5 ms·

We re-learn why a deflationary currency is an awful idea.

by jonknee 11y ago

andys627 11y ago
ELI5 por favor
- jonknee 11y ago
  http://www.economist.com/blogs/freeexchange/2014/04/money http://www.economist.com/blogs/freeexchange/2014/04/money Essentially, if you think that a currency will be worth more tomorrow than it is today there is little reason for investment (or even spending!). It quickly becomes a spiral where no one wants to spend. Inflation provides a nice kick in the pants for people to put their money to good use. This isn't a concern yet for Bitcoin because in the scheme of world economies BTC simply doesn't matter (it could go away tomorrow without any noticeable effects), but if in the future it becomes a critical thing it would be a major concern.
  - kristianp 11y ago
    Aren't we learning in today's environment where prices of many things are going down (or with recent Japan as an example), that deflation isn't necessarily bad? In the past it is associated with recessions, but it may be a side effect of the recession or depression, or an over-adjustment by governments trying to reign in inflation. Economists agree: deflation is either good, or bad, or irrelevant: http://ftalphaville.ft.com/2015/03/23/2122452/economists-agree-deflation-is-either-good-or-bad-or-irrelevant/ http://ftalphaville.ft.com/2015/03/23/2122452/economists-agr...
  - vezzy-fnord 11y ago
    Deflationary spirals are a hypothetical concern and mostly a fringe neo-Fisherian idea that has recently gained some mainstream nodding, but is otherwise difficult to verify in any way. For one thing it assumes a massive collective irrationality where people's expectations are all rendered berserk and plunged into a negative time preference. It's a very tough gambit to make that people can withdraw their propensity to consume to such a high extent. It's tough to presume that the heterogeneous stock of capital and the time structure of production will just stand still to a deflationary pressure and not readjust to add more stages or adjust the price spreads in between. [1] Of course, BTC being a global currency means it exists in competition and per Gresham's law can always be driven out. Not a catastrophe. [1] https://www.jstor.org/stable/2547921 https://www.jstor.org/stable/2547921
    - crdoconnor 11y ago
      >For one thing it assumes a massive collective irrationality where people's expectations are all rendered berserk and plunged into a negative time preference. One of the more idiotic ideas to come out of neoclassical economics is the assumption that a negative time preference is irrational or impossible, when most of us have one (pension, passing wealth on to one's kids, saving up to buy big ticket items, etc.). Indeed, what would really be irrational is spending all of your money immediately.
      - vezzy-fnord 11y ago
        I am uncertain as to why you imply that a) I think a negative time preference is irrational or impossible apodictically, b) that the former is necessarily a neoclassical idea when the neoclassical synthesis in fact eschews it, c) that there is a natural rate of time preference, d) that time preferences do not differ per subjective valuations and units of goods on an individual scale, or that they are not dynamic, and e) that to respond to the assertion that deflationary spirals are unrealistic in presupposing a fixed natural rate of negative time preference with the opposite straw man idea of extremely high time preferences that favor immediate consumption is a convincing line of argument (indeed, the latter cannot be true for it would make capital investment an impossibility). The three activities you list in parentheses apply only for those goods, and do not even imply a negative time preference. Saving doesn't have to be a result of negativity at all, per se.
        crdoconnor 11y ago
        >the opposite straw man idea of extremely high time preferences that favor immediate consumption is a convincing line of argument (indeed, the latter cannot be true for it would make capital investment an impossibility). Under the neoclassical synthesis capital investment is done purely by investors who have a positive time preference but are being paid enough to offset their desire to spend absolutely all of their money right this second. It's kind of dumb.
      - dnautics 11y ago
        the irony is that in order to satisfy these 'negative time preferences', inflation forces people into risky investment behavior, which is basically regressive wealth redistribution. And then we complain how the rich get richer and the poor get poorer, and blame it on capitalism.
  - baddox 11y ago
    I'm no economist, but it seems like a lot of things (most, by dollar amount) I buy are simply not things I could feasibly defer for long. Food and rent (shelter) are the obvious examples by necessity, but also plenty of discretionary spending is obviously time-sensitive. I want to see a movie now, go skiing now, fly home for the holidays now, etc. It's unlikely that deflation stop me from making these purchases, unless it was some guaranteed short-term high-percentage deflation.
    - jonknee 11y ago
      It doesn't take a big change of behavior if there are a lot of people doing it. If everyone reduced spending by just a couple of percent it would radically change the economy and growth forecasts (we'd be in a recession). Lowered growth forecasts would then incentivize savings, further pushing down future growth. There is no Bitcoin Fed that could cut rates and incentivize investment, a Bitcoin dominated world in recession would be a dire place to be.
      - vezzy-fnord 11y ago
        Cutting rates would not necessarily stimulate investment: http://www.themoneyillusion.com/?p=31372 http://www.themoneyillusion.com/?p=31372
  - narrator 11y ago
