Will deflation be the fatal weakness of bitcoin?

[viboracecata]

Till now, bitcoin seems the perfect currency in in the free world, it has many advantages as we can see. Such as convienence, decentralization, no worry of inflation, except for the boring blockchain file lay in system partition.

But to me, I think I treated it as gold as many others did, so maybe we will hardly to use them, just holding to see price up, obviously it will cause the deflation, and then the bitcoin will not be currency any more, but like treasure.

But it is not treasure, and let's consider this situation, one day, bitcoin has been granted, and suddenly a big catastrophe attacks somewhere in the world, and destroyes all, people die, bitcoins of those people then lose forever, so the price up, others will hold their bitcoins more tightly, and no bitcoins are in the circulation.

No curculation, so it can be called curreny?

[1714999540]

1714999540

[jwzguy]

Nope.

[Serge]

there must be some graphs out there on amount of transactions...

[Shuai]

Till now, bitcoin seems the perfect currency in in the free world, it has many advantages as we can see. Such as convienence, decentralization, no worry of inflation, except for the boring blockchain file lay in system partition.

But to me, I think I treated it as gold as many others did, so maybe we will hardly to use them, just holding to see price up, obviously it will cause the deflation, and then the bitcoin will not be currency any more, but like treasure.

But it is not treasure, and let's consider this situation, one day, bitcoin has been granted, and suddenly a big catastrophe attacks somewhere in the world, and destroyes all, people die, bitcoins of those people then lose forever, so the price up, others will hold their bitcoins more tightly, and no bitcoins are in the circulation.

No curculation, so it can be called curreny?

You're an idiot and should learn how to read/search about a topic that has been discussed to death already.

The answer is no - Bitcoin is deflationary by design, it is not a weakness.

[Stephen Gornick]

But to me, I think I treated it as gold as many others did, so maybe we will hardly to use them, just holding to see price up, obviously it will cause the deflation, and then the bitcoin will not be currency any more, but like treasure.

Take a 1,000 people all with 1.0 bitcoin, and 900 are speculators and sit on their bitcoins.  Just 100 use it as currency, exchanging these 100 bitcoins back and forth.

Now imagine scenario 2: There are 100 people, each with 10 bitcoins and all 100 use bitcoin as a currency, exchanging them back and forth.

There's no difference between the two scenarios -- they both involve 1,000 bitcoins, and there's the same level of economic activity between the two of them. The difference is that the velocity of the 100 coins in scenario one is much higher than the velocity in scenario two.

Your hoarding does not take coins from anyone else.  If that's what you want to do with them, that's perfectly fine. Enjoy!

[FreeMoney]

An 'economist' I met while riding a bus saw my bitcoin logo and informed that while bitcoin was an awesome idea, it was going to completely fail because of deflation. I acted surprised to hear this and said "oh, does that mean it will be worth a lot more?" In case you are wondering, yes, yes it will, then it will be worth nothing because everyone wants it so much.

This fallacy is rampant. It's like schools and/or the media are giving everyone vaccinations against the idea of sound money.

[hazek]

It's truly astonishing to me how well the public education brainwashing takes hold of people's minds and makes them believe crazy stuff that no rational person would ever consider as logically valid and part of our reality.


This is basically what the OP claims:

So yea, umm hey guys, you can't have money that gets worth more over time making you richer! You know, because that will cause problems for the economy! You must have money that gets worth less and makes you poorer and it must get worth less by allowing this small gang of psychopaths to counterfeit and steal the productivity of the entire economy, it's only this way that you'll ever have a viable and healthy economy!!!11

W T F?  

[Graet]

It's truly astonishing to me how well the public education brainwashing takes hold of people's minds and makes them believe crazy stuff that no rational person would ever consider as logically valid and part of our reality.


This is basically what the OP claims:

So yea, umm hey guys, you can't have money that gets worth more over time making you richer! You know, because that will cause problems for the economy! You must have money that gets worth less and makes you poorer and it must get worth less by allowing this small gang of psychopaths to counterfeit and steal the productivity of the entire economy, it's only this way that you'll ever have a viable and healthy economy!!!11

W T F?  

nice translation

[DarkEmi]

hypothesis : Bitcoin will fail because of deflation
--
If bitcoin fails then price will go towards 0
If price goes to 0 then there is no deflation

Conclusion : Hypothesis is false

[sgravina]

Bitcoin as it exists today will fail.  Bitcoins are constantly being lost.  Yet there will never be more than 21,000,000 created.  Someday the last bitcoin will disappear and there will be none left.

For example, say Satoshi is dead and nobody knows about his bitcoin wallet.  Nobody knows Satoshi except his Mom.  And maybe his Mom doesn't know anything about Satoshi's cryptocurrency habit.   Whatever she does with Satoshi's computer probably destroys the bitcoins.

Gold is different.   It too is constantly being lost but it can be found again.  There was just a story about a ceiling full of gold being found in a house in France.  Gold never disappears.

When government fiat fails the people left just create a new fiat.  Because people still want to trade whatever they use for trade is currency.  Similarly bitcoin will eventually be replace with something else, something people like better.

[Ferroh]

Bitcoin as it exists today will fail.  Bitcoins are constantly being lost.  Yet there will never be more than 21,000,000 created.  Someday the last bitcoin will disappear and there will be none left.

A sufficient solution may be to raise the number of digits used. Then mining can continue for a while (since mining stops before 21 million coins due to rounding issues, but could continue when precision is increased). As long as we have a few satoshis, we have enough for everyone in the world due to infinite divisibility.

[Bitcoin Oz]

People need somewhere to stash their wealth thats safe from government interference and inflation. As long as that exists bitcoin will never die.

[Topazan]

There is one weakness of it, which I hope someone can invalidate. Suppose I'm a car-dealer and I buy 1 car for 100 BTC from my supplier. By the time I can sell it to a customer, I can only ask 95 BTC for it, because of deflation. Now everyone argues that isn't a problem, because the prices at my supplier also have dropped with the same amount, so I can buy a new one there for 95 BTC, and again have 1 car in stock, and don't suffer any losses. But if I did absolutely nothing I would still have 100 BTC, so why should I work hard as a car-dealer instead of hoarding?

I can't see why this would be good for Bitcoin. People said that it's good because it forces merchants to keep their stocks low, or produce goods only on-demand. But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

So how can Bitcoin solve this problem for merchants?

I don't see why that seems unlikely.  The car-dealer will realize that buying stock he can't sell at a profit is a bad investment, and will adjust his practice accordingly.

Besides, if the merchants are more comfortable doing business in more traditional currencies, no one's going to force them to use bitcoin.  It seems to me that most of the talk about inflation/deflation becomes irrelevant as soon as we let go of the idea that currency has to be a monopoly.

[paraipan]

People need somewhere to stash their wealth thats safe from government interference and inflation. As long as that exists bitcoin will never die.

^this, don't mind the gov shills guys, they will keep doing their shitty and worthless jobs while getting paid with the "monopoly" money.

[Clipse]

People tend to spend shitload of funnymoney($$$) on useless crap they dont need.

What we will start to see with bitcoins is that people will start spending bitcoins on stuff they really need rather than pure impulsive buying which is exactly why we are all in this shitstorm economy due to creditcards and impulsive buying of useless crap.

[AbsoluteZero]

The deflation is not a problem

Once the price is High enough to Support the economy of people trading In It, ”deflation” or rise In price will be very slow.

Now the price has risen very fast, From 0 to 11 In a couple of years.

Lets say price one day reaches 10,000 price will rise much slower From there.

[Clipse]

The deflation is not a problem

Once the price is High enough to Support the economy of people trading In It, ”deflation” or rise In price will be very slow.

Now the price has risen very fast, From 0 to 11 In a couple of years.

Lets say price one day reaches 10,000 price will rise much slower From there.

Yep, exponential growth wont be linear and there will be a cutoff point where bitcoin will start to represent small percentage gains/losses.

Right now its in the exponential growing stage and totally understandable that people want to hold on during the growth.

[hazek]

But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

Why does it seem unlikely to happen? I think it's very likely, almost certain to happen.

So how can Bitcoin solve this problem for merchants?

Bitcoin doesn't need to solve anything.

[Clipse]

The main goal about bitcoin in case it had no other goal is to put a end to freely printing money whenever you want more ie. every country right now. If there is other great things about bitcoin, and we all know there is, then thats just part of the bonus.

[Come-from-Beyond]

Till now, bitcoin seems the perfect currency in in the free world, it has many advantages as we can see. Such as convienence, decentralization, no worry of inflation, except for the boring blockchain file lay in system partition.

But to me, I think I treated it as gold as many others did, so maybe we will hardly to use them, just holding to see price up, obviously it will cause the deflation, and then the bitcoin will not be currency any more, but like treasure.

But it is not treasure, and let's consider this situation, one day, bitcoin has been granted, and suddenly a big catastrophe attacks somewhere in the world, and destroyes all, people die, bitcoins of those people then lose forever, so the price up, others will hold their bitcoins more tightly, and no bitcoins are in the circulation.

No curculation, so it can be called curreny?

The only true point why deflation was chosen as a feature of Bitcoin is to make early adopters (and Satoshi) rich. If Bitcoin succeeds in the future it will be just a side effect. Unfortunately, probability of such event is very low. So deflation will rather be fatal.

[TTBit]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Conclusion: We all want to spend money that is worth less and less each day, but this is only looking at half the story. We would rather work for a currency that appreciates in value. The more a currency is debased, the less work gets done. And isn't that exactly where the world is today? Flush with depreciating currencies which led to low productivity (high unemployment), declining GDP, etc.

 

[Come-from-Beyond]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Of coz inflationary currency. Deflation leads to unbalanced economics in which even a small factor could crash the whole system. Bitcoin will raise to 100$, 1.000$, 10.000$ just to fall to 0$ at some point.

[hazek]

Besides, if the merchants are more comfortable doing business in more traditional currencies, no one's going to force them to use bitcoin.  It seems to me that most of the talk about inflation/deflation becomes irrelevant as soon as we let go of the idea that currency has to be a monopoly.

Merchants are more comfortable doing business in more traditional currencies, because the deflational nature of Bitcoin doesn't allow them to sell their stock at a profit (as explained above), not because they don't want it. If the merchant still would ask 100 BTC for that car in order to make any profit, nobody would buy it, because it's above the market-value in USD.

So how will Bitcoin ever become adapted by the mainstream when most merchants can't use it, unless they pay their suppliers in USD? I do not think Bitcoin will ever become a monopoly, but it seems it could never function well if it was, and that seems not a good sign...

The mistake you're making here is assuming that because you can't find a solution other wont be able to either. And that's just not the case. Just because you don't see how this "problem" can be solved that doesn't mean there aren't merchants out there who know how to solve this problem. A clear example are merchants trading highly volatile commodities. These merchants must find a way to protect themselves in case they can't sell the commodities they bought at a higher price in case the spot price falls. How do they do it? The use futures contracts to hedge their profit, something that can be done with any good. If I car may fall in price, a car salesman can buy/sell a futures contract and protect his profits, problem solved.

BTW in case you didn't notice, bitcoins are consistently getting worth more and most likely never will. There will always be period when they get worth less because of people trying to diminish their balance sheets.

[hazek]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Of coz inflationary currency. Deflation leads to unbalanced economics in which even a small factor could crash the whole system. Bitcoin will raise to 100$, 1.000$, 10.000$ just to fall to 0$ at some point.

I'm sorry, but that's just idiotic. Who in their right mind would want to work for money they know will be worth less over a period of time just because you say it's going to help the economy when they have the option of working for money that will be worth more over time? 

[hazek]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Answer this question: How would you rather pay your employees? With a deflationary currency, or inflationary currency? When I hire someone for a year, I'd rather not have to change their salary every week to make sure it stays around the same value. And as long as employees don't get paid in BTC, it's never becoming a mainstream currency, but stays a commodity.

That's you and your personal preference and also irrelevant to the whole market. Those who will want to deal with a currency that gets worth more over time will find a way to solve this "problem". Perhaps a solution is to peg the wage contract to some amount of purchasing power instead of a fixed amount of currency.

[Come-from-Beyond]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Of coz inflationary currency. Deflation leads to unbalanced economics in which even a small factor could crash the whole system. Bitcoin will raise to 100$, 1.000$, 10.000$ just to fall to 0$ at some point.

