Economic of Deflationary Spiral

[fsargent]

Can you point me directly to 'time preference' theory? I am not sure what I'm looking for.

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[BitterTea]

Basically, humans tend to prefer things now rather than later. This preference causes people to buy the things they want, even though they could buy them cheaper in the future (due to price deflation). An example of this is in the field of information technology. Computers are always getting faster and cheaper, yet people still purchase them now.

Time preference also accounts for interest rates (I prefer money now rather than later and am willing to pay for that privilege) and many other economic phenomena.

http://en.wikipedia.org/wiki/Time_preference#Austrian_School_views

[fsargent]

But time preference is founded upon a functioning economy. If you have a deflationary spiral, then you won't have a functioning economy, so time preference is invalid.

I'm confused how Time Preference links into the argument that I'm making that Bitcoin has a deflationary spiral built into the system.

[tomcollins]

But time preference is founded upon a functioning economy. If you have a deflationary spiral, then you won't have a functioning economy, so time preference is invalid.

I'm confused how Time Preference links into the argument that I'm making that Bitcoin has a deflationary spiral built into the system.

Have you purchased a computer?  Why?  If you wait a year, you can buy it for cheaper.  Do you buy a new cell phone ever?  If so, why?  You could wait a year and get a better one for the same price.  Do you buy televisions ever?  Why?  You could wait a year and get a better one or the same one for cheaper.

Someone should tell all these technology company about this deflationary spiral.  No one will ever buy their products!  Sony, Microsoft, LG, Vizio, Dell, etc... should all be out of business due to it.  I'm gonna go short them.

[fsargent]

Yeah but our economy doesn't have a deflationary spiral.

[fsargent]

OH, that's what you mean.

That's not deflation, that's competition. The cost will decrease because of returns to scale and increase in efficiency, profits will increase, but then get reduced as companies reduce prices to gain marginal revenue. Companies jockeying for profit causes prices to decline.

Deflationary spirals are where the relative value between money and the goods purchased with that amount of money change. Has nothing to do with the price of the assets themselves, but the relative value of the price of the currency.

[BitterTea]

But time preference is founded upon a functioning economy. If you have a deflationary spiral, then you won't have a functioning economy, so time preference is invalid.

I disagree. Time preference is a fundamental aspect of human psychology, which happens to manifest itself in our economic dealings. Would you rather have $1000 now, or $1000 later?

[fsargent]

But there's a difference between 1MB of RAM now to 1MB of RAM ten years ago.

The price of assets is set by supply and demand of that asset.
The price of currency is set by supply and demand of that currency.

As goods get improved upon, previous products' demand decreases. With that demand decrease, price decreases. If that 'new' good weren't invented, the price would remain stable. This is why good like precious metals remain stable, as supply is pretty consistent (relative to computers).

Deflation isn't about price, it's about worth.

[mizerydearia]

But time preference is founded upon a functioning economy. If you have a deflationary spiral, then you won't have a functioning economy, so time preference is invalid.

I'm confused how Time Preference links into the argument that I'm making that Bitcoin has a deflationary spiral built into the system.

Have you purchased a computer?  Why?  If you wait a year, you can buy it for cheaper.  Do you buy a new cell phone ever?  If so, why?  You could wait a year and get a better one for the same price.  Do you buy televisions ever?  Why?  You could wait a year and get a better one or the same one for cheaper.

Someone should tell all these technology company about this deflationary spiral.  No one will ever buy their products!  Sony, Microsoft, LG, Vizio, Dell, etc... should all be out of business due to it.  I'm gonna go short them.

Have you purchased a pizza?   Why?  If you wait a year, you can buy it for cheaper.  http://bitcointalk.org/index.php?topic=137.0

[tomcollins]

But there's a difference between 1MB of RAM now to 1MB of RAM ten years ago.

The price of assets is set by supply and demand of that asset.
The price of currency is set by supply and demand of that currency.

As goods get improved upon, previous products' demand decreases. With that demand decrease, price decreases. If that 'new' good weren't invented, the price would remain stable. This is why good like precious metals remain stable, as supply is pretty consistent (relative to computers).

Deflation isn't about price, it's about worth.

You are right.  1MB of RAM now is probably higher quality too.

Did all of the RAM manufacturers go out of business due to the deflationary spiral?  Or does that happen in the next 20 years?

