation of gravitational force. So, even without knowing how, we can know that gravity cannot be subject to classical 3-dimensional relativity.  

The same is true with economics. It's unclear if Bitcoin-like systems are the solution, but they look a lot better than the incumbents. Those are provably unstable.

[zachcope]

In my view Keynsian economics has directly contributed to the worst excesses of excess consumption that has lead to oil wars, environmental catastrophe and personal obesity, diabetes and depression.

'Excess consumption' because there is no incentive to save and plan for ones 80+ years on this earth, as many 'progressive' governments reward the improvident and punish those who forgo consumption during their life in order to save for the future.

Current monetary and political systems have created a world of prodigal sons, who can only live by the grace of father state when they have exhausted their wealth.

[FenixRD]

In my view Keynsian economics has directly contributed to the worst excesses of excess consumption that has lead to oil wars, environmental catastrophe and personal obesit, diabetes and depression.

'Excess consumption' because there is no incentive to save and plan for ones 80+ years on this earth, as many 'progressive' governments reward the improvident and punish those who forgo consumption during their life in order to save for the future.

Current monetary and political systems have created a world of prodigal sons, who can only live by the grace of father state when they have exhausted their wealth.

Yup. I'm worried for Japan now. It'll take a while for the effects to fully take hold, but it's so sad.

[player01]

Deflation is just fine if you have lots of money and your job won't cut your pay rate, otherwise, it really sucks. It generally happens when you have no money floating around. What is worse is stagflation, which imo is what is going on in the US right now. Prices stay steady or slightly higher, but wages and ways to make money decrease... the worst of both worlds.

[Kungfucheez]

Deflation is just fine if you have lots of money and your job won't cut your pay rate, otherwise, it really sucks. It generally happens when you have no money floating around. What is worse is stagflation, which imo is what is going on in the US right now. Prices stay steady or slightly higher, but wages and ways to make money decrease... the worst of both worlds.

Stagflation is a serious problem, and the term was first used in the UK in the 1970's when they experienced an unprecedented series of rising prices and wage halts. Same occurred here in the States, and throughout the world as well during the 70's, and peaked about 79'-82'.

I wouldn't classify what is occurring now as stagflation, that implies inflation is very high, which currently it is not. Wages have also increased steadily as well.

[Lloydie]

Stagflation is where we are headed because central banks are trying to create inflation whilst unemployment is high.

70's stagflation was a different animal. That was driven by oil price increases due to the formation of OPEC. I'm disappointed in the amount of FUD against Bitcoin/deflation in this forum.

If I had my tinfoil hat on, I would think some people here might be working for government. I can't see why gen Ys and even Xers would want to support the fiat credit monetary system.

Not only are government workers inefficient, they get in the way of progress.

[Lloydie]

Deflation is just fine if you have lots of money and your job won't cut your pay rate, otherwise, it really sucks. It generally happens when you have no money floating around. What is worse is stagflation, which imo is what is going on in the US right now. Prices stay steady or slightly higher, but wages and ways to make money decrease... the worst of both worlds.

CEX.io supporter says it all.

Deflation is bad for low income earners because goods are getting cheaper? Ridiculous.

[joulesbeef]

first lol at stagflation dude. You always try to keep inflation up when UE is high.. that is the feds mission. and the theory of stagflation, is that the markets are responding to the feds measures and anything done to LOWER INFLATION.. would increase UE. It is normally caused by things like a spike in oil prices DURING a recession.. when they normally go down.. like we had in the 70s.(which was made worse by the central bank but only due to stagflation effects t hat make the economy respond opposite to traditional measures)


and both inflation or deflation in high degrees suck balls and we have seen it several times with BTC.. not sure why people cant grasp it.
society likes a stable currency.. with our capitalistic and growing population, a slight bit of inflation is preferred.


Inflation sucks, it makes people not want to sell. Why sell a car for 2,000 today, if you can get 4k tomorrow?


deflation sucks. Why buy a car for 2000 today, when you can get it for 1000 tomorrow.

BOTH CONCEPTS  HARM AN ECONOMY. as they slow down economic activity as people wait for stability before buying discretionary goods.

[Lloydie]

first lol at stagflation dude. You always try to keep inflation up when UE is high.. that is the feds mission. and the theory of stagflation, is that the markets are responding to the feds measures and anything done to LOWER INFLATION.. would increase UE.


and both inflation or deflation in high degrees suck balls and we have seen it several times with BTC.. not sure why people cant grasp it.
society likes a stable currency.. with our capitalistic and growing population, a slight bit of inflation is preferred.


Inflation sucks, it makes people not want to sell. Why sell a car for 2,000 today, if you can get 4k tomorrow?


deflation sucks. Why buy a car for 2000 today, when you can get it for 1000 tomorrow.

BOTH CONCEPTS  HARM AN ECONOMY. as they slow down economic activity as people wait for stability before buying discretionary goods.

A slight bit of inflation might be good but share prices rising more than 20% in 2013 is not good. Property prices rising more than 10% is not good.  Yes, that is your purchasing power being devalued.