I'm sorry, but that's just idiotic. Who in their right mind would want to work for money they know will be worth less over a period of time just because you say it's going to help the economy when they have the option of working for money that will be worth more over time? 

Inflation problem is solved with putting the money, u don't need right now, into business or bank accounts. Every person who have basic knowledge of economics would choose inflationary currency.

[Gabi]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Of coz inflationary currency. Deflation leads to unbalanced economics in which even a small factor could crash the whole system. Bitcoin will raise to 100$, 1.000$, 10.000$ just to fall to 0$ at some point.

I'm sorry, but that's just idiotic. Who in their right mind would want to work for money they know will be worth less over a period of time just because you say it's going to help the economy when they have the option of working for money that will be worth more over time? 

Inflation problem is solved with putting the money, u don't need right now, into business or bank accounts. Every person who have basic knowledge of economics would choose inflationary currency.

I'm unsure if you are trolling or epic failing.
If you are trolling then 0/10
If you are failing then epic fail.

[hazek]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Of coz inflationary currency. Deflation leads to unbalanced economics in which even a small factor could crash the whole system. Bitcoin will raise to 100$, 1.000$, 10.000$ just to fall to 0$ at some point.

I'm sorry, but that's just idiotic. Who in their right mind would want to work for money they know will be worth less over a period of time just because you say it's going to help the economy when they have the option of working for money that will be worth more over time?  

Inflation problem is solved with putting the money, u don't need right now, into business or bank accounts. Every person who have basic knowledge of economics would choose inflationary currency.

OOooohhh I see, so what you're saying is if I had any clue about economics I'd know that in order to get the greatest benefit for a society out of an economy(i.e. making a small gang of psychopaths rich when they steal by counterfeiting) I'd want to make a self sacrifice and use a currency that makes me poorer over time. And in order to protect myself from getting poorer I'd want to expose myself to counterparty risk by giving my money over to someone else in the economy (i.e. basically the same small gang of psychopaths) and allow them to do with my money what ever they want in order for them to pay me just barely enough interest to cover the inflation rate, if that.

I see, yeah, that makes a ton of sense to me, where do I sign up?

 
You got to be joking.

[Come-from-Beyond]

Inflation problem is solved with putting the money, u don't need right now, into business or bank accounts. Every person who have basic knowledge of economics would choose inflationary currency.

I'm unsure if you are trolling or epic failing.
If you are trolling then 0/10
If you are failing then epic fail.

I'm not trolling. Perhaps I'm failing (I'm not so good in economics) but here is citation from http://en.wikipedia.org/wiki/Deflation

Economists generally believe that deflation is a problem in a modern economy because they believe it may lead to a deflationary spiral. Historically not all episodes of deflation correspond with periods of poor economic growth.

[memvola]

Answer this question: How would you rather pay your employees? With a deflationary currency, or inflationary currency? When I hire someone for a year, I'd rather not have to change their salary every week to make sure it stays around the same value. And as long as employees don't get paid in BTC, it's never becoming a mainstream currency, but stays a commodity.

Why do you need to decrease salaries every week? Do you do increase them every week with an inflationary currency?

Most your arguments are based on volatility, not deflation. These can be solved by futures contracts, which are already being used for other currencies/vehicles. Also, most arguments about deflation is anti-symmetrical with inflation, and their solutions are anti-symmetrical as well, so usually either one is not better.

As such, I fail to see any difference between increasing salaries and decreasing them. Care to explain? Are you talking about the psychological hazard (which makes sense actually, but it's circumstantial) or a real economical problem there?

[Piper67]

Inflation problem is solved with putting the money, u don't need right now, into business or bank accounts. Every person who have basic knowledge of economics would choose inflationary currency.

I'm unsure if you are trolling or epic failing.
If you are trolling then 0/10
If you are failing then epic fail.

I'm not trolling. Perhaps I'm failing (I'm not so good in economics) but here is citation from http://en.wikipedia.org/wiki/Deflation

Economists generally believe that deflation is a problem in a modern economy because they believe it may lead to a deflationary spiral. Historically not all episodes of deflation correspond with periods of poor economic growth.

Trust me... inflation is no picnic.

Also, deflation might pose a problem to Bitcoin as a currency, but not as a commodity. In general, commodities with a fixed supply tend to do better than those without, because they are, in a sense, deflationary.

There are a bunch of solutions to this "problem" of Bitcoin deflation, when it finally becomes one (around 2020, by the way, until then, Bitcoin is inflationary). One of the solutions that I like best is to use Bitcoin as "backing" for other cryptocurrencies that will, in fact, be inflationary. That way Bitcoin acts like a gold standard for cryptocurrencies of the future.

But I agree with previous posts, OP should do even minimal homework before launching into this tired argument. There's a whole thread on deflation where all of these issues have been dealt with to death.

[Come-from-Beyond]

Inflation problem is solved with putting the money, u don't need right now, into business or bank accounts. Every person who have basic knowledge of economics would choose inflationary currency.

OOooohhh I see, so what you're saying is if I had any clue about economics I'd know that in order to get the greatest benefit for a society out of an economy(i.e. making a small gang of psychopaths rich when they steal by counterfeiting) I'd want to make a self sacrifice and use a currency that makes me poorer over time. And in order to protect myself from getting poorer I'd want to expose myself to counterparty risk by giving my money over to someone else in the economy (i.e. basically the same small gang of psychopaths) and allow them to do with my money what ever they want in order for them to pay me just barely enough interest to cover the inflation rate, if that.

I see, yeah, that makes a ton of sense to me, where do I sign up?

 
You got to be joking.

No self sacrifice here. Part of my money (USD) is stored in the bank and if I claimed it and bought something I use every day I would get more qty of that items. People usually forget that technological progress makes things cheaper and cheaper to produce. This works against inflation, so whole system is in a balanced state. If USD was deflationary currency the system would be unbalanced.

[Gabi]

Economists generally believe that deflation is a problem

Sorry but this "deflation is bad" thing is false. The deflationary spiral is just lol. It's the same as saying: "Why buy a computer today? Tomorrow there will be one more powerful, so wait for tomorrow! But next week there will be a even better computer!!" I suppose that no one buy computers today? Mh, false, everyone buy them

While if we look at inflationary currencies we see that tons of them failed all around the world. Post WW1 Germany? Zimbabwe? These 2 nations had such a heavy inflation that money was good as fuel for fire...

[memvola]

I'm not trolling. Perhaps I'm failing (I'm not so good in economics) but here is citation from http://en.wikipedia.org/wiki/Deflation

Economists generally believe that deflation is a problem in a modern economy because they believe it may lead to a deflationary spiral. Historically not all episodes of deflation correspond with periods of poor economic growth.

Quoting Wikipedia adds to the fail though.

What do you think is the mechanism that causes the deflationary spiral?

I concede that it's hard to discover causality in real world cases like the great depression, but you should always assume that there is a lot of bias towards easy explanations and centralized intervention and then covering the asses of those who intervened.

[Gabi]

Inflation problem is solved with putting the money, u don't need right now, into business or bank accounts. Every person who have basic knowledge of economics would choose inflationary currency.

OOooohhh I see, so what you're saying is if I had any clue about economics I'd know that in order to get the greatest benefit for a society out of an economy(i.e. making a small gang of psychopaths rich when they steal by counterfeiting) I'd want to make a self sacrifice and use a currency that makes me poorer over time. And in order to protect myself from getting poorer I'd want to expose myself to counterparty risk by giving my money over to someone else in the economy (i.e. basically the same small gang of psychopaths) and allow them to do with my money what ever they want in order for them to pay me just barely enough interest to cover the inflation rate, if that.

I see, yeah, that makes a ton of sense to me, where do I sign up?

 
You got to be joking.

No self sacrifice here. Part of my money (USD) is stored in the bank and if I claimed it and bought something I use every day I would get more qty of that items. People usually forget that technological progress makes things cheaper and cheaper to produce. This works against inflation, so whole system is in a balanced state. If USD was deflationary currency the system would be unbalanced.

MMhh.... no? What are you saying is false.

[Saturn7]

The problem of deflation in the classical sense stems from the lack of granularity of paper money.
You can't practically spend less then 1 cent.

Bitcoin is a new monetary instrument, trying to explain it with classical economics is like trying to disprove Einsteins relativity with Newtonian physics. You just can't.

There is no reason why both systems can't co-exist, just like in research you can use Newtonian physics for placing a satellite in orbit and you have to use Einsteins relativity to make GPS work.

All monetary policy (paper money) has one thing in common.
They want the whole universe to revolve around "their" policy.
Just like when String theory came out, the only reason so many scientists where against it is because it devalued their own knowledge of how the universe works.
They didn't want an opinion outside of their own framework.

[Gabi]

Guys sell your gold now! Otherwise eventually it will drop to 0 and will be worthless!

[memvola]

Why do you need to decrease salaries every week? Do you do increase them every week with an inflationary currency?

Because the purchasing power of the BTC grows quickly because of deflation, and the purchasing power of USD is kept pretty stable by the controlled inflation.

Although I get your point, it's still volatility. I don't see why deflation would be faster than inflation in the ideal case. Also, Bitcoin money supply is inflating like crazy at the moment, but the price is still increasing. So I'll re-phrase your argument to make it clearer for me:

"As an employer, I would prefer to pay salaries in a controlled currency, because exchange rate changes could be harmful to me otherwise."

I'll argue that, as an employer or an employee, I'd prefer some kind of contractual local control there, rather than an alien authority. It will be fairer for me as an employee, and more predictable for me as an employer. Sure, it would involve something I wouldn't have to deal with with State money, but technology can alleviate the burden here too.

Guys sell your gold now! Otherwise eventually it will drop to 0 and will be worthless!

 

[Come-from-Beyond]

Guys sell your gold now! Otherwise eventually it will drop to 0 and will be worthless!

Gold itself could be used to produce components of electronical devices. Bitcoin useless without using it as an instrument of exchange. When the price goes up, ppl try to avoid to exchange their bitcoin for goods/services. So for bitcoin deflation equals death. The only way to solve this problem is to get rid of 21.000.000 cap.

[waspoza]

Why do you need to decrease salaries every week? Do you do increase them every week with an inflationary currency?

Because the purchasing power of the BTC will grow quickly after 21M, while the purchasing power of USD can be kept pretty stable by the controlled inflation.

In last 12 years USD lost about 30% purchasing power. This is "keeping pretty stable" for you?

[paraipan]

Guys sell your gold now! Otherwise eventually it will drop to 0 and will be worthless!

Gold itself could be used to produce components of electronical devices. Bitcoin useless without using it as an instrument of exchange. When the price goes up, ppl try to avoid to exchange their bitcoin for goods/services. So for bitcoin deflation equals death. The only way to solve this problem is to get rid of 21.000.000 cap.

[Come-from-Beyond]

The only way to solve this problem is to get rid of 21.000.000 cap.

The best way to solve it is leave Bitcoin alone and go make a different coin with whatever properties you think are superior, and then let them compete.

Already beta-testing and tuning new coin. But I need Bitcoin stay alive to keep cryptocoin ecosystem healthy.

[nevafuse]

Stocks are deflationary.  Aren't we told to keep our money in stocks to counter inflation & grow our money for retirement?  So if everyone is hoarding stocks & they are deflationary, how come they haven't failed yet?

[cbeast]

Stocks are deflationary.  Aren't we told to keep our money in stocks to counter inflation & grow our money for retirement?  So if everyone is hoarding stocks & they are deflationary, how come they haven't failed yet?

Stocks are not deflationary, when the demand rises they just give out extra stocks.

They split the stocks sometimes.

[Pieter Wuille]

Read https://bitcointalk.org/index.php?topic=11627.0.

[ffe]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Answer this question: How would you rather pay your employees? With a deflationary currency, or inflationary currency? When I hire someone for a year, I'd rather not have to change their salary every week to make sure it stays around the same value. And as long as employees don't get paid in BTC, it's never becoming a mainstream currency, but stays a commodity.

That's you and your personal preference and also irrelevant to the whole market. Those who will want to deal with a currency that gets worth more over time will find a way to solve this "problem". Perhaps a solution is to peg the wage contract to some amount of purchasing power instead of a fixed amount of currency.

Yeah. Dollars for example...

