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Sincere question: What is fundamentally wrong with deflation, other than the population of Earth increases over time (so only increase the money supply to the s

Sincere question: What is fundamentally wrong with deflation, other than the population of Earth increases over time (so only increase the money supply to the same rate the population increases)? Doesnt inflation cause asset bubbles? If the money supply remains constant, we would only devote money to stuff we truly really value. So any bubble talk would be nonexistent (because who would waste money investing in Pets.com stock when money is scarce? we need to use it for food, shelter and THEN use the rest for stuff we truly value)

Terr_ 9y ago
In this case you could say that cryptocurrencies are the asset bubble. The problem with deflation is that it prevents the thing from doing it's job as a currency. People have an incentive not to conduct transactions with it. And insofar as that prevents people from making transactions, that harms the economy.
- AznHisoka 9y ago
  So people would wait forever until the prices of homes reaches $1? That seems unlikely. People would never buy anything then? Wouldn't they just wait until the price of something matches what they deem is fair value? And if it never goes down to a fair value, then they wouldn't buy it (that might include things like cryptocurrencies, huge TVs, Pets.com stock, and lots of nice-to-haves that waste a lot of resources but props up that vanity GDP metric and "boosts" the economy)
  - ufo 9y ago
    The problem with deflation is that wages and income go down over time, which makes debts harder to pay off. This discourages investment. In your example, the problem is that it is harder to take a bitcoin-denominated loan to purchase a house because your bitcoin-denominated wages go down every year and eventually you can't pay off the interest anymore.
    - AznHisoka 9y ago
      But wouldn't prices of goods go down too? Wouldn't that even things out with lower wages? You'll still be able to afford the same amount of stuff. Continuing the example of buying homes... wouldn't that be a good (or neutral) thing since it means we wouldn't have so many people speculating on real estate, and taking out easy loans to buy homes, leading to unhealthy increases in home prices?
      - ufo 9y ago
        Prices of goods go down, but the price of existing debts doesn't, which is the big problem. I agree that the housing market is not the ideal example but we need to look at debt in general when talking about deflation. In a deflationary setting, reduced lending reduces the speed that money moves around and depresses the economy. Business have trouble closing the book because falling prices of goods sold today are not enough to cover the cost of supplies from when they were manufactured a month ago. Periods of deflation have tended to go hand in hand with major economic busts, which is why modern monetary policy tries to avoid even the mildest form of deflation.
  - Terr_ 9y ago
    $1 houses? What? I really don't understand what you're trying to say here. When FunBux are deflating, people who have FunBux (or are owed FunBux) tend to avoid spending if when they can, because its predicted future value is greater. In essence, it gradually stops behaving like a currency and is more like a commodity that they are holding for speculative purposes.
    - AznHisoka 9y ago
      Prices for electronics and clothes are the cheapest on Black friday but there are many people who buy those things year round So how would that support your theory?
      - Terr_ 9y ago
        You post is a non-sequitur. What the heck does "Black Friday" marketing have to do with a fundamentally deflationary currency? Perhaps you've somehow gotten the idea that deflation means a currency is absolutely not spent in any amount under any circumstances, because the incentive is so strong that it overrides all other things that human may need or want? Because that's not at all what I said. People who can "afford" not to decrease their cache of DeflationBux will tend to avoid doing so, unless they're getting something they believe has a better future value. They are more likely to delay non-critical purchases or arrange deals that avoid that currency. And when that happens, the currency isn't really doing its job. You can have plenty of blood in your body, but it's a bad thing when a lot of it stops moving.
        AznHisoka 9y ago
        If consumers delay non critical purchases, how is that bad? More money would flow into important things in society as a result and potentially less to things that probably arent needed on society (ie Angry Birds games, or selfie sticks). Those industries might go out of business and release more resources to the important ones. You say it isnt doing "its job"? but thats not a real reason. cigarettes arent doing its job if its stashed away and not smoked.
  - imtringued 9y ago
    The problem is that certain goods like food can perish. By the time the price matches the fair value it's already gone.
    - AznHisoka 9y ago
      People would never buy food even if they are starving until it is at their desired price?
BenoitEssiambre 9y ago
Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity. When this trend becomes widespread enough, it can eventually cause global production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these very tokens. Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which will mean prices for stuff will rise (tokens will lose value). This may happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline ready to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop brings the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility will keep the speculation wild and cryptocoins unstable. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always fluctuate increasingly wildly as they get more popular.
- AznHisoka 9y ago
  "Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity." I know we are commenting on cryptos but what about money? wouldnt people put their money into savings accounts (which is also investing not hoarding as banks loan their money out) or into a business if they were going to get a higher return than deflationary rate? Of course i M not going to invest in you if you offer a pitiful 1% interest rate and the deflation rate is 1.5%. With money, building stashes and hoarding would literally be hoarding it under your bed, no? Putting it into your savings account is technically investing it as it allows banks to loan more to businesses. Where is the flaw in my thinking?
imtringued 9y ago
If everyone stops spending their excess income and instead saves it nothing will be produced but if they suddenly decide to spend it they will have nothing to spend it on unless the type of good is also non perishable.

