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Author Topic: Question for deflation advocates  (Read 1899 times)
JohnDoe
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December 06, 2011, 07:21:39 PM
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What is your opinion on the effect that a strong Swiss Franc has had on the economy of Switzerland? Don't you think that the same thing could happen to Bitcoin's economy?
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December 06, 2011, 07:32:53 PM
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What is your opinion on the effect that a strong Swiss Franc has had on the economy of Switzerland? Don't you think that the same thing could happen to Bitcoin's economy?

Could you be more specific about what you are talking about?  From what I know, the Swiss Franc has been debased as much as the rest of the world.  There are a lot of things that happen that have little to do with the relative quality of the currency.

As for what can happen to a bitcoin economy, honestly we don't know.  The bitcoin economy is truly global, there is no 'currency friction' from floating exchange rates that businesses have to be aware of, at least if they stick to bitcoin.  This is not so for the Swiss Franc, for there must always be exchange into other currencies for trade.  In a world of floating fiat currencies, a rapid change in relative quality is generally undesirable because it upsets international trade.  This is the primary reason that the Swiss Franc is being devalued along with the Euro.  Bitcoin is sounder currency, but again, does not necessarily need to be exchanged for other currencies in an international trade setting.

"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."

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December 07, 2011, 10:20:10 AM
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What is your opinion on the effect that a strong Swiss Franc has had on the economy of Switzerland? Don't you think that the same thing could happen to Bitcoin's economy?

This is not a very good analogy.

Switzerland is not as economically free as it looks.  Sure, taxes are low, but the labor market is heavily regulated, heavier that in some "socialist" countries like Denmark.  

It is almost impossible for employers to decrease nominal wages, even if the employees voluntarily agree to this. Also, firing and hiring at a lower nominal wage is difficult and costly.

Because of this inflexibility the Swiss economy reacts very differently to deflation than a free economy would react.

Prices in Switzerland are sticky.  There are a few exceptions, such as electronics retailers, who are already used to sector-specific deflation, but most businesses are not willing or capable of lowering their prices.

The results have been twofold: People buying more stuff from neighboring countries such as Germany, and International companies (who make up a big part of the Swiss economy) have slowly started to relocate their workforce to cheaper European countries.

That is why the strong CHF is generally perceived negatively in Switzerland.

You can't really compare the bitcoin economy to the Swiss economy. The Swiss economy is static as treacle, and the bitcoin economy is dynamic and adaptive, and so far almost completely unregulated.  

Until people earn a large proportion of their income in BTC, deflation is not an issue anyhow.
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December 07, 2011, 12:52:06 PM
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As a rule of thumb, higher the deflation stronger the economy.  Bitcoin needs deflation to support its growth.  When bitcoin was rising in price, the economy was also growing faster.  After the crash after the price dropped, the number of transactions dropped.
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December 07, 2011, 06:26:29 PM
 #5

Alright, since you are a outspoken limited supply critic which level of inflation would you prefer?

Constant inflation - The currency base rises exponentially.
like 1% for one year, 2.01% for two years, 5.1% for 5 years and 64% for 50 years

Constant currency base growth - Inflation decays logarithmically.
100 % for the first year, 50% for the second, 33% for the third.

Logarithmic currency base growth - Inflation decays hyperbolically (I would prefer this one)
100% for the first year,  58% for the second, 26% for the third, 4% for the tenth and 0.2% for the 100th.

Bitcoin uses both asymptotic currency base growth and inflation, which is by definition not really deflationary.

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December 07, 2011, 07:26:13 PM
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Alright, since you are a outspoken limited supply critic which level of inflation would you prefer?

Constant inflation - The currency base rises exponentially.
like 1% for one year, 2.01% for two years, 5.1% for 5 years and 64% for 50 years

Constant currency base growth - Inflation decays logarithmically.
100 % for the first year, 50% for the second, 33% for the third.