[Come-from-Beyond]

Read https://bitcointalk.org/index.php?topic=11627.0.

Useless reading. The author just avoids the topic. I repeat if someone missed my words:

The only true point why deflation was chosen as a feature of Bitcoin is to make early adopters (and Satoshi) rich.

[cbeast]

Read https://bitcointalk.org/index.php?topic=11627.0.

Useless reading. The author just avoids the topic. I repeat if someone missed my words:

The only true point why deflation was chosen as a feature of Bitcoin is to make early adopters (and Satoshi) rich.

Q: "Will deflation be the fatal weakness of bitcoin?"
A: No

[Portnoy]

Read https://bitcointalk.org/index.php?topic=11627.0.

Useless reading. The author just avoids the topic. I repeat if someone missed my words:

The only true point why deflation was chosen as a feature of Bitcoin is to make early adopters (and Satoshi) rich.

There are several authors.  Read the whole thread. 

[evoorhees]

hypothesis : Bitcoin will fail because of deflation
--
If bitcoin fails then price will go towards 0
If price goes to 0 then there is no deflation

Conclusion : Hypothesis is false

This is so beautifully stated. Thank you!

[memvola]

Bitcoin money supply is inflating like crazy at the moment, but the price is still increasing.

Exactly my point! If the price is increasing fast now, even thought it's inflating, can you imagine how much harder it will sky-rocket as soon as deflation actually kicks in? I love everything about Bitcoin, except for the fact that it can never have a stable value by nature.

I share your love of Bitcoin, but I think you got past my point altogether, and went backwards through the debate some more. Why don't you do some research on how options contracts work and think about how they can be made easier to use? Maybe they aren't as much of a solution as I think, but at least it would give something to argue about.

Besides, as you are also presumably talking about inflation of the money supply, when do you think the deflation will kick in? In 10 years? 20? As Bitcoin is distributed more homogeneously throughout humanity, the volatility should actually get lower. Why do you think the value will increase rapidly? If it were such a certainty, the current price would already reflect that.

[memvola]

The only true point why deflation was chosen as a feature of Bitcoin is to make early adopters (and Satoshi) rich.

That is how comic books work.

[Come-from-Beyond]

hypothesis : Bitcoin will fail because of deflation
--
If bitcoin fails then price will go towards 0
If price goes to 0 then there is no deflation

Conclusion : Hypothesis is false

This is so beautifully stated. Thank you!

Wrong statement. U assumed that deflation is a permanent state.

[evoorhees]

Bitcoin as it exists today will fail.  Bitcoins are constantly being lost.  Yet there will never be more than 21,000,000 created.  Someday the last bitcoin will disappear and there will be none left.

For example, say Satoshi is dead and nobody knows about his bitcoin wallet.  Nobody knows Satoshi except his Mom.  And maybe his Mom doesn't know anything about Satoshi's cryptocurrency habit.   Whatever she does with Satoshi's computer probably destroys the bitcoins.

Gold is different.   It too is constantly being lost but it can be found again.  There was just a story about a ceiling full of gold being found in a house in France.  Gold never disappears.

When government fiat fails the people left just create a new fiat.  Because people still want to trade whatever they use for trade is currency.  Similarly bitcoin will eventually be replace with something else, something people like better.

Hmmmm.

A) The last Bitcoin will never be lost. In fact, it's almost certainly true that the rate of "loss" of Bitcoins falls off asymptotically, so that each year fewer and fewer coins are lost. This is true because as the coins get more valuable, people are increasingly careful with them (if you own a $1000 coin you will be careful with it, I assure you). It is also true because as people get comfortable with BTC they won't lose coins as often. Given the above, I might go so far as to say that the maximum number of lost coins will likely never pass a few million btc.

B) Gold is not different. There is a fixed amount of gold on earth, and a fixed amount of Bitcoin. Both can be lost. Gold definitely "disappears"... there are plenty of sunken ships that will never be recovered, and lost wedding rings thrown into lakes with no attempt to recover

C) Yes, "eventually" Bitcoin will be replaced by something else... just as gold is about to be replaced by Bitcoin

[evoorhees]

The only true point why deflation was chosen as a feature of Bitcoin is to make early adopters (and Satoshi) rich. If Bitcoin succeeds in the future it will be just a side effect. Unfortunately, probability of such event is very low. So deflation will rather be fatal.

Bitcoin is not deflationary. It is inflationary. The rate of inflation is currently high, and it falls to zero over time, but never goes negative. For the gazillionth time, let's stop calling Bitcoin deflationary.

[nevafuse]

Stocks are not deflationary, when the demand rises they just give out extra stocks.

Although I didn't previously know, it appears Google did this in 2005.  But I couldn't find any other examples with large companies, so it appears to be pretty rare.  So sounds like for the most part, the number of shares stays pretty set unless it is split (which is no different than moving the decimal point in bitcoin).  I still think this is a good example of a successful deflationary system that carries similar characteristics.

[cbeast]

"Have you come to enslave Mankind to mine gold for your Overlords?"
"Nah. We have robots mining asteroids for gold. We came to flood your gold market to enslave you with your Bitcoin."

[tonto]

An 'economist' I met while riding a bus saw my bitcoin logo and informed that while bitcoin was an awesome idea, it was going to completely fail because of deflation. I acted surprised to hear this and said "oh, does that mean it will be worth a lot more?" In case you are wondering, yes, yes it will, then it will be worth nothing because everyone wants it so much.

I disagree with the economist as well... I like "stuff" too much.  Sometimes money burns a hole in my pocket.  I strongly believe that having a bird in hand is worth two in the bush.  Which means that I like having physical things that can't be taken away from me in a puff of economy crashing, etc.  
 
I hold on to bitcoins only until I can afford that thing that I currently want to buy.
 
If someday they skyrocket to 100s or 1000s of dollars per, then I will buy a nicer boat than I currently own.  Or cash out to pay off my house, etc.  
 
I take the middle road of not knowing if bitcoins will win or lose, so I just buy things now.  If they crash, great, I "won".  If they skyrocket in value, then I will feel good for you guys who gambled and won that game.  
 
I think everyone has a "cash-out" value where they think "ok, they're high enough, time for me to cash out and buy something cool".  

[wormbog]

Bitcoin will never replace fiat because it can't be easily controlled by a central government. It's a parallel currency, like gold. Its best uses are:

• Store of value (hoarding)
• Unregulated/illegal trade (silkroad)

No government will ever allow a legitimate business to pay its employees in an unregulated and untraceable currency. Bitcoin is the currency of the black market.

Here's a milestone to keep an eye out for: the first kidnapping with ransom demanded in Bitcoin. No more briefcases of cash and police stakeouts.

[evoorhees]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Answer this question: How would you rather pay your employees? With a deflationary currency, or inflationary currency? When I hire someone for a year, I'd rather not have to change their salary every week to make sure it stays around the same value. And as long as employees don't get paid in BTC, it's never becoming a mainstream currency, but stays a commodity.

You forget the aspect of competition. An employer doesn't get to unilaterally "chose" in which currency to pay his employees. His employees will demand a certain compensation in line with market expectations. If everyone wants Bitcoins, the employer will need to offer salary in Bitcoins.

Further, if the market rate for labor is X in a depreciating currency, it will be X-Y in an appreciating currency, meaning that an employer can pay nominally less in the appreciating currency and thus may well chose to do so. An employee may say, "I'll work for $20,000 in USD or $19,000 in BTC" and through negotiation both the employer and employee will meet on mutually beneficial terms.

[Etlase2]

The problem of deflation in the classical sense stems from the lack of granularity of paper money.
You can't practically spend less then 1 cent.

I've seen this argument before, and it is hilariously awful. The indivisibility of a cent has absolutely nothing to do with the problems of deflation. Ok, theoretically in some bizarro world it could have potentially been a problem, but not in any historic era of deflation. Not even close. The problem of bitcoin's coin distribution is "resolved" by having near infinitely divisible coins.

As far as deflation itself being a weakness, I don't think it will cause the end of the currency or anything, but I think it will hinder its widespread adoption. Volatility may be fun to play, but it's not fun to run a business around.

[evoorhees]

Why do you need to decrease salaries every week? Do you do increase them every week with an inflationary currency?

Because the purchasing power of the BTC will grow quickly after 21M, while the purchasing power of USD can be kept pretty stable by the controlled inflation.

The purchasing power of USD has fallen by 98% in the last 100 years. That's stable to you?

And let's not forget that in a "mature bitcoin world", the rate of BTC appreciation in purchasing power will be small. BTC will not increase by 10% in a month in a mature market. It might increase a few percent per year, and market participants will not have problems transacting in a currency which increasing a few percent annually, for they are already today doing so with a currency that is depreciating by that amount.

[mobile4ever]

Till now, bitcoin seems the perfect currency in in the free world, it has many advantages as we can see. Such as convienence, decentralization, no worry of inflation, except for the boring blockchain file lay in system partition.

But to me, I think I treated it as gold as many others did, so maybe we will hardly to use them, just holding to see price up, obviously it will cause the deflation, and then the bitcoin will not be currency any more, but like treasure.

But it is not treasure, and let's consider this situation, one day, bitcoin has been granted, and suddenly a big catastrophe attacks somewhere in the world, and destroyes all, people die, bitcoins of those people then lose forever, so the price up, others will hold their bitcoins more tightly, and no bitcoins are in the circulation.

No curculation, so it can be called curreny?

I think you have a valid point, but the solution is to have a POS system created. BTC will become mainstream and then no more a "treasure", but more of what it was intended to be... a mode of transactions.

[TTBit]

If you believe deflation is a problem, answer this question: Would you rather work and be paid with a deflationary currency (gold / bitcoin), or inflationary currency (USD / zimbabwe dollars)?

Answer this question: How would you rather pay your employees? With a deflationary currency, or inflationary currency? When I hire someone for a year, I'd rather not have to change their salary every week to make sure it stays around the same value. And as long as employees don't get paid in BTC, it's never becoming a mainstream currency, but stays a commodity.

I think you are proving my point?

I'd rather PAY in an inflationary currency. Be it my employees or my groceries.

[cbeast]

Bitcoin will never replace fiat because it can't be easily controlled by a central government. It's a parallel currency, like gold. Its best uses are:

• Store of value (hoarding)
• Unregulated/illegal trade (silkroad)

No government will ever allow a legitimate business to pay its employees in an unregulated and untraceable currency. Bitcoin is the currency of the black market.

Here's a milestone to keep an eye out for: the first kidnapping with ransom demanded in Bitcoin. No more briefcases of cash and police stakeouts.

Take my wife, please.

[anu]

Today there is a flurry of news about how Silk Road is turning over $2 Million a day. And that is just SR. If no one is spending, how does that happen?

This whole "Deflation is bad" meme is just propaganda set loose by people who want to collect seignorage (the central banks) - aka Inflation TAX. Deflation is not bad, otherwise the computer industry would be in a recession since the 1950s.

In the FIAT world, a credit contraction is bad. And this causes Deflation in the FIAT world. Credit contraction is bad because everyone is forced to pay back loans instead of investing and consuming.

[evoorhees]

No government will ever allow a legitimate business to pay its employees in an unregulated and untraceable currency. Bitcoin is the currency of the black market.

The US government is currently allowing it today. Your point is demonstrably false.

Bitcoin is the currency of the market, because it is mankind's most efficient means of exchange (or perhaps I should say, this is its potential at least). Whether the market is black or white or anything in between, we'll see increased adoption of Bitcoin throughout. Dismissing Bitcoin because some smart criminals have caught on earlier than the average gas station owner is silly.

[evoorhees]

As far as deflation itself being a weakness, I don't think it will cause the end of the currency or anything, but I think it will hinder its widespread adoption. Volatility may be fun to play, but it's not fun to run a business around.

I bet you that, if given a long enough term, Bitcoin will be less volatile than any government fiat currency. On one hand, we have a currency with a fixed (non-volatile) supply, and on the other hand, we have currencies with very volatile supplies. To disagree with me, you have to make the absurd claim that a currency with a highly volatile supply will tend to be less volatile than one with a perfectly predictable supply in the long run. 

Bitcoin's price volatility will roughly resemble the asymptotic curve shape of its inflation schedule. Volatility is already far lower than a year ago, and a year from now will be lower than today, and so on. There have already been days this year where BTC was less volatile than EUR... an amazing statistic, for such a small market so soon.

