6 ms·

Fear Not Deflation

33 points by secondChrome 14y ago

millstone 14y ago
I hope there are better arguments for the deflationary nature of Bitcoin than this article. The author uses the utterly senseless definition of deflation as a change in the total money supply, instead of per capita money supply. If Bitcoin becomes more popular, its asset value increases because demand for it has increased, not due to "political numéraires" (whatever those are). Increasing the population but keeping the money supply fixed is fundamentally deflationary, and Bitcoin's "population" has the potential for large growth. Second, it's astonishing that the author would approvingly quote a passage like this: Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. In other words, by saving, not borrowing. This is naive bullionism taken to a whole new level of insanity, with physical gold replaced by numbers in a file. Saving is equated with producing, as if putting my bitcoin wallet on a thumb drive and stuffing it under my mattress starts up a factory. Entirely absent from this morality play is the prudent investor, who borrows or spends out of savings to buy capital goods with the hope of increasing production, and is punished.
josephlord 14y ago
Deflation is a disaster for anyone with debts as the value of them grows rather than being inflated away. So while it may be OK in the bit coin world (as I don't believe there are any significant bit coin denominated debts) deflation would cause massive economic contraction in the real world as debts would grow reducing spending and there is reason to believe it would not converge rapidly to an equilibrium (certainly not one that people would like). http://www.debtdeflation.com/blogs http://www.debtdeflation.com/blogs http://www.complexity.org.au/ci/vol06/keen/keen.html http://www.complexity.org.au/ci/vol06/keen/keen.html
- Tycho 14y ago
  Wouldn't this be compensated for by lower rates for lending?
  - josephlord 14y ago
    Interest probably wouldn't fall below zero. Also no incentive to lend money rather than hold so not so much incentive to offer good rates anyway. Savings rates might well go negative though. Steve Keen as linked to is well worth a read rather than my first approximation guesses.
    - Tycho 14y ago
      Doesn't inflation just encourage a different type of hoarding (ie. in physical assets like real estate or gold)?
      - josephlord 14y ago
        Well when you buy real assets someone is selling and they are left with inflating cash they need to spend on something. If someone is investing in productive assets (companies, rentable property) for their sustained revenue potential that isn't a bad thing. Spending on goods and services will add demand to the economy and money will circulate. There is also more reason to borrow in an inflating economy which adds money and demand to the economy. Obviously borrowing can get too high and needs moderation if bubbles are to be avoided but gentle adjustment is needed to prevent massive swings in aggregate demand. Also I'm not arguing for high inflation just that even a couple of percent deflation could be really bad.
        Tycho 14y ago
        Ok. Thanks. One more question. Isn't there some circular logic at play when you say that deflation would cause people to simply hold onto cash rather than invest in productive enterprises. Because if nobody invests in productive assets, then there will be no more goods entering the economy, therefore there will be no deflation of the currency to worry about in the first place...
  - yxhuvud 14y ago
    There are very low incentives to investing when the markets are shrinking, and even less to employ people. Now, tell me why lower rates are usually considered a good thing for business?
eli_gottlieb 14y ago
This has got to be one of the dumbest fucking things I've ever seen. Its only real point is that commodity-based currencies and deflations weaken government. Furthermore, its idiotic praise of societal-level saving is pure nonsense. My income is someone else's expenditure, my credit is someone else's debt. Money can obscure this fact, not alter it. In order for me to save, someone else must spend. Do they have to spend beyond their means and go into debt or reduce their own savings for me to save? Well, that's where the issue of money comes in. If we have a standard-issue modern currency, ie: slow but steady rate of inflation targeted by a central bank, then some amount of new money enters the economy each year. As long as total new savings in the year don't exceed this amount, then and only then can everyone save at the same time. In a gold-backed inherently-deflationary currency without fractional reserve banking or government fiat to create inflation.... all savings is zero-sum. Such a currency is indeed inherently deflationary, and the deflation spirals as those who can actually afford to save come to own larger and larger portions of the total bullion supply -- which they are of course saving! You end up with only one way to put aggregate demand back into the system: credit. Which is exactly what has happened to our real societies in the past three decades of anti-inflationary, anti-labor public policies! Problem is, that makes the deflation truly become a crisis, because even a 2% annual deflation is in fact an extra 2% interest compounding on any and all nominal debts. Deflation is bad for the same reason inflation is bad, namely that an unexpected change in currency value alters the real terms of almost all business contracts ex post facto. But deflation is also distinctly bad for another reason: once it kicks in, there is no incentive for net creditors/savers to engage in any real production of anything. Their biggest incentive becomes the generation and continuation of nominal debts (whose real value accumulates a deflation bonus). Worse, as the deflation happens and alters contracts ex-post-facto, people's debts become unpayable. So now the creditors go bankrupt too, and the only people left safe are the savers who literally stored physical bullion in a physical location. Anyone with so much as a bank account finds out they were actually a creditor, and are now completely fucked. Deflation is a wet dream of survivalist "gold, beans, and ammo" nutters, and the world's worst preventable nightmare for everyone else!
- kiba 14y ago
  And who will survive if nobody produces anything for anybody to consume or horde? Imagine that the farmers of the world decided not to produce anything for us to eat and instead only horde stuff.
shadeless 14y ago