Deflation is awesome.  Unless you owe money. Then it sucks.  But just don't borrow money unless you can get a great return on that investment.  Buying hookers and blow with borrowed money, not gonna be a good idea in a deflationary economy.

When the money supply is fixed or growing, deflationary prices is ONLY possible when the economy is growing.  That is a good thing.  I'm very happy I don't have to spend $9000 for a computer that has 32 MB of RAM, 200 MHz Processor, etc...

[asdf]

Assuming a fixed money supply and fixed population, price deflation can only be the result of economic growth.

so...

economy grows     <-   people spend         <-   price inflation
   |                                                   ^
   V                                                   |
price deflation   ->   people don't spend   ->   economy contracts

...get it?

This is called negative feedback and it results in a stable system. This is the bitcoin economy.

[DATA COMMANDER]

But time preference is founded upon a functioning economy. If you have a deflationary spiral, then you won't have a functioning economy, so time preference is invalid.

I'm confused how Time Preference links into the argument that I'm making that Bitcoin has a deflationary spiral built into the system.

You're confusing cause and effect. Time preference is why deflation won't kill an economy. If people start hoarding and this causes prices to fall, the incentive to spend will become more and more powerful, because while it's true that you can continue to hoard and buy more stuff later, prices are low and you can buy a lot of stuff now. Your life is finite; you can only enjoy so much stuff. Let's say that you like to read fiction, and you have enough free time to read an average of one novel per week.  Every week that you refuse to buy a novel, the number of novels that you will be able to read during your lifetime decreases by one irreversibly.

[kiba]

You're confusing cause and effect. Time preference is why deflation won't kill an economy. If people start hoarding and this causes prices to fall, the incentive to spend will become more and more powerful, because while it's true that you can continue to hoard and buy more stuff later, prices are low and you can buy a lot of stuff now. Your life is finite; you can only enjoy so much stuff. Let's say that you like to read fiction, and you have enough free time to read an average of one novel per week.  Every week that you refuse to buy a novel, the number of novels that you will be able to read during your lifetime decreases by one irreversibly.

I am offering to pay ya for 5 BTC for an article on Time Preference and Deflationary Spiral in Bitcoin.

[da2ce7]

There is lots of confusion about this topic from Keynesian 'economists.'

The ‘deflationary spiral’ is a real condition that affects the fiat reserve back system.

First you need to understand that there is no ‘money’ as an asset, but a whole lot of ‘IOU’s’ that we are trading.  When the money supply is contracting (deflation) that means people are paying back their loans. (or saving).

The other thing is to understand is there is MORE loans out there than ‘money,’ so when people pay back their loans, the money to pay back the reaming loans becomes harder to find.

When the economy is booming or growing, more and more people take out loans to fund their future endeavours, thus increasing the monetary supply.  Because the economy is growing, this masks the real inflation (of the monetary supply).

The deflationary spiral happens when people start saving because of a slowing or contracting economy.  The money supply gets smaller as the loans get paid back, but because there is more loans that money, the total liquid money supply quickly gets smaller.  Remember hording means the repayment of loans, meaning money is being destroyed.  The loans get harder and harder to repay, and people start defaulting.

Thus in the current economic system, dollars will become very expensive stoping people spending, slowing the economy. Not because they are saving (for future spending), but because they are paying back their loans (so they don't have to pay interest).

Bitcoins are different.  Bitcoins go up in value when the bitcoin economy grows, and go down in value when it contracts.  Everything is the opposite to the fiat fractional reserve banking system.

Bitcoins ONLY deflate in value when the Bitcoin Economy is GROWING.

[no to the gold cult]

Gold is mined, that's where the currency comes from. Once the gold ran out, thats when things got nasty. That's why countries invaded eachother under mercantileism.
See: http://en.wikipedia.org/wiki/Dutch_disease
Not an exact comparison, to be fair. But the point is the same where you're mining a currency rather than providing goods or services. Once that currency mine runs out, then the effects that I'm discussing, like hording, will come into effect.

People are already hoarding. We just like to call them: saving.

Hm, actually saving is mostly the same as investment, you put your savings in a bank and the bank lends it out to someone else to start a flower-arranging business or whatever.

With bitcoins you hold them on your usb disk in a safe somewhere, ok fair enough, but nobody gets to use them (for a price).

