Will deflation be the fatal weakness of bitcoin?

[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?