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The problem isn't the psychological effects of needing to constantly lower prices – this happens all the time in the tech industry, and everyone in that industr
by johnthedebs 15y ago
The problem isn't the psychological effects of needing to constantly lower prices – this happens all the time in the tech industry, and everyone in that industry is doing just fine psychologically.
Rather, it has to do with the fact that constantly down-shifting prices cause people not to buy nearly as often as they would if prices were stable or slightly inflationary. As a result of that, the economy slows down (sometimes dramatically).
- danielsoneg 15y agoThe other big problem is that debt loads don't drop along with prices - which effectively makes them rise. Falling prices (which lead to falling wages) + stable debt loads make it far harder for debtors to pay off their debts, which puts even further drag on the economy.
- stevenwagner 15y agoI would not short gold or Apple either, the risk would be huge! So are you agreeing that bitcoins will become worth more then? So I shouldnt take a bitcoin loan out, I should take a dollar loan out and buy bitcoins with it. Or you are saying bitcoins are bad so they will go down in value ... and I should... whaaat?
- msbarnett 15y agoHe's saying that the characteristics of bitcoins make it a lousy currency (people have little incentive to spend or loan it). Whether or not it's an asset worthy of investing in is a separate question. (I'd argue that it isn't, but that's a separate issue from the characteristics that make it a bad currency).
- jarek 15y agoAs an investment, it's like gold but without the intrinsic value part and the "historically used as an investment for the past couple of millenia" part.
- caf 15y agoThe intrinsic value of gold is quite a bit less than its market value, though - it's very hard to separate that from the "historically desired" aspect. If you want intrinsic value, you're probably better off investing in good quality rifles.
- jarek 15y agoWell, of course. But bitcoin doesn't have even that. Though I would suggest that you would have to time your entry into the quality rifle investment market well to avoid getting hit by a speculative markup caused by people's expectations of their future intrinsic value.
- guelo 15y agoThe intrinsic value of bitcoin is as an uncensorable way to transfer money, for example to donate to Wikileaks when Visa and Paypal won't let you. It becomes more valuable the more governments try to stop transactions. This is why I'm bullish on it.
- jarek 15y agoOh, uncensorable? You mean as long as the government permits both parties to be connected to the internet. When they block either of you, it's about as good as a hundred dollar bill.
- Amincd 15y agoBut this contradicts itself. If it makes it a lousy currency, then people wouldn't expect its value to rise, and hence would have an incentive to spend it, hence it would be a good currency and its value would rise.
- euroclydon 15y agoWow, for all I've read about Austrian Economics, I've never heard that simple yet devastating argument.
- TruthElixirX 15y agoAustrians don't advocate for a deflationary currency, they advocate for competing currencies. Rothbard, one of the "pillars" of Austrian Economics, even stated that The Great Depression was due to deflation not inflation. Lots of people that scratch the surface of Austrian Economics immediately start shouting the ills of inflation and such. Most "hardcore" Austrians I know would like a currency that's supply grew with economic growth. Economy grows by x measure then so does the currency, to keep it stable.
- euroclydon 15y agoThanks. I knew this was wrong as soon as it left my keyboard. I guess the problem we're having is that the Fed's mandate is to keep unemployment low, not to expand the currency as the population expands. I really don't understand how a currency supply is supposed to track growth, when one of the means of controlling currency expansion, the discount rate, can actually stimulate growth sometimes, right?
- michaeldhopkins 15y agoJust to be clear, it's an argument against fiat currency as deflationary and inflationary shocks occur in those systems. The effects of deflation and inflation over time are countered with market-set interest rates -- higher savings and loan rates in an inflationary period and low-to-negative rates in a deflationary period. Yes, in a deflationary economy a (for example) -5.00% interest rate might be fair and would happen were it allowed.
- caf 15y agoWhy would you ever lend money at a negative interest rate? You can always get 0.00% with virtually no risk just by socking the money away in a secure location. This is the heart of the problem with deflation (and deflationary currencies like bitcoin) - there's a 0.00% floor on the time cost of money.
- iradik 15y agoYes, instead of taking on debt people would be incentivized to save money before spending it. With inflation you get the reverse effect: people are incentivized to take on debt to spend.
- ajross 15y agoExactly. In the bitcoin world, you make more money by not investing the money you have and instead holding onto it in the hopes that you'll be able eventually convert it to a stable currency in the future. That's a disaster. Who, for example, is going lend their precious bitcoins to a risky startup when they can just sit on them and watch them appreciate?
- stevenwagner 15y agoFinance 101, its called hedging. You can invest in dollars, euros, bitcoins, google, gold, food or whatever. They all have relative leverage and are all investments. Purchasing bitcoins means to investing in a share of the bitcoin economy. Its a startup currency which has never happened before. The increase in trading value has created an enormous amount of funding for bitcoin startups.
- scott_s 15y agoHe's talking about the situation where you already have bitcoins. If their value is deflating fast enough, then the most sound "investment" is to just hold onto them.
- brown9-2 15y agoBut what about the people that want to use it as a currency, to buy things? If everyone views it as an investment, and not a vehicle for trade, it will fail as a currency / never take off as a currency. A lot of this logic is circular - the value will continue to rise because people will keep investing because the value will keep rising, etc.
- Amincd 15y agoPeople are not all going to hold on to it and not spend. Some people are going to feel that due to hoarding, it won't become a currency, and hence it's not a good investment, and will be more likely to spend.
- 15y ago
- aschoen 15y agoThe total number of bitcoins in circulation is capped, even though the total quantity of wealth in the world continues to increase. If bitcoins were the only currency used, then yes, this would cause hoarding problems. Does this mean bitcoins are flawed? No. It just means that there is a cap on how much wealth can be purchased with bitcoins.
- aschoen 15y agoIn other words, prices of goods (in bitcoins) will (eventually) stop deflating, even though there is a fixed quantity of bitcoins, because other cryptocurrencies will be introduced.
- stevenwagner 15y agoIt is 21.00000000 million-- or 2.1 quadrillion of the smallest-possible-unit.
- Raphael 15y agoSo every person on earth only gets 300,000 of the smallest possible unit?
- stevenwagner 15y agoWith the current software yes. It could always be expanded if need though.
- DennisP 15y agoRationally, people should wait as long as possible to buy tech because they'll get more later. Instead, they buy it at a furious rate. Why is that?
- stevenwagner 15y agoI know! The iPad is going to be so much cheaper in 10 years. Im waiting.
- khafra 15y agostevenwagner shows by example why this isn't so, but to spell it out: If you were buying a CPU as an investment like a share of a mutual fund, to buy, hold, and sell, you'd want to wait as long as possible. In fact, you'd never buy one; we pretty much always expect the price of a given CPU to go down in the future. But if you're going to use it to generate value, you should buy it as soon as your expectation for the marginal value it will generate is greater than the price of the CPU.
- DennisP 15y agoThat makes sense, but what I'm wondering is: why doesn't the same argument apply to all products in the presence of deflation? It seems to me the real problem of deflation is that debts get harder to pay off, not that people put off their purchases. But the "deflationary spiral" of delayed purchases is what people keep talking about, and I haven't heard a good reason why the tech industry is uniquely exempt from that.
- sethg 15y agoDeflationary spirals happen when the average price of everything, economy-wide, is going down. It’s perfectly normal for some things in the economy to get cheaper while other things get more expensive. Consumer technology is conspicuous and the way it gets cheap is conspicuous, but it accounts for a small proportion of what the average American spends money on. (The average American spends a small proportion of his/her income on consumer electronics because they’re so cheap.)