Sorry for off topic but I must say I'm shocked at how bad is the experience browsing forbes site - popup, ad redirect page, ridiculously overcrowded article page (http://i.imgur.com/uARSR.jpg http://i.imgur.com/uARSR.jpg). Just wow.
markpercival 14y ago
Since neither Forbes nor the author, Jon Matonis, saw fit to point this out, I will. This is an op-ed piece, written by a board member of the Bitcoin Foundation. Regardless of the merit of the article, it should have been explicitly stated in the piece.
- gojomo 14y ago
  The prominent author bio in the right column discloses his Bitcoin Foundation affiliation, and as a signed 'contributor' piece, it's 'opinion' by format and convention. (They also include a "The opinions expressed are those of the writer" note under the bio.)
  - deleted 14y ago
    [deleted]
- deleted 14y ago
  [deleted]
yxhuvud 14y ago
I really wish Ripple got more press. Instead we get stupid articles like this that is downright painful to read. Eli explained why it was stupid way better than I ever could, so read that comment for motivation. Basically Ripple is the anti-thesis of bitcoin as it works solely on trust between the participant and does therefore catch the essential mechanism of how all fiat economies work.
goodcanadian 14y ago
Personally, I don't consider mild deflation to be any worse than mild inflation. A stable currency is better for everyone. Things get increasingly bad as the rate moves away from 0% in either direction, especially, if it occurs in an unpredictable way. As it happens, most central banks aim for a stable currency with a slight tendency towards inflation. My policy change would really only be minor: make the inflation target -1% to 1% rather than 1% to 3% (I didn't completely pull that number out of my ass; apparently, that is the Bank of Canada target range).
- slurry 14y ago
  > Personally, I don't consider mild deflation to be any worse than mild inflation. A priori this sounds reasonable. But would you rather live/invest in 1990s Japan (mild deflation) or 1990s America (mild inflation)? Mild deflation is absolutely terrible in practice. Mild inflation is good/not so bad.
  - goodcanadian 14y ago
    All else being equal, I don't consider mild deflation to be any worse than mild inflation. Comparing 1990s Japan to 1990s America is not an "all else being equal" situation. Really, economics is such a complex beast, it would take an incredibly complicated analysis to demonstrate which is better.
    - slurry 14y ago
      I'd be interested to know of examples where sustained mild deflation has been accompanied by steadily high economic growth and steadily low unemployment.
- jvm 14y ago
  The advantages of monetary stability come with a stable growth rate, because contracts are bets on the future growth rate of money and stability means those bets can be made reliably. You have proposed a stable CPI growth rate of 0%. There are two problems with this: the first (more important) problem is that arguably stable money supply is more desirable than stable CPI. During a downward supply shock, tightening the money supply can lead to a financial crisis by causing contracts made before the shock to fail. In that instance, rising CPI is good because it reflects a real fall in supply (prices should be higher). The second problem and the reason why they shoot for 2% CPI inflation is that many prices are sticky downwards so an average CPI growth rate of 0% leads to problems. For example, people are known to find a paycut of 1% under 0% inflation more aversive than a pay increase of 1% under 2% inflation. As a result, during deflationary periods wages are often frozen at levels higher than equilibrium, leading to greater unemployment. Despite these reservations, I agree that 0% CPI growth would be an acceptable policy, particularly as opposed to erratic policy as we saw in 2008–9. But you should recognize that moving from 2% to 0% would itself be a strong downward demand shock that in most countries would likely cause a recession.
RockyMcNuts 14y ago
tell it to the guy who goes from an 80% loan-to-value on his house to owing way more than the house is worth. who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces? who's going to hire anyone if you can hire them cheaper next year? especially in a country like the US, where everyone is in debt up to their eyeballs, deflation is a disaster.
- juliancorlet 14y ago
  "who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces?" That statement is true of just about any technology I can think of, and yet investment in tech doesn't seem to have collapsed as a result.
  - RockyMcNuts 14y ago
    good point. but tech progress is fast, and tech margins for the leader are gigantic. so you recoup your investment in 3 years before the next generation. then the next generation is 10x better, so that motivates building the following factory with high margins. you can't build a new power plant that makes 10x better power than the last one. and yet prices are falling. so basically you have to wait a lot longer until the old plant is obsolescent, or only build a power plant when the power shortage gets really bad and margins so high that you would recoup quickly. falling prices mean high real interest rates, fewer projects meet high hurdle rates, less investment, less growth and employment.
martinced 14y ago
I agree with the author of TFA that Krugman is wrong. Just as every single Keynesians out there: they have never predicted anything more than short term (and what really hurts them is that there are economists from other school of thought who can repeatedly predict correctly over the long term. Ouch.). And I also agree that we should not fear deflation. However hoping that deflation will happen would be like waiting for some pink unicorn to show up: both the U.S. and the Japan have announced "unlimited QEs". In order words: endless money printing to prevent the utter failure of the Keynesian system. We'll not discuss the fact that if money is free to print this is not true capitalism at work (because the amount of new money in circulation doesn't correspond to the new wealth created)... But hey, this is a Keynes' world right, so what do you expect. Could anyone explain me how we'll anything other than inflation (and possibly a very severe inflation) when, worldwide, the biggest economies are doing "unlimited QEs"? If deflation takes place I'd be very surprised (and very happy too, because I'm a "saver"). I did hedge myself against inflation/hyper-inflation but I still do have lots of cash/savings. I'd love deflation to take place but with unlimited QEs it's never going to happen.

