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Deflation means that aggregate prices go down over time. I am not sure what it means that, as you said, people bought cryptos in the hopes that the dollar price
by sedeki 7y ago
Deflation means that aggregate prices go down over time. I am not sure what it means that, as you said, people bought cryptos in the hopes that the dollar prices of bitcoins would ”””deflate”””. But sure, prices go up when demand go up - is this unusual?
(Sorry if I came across as arrogant.)
On whether deflation is bad for the economy. The standard example of this is the Great Depression, where massive amounts of credit was created and later people opted out of USD and wanted gold. There were bank-runs, as I’m sure you know. Thus FDR ”banned” gold (he even forced people to return gold or risk confiscation and jail time).
Of course dollar prices go down then, i.e. deflation.
I don’t see this as an argument that deflation is bad.
Or do you have another example or perhaps can correct me?
- ivalm 7y agoYou seemed to suggest in GP that one problem with fiat is that it may become deflationary (ie prices for goods in fiat will go down). I pointed out that Bitcoin is by construction deflationary, prices (in bitcoin) for goods go down as long as bitcoin occupies at least a fixed fraction of total exchange tokens. Simple example, if bitcoin is the only exchange token in circulation then bitcoin will become more valuable as a function of time simply because the amount of "stuff" increases. This is as opposed to fiat, which increases in supply to compensate the increase of material wealth in the world. The reason deflation is bad is because it discourages investment. If I can buy more stuff later with the same amount of tokens then I have an incentive to not spend my exchange tokens, thus reducing the total circulation of tokens/investment/etc. It also makes loans more painful (unless interest rates are negative), but if interest rates are sufficiently negative then this encourages people to not deposit money into loan originators (traditionally banks, but in crypto world could be something else).
- sedeki 7y ago> then bitcoin will become more valuable as a function of time simply because the amount of "stuff" increases. > The reason deflation is bad is because it discourages investment. I agree that economies are naturally deflationary because people don't stop working. So what? I think printing money is bad (as opposed to the concept of "inflation" which is an effect) is bad, because it distorts market mechanisms that occurr naturally - I'm talking about (more) efficient capital allocation here.
- ivalm 7y agoIf you are discouraged from investing (deflationary exchange token) then this leads to suboptimal capital allocation (since money will be used neither for investment nor loans)