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There are a few replies here that seem to be reacting negatively to the OP due to the tone of the submission instead of the content. To be clear, deflation is c

by deelowe 14y ago

There are a few replies here that seem to be reacting negatively to the OP due to the tone of the submission instead of the content. To be clear, deflation is categorically bad for a currency. It's terrible, like great depression terrible. The reason it's bad is that deflation makes it more profitable to do nothing than to invest. When this happens, people react by not spending money. The market dies. While inflation can be bad, it's at least manageable. In fact, some inflation is actually heathly as it encourages investing. If that doesn't make sense, think of it like this. Inflation is similar to nuclear fusion and deflation is like nuclear fission. When the former goes critical, you can just shut off the spigots and things more or less fix themselves(albeit with some collateral damage) without the whole system crashing. However, with the latter, there may be no fixing without dismantling everything and starting over.

fragsworth 14y ago
> To be clear, deflation is categorically bad for a currency. It's terrible, like great depression terrible. I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right? We've never (recently) been in a period of significant deflation, so how can we be so certain of its effects? > deflation makes it more profitable to do nothing than to invest. Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it. People will still work, and spend what they need to. And there's a limit to how much a currency can deflate before it cycles back. And hell, how do we even know that inflationary/deflationary cycles are unhealthy? Even if it causes some businesses to die, maybe this improves an economy in the long term by churning things up a bit.
- cookiecaper 14y ago
  >Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it. But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything? To use a case from the bitcoin economy, we all know the story of the pizza that someone bought when the x-rate was something like 3 cents per coin. Today, the 10k btc spent on that pizza would have been worth $100k! This story is often told to try to incent people to get into btc, with the implication that "if you forgo the cost of one pizza, in a little while that will be worth thousands of dollars", without realizing that this exactly is the problem with a btc-based economy; if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.
  - kiba 14y ago
    But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything? People loans each other bitcoin in the bitcoin economy all the time, abiet with high interest rate. if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable. The demand for pizza will be low, but not zero, because the desire for pizza competes with desire for monetary profit. At some point in the future, people decides that the waiting is enough, and they will buy pizza as reward for all their patience.
- brc 14y ago
  Good luck. You're swimming against a tide of people minted from education with the mindset of deflation bad, inflation good. Of course, everyone likes deflation when it means they can buy more for less. Of course, if prices of things get so low that people start to purchase, then deflation will eventually reverse, unless you assume that deflation will continue forever until prices reach zero and everything is free. Of course, everyone force-fed a diet of Keynes assumes that hoarding relates to stuffing mattresses full of money instead of holding cash in banks, where the bank can lend the money out and still invest. They uncritically swallow the line that a central bank inflating at will is the best thing for an economy. Inflation/deflation are just two phenomena with different winners and losers, the same as high/low currency values. Deflation favors lenders and savers, and inflation favors borrowers and spenders. The inflationists always assume that the borrow/spend nexus is far more important than the lend/save. But of course saving drives all investment, so a period of deflation isn't necessarily a bad thing. In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion. Once you clear your head of the foolish 'borrow and spend' mantra of the last 80 or so years, and realise that investment and production are more important than spending and consuming, it becomes obvious that a bit of mild deflation isn't necessarily the hobgoblin it is made out to be. The simple fact is that no economy and social order has ever imploded due to deflation, but inflation has some pretty terrible economic and social effects when it gets out of control. Deflation, like any long position, can only ever go down to zero. Inflation, however, is like any short position and can go to infinity.
  - EGreg 14y ago
    Just because people hold money in bank does not mean that the banks will lend people money. In fact, after being bailed out with TARP, many banks did not turn around and increase the amount of lending that they were doing. However, most of them did pay back their lender (the Fed). As with anything, too much of any extreme is bad. Too much inflation or too much deflation. But with fiat currency, it's natural to expect steady inflation over time -- especially if it's not tied to a commodity (e.g. after we got off the gold standard). That's because there's value in lending money to some enterprise, and that's the time value of money. Organizations with good credit (e.g. banks) issue and lend money to organizations with worse credit. So they will expect a return in the enterprise, and overall if they guess right, the enterprise will have returned principal + interest to the lender. If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest. So it's like an elastic money supply that's being prodded by lenders / banks looking for a return.
