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Author Topic: Positive aspects of deflation...  (Read 6094 times)
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November 07, 2011, 08:40:11 AM
 #1

Just a few things I've mentioned when having to "defend" the deflationary aspect of Bitcoin to people who are new to the idea.

1) We live in a world that is rapidly running out of resources (such as oil now and later coal) due to consumption.

The idea of the necessity to have "ever expanding" economies must surely have a lot to do with this issue. A deflationary economy might well be of great benefit in helping the world to reduce the problems of over consumption.

2) We live in a world that is badly polluted by the very consumption our "growing economies" have so heavily promoted.

Slowing demand down (and especially the demand for "throw away" goods) surely is a good way to help the environment (and therefore all life living on planet Earth).

3) Goods these days are never made to last (I think most people even only just over 30yo would agree that many modern tools and devices are inferior compared to products that were being made by previous generations).

If your money was becoming more valuable by you not spending it then you are going to buy a replacement widget when you absolutely need it (and you would want that widget to last as long as possible so you are not losing even more by constant replacement).

Tie in the above with a bit about the greed of modern banks (which as a store for your savings in order to earn interest would be unnecessary with deflation) and you start to put forward a more convincing argument in favour of deflation for those that although perhaps schooled in Keynesian economics do understand the problems of the modern world (assuming they are not bankers).

Cheers,

Ian.

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Etlase2
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November 07, 2011, 08:52:12 AM
 #2

"just think, if we have deflation, our tools will last longer!"

quite a stretch to blame money for consumerism, bro. perhaps we should go back to lords and fiefdoms?

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November 07, 2011, 09:23:07 AM
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"just think, if we have deflation, our tools will last longer!"

quite a stretch to blame money for consumerism, bro. perhaps we should go back to lords and fiefdoms?

Sorry but I don't quite see how I "blamed money for consumerism" - consumerism is tied to inflation/deflation in that we see behavior such as "keeping up with the latest" vs. "keeping what I've got working" being fairly related to economic cycles but money itself causes neither.

I have no idea why my post would suggest anything to do with lords and fiefdoms either - care to explain?

Cheers,

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November 07, 2011, 09:33:20 AM
 #4

I certainly agree that economic growth is not good when it's at the expense of resource depletion and environmental damage.  I am absolutely in favor of economic incentives to produce durable, long-life goods, and discouraging the use of disposable products and wasting resources.

Limiting economic growth to achieve those goals has several problems:

While it encourages you to continue using an old product for as long as possible, when a replacement becomes necessary it doesn't provide a strong incentive to replace it with a high-quality one.  Because deflation increases the time-value of money, you have an economic incentive to spend as little as possible now even if it means buying a second replacement sooner.  Since your money will be worth more in the future, that second replacement will cost you less.

Not all economic activity has nonrenewable resource costs.  Paying for telephone service, food, sex, etc, does not directly deplete resources.  There may be secondary effects (oil for mechanized farming, coal to power the telephone company), but economy-wide deflation doesn't create an incentive to buy your food from a more efficient farm; it just encourages eating less.

It also discourages investments that conserve resources: rooftop solar that would have paid off in 10 years now becomes much less rewarding if spending that money now hurts more and buying coal-power for the next ten years becomes effectively cheaper to you.

Economic incentives that are targeted directly at the externalities are much more effective and have far fewer unintended consequences.  I don't mind slowing economic growth when it's driven by those incentives, but limiting economic growth to try to achieve those goals is backwards and often counterproductive.

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November 07, 2011, 10:02:44 AM
 #5

While I agree that deflation isn't always positive and think that most of your points are very relevant I do think that the idea of buying cheaper rather than better goods can be argued. Consider that the consumer has a choice of a cheaper product (for $20) and a better quality one (for $30) and that the quality one will outlast the cheaper one by a factor of two (say 2 years rather than 1).

Consider then the following:

Cheaper $20 - lasts 1 year
Quality $30 - lasts 2 years

lets just assume that the "price" of both of these goods remains the same (so getting more expensive in real terms each year due to perhaps increased scarcity of resources required for manufacturing) then we would see the following spending occur over 5 years

        Cheaper  Quality
Year 1    20.0    30.0
Year 2  +20.0   +0.0
Year 3  +20.0   +30.0
Year 4  +20.0   +0.0
Year 5  +20.0   +30.0

Total   100.0     90.0

In this example by buying the quality product we have actually saved money.

Whilst this is a contrived example I've generally found that quality products will last much more time than their proportional cost (YMMV) so I do think that deflation can assist in favoring the choice of quality over the cheapest price (as I think the real problem is that a lot of people just don't bother to consider how long something will last these days).