Logarithmic currency base growth - Inflation decays hyperbolically (I would prefer this one)
100% for the first year,  58% for the second, 26% for the third, 4% for the tenth and 0.2% for the 100th.

Bitcoin uses both asymptotic currency base growth and inflation, which is by definition not really deflationary.

Bitcoin inflates at a predictable rate, halving every... 4 years I believe the rough estimate is. So while, yes, it is inflationary... How it inflates is based on how Bitcoin works and not based on how much money a government wants to give itself.

The fact that Bitcoin can still hold value while the number in existence increases steadily shows that it is doing well.
molecular
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December 08, 2011, 01:29:40 AM
 #7

Prices in Switzerland are sticky.  There are a few exceptions, such as electronics retailers, who are already used to sector-specific deflation, but most businesses are not willing or capable of lowering their prices.

I've talked to lonelyminer in Prague and I asked him what where the arguments of the people arguing that deflation is a danger because this is a long-running question I had. He answered with this concept of "stickiness of prices" and with the problem of cash divisibility. It made sense to me.

Bitcoin clearly doesn't have any of these problems, people are used to wildly fluctuating prices in the bitcoin economy and the "cash" is arbitrarily divisible.

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lonelyminer (Peter Šurda)
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December 09, 2011, 05:40:20 PM
 #8

I'd just like to add to what molecular said, there is also a third aspect, which is in my opinion the most important one. The problems associated with deflation, even if they actually existed, are unlikely to manifest themselves if there is a currency competition. Maybe that's also why it didn't cause problems in the 1800's when there was a competition between gold and silver, and did occur since 1920s after the FED was instated. Unless there are some unlikely changes in the laws, such as a country declaring Bitcoin for legal tender, or unions that have special legal status negotiate their contracts denominated in Bitcoin, I do not see a reason to worry about deflation, even if you're a Keynesian or a monetarist.
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December 09, 2011, 09:42:15 PM
 #9

Switzerland as most nations generally only has one currency. The Swiss are expected to use CHF and are not free to buy and sell CHF without penalties (however minor). Swiss industry might choose to switch the books to EUR, but they still must pay taxes in CHF, and their local customers will pay them in CHF.

There is no bitcoin nation. Actors are free to use or not use bitcoins as they please, just as they are free to buy and sell electronics or gold as they please, with all the penalties and rewards they accept by choice not by fiat. There are no bitcoin taxes nor local bitcoin consumers.

When bitcoin is the sole global currency, then we'll address this deflationary advantage further. Until then, it's a non-issue.

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molecular
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December 09, 2011, 10:58:33 PM
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Hey Lonelyminer,

I'd just like to add to what molecular said, there is also a third aspect, which is in my opinion the most important one. The problems associated with deflation, even if they actually existed, are unlikely to manifest themselves if there is a currency competition. Maybe that's also why it didn't cause problems in the 1800's when there was a competition between gold and silver, and did occur since 1920s after the FED was instated. Unless there are some unlikely changes in the laws, such as a country declaring Bitcoin for legal tender, or unions that have special legal status negotiate their contracts denominated in Bitcoin, I do not see a reason to worry about deflation, even if you're a Keynesian or a monetarist.

I don't quite understand... let's assume such an unlikely case of some Nationstate declaring bitcoin to be legal tender. How is this going to make deflation a problem?

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netrin
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December 10, 2011, 12:32:05 AM
 #11

I don't quite understand... let's assume such an unlikely case of some Nationstate declaring bitcoin to be legal tender. How is this going to make deflation a problem?

It's a problem for that nation's exporting industries. Hence the Sissy analogy.

Deflation makes those who hold real wealth wealthier and those in debt (investing) poorer. Before Zurich printed unlimited digital sissies in September, exporting industries had trouble selling to their poorer neighbors - the rest of inflating Europe. In this particular case, Zurich got a free lunch.

Keynes fear of deflation is rational only within an environment of ever expanding debt. Deflation is bad when the entire nation is in debt and the monetary system assumes, encourages, and depends upon debt.