[waspoza]

To all who wanna bitcoin be inflanatory: you can always send periodically small amount of your bitcoins to 1waSPoZabGQw9a2MeWmJYaqaUyDJBcGmj. There, problem solved.

[anu]

As far as deflation itself being a weakness, I don't think it will cause the end of the currency or anything, but I think it will hinder its widespread adoption. Volatility may be fun to play, but it's not fun to run a business around.

I bet you that, if given a long enough term, Bitcoin will be less volatile than any government fiat currency.

+1

But nobody would take that bet. Last november, buying a car would move the market by 20% or more. Nowadays, this deal would go unnoticed.

[evoorhees]

To all who wanna bitcoin be inflanatory: you can always send periodically small amount of your bitcoins to 1waSPoZabGQw9a2MeWmJYaqaUyDJBcGmj. There, problem solved.

LOL brilliant

[wormbog]

No government will ever allow a legitimate business to pay its employees in an unregulated and untraceable currency. Bitcoin is the currency of the black market.

The US government is currently allowing it today. Your point is demonstrably false.

Bitcoin is the currency of the market, because it is mankind's most efficient means of exchange (or perhaps I should say, this is its potential at least). Whether the market is black or white or anything in between, we'll see increased adoption of Bitcoin throughout. Dismissing Bitcoin because some smart criminals have caught on earlier than the average gas station owner is silly.

Can you offer an example of a US business that legally pays its employees without bank involvement?

Governments issue currency and regulate commerce. They will not sanction a currency that they cannot regulate. It's not a matter of efficiency. It's a matter of control.

[evoorhees]

No government will ever allow a legitimate business to pay its employees in an unregulated and untraceable currency. Bitcoin is the currency of the black market.

The US government is currently allowing it today. Your point is demonstrably false.

Bitcoin is the currency of the market, because it is mankind's most efficient means of exchange (or perhaps I should say, this is its potential at least). Whether the market is black or white or anything in between, we'll see increased adoption of Bitcoin throughout. Dismissing Bitcoin because some smart criminals have caught on earlier than the average gas station owner is silly.

Can you offer an example of a US business that legally pays its employees without bank involvement?

Governments issue currency and regulate commerce. They will not sanction a currency that they cannot regulate. It's not a matter of efficiency. It's a matter of control.

I work for BitInstant LLC, a fully legal and licensed NY company, registered with FinCEN. I'm paid in BTC.  I could also be paid in gold, silver, carts of ammo, or seashells. The US Gov doesn't need to "sanction" something for it to be used in the marketplace. Unless the US Gov explicitly declares BTC to be illegal for use (THAT would be quite crazy), there is no reason a company can't pay in Bitcoin. Of course, whenver anyone receives value it is supposed to be declared for taxes, but this is true of all assets from USD to BTC to gold to garage sale collections.

[anu]

Unless the US Gov explicitly declares BTC to be illegal for use (THAT would be quite crazy), ...

Not surprising, though. The US govt is waging war on many things, why not Bitcoin, English lawn or the number PI?

[cypherdoc]

It's truly astonishing to me how well the public education brainwashing takes hold of people's minds and makes them believe crazy stuff that no rational person would ever consider as logically valid and part of our reality.


This is basically what the OP claims:

So yea, umm hey guys, you can't have money that gets worth more over time making you richer rewarding savers and the prudent! You know, because that will cause problems for the economy financial elite/banksters! You must have money that gets worth less and makes you poorer and it must get worth less by allowing this small gang of psychopaths to counterfeit and steal the productivity of the entire real economy, it's only this way that you'll ever have a viable and healthy economy!!!11

W T F?  

cleaned that up for ya, altho overall it was pretty darn close.  +1!

[Portnoy]

Unless the US Gov explicitly declares BTC to be illegal for use (THAT would be quite crazy), ...

Not surprising, though. The US govt is waging war on many things, why not Bitcoin, English lawn or the number PI?

When was the last time the US govt won a war it waged?  I mean based on actual facts and not reports from
FOX news... 

[wormbog]

I work for BitInstant LLC, a fully legal and licensed NY company, registered with FinCEN. I'm paid in BTC.  I could also be paid in gold, silver, carts of ammo, or seashells. The US Gov doesn't need to "sanction" something for it to be used in the marketplace. Unless the US Gov explicitly declares BTC to be illegal for use (THAT would be quite crazy), there is no reason a company can't pay in Bitcoin. Of course, whenver anyone receives value it is supposed to be declared for taxes, but this is true of all assets from USD to BTC to gold to garage sale collections.

Interesting. Are you an employee or a contractor?

[memvola]

Why do you think the value will increase rapidly? If it were such a certainty, the current price would already reflect that.

Because there will be not enough coins compared to the people living on this planet. So either Bitcoin will become hugely deflationary, and prices will rise rapidly each week. Or it will fail to attract an large userbase, and demand will be low enough that prices can stay stable. Both are not positive outcomes.

I don't get the maths behind it. If everyone already had Bitcoins, then it would rise only according to the overall wealth increase, which the wages should match anyway, so you wouldn't have to change a damn thing. If everyone doesn't use Bitcoin and there are tens of competing currencies, investment vehicles and whatnot, why does everyone want to hold Bitcoin all of a sudden? Didn't they know Bitcoin's supply is limited before it hit the limit?

I'd rather PAY in an inflationary currency. Be it my employees or my groceries.

If you are not willing to PAY with them, then you're hoarding them, so deflation is a problem.

I don't get this either. When you decide to pay or have to pay, value transfer isn't affected by in which form you make the transfer. It only matters in which form you keep it until payment. That's not hoarding either.

Say you have Euros. You can convert them to Bitcoin and "hoard" them, or you can buy a camcorder with your Euros. Why do you buy the camcorder instead of buying Bitcoin if hoarding is so appealing? It doesn't make any sense. How is it different than having bitcoins in the first place? How is it not rational to buy the camcorder when I have Bitcoin but rational when I have the same value in Euros?

[Etlase2]

I bet you that, if given a long enough term, Bitcoin will be less volatile than any government fiat currency. On one hand, we have a currency with a fixed (non-volatile) supply, and on the other hand, we have currencies with very volatile supplies. To disagree with me, you have to make the absurd claim that a currency with a highly volatile supply will tend to be less volatile than one with a perfectly predictable supply in the long run. 

Supply doesn't matter, velocity does. It is possible, and hell probably likely, that hyperinflation will happen with some of the world's biggest currencies, but it hasn't happened yet. So far, as far as absolute, economic catastrophes go, the limited supply currency loses. And really, fiat currencies are only so bad today because of central banks and all of the ills that come along with that and debt-based money.

Bitcoin's price volatility will roughly resemble the asymptotic curve shape of its inflation schedule. Volatility is already far lower than a year ago, and a year from now will be lower than today, and so on.

Whoa you mean volatility is lower from when someone pumped $3 million into a ~$50k market?? Bitcoin's "market cap" is still insanely tiny compared to the world economy. It has to go through one of these volatility periods for every market expansion. Every new market will be at the mercy of the previous markets. "Hey switch over to bitcoin, you only have to give up 20-30% of your revenue to us for the first couple years to get in!" Pumps, dumps, manipulations, bankruptcies--it is all quite accessible in this format. "Bit Street" arguably already exists and will only get smarter.

[makomk]

It's truly astonishing to me how well the public education brainwashing takes hold of people's minds and makes them believe crazy stuff that no rational person would ever consider as logically valid and part of our reality.


This is basically what the OP claims:

So yea, umm hey guys, you can't have money that gets worth more over time making you richer! You know, because that will cause problems for the economy! You must have money that gets worth less and makes you poorer and it must get worth less by allowing this small gang of psychopaths to counterfeit and steal the productivity of the entire economy, it's only this way that you'll ever have a viable and healthy economy!!!11

W T F?  

Well, obviously you can't. I mean, if money worked that way we'd just need to make everyone's money worth more and then everyone would be able to afford a palatial estate with solid gold fixtures and fittings and an army of servants waiting on their every word. Except that there's not enough land for palatial estates for everyone, or enough gold, and where are you going to get servants from if everyone's retired to their own palatial estate? Where are you going to get maintenance staff from too, for that matter?

Money is just a kind of token we use to divide up resources, and if deflation means that people with lots of money are getting wealthier then unless there's some kind of massive underlying improvement to the productivity of society - which you can have just as easily with inflation - every increase in their wealth as a result of deflation has to correspond to correspond to a decrease in the wealth of someone else.

[commonancestor]

I wonder if there are any failed deflationary currencies. Actually I guess no.

The difference between deflationary and inflationary money is that deflationary money are valued more than inflationary. It means that under deflation people buy just what they need. Subsequently, deflation induces lower prices, lower production of goods, people spend less time creating useless stuff at work, and with their overstuffed bitcoin wallets they go fishing.

[bg002h]

There is one weakness of it, which I hope someone can invalidate. Suppose I'm a car-dealer and I buy 1 car for 100 BTC from my supplier. By the time I can sell it to a customer, I can only ask 95 BTC for it, because of deflation. Now everyone argues that isn't a problem, because the prices at my supplier also have dropped with the same amount, so I can buy a new one there for 95 BTC, and again have 1 car in stock, and don't suffer any losses. But if I did absolutely nothing I would still have 100 BTC, so why should I work hard as a car-dealer instead of hoarding?

I can't see why this would be good for Bitcoin. People said that it's good because it forces merchants to keep their stocks low, or produce goods only on-demand. But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

So how can Bitcoin solve this problem for merchants?

While the value of Bitcoin is unstable, it can only succeed as an intermediary currency (ie, you exchange fiat for btc, transact, and reverse the exchange quickly). When value is reasonably stable, Bitcoin can be used like fiat.

[DeathAndTaxes]

I wonder if there are any failed deflationary currencies. Actually I guess no.

There is a simple reason.  Inflation hurts the productive and helps the debtors. 

Collectively around the world who are the largest debtors?  Governments of course.
Who sets monetary policy?  Governments of course.
Who benefits the most from an inflaitonary policy?  Governments of course.

Any government that adopted a deflationary policy would face their unsustainable debt growing in value rather then robbing their creditors with inflation.  The US national debt can grow to any amount it wants.  The only true metric if debt/GDP and guess what happens when you inflate your currency 20%.  Nominal GDP goes up 20% while the amount of debt is fixed (assumming no new debt).  The "real" (adjusted for inflation) carrying cost of the debt is reduced.   Using the same "trick" governments can deficit spend forever.  Just rack up debt to less than the rate of inflation and in real terms you debt will decline towards zero.

Free money!!!!!

[markm]

The only way to solve this problem is to get rid of 21.000.000 cap.

The best way to solve it is leave Bitcoin alone and go make a different coin with whatever properties you think are superior, and then let them compete.

Already beta-testing and tuning new coin. But I need Bitcoin stay alive to keep cryptocoin ecosystem healthy.

Great, I've been waiting for over a year now for Inflatacoin so I know where to direct people who think the 21,000,000 limit is bad.

Both GRouPcoin and DeVCoin keep on minting the same number of coins per block forever. So "inflatacoin" already exists, in two denominations, one producing 1000 times as many coins as the other per block.

-MarkM-

[wormbog]

You can buy 100,000 devcoins right now for a mere 12 bitcents at vircurex.com. Now *that's* inflation!

[commonancestor]

There is one weakness of it, which I hope someone can invalidate. Suppose I'm a car-dealer and I buy 1 car for 100 BTC from my supplier. By the time I can sell it to a customer, I can only ask 95 BTC for it, because of deflation. Now everyone argues that isn't a problem, because the prices at my supplier also have dropped with the same amount, so I can buy a new one there for 95 BTC, and again have 1 car in stock, and don't suffer any losses. But if I did absolutely nothing I would still have 100 BTC, so why should I work hard as a car-dealer instead of hoarding?

I can't see why this would be good for Bitcoin. People said that it's good because it forces merchants to keep their stocks low, or produce goods only on-demand. But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

So how can Bitcoin solve this problem for merchants?