33 points by secondChrome 14y ago

I hope there are better arguments for the deflationary nature of Bitcoin than this article. The author uses the utterly senseless definition of deflation as a change in the total money supply, instead of per capita money supply. If Bitcoin becomes more popular, its asset value increases because demand for it has increased, not due to "political numéraires" (whatever those are). Increasing the population but keeping the money supply fixed is fundamentally deflationary, and Bitcoin's "population" has the potential for large growth. Second, it's astonishing that the author would approvingly quote a passage like this: Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. In other words, by saving, not borrowing. This is naive bullionism taken to a whole new level of insanity, with physical gold replaced by numbers in a file. Saving is equated with producing, as if putting my bitcoin wallet on a thumb drive and stuffing it under my mattress starts up a factory. Entirely absent from this morality play is the prudent investor, who borrows or spends out of savings to buy capital goods with the hope of increasing production, and is punished.

josephlord 14y ago

Deflation is a disaster for anyone with debts as the value of them grows rather than being inflated away. So while it may be OK in the bit coin world (as I don't believe there are any significant bit coin denominated debts) deflation would cause massive economic contraction in the real world as debts would grow reducing spending and there is reason to believe it would not converge rapidly to an equilibrium (certainly not one that people would like). http://www.debtdeflation.com/blogs http://www.debtdeflation.com/blogs http://www.complexity.org.au/ci/vol06/keen/keen.html http://www.complexity.org.au/ci/vol06/keen/keen.html