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lonelyminer (Peter Šurda)
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December 11, 2011, 09:24:44 AM
 #12

Hello molecular,

I don't quite understand... let's assume such an unlikely case of some Nationstate declaring bitcoin to be legal tender. How is this going to make deflation a problem?
Keynesians claim that prices are sticky and that prevents them from adjusting downwards and causes a "deflationary spiral" (less and less trade until the economy collapses). Monetarists claim that during deflation the economy growth will be below the "optimum" because not enough investments can be made. If there is a competition among currencies, neither of these assumptions lead to the respective conclusion: if Bitcoin prices are sticky or people can't borrow enough Bitcoins, they just use a different currency for pricing/lending and the alleged problematic consequences do not arise.

The address of the claims under the assumption that there is a restriction of market (e.g. Bitcoin being legal tender) is beyond the scope of my post, but if you're interested, you can read for example Deflation and Liberty by Jörg Guido Hülsmann, it's relatively short.

To summarise: I don't think deflation would cause problems if Bitcoin was legal tender, but some economists think it would.

netrin,
It's a problem for that nation's exporting industries.
Well, this is also not necessarily true. Germany has an export economy, and the DM was harder than the many other currencies. I read somewhere recently an explanation, I don't remember the exact quote, that this is because the international trade is so huge that components for the exported goods need to be imported anyway, so exchange rates have little effect on the result. I can imagine that it might cause problems if you're exporting raw materials, however.
molecular
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December 11, 2011, 03:18:56 PM
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Thanks for your answers netrin and lonelyminer,

I'm imagining this:

African Countries Parliament: "We use Bitcoins, they're legal tender for tax and pay all debt"
Finnish raw material importer: "We want 100 tons of aramythalit, grade 3"
African miner: "Ok, you can have for 33,000 BTC (100,000 USD)"
Finnish raw material importer: "Quite the hassle, will need to acquire BTC. mom. here they are, thanks for the stuff, we need more next month, ready to pay only 310 BTC/ton because of deflation in BTC"
African miner: "our workers did not agree to pay-cut, went on hike. We can't lower price, it's too sticky!"
Finnish raw material importer: "Let's use $, like we always did, 1,100 USD/ton ok with you (290 BTC/ton)?"
African miner: "ok, workers are happy to be payed again in more $ (less BTC) than before"

is that how currency competition will drive out a deflationary currency? By the negligence of the people to consider inflation?

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netrin
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December 11, 2011, 06:43:56 PM
 #14

If German or Swiss industry imported raw materials just as cheaply as their weaker neighbors but paid higher labor costs they would have had trouble competing against similar industries in the weaker nations. However, it was superior German industry that made them stronger and thus compensated for their price disadvantage. China is a perfect converse. Beijing has artificially devalued the yuan to increase export growth. If China floated the currency, then it would have negative impact on growth - the same deflationary impact Zurich avoided two months ago.

If my understanding is mistaken, I'd appreciate an article refuting what seems to be standard international policy.

None of this however is relevant to bitcoin. If bitcoin is a witch and witches float...

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December 12, 2011, 05:48:58 AM
 #15

If German or Swiss industry imported raw materials just as cheaply as their weaker neighbors but paid higher labor costs they would have had trouble competing against similar industries in the weaker nations. However, it was superior German industry that made them stronger and thus compensated for their price disadvantage. China is a perfect converse. Beijing has artificially devalued the yuan to increase export growth. If China floated the currency, then it would have negative impact on growth - the same deflationary impact Zurich avoided two months ago.

If my understanding is mistaken, I'd appreciate an article refuting what seems to be standard international policy.

None of this however is relevant to bitcoin. If bitcoin is a witch and witches float...

Unless we start interstellar or even interplanetary(Earth-Mars Colony) trading, there is no need to worry about how the value of bitcoin affects trading.
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