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I would love to see a currency like this work, and I would be interested in using one, but the major issue for bitcoin, for me, is that deflation is built into

by ap22213 15y ago

I would love to see a currency like this work, and I would be interested in using one, but the major issue for bitcoin, for me, is that deflation is built into its core. Inflation is a good thing. Inflation encourages holders of capital to use it to invest in other things. That is, inflation encourages productivity. The inflation has to be relatively low, of course. Probably low enough to allow someone to retire without worry.

tomjen3 15y ago
An inflationist currency is great if you are deep in debt or like cheap consumer credit. Deflation (or really constant value) means that those who save, build things and invest wisely will benefit. And no, I am not going to starve today, so that I can get marginally more bread a year from now.
- ap22213 15y ago
  I don't know. Maybe. It seems like it would just create aristocracy. If I inherit a large sum of money, I have incentive to ensure that my large sum of money increases (or at least doesn't decrease) in value in the easiest, least risky way possible. If my wealth was in bitcoin, I wouldn't have to do much, except ensure that more people join bitcoin and that the bitcoin didn't disappear. Otherwise, I would just play warcraft all day, procreate, and then die and split my wealth amongst my children to continue the cycle. If my wealth was in an inflationary currency, I would have much more incentive to take on risk. Perhaps through that risk taking, I end up losing my wealth, and others gain. Or, perhaps I gain more wealth. At least I have incentive to take productive action.
  - njs12345 15y ago
    Of course, most forms of wealth people have aren't inflationary anyway - the very wealthy tend to have little in terms of actual liquid currency and more stock and property. It has been argued (http://en.wikipedia.org/wiki/Inflation_tax http://en.wikipedia.org/wiki/Inflation_tax) that inflation can be thought of as a regressive tax for this reason.
    - ap22213 15y ago
      Exactly. As nl stated [1], bitcoin would turn the currency into an investment. The very wealthy who would otherwise hold stock and property would instead have incentive to just hold the bitcoin currency. [1] http://news.ycombinator.com/item?id=2611613 http://news.ycombinator.com/item?id=2611613
      - njs12345 15y ago
        My point was more of an observation about the aristocracy point. Often the rich do still take significant risks with their wealth even though the effects of inflation are negligible on them. I'm unsure about the deflationary aspect of bitcoin - in my opinion the degree to which it is problematic depends on the rate of depreciation compared to other assets. It seems more of a problem if you wanted to use bitcoin to replace a sovereign currency, rather than use it as a currency on a smaller scale intended for grey market/black market transactions. I think the appreciation of the currency over time was probably intended to ensure it originally took off by providing an incentive for early adopters; its dubious legal status probably means it's a poor long term investment choice anyway. To some extent this discussion is entirely academic anyway - bitcoin is being used as a currency right now (see the Silk Road Market), so in that sense it's already succeeded..
    - thomasz 15y ago
      That proves the point. They have to invest their wealth in stock, real estate etc. instead of putting it in a chest/thumb drive and burying it on a lonely island in order to keep it.
      - hugh3 15y ago
        ... which is surely a very good thing? If cash paid a better return than most investments then we wouldn't have anyone to invest in things.
- knowtheory 15y ago
  > And no, I am not going to starve today, so that I can get marginally more bread a year from now. That only works if a majority of your assets or earnings are in bitcoins (e.g. you have to convert them in order to live), or if bitcoins are exchangeable for necessities. If the article's author is correct (and he is imo) and it's more sensible to look at Bitcoin as a commodity, not a currency, then i think your assertion is a red herring.
- sethg 15y ago
  In order for one person to be able to save (or invest), someone else has to be willing to borrow (or sell stock).
anonymoushn 15y ago
I don't understand. If a man can earn an expected 3% interest (in real terms) by buying a certain investment, is he less likely to buy it in a deflationary environment than in an inflationary environment?
- nl 15y ago
  In that case ("in real terms") there is no difference. That's not the problem. The real problem is if someone is more or less likely to buy something in currency denominated terms if it is a deflationary or inflationary environment. If people don't spend then you tend to end up in a low (or negative) growth environment, which can lead to high unemployment and a falling standard of living.
  - anonymoushn 15y ago
    Why do we expect real ROI to vary significantly based on whether the currency is inflating by 2% or deflating by 2% y/o/y? I would expect if I were a lender, and inflation increased, I would price that in to my new transactions, and I would think if I were a business, I would be impacted much more by my ability to convert real time and real resources into real value than by the number of loaves of bread I could buy if I spent all my cash reserves on them.
- vladd 15y ago
  Yes, because in a deflationary environment, just sitting on the money is an investment in itself. Let's say you have an amount of money which buys you today 1 house. If within 1 month, with the same amount of money, you'll be able to buy 1.04 houses, nobody will invest in any business which increases real (non-money denominated) assets at anything lower than 4% per month. Or, to look at it from another angle: the central bank cannot set a negative interest rate, that is, take interest just for keeping the money in the account (people will keep it under the mattress instead). So the deflation rate is the minimum interest rate that the businesses must achieve in order to be economically viable and attract funds (otherwise investors sit on the money). The greater the deflation rate, the more bankruptcies it causes.
vilda 15y ago
"That is, inflation encourages productivity." Wrong. Inflation encourages to invest in commodities or real estates. Watch for increasing price of metals, agriculture products. The primary cause of real estate bubble in US was cheap money.