Tycho 14y ago
Wouldn't this be compensated for by lower rates for lending?
- josephlord 14y ago
  Interest probably wouldn't fall below zero. Also no incentive to lend money rather than hold so not so much incentive to offer good rates anyway. Savings rates might well go negative though. Steve Keen as linked to is well worth a read rather than my first approximation guesses.
  - Tycho 14y ago
    Doesn't inflation just encourage a different type of hoarding (ie. in physical assets like real estate or gold)?
    - josephlord 14y ago
      Well when you buy real assets someone is selling and they are left with inflating cash they need to spend on something. If someone is investing in productive assets (companies, rentable property) for their sustained revenue potential that isn't a bad thing. Spending on goods and services will add demand to the economy and money will circulate. There is also more reason to borrow in an inflating economy which adds money and demand to the economy. Obviously borrowing can get too high and needs moderation if bubbles are to be avoided but gentle adjustment is needed to prevent massive swings in aggregate demand. Also I'm not arguing for high inflation just that even a couple of percent deflation could be really bad.
      - Tycho 14y ago
        Ok. Thanks. One more question. Isn't there some circular logic at play when you say that deflation would cause people to simply hold onto cash rather than invest in productive enterprises. Because if nobody invests in productive assets, then there will be no more goods entering the economy, therefore there will be no deflation of the currency to worry about in the first place...
- yxhuvud 14y ago
  There are very low incentives to investing when the markets are shrinking, and even less to employ people. Now, tell me why lower rates are usually considered a good thing for business?

eli_gottlieb 14y ago

This has got to be one of the dumbest fucking things I've ever seen. Its only real point is that commodity-based currencies and deflations weaken government. Furthermore, its idiotic praise of societal-level saving is pure nonsense. My income is someone else's expenditure, my credit is someone else's debt. Money can obscure this fact, not alter it. In order for me to save, someone else must spend. Do they have to spend beyond their means and go into debt or reduce their own savings for me to save? Well, that's where the issue of money comes in. If we have a standard-issue modern currency, ie: slow but steady rate of inflation targeted by a central bank, then some amount of new money enters the economy each year. As long as total new savings in the year don't exceed this amount, then and only then can everyone save at the same time. In a gold-backed inherently-deflationary currency without fractional reserve banking or government fiat to create inflation.... all savings is zero-sum. Such a currency is indeed inherently deflationary, and the deflation spirals as those who can actually afford to save come to own larger and larger portions of the total bullion supply -- which they are of course saving! You end up with only one way to put aggregate demand back into the system: credit. Which is exactly what has happened to our real societies in the past three decades of anti-inflationary, anti-labor public policies! Problem is, that makes the deflation truly become a crisis, because even a 2% annual deflation is in fact an extra 2% interest compounding on any and all nominal debts. Deflation is bad for the same reason inflation is bad, namely that an unexpected change in currency value alters the real terms of almost all business contracts ex post facto. But deflation is also distinctly bad for another reason: once it kicks in, there is no incentive for net creditors/savers to engage in any real production of anything. Their biggest incentive becomes the generation and continuation of nominal debts (whose real value accumulates a deflation bonus). Worse, as the deflation happens and alters contracts ex-post-facto, people's debts become unpayable. So now the creditors go bankrupt too, and the only people left safe are the savers who literally stored physical bullion in a physical location. Anyone with so much as a bank account finds out they were actually a creditor, and are now completely fucked. Deflation is a wet dream of survivalist "gold, beans, and ammo" nutters, and the world's worst preventable nightmare for everyone else!

kiba 14y ago
And who will survive if nobody produces anything for anybody to consume or horde? Imagine that the farmers of the world decided not to produce anything for us to eat and instead only horde stuff.

shadeless 14y ago

Sorry for off topic but I must say I'm shocked at how bad is the experience browsing forbes site - popup, ad redirect page, ridiculously overcrowded article page (http://i.imgur.com/uARSR.jpg http://i.imgur.com/uARSR.jpg). Just wow.

markpercival 14y ago

Since neither Forbes nor the author, Jon Matonis, saw fit to point this out, I will. This is an op-ed piece, written by a board member of the Bitcoin Foundation. Regardless of the merit of the article, it should have been explicitly stated in the piece.

gojomo 14y ago
The prominent author bio in the right column discloses his Bitcoin Foundation affiliation, and as a signed 'contributor' piece, it's 'opinion' by format and convention. (They also include a "The opinions expressed are those of the writer" note under the bio.)
- deleted 14y ago
  [deleted]
deleted 14y ago
[deleted]

yxhuvud 14y ago

I really wish Ripple got more press. Instead we get stupid articles like this that is downright painful to read. Eli explained why it was stupid way better than I ever could, so read that comment for motivation. Basically Ripple is the anti-thesis of bitcoin as it works solely on trust between the participant and does therefore catch the essential mechanism of how all fiat economies work.