    As a counterpoint, you should consider Hayek's critique of the Paradox of Savings: https://mises.org/library/hayek-paradox-saving https://mises.org/library/hayek-paradox-saving The "deflation makes people not spend" is a hand-wavy argument. There is zero empirical evidence for it.
    - sanswork 11y ago
      You could just read any Bitcoin forum where everyone is 'hodling' because they expect their coins to be worth $100000 each soon.
      - narrator 11y ago
        This is more an example of Gresham's law than anything else.
    - danieltillett 11y ago
      It is not so much that it stops people from spending - it is that it makes the real interest rate high relative to the nominal and so discourages borrowing. Actually with negative interest rates proving possible (almost nobody thought they were a few years ago) if you had a deflationary currency you could always use negative interest rates to control demand. I am sure some smart economist has looked into this.
      - narrator 11y ago
        When the real interest rate is high, business retained earnings are more valuable. Thus, economic power is transferred from lending institutions to profitable corporations. Who do you think does a better job investing?
        danieltillett 11y ago
        Well the theory of a bank is to act as an efficient mechanism to transfer capital from businesses and consumers with excess capital to those with a need for more capital. Of course in practice banks have got pretty good at capturing almost all the value out of this process. Business should not really be in the business of retaining earnings. If it was not for tax reasons it would be best to return any excess funds to the shareholders and raise new capital when needed.
baddox 11y ago
It's not so bad an idea as long as you get to choose which currencies you use.
Mandatum 11y ago
Gold seemed to work for a long time.
- jonknee 11y ago
  They keep digging more of it up too, it's not like Bitcoin. It's also not a good thing to run an economy on, but that's another concern.
  - csseinpoont 11y ago
    Every fiat currency ever has collapsed, yet gold is still being hoarded in vaults. You have a limited perspective of history.
    - lukifer 11y ago
      I'm no fan of fiat, but your statement is tautological at best: the fiat currencies that have collapsed, collapsed. Communications tech and electronic fiat make the future anyone's bet.
      - csseinpoont 11y ago
        Tomorrow always different right? You're some saying it'll be different this time, and the only explanation you give is, 'communications' and 'electronic', and yet plenty of fiat currencies have collapses under such systems. Again, every fiat currency that has ever existed has collapsed, sure there are some new ones that haven't yet but to believe they won't is magical thinking. Again gold, after thousands of years, is still being hoarded in vaults by every major and minor world power, you really need to review some history.
    - umanwizard 11y ago
      The USD and Euro haven't collapsed, so I'm not sure what you're getting at.
- crdoconnor 11y ago
  Define "work". Gold denominated WW1 debts caused WW2.
yc1010 11y ago
Bitcoin inflation was around 10% recently Hashrate!= inflation btw
- jonknee 11y ago
  The question was about when new coins stop being mined...
  - yc1010 11y ago
    That's a long way away, by then either bitcoin becomes popular, bitcoin evolves into something else or bitcoin dies. Right now all comments about "inflation" etc are downright silly, usually form people regurgitating sill cons against bitcoin that are not a concern at this time. But lets not have fact get in the way, downvote away.
dnautics 11y ago
So let's see... We have an inflationary currency which is behind an increasing divide between the rich and the poor[0], and keeps people hooked on unsustainable growth to just survive, leading to intensifying environmental destruction and wanton consumption of limited resources... It's not like an inflationary currency is necessarily a good idea, either. [0] before you say that inflation hurts the rich, among other reasons the if inflation didn't hurt the poor, we would never feel the political pressure to increase the minimum wage.
CyberDildonics 11y ago
Like precious metals? Deflationary currencies have been used successfully for over 1000 years. The only people it is bad for are governments. Throughout history there is a patter of promising, spending, and becoming insolvent. The idea that an individual wouldn't choose a deflationary currency is ludicrous. Inflationary currencies are what you want everyone else to use. And by the way, the cat is out of the bag. Cryptocurrencies are here, bitcoin or not. When people can choose to use any currency they want, will they choose one that inflates? I doubt it.
- sfackler 11y ago
  I am pretty confident that the amount of precious metals in circulation has gone up over the last 1000 years.
- Jtsummers 11y ago
  AS sfackler points out, mining of precious metals has continued (though, like bitcoin, with diminishing returns over time). They will choose an inflationary currency if they have any debt. Debt with deflation is very bad, and it's incredibly stupid to offer credit with deflation.
- maaku 11y ago
  Yes, like precious metals. The history of precious metal economies is pretty bad -- decades-long recessions and wars triggered by fluctuations in the commodity markets. Deflationary currency is not a good thing, and bitcoiners will eventually realize this. (Note I work on Bitcoin Core and co-founded Blockstream, a prominant bitcoin company. The value of Bitcoin is not the currency, but rather what censorship-resistant, distributed global consensus gives us.)
  - lmm 11y ago
    > (Note I work on Bitcoin Core and co-founded Blockstream, a prominant bitcoin company. The value of Bitcoin is not the currency, but rather what censorship-resistant, distributed global consensus gives us.) You can get that while being less deflationary though, e.g. Dogecoin.