Terr_ 9y ago

In this case you could say that cryptocurrencies are the asset bubble. The problem with deflation is that it prevents the thing from doing it's job as a currency. People have an incentive not to conduct transactions with it. And insofar as that prevents people from making transactions, that harms the economy.

AznHisoka 9y ago
So people would wait forever until the prices of homes reaches $1? That seems unlikely. People would never buy anything then? Wouldn't they just wait until the price of something matches what they deem is fair value? And if it never goes down to a fair value, then they wouldn't buy it (that might include things like cryptocurrencies, huge TVs, Pets.com stock, and lots of nice-to-haves that waste a lot of resources but props up that vanity GDP metric and "boosts" the economy)
- ufo 9y ago
  The problem with deflation is that wages and income go down over time, which makes debts harder to pay off. This discourages investment. In your example, the problem is that it is harder to take a bitcoin-denominated loan to purchase a house because your bitcoin-denominated wages go down every year and eventually you can't pay off the interest anymore.
  - AznHisoka 9y ago
    But wouldn't prices of goods go down too? Wouldn't that even things out with lower wages? You'll still be able to afford the same amount of stuff. Continuing the example of buying homes... wouldn't that be a good (or neutral) thing since it means we wouldn't have so many people speculating on real estate, and taking out easy loans to buy homes, leading to unhealthy increases in home prices?
    - ufo 9y ago
      Prices of goods go down, but the price of existing debts doesn't, which is the big problem. I agree that the housing market is not the ideal example but we need to look at debt in general when talking about deflation. In a deflationary setting, reduced lending reduces the speed that money moves around and depresses the economy. Business have trouble closing the book because falling prices of goods sold today are not enough to cover the cost of supplies from when they were manufactured a month ago. Periods of deflation have tended to go hand in hand with major economic busts, which is why modern monetary policy tries to avoid even the mildest form of deflation.
- Terr_ 9y ago
  $1 houses? What? I really don't understand what you're trying to say here. When FunBux are deflating, people who have FunBux (or are owed FunBux) tend to avoid spending if when they can, because its predicted future value is greater. In essence, it gradually stops behaving like a currency and is more like a commodity that they are holding for speculative purposes.
  - AznHisoka 9y ago
    Prices for electronics and clothes are the cheapest on Black friday but there are many people who buy those things year round So how would that support your theory?
    - Terr_ 9y ago
      You post is a non-sequitur. What the heck does "Black Friday" marketing have to do with a fundamentally deflationary currency? Perhaps you've somehow gotten the idea that deflation means a currency is absolutely not spent in any amount under any circumstances, because the incentive is so strong that it overrides all other things that human may need or want? Because that's not at all what I said. People who can "afford" not to decrease their cache of DeflationBux will tend to avoid doing so, unless they're getting something they believe has a better future value. They are more likely to delay non-critical purchases or arrange deals that avoid that currency. And when that happens, the currency isn't really doing its job. You can have plenty of blood in your body, but it's a bad thing when a lot of it stops moving.
      - AznHisoka 9y ago
        If consumers delay non critical purchases, how is that bad? More money would flow into important things in society as a result and potentially less to things that probably arent needed on society (ie Angry Birds games, or selfie sticks). Those industries might go out of business and release more resources to the important ones. You say it isnt doing "its job"? but thats not a real reason. cigarettes arent doing its job if its stashed away and not smoked.
- imtringued 9y ago
  The problem is that certain goods like food can perish. By the time the price matches the fair value it's already gone.
  - AznHisoka 9y ago
    People would never buy food even if they are starving until it is at their desired price?

BenoitEssiambre 9y ago

Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity. When this trend becomes widespread enough, it can eventually cause global production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these very tokens. Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which will mean prices for stuff will rise (tokens will lose value). This may happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline ready to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop brings the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility will keep the speculation wild and cryptocoins unstable. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always fluctuate increasingly wildly as they get more popular.

AznHisoka 9y ago
"Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity." I know we are commenting on cryptos but what about money? wouldnt people put their money into savings accounts (which is also investing not hoarding as banks loan their money out) or into a business if they were going to get a higher return than deflationary rate? Of course i M not going to invest in you if you offer a pitiful 1% interest rate and the deflation rate is 1.5%. With money, building stashes and hoarding would literally be hoarding it under your bed, no? Putting it into your savings account is technically investing it as it allows banks to loan more to businesses. Where is the flaw in my thinking?

imtringued 9y ago

If everyone stops spending their excess income and instead saves it nothing will be produced but if they suddenly decide to spend it they will have nothing to spend it on unless the type of good is also non perishable.