Were the Keynesians wrong?

[Erdogan]

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

Well he is smart, but he is not smart enough to grok that a trade always have two sides, and if the deflationary trait of the money means less buying, then the inflationary money would mean less selling. Why sell now when you can get more money for the same thing next year?

[twiifm]

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

Well he is smart, but he is not smart enough to grok that a trade always have two sides, and if the deflationary trait of the money means less buying, then the inflationary money would mean less selling. Why sell now when you can get more money for the same thing next year?

It's macro.  Has nothing to do with trading.

Deflationary prices cause people to put off spending.  Both consumers and business, so there is danger of deflationary spiral.  Rampant inflation is also not good but mild inflation provides enough incentive for spending which stimulate economic activity

[Erdogan]

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

Well he is smart, but he is not smart enough to grok that a trade always have two sides, and if the deflationary trait of the money means less buying, then the inflationary money would mean less selling. Why sell now when you can get more money for the same thing next year?

It's macro.  Has nothing to do with trading.

Deflationary prices cause people to put off spending.  Both consumers and business, so there is danger of deflationary spiral.  Rampant inflation is also not good but mild inflation provides enough incentive for spending which stimulate economic activity

Thats absurd, as I just explained. You have to think. You can not just listen to a bunch of people who talk each other up.

[twiifm]

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

Well he is smart, but he is not smart enough to grok that a trade always have two sides, and if the deflationary trait of the money means less buying, then the inflationary money would mean less selling. Why sell now when you can get more money for the same thing next year?

It's macro.  Has nothing to do with trading.

Deflationary prices cause people to put off spending.  Both consumers and business, so there is danger of deflationary spiral.  Rampant inflation is also not good but mild inflation provides enough incentive for spending which stimulate economic activity

Thats absurd, as I just explained. You have to think. You can not just listen to a bunch of people who talk each other up.

Why is it absurd?  Taken your logic it should be less buying vs more buying for the buyer.  Less buying means less selling vs more buying equal more selling; for the seller.

Your logic is broken

[virtfund]

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

It inflates initially; however, that inflation decreases to nothing over time (and, in fact, “becomes” deflation as the rate whereat coins are lost or made “unspendable” overtakes their production).

But this won't happen for decades. If it turns out the Bitcoin can't handle deflation (the two terms are mixed in your post), by the time it would start inflating, it will already by dead.

[dinofelis]

Deflationary prices cause people to put off spending.  Both consumers and business, so there is danger of deflationary spiral.  Rampant inflation is also not good but mild inflation provides enough incentive for spending which stimulate economic activity

Mild deflation causes people to put off SOME spending, in the same way as mild inflation causes people to put off SOME saving.

If mild deflation causes a deflationary spiral, then mild inflation causes hyperinflation.  They are each others' dual.

[twiifm]

Deflationary prices cause people to put off spending.  Both consumers and business, so there is danger of deflationary spiral.  Rampant inflation is also not good but mild inflation provides enough incentive for spending which stimulate economic activity

Mild deflation causes people to put off SOME spending, in the same way as mild inflation causes people to put off SOME saving.

If mild deflation causes a deflationary spiral, then mild inflation causes hyperinflation.  They are each others' dual.

Except we've never seen this case.  You are ignoring market psychology as determinant factor.  Things like sticky wages

[dinofelis]

Except we've never seen this case.  You are ignoring market psychology as determinant factor.  Things like sticky wages

Actually we do have seen this.  Computers !  Computers have been getting cheaper and cheaper the last 15 years.  According to Keynesian logic, nobody is going to buy computers, because next year you get not only a cheaper one, but also a more powerful one !

Turns out that the computer market is one in which the turn-over has been one of the highest.

We observe a similar behavior in cellular phones.  They get cheaper and cheaper (except for i-phones, which are transiting to a luxury item).  And the market explodes.

So no, lower prices in the future do not stop people from spending.

[twiifm]

Except we've never seen this case.  You are ignoring market psychology as determinant factor.  Things like sticky wages

Actually we do have seen this.  Computers !  Computers have been getting cheaper and cheaper the last 15 years.  According to Keynesian logic, nobody is going to buy computers, because next year you get not only a cheaper one, but also a more powerful one !

Turns out that the computer market is one in which the turn-over has been one of the highest.

We observe a similar behavior in cellular phones.  They get cheaper and cheaper (except for i-phones, which are transiting to a luxury item).  And the market explodes.

