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I have never met a single person who was able to convincingly raise at least a little bit of suspicion about deflation in me. Why is deflation bad? Because peop

by snitko 14y ago

I have never met a single person who was able to convincingly raise at least a little bit of suspicion about deflation in me. Why is deflation bad? Because people stop spending? Can't you see how ludicrous this explanation is?

betterunix 14y ago
"Why is deflation bad?" Deflation is bad because it makes loan repayment more difficult during both recessions and periods of growth. In the extreme, deflation will worsen recessions and hinder expansions of the economy.
- snitko 14y ago
  Then we have to ask, bad for whom? For those who take loans certainly it's bad. For those who loan, it's great. Inflation creates a reverse situation. It is possible, I would imagine, to create contracts that adjust for the fluctuations in currency valuation, but it is unwise to blame deflation for all the bad luck of those who take loans. Deflation would only mean that people taking those loans would think really hard about the prospects of any future profit they are hoping to get from investing the loaned money. Which means we'll have a more, not less, stable economy.
  - betterunix 14y ago
    Actually, deflation is bad for both lenders and borrowers, since it increases the likelihood of default. Let's put it this way: if you knew that it would be hard for me to repay a loan during an economic boom, and even harder during a recession, would you want to lend money to me? Deflation actively discourages lending, by creating an incentive to hold money. It is easy to think that lending is a bad thing, but let's put it this way: it is because we are able to take out loans (of various kinds) to start businesses that non-wealthy non-aristocrats are able to participate in the market. Too much credit is a bad thing, but too little credit denies capital to anyone who is not already wealthy.
    - jessaustin 14y ago
      Have any loans ever been denominated in bitcoin? Given the disadvantages of a bitcoin loan, some of which you cite, when should we expect such to occur? Is there any reason to believe bitcoin could affect the supply or demand of loans denominated in other currencies?
      - betterunix 14y ago
        I am not aware of any major Bitcoin lending, nor would I expect to see any major Bitcoin lending at any point. The reason is simple: Bitcoin is not a legal tender anywhere, nor does it enjoy any legal status as a currency anywhere. Courts deal in fiat currencies, and both lenders and borrowers need to deal with the court system in case of default; until courts start dealing in Bitcoin, issuing a Bitcoin loan will only add complication to such proceedings. In my view, Bitcoin will ultimately be little more than another way to make electronic payments. Merchants will accept Bitcoin only to immediately trade the Bitcoin units for some fiat currency on a Bitcoin exchange. Bitcoin exchanges will basically be payment processors. This, of course, assumes that technical problems do not destabilize everyone's trust in Bitcoin as a secure payment system (and given that it fails to meet the formal definition of security used by cryptographers, I suspect that this is bound to happen).
        jessaustin 14y ago
        All of this makes sense, which leads me to think that when you said "deflation is bad" above you meant it in a very general sense rather than as a criticism of bitcoin. After all if there will never be significant loans in bitcoin it can't very well be implicated in a breakdown of the lending system. Sorry for misunderstanding.
      - themusicgod1 14y ago
        Yes. Ripple[1] has allowed for the use of bitcoins to denominate loan-like credit extended between people for quite some time[2]. You just have to be careful. By the way I back my ripple credit entirely with bitcoin -- if you can make a payment go through the network to me, you are entitled to it. [1] http://www.ripple.com http://www.ripple.com [2] http://ripplepay.com http://ripplepay.com
notahacker 14y ago
It's more because people stop investing If the real rate return of investments over any period of time is on average less than simply hoarding the currency (an inevitable consequence of a permanently deflationary economy) your economy is screwed up.
- snitko 14y ago
  Ok, let's say everybody in the world uses Bitcoin. Nobody invests. If that's the case, then the amount of goods and services in the economy remains constant, which means the price of Bitcoin doesn't rise. How do I make money then without investing and creating more value?
  - notahacker 14y ago
    In that scenario, once you've adjusted for the risk associated with investment you'd give up all hope of "making money" - with no aggregate monetary growth(1) it would be like "investing" in a game of poker (sure, you might back the surprise winner but...). It's amazing how much less risk averse you are if you lose ~2% per annum from sitting on cash and you can make money from a slightly-worse-than-average investment portfolio (and there's a 2% return for an average investment) Arcane hypothetical edge cases are unhelpful for exposition. It's easier to look at the conventional alternative: everybody in the world uses a means of payment which diminishes in value at a slow but stable rate. Now the average person that invests in production gains, and the average person holding cash is incentivised to convert that cash into something they want or funding the production of something others want. Isn't this better? (1)strictly speaking we're better off looking at money as a flow, in which case the velocity of circulation comes into place, but a fixed money supply certainly wouldn't induce that to increase....
    - snitko 14y ago
      with no aggregate monetary growth it would be like "investing" in a game of poker. This statement is wrong, because you measure profits in money rather than value. With bitcoin the amount of money in the economy stays the same, true. However the value of each unit grows as soon as you invest and produce something useful that people want. This means, you may receive back even less than you invested in absolute units of money, but more in value.