- deleted 14y ago
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- tatsuke95 14y ago
  >"I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right?" And which have collapsed from inflation? None, directly. Hyperinflation (and deflation) is an effect of an economy collapsing. Not a cause. From Wiki: "Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation." Note "decrease in tax revenue". Economic crisis > deflation > country can't pay the bills > hyper-inflates currency.
  - brc 14y ago
    A curious retelling of history. The Weimar Republic intentionally inflated their currency to reduce the WW1 reparations payments, which got out of control and reduced the value of the Mark to nothing. Inflationary policies collapsed the tax base due to destroying the ability of the economy to function normally, not the other way around. This is easily shown by the fact that as soon as the Weimar Republic re-introduced an asset-backed stable currency, the economic problems improved greatly, though there were deflationary periods after that caused by the massive economic upheaval.
    - tatsuke95 14y ago
      >A curious retelling of history. By you, perhaps. Economic crisis, couldn't pay the bills, so they inflated the currency. Just like I said. Are you really going to argue that there was no war or aftermath, social upheaval or other crisis (like, say, debilitating war reparations) that led to hyperinflation? Crisis comes first. So often Wiemar Germany is trotted out as the example of what can happen when the government prints excessively. "It can happen to you! Wheel-barrows full of money to buy bread!" The reality, the country and its economy was in shambles. Not because of inflation. Your turn: point to an economy that was happily chugging along, and hyperinflation came out of nowhere and took it down.
- eru 14y ago
  > I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right? The Weimar Republic, arguably.
randallsquared 14y ago
> The reason it's bad is that deflation makes it more profitable to do nothing than to invest. This makes no sense to me. If keeping 100 units makes one richer because they are worth more in a year, then any investment which has a positive return (that is, you end up with more than 100 units in a year) must be that much better... What am I missing?
- xyzzyz 14y ago
  I don't see why any investment would necessarily need to be much better. For one thing, investment is risky, while hoarding money is not.
  - Evbn 14y ago
    On a macro scale, hoarding money stops the economy, as people no longer produce and consume. If you thing sitting in an empty room counting bit coins is better than buying caviar or plane travel or curing malaria or whatever, then hoarding is good.
- api 14y ago
  Risk.
- T-hawk 14y ago
  Those investments may not exist. Investments can yield a positive return only if somebody else spends money. But what if every potential customer also sits on their money to exploit the deflation instead of spending any?
- pg_bot 14y ago
  Deflation increases the value of holding cash. By definition deflation occurs when the price of a basket of goods decreases. Why invest your money in a basket of goods today when it is going to be cheaper to buy that same basket tomorrow?
  - adventured 14y ago
    Nope, by definition deflation occurs when the authority controlling the money supply (eg the Fed) contracts said money supply. Prices going down is merely a symptom of deflation, but it is not deflation.
teebs 14y ago
This is part of the issue. The other part is that no one has any incentive to spend money, which can cause a recession. You can either 100 units of something today, or buy 110 units of it tomorrow. This gives you a very strong incentive to wait and not spend money. This means that no one buys anything, so no one needs to make or manufacture anything. People lose their jobs, so they don't have money, so they can't buy things... and so on. Of course, inflation can be very bad, too.
- aneth4 14y ago
  I can buy a 2014 Cadillac or iPhone 5 next year for 30% less than I can this year. People seem to be buying these things. In a deflationary environment, people buy less stuff they don't need today, which leads to a higher quality of economic growth.
