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I hear this argument a lot, but I'm not sure it's as simple as that. Orthodox macroeconomics holds that your currency needs to be slightly inflationary, but it

I hear this argument a lot, but I'm not sure it's as simple as that. Orthodox macroeconomics holds that your currency needs to be slightly inflationary, but it doesn't consider what happens in the face of credible competition with a deflationary currency. It might very well be the case that the economy runs better when everyone uses an inflationary currency. But if everyone wants to hold the deflationary currency instead of the inflationary one (which, all else being equal, they do, for obvious reasons) no amount of theorising will save it. We haven't yet seen a credible competitor to the inflationary currencies of nation states, but bitcoin is rapidly heading in that direction. And the cat is out of the bag now. If deflationary currencies do outcompete inflationary ones, then it's only a matter of time until it happens, even if it's not bitcoin. Switching to a deflationary currency might be "bad for the economy", but if it's good for individuals, they'll do it.

raiflip 9y ago
What you are describing is an ancient economic law known as Gresham's law: https://en.wikipedia.org/wiki/Gresham%27s_law https://en.wikipedia.org/wiki/Gresham%27s_law . It states that bad money drives out good because people hold onto good and spend bad. Bad is really normative saying more valuable is good and less is bad. So deflationary (up in value is good) and inflationary is bad (down in value). Frankly your argument is incoherent. If something is bad for the economy its bad for individuals. If the economy goes down most people starve. You also seem to argue that people hold onto more of a currency than another that currency "wins" but the currency that "wins" is the one in circulation. If by "win" we mean the currency that survives, then the one that survives is the one in circulation. Again this is all eco 101.
- anonymous5133 9y ago
  Crypto is being used in circulation though. There are dark net markets that sell drugs and you can buy various things with crypto. You can use certain websites to buy stuff off amazon while other websites sell gift cards which indirectly allows you to buy stuff in stores with crypto. The gift card is just pre-paid store credit. In the past, it was difficult to use 100% crypto to live on but now it is a real possibility.
  - raiflip 9y ago
    That's a good point, but for the case of illegal online activity bitcoin currently has a kind of anonymity guarantee that no other system does, and is as such an apples to oranges comparison. If the USD had the same anonymity guarantee you'd see those people making the same choice everyone else is: hold onto bitcoin and spend USD.
anonymous5133 9y ago
Excellent point. The truth is we have not had any real deflationary currencies compete against state issued currencies. Even commodity monies like gold and silver aren't deflationary since the existing in-ground resource base is still very large and can continue to be mined for millions of years. Crypto, on the other hand, will eventually stop creating new coins based on programming. It is essentially the ultimate deflationary currency. From the end-user stand point, the currency of choice is always going to be deflationary. The end-user has absolutely nothing to gain by using an inflationary currency. The benefits of the inflationary currency is that is encourages people to get rid of their currency as fast as possible because it is losing value. That doesn't benefit the end-user. It benefits businesses and the people those businesses employ. The inflationary currency ideals are mostly based on the socialist ideas that we need to spend our money as fast as possible to "move the economy forward" but that does not benefit the user of the money. It benefits other people. I believe that most people are self-interested and will do actions that maximize their benefit in most situations. Thus, it is easy to see that users will prefer to keep their money in deflationary currency rather than inflationary. Will it seize up the entire economy? My theory is no it won't and it will have the side effect of encouraging people to wisely spend their money. People will only buy stuff they really want or need rather than this idea of "I better buy it right now before the price goes up (due to inflation)".
- raiflip 9y ago
  See https://en.wikipedia.org/wiki/Gresham%27s_law https://en.wikipedia.org/wiki/Gresham%27s_law. If given the choice between holding bitcoin and USD people will hold bitcoin, but they will still want to buy stuff. People then have an incentive to use USD to buy stuff, and since USD is used to buy stuff they will want to have USD on hand to buy stuff when they want to. Hence Gresham's Law.
  - jstanley 9y ago
    > People then have an incentive to use USD to buy stuff, Yep. > and since USD is used to buy stuff they will want to have USD on hand to buy stuff when they want to Nope! Starting from a position of only having BTC (because you've already got rid of the USD you had, and you immediately convert any USD you receive into BTC), what is the advantage of buying USD to spend instead of spending your BTC directly?
flashmob 9y ago
Note that at this time, bitcoin is still very much inflationary, with 1800 new bitcoins being generated every day. This puts the annual inflation rate at 4.01%. Source: http://www.bitcoinblockhalf.com/ http://www.bitcoinblockhalf.com/ Perhaps real deflationary effects of bitcoin will probably kick in after 3 halvings (about 10 years?), when the number of bitcoin that is being lost naturally becomes greater than the inflation. However, at that stage, bitcoin fees would need to dramatically increase from what they are now. This is probably a paradox of deflationary crypto-currencies: They need to raise revenue from fees to pay for validation/security, however if there's more incentive to hold rather than spend them, their revenue raising ability becomes constricted. Whenever this is true, I'm excited that we'll find this out in the future.
- jstanley 9y ago
  I didn't mention bitcoin. I was arguing the abstract merits of inflationary vs deflationary currencies, from a vaguely-game-theory perspective.
  - flashmob 9y ago
    yep, I was just using it as an example to make a general statement that I made in the third paragraph. Do you agree or not? Was wondering what are your thoughts on that
    - jstanley 9y ago
      It's an interesting point. Already there is an awful lot of money being paid in bitcoin tx fees, and it's rising over time, and I can't see any reason for it to start going down, so I don't think it'll be a problem.
- raiflip 9y ago
  Deflation means the value of the currency is increasing. It does not mean the amount of units of that currency is increasing.
  - 9y ago