We re-learn why a deflationary currency is an awful idea.

by jonknee 11y ago

We re-learn why a deflationary currency is an awful idea.

andys627 11y ago

ELI5 por favor

jonknee 11y ago
http://www.economist.com/blogs/freeexchange/2014/04/money http://www.economist.com/blogs/freeexchange/2014/04/money Essentially, if you think that a currency will be worth more tomorrow than it is today there is little reason for investment (or even spending!). It quickly becomes a spiral where no one wants to spend. Inflation provides a nice kick in the pants for people to put their money to good use. This isn't a concern yet for Bitcoin because in the scheme of world economies BTC simply doesn't matter (it could go away tomorrow without any noticeable effects), but if in the future it becomes a critical thing it would be a major concern.
- kristianp 11y ago
  Aren't we learning in today's environment where prices of many things are going down (or with recent Japan as an example), that deflation isn't necessarily bad? In the past it is associated with recessions, but it may be a side effect of the recession or depression, or an over-adjustment by governments trying to reign in inflation. Economists agree: deflation is either good, or bad, or irrelevant: http://ftalphaville.ft.com/2015/03/23/2122452/economists-agree-deflation-is-either-good-or-bad-or-irrelevant/ http://ftalphaville.ft.com/2015/03/23/2122452/economists-agr...
- vezzy-fnord 11y ago
  Deflationary spirals are a hypothetical concern and mostly a fringe neo-Fisherian idea that has recently gained some mainstream nodding, but is otherwise difficult to verify in any way. For one thing it assumes a massive collective irrationality where people's expectations are all rendered berserk and plunged into a negative time preference. It's a very tough gambit to make that people can withdraw their propensity to consume to such a high extent. It's tough to presume that the heterogeneous stock of capital and the time structure of production will just stand still to a deflationary pressure and not readjust to add more stages or adjust the price spreads in between. [1] Of course, BTC being a global currency means it exists in competition and per Gresham's law can always be driven out. Not a catastrophe. [1] https://www.jstor.org/stable/2547921 https://www.jstor.org/stable/2547921
  - crdoconnor 11y ago
    >For one thing it assumes a massive collective irrationality where people's expectations are all rendered berserk and plunged into a negative time preference. One of the more idiotic ideas to come out of neoclassical economics is the assumption that a negative time preference is irrational or impossible, when most of us have one (pension, passing wealth on to one's kids, saving up to buy big ticket items, etc.). Indeed, what would really be irrational is spending all of your money immediately.
    - vezzy-fnord 11y ago
      I am uncertain as to why you imply that a) I think a negative time preference is irrational or impossible apodictically, b) that the former is necessarily a neoclassical idea when the neoclassical synthesis in fact eschews it, c) that there is a natural rate of time preference, d) that time preferences do not differ per subjective valuations and units of goods on an individual scale, or that they are not dynamic, and e) that to respond to the assertion that deflationary spirals are unrealistic in presupposing a fixed natural rate of negative time preference with the opposite straw man idea of extremely high time preferences that favor immediate consumption is a convincing line of argument (indeed, the latter cannot be true for it would make capital investment an impossibility). The three activities you list in parentheses apply only for those goods, and do not even imply a negative time preference. Saving doesn't have to be a result of negativity at all, per se.
