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I don't necessarily disagree with you but: > only a fool would issue a line of credit in a currency that has built-in deflation. Is backwards. Deflation is ba

I don't necessarily disagree with you but: > only a fool would issue a line of credit in a currency that has built-in deflation. Is backwards. Deflation is bad for borrowers, not creditors. This should be self evident; in periods of deflation, one unit of currency can buy more tomorrow than it can today. As a borrower, you are paying a second interest rate. Further, deflation and inflation are only damaging when they occur unpredictably. Predictable amounts of either can easily be built into the interest rate of the transaction.

betterunix 14y ago
Deflation is bad for creditors for the same reason it is bad for debtors. By making it harder to repay a loan, deflation raises the risk of default i.e. it makes issuing a loan riskier. Out-of-control deflation can lead to disasters where large numbers of loans go into default, ultimately bankrupting creditors. "deflation and inflation are only damaging when they occur unpredictably. Predictable amounts of either can easily be built into the interest rate of the transaction." The problem here is that as the economy expands, the rate of deflation increases if no new currency can be added to the system (as is the case with Bitcoin). As the economy contracts, issuing a loan is risky due to the economic contraction. Expansions and contractions of an economy are basically unpredictable; there are a few vague patterns here and there, but in general predicting economic booms and busts is difficult (if you could do it, you would be very rich very fast). Issuing a loan in a deflationary currency is asking for trouble.
- AnIrishDuck 14y ago
  Good points. I wasn't thinking of the macroeconomic implications of deflation. You're absolutely right; there's a spectre of unpredictability that I fear will preclude any "real" institutional use of the Bitcoin system. I honestly wish that Nakamoto had consulted an economist before creating Bitcoin. A system with a modest rate of built-in inflation makes far more sense than Bitcoin's deflationary issue scheme.
  - ealloc 14y ago
    It may not be too late - the parameters controlling the deflation are independent of bitcoin's cryptosystem, and can (technically very easily) be changed and improved. I think Bitcoin's creator thought a deflationary policy would help generate initial support for bitcoin by encouraging people to become invested. Arguably, without a deflationary policy bitcoin would never have caught on as it has. Probably the most practical way to actually change the policy is to create an alternate 'bitcoin-2' network with a better (inflationary) policy. You could even allow transactions from the old network into the new one thus allowing people to carry their wealth over. If everyone agreed it was better, it would happen. The challenge is more social than technical. For now though, it doesn't matter since the current bitcoin 'fiscal policy' is fairly expansionary (bitcoins are still being generated) and will be for years, and anyway the effect of 'fiscal policy' on bitcoin value is currently dwarfed by the effects of speculation and the increasing demand for bitcoins.
- foxylad 14y ago
  First, if deflation makes loans less appealing... is that such a bad thing given recent history? Second, our economies have always grown so far, but this is not a law of nature. Our population is stabilising, and much recent growth is effectively a loan (a deflationary one?) from the environment that our kids will have to repay. It's possible that our current economic woes may even be "peak economy". In which case a currency that cannot be inflated whenever a government/populace gets lazy might be just what we need.

betterunix 14y ago

Deflation is bad for creditors for the same reason it is bad for debtors. By making it harder to repay a loan, deflation raises the risk of default i.e. it makes issuing a loan riskier. Out-of-control deflation can lead to disasters where large numbers of loans go into default, ultimately bankrupting creditors. "deflation and inflation are only damaging when they occur unpredictably. Predictable amounts of either can easily be built into the interest rate of the transaction." The problem here is that as the economy expands, the rate of deflation increases if no new currency can be added to the system (as is the case with Bitcoin). As the economy contracts, issuing a loan is risky due to the economic contraction. Expansions and contractions of an economy are basically unpredictable; there are a few vague patterns here and there, but in general predicting economic booms and busts is difficult (if you could do it, you would be very rich very fast). Issuing a loan in a deflationary currency is asking for trouble.

AnIrishDuck 14y ago
Good points. I wasn't thinking of the macroeconomic implications of deflation. You're absolutely right; there's a spectre of unpredictability that I fear will preclude any "real" institutional use of the Bitcoin system. I honestly wish that Nakamoto had consulted an economist before creating Bitcoin. A system with a modest rate of built-in inflation makes far more sense than Bitcoin's deflationary issue scheme.
- ealloc 14y ago
  It may not be too late - the parameters controlling the deflation are independent of bitcoin's cryptosystem, and can (technically very easily) be changed and improved. I think Bitcoin's creator thought a deflationary policy would help generate initial support for bitcoin by encouraging people to become invested. Arguably, without a deflationary policy bitcoin would never have caught on as it has. Probably the most practical way to actually change the policy is to create an alternate 'bitcoin-2' network with a better (inflationary) policy. You could even allow transactions from the old network into the new one thus allowing people to carry their wealth over. If everyone agreed it was better, it would happen. The challenge is more social than technical. For now though, it doesn't matter since the current bitcoin 'fiscal policy' is fairly expansionary (bitcoins are still being generated) and will be for years, and anyway the effect of 'fiscal policy' on bitcoin value is currently dwarfed by the effects of speculation and the increasing demand for bitcoins.
foxylad 14y ago
First, if deflation makes loans less appealing... is that such a bad thing given recent history? Second, our economies have always grown so far, but this is not a law of nature. Our population is stabilising, and much recent growth is effectively a loan (a deflationary one?) from the environment that our kids will have to repay. It's possible that our current economic woes may even be "peak economy". In which case a currency that cannot be inflated whenever a government/populace gets lazy might be just what we need.