  - teebs 14y ago
    What do you mean "higher quality"? Almost everything everyone buys is something they don't need. I would guess that almost everyone using Hacker News produces things people don't need. No one needs Google or Amazon or whatever your favorite tech company is.... The economy is built on things people don't need. The problem is that if I won't buy it for $100 today because I can buy it for $50 tomorrow, I won't buy it for $50 tomorrow because I can buy it for $25 the next day, so you NEVER buy an iPhone
    - Judson 14y ago
      I just have a hard time believing deflation leads to perfect demand inelasticity at $0.
      - brc 14y ago
        Because it is completely unrealistic and total rubbish. That's why you have a hard time believing it. Of course, all those who insist that inflation is a superior state can't explain the economic effects of everyone deciding to purchase today before the prices go up, leading to much weaker demand and production in the future. Bringing forward spending excessively is just as problematic as send it backward into the future.
walkon 14y ago
> The reason it's bad is that deflation makes it more profitable to do nothing than to invest. When this happens, people react by not spending money. The market dies. If this is holds true, why do people buy from markets where prices regularly decrease? Wouldn't it follow that they will wait in perpetuity and never buy that new phone/laptop/etc?
- deleted 14y ago
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- AnIrishDuck 14y ago
  > Wouldn't it follow that they will wait in perpetuity and never buy that new phone/laptop/etc? People derive utility from those things. They make calls with their phone and do work on their laptop. Bitcoin is entirely different. It's only purpose is to allow you to buy other stuff.
  - baddox 14y ago
    > It's only purpose is to allow you to buy other stuff. There is certainly utility in being able to buy stuff that cannot easily be bought with traditional (government) currencies. Namely, things that are illegal in various countries, like drugs or gambling.
    - rwmj 14y ago
      You're saying that drugs cannot easily be bought with government-issued cash? It's totally the other way around: drugs are easily and frequently bought using cash, and vanishingly rarely bought with bitcoins.
      - baddox 14y ago
        I would consider the Silk Road to be fairly large. Obviously, it's tiny relative to the entire USD drug market, but bitcoin is also tiny relative to USD. But the point is, you simply cannot deny that there is actual demand for bitcoins caused by the fact that the Silk Road only uses bitcoin.
aneth4 14y ago
That is one theory, and is the prevailing one. It is not necessarily correct. Regardless, it is certainly a consumer's right to store their assets in something that is not inflationary, as most do. Is the population holding empty real estate or gold instead of currency really that much better for the economy? No. Smart money will simply shift out of cash in an inflationary environment, and the value will not necessarily be productively invested. An opposing viewpoint more thoroughly articulated: http://mises.org/daily/4618 http://mises.org/daily/4618
- betterunix 14y ago
  "Is the population holding empty real estate or gold instead of currency really that much better for the economy? No." A population holding productive factories, tools, and land is a whole lot better for the economy than people hoarding gold.
  - SilasX 14y ago
    And a population withholding investment capital when those (actually very heterogeneous) tools when they're for unsustainable business plans is better than one in which people have to invest in some business plan to preserve what they have. It's really not as simple as "investment = good". It's good when it's for stuff that produces value. It's not good when it's invested for the sake of investing and ends up in the stocks of corrupt corporations and shady ventures.
- dragontamer 14y ago
  Gold is a piss poor investment. Owning Real Estate (and making money off of it) entails taking care of it. People taking care of their land (so that it can appreciate in value) is a good thing. The typical Real Estate "investor" adds a ton of value to their home, not just through maintenance, but also additions (ie: a new deck). This maintenance is true value added to the economy. True value that wouldn't have been added if the investor just left his cash in something else. No one wants to buy a 30-year old home that had no maintenance on it. Unless you're a fan of buying homes with leaky roofs and a flooded basement...
deleted 14y ago
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jamoes 14y ago
> deflation makes it more profitable to do nothing than to invest Saving is investing. You're investing in your ability to manage your risk at a future date. If you have no savings, then you are at risk of any minor problem (e.g. an injury, decreased revenue, or a natural disaster) causing you a major setback. The "common wisdom" you've heard about inflation being necessary for an economy is a lie. It's a lie that justifies the wealthiest class of individuals in this society to be "bailed out" again and again.