As a car-dealer you add value to the products you sell, like people don't have to travel all the way to the factory to buy a car. You need to sum the costs of doing your business and calculate it into the prices you ask. If the car itself costs you 100 BTC, plus you incur other costs like rent and salaries worth maybe 20 BTC per car, then you will ask 120 BTC per car. Something like this happens to every car-dealer. People can choose either to pay 120 BTC to a car-dealer, or to travel to the factory and buy for 95 BTC. I think it is fair.

EDIT: Also to protect from deflation, the car-dealer can slide the price like this: Now - 125 BTC, in 3 months - 120 BTC, in 6 months - 115 BTC. If he sells his cars in 3 months in average, then his profit is not affected.

[Gabi]

Gold is deflationary

Did gold fail so far? No.

[Etlase2]

Is gold still a currency? lols

[Piper67]

Is gold still a currency? lols

It would be if you could send a milligram over the net instantaneously.

[Gabi]

Is gold still a currency? lols

Lol for you gold is worthless?

0/10 troll.

[Come-from-Beyond]

Is gold still a currency? lols

Lol for you gold is worthless?

0/10 troll.

Gold is not a currency anymore. Those who still believe it is should read http://en.wikipedia.org/wiki/Gold_standard.

[Technomage]

Some people seem to have it backwards. Deflation is the intended solution to the debt problem of fiat money and the inflation tax. It's not the problem or a problem, nor is it simply a solution. It's the solution.

Bitcoin provides, eventually, the same level of value store that gold does and at the same time it's massively more convenient as a medium of exchange. Bitcoin I believe, could become a universal currency. The nonpolitical nature of it, the store of value capabilities and the convenience as a payment method, Bitcoin has it all.

All of this is of course dependent on Bitcoin being able to withstand the attack it will likely experience in a few years time. I'm personally not worried about it, even if Bitcoin fails new cryptocurrencies will arise and take its place.

[cbeast]

Is gold still a currency? lols

Lol for you gold is worthless?

0/10 troll.

Gold is not a currency anymore. Those who still believe it is should read http://en.wikipedia.org/wiki/Gold_standard.

Gold and silver are legal tender in Utah.

[tynt]

There is one weakness of it, which I hope someone can invalidate. Suppose I'm a car-dealer and I buy 1 car for 100 BTC from my supplier. By the time I can sell it to a customer, I can only ask 95 BTC for it, because of deflation. Now everyone argues that isn't a problem, because the prices at my supplier also have dropped with the same amount, so I can buy a new one there for 95 BTC, and again have 1 car in stock, and don't suffer any losses. But if I did absolutely nothing I would still have 100 BTC, so why should I work hard as a car-dealer instead of hoarding?

I can't see why this would be good for Bitcoin. People said that it's good because it forces merchants to keep their stocks low, or produce goods only on-demand. But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

So how can Bitcoin solve this problem for merchants?

This is true if you have hyperdeflation and your business's profit margin is 0%.
Lets take a scenario where annual deflation is 5% and you take 5% cut of each car sold. You have BTC100. First month you buy BTC100 car and sell a month later. Car costs now BTC99.5 due to the deflation. To take your cut you sell it for BTC104.5.
(BTC100- 5% / 12months)* 1.05 = BTC104.5
Pocket the BTC4.5 and buy another BTC100 car. Do that for 1 year and you end up with BTC154. If you count in the deflation you are now 58% richer.
If you didn't do anything then you are only 2% richer.

[mpfrank]

Someone may have pointed this out already, but Bitcoin is not necessarily deflationary.  This is because it can be (and if it's successful, most likely will be) used as the base currency for a fractional-reserve banking system that continually issues "new money" (i.e., bank notes) denominated in Bitcoin, in amounts greater than the underlying BTC deposits held by the banks.  By this means, the effective money supply of BTC-denominated paper money can be inflated almost arbitrarily above the base amount of actual BTC.  This is the same as how the effective money supply of, say, U.S. dollars in bank accounts today is much larger than the actual amount of hard currency (US dollar-denominated coins and bills) in circulation.  Thus, Bitcoin is not inherently deflationary, but neither does it inherently solve the problem of today's debt-based currency that is prone to causing defaults, bank failures, etc. whenever the economy shrinks and the debts cannot all be paid back.  That can only be solved by outright banning fractional-reserve banking (whether based on dollars, gold, or BTC as the base reserve asset).  Arguably, such a ban should be instituted, since it is inherently a fraudulent practice for a bank to issue notes in excess of their physical deposits - no matter that bankers have been doing exactly this ever since the Renaissance, and this practice has been much of the basis for their whole business model.

[wormbog]

Someone may have pointed this out already, but Bitcoin is not necessarily deflationary.  This is because it can be (and if it's successful, most likely will be) used as the base currency for a fractional-reserve banking system that continually issues "new money" (i.e., bank notes) denominated in Bitcoin, in amounts greater than the underlying BTC deposits held by the banks.  By this means, the effective money supply of BTC-denominated paper money can be inflated almost arbitrarily above the base amount of actual BTC.  This is the same as how the effective money supply of, say, U.S. dollars in bank accounts today is much larger than the actual amount of hard currency (US dollar-denominated coins and bills) in circulation.  Thus, Bitcoin is not inherently deflationary, but neither does it inherently solve the problem of today's debt-based currency that is prone to causing defaults, bank failures, etc. whenever the economy shrinks and the debts cannot all be paid back.  That can only be solved by outright banning fractional-reserve banking (whether based on dollars, gold, or BTC as the base reserve asset).  Arguably, such a ban should be instituted, since it is inherently a fraudulent practice for a bank to issue notes in excess of their physical deposits - no matter that bankers have been doing exactly this ever since the Renaissance, and this practice has been much of the basis for their whole business model.

Interesting point. The difference is, since BTC is already an electronic currency with no physical aspect (cash, metal, etc.) there would be little motivation to accept a placeholder credit for BTC instead of BTC itself.

Further, since it's impossible to create new BTC (other than mining) there would be now way to create new currency to bail out overextended banks.

It would be possible for the blockchain to eventually get so active (and large) that only banks and governments would have the resources to deal in actual BTC. In that case, banks could collude to overlend some new type of currency that is supposedly backed by BTC, but is secretly not backed at all.

[n8rwJeTt8TrrLKPa55eU]

Someone may have pointed this out already, but Bitcoin is not necessarily deflationary.  This is because it can be (and if it's successful, most likely will be) used as the base currency for a fractional-reserve banking system that continually issues "new money" (i.e., bank notes) denominated in Bitcoin, in amounts greater than the underlying BTC deposits held by the banks.  By this means, the effective money supply of BTC-denominated paper money can be inflated almost arbitrarily above the base amount of actual BTC.  This is the same as how the effective money supply of, say, U.S. dollars in bank accounts today is much larger than the actual amount of hard currency (US dollar-denominated coins and bills) in circulation.  Thus, Bitcoin is not inherently deflationary, but neither does it inherently solve the problem of today's debt-based currency that is prone to causing defaults, bank failures, etc. whenever the economy shrinks and the debts cannot all be paid back.  That can only be solved by outright banning fractional-reserve banking (whether based on dollars, gold, or BTC as the base reserve asset).  Arguably, such a ban should be instituted, since it is inherently a fraudulent practice for a bank to issue notes in excess of their physical deposits - no matter that bankers have been doing exactly this ever since the Renaissance, and this practice has been much of the basis for their whole business model.

My hope in this scenario is that the built-in public nature of the Bitcoin blockchain will force banks to compete on reserve ratios and transparency.  In other words, as you're starting to see in the lender forum here, banks/lenders could make themselves more attractive by certifying certain addresses as theirs, so that customers could see how much Bitcoin reserve they actually held versus liabilities, in real time.  Customers could then choose to invest according to their risk tolerance: in a full reserve operation at zero interest rate, or a fractional reserve operation at a higher interest rate.  The main problem with FRB in our current system is the lack of disclosure to the customer, I bet not even 1 in 100 people actually understands that the bank is basically making bets with their money instead of holding it in storage.

[Roger_Murdock]

I think these examples I used in the "Deflation and Bitcoin, the last word on this forum" thread were pretty useful:

Imagine that it's Jan. 1, 2020, and you're an investor in an economy where the currency is deflating 10% a year.  You're considering making an investment in a programmable widget-maker.  The widget-maker costs 100 BTC (naturally everyone uses Bitcoins in 2020).  To simplify things, assume that the widget maker is disposable and can only be used once, after which it has zero value.  Also assume that all you have to do to use the widget maker is to input two choices, e.g. color and shape, and then wait exactly one year.  Let's say that you know that you can make a green circle widget that will be worth 105 BTC in present 2020 BTC.  So it sounds like a smart (and wealth-creating) investment, right? Except there's a problem. You also know that when you can actually sell the widget on Jan. 1, 2021, it will only sell for 94.5 BTC as a result of deflation. So you're better off just sitting on your 100 BTC, and you certainly won't borrow money to make the investment.  Is that a bad result for society? I don't think so.  First, it should be noted that if the widget maker were only capable of making green circle widgets, it wouldn't sell for 100 BTC because no one would pay that much (everyone else would make the same calculation you did). In that case, the price would be adjusted downwards until it made economic sense.  But if it DOES sell for 100 BTC, what does that tell us? It tells us that there's someone else (who's presumably also aware of deflation) who knows that they can make, e.g., a yellow square widget worth at least 111.11 BTC in 2020 BTC (meaning it will sell for at least 100 BTC in 2021).  So there's no problem.  The asset goes to its most productive user and doesn't just sit on a shelf.

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital. 

Krugman makes it sound like it's a bad thing that "just sitting on cash becomes an investment with a positive real yield." But I don't think that it is. And again, the only reason that sitting on cash can produce a positive real yield for some people is that many other people AREN'T just sitting on their cash.  There MUST be even higher-return investments occurring.  And it seems to me that "just sitting on cash" SHOULD return a positive real yield.  Deferring consumption is not something people typically like to do.  And people who do make that sacrifice ARE providing something of value to society by doing so.  By sitting on their cash, that cash is temporarily not competing with other cash for goods and services, thus keeping prices low for everyone else, including investors.

Now let's look at an inflation scenario.  Assume that it's Jan. 1, 2000 and the inflation rate is 10% (you're stuck using inflationary U.S. fiat because Bitcoin hasn't been invented). You're looking at a widget maker that costs 100 USD, but this widget maker is not programmable.  It only makes orange triangle widgets and once again, it takes a year to do so.  But these orange triangle widgets can only be sold for 95 bucks (in 2000 dollars).  But that means that on Jan. 1, 2001, when you can actually sell the widget, you'll be able to get $104.50 for it.  So buying the widget maker with your 100 bucks makes more sense than just sitting on the cash despite the fact that it's a wealth-destroying investment.  That seems bad.  Basically, it seems like inflation causes people to treat cash like a hot potato which will sometimes lead to economically-wasteful transactions.

[anu]

Your main idea is obviously right, but please fix your numbers.

[Roger_Murdock]

Your main idea is obviously right, but please fix your numbers.

I'm assuming you mean me? Which numbers do I have wrong?

[anu]

Your main idea is obviously right, but please fix your numbers.

I'm assuming you mean me? Which numbers do I have wrong?

Yep. If pretty much everyone (say, more than 3 Billion ppl) is using Bitcoin, then there is less than 7 milliBitcoin for everyone. Thus BTC 100 will be a fantastic amount of money.

The decrease of prices (the term "Deflation" is IMHO not adequate) is caused by the growth of the Bitcoin economy (ignoring speculative bubbles) - either new users entering the Bitcoin economy or old users increasing their use of Bitcoin. Assuming a 10% decrease in prices therefore assumes a 10% real growth. Assuming that most people are already in Bitcoin, this will have to be mainly increases in efficiency. Which doesn't seem right.

[bg002h]

While price is unstable, Bitcoin will be used as an intermediary currency, quickly bought and sold to purchase goods or services whose price is stable in another currency.  While Bitcoin deflation is rapid, it's other use will be as a value store. An rapidly inflating coin would be either unused or highly circulated. A quasi-stable, slowly deflating coin seems to me to be the steady-state for Bitcoin in the long term, should it survive.

[lonelyminer (Peter Šurda)]

Based on my research, people choose what to use as money based on transaction costs, not on its macroeconomic properties. Even one of the more famous "fighters against deflation", Paul Krugman, wrote two papers arguing that in international trade, the choice of currency is determined by transaction costs. In his models, he uses liquidity to account for all transaction costs. With Bitcoin, there is however, a technological advantage influencing the transaction costs that I don't see likely to be beaten by the encumbent system.