raiflip 9y ago

What you are describing is an ancient economic law known as Gresham's law: https://en.wikipedia.org/wiki/Gresham%27s_law https://en.wikipedia.org/wiki/Gresham%27s_law . It states that bad money drives out good because people hold onto good and spend bad. Bad is really normative saying more valuable is good and less is bad. So deflationary (up in value is good) and inflationary is bad (down in value). Frankly your argument is incoherent. If something is bad for the economy its bad for individuals. If the economy goes down most people starve. You also seem to argue that people hold onto more of a currency than another that currency "wins" but the currency that "wins" is the one in circulation. If by "win" we mean the currency that survives, then the one that survives is the one in circulation. Again this is all eco 101.

anonymous5133 9y ago
Crypto is being used in circulation though. There are dark net markets that sell drugs and you can buy various things with crypto. You can use certain websites to buy stuff off amazon while other websites sell gift cards which indirectly allows you to buy stuff in stores with crypto. The gift card is just pre-paid store credit. In the past, it was difficult to use 100% crypto to live on but now it is a real possibility.
- raiflip 9y ago
  That's a good point, but for the case of illegal online activity bitcoin currently has a kind of anonymity guarantee that no other system does, and is as such an apples to oranges comparison. If the USD had the same anonymity guarantee you'd see those people making the same choice everyone else is: hold onto bitcoin and spend USD.

anonymous5133 9y ago

Excellent point. The truth is we have not had any real deflationary currencies compete against state issued currencies. Even commodity monies like gold and silver aren't deflationary since the existing in-ground resource base is still very large and can continue to be mined for millions of years. Crypto, on the other hand, will eventually stop creating new coins based on programming. It is essentially the ultimate deflationary currency. From the end-user stand point, the currency of choice is always going to be deflationary. The end-user has absolutely nothing to gain by using an inflationary currency. The benefits of the inflationary currency is that is encourages people to get rid of their currency as fast as possible because it is losing value. That doesn't benefit the end-user. It benefits businesses and the people those businesses employ. The inflationary currency ideals are mostly based on the socialist ideas that we need to spend our money as fast as possible to "move the economy forward" but that does not benefit the user of the money. It benefits other people. I believe that most people are self-interested and will do actions that maximize their benefit in most situations. Thus, it is easy to see that users will prefer to keep their money in deflationary currency rather than inflationary. Will it seize up the entire economy? My theory is no it won't and it will have the side effect of encouraging people to wisely spend their money. People will only buy stuff they really want or need rather than this idea of "I better buy it right now before the price goes up (due to inflation)".

raiflip 9y ago
See https://en.wikipedia.org/wiki/Gresham%27s_law https://en.wikipedia.org/wiki/Gresham%27s_law. If given the choice between holding bitcoin and USD people will hold bitcoin, but they will still want to buy stuff. People then have an incentive to use USD to buy stuff, and since USD is used to buy stuff they will want to have USD on hand to buy stuff when they want to. Hence Gresham's Law.
- jstanley 9y ago
  > People then have an incentive to use USD to buy stuff, Yep. > and since USD is used to buy stuff they will want to have USD on hand to buy stuff when they want to Nope! Starting from a position of only having BTC (because you've already got rid of the USD you had, and you immediately convert any USD you receive into BTC), what is the advantage of buying USD to spend instead of spending your BTC directly?

flashmob 9y ago

Note that at this time, bitcoin is still very much inflationary, with 1800 new bitcoins being generated every day. This puts the annual inflation rate at 4.01%. Source: http://www.bitcoinblockhalf.com/ http://www.bitcoinblockhalf.com/ Perhaps real deflationary effects of bitcoin will probably kick in after 3 halvings (about 10 years?), when the number of bitcoin that is being lost naturally becomes greater than the inflation. However, at that stage, bitcoin fees would need to dramatically increase from what they are now. This is probably a paradox of deflationary crypto-currencies: They need to raise revenue from fees to pay for validation/security, however if there's more incentive to hold rather than spend them, their revenue raising ability becomes constricted. Whenever this is true, I'm excited that we'll find this out in the future.

jstanley 9y ago
I didn't mention bitcoin. I was arguing the abstract merits of inflationary vs deflationary currencies, from a vaguely-game-theory perspective.
- flashmob 9y ago
  yep, I was just using it as an example to make a general statement that I made in the third paragraph. Do you agree or not? Was wondering what are your thoughts on that
  - jstanley 9y ago
    It's an interesting point. Already there is an awful lot of money being paid in bitcoin tx fees, and it's rising over time, and I can't see any reason for it to start going down, so I don't think it'll be a problem.
raiflip 9y ago
Deflation means the value of the currency is increasing. It does not mean the amount of units of that currency is increasing.
- 9y ago