- leot 14y ago
  No, it's not a lie. Why in heaven's name would the investor class want higher inflation? They don't. The really don't. Our understanding of the benefits of a small amount of inflation comes in spite of the interests of those who already possess of a lot of wealth. The investor class doesn't want bail-outs, though I'm sure they appreciate bail-outs when they happen. The wealthiest lost the most (in money, though not in utility/standard of living) in the 2008 crash. They'd have much rather avoided the 2008 crash's happening in the first place. The lie, in actuality, is the idea deliberately promulgated by certain members of the investor class that inflation is evil. They do this for obvious reasons. It is precisely this lie to which you evidently subscribe.
  - jamoes 14y ago
    The investor class doesn't benefit from inflation, it's the banker class that benefits. Here's how it works: The banks have a balance sheet of debts owed to them. Some of the debts come from companies like General Motors and United Airlines. If one of those companies threatens to go bankrupt, then the bankers simply lobby the congress to "bail out" the troubled company. This allows the banks to keep the troubled asset on their balance sheet, and continue making an ongoing revenue stream. Of course, the "bail out" results in an increase in the money supply, which means every single holder of USD pays through a decrease in spending power of their dollars.
    - leot 14y ago
      That's awfully convoluted. You're asserting that this Glenn-Beck's-whiteboard-esque arrangement holds more sway on banker's behavior than the effects of inflation on bankers' own personal wealth holdings. Do banks want to be bailed out? Sure. Who doesn't. Do rich bankers benefit more than the working class from higher inflation? Certainly not.
jasonkolb 14y ago
Deflation is just one form of asset appreciation. If this line of reasoning were true then we would never see anyone selling anything that appreciates in value. But this is a very one-sided way to consider this scenario--it only takes into account the supply side. When the asset is appreciating, the demand side takes this into account as well and is willing to discount their asking price to take this into account. You saw this play out with real estate several years ago, and with gold more recently. It may blow out the bid/ask spread a bit, but eventually there will be people who need to sell their asset to buy something else, or there will be people who want the asset badly enough to pay what people are asking. I think this argument can be discounted simply by looking at the current state of things--people are still spending bitcoins even though the recent appreciation dwarfs any built-in deflation. Sellers may need to discount their price to get people to pay in bitcoins, but even that doesn't seem to be happening yet.
- cookiecaper 14y ago
  One problem here is that you're considering the currency as an asset that should appreciate. The argument of most economists today is that currency should not appreciate because it encourages hoarding what is essentially a useless non-good, it's just a token for convenience of value transfer. If real goods appreciate, it's because the value offered by that good to the marketplace has increased, so the market pays a commensurately larger price. If currency appreciates on its own, people will want to hoard it, and will only spend it on things they deem highly valuable. Perhaps you can argue that this is better in the long run and would stop rampant consumerism, but it's pretty obvious that without rampant consumerism, many people would be making less money. People aren't really spending bitcoins in a meaningful way. They're using it as a passthrough for the dollar, basically. I have a Bioshock Infinite key that I want to sell. Will let it go for 1.5 btc. Why won't this offer be taken up now, when just a couple of weeks ago it would've been considered a fair deal, and just a couple of months ago it would have been considered a GREAT deal?
  - jasonkolb 14y ago
    You're just noting the difference between a centrally-managed currency and one that's not. The value of bitcoins tends to move quite a lot lately, so it's like trying to price something in AAPL stock or something right now--you have to peg the value to a slower-moving reference currency. (And that's typically how BTC-denominated goods are priced, for example on the Silk Road the product prices are pegged to the USD.) But that's not to say that centrally-managed currencies don't fluctuate either, because they do--just, typically, in the other direction. If I tried to find a gas station that would sell me a gallon of gas for $2USD today I'd be out of luck, but 2-3 years ago I'd be able to go anywhere in America and get that deal.