So no, lower prices in the future do not stop people from spending.

That has to do with scale and manufacturing within one industry as it goes from infancy to maturity not macro issues. 

Also your analysis is flawed.  Take Samsung for example.  Their top of the line model keeps increasing in price after each generation at the onset of release.  S5 at release costs more than S4, costs more than S3, etc.  It's just that they discount the previous generation after the initial R&D are recouped.  They depreciate the capex over the life cycle of product

[Erdogan]

Except we've never seen this case.  You are ignoring market psychology as determinant factor.  Things like sticky wages

Actually we do have seen this.  Computers !  Computers have been getting cheaper and cheaper the last 15 years.  According to Keynesian logic, nobody is going to buy computers, because next year you get not only a cheaper one, but also a more powerful one !

Turns out that the computer market is one in which the turn-over has been one of the highest.

We observe a similar behavior in cellular phones.  They get cheaper and cheaper (except for i-phones, which are transiting to a luxury item).  And the market explodes.

So no, lower prices in the future do not stop people from spending.

That has to do with scale and manufacturing within one industry as it goes from infancy to maturity not macro issues. 

Also your analysis is flawed.  Take Samsung for example.  Their top of the line model keeps increasing in price after each generation at the onset of release.  S5 at release costs more than S4, costs more than S3, etc.  It's just that they discount the previous generation after the initial R&D are recouped.  They depreciate the capex over the life cycle of product

If your proposition is that lower prices defer buying, he needs only one counterexample to negate it, and he has given it.

[twiifm]

Except we've never seen this case.  You are ignoring market psychology as determinant factor.  Things like sticky wages

Actually we do have seen this.  Computers !  Computers have been getting cheaper and cheaper the last 15 years.  According to Keynesian logic, nobody is going to buy computers, because next year you get not only a cheaper one, but also a more powerful one !

Turns out that the computer market is one in which the turn-over has been one of the highest.

We observe a similar behavior in cellular phones.  They get cheaper and cheaper (except for i-phones, which are transiting to a luxury item).  And the market explodes.

So no, lower prices in the future do not stop people from spending.

That has to do with scale and manufacturing within one industry as it goes from infancy to maturity not macro issues.  

Also your analysis is flawed.  Take Samsung for example.  Their top of the line model keeps increasing in price after each generation at the onset of release.  S5 at release costs more than S4, costs more than S3, etc.  It's just that they discount the previous generation after the initial R&D are recouped.  They depreciate the capex over the life cycle of product

If your proposition is that lower prices defer buying, he needs only one counterexample to negate it, and he has given it.

LOL no. Only if you don't understand macro principles.  Deflation is falling prices in aggregate not because of one sector.  You have to use CPI

Also I just made an example he he percieved the price is falling, yet in actuality they are not.

It's also easy to refute that notion.  If you are looking to buy an iPhone 5s and you know the price gets marked down in 6 months when iPhone 6 is released you might defer your purchase.  However this isn't the point

[Maegfaer]

LOL no. Only if you don't understand macro principles.  Deflation is falling prices in aggregate not because of one sector.  You have to use CPI

Also I just made an example he he percieved the price is falling, yet in actuality they are not.

It's also easy to refute that notion.  If you are looking to buy an iPhone 5s and you know the price gets marked down in 6 months when iPhone 6 is released you might defer your purchase.  However this isn't the point

You haven't given any argument why it's different in macro. Your iPhone example would mean that iPhones wouldn't sell well because people defer their purchase because new models constantly come out. Yet iPhones sell extremely well.

The argument is that if something can be gotten cheaper a year later than right now, people tend to defer their purchase. This ignores the fact that having something right now is more useful than having something at a later date. Having a roof over your head tonight is more valuable than having a roof over your head next week. Having a new phone right now is apparently more valuable than having to deal with an older phone for another year to get the new phone at a lower price, or an even better one at the same price.

It may be true that some people might defer because of lowering prices, but this doesn't make it a spiral, because things that have practical utility are more valuable in the now than in the future. The cost of postponing must be lower than the profits of postponing.


What makes deflation dangerous in our current monetary fiat system has to do with the reason behind the deflation. That reason is usually an excess of debts causing liquidity problems, effectively a reduction of the money supply. Those in monetary debt are more likely to default in times of deflation, because their debts increase in value. If they default, their creditor (like a bank) has to write off that debt. If the collateral didn't cover the value of the debt, and if the creditor (bank) also has debts to others it might default itself, which may bring it's creditors in trouble as well. It can become a chain-reaction.

