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Author Topic: Economic of Deflationary Spiral  (Read 11289 times)
mewantsbitcoins
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April 22, 2011, 10:05:37 PM
 #21

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Additionally, having people not satisfy their every minuscule needs and desires and going back to subsistence living isn't exactly a great way to live.

Yeah - not consuming every resource on this planet to produce shit you don't need is a bad thing. No more SUV's, overpriced designer shit and similar - what a tragedy  Cheesy
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mizerydearia
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April 22, 2011, 10:07:26 PM
 #22

I never understand this deflationary argument people give. I think it only applies to national currencies not something like bitcoin. Let me see if I have your argument straight:
1) bitcoin is deflationary so bitcoin's will exchange for more and more dollars as time goes on.
2) This means that bitcoins are worthless

huh? which is it? are they going to be worth a lot or worth a little?

It seems to me that they confused monetary goal as the end goal of human beings.

But humans do not want money. They want power, love, sex, gratification, understanding, and so on. Money helps achieve these things.

jed and kiba's responses were in response to fsargent I believe...  /me awaits fsargent's response
kiba
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April 22, 2011, 10:10:26 PM
 #23


Yeah - stop consuming every resource on this planet to produce shit you don't need is a bad thing. No more SUV's, overpriced designer shit and similar - what a tragedy  Cheesy

The hoarders are actually the guys that DON'T CONSUME these things. People don't want SUV, overpriced designer shit, etc just because the economy is in a deflationary spiral?

That's laughable.

I think, we should celebrate hoarders instead. They make everything cheaper by excess production and underconsumption, which MEAN the non-hoarders are going to have a very long party.

For every thrifty rich douchebags, there's the gold diggers.

The thrifty rich douchebags: you are our heores.

BitterTea
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April 22, 2011, 10:11:33 PM
 #24

I'll just leave this here...

The Virtue of Hoarding

The line drawn by Keynesian between saving and hoarding is arbitrary. What to me is saving, to you is hoarding. Who is the best just of the use of my money? You or me?

Additionally, saving or hoarding money does, as you say, remove it from the economy. However, when that happens, the purchasing power of all the other money increases. That means that when I hoard, everyone else can purchase more things.

edit... One more thing. Here's a short (but good) introduction to Austrian business cycle theory. If you understand and accept that, it should be obvious that saving (aka hoarding) is a good thing.

http://oneminute.rationalmind.net/business_cycles/
fsargent
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April 22, 2011, 10:12:24 PM
 #25

1) bitcoin is deflationary so bitcoin's will exchange for more and more dollars as time goes on.
2) This means that bitcoins are worthless


The more that bitcoins become worth, the more the buyer of bitcoins will have to give up in order to get one.
At that point, the person thinks, fuck, I can't afford to work for bitcoins, I'll use something else (dollars, barter).
Then the guy with all the bitcoins ends up with a currency that nobody wants to buy from them. That person won't give up those bitcoins because he knows exactly what he gave up to get them too. They'll have value to the holder of the bitcoins, but not to anyone else.
kiba
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April 22, 2011, 10:16:12 PM
 #26

1) bitcoin is deflationary so bitcoin's will exchange for more and more dollars as time goes on.
2) This means that bitcoins are worthless


The more that bitcoins become worth, the more the buyer of bitcoins will have to give up in order to get one.
At that point, the person thinks, fuck, I can't afford to work for bitcoins, I'll use something else (dollars, barter).
Then the guy with all the bitcoins ends up with a currency that nobody wants to buy from them. That person won't give up those bitcoins because he knows exactly what he gave up to get them too. They'll have value to the holder of the bitcoins, but not to anyone else.

The bitcoin economy is growing...the territory is contradicting your map.

mizerydearia
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April 22, 2011, 10:16:25 PM
 #27

1) bitcoin is deflationary so bitcoin's will exchange for more and more dollars as time goes on.
2) This means that bitcoins are worthless


The more that bitcoins become worth, the more the buyer of bitcoins will have to give up in order to get one.
At that point, the person thinks, fuck, I can't afford to work for bitcoins, I'll use something else (dollars, barter).
Then the guy with all the bitcoins ends up with a currency that nobody wants to buy from them. That person won't give up those bitcoins because he knows exactly what he gave up to get them too. They'll have value to the holder of the bitcoins, but not to anyone else.