So, even if those that worry about deflation are entirely correct, the consequence would be depressions and crises, not a loss of market share for Bitcoin. But economists other than Austrians tend to assume that the choice of currency within a state is a given. They entirely miss the broader issues.

[ffe]

While price is unstable, Bitcoin will be used as an intermediary currency, quickly bought and sold to purchase goods or services whose price is stable in another currency.  While Bitcoin deflation is rapid, it's other use will be as a value store. An rapidly inflating coin would be either unused or highly circulated. A quasi-stable, slowly deflating coin seems to me to be the steady-state for Bitcoin in the long term, should it survive.

I agree with this. However, it will only happen after Bitcoin can be bought and sold quickly and Bitcoin markets can support the volume.

[ffe]

Your main idea is obviously right, but please fix your numbers.

I'm assuming you mean me? Which numbers do I have wrong?

Yep. If pretty much everyone (say, more than 3 Billion ppl) is using Bitcoin, then there is less than 7 milliBitcoin for everyone. Thus BTC 100 will be a fantastic amount of money.

The decrease of prices (the term "Deflation" is IMHO not adequate) is caused by the growth of the Bitcoin economy (ignoring speculative bubbles) - either new users entering the Bitcoin economy or old users increasing their use of Bitcoin. Assuming a 10% decrease in prices therefore assumes a 10% real growth. Assuming that most people are already in Bitcoin, this will have to be mainly increases in efficiency. Which doesn't seem right.

Even with fiat money the amount of currency (paper bills) is a small fraction of the total money in circulation. Most dollars are in checking accounts and exist only as a promise by banks to redeem in dollars on demand. This represents the financial market's response to "demand for money" by the market.

I know a lot of you don't like fractional reserve banking, but Bitcoin is not immune to this. If the world decides it wants to hold Bitcoins in large numbers then financial institutions will invent ways to create instruments that satisfy that need. We will see Bitcoin "checking accounts" backed by nothing more than a promise and that will be fine for the vast bulk of people and companies. This is because of all the conveniences and security (audits - rollbacks - etc.) built into the financial system today. Truly, a large company would prefer to deal with Chase checking accounts than fiddle with secret keys and such. So would my grandmother.

People would only bother with real Bitcoins in situations similar to when you need cash today. A drug deal or a trip to the bazaar in a town in Africa, and so on. Most of the time people would be fine leaving their coins at the bank and using a debit card to pay for coffee.

So the real Bitcoin economy can be MUCH larger than the Bitcoin base and it is meaningless to take 21M bitcoins and divide by the population of the earth when having these discussions.

[anu]

I know a lot of you don't like fractional reserve banking, but Bitcoin is not immune to this.

For the time being it is. Anyone doing fractional reserve banking *now* without the *intention* to default is plain stupid.

In a mature Bitcoin economy, the situation may change and the "real" Bitcoin (the ones in the blockchain) may take the position of gold in gold backed currency.

At some point, the Bitcoin window may be closed like Nixon closed the gold window and we call a currency "Bitcoin" that has nothing to do with the stuff we use now - we go full circle

[bg002h]

I know a lot of you don't like fractional reserve banking, but Bitcoin is not immune to this.

For the time being it is. Anyone doing fractional reserve banking *now* without the *intention* to default is plain stupid.

In a mature Bitcoin economy, the situation may change and the "real" Bitcoin (the ones in the blockchain) may take the position of gold in gold backed currency.

At some point, the Bitcoin window may be closed like Nixon closed the gold window and we call a currency "Bitcoin" that has nothing to do with the stuff we use now - we go full circle

What is the ratio of most nations physical currency to their total money supply? What is a typical fractional reserve requirement? Could anyone estimate the total money supply of Bitcoins in a fractional reserve system similar to modern fractional reserve systems? I'm not sure where to begin...

[Roger_Murdock]

I just don't see how fractional reserve banking will ever be a major force wrt Bitcoin. FRB only operates to expand the money supply when I.O.U.'s begin to be treated as the equivalent of money. Why would we expect this to happen with Bitcoin? The I.O.U.'s wouldn't provide an advantage over actual BTC that would compensate for the risk of default. In contrast, people began using the first bank notes (I.O.U.'s from the gold-smith) way back when because they were easier to transact with than physical gold. And there's no system of implicit and explicit governmental guarantees that would back up the issuers of Bitcoin I.O.U.'s. Some have speculated that Mt. Gox could be operating in FRB mode. And I understand that some people pay each other by simply transferring from one Gox account to another, but most people, most of the time are going to want real money to settle payments (i.e., "Blockchain or it doesn't count").

[Meatpile]

There is one weakness of it, which I hope someone can invalidate. Suppose I'm a car-dealer and I buy 1 car for 100 BTC from my supplier. By the time I can sell it to a customer, I can only ask 95 BTC for it, because of deflation. Now everyone argues that isn't a problem, because the prices at my supplier also have dropped with the same amount, so I can buy a new one there for 95 BTC, and again have 1 car in stock, and don't suffer any losses. But if I did absolutely nothing I would still have 100 BTC, so why should I work hard as a car-dealer instead of hoarding?

I can't see why this would be good for Bitcoin. People said that it's good because it forces merchants to keep their stocks low, or produce goods only on-demand. But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

So how can Bitcoin solve this problem for merchants?

This is true if you have hyperdeflation and your business's profit margin is 0%.
Lets take a scenario where annual deflation is 5% and you take 5% cut of each car sold. You have BTC100. First month you buy BTC100 car and sell a month later. Car costs now BTC99.5 due to the deflation. To take your cut you sell it for BTC104.5.
(BTC100- 5% / 12months)* 1.05 = BTC104.5
Pocket the BTC4.5 and buy another BTC100 car. Do that for 1 year and you end up with BTC154. If you count in the deflation you are now 58% richer.
If you didn't do anything then you are only 2% richer.

That is a terrible example: Your whole premise means that anyone doing business needs to KNOW THE FUTURE. You assume it will be 5% per year... with the volatility of bitcoin can be upwards of 50% or more.

How can you possibly set realistic profit margins when value can swing in such huge unpredictable fashions?

[acoindr]

There is one weakness of it, which I hope someone can invalidate. Suppose I'm a car-dealer and I buy 1 car for 100 BTC from my supplier. By the time I can sell it to a customer, I can only ask 95 BTC for it, because of deflation. Now everyone argues that isn't a problem, because the prices at my supplier also have dropped with the same amount, so I can buy a new one there for 95 BTC, and again have 1 car in stock, and don't suffer any losses. But if I did absolutely nothing I would still have 100 BTC, so why should I work hard as a car-dealer instead of hoarding?

I can't see why this would be good for Bitcoin. People said that it's good because it forces merchants to keep their stocks low, or produce goods only on-demand. But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

So how can Bitcoin solve this problem for merchants?

I haven't read this whole thread but here is my answer to this question.

There are two important things to consider for your example. I'll address both. The first thing you've overlooked is whether or not bitcoins are used by everyone or not. Consider this: there are consistent sellers on SilkRoad. Over the last few months bitcoins have gone from about $5 to more than $10 - double the price.

Let's say I'm a canabis dealer on SR and last month my price was 10 BTC for 1 ounce of premium canabis. With bitcoin value on the rise your argument is I would no longer sell on SR and simply sit back and hold onto the BTC I have, because this month I have to sell the same product for 5 BTC which was double that amount awhile ago.

Of course, SR sellers are still selling and SR isn't shutting down anytime soon. Why? Because sellers still rely on outside currencies, such as dollars, for most of their costs. Paying a canabis grower for their time and resources costs the same in dollars now as it did 3 months ago, so if I made a profit by selling at 10 BTC (value of $5 per BTC) then I make the same profit selling at 5 BTC (value of $10 per BTC).
___________

That's the first answer to your question. But there is something else to consider, which leads into the second part of the answer. If BTC prices have deflated then everyone holding BTC is richer. The same customers that were buying canabis before can now afford twice as much! Certainly good for business! That's assuming they had savings in BTC of course and don't convert from another currency like USD on demand.

In the second scenario we imagine the majority of people now use BTC as the world currently uses USD. Let's look again at your question:

why should I work hard as a car-dealer instead of hoarding?

You do so because you want to increase your BTC, like everyone else. That includes hoarding.

The purpose of being in business is to profit. It's that simple. If bitcoins are deflating and you're old and retired perhaps you might choose to sit at home and allow your BTC savings to become more valuable.

On the other hand, if you're young and ambitious you will probably want to amass as many BTC as you can, just as people do with dollars now, but more so since the currency is deflationary!

Here is the situation. You have 1,000 BTC and your goal is to increase that. You know you have that chance by selling cars. Everyone uses BTC including your supplier. Let's say it costs 100 BTC for 1 new car and BTC is deflating at a rate of 5% per month. It also takes 1 month on average to sell a car. That means you buy a car for 100 BTC but by the time you sell it you can only charge 95 BTC - deflation.

Your question is whether or not you can do better than a 5% return. Now, that's pretty good and many might live off that, but being in business you might be clever. If you see the trend is cars are becoming cheaper and cheaper in BTC every month what does that mean? Yep. More people can afford them. More buyers equals demand, and demand puts upward pressure on price. Wouldn't it make sense to try and profit with volume? Instead of going to your supplier and buying 1 car for 100 BTC why not ask how much of a discount would there be for 10 cars? Perhaps 5%?  That sounds possible, and if so you've just broken even with your problem of deflation provided you sell the 10 cars. Now you're a volume dealer. Bigger dealership means more customers as you have more selection, etc. Now you just need to make a profit, and you do that anytime you sell more than the 10 cars per month, or negotiate a better supplier discount, or put a slightly higher markup on cars. Does that sound impossible? Not at all.

In short: it's probably better to be in business when your product becomes more affordable to customers than more expensive (inflation).

[Etlase2]

There is a simple reason.  Inflation hurts the productive and helps the debtors.  

Collectively around the world who are the largest debtors?  Governments of course.
Who sets monetary policy?  Governments of course.
Who benefits the most from an inflaitonary policy?  Governments of course.

Governments are the ones that voluntarily signed on to debt-based money. Did they really need to? There are historic examples of somewhat successful government debt-free fiat. With debt-free fiat, governments spend money into existence; with debt fiat banks loan it into existence. In the end, there isn't much difference in the money supply. But in debt-free, producers receive the benefit of inflation; in debt-based, it is the banks.

It's a collaboration between the wealthy and government that has been going on for a long time. Inflation is not the root of the problem, it is a side effect.

I just don't see how fractional reserve banking will ever be a major force wrt Bitcoin. FRB only operates to expand the money supply when I.O.U.'s begin to be treated as the equivalent of money. Why would we expect this to happen with Bitcoin?

If bitcoin became seen as a better currency than some of the typical reserve currencies, people may very well accept FRB, perhaps at a discount. It could be very dangerous not to considering the chunks of bitcoins that currently sit around unused.

If you see the trend is cars are becoming cheaper and cheaper in BTC every month what does that mean? Yep. More people can afford them.

Your logic here fails the giggle test. Everything goes down, including your salary in a deflationary economy. Sure, maybe the top 50% saves every month and deflation is a bonus, but these are the same people that lend money in an inflationary economy.

[acoindr]

Governments are the ones that voluntarily signed on to debt-based money.

Well that depends on which government you're talking about.

In the U.S. the government is supposed to be the people... of the people, by the people, for the people...

However, the Federal Reserve bank was conceived of outside of Congress and brought into law dubiously - over a holiday when lawmakers were headed home, as opposed to being ardently debated.

Did they really need to?

No.

There are historic examples of somewhat successful government debt-free fiat. With debt-free fiat, governments spend money into existence; with debt fiat banks loan it into existence. In the end, there isn't much difference in the money supply. But in debt-free, producers receive the benefit of inflation; in debt-based, it is the banks.

I agree debt-free fiat is far preferable to debt-based fiat. In fact, the U.S. Constitution does give Congress the power to coin money and regulate the value thereof. At the same time the States are to make nothing but gold or silver legal tender. The result is that legally the U.S. Congress can define how much silver, for example, goes into a dollar, in effect controlling the money supply (inflation/deflation). And states can accept that as legal tender.

