Deflationary currency? Really?

[BitterTea]

I've seen this term used more and more to describe Bitcoin, and I really don't think it fits.

The supply of Bitcoins is inflating, though the rate of inflation is decreasing. Once ~21 million coins have been created, it is true that the currency will only experience monetary deflation.

However, gold is deflationary in exactly the same way. The supply of gold in the ground is finite, and as the easy gold is found and mined, the cost of mining the same amount of gold increases. The circulated supply of gold also deflates over time, due to natural processes causing minute amounts of gold to separate from the coin or bar.

Yet, does anyone refer to gold as a "deflationary currency"?

[SmokeTooMuch]

Deflationary currency

who is using that definition ?
board search points only to you.

[db]

The monetary deflation of both gold and Bitcoin is (will be) insignificant. What people are talking about is falling prices from economic growth which has nothing to do with deflating the money supply but is still confusingly called "price deflation".

[BitterTea]

who is using that definition ?
board search points only to you.

Try just "deflationary". I got 3 pages of hits. It seems to me that it's "common knowledge" that Bitcoin is deflationary. Perhaps it's a viewpoint only held by a vocal minority, but it does not seem that way.

The monetary deflation of both gold and Bitcoin is (will be) insignificant. What people are talking about is falling prices from economic growth which has nothing to do with deflating the money supply but is still confusingly called "price deflation".

Do people not realize that price deflation can occur even while using a currency that undergoes monetary inflation? A good example is the technology sector, priced in USD.

Additionally, the only reason we see price deflation today is that prices are set in USD and converted to Bitcoin. Since Bitcoin is growing in strength relative to the dollar, it gives the appearance that prices are decreasing. Once prices are set and denominated in BTC, I think most of this will go away.

[db]

By contrast, currencies that are based on the value of debt, like the U.S. Dollar, are inherently inflationary. This is because, in a debt based monetary system, there must always be more money owed than is in circulation. If there were no net debt there would be no money. A currency such as this must be continually inflated in order to remain operational.

Why? What would happen if they just stopped printing money?

Deflation is the enemy to this type of monetary system

Why? What is the difference from Bitcoin or gold?

The problem with this scenario is that it depends on exponential growth forever, which is not possible with finite resources.

Maybe not forever but a quite long time. Keep configuring the same stuff in ever more desirable ways. A lightbulb is thousands of times more useful and valuable than the rocks it is made of. A GPS navigator made from the same matter is hundreds of times more useful and valuable than the lightbulb.

This is the way Bitcoin works. Since there is a limited supply, and it can not be inflated by 'fiat' it will limit the rate of growth of it's economy to the rate at which new value can be discovered.

The rate of growth is always limited to the rate at which new value can be discovered no matter what.

[db]

The money supply is not expanded by printing money, but by issuing credit. This is what the Fed does when it does Quantitative Easing, it issues credit.

Suppose they scrap the printing presses and then go on a Zimbabwe-style credit issuing binge. Now a banana costs a billion dollars. You feel like having a banana and go to the nearest ATM and try to withdraw a few billion dollars. See the problem?

This has been going on for a long time... And we have recycled only a tiny portion of the same stuff, mostly it was all just wasted, and so we have the problem that we have now.

Few things are really wasted unrecoverably. In the end it's all atoms and pretty much anything can be recycled if the need arises. You just need energy.

[BitterTea]

You do need energy. Only right now the amount of energy that is takes to extract energy resources is higher than it has ever been in our history.

This is significant. Especially if you disagree with this statement, I highly recommend watching this series of videos - "The greatest shortcoming of the human race is our inability to understand the exponential function".

[barbarousrelic]

"Disinflationary" would be a more fitting adjective to describe the Bitcoin model.

http://en.wikipedia.org/wiki/Disinflation

Disinflation is a decrease in the rate of inflation

[db]

You do need energy. Only right now the amount of energy that is takes to extract energy resources is higher than it has ever been in our history.

This is significant. Especially if you disagree with this statement, I highly recommend watching this series of videos - "The greatest shortcoming of the human race is our inability to understand the exponential function".

Population growth is a serious long term problem.