by ap22213 15y ago

tomjen3 15y ago

An inflationist currency is great if you are deep in debt or like cheap consumer credit. Deflation (or really constant value) means that those who save, build things and invest wisely will benefit. And no, I am not going to starve today, so that I can get marginally more bread a year from now.

ap22213 15y ago
I don't know. Maybe. It seems like it would just create aristocracy. If I inherit a large sum of money, I have incentive to ensure that my large sum of money increases (or at least doesn't decrease) in value in the easiest, least risky way possible. If my wealth was in bitcoin, I wouldn't have to do much, except ensure that more people join bitcoin and that the bitcoin didn't disappear. Otherwise, I would just play warcraft all day, procreate, and then die and split my wealth amongst my children to continue the cycle. If my wealth was in an inflationary currency, I would have much more incentive to take on risk. Perhaps through that risk taking, I end up losing my wealth, and others gain. Or, perhaps I gain more wealth. At least I have incentive to take productive action.
- njs12345 15y ago
  Of course, most forms of wealth people have aren't inflationary anyway - the very wealthy tend to have little in terms of actual liquid currency and more stock and property. It has been argued (http://en.wikipedia.org/wiki/Inflation_tax http://en.wikipedia.org/wiki/Inflation_tax) that inflation can be thought of as a regressive tax for this reason.
  - ap22213 15y ago
    Exactly. As nl stated [1], bitcoin would turn the currency into an investment. The very wealthy who would otherwise hold stock and property would instead have incentive to just hold the bitcoin currency. [1] http://news.ycombinator.com/item?id=2611613 http://news.ycombinator.com/item?id=2611613
    - njs12345 15y ago
      My point was more of an observation about the aristocracy point. Often the rich do still take significant risks with their wealth even though the effects of inflation are negligible on them. I'm unsure about the deflationary aspect of bitcoin - in my opinion the degree to which it is problematic depends on the rate of depreciation compared to other assets. It seems more of a problem if you wanted to use bitcoin to replace a sovereign currency, rather than use it as a currency on a smaller scale intended for grey market/black market transactions. I think the appreciation of the currency over time was probably intended to ensure it originally took off by providing an incentive for early adopters; its dubious legal status probably means it's a poor long term investment choice anyway. To some extent this discussion is entirely academic anyway - bitcoin is being used as a currency right now (see the Silk Road Market), so in that sense it's already succeeded..
  - thomasz 15y ago
    That proves the point. They have to invest their wealth in stock, real estate etc. instead of putting it in a chest/thumb drive and burying it on a lonely island in order to keep it.
    - hugh3 15y ago
      ... which is surely a very good thing? If cash paid a better return than most investments then we wouldn't have anyone to invest in things.
knowtheory 15y ago
> And no, I am not going to starve today, so that I can get marginally more bread a year from now. That only works if a majority of your assets or earnings are in bitcoins (e.g. you have to convert them in order to live), or if bitcoins are exchangeable for necessities. If the article's author is correct (and he is imo) and it's more sensible to look at Bitcoin as a commodity, not a currency, then i think your assertion is a red herring.
sethg 15y ago
In order for one person to be able to save (or invest), someone else has to be willing to borrow (or sell stock).

anonymoushn 15y ago

I don't understand. If a man can earn an expected 3% interest (in real terms) by buying a certain investment, is he less likely to buy it in a deflationary environment than in an inflationary environment?

nl 15y ago
In that case ("in real terms") there is no difference. That's not the problem. The real problem is if someone is more or less likely to buy something in currency denominated terms if it is a deflationary or inflationary environment. If people don't spend then you tend to end up in a low (or negative) growth environment, which can lead to high unemployment and a falling standard of living.
- anonymoushn 15y ago
  Why do we expect real ROI to vary significantly based on whether the currency is inflating by 2% or deflating by 2% y/o/y? I would expect if I were a lender, and inflation increased, I would price that in to my new transactions, and I would think if I were a business, I would be impacted much more by my ability to convert real time and real resources into real value than by the number of loaves of bread I could buy if I spent all my cash reserves on them.
vladd 15y ago
Yes, because in a deflationary environment, just sitting on the money is an investment in itself. Let's say you have an amount of money which buys you today 1 house. If within 1 month, with the same amount of money, you'll be able to buy 1.04 houses, nobody will invest in any business which increases real (non-money denominated) assets at anything lower than 4% per month. Or, to look at it from another angle: the central bank cannot set a negative interest rate, that is, take interest just for keeping the money in the account (people will keep it under the mattress instead). So the deflation rate is the minimum interest rate that the businesses must achieve in order to be economically viable and attract funds (otherwise investors sit on the money). The greater the deflation rate, the more bankruptcies it causes.

vilda 15y ago

"That is, inflation encourages productivity." Wrong. Inflation encourages to invest in commodities or real estates. Watch for increasing price of metals, agriculture products. The primary cause of real estate bubble in US was cheap money.