So deflation in a debt-based monetary system like we have right now is lethal to governments and banks due to all the debt, and thus lethal to the fiat currency. A reduction of prices in a fixed money supply system due to economic growth is a completely different thing, and is actually benign. The "deflation is bad because of hoarding" argument is bullshit. It only distracts from the real problem, the ever-increasing debt due to higher interest rates on debit than on credit.

[twiifm]

Nope.  Try to pay attention.  I wasn't trying to prove anything except how utterly ridiculous it is to cite a micro example to illustrate a macro principle.

My evidence is a hundred years of economic data and the entire economics profession having consensus on this point.  Since you take a fringe and controversial position its your burden to prove not me.

https://www.stlouisfed.org/On-The-Economy/2014/August/The-Gold-Standard-and-Price-Inflation

Even Hayek conceded this point.  Only the fringe like Mises and Rothbard thinks otherwise

[Maegfaer]

http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2008/11/cj28n3-1.pdf

"The second type of deflation, however, is the result of positive
aggregate supply shocks that are not accommodated by an easing of
monetary policy. Such aggregate supply shocks are the result of pos-
itive innovations to productivity or factor input growth that lower per
unit costs of production and, in conjunction with competitive market
forces, create downward pressure on output prices. Unlike a collapse
in aggregate demand, positive aggregate supply shocks that are not
monetarily accommodated generate a benign form of deflation
where nominal spending is stable, because the decline in the price
level is accompanied by an increase in the actual and “natural” level
of output."

https://www.stlouisfed.org/On-The-Economy/2014/August/The-Gold-Standard-and-Price-Inflation

That article's point is that the gold standard isn't a good idea because it can be abolished or adjusted. Like fiat being "money created out of thin air" a gold-standard is a "promise out of thin air". It basically argues that you can trust neither government nor private central bank with control over your monetary system.

Anyway, I wasn't arguing for a gold-standard.

[Erdogan]

LOL no. Only if you don't understand macro principles.  Deflation is falling prices in aggregate not because of one sector.  You have to use CPI

Also I just made an example he he percieved the price is falling, yet in actuality they are not.

It's also easy to refute that notion.  If you are looking to buy an iPhone 5s and you know the price gets marked down in 6 months when iPhone 6 is released you might defer your purchase.  However this isn't the point

You haven't given any argument why it's different in macro. Your iPhone example would mean that iPhones wouldn't sell well because people defer their purchase because new models constantly come out. Yet iPhones sell extremely well.

The argument is that if something can be gotten cheaper a year later than right now, people tend to defer their purchase. This ignores the fact that having something right now is more useful than having something at a later date. Having a roof over your head tonight is more valuable than having a roof over your head next week. Having a new phone right now is apparently more valuable than having to deal with an older phone for another year to get the new phone at a lower price, or an even better one at the same price.

It may be true that some people might defer because of lowering prices, but this doesn't make it a spiral, because things that have practical utility are more valuable in the now than in the future. The cost of postponing must be lower than the profits of postponing.


What makes deflation dangerous in our current monetary fiat system has to do with the reason behind the deflation. That reason is usually an excess of debts causing liquidity problems, effectively a reduction of the money supply. Those in monetary debt are more likely to default in times of deflation, because their debts increase in value. If they default, their creditor (like a bank) has to write off that debt. If the collateral didn't cover the value of the debt, and if the creditor (bank) also has debts to others it might default itself, which may bring it's creditors in trouble as well. It can become a chain-reaction.

So deflation in a debt-based monetary system like we have right now is lethal to governments and banks due to all the debt, and thus lethal to the fiat currency. A reduction of prices in a fixed money supply system due to economic growth is a completely different thing, and is actually benign. The "deflation is bad because of hoarding" argument is bullshit. It only distracts from the real problem, the ever-increasing debt due to higher interest rates on debit than on credit.

Great wording.

[twiifm]

http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2008/11/cj28n3-1.pdf

"The second type of deflation, however, is the result of positive
aggregate supply shocks that are not accommodated by an easing of
monetary policy. Such aggregate supply shocks are the result of pos-
itive innovations to productivity or factor input growth that lower per
unit costs of production and, in conjunction with competitive market
forces, create downward pressure on output prices. Unlike a collapse
in aggregate demand, positive aggregate supply shocks that are not
monetarily accommodated generate a benign form of deflation
where nominal spending is stable, because the decline in the price
level is accompanied by an increase in the actual and “natural” level
of output."

https://www.stlouisfed.org/On-The-Economy/2014/August/The-Gold-Standard-and-Price-Inflation

That article's point is that the gold standard isn't a good idea because it can be abolished or adjusted. Like fiat being "money created out of thin air" a gold-standard is a "promise out of thin air". It basically argues that you can trust neither government nor private central bank with control over your monetary system.

