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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

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?
- BenoitEssiambre 9y ago
  Under deflationary conditions banks don't lend out because banks too want to get the above market returns of deflationary cash. That is why the amount of excess reserves (unlent money) shot up during the last financial crisis. This is a bit of a simplification. You also have to take into account risk and liquidity. Banks or anyone else won't lend out or invest unless the money has a lower return than market investment or that the volatile money gets too risky to hold. Eventually money gets pushed towards enough volatility that some level of investment returns. This might help avoid complete economic ruin.
dcAM 9y ago
I don’t follow your point about deflation. Ultimately price change has to be neutral in the medium/long run. Simply, interest rates would become higher because of deflation. If I lend you 1 Bitcoin today and value will be 1.1 tomorrow, I need to factor that in the interest rate I ask you, on top of the prevailing real return to investing. In my view, the problem it’s a matter of transaction costs induced by continuosly changing prices.

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?

BenoitEssiambre 9y ago
Under deflationary conditions banks don't lend out because banks too want to get the above market returns of deflationary cash. That is why the amount of excess reserves (unlent money) shot up during the last financial crisis. This is a bit of a simplification. You also have to take into account risk and liquidity. Banks or anyone else won't lend out or invest unless the money has a lower return than market investment or that the volatile money gets too risky to hold. Eventually money gets pushed towards enough volatility that some level of investment returns. This might help avoid complete economic ruin.

dcAM 9y ago

I don’t follow your point about deflation. Ultimately price change has to be neutral in the medium/long run. Simply, interest rates would become higher because of deflation. If I lend you 1 Bitcoin today and value will be 1.1 tomorrow, I need to factor that in the interest rate I ask you, on top of the prevailing real return to investing. In my view, the problem it’s a matter of transaction costs induced by continuosly changing prices.