      - crdoconnor 11y ago
        >the opposite straw man idea of extremely high time preferences that favor immediate consumption is a convincing line of argument (indeed, the latter cannot be true for it would make capital investment an impossibility). Under the neoclassical synthesis capital investment is done purely by investors who have a positive time preference but are being paid enough to offset their desire to spend absolutely all of their money right this second. It's kind of dumb.
    - dnautics 11y ago
      the irony is that in order to satisfy these 'negative time preferences', inflation forces people into risky investment behavior, which is basically regressive wealth redistribution. And then we complain how the rich get richer and the poor get poorer, and blame it on capitalism.
- baddox 11y ago
  I'm no economist, but it seems like a lot of things (most, by dollar amount) I buy are simply not things I could feasibly defer for long. Food and rent (shelter) are the obvious examples by necessity, but also plenty of discretionary spending is obviously time-sensitive. I want to see a movie now, go skiing now, fly home for the holidays now, etc. It's unlikely that deflation stop me from making these purchases, unless it was some guaranteed short-term high-percentage deflation.
  - jonknee 11y ago
    It doesn't take a big change of behavior if there are a lot of people doing it. If everyone reduced spending by just a couple of percent it would radically change the economy and growth forecasts (we'd be in a recession). Lowered growth forecasts would then incentivize savings, further pushing down future growth. There is no Bitcoin Fed that could cut rates and incentivize investment, a Bitcoin dominated world in recession would be a dire place to be.
    - vezzy-fnord 11y ago
      Cutting rates would not necessarily stimulate investment: http://www.themoneyillusion.com/?p=31372 http://www.themoneyillusion.com/?p=31372
- narrator 11y ago
  As a counterpoint, you should consider Hayek's critique of the Paradox of Savings: https://mises.org/library/hayek-paradox-saving https://mises.org/library/hayek-paradox-saving The "deflation makes people not spend" is a hand-wavy argument. There is zero empirical evidence for it.
  - sanswork 11y ago
    You could just read any Bitcoin forum where everyone is 'hodling' because they expect their coins to be worth $100000 each soon.
    - narrator 11y ago
      This is more an example of Gresham's law than anything else.
  - danieltillett 11y ago
    It is not so much that it stops people from spending - it is that it makes the real interest rate high relative to the nominal and so discourages borrowing. Actually with negative interest rates proving possible (almost nobody thought they were a few years ago) if you had a deflationary currency you could always use negative interest rates to control demand. I am sure some smart economist has looked into this.
    - narrator 11y ago
      When the real interest rate is high, business retained earnings are more valuable. Thus, economic power is transferred from lending institutions to profitable corporations. Who do you think does a better job investing?
      - danieltillett 11y ago
        Well the theory of a bank is to act as an efficient mechanism to transfer capital from businesses and consumers with excess capital to those with a need for more capital. Of course in practice banks have got pretty good at capturing almost all the value out of this process. Business should not really be in the business of retaining earnings. If it was not for tax reasons it would be best to return any excess funds to the shareholders and raise new capital when needed.

baddox 11y ago

It's not so bad an idea as long as you get to choose which currencies you use.