What you mean by governments spending debt-free fiat into existence is, for example, if a government decided to build a bridge and other infrastructure for the public good. The government then paid contractors to hire workers and complete all the work. The money then enters the economy. Unfortunately, however, government is a natural magnet for corruption and abuse. So those with favorable influence over government can benefit disproportionately.

It's a collaboration between the wealthy and government that has been going on for a long time. Inflation is not the root of the problem, it is a side effect.

If you have inflation, the ones that get the money first always benefit more than ones getting it later. Inflation saps purchasing power, and I don't see how that can be argued to be a good thing.

I just don't see how fractional reserve banking will ever be a major force wrt Bitcoin. FRB only operates to expand the money supply when I.O.U.'s begin to be treated as the equivalent of money. Why would we expect this to happen with Bitcoin?

If bitcoin became seen as a better currency than some of the typical reserve currencies, people may very well accept FRB, perhaps at a discount. It could be very dangerous not to considering the chunks of bitcoins that currently sit around unused.

I don't think bitcoins would have much problem competing against other currencies, especially inflationary ones. Just look at gold, for example. Gold is winning in value compared to fiat by a margin of about 1500 to 1. And bitcoins are better suited for currency exchange than gold.

If you see the trend is cars are becoming cheaper and cheaper in BTC every month what does that mean? Yep. More people can afford them.

Your logic here fails the giggle test. Everything goes down, including your salary in a deflationary economy. Sure, maybe the top 50% saves every month and deflation is a bonus, but these are the same people that lend money in an inflationary economy.

No, salary doesn't go down in a deflationary economy. No boss will walk into your office and say, "Your groceries are going to cost you less this month, so I'm cutting your pay". That doesn't happen. Deflation means job opportunities decrease, but it doesn't affect people who have jobs, unless it gets to the point they lose them totally.

[marcus_of_augustus]

Short answer to OP: no.

Reason being deflation is by definition a shortage of money in the economy, i.e, demand exceeding supply. Since OS, p2p crypto-currencies like bitcoin can essentially be cloned and created at will, there will never be a self-imposed "shortage" of the money supply as happens within an economy based on a single, monopolised money supply. It is only central bank fiat money based economies that are uniquely prone to the deflationary death spiral brought about by errors or incompetence of the centralised planning, which over time are inevitable since no-one bats 100 forever. They even enforce these central planning mistakes with the full force of the law, (gold confiscation, imprisonment, propaganda etc) to prevent competing currencies from fulfilling the need in the market for more currency, it is pure evil. Basically, deflation can only take place at the end of the state gun backing up it's failed monetary policies.

Deflation is not an issue for bitcoin, of course you could have read the already archived hundreds of posts, and the sticky in the "Economics" section to know this but here you are ....

[Etlase2]

However, the Federal Reserve bank was conceived of outside of Congress and brought into law dubiously - over a holiday when lawmakers were headed home, as opposed to being ardently debated.

Any system using hard currency has to be partially debt-based as well. The US has had mostly a debt-based currency through its history, though there were periods without it (scrip, greenbacks). The Federal Reserve was the "solution" to the problems of a fixed supply, it did not introduce the national debt.

What you mean by governments spending debt-free fiat into existence is, for example, if a government decided to build a bridge and other infrastructure for the public good. The government then paid contractors to hire workers and complete all the work. The money then enters the economy. Unfortunately, however, government is a natural magnet for corruption and abuse. So those with favorable influence over government can benefit disproportionately.

But this is the way it works anyway, so the only difference it probably makes is one has bankers at the helm, the other has large corporations.

If you have inflation, the ones that get the money first always benefit more than ones getting it later. Inflation saps purchasing power, and I don't see how that can be argued to be a good thing.

Because we witnessed the power of deflation with the great depression. Why this little nugget is so easy for deflationistas to forget is beyond me. Inflation saps purchasing power only because there is a preference to who receives new money first. Deflation doesn't have any shame in saying it is those who have money who benefit.

I don't think bitcoins would have much problem competing against other currencies, especially inflationary ones. Just look at gold, for example. Gold is winning in value compared to fiat by a margin of about 1500 to 1. And bitcoins are better suited for currency exchange than gold.

This doesn't address what I said and is just rhetoric.

No, salary doesn't go down in a deflationary economy. No boss will walk into your office and say, "Your groceries are going to cost you less this month, so I'm cutting your pay". That doesn't happen. Deflation means job opportunities decrease, but it doesn't affect people who have jobs, unless it gets to the point they lose them totally.

One way or the other, "more people can buy cars" is a complete falsehood. Salaries reduce or people get fired. Assuming a healthy economy aware of the deflationary aspects, salaries would have to go down over time just like many now receive a typical 3% cost-of-living raise every year.

[Etlase2]

Short answer to OP: no.

Reason being deflation is by definition a shortage of money in the economy, i.e, demand exceeding supply. Since OS, p2p crypto-currencies like bitcoin can essentially be cloned and created at will, there will never be a self-imposed "shortage" of the money supply as happens within an economy based on a single, monopolised money supply. It is only central bank fiat money based economies that are uniquely prone to the deflationary death spiral brought about by errors or incompetence of the centralised planning, which over time are inevitable since no-one bats 100 forever. They even enforce these central planning mistakes with the full force of the law, (gold confiscation, imprisonment, propaganda etc) to prevent competing currencies from fulfilling the need in the market for more currency, it is pure evil. Basically, deflation can only take place at the end of the state gun backing up it's failed monetary policies.

Deflation is not an issue for bitcoin, of course you could have read the already archived hundreds of posts, and the sticky in the "Economics" section to know this but here you are ....

Great post, by the way. You have definitely hit the heart of the matter of both traditional government currencies and bitcoin. Bitcoin isn't the final solution because other cryptocurrencies will crop up in droves (or ramp up in popularity) to solve financial crises. To me that means bitcoin is fundamentally flawed, but many seem to disagree.

[acoindr]

Any system using hard currency has to be partially debt-based as well.

Hold on a second. We need to clarify a couple of your terms.

First, debt-based for whom, the government, or citizens? I designed a theoretical fiat-currency system that is debt-based for citizens but not the government.

Second, when you say "hard currency" I must say I don't like that term at all. To me you can't say hard currency if you're not talking about hard backed, as in backed by a precious metal.

The Wikipedia definition for hard currency even points out this danger:

http://en.wikipedia.org/wiki/Hard_currency

Hard currency, in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value. Factors contributing to a currency's hard status might include the long-term stability of its purchasing power, ...

Varying theories of monetary policy, and the ever-present risk of unexpected geopolitical and policy events, preclude any claim of a currency's hardness from being called definitive.

What you mean by governments spending debt-free fiat into existence is, for example, if a government decided to build a bridge and other infrastructure for the public good. The government then paid contractors to hire workers and complete all the work. The money then enters the economy. Unfortunately, however, government is a natural magnet for corruption and abuse. So those with favorable influence over government can benefit disproportionately.

But this is the way it works anyway, so the only difference it probably makes is one has bankers at the helm, the other has large corporations.

I designed a theoretical system where neither bankers or corporations is at the helm.

If you have inflation, the ones that get the money first always benefit more than ones getting it later. Inflation saps purchasing power, and I don't see how that can be argued to be a good thing.

Because we witnessed the power of deflation with the great depression. Why this little nugget is so easy for deflationistas to forget is beyond me. Inflation saps purchasing power only because there is a preference to who receives new money first. Deflation doesn't have any shame in saying it is those who have money who benefit.

The effects of the Great Depression came from inflating before (the roaring 20s) culminating in the crash of 1929. Deflation in that case had a cleansing effect on the market allowing it to move on.

Deflation has no shame in saying those who have money benefit... What are you saying exactly? There shouldn't be a benefit to having money? What use would money be then? As least with deflation even if you have little money you can rest assured the value you have will be the value you expect, at a minimum.

No, salary doesn't go down in a deflationary economy. No boss will walk into your office and say, "Your groceries are going to cost you less this month, so I'm cutting your pay". That doesn't happen. Deflation means job opportunities decrease, but it doesn't affect people who have jobs, unless it gets to the point they lose them totally.

One way or the other, "more people can buy cars" is a complete falsehood. Salaries reduce or people get fired. Assuming a healthy economy aware of the deflationary aspects, salaries would have to go down over time just like many now receive a typical 3% cost-of-living raise every year.

No, it's not a falsehood.

*sigh*

Let me break it down for you.

Say you have a town, call it BoomTown. In BoomTown there are 100 residents and all they have is the clothes on their back and the houses they built.

One day somebody discovers gold in a nearby mountain and a mining rush begins. As it happens there are only 5,000 gold nuggets total in that mountain, and every resident is only resourceful enough to mine about the same as others. After time each resident has 500 gold nuggets.

These residents have different skills. Some are seamstresses, some are farmers, some dentists, etc. They begin trading the gold as currency for other valuable goods and services - economic exchange.

One day a stranger named Bill pulls into town towing a fleet of cars, left to him by a dying uncle (I guess). He sets up a car dealership on the edge of town. The only things Bill has are his clothes and his cars. He needs food from the farmers, he needs his hair cut, his teeth cleaned and worked on, etc. He has no gold so he figures he will trade cars for some, then he can purchase things he needs, including a house.

Bill has about 10 cars. A house costs about 500 gold nuggets - the entire wealth of a resident on average. Bill figures he will price his cars at 100 gold nuggets each, because that way he can afford approximately 2 houses, or maybe one luxuriant one (of course, then he'd be broke). At 100 gold nuggets per car many residents are hesitant to buy from Bill. They prefer to walk than part with 1/5th of their wealth.

Since this town is called BoomTown it draws in settlers. About 300 people arrive one day exploding the population 4 times higher.

Now we get deflation.

The same amount of currency exists but there is increased demand for it. That makes the value of the currency go up. People are willing to sew, or perform dental practice for fewer gold nuggets, because they need nuggets.

What does that have the effect of? The people with the gold nuggets are now richer. They can get goods and services, like buying groceries, for less. If you're suddenly richer you will probably spend money more freely... Don't have a car? Buy one. Even if it costs 100 gold nuggets, you can now afford it because everything else now is cheaper for you.

So, yes, more people can and will now buy cars. All of Bill's stock of 10 cars will sell overnight, and there will be demand for more!

[Etlase2]

First, debt-based for whom, the government, or citizens? I designed a theoretical fiat-currency system that is debt-based for citizens but not the government.

lolwut? It's not theoretical, and you were simply stating what could happen if currency were created that way. You call that "designing a theoretical fiat-currency that is debt-based for citizens but not the government"? Awfully lofty.

Second, when you say "hard currency" I must say I don't like that term at all. To me you can't say hard currency if you're not talking about hard backed, as in backed by a precious metal.

Uhh, deflect much? And I was referring to the gold standard, so it seems we are in agreement unless you are of the purist non-FRB gold standard as the only hard money.

I designed a theoretical system where neither bankers or corporations is at the helm.

Sure buddy.

Deflation has no shame in saying those who have money benefit... What are you saying exactly? There shouldn't be a benefit to having money? What use would money be then? As least with deflation even if you have little money you can rest assured the value you have will be the value you expect, at a minimum.

Well anti-inflationists whine that the bankers get the "new" wealth, but somehow this is absolutely not a problem when existing wealth increases in value even though it is the exact same result.

What does that have the effect of? The people with the gold nuggets are now richer. They can get goods and services, like buying groceries, for less. If you're suddenly richer you will probably spend money more freely... Don't have a car? Buy one. Even if it costs 100 gold nuggets, you can now afford it because everything else now is cheaper for you.

So, yes, more people can and will now buy cars.

This is because value is added to the system. New producers are in the economy, and that is what presumably would drive the deflation rate. This, however, exists just the same with any currency. If the government awarded all those new people with 500 gold nuggets too, then the price of everything would remain the same and no one would benefit disproportionately (and some of them would buy cars!). But instead, the people who save get to take advantage of those who are new or who don't save, not because of their own production, but only because of the attributes of the currency. While bitcoin isn't government-managed, neither was gold in the gold smith money lending days. People still did many awful things then revolving around the manipulation of money. There is nothing inherent in deflation that is going to make car sales increase over a stable currency or an inflationary one, it only changes who might be purchasing those cars.