Whereas with us dollar, the federal reserve company can create money out of thin air and everyone is happy?
BitterTea
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April 22, 2011, 10:24:27 PM
 #28

1) bitcoin is deflationary so bitcoin's will exchange for more and more dollars as time goes on.
2) This means that bitcoins are worthless

Bitcoins are not deflationary. There are ~7200 Bitcoins found/created every day.

The dollar inflates at a much faster rate. Even if demand for Bitcoins was constant, the mismatch of inflation rates would cause Bitcoins to be worth more dollars over time.

Is gold worthless? Gold has and will exchange for more and more dollars as time goes on.
stillfire
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April 22, 2011, 10:29:05 PM
 #29

Then the guy with all the bitcoins ends up with a currency that nobody wants to buy from them. That person won't give up those bitcoins because he knows exactly what he gave up to get them too. They'll have value to the holder of the bitcoins, but not to anyone else.

So now the problem is that the value will go down - aka inflation? I might misunderstand you here but it sounds like you're saying deflation is bad because it leads to inflation.

Everyone has a price. That's when you'll sell your coins.

I think it's important to remember that Bitcoins are divisible. Let's say that an army of hoarders bought half the Bitcoins in existence and solemnly vowed never to spend them no matter what services they were offered. In this case, it would be like if those Bitcoins didn't exist, and the value of the remaining Bitcoins would go up. Like in a stock split, people will split their coins (not literally as a conscious action of course, but gradually, over time) and continue going about their lives.

I think the common illusion here is that many of us think we are doing well if our economy is 'expanding'. And we conveniently measure that 'expansion' in dollars being moved - so when the Feds print another 600 billion dollars, voila! The economy just 'grew'. That's a nice comforting blanket to have. In tough times we can 'jump start' the economy with just the push of a button.

But it's still an illusion. If Bitcoin means we have to give that illusion up to some extent, I think we will be okay. We'll just have to start measuring the economy by what really matters: goods and services being traded, not bills being printed.



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fsargent
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April 22, 2011, 10:30:41 PM
 #30

I'm not going to say that hording/investing/conspicuous consumption is bad for any individual.

What I will say is that a currency needs to mirror the amount of value currently in the economy.

It's really hard to talk about the 'value in the economy' without referring to currency. How do we quantify a nice meal, a working product, or a train ride -- without the crutches of price? Supply and demand are useful, but trying to put supply and demand on to the price of price is like trying to quantify an emotion. This is where it all gets a little philosophical.

The federal reserve's objective is to retain 'relative price stability'
Lets ignore debate on the federal reserve or its worth right now. Valid, but later.

Relative price stability means to stop mood swings in the 'worth of worth' -- so that money today is the same as money tomorrow. Inflation means that the price of goods is 'inflated' to their worth because money is 'worth less' because there's so much of it. Deflation vice versa. If the amount of currency matches the amount of stuff within an economy, then prices remain stable. With me so far?

Sandwich maker. Each sandwich is worth one token. There are ten tokens. There are ten sandwiches.

Some guy forges some tokens. He takes a few sandwiches, but there are still ten tokens in the economy, but only 8 sandwiches. How do you divide 8 sandwiches into ten tokens without either short changing someone 2 sandwiches, or dividing sandwiches or tokens? You can't, so the value of tokens has gone down. Inflation.

So lets move this up one integration.
Sandwich maker is making one sandwich a day, and one token a day. Stable!
Guy makes a few tokens.
Still as the economy progresses it'll keep being stable, once its gotten over the price change of the guy who 'invented' the tokens. But ultimately, he changed the economy without making sandwiches, by making tokens.
BUT!! The sandwhich maker is making tokens too! He's just making those tokens at the same rate as the sandwiches, so it's all good. The prices remain stable when the sandwich maker does it. If he just made sandwiches, those tokens would be super valueable, and the sandwich maker would just have a crap ton of sandwiches that nobody would trade him for, because they didn't have the tokens to buy it with.