goodcanadian 14y ago

Personally, I don't consider mild deflation to be any worse than mild inflation. A stable currency is better for everyone. Things get increasingly bad as the rate moves away from 0% in either direction, especially, if it occurs in an unpredictable way. As it happens, most central banks aim for a stable currency with a slight tendency towards inflation. My policy change would really only be minor: make the inflation target -1% to 1% rather than 1% to 3% (I didn't completely pull that number out of my ass; apparently, that is the Bank of Canada target range).

slurry 14y ago
> Personally, I don't consider mild deflation to be any worse than mild inflation. A priori this sounds reasonable. But would you rather live/invest in 1990s Japan (mild deflation) or 1990s America (mild inflation)? Mild deflation is absolutely terrible in practice. Mild inflation is good/not so bad.
- goodcanadian 14y ago
  All else being equal, I don't consider mild deflation to be any worse than mild inflation. Comparing 1990s Japan to 1990s America is not an "all else being equal" situation. Really, economics is such a complex beast, it would take an incredibly complicated analysis to demonstrate which is better.
  - slurry 14y ago
    I'd be interested to know of examples where sustained mild deflation has been accompanied by steadily high economic growth and steadily low unemployment.
jvm 14y ago
The advantages of monetary stability come with a stable growth rate, because contracts are bets on the future growth rate of money and stability means those bets can be made reliably. You have proposed a stable CPI growth rate of 0%. There are two problems with this: the first (more important) problem is that arguably stable money supply is more desirable than stable CPI. During a downward supply shock, tightening the money supply can lead to a financial crisis by causing contracts made before the shock to fail. In that instance, rising CPI is good because it reflects a real fall in supply (prices should be higher). The second problem and the reason why they shoot for 2% CPI inflation is that many prices are sticky downwards so an average CPI growth rate of 0% leads to problems. For example, people are known to find a paycut of 1% under 0% inflation more aversive than a pay increase of 1% under 2% inflation. As a result, during deflationary periods wages are often frozen at levels higher than equilibrium, leading to greater unemployment. Despite these reservations, I agree that 0% CPI growth would be an acceptable policy, particularly as opposed to erratic policy as we saw in 2008–9. But you should recognize that moving from 2% to 0% would itself be a strong downward demand shock that in most countries would likely cause a recession.

RockyMcNuts 14y ago

tell it to the guy who goes from an 80% loan-to-value on his house to owing way more than the house is worth. who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces? who's going to hire anyone if you can hire them cheaper next year? especially in a country like the US, where everyone is in debt up to their eyeballs, deflation is a disaster.

juliancorlet 14y ago
"who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces?" That statement is true of just about any technology I can think of, and yet investment in tech doesn't seem to have collapsed as a result.
- RockyMcNuts 14y ago
  good point. but tech progress is fast, and tech margins for the leader are gigantic. so you recoup your investment in 3 years before the next generation. then the next generation is 10x better, so that motivates building the following factory with high margins. you can't build a new power plant that makes 10x better power than the last one. and yet prices are falling. so basically you have to wait a lot longer until the old plant is obsolescent, or only build a power plant when the power shortage gets really bad and margins so high that you would recoup quickly. falling prices mean high real interest rates, fewer projects meet high hurdle rates, less investment, less growth and employment.

martinced 14y ago

I agree with the author of TFA that Krugman is wrong. Just as every single Keynesians out there: they have never predicted anything more than short term (and what really hurts them is that there are economists from other school of thought who can repeatedly predict correctly over the long term. Ouch.). And I also agree that we should not fear deflation. However hoping that deflation will happen would be like waiting for some pink unicorn to show up: both the U.S. and the Japan have announced "unlimited QEs". In order words: endless money printing to prevent the utter failure of the Keynesian system. We'll not discuss the fact that if money is free to print this is not true capitalism at work (because the amount of new money in circulation doesn't correspond to the new wealth created)... But hey, this is a Keynes' world right, so what do you expect. Could anyone explain me how we'll anything other than inflation (and possibly a very severe inflation) when, worldwide, the biggest economies are doing "unlimited QEs"? If deflation takes place I'd be very surprised (and very happy too, because I'm a "saver"). I did hedge myself against inflation/hyper-inflation but I still do have lots of cash/savings. I'd love deflation to take place but with unlimited QEs it's never going to happen.