Resource usage not so much. It is limited by available materials and the energy from the sun. It would be stupid to bet on exponentially increasing amounts of for example copper, so don't. Prices will make sure most people won't.

Economic growth is a good thing, not a problem. It will eventually slow, but having run out of new ideas to discover and new things to invent is quite an accomplishment and a pretty nice problem to have.

[Grinder]

"Disinflationary" would be a more fitting adjective to describe the Bitcoin model.
http://en.wikipedia.org/wiki/Disinflation

If there is disinflation there is still inflation, only less. Bitcoin leads to the opposite of inflation, which is deflation (provided there is economic growth and the population stays the same or increases).

[kiba]

Resource usage not so much. It is limited by available materials and the energy from the sun. It would be stupid to bet on exponentially increasing amounts of for example copper, so don't. Prices will make sure most people won't.

Mine asteroids.

[barbarousrelic]

"Disinflationary" would be a more fitting adjective to describe the Bitcoin model.
http://en.wikipedia.org/wiki/Disinflation

If there is disinflation there is still inflation, only less. Bitcoin leads to the opposite of inflation, which is deflation (provided there is economic growth and the population stays the same or increases).

I think we're hung up on the difference between monetary deflation and price deflation.

[no to the gold cult]

who is using that definition ?
board search points only to you.

Try just "deflationary". I got 3 pages of hits. It seems to me that it's "common knowledge" that Bitcoin is deflationary. Perhaps it's a viewpoint only held by a vocal minority, but it does not seem that way.

The monetary deflation of both gold and Bitcoin is (will be) insignificant. What people are talking about is falling prices from economic growth which has nothing to do with deflating the money supply but is still confusingly called "price deflation".

Do people not realize that price deflation can occur even while using a currency that undergoes monetary inflation? A good example is the technology sector, priced in USD.

Additionally, the only reason we see price deflation today is that prices are set in USD and converted to Bitcoin. Since Bitcoin is growing in strength relative to the dollar, it gives the appearance that prices are decreasing. Once prices are set and denominated in BTC, I think most of this will go away.

I think there is some confusion here depending on what one considers as 'deflating'. In the sense that Bitcoin is a 'deflationary currency' it is the price of goods compared to BTC that would be deflating, even as more BTC are being introduced to the economy. As long as the value of a single BTC continues to rise in relation to other commodities (say U.S. Dollars) it is a 'deflationary currency'. Once the maximum number of BTC is in circulation it would be essentially free of inflation, but until then this designation properly depends on the market forces relative to BTC compared to other commodities. In this respect it behaves as other limited commodities, such as gold or oil. Even though gold and oil continue to be introduced into the economy this now happens at a slower rate then it once did, this being irrespective of demand. Even when there is additional demand the rate of extraction of these resources lags that demand. Were gold and oil to be considered 'currency' in this respect they would also be deflationary.

By contrast, currencies that are based on the value of debt, like the U.S. Dollar, are inherently inflationary. This is because, in a debt based monetary system, there must always be more money owed than is in circulation. If there were no net debt there would be no money. A currency such as this must be continually inflated in order to remain operational. Deflation is the enemy to this type of monetary system, so is too much inflation because this would mean an inevitable deflationary correction which may be difficult to fix. The problem with this scenario is that it depends on exponential growth forever, which is not possible with finite resources. And this is fundamentally the problem with the world economy now. We already got all the easy stuff, now it requires more resources to extract more resources... Placing a limit on growth. And I don't think we are smart enough or have the will to fix that fast enough to keep the system of an inflationary currency going indefinitely.

So, why would a 'deflationary currency' be any better than an 'inflationary currency'? An 'inflationary currency' encourages consumption because the longer you hang onto it the less stuff you can buy with it, in this way it also discourages resource efficiency. OTOH a 'deflationary currency' encourages resource efficiency because the longer you hold onto it the more it is worth. The only time it makes economic sense to spend a 'deflationary currency' is when you have an opportunity to arbitrage it for something of greater value to you. This is the way Bitcoin works. Since there is a limited supply, and it can not be inflated by 'fiat' it will limit the rate of growth of it's economy to the rate at which new value can be discovered.

