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I don't know that you can call deflation an inherent flaw. In most econometric schools of thought, the debate between deflation and inflation boils down to expe

I don't know that you can call deflation an inherent flaw. In most econometric schools of thought, the debate between deflation and inflation boils down to expectations, making predictability more important than either tendency. IE Actors knowing what to expect from the money supply, eliminates some of the uncertainty that drives volatility. Predictability gives actors the opportunity to properly hedge protecting against the negatives normally attributed to both inflationary and deflationary currencies. With central banks, it just became accepted that when dealing with unpredictable economies, the tendency to inflate was less dangerous than the tendency to deflate and thus why most banks will err on that side when making policy decisions. There are some great historical examples where banks organized mass deflation (I can't find one right now, but the one in my mind involved the entire country dropping zeroes from the end of their notes) and by making the change predictable, they were able to avoid many of the harmful effects.

Symmetry 14y ago
Are you sure there are examples of actual successful deflations, where debts, payments, wages, etc denominated in the form of money deflating increased in value? I know of successful cases central banks have brought inflation under control or one currency was replaced with another that was much more valuable. But human nominal loss aversion[1] usually causes big problems during deflation in any modern economy. Maybe you could have pulled it off back in the day when 90% of the population were independent agents in the market, but not today where 90% are employees of firms with contractual wages. [1]http://en.wikipedia.org/wiki/Loss_aversion http://en.wikipedia.org/wiki/Loss_aversion
- zanny 14y ago
  I don't see how a currency like BTC would deflate, ever, besides runs on the market. At least if BTC became a real market force. Right now, almost all BTC transactions are between currencies like USD, so it is functioning more like stock than real money. If it were legitimately used in widespread transactions, the currencies market wouldn't impact the valuation as much, and without that turbulance, since BTC's can't "disappear" under your couch, and you have a mathematically fixed growth rate up through 2140, the currency shouldn't deflate. Just as a frequently cited example, the US had a crisis in the 70's not because pegging the dollar to gold was bad, but because the real gold reserves were covering vastly less of the actual dollars in the market drastically due to money printing. BTC doesn't have those issues - they are fixed in circulation, have a predictable rate of disbursement that will slow to nothing in 2140, and at that point the exchange rates for goods with BTC would only fluctuate its fixed value against other currencies or against goods scarcity. I wouldn't imagine, if it actually became a well grounded currency, significant swathes of the market making a run on it and depreciating its value as badly by that point. It lets you keep currency speculation, though, without the rampant inflationary effects of quantitative easing and money printing at whims.

Symmetry 14y ago

Are you sure there are examples of actual successful deflations, where debts, payments, wages, etc denominated in the form of money deflating increased in value? I know of successful cases central banks have brought inflation under control or one currency was replaced with another that was much more valuable. But human nominal loss aversion[1] usually causes big problems during deflation in any modern economy. Maybe you could have pulled it off back in the day when 90% of the population were independent agents in the market, but not today where 90% are employees of firms with contractual wages. [1]http://en.wikipedia.org/wiki/Loss_aversion http://en.wikipedia.org/wiki/Loss_aversion

zanny 14y ago
I don't see how a currency like BTC would deflate, ever, besides runs on the market. At least if BTC became a real market force. Right now, almost all BTC transactions are between currencies like USD, so it is functioning more like stock than real money. If it were legitimately used in widespread transactions, the currencies market wouldn't impact the valuation as much, and without that turbulance, since BTC's can't "disappear" under your couch, and you have a mathematically fixed growth rate up through 2140, the currency shouldn't deflate. Just as a frequently cited example, the US had a crisis in the 70's not because pegging the dollar to gold was bad, but because the real gold reserves were covering vastly less of the actual dollars in the market drastically due to money printing. BTC doesn't have those issues - they are fixed in circulation, have a predictable rate of disbursement that will slow to nothing in 2140, and at that point the exchange rates for goods with BTC would only fluctuate its fixed value against other currencies or against goods scarcity. I wouldn't imagine, if it actually became a well grounded currency, significant swathes of the market making a run on it and depreciating its value as badly by that point. It lets you keep currency speculation, though, without the rampant inflationary effects of quantitative easing and money printing at whims.