Anyway, I wasn't arguing for a gold-standard.

This is what I said.  The price deflation of phones has to do with scale and manufacturing.  Still doesn't make this macro.  It just makes his original example impotent

What makes deflation dangerous in our current monetary fiat system has to do with the reason behind the deflation.

No it doesn't because inflation still occurred under gold standard.

Those in monetary debt are more likely to default in times of deflation, because their debts increase in value. If they default, their creditor (like a bank) has to write off that debt. If the collateral didn't cover the value of the debt, and if the creditor (bank) also has debts to others it might default itself, which may bring it's creditors in trouble as well. It can become a chain-reaction.

Congratulations, you just described a deflationary spiral.  In recession all prices are falling including income.  Macro 101

[Possum577]

I don't think Bitcoin has been around long enough for traditional economics or monetary theories to apply. The use, the price of bitcoin is so fresh and untested that none of it's history can be applied (yet) to it and arrive at conclusions that are generated using the same principles against the dollar or any other fiat currency.

[Erdogan]

I don't think Bitcoin has been around long enough for traditional economics or monetary theories to apply. The use, the price of bitcoin is so fresh and untested that none of it's history can be applied (yet) to it and arrive at conclusions that are generated using the same principles against the dollar or any other fiat currency.

That is a typical keynesian point of view. Inflation leads to increased productive output, unless when it don't, so they just add some new law and a new name, stagflation. Higher prices is soo good, except cheap oil, that is good. More money and credit is so good, but it is never relevant politics to just give people the money, or lower the tax. No, the extra money must always go to someone. Trickle down halleluja, but trickle up from some consumer to the investor, that is never good. There are no rules in keynesianism, it is only hapless statistics and correlastions that doesn't even correlate, and can not really be reliably collected. No respect for logic.

The real point of the rules you discover or express in academia, is that they either work, or the rule is wrong.

There is theory on how money works. It works for all money. Of course you have to define money, which is also covered. Don't shy away by calling it something else, like currency.

[username18333]

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

It inflates initially; however, that inflation decreases to nothing over time (and, in fact, “becomes” deflation as the rate whereat coins are lost or made “unspendable” overtakes their production).

But this won't happen for decades. If it turns out the Bitcoin can't handle deflation (the two terms are mixed in your post), by the time it would start inflating, it will already by dead.

2  :  a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

2  :  a contraction in the volume of available money or credit that results in a general decline in prices

(All red colorization mine.)

[dinofelis]

Nope.  Try to pay attention.  I wasn't trying to prove anything except how utterly ridiculous it is to cite a micro example to illustrate a macro principle.

The macro "law" is the macro-economic consequence of a certain postulated type of behavior of individual economic agents.
The theorem that (even mild) deflation will lead to a deflationary spiral, is based upon the idea that individual agents will hoard more, and spend less, today, because they know that they will get "more" for the same money.  That is a postulated behavior that is at the basis of the theorem on the Keynesian deflationary spiral.

We clearly see in specific cases, such as with computers and i-phones, that that behavior is NOT universal. 
That is sufficient to undermine the theorem, which is based upon that hypothesis.

If individual agents do NOT (systematically) defer spending because of *MILD* deflation, then this will NOT induce a deflationary spiral.  The price deflation (versus performance) in the computing market is actually HUGE: it is given grossly by Moore's law, which gives you a 100% deflation in 18 months, or grossly 66% yearly deflation !!!
Moore's law has been observed to hold until very recently for about more than 4 decades.  It starts to level off a bit.

So we have seen a deflationary market (which is btw the BIGGEST ECONOMIC SECTOR ON EARTH - the electronics market) which has been deflationary for about 66% for about 4 decades, without this market to stall totally (that is, without customers stopping to buy stuff that devaluates at a rate of 66% per year !).

So if this is an indication: 66% deflation in the biggest economic sector on earth for 4 decades while it is one of the most fertile sectors economically speaking, then you might start to get a small doubt that a mid deflation of a few percent per year will trigger a deflationary spiral, no ?