The point that I'm finally getting to:
Making tokens, mining gold, forging, 'increasing the money supply', counterfitting all do the same thing -- Dilute the economy.
BUT if the economy is growing at the rate its being diluted, things remain the same.

This is where the Austrian economists are wrong in preferring hard metal currency as opposed to fiat currencies. Because Economies are what matters, and economics are fluid, and fiat. The object is irrelevant, what we're really quantifying is the value of human being's time, effort, and focus.
kiba
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April 22, 2011, 10:37:41 PM
 #31


This is where the Austrian economists are wrong in preferring hard metal currency as opposed to fiat currencies. Because Economies are what matters, and economics are fluid, and fiat. The object is irrelevant, what we're really quantifying is the value of human being's time, effort, and focus.

If this isn't a strawman, I don't know what it is.

In any case, the purpose of money or economic or whatever you refer to isn't about quantifying a human being's time, effort, and focus. None of this matters. What money does is to coordinate the allocation of resources, and human beings react to the incentives that's set by the economics of money.

The Austrians don't prefer hard currency to fiat money. They prefer free market money.

fsargent
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April 22, 2011, 10:43:19 PM
 #32


This is where the Austrian economists are wrong in preferring hard metal currency as opposed to fiat currencies. Because Economies are what matters, and economics are fluid, and fiat. The object is irrelevant, what we're really quantifying is the value of human being's time, effort, and focus.

If this isn't a strawman, I don't know what it is.

In any case, the purpose of money or economic or whatever you refer to isn't about quantifying a human being's time, effort, and focus. None of this matters. What money does is to coordinate the allocation of resources, and human beings react to the incentives that's set by the economics of money.

The Austrians don't prefer hard currency to fiat money. They prefer free market money.

Yeah sorry about the Austrian thing.
Money doesn't exist in a vacuum -- While it manages the incentives of individuals, larger bodies such as governments can enact policies which change the nature of money.

Philosophically money is to act as a physical embodiment of value.
That embodiment needs to be proportional to the past, and representative of the present.
kiba
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April 22, 2011, 10:47:37 PM
 #33

Yeah sorry about the Austrian thing.
Money doesn't exist in a vacuum -- While it manages the incentives of individuals, larger bodies such as governments can enact policies which change the nature of money.

Philosophically money is to act as a physical embodiment of value.
That embodiment needs to be proportional to the past, and representative of the present.

That is complete nonsense. Money is an abstraction. Money follow the laws of economics, not what economists want money to do.

Bitcoin is merely information. It doesn't physically embodies something abstract, like "value". It IS an abstraction.

fsargent
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April 22, 2011, 11:03:43 PM
 #34

Yeah sorry about the Austrian thing.
Money doesn't exist in a vacuum -- While it manages the incentives of individuals, larger bodies such as governments can enact policies which change the nature of money.

Philosophically money is to act as a physical embodiment of value.
That embodiment needs to be proportional to the past, and representative of the present.

That is complete nonsense. Money is an abstraction. Money follow the laws of economics, not what economists want money to do.

Bitcoin is merely information. It doesn't physically embodies something abstract, like "value". It IS an abstraction.


Money isn't its own entity, it's not an organism that needs to be tamed.
Don't mean to troll, but I'm hearing this:
Randy Marsh:
Yea, it is an angry and unforgiving Economy. To repent we must stop frivolous spending! Instead of paying for cable let us watch clouds! Instead of buying clothes, wear but sheets from thine beds! Cut spending to only the bare essentials! Water and bread and margaritas, yea. [everyone applauds softly]
(http://www.southparkstuff.com/season_13/episode_1303/epi1303script/ Video: http://www.southparkstudios.com/full-episodes/s13e03-margaritaville)


to which I reply:
Kyle:
Listen, this is all you need to know: the economy is not a supernatural all-knowing entity. The economy is just an idea, made up by people, thousands of years ago. The economy is not real. And yet, it is real. Nowadays they'll give credit to preactically anyone who applies for them. [pulls out an envelope] I applied for this yesterday to prove a point. It is an American Express Platinum card. [from Kyle's position, one can see hundreds of people listening to him] It has no spending limit. [cries of shock rise from the crowd] Do not be afraid! This is only plastic. It's just something made up by people. Truly meaningless and still we put our faith in it. Faith is what makes an economy exist. Without faith, it is only plastic cards and paper money.