Cheers,

Ian.

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November 07, 2011, 10:51:52 AM
 #6

Prosperity comes from people growing useful things, making useful things, or providing useful services. Contrary to what bankers and politicians will tell you, prosperity doesn't come from increasing the money supply.

The higher the rate of inflation, the more of the prosperity goes to people who borrowed their capital, and are in debt. The higher the rate of deflation, the more of the prosperity goes to people who have saved, and are providing the capital for others.

In ideal circumstances, there is no inflation or deflation. Savers can obtain a small premium in return for temporarily foregoing use of their money, and borrowers can pay a small premium in return for using other people's capital for productive purposes.
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November 07, 2011, 11:12:27 AM
 #7

It all depends on the price/quality ratios.  When I can get a product that's twice as good for 50% more cost, I'll take it every time.  The trouble is it's often not nearly so clear-cut.

http://www.amazon.com/Ingersoll-Rand-2135TiMAX-2-Inch-Impact-Wrench/dp/B000WMN2GU
http://www.amazon.com/Campbell-Hausfeld-TL1302-2-Inch-Impact/dp/B000TA4BDI

I've used both.  The Ingersoll is a quality tool, clearly made to last a lifetime, and it's a real pleasure to use.  The C-H is disposable; it performs as promised, but I'd expect to replace it frequently since it's not nearly as well made and it's too cheap to bother fixing.

The environmental impact (materials and energy) that go into each are comparable.  The difference is in the extra manufacturing costs to produce the finer-quality, better-engineered product.  It's basically all labor.

Is the Ingersoll worth 10x more?  Is it worth 20x more with the time-value considered?  Is it worth 30x once you start adding deflation?  Deflation's encouraging us to buy the disposable one.

If you price in the externalities (environmental damage from metals mining, carbon remediation costs for the power generation) into the materials (eg, make the metal more expensive), it will drive up the cost of each by, say, $25.  That's negligible for the Ingersoll, but suddenly the C-H becomes a lot less appealing at twice the cost.  That creates a market incentive to allocate those resources efficiently instead of just telling us to buy less stuff.

http://www.amazon.com/HP-Deskjet-Printer-C8970A-B1H/dp/B000CO9ZMI
http://www.amazon.com/HP-CP3525N-Color-LaserJet-Printer/dp/B001FWG8DU

Pretty similar performance:  around 30PPM, color, networked...  Is the latter worth 6x more?  Even its toner cartridges are worth several times the purchase price of the cheap one!  The operating costs are much lower, and the latter will last 20 years in a home office while the former will get tossed out every couple years.  The overall price/quality tradeoff is OK: pay 6x for something that lasts 10x longer and saves you money on refills in the future.  Once you add deflation in, you start having a really big incentive to buy the one that only costs 1/6th.

I wish it was just a 50% premium to get the good stuff, but cheap disposable goods have flooded the market because they're dramatically cheaper.  Making people reluctant to spend their money will encourage that trend.

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November 07, 2011, 11:47:45 AM
 #8

I wish it was just a 50% premium to get the good stuff, but cheap disposable goods have flooded the market because they're dramatically cheaper.  Making people reluctant to spend their money will encourage that trend.
I think the main reason why cheap disposable goods could flood the market is because they are produced in very large quantities - often exceeding the "real" demand for a product of that type.
People often buy things they do not really need just because they think they make a bargain.

In a deflationary economy people would probably think twice before buying, thus making mass production of goods less cost-effective.

Also I'm under the impression, that with production costs increasingly having to take into account secondary costs (like recycling the product after its lifespan, the environmental impact of the resources and the production process, future supply of limited resources,...), the real cost for a product would shift the balance even more towards longer lasting products of higher quality. This has nothing to do with inflation/deflation but with cost transparency.
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November 07, 2011, 12:15:41 PM
 #9

I agree with the market flooding effect.  I partly agree about deflation helping by discouraging unnecessary consumption: that's certainly true, but it equally discourages investing in high quality goods.  If the apparent cost of both doubles, what's improved?  It decreases resource consumption, but it also increases the cost of non-constrained resources; this dilutes the incentive to use the limited resources efficiently.

Ideally you only want to increase the cost of the limited resources; your last paragraph hits it square on the head.

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November 07, 2011, 10:20:54 PM
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1) We live in a world that is rapidly running out of resources (such as oil now and later coal) due to consumption.

No we aren't and even if we where resources are never depleted. They get substituted long before that...

There is very little reason to assume deflation would have any effect on the savings/spending ratio. Not a little inflation either, the problem is not in the pocket of the average Joe but because it makes entrepreneurs think there are more savings available then there are.