Lerc 14y ago
Isn't the value(not necessarily the price) of a currency the size of the market in which it trades divided by the number of units of currency in circulation. If the market reduces because of a lack of investment, wouldn't the currency reduce because you hold the same proportion of a smaller thing, creating an incentive to stop negative growth. There is also the factor of the OP's so-called CryptoBarons. Money is just an idea until you actually spend it. If there are a number of people living it up because they got a bunch of bitcoin really early the result would be essentially another form of bitcoin creation. Those CryptoBarons would be adding currency into circulation as they spend, currency that was effectively frozen before that point. I'm not sure what will happen in the end, but it will certainly be an interesting ride.
- Evbn 14y ago
  Yeah, there is nothing stopping "bytecoins" if early bitcoin holders hoard too much. Same as with dollars and bankers. As long as the system produces more value than the barons seize, people will get value from the system.
stevedekorte 14y ago
> deflation makes it more profitable to do nothing Isn't deflation for the buyer seen as inflation for the seller and vice versa? Why would you then not (applying your deflationary spiral model) expect a "market death" from sellers not selling under currency inflation?
- fr0sty 14y ago
  Think of it this way: Person A: one who gives Bitcoins in exchange for Widgets. Person B: one who gives Widgets in exchange for Bitcoins. Notice the symmetry. The name buyer and seller are arbitrary designations depending on what you consider the currency and what you consider the good being sold. The inflation/deflation symmetry exists but it is not in the same terms. Deflation for bitcoins is the same as inflation for widgets. The widget holders are desperate to trade their widgets for bitcoins since their widgets's purchasing power is decreasing, but bitcoin holders are reluctant to buy widgets since their value is decreasing.
arthulia 14y ago
> If that doesn't make sense, think of it like this. Inflation is similar to nuclear fusion and deflation is like nuclear fission. Ohhh, now I get it.
JumpCrisscross 14y ago
Why is deflation bad? Let's look at a single-currency country first. Prices fall. Including wages. Credit is tight - money appreciates without being invested and borrowers have to repay debts in more expensive currency tomorrow, making them more likely to default [Fisher]. People with money benefit - the rich get richer and the banks hoard capital, refusing to make loans. Inflation fuels asset bubbles as the economy over-invests; deflation fuels the opposite as the economy starves itself. Yes, we have seen deflation. The U.S. and U.K. both experienced crippling deflation in the 1930s [1]. Before that, remember the American populist movement's "Cross of Gold" speech [2]? That wasn't a reaction to an inflationary gold standard. The euro zone offers a more contemporary view of the effects of deflation, as does my Switzerland [3]. Uncertainty in the future path of deflation that is more toxic than deflation per se. The U.S. grew through the Great Deflation in the 1870s and Japan has had mixed real effects from its almost two decade deflation [Morana]. Theoretically, if deflation proceeded at a steady clip, markets could accommodate (Milton Friedman advocated for an economy deflating at the real interest rate [Friedman]). But what if we have two currencies, e.g. U.S. dollars and Bitcoin? Argentinians have a choice between black market (or "blue") dollars and an available but inflating peso. Tellingly, Argentinians buy dollars primarily for overseas vacations [4]. This is an example of a bad currency (the peso) and a good (the greenback). The Argentinians still execute the bulk of their transactions in pesos, not dollars. Deflation is not likely to be Bitcoin's death knell, but rather a ceiling on its usage. A deflating Bitcoin will crimp transaction demand for the currency as spenders shift preference to more easily borrowed and spent dollars. Sellers would respond in kind (or, alternatively, sellers who respond in kind would gain market share). Caveat: if Bitcoins are treated as a financial asset, for speculating versus spending. If so, deflation would proceed un-checked, with speculators driving out the transaction value of the currency. That said, gold has survived both deflation and speculation, so this isn't a fatal blow either. [Fisher] http://www.jstor.org/stable/10.2307/i332559 http://www.jstor.org/stable/10.2307/i332559 The Debt Deflation Theory of Great Depressions (1933) [1] http://www.amazon.com/gp/aw/d/0143116800/ref=redir_mdp_mobile/178-3104233-1254858 