by snitko 14y ago

betterunix 14y ago

"Why is deflation bad?" Deflation is bad because it makes loan repayment more difficult during both recessions and periods of growth. In the extreme, deflation will worsen recessions and hinder expansions of the economy.

snitko 14y ago
Then we have to ask, bad for whom? For those who take loans certainly it's bad. For those who loan, it's great. Inflation creates a reverse situation. It is possible, I would imagine, to create contracts that adjust for the fluctuations in currency valuation, but it is unwise to blame deflation for all the bad luck of those who take loans. Deflation would only mean that people taking those loans would think really hard about the prospects of any future profit they are hoping to get from investing the loaned money. Which means we'll have a more, not less, stable economy.
- betterunix 14y ago
  Actually, deflation is bad for both lenders and borrowers, since it increases the likelihood of default. Let's put it this way: if you knew that it would be hard for me to repay a loan during an economic boom, and even harder during a recession, would you want to lend money to me? Deflation actively discourages lending, by creating an incentive to hold money. It is easy to think that lending is a bad thing, but let's put it this way: it is because we are able to take out loans (of various kinds) to start businesses that non-wealthy non-aristocrats are able to participate in the market. Too much credit is a bad thing, but too little credit denies capital to anyone who is not already wealthy.
  - jessaustin 14y ago
    Have any loans ever been denominated in bitcoin? Given the disadvantages of a bitcoin loan, some of which you cite, when should we expect such to occur? Is there any reason to believe bitcoin could affect the supply or demand of loans denominated in other currencies?
    - betterunix 14y ago
      I am not aware of any major Bitcoin lending, nor would I expect to see any major Bitcoin lending at any point. The reason is simple: Bitcoin is not a legal tender anywhere, nor does it enjoy any legal status as a currency anywhere. Courts deal in fiat currencies, and both lenders and borrowers need to deal with the court system in case of default; until courts start dealing in Bitcoin, issuing a Bitcoin loan will only add complication to such proceedings. In my view, Bitcoin will ultimately be little more than another way to make electronic payments. Merchants will accept Bitcoin only to immediately trade the Bitcoin units for some fiat currency on a Bitcoin exchange. Bitcoin exchanges will basically be payment processors. This, of course, assumes that technical problems do not destabilize everyone's trust in Bitcoin as a secure payment system (and given that it fails to meet the formal definition of security used by cryptographers, I suspect that this is bound to happen).
      - jessaustin 14y ago
        All of this makes sense, which leads me to think that when you said "deflation is bad" above you meant it in a very general sense rather than as a criticism of bitcoin. After all if there will never be significant loans in bitcoin it can't very well be implicated in a breakdown of the lending system. Sorry for misunderstanding.
    - themusicgod1 14y ago
      Yes. Ripple[1] has allowed for the use of bitcoins to denominate loan-like credit extended between people for quite some time[2]. You just have to be careful. By the way I back my ripple credit entirely with bitcoin -- if you can make a payment go through the network to me, you are entitled to it. [1] http://www.ripple.com http://www.ripple.com [2] http://ripplepay.com http://ripplepay.com

notahacker 14y ago

It's more because people stop investing If the real rate return of investments over any period of time is on average less than simply hoarding the currency (an inevitable consequence of a permanently deflationary economy) your economy is screwed up.

snitko 14y ago
Ok, let's say everybody in the world uses Bitcoin. Nobody invests. If that's the case, then the amount of goods and services in the economy remains constant, which means the price of Bitcoin doesn't rise. How do I make money then without investing and creating more value?
- notahacker 14y ago
  In that scenario, once you've adjusted for the risk associated with investment you'd give up all hope of "making money" - with no aggregate monetary growth(1) it would be like "investing" in a game of poker (sure, you might back the surprise winner but...). It's amazing how much less risk averse you are if you lose ~2% per annum from sitting on cash and you can make money from a slightly-worse-than-average investment portfolio (and there's a 2% return for an average investment) Arcane hypothetical edge cases are unhelpful for exposition. It's easier to look at the conventional alternative: everybody in the world uses a means of payment which diminishes in value at a slow but stable rate. Now the average person that invests in production gains, and the average person holding cash is incentivised to convert that cash into something they want or funding the production of something others want. Isn't this better? (1)strictly speaking we're better off looking at money as a flow, in which case the velocity of circulation comes into place, but a fixed money supply certainly wouldn't induce that to increase....
  - snitko 14y ago
    with no aggregate monetary growth it would be like "investing" in a game of poker. This statement is wrong, because you measure profits in money rather than value. With bitcoin the amount of money in the economy stays the same, true. However the value of each unit grows as soon as you invest and produce something useful that people want. This means, you may receive back even less than you invested in absolute units of money, but more in value.