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Bitcoin would be a very flawed currency. It has deflation baked into it's design. Imagine if bitcoin was legal tender in the country. If my country produced 5%

Bitcoin would be a very flawed currency. It has deflation baked into it's design. Imagine if bitcoin was legal tender in the country. If my country produced 5% more goods and services in a year, but the bitcoin supply increases by just 1% due to the mining mechanism, resulting in deflation. This means I am better off hoarding my surplus bitcoin, stashing it under the digital mattress, as I know it can buy more in the future. I won't spend it on goods and services, or risk it by investing in a company. Most others would do the same. The reduction in demand for goods and services means companies would have to lay off workers or close down, causing unemployment. The reduction in investment will mean less companies starting up, and less coin for companies to invest in staff or equipment to increase efficiency. All this will depress economic growth, and cause unemployment. Which in turn reduces demand even more, causing a reinforcing cycle of economic contraction. A great depression in other words. The similarity is apt, because the great depression was partly driven by the gold standard, which had the same dynamics as my hypothetical bitcoin economy.

montaguy 9y ago
So say your country produced 5% more goods, and the bitcoin supply increased 1% or even decreased. Production is higher than monetary supply increase. Seems to me that sure, the cost of investment would rise in this deflationary scenario, but to assume this results in no investment is a foregone conclusion. Wouldn't you just get a new investment vs savings equilibrium? One that may be more aligned with responsible investments and purchases? Why is it a downward spiral? If saving is greater than investment than production wouldn't stay at 5%, it's ostensibly fall, reducing deflation, and making investment more appealing relative to saving. Doubtless this 'target inflation' debate has raged for the past century. Does anyone have any book recommendations that explore these ideas?
- taw55 9y ago
  Debts are denominated in money, if that money becomes more scarce, people will spend a lower fraction of their income on consumption articles out of fear of not making ends meet. At any point in time total spending equals total income, so this will reduce total demand inside the economy. If people's income diminishes, their debt-to-income ratio rises. This results in what is called a debt-deflation spiral.

montaguy 9y ago

So say your country produced 5% more goods, and the bitcoin supply increased 1% or even decreased. Production is higher than monetary supply increase. Seems to me that sure, the cost of investment would rise in this deflationary scenario, but to assume this results in no investment is a foregone conclusion. Wouldn't you just get a new investment vs savings equilibrium? One that may be more aligned with responsible investments and purchases? Why is it a downward spiral? If saving is greater than investment than production wouldn't stay at 5%, it's ostensibly fall, reducing deflation, and making investment more appealing relative to saving. Doubtless this 'target inflation' debate has raged for the past century. Does anyone have any book recommendations that explore these ideas?

taw55 9y ago
Debts are denominated in money, if that money becomes more scarce, people will spend a lower fraction of their income on consumption articles out of fear of not making ends meet. At any point in time total spending equals total income, so this will reduce total demand inside the economy. If people's income diminishes, their debt-to-income ratio rises. This results in what is called a debt-deflation spiral.