On the other hand, you withdrawing bitcoins from being passed around the economy helps make all other bitcoins more valuable, thus increasing their buying power, so our flower-arranging enterprise can buy stock a tiny bit cheaper, and so can the baker next door... Still doesn't quite serve the same function as being able to borrow a lump sum from the bank though. In my opinion that sort of thing is probably best left to fiat.

[BioMike]

With bitcoins you hold them on your usb disk in a safe somewhere, ok fair enough, but nobody gets to use them (for a price).

Makes me think if these bearer bonds that you see on biddingpond are going to fill this niche.

[no to the gold cult]

People are already hoarding. We just like to call them: saving.

Difference between hording and saving is that savers are saving for a purchase, while horders are hording because they believe their money will be worth more next year than the current one.

BTW, saving in investments is not hording, because someone is using your money to grow it. Saving your money in cash, that's hording.

Basically as long as one does not take money from the bank deposit thus allowing bunks to multiply it by at least 10 due to miracle of fractional reserve banking it is saving. (Saving the banks, probably)

But as soon as one takes money from the bank and put it under the mattress in form of cash or gold or bitcoin, it is hoarding, is it not? And this is now classified as an act of "internal terrorism", no less...

Who said that brainwashing is not working?

That's quite far from what I said.
The banks generate their money because they loan it to people.
If I have $10, give it to the bank, and after one period they give me $11.
That bank gave "Steve" a loan of $10, and demanded $12 and the end of the term.
Steve took that $10 and made/sold muffins, earning him $15. He repays the loan, netting him $3.

That's an economy.

I disagree, an enconomy is the production, distribution and consumption of goods and services, what you describe above is how the banking sector works, at least in theory. And I must say it's good to read this discription on this forum.

Mostly around these parts people come over sounding quite shrill and paranoid about the evil Darth Banker. There's a lot wrong with the system to be sure, power and corruptability and human fallability and so on, but shreiking about 'fractional reserve banking' being a scam is like accusing a clock hanging on a wall of making time out of nothing.



^ LIAR!!!

[no to the gold cult]

But you will die if you don't eat anything for a year? Maybe this will cause people to only buy things which are important rather than what they do now which is buy an ton of crap.

To be fair, he already said 'subsistance levels'. But I also think what you say here is a feature of bitcoin... from a political/philosophical point of veiw I'm no anarcho-capitalist, I just want a more sustainable form of monetary system that doesn't drive us all to consume the planet like it is an infinate thing and there's no tommorow.

[no to the gold cult]

That's quite far from what I said.
The banks generate their money because they loan it to people.
If I have $10, give it to the bank, and after one period they give me $11.
That bank gave "Steve" a loan of $10, and demanded $12 and the end of the term.
Steve took that $10 and made/sold muffins, earning him $15. He repays the loan, netting him $3.

No. that would be:

If I have $10, give it to the bank, and after one period they give me $11.
That bank gave "Steve" a loan of $100, and demanded $120 and the end of the term.
Steve took that $100 and made/sold muffins, earning him $150. He repays the loan, netting him $30 and and bank 19$.

Out of 19$ Bank spends 9$ on marketing (also known as brainwashing) and everyone is happy.

[jtimon]

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

It would be great if a private currency (like bitcoin), could achieve stable prices, wouldn't it?
I understand that you prefer deflation to inflation, but sometimes some of you sound like you really like deflation and think it's a good thing.
Anyone wants to say openly that deflation is better than stable prices?

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?

Then how can you say that bitcoin will be deflationary?
Imagine we're in 2030, bitcoin is the world currency and new bitcoins are not issued anymore. If "the amount of stuff within an economy" increase we would have deflation. But if the "the amount of stuff within an economy" decreases (let's say due to an energy crisis or because mines are empty and rubbish dump full, or ...) we would have inflation. It's impossible to know what the money supply should be in 20 years without having a clue of how the real economy will look like then.

Maybe you can say that that's the reason why we need a central wise authority to issue the money, but I prefer inflation and deflation that emerge "naturally" from the free market than a central authority trying to avoid them artificially.

The federal reserve's objective is to retain 'relative price stability'

Really?
Is not to "save the economy" when things go wrong?
It's amazing how easy to forget is that objective for central bankers.
Who should remind this to the bernanke?