Deflation I can live with. I'd buy a car for 2000 even if I could have it for 1000 tomorrow. The Norwegian guy who bought an apartment by selling his btcs proves this point. He sold at around $886 per btc knowing full well that btcs could rise further. He retained 80% of his btcs and spent 20%.

I like Btc being deflationary. It will prove that deflationary systems can work.

[Kungfucheez]

first lol at stagflation dude. You always try to keep inflation up when UE is high.. that is the feds mission. and the theory of stagflation, is that the markets are responding to the feds measures and anything done to LOWER INFLATION.. would increase UE.


and both inflation or deflation in high degrees suck balls and we have seen it several times with BTC.. not sure why people cant grasp it.
society likes a stable currency.. with our capitalistic and growing population, a slight bit of inflation is preferred.


Inflation sucks, it makes people not want to sell. Why sell a car for 2,000 today, if you can get 4k tomorrow?


deflation sucks. Why buy a car for 2000 today, when you can get it for 1000 tomorrow.

BOTH CONCEPTS  HARM AN ECONOMY. as they slow down economic activity as people wait for stability before buying discretionary goods.

A slight bit of inflation might be good but share prices rising more than 20% in 2013 is not good. Property prices rising more than 10% is not good.  Yes, that is your purchasing power being devalued.

Deflation I can live with. I'd buy a car for 2000 even if I could have it for 1000 tomorrow. The Norwegian guy who bought an apartment by selling his btcs proves this point. He sold at around $886 per btc knowing full well that btcs could rise further. He retained 80% of his btcs and spent 20%.

I like Btc being deflationary. It will prove that deflationary systems can work.

I'm sorry, but I don't understand. Why would anyone pay more for something today when they know it will be more affordable tomorrow? Why would you ever buy a car for $2000 when you could have it for half that price the next day? That makes zero sense.

Also regarding the guy who bought an apartment. That's all well and good, but that's pure speculation. That's not confidence buying, it's speculative investing. He can't be sure the price of btc will rise over time, he can't be sure if the price will fall, neither can the seller.  and joulesbeef is correct. Deflation you most certainly cannot live with if it is sustained over time. Same with hyper inflation. 

[Lloydie]

first lol at stagflation dude. You always try to keep inflation up when UE is high.. that is the feds mission. and the theory of stagflation, is that the markets are responding to the feds measures and anything done to LOWER INFLATION.. would increase UE.


and both inflation or deflation in high degrees suck balls and we have seen it several times with BTC.. not sure why people cant grasp it.
society likes a stable currency.. with our capitalistic and growing population, a slight bit of inflation is preferred.


Inflation sucks, it makes people not want to sell. Why sell a car for 2,000 today, if you can get 4k tomorrow?


deflation sucks. Why buy a car for 2000 today, when you can get it for 1000 tomorrow.

BOTH CONCEPTS  HARM AN ECONOMY. as they slow down economic activity as people wait for stability before buying discretionary goods.

A slight bit of inflation might be good but share prices rising more than 20% in 2013 is not good. Property prices rising more than 10% is not good.  Yes, that is your purchasing power being devalued.

Deflation I can live with. I'd buy a car for 2000 even if I could have it for 1000 tomorrow. The Norwegian guy who bought an apartment by selling his btcs proves this point. He sold at around $886 per btc knowing full well that btcs could rise further. He retained 80% of his btcs and spent 20%.

I like Btc being deflationary. It will prove that deflationary systems can work.

I'm sorry, but I don't understand. Why would anyone pay more for something today when they know it will be more affordable tomorrow? Why would you ever buy a car for $2000 when you could have it for half that price the next day? That makes zero sense.

Also regarding the guy who bought an apartment. That's all well and good, but that's pure speculation. That's not confidence buying, it's speculative investing. He can't be sure the price of btc will rise over time, he can't be sure if the price will fall, neither can the seller.  and joulesbeef is correct. Deflation you most certainly cannot live with if it is sustained over time. Same with hyper inflation.  

It's easy to understand that people will buy stuff more based on real needs rather than take out speculative loans to buy inflating assets, which is not real GDP growth.

As Norwegian guy's wealth approaches $40 Million (or $10,000 per Bitcoin), I guarantee you he will be spending Bitcoins even though Bitcoins might keep rising in value.  

Look at China OTOH.  Millions of empty apartments whilst poor people live in cramped basements and ghettos.  What a sick debt driven economic system.  The inequity is just sickening.

Sure the Norwegian guy can be confident that Btcs will rise in price.  Afterall, he retained 80% of them.  It's simple: there is a limited supply of Btcs and as long as Btc users increase at the rate of 30% per month as it is currently doing, all will be well in Bitcoin land.

The only problem is when some Government tries to intervene and regulate Bitcoin to death.  

[ning]

Having a cap on the total number of currency has two aspects. One is that the price denominated by this currency will decrease as the economy grows. Another aspect is that people will have to use smaller and smaller units of the currency as prices decrease. The second aspect is really a pain in the ass with traditional fiat currency so central banks advocate the idea of printing more fiat as the economy grows and they have ever since been milking it. However, the second aspect isn't a problem with Bitcoin because Bitcoins are technically infinitely divisible.