Money embodies something value. You trade it for things you consider valueable. Money is valueable to it. But in order for it to have value, you need to have faith, faith that Kyle is talking about, that your currency will be accepted by others. It has no intrinsic value without the common consensus that it has value.

So, once you accept that it has value, my previous points have their foundation, where you need to match the economy to the quantity of your currency to maintain stable prices. Without being able to establish price stability, which you can't in bitcoin, then your currency will reach a breaking deflationary point, and fail.
kiba
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April 22, 2011, 11:07:22 PM
 #35



Money isn't its own entity, it's not an organism that needs to be tamed.
Don't mean to troll, but I'm hearing this:
Randy Marsh:
Yea, it is an angry and unforgiving Economy. To repent we must stop frivolous spending! Instead of paying for cable let us watch clouds! Instead of buying clothes, wear but sheets from thine beds! Cut spending to only the bare essentials! Water and bread and margaritas, yea. [everyone applauds softly]

Strawman.

Quote
So, once you accept that it has value, my previous points have their foundation, where you need to match the economy to the quantity of your currency to maintain stable prices. Without being able to establish price stability, which you can't in bitcoin, then your currency will reach a breaking deflationary point, and fail.

I already dispute this theory of your with the time preference account.

stillfire
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April 22, 2011, 11:08:16 PM
 #36

I can admit that the high speed money printing presses do lead to one form of economic stimulus: either you spend your money or it becomes worthless. A little like how you'd had to receive your daily paycheque in Germany and then run to the baker to buy bread before it was worthless.

It's not quite that extreme with dollars yet, but even in an interest bearing savings account (which technically is an investment) you'll lose a few percent of your purchasing power every year even in the 'high yield' accounts today.

But here's the twist: if this is what you're really after, you could do this with Bitcoin too. You would make a law that has everyone pay an annualised 3% of their savings to the state. Spend it or lose it.

So the question you should ask yourself is: is the problem the currency itself, or is it perhaps that you're in favour of inflationary spending? I certainly don't want to put words in your mouth, but let's say that is what you are angling for and that you have a hard time envisioning it working with Bitcoin.

Then indeed: it would no doubt be harder to sell the idea of the government literally taking money out of your account rather than invisible whisking it away through inflation. But it would at least be refreshingly honest.

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kiba
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April 22, 2011, 11:11:02 PM
 #37

I can admit that the high speed money printing presses do lead to one form of economic stimulus: either you spend your money or it becomes worthless. A little like how you'd had to receive your daily paycheque in Germany and then run to the baker to buy bread before it was worthless.

All that does is lead to inefficient spending of finite resources as companies are fooled by monetary profit.

Deflationary spiral, especially of the growth spiral, kill companies that aren't efficient.

stillfire
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April 22, 2011, 11:13:49 PM
 #38

So, once you accept that it has value, my previous points have their foundation, where you need to match the economy to the quantity of your currency to maintain stable prices. Without being able to establish price stability, which you can't in bitcoin, then your currency will reach a breaking deflationary point, and fail.

Given those grim prospects we're certainly lucky that no-one forces you to have faith in Bitcoin (as opposed to certain other currencies) and that you may rationally choose whether to use it or not.

And it is, of course, exactly that same rational choice which makes a deflationary 'spiral' impossible and self defeating. If you think the value is too high and must crash, you sell.

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stillfire
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April 22, 2011, 11:17:03 PM
 #39

All that does is lead to inefficient spending of finite resources as companies are fooled by monetary profit.

Deflationary spiral, especially of the growth spiral, kill companies that aren't efficient.

Ah, just to be clear, I agree with this as well. I was just setting the point up so I could refute an unspoken argument that 'spend it or lose it' policies aren't possible with Bitcoin, desirable or not.

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fsargent
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April 22, 2011, 11:19:34 PM
 #40

So do you guys see deflationary spirals as a good thing?
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