[acoindr]

First, debt-based for whom, the government, or citizens? I designed a theoretical fiat-currency system that is debt-based for citizens but not the government.

lolwut? It's not theoretical, and you were simply stating what could happen if currency were created that way.

The theoretical fiat-currency system I came up with, which I haven't shared with anyone, including you, you believe is not theoretical?  

You call that "designing a theoretical fiat-currency that is debt-based for citizens but not the government"? Awfully lofty.

What is awfully lofty? The system I came up with? How would you know? It might be completely illogical and/or unworkable.

Second, when you say "hard currency" I must say I don't like that term at all. To me you can't say hard currency if you're not talking about hard backed, as in backed by a precious metal.

Uhh, deflect much?

I don't know what you're trying to convey here.

And I was referring to the gold standard, so it seems we are in agreement unless you are of the purist non-FRB gold standard as the only hard money.

Yes, I agree the gold standard can be thought of as hard currency.

I designed a theoretical system where neither bankers or corporations is at the helm.

Sure buddy.

Yes, I'm quite sure.

Deflation has no shame in saying those who have money benefit... What are you saying exactly? There shouldn't be a benefit to having money? What use would money be then? As least with deflation even if you have little money you can rest assured the value you have will be the value you expect, at a minimum.

Well anti-inflationists whine that the bankers get the "new" wealth, but somehow this is absolutely not a problem when existing wealth increases in value even though it is the exact same result.

No, it's not the exact same result. If you notice in my BoomTown example, all of the residents had equal amounts of money. And obviously all of them were not bankers; also they equally worked for the money they obtained.

What does that have the effect of? The people with the gold nuggets are now richer. They can get goods and services, like buying groceries, for less. If you're suddenly richer you will probably spend money more freely... Don't have a car? Buy one. Even if it costs 100 gold nuggets, you can now afford it because everything else now is cheaper for you.

So, yes, more people can and will now buy cars.

This is because value is added to the system.

Ding, ding, ding!!! Yep, exactly.

This is why deflation is preferred. Your economic exchange is more based on value than debt.

New producers are in the economy, and that is what presumably would drive the deflation rate. This, however, exists just the same with any currency.

Yes, that's why I gave it as an example.

If the government awarded all those new people with 500 gold nuggets too, then the price of everything would remain the same and no one would benefit disproportionately (and some of them would buy cars!).

Now, when do you think a government will "award" people 500 gold nuggets?

But instead, the people who save get to take advantage of those who are new or who don't save, not because of their own production, but only because of the attributes of the currency. While bitcoin isn't government-managed, neither was gold in the gold smith money lending days. People still did many awful things then revolving around the manipulation of money. There is nothing inherent in deflation that is going to make car sales increase over a stable currency or an inflationary one, it only changes who might be purchasing those cars.

That's not taking advantage of anyone. If you can't see that, you've missed the point.

[marcus_of_augustus]

Here's someone who speaks with genuine authority on the matter .... Hayek

"If we start on this soon we may indeed achieve a position in which at last capitalism is in a position to provide itself with the money it needs in order to function properly, a thing which it has always been denied. Ever since the development of capitalism it has never been allowed to produce for itself the money it needs; and if I had more time I could show you how the whole crazy structure we have as a result, this monopoly originally only of issuing gold money, is very largely the cause of the great fluctuations in credit, of the great fluctuations in economic activity, and ultimately of the recurring depressions. I think if the capitalists had been allowed to provide themselves with the money which they need, the competitive system would have long overcome the major fluctuations in economic activity and the prolonged periods of depression. At the present moment we have of course been led by official monetary policy into a situation where it has produced so much misdirection of resources that you must not hope for a quick escape from our present difficulties, even if we adopted a new monetary system."

http://mises.org/daily/3204 (linked from here http://monetaryfreedom.org/... found some excellent reading under "Resources" link btw)

NB: many people confuse/conflate the terms deflation and depression (when they actually want to refer to a deflationary depression), dyodd.

[Etlase2]

The theoretical fiat-currency system I came up with, which I haven't shared with anyone, including you, you believe is not theoretical? 

I didn't realize that you were a nutjob and pontificating on something that had no relation whatsoever to the discussion.

I don't know what you're trying to convey here.

Right because for some reason I was obscure in my meaning of hard currency so you gave me an irrelevant wikipedia link and went off on a tangent rather than respond to what I had said in that paragraph. Not that it was anything that important.

No, it's not the exact same result. If you notice in my BoomTown example, all of the residents had equal amounts of money. And obviously all of them were not bankers, rather they equally worked for the money they obtained.

Where again is this perfect world you speak of? We can make lots of things sound nice when it's a perfect world, but it's not reality.

This is why deflation is preferred. Your economic exchange is more based on value than debt.

Based on what evidence? That bankers didn't exist during pre-government gold currencies? Maybe in that perfect world that we don't live in.

Now, when do you think a government will "award" people 500 gold nuggets?

This is your response? The point is that the value of those peoples' production does not hinge on currency. Value exists regardless of currency. Currency is only a means to trade value easily. All BoomTowners did was mine gold, and it's worth something because it's rare and they got lucky. They didn't do anything productive to get it except mine, which in the grand scheme of things is rather unproductive.

That's not taking advantage of anyone. If you can't see that, you've missed the point.

All these new peasants moved in and we just happen to be richer! Free money! Oh wait, existing money is just worth more it's totally different! You may think deflation is a fairer system, but it is still a system that takes advantage of people. These simplistic arguments that fly in the face of the history of gold and what was done with it should not carry much weight with people who have studied that history. It is not the governments that started this wealth siphoning, it was the bankers. With 50% of all the bitcoins in existing to be mined by the end of this year, loans are going to be a big part of the bitcoin economy if it is to go anywhere. Rather than actually fixing the problem of wealth transfer, bitcoiners would just prefer that they be the receivers rather than the existing bourgeoisie. Maybe a larger part of the economy will benefit, but probably not.

[bitlizard]

Till now, bitcoin seems the perfect currency in in the free world, it has many advantages as we can see. Such as convienence, decentralization, no worry of inflation, except for the boring blockchain file lay in system partition.

But to me, I think I treated it as gold as many others did, so maybe we will hardly to use them, just holding to see price up, obviously it will cause the deflation, and then the bitcoin will not be currency any more, but like treasure.

But it is not treasure, and let's consider this situation, one day, bitcoin has been granted, and suddenly a big catastrophe attacks somewhere in the world, and destroyes all, people die, bitcoins of those people then lose forever, so the price up, others will hold their bitcoins more tightly, and no bitcoins are in the circulation.

No curculation, so it can be called curreny?

You're an idiot and should learn how to read/search about a topic that has been discussed to death already.

The answer is no - Bitcoin is deflationary by design, it is not a weakness.

I personally think it is pretty damn rude to call the OP an idiot for just asking a question, that why I had to really stop and think before doing the following...
"+1"

[tiberiandusk]

There is one weakness of it, which I hope someone can invalidate. Suppose I'm a car-dealer and I buy 1 car for 100 BTC from my supplier. By the time I can sell it to a customer, I can only ask 95 BTC for it, because of deflation. Now everyone argues that isn't a problem, because the prices at my supplier also have dropped with the same amount, so I can buy a new one there for 95 BTC, and again have 1 car in stock, and don't suffer any losses. But if I did absolutely nothing I would still have 100 BTC, so why should I work hard as a car-dealer instead of hoarding?

I can't see why this would be good for Bitcoin. People said that it's good because it forces merchants to keep their stocks low, or produce goods only on-demand. But then you're asking merchants to change the way they have been doing business for decades, which seems unlikely to happen.

So how can Bitcoin solve this problem for merchants?

This is true if you have hyperdeflation and your business's profit margin is 0%.
Lets take a scenario where annual deflation is 5% and you take 5% cut of each car sold. You have BTC100. First month you buy BTC100 car and sell a month later. Car costs now BTC99.5 due to the deflation. To take your cut you sell it for BTC104.5.
(BTC100- 5% / 12months)* 1.05 = BTC104.5
Pocket the BTC4.5 and buy another BTC100 car. Do that for 1 year and you end up with BTC154. If you count in the deflation you are now 58% richer.
If you didn't do anything then you are only 2% richer.

That is a terrible example: Your whole premise means that anyone doing business needs to KNOW THE FUTURE. You assume it will be 5% per year... with the volatility of bitcoin can be upwards of 50% or more.

How can you possibly set realistic profit margins when value can swing in such huge unpredictable fashions?

Ask Wall Street.

[FreeMoney]

Damn, I wish we had an economics forum here. Deflation is such an important topic, maybe there should be a sticky thread about it there.

[Come-from-Beyond]

Damn, I wish we had an economics forum here. Deflation is such an important topic, maybe there should be a sticky thread about it there.

Already - https://bitcointalk.org/index.php?board=7.0

[waspoza]

He was sarcastic.

[acoindr]

The theoretical fiat-currency system I came up with, which I haven't shared with anyone, including you, you believe is not theoretical? 

I didn't realize that you were a nutjob and pontificating on something that had no relation whatsoever to the discussion.

Advice on how to debate more effectively is to avoid using fallacies as you have just done:

Ad Hominem Fallacy

As you don't even seem to know that basic convention I didn't bother reading the rest of your reply.

For the benefit, however, of any that may be interested in following this line of discussion I'll add one more response I consider important.

I realized where you may be confused as to how deflation can make people richer, and result in more car sales.

I think you have a misunderstanding of deflation as I mean it.

Deflation is a shortage of money supply to the ratio of people in an economic system. Inflation of course is the opposite - an abundance of money supply to the ratio of people, which causes rising prices.

There are two ways to arrive at a shortage of money supply, or deflation... Either more people enter an economic system without corresponding rise in the money supply, OR the number of people stays about the same, but money leaves the system.

In my BoomTown example I'm obviously talking about people entering the system to cause the deflation. However, I think you are talking about what I consider a more unconventional form of deflation: money leaving the system.

Ironically, that's the exact situation we have with the world's dollar based system, which has become the convention. Generally speaking it's not possible for money to leave an economic system. The only way that happens is if participants lose the money physically or perhaps bury it with them, mimicking ancient Egyptian kings. Of course that's not to be expected on a widespread basis.

Unfortunately, the dollar based system does provide another way for money to leave the system. Dollars come into existence as debt; IOUs. Therefore, anytime someone defaults on repayment that money effectively evaporates, disappears, or deflates from the system; it was never really money in the first place.

This form of deflation certainly is to be supremely feared, and I can see why you would rail against it, because deflation of money that way takes away wealth with it.

It's also important to note, you can have both forms of deflation happen at the same time, people entering the system and money leaving the system. We experience this in our dollar based system with population growth (birth, immigration, etc.). And you can have deflation and inflation happening at the same time; this is also currently happening in our dollar based system.

Deflation as I mean it does not remove wealth from the system, and that's why products like cars become more affordable to people.

[Etlase2]

Unfortunately for you, I did not make an argument against anything in that sentence, so there is no ad hominem fallacy.

You, however, have twice now used a red herring.

I think you have a misunderstanding of deflation as I mean it.

mm hmm, carry on.

[cbeast]

Unfortunately for you, I did not make an argument against anything in that sentence, so there is no ad hominem fallacy.

You, however, have twice now used a red herring.

I think you have a misunderstanding of deflation as I mean it.

mm hmm, carry on.

I think in this case it was a Moving the Goalposts fallacy. But it may only be a matter of perspective.

[acoindr]

Unfortunately for you, I did not make an argument against anything in that sentence, so there is no ad hominem fallacy.

That's what a fallacy is. It's a failure to make a well reasoned argument.

*sigh*

I guess you didn't bother reading from the ad hominem link provided. Let me explain it for you:

Abusive ad hominem (also called personal abuse or personal attacks) usually involves insulting or belittling one's opponents in order to attack their claims or invalidate their arguments ...

You seem to be stuck on my mentioning that I designed a theoretical monetary system, which I did in response to your quote:

Any system using hard currency has to be partially debt-based as well.

What you failed to consider is that I never said how much merit I felt my design had. It so happens I believe the concepts need refinement should it have merit overall.

I think you have a misunderstanding of deflation as I mean it.

mm hmm, carry on.

As I alluded to earlier, I've lost interest in carrying on this discussion with you.