The savings/spending ratio is determined by time-preferences and the real interest rate which there is no reason I can see to assume would be higher with a slowly diminishing money supply then with a steady one. But interest rates would not be artificially lowered by government credit expansion so there would be no artificial cheap consumer credits to get. Saving might be somewhat higher with a market interest rate which would mean there is more capital to use to make capital goods and new technologies and the production capability of the society would grow at a faster rate. This does however also make consumer goods cheaper.
So chances are we would land pretty much right we are today anyway but without the destructive miss-allocation of inflation created business cycles, some of the capital that get miss-allocated and destroyed during booms would go to investments. But some of it also probably to consumption.

People just hoarding the currency does absolutely nothing to anything except the price of the currency if the degree of hoarding changes but that doesn't really do anything either since it is a transparent and universal price change the market can easily account for.

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November 07, 2011, 10:44:33 PM
 #11

So chances are we would land pretty much right we are today anyway but without the destructive miss-allocation of inflation created business cycles,

110% agreed. But you don't need deflation to fix this, you need stability. Deflation WILL lead to hoarding if there is no counterpoint that says "if you hoard, I'm going to inflate the supply." Thus the idea for the cryptocurrency linked in my sig.

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November 08, 2011, 08:28:57 AM
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110% agreed. But you don't need deflation to fix this, you need stability. Deflation WILL lead to hoarding if there is no counterpoint that says "if you hoard, I'm going to inflate the supply." Thus the idea for the cryptocurrency linked in my sig.

You can't create price stability, it is just a nonsensical idea to try and fix the price of money.
Increasing price of money will not lead to hoarding, there will be savings options where the risk weighted return is higher for almost everyone then just holding cash in any developed market that isn't in chock.

If someone is destroying money very fast there may be a problem but I don't think BitCoin are going to get lost of that rate and if they where it should rather indicate some other significant problems in the currency that will probably make it unusable as money in the near future.

Of-course there is Gresham's law as long as people are forced to use artificially overpriced government currencies they will spend those and hold onto there bitcoin. But you can't really fix that by trying to price fix another currency...

I read some about your proposal I am not sure how you plan it is going to work. People will mine it when it is not profitable based on future expectations or just for fun like they do BitCoin and just messing around with the release rate really does nothing in the long run. The money will disperse eventually. The only way to do anything different that really matters in the long run is having a currency board that manipulates the supply and that will never work...

The analogy to gold is wrong also as gold mining adds very little new gold and the mining output is very slow to react to price changes and relative to the gold supply the changes in mining output are very small. Gold production is actually a lot more like BitCoin. The high concentration easy to extract resources where excavated long ago and did created massive concentrations of gold (they where later stolen and concentrated elsewhere but anyway). What we are left with now is resources that are difficult and expensive to extract and the supply is rising steadily at about 2% per year where some of it is allocated to industrial use.

I think BitCoin would be a little better if was designed to stabilize at something like a 1% per year growth of the money stock but it should not make a difference really unless so much is lost that you get divisibility issues or it hinders transaction times that no new blocks are created at all.







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November 08, 2011, 09:15:04 AM
 #13

You can't create price stability, it is just a nonsensical idea to try and fix the price of money.

You can't fix the price. 100% agreed there.

However you CAN create stability.  Specifically, you can reduce factors that cause instability.

Bitcoin's design has inherent economic properties that create speculation cycles.  Etlase2's proposal (EnCoin) tries to improve these problems one way; my proposal (RevCoin or whatever) uses a different mechanism; Red's (GEM) is broadly similar; plenty of other systems with varying levels of practicality have been suggested.

Perfect stability isn't possible, but we can do a lot better than what we have now.

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November 08, 2011, 10:24:40 AM
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Bitcoin's design has inherent economic properties that create speculation cycles.

Every small currency will be subject to speculation. And speculation is a really good thing too. What we need is just more speculation in the form of a futures market so merchants can hedge against price changes between different currencies and goods they are doing business in.

Quote
Etlase2's proposal (EnCoin) tries to improve these problems one way; my proposal (RevCoin or whatever) uses a different mechanism; Red's (GEM) is broadly similar; plenty of other systems with varying levels of practicality have been suggested.

I don't see any solutions. EnCoins just seems to peg it to the electricity price which is really very volatile at least here in the colder part of the world. Most families here actually pay a premium on electricity to hedge against price changes. Fixed term price electricity contracts are still the most popular even though they end up paying more then having a floating price in the long run...