Mandatum 11y ago

Gold seemed to work for a long time.

jonknee 11y ago
They keep digging more of it up too, it's not like Bitcoin. It's also not a good thing to run an economy on, but that's another concern.
- csseinpoont 11y ago
  Every fiat currency ever has collapsed, yet gold is still being hoarded in vaults. You have a limited perspective of history.
  - lukifer 11y ago
    I'm no fan of fiat, but your statement is tautological at best: the fiat currencies that have collapsed, collapsed. Communications tech and electronic fiat make the future anyone's bet.
    - csseinpoont 11y ago
      Tomorrow always different right? You're some saying it'll be different this time, and the only explanation you give is, 'communications' and 'electronic', and yet plenty of fiat currencies have collapses under such systems. Again, every fiat currency that has ever existed has collapsed, sure there are some new ones that haven't yet but to believe they won't is magical thinking. Again gold, after thousands of years, is still being hoarded in vaults by every major and minor world power, you really need to review some history.
  - umanwizard 11y ago
    The USD and Euro haven't collapsed, so I'm not sure what you're getting at.
crdoconnor 11y ago
Define "work". Gold denominated WW1 debts caused WW2.

yc1010 11y ago

Bitcoin inflation was around 10% recently Hashrate!= inflation btw

jonknee 11y ago
The question was about when new coins stop being mined...
- yc1010 11y ago
  That's a long way away, by then either bitcoin becomes popular, bitcoin evolves into something else or bitcoin dies. Right now all comments about "inflation" etc are downright silly, usually form people regurgitating sill cons against bitcoin that are not a concern at this time. But lets not have fact get in the way, downvote away.

dnautics 11y ago

So let's see... We have an inflationary currency which is behind an increasing divide between the rich and the poor[0], and keeps people hooked on unsustainable growth to just survive, leading to intensifying environmental destruction and wanton consumption of limited resources... It's not like an inflationary currency is necessarily a good idea, either. [0] before you say that inflation hurts the rich, among other reasons the if inflation didn't hurt the poor, we would never feel the political pressure to increase the minimum wage.

CyberDildonics 11y ago

Like precious metals? Deflationary currencies have been used successfully for over 1000 years. The only people it is bad for are governments. Throughout history there is a patter of promising, spending, and becoming insolvent. The idea that an individual wouldn't choose a deflationary currency is ludicrous. Inflationary currencies are what you want everyone else to use. And by the way, the cat is out of the bag. Cryptocurrencies are here, bitcoin or not. When people can choose to use any currency they want, will they choose one that inflates? I doubt it.

sfackler 11y ago
I am pretty confident that the amount of precious metals in circulation has gone up over the last 1000 years.
Jtsummers 11y ago
AS sfackler points out, mining of precious metals has continued (though, like bitcoin, with diminishing returns over time). They will choose an inflationary currency if they have any debt. Debt with deflation is very bad, and it's incredibly stupid to offer credit with deflation.
maaku 11y ago
Yes, like precious metals. The history of precious metal economies is pretty bad -- decades-long recessions and wars triggered by fluctuations in the commodity markets. Deflationary currency is not a good thing, and bitcoiners will eventually realize this. (Note I work on Bitcoin Core and co-founded Blockstream, a prominant bitcoin company. The value of Bitcoin is not the currency, but rather what censorship-resistant, distributed global consensus gives us.)
- lmm 11y ago
  > (Note I work on Bitcoin Core and co-founded Blockstream, a prominant bitcoin company. The value of Bitcoin is not the currency, but rather what censorship-resistant, distributed global consensus gives us.) You can get that while being less deflationary though, e.g. Dogecoin.