Great post. I like bitcoin but all the Libertarian ideology around it I find wrong-headed and naive, almost to the point of despair. This analysis however is reassuring, I realize that from the ideological perspective this is the argument I'm in it for.

I'm not concerned with government spying on me or bankers forever trying to figure out ways to take my stuff away (I don't discount that kind of thing totally, I merely consider such things as issues of bad or hijacked governance). "G", (government spending) is merely a function of the community's attempt to make rational collective decisions (ooh, scary, the "C" word, Libertarians don't believe in "collectivism" (that's Libertarian for "society") because it's tyranny, Ayn Rand says so, every man is an island you see), and Banking as a profession is merely the current method of turning "S" (savings) into "I" (investments) though this process too can malfunction or get hijacked.

In my bones I feel that bitcoin has the quality of not requiring eternally increasing growth, perhaps now we can embark on persistent development instead (certainly there's much that is neglected that needs to be developed). Really it's just growth in another direction, but the use of the different word is important to make the point. From an ideological perspective the idea of bitcoin and sustainable development is something I really dig.

[benjamindees]

Inflation in the monetary sense is a term that lost all meaning with the advent of tiered money.  Now we can have both inflation and deflation at the same time.  The price of paper instruments (mortgages, derivatives) goes down, while the price of physical goods (food, energy) goes up.  Bankers call this deflation.  Everyone else calls it inflation.

To answer the original question, yes, many people will argue that a gold standard is 'deflationary'.  It's ridiculous, of course.  And it belies the extent to which wealth confiscation has become an acceptable part of American culture.  Any monetary standard that doesn't automatically enable the confiscation of productivity growth through technical advancement is considered 'deflationary' and therefore bad.

When, in reality, deflation just means cheaper goods and fewer jobs means more free time and the only real problem is the concentration of wealth created by, wait for it, monetary fraud and manipulation in the name of wealth redistribution.

[Grinder]

So, why would a 'deflationary currency' be any better than an 'inflationary currency'? An 'inflationary currency' encourages consumption because the longer you hang onto it the less stuff you can buy with it, in this way it also discourages resource efficiency.

Neither model encourages or discourages consumption, it just shifts the best way to preserve wealth. With inflation you should buy what you need early, but that doesn't mean you should consume it. Because it will be more valueable tomorrow than it is today, it makes just as much sense to delay consumption as it would with a deflationary model.

[benjamindees]

With inflation you should buy what you need early, but that doesn't mean you should consume it.

Division and distribution is the same as consumption.  They are absolutely equivalent.

This applies to everything from raw materials, refined commodities, manufactured goods, and obviously services.

[benjamindees]

Nothing I said was the least bit Keynesian.  But biflation does have meaning.  It tells us that there is not one unified market, just like you said.  There are artificial barriers separating monetary tiers, and this makes measurement of any kind of "on net" metric impossible.

[Grinder]

Division and distribution is the same as consumption.  They are absolutely equivalent.

I guess we live in different worlds, then. In mine you can't eat the cake and have it.

[benjamindees]

Division and distribution is the same as consumption.  They are absolutely equivalent.

I guess we live in different worlds, then. In mine you can't eat the cake and have it.

So in your world what do you do to consume things that is different from division and distribution?

[Lithium]

I've seen this term used more and more to describe Bitcoin, and I really don't think it fits.

The supply of Bitcoins is inflating, though the rate of inflation is decreasing. Once ~21 million coins have been created, it is true that the currency will only experience monetary deflation.

The Bitcoin "monetary base" (number of outstanding Bitcoins) is deflationary in the long term and their supply will, given enough time, approach 0. This is because once a wallet is lost the Bitcoins associated with it are no longer transferable and effectively forever removed from the Bitcoin supply. This is a terrible flaw in the Bitcoin paradigm as it currently implemented.

However, gold is deflationary in exactly the same way. The supply of gold in the ground is finite, and as the easy gold is found and mined, the cost of mining the same amount of gold increases. The circulated supply of gold also deflates over time, due to natural processes causing minute amounts of gold to separate from the coin or bar.

Yet, does anyone refer to gold as a "deflationary currency"?

The gold supply is not in deflation and likely never has been for any significant period in history. Total supplies of gold have increased every year since gold has been considered valuable.