Really it is neither necessary or possible to stabilise the price of money. Stabilizing the supply yes, but BitCoin supply is already stable. I am sure it is possible to do improvements when it comes to things like transaction handling and security but not much you can do that matters to the supply. Maybe you can improve on the initial distribution but as long as you do it in a way that gets people to start using it then it in the long run that is quite irrelevant.

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November 08, 2011, 10:41:39 AM
 #15

Every small currency will be subject to speculation. And speculation is a really good thing too. What we need is just more speculation in the form of a futures market so merchants can hedge against price changes between different currencies and goods they are doing business in.

I don't mind speculation when it's pricing in the future.  I do mind uninformed, wild-eyed speculation.

Futures are great to mitigate price risk, but how much do you see of businesses planning a quarter in advance to make a large purchase in BTC?  I don't think that's a very large part of the current economy.  In fact, I don't think it exists at all.  Shorts are much more useful for those who just want to hedge day-to-day currency risk.

In any case, none of that helps the guy who just wants to store some money in his wallet without being whipped around by volatility.

Quote
I don't see any solutions. EnCoins just seems to peg it to the electricity price which is really very volatile at least here in the colder part of the world.

Really it is neither necessary or possible to stabilise the price of money. Stabilizing the supply yes, but BitCoin supply is already stable.

Does your electricity price move 10x in under 6 months?

In any case, I'm not arguing for pegging the price (which can't work).  I'm saying we should look at ways to mitigate destabilizing factors - like deflation - which make the market fluctuate by 10x in such a short time period.

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Bitcoin is the Devil's way of teaching geeks economics.  --Revalin 165YUuQUWhBz3d27iXKxRiazQnjEtJNG9g
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November 08, 2011, 11:23:54 AM
 #16

I don't see any solutions. EnCoins just seems to peg it to the electricity price which is really very volatile at least here in the colder part of the world.

It is electricity + processing cycles + time. I don't know how things will eventually work out, but the second two factors may be worth a larger percentage of the value to people than the first. The price is far from fixed, it is rather an oscillation that would hopefully never go too far one way or the other. I'm still working on more ideas to keep the oscillations smaller and to be able to account for unexpected future variables such as the CPU->GPU thing that bitcoin suffered, as well as large changes in the price of electricity.

Quote
Really it is neither necessary or possible to stabilise the price of money. Stabilizing the supply yes, but BitCoin supply is already stable. I am sure it is possible to do improvements when it comes to things like transaction handling and security but not much you can do that matters to the supply. Maybe you can improve on the initial distribution but as long as you do it in a way that gets people to start using it then it in the long run that is quite irrelevant.

It isn't possible? If there was a commodity that worked very efficiently as a currency and was always difficult to acquire but not limited, would that not create a stable value to the currency? And the fact that no government can dilute the supply when they feel like it? The bitcoin supply is most definitely not stable or we would not have seen a deflationary spiral in the first few years of its existence. And deflationary spirals are wont to happen again and again as the prisoner's dilemma takes hold--this doesn't require a bad distribution or early adopters--so what the end result will likely be is that merchants will have to stop taking BTC as payment and switch back to a traditional currency during spirals. Currency fail. Surprise, surprise but if there aren't businesses popping up all over the place to keep the volatility away from merchants by just converting it to something else. Gogo payment processor, fail currency.

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November 08, 2011, 01:03:36 PM
 #17

economic growth in rich countries is mainly driven by productivity gains, not by growth in resource consumption.
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November 09, 2011, 12:57:37 PM
 #18

In any case, I'm not arguing for pegging the price (which can't work).  I'm saying we should look at ways to mitigate destabilizing factors - like deflation - which make the market fluctuate by 10x in such a short time period.

From my knowledge the BitCoin supply has not decreased yet. So by definition there has never been any deflation.

The only reason the BitCoin price so unstable is because there is very little actual commerce going on with BitCoins.

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November 09, 2011, 01:01:30 PM
 #19

When I say "deflation" here, I'm talking in the sense that "Bitcoin is a deflationary currency": that the money supply is limited and therefore prone to value growth, not that the money supply decreases.

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November 09, 2011, 01:36:18 PM
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When I say "deflation" here, I'm talking in the sense that "Bitcoin is a deflationary currency": that the money supply is limited and therefore prone to value growth, not that the money supply decreases.

A fixed supply currency does not have any value growth. It is everything else's value that decreases. The money could never outperform investments in production gains on average. All it does is to preserve your productive output for the future which is very important that a money can do and if you saved the productive value of a chair from when they took 2 times the input to make it makes perfect sense you can buy 2 chairs for that not that they are easier to make.


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