http://www.amazon.com/gp/aw/d/0143116800/ref=redir_mdp_mobil... See Norman Montagu; British depression [2] http://en.m.wikipedia.org/wiki/Cross_of_Gold_speech http://en.m.wikipedia.org/wiki/Cross_of_Gold_speech [3] http://www.ft.com/intl/cms/s/0/1c23c088-60c3-11de-aa12-00144feabdc0.html#axzz2PIBbW6hp http://www.ft.com/intl/cms/s/0/1c23c088-60c3-11de-aa12-00144... Swiss central bank moves to weaken franc (June 2009) [Morana] http://www.icer.it/docs/wp2004/Morana29-04.pdf http://www.icer.it/docs/wp2004/Morana29-04.pdf (2004) [Friedman] http://www.amazon.com/gp/aw/d/1412804779/ref=redir_mdp_mobile http://www.amazon.com/gp/aw/d/1412804779/ref=redir_mdp_mobil... The Optimum Quantity of Money (1969) [4] http://blogs.ft.com/beyond-brics/2013/01/17/argentinas-blue-dollar-blues/#axzz2PI6FE7Uo http://blogs.ft.com/beyond-brics/2013/01/17/argentinas-blue-... Argentina’s “blue” dollar blues (January 2013)

by deelowe 14y ago

fragsworth 14y ago

> To be clear, deflation is categorically bad for a currency. It's terrible, like great depression terrible. I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right? We've never (recently) been in a period of significant deflation, so how can we be so certain of its effects? > deflation makes it more profitable to do nothing than to invest. Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it. People will still work, and spend what they need to. And there's a limit to how much a currency can deflate before it cycles back. And hell, how do we even know that inflationary/deflationary cycles are unhealthy? Even if it causes some businesses to die, maybe this improves an economy in the long term by churning things up a bit.

cookiecaper 14y ago
>Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it. But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything? To use a case from the bitcoin economy, we all know the story of the pizza that someone bought when the x-rate was something like 3 cents per coin. Today, the 10k btc spent on that pizza would have been worth $100k! This story is often told to try to incent people to get into btc, with the implication that "if you forgo the cost of one pizza, in a little while that will be worth thousands of dollars", without realizing that this exactly is the problem with a btc-based economy; if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.
- kiba 14y ago
  But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything? People loans each other bitcoin in the bitcoin economy all the time, abiet with high interest rate. if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable. The demand for pizza will be low, but not zero, because the desire for pizza competes with desire for monetary profit. At some point in the future, people decides that the waiting is enough, and they will buy pizza as reward for all their patience.
brc 14y ago
Good luck. You're swimming against a tide of people minted from education with the mindset of deflation bad, inflation good. Of course, everyone likes deflation when it means they can buy more for less. Of course, if prices of things get so low that people start to purchase, then deflation will eventually reverse, unless you assume that deflation will continue forever until prices reach zero and everything is free. Of course, everyone force-fed a diet of Keynes assumes that hoarding relates to stuffing mattresses full of money instead of holding cash in banks, where the bank can lend the money out and still invest. They uncritically swallow the line that a central bank inflating at will is the best thing for an economy. Inflation/deflation are just two phenomena with different winners and losers, the same as high/low currency values. Deflation favors lenders and savers, and inflation favors borrowers and spenders. The inflationists always assume that the borrow/spend nexus is far more important than the lend/save. But of course saving drives all investment, so a period of deflation isn't necessarily a bad thing. In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion. Once you clear your head of the foolish 'borrow and spend' mantra of the last 80 or so years, and realise that investment and production are more important than spending and consuming, it becomes obvious that a bit of mild deflation isn't necessarily the hobgoblin it is made out to be. The simple fact is that no economy and social order has ever imploded due to deflation, but inflation has some pretty terrible economic and social effects when it gets out of control. Deflation, like any long position, can only ever go down to zero. Inflation, however, is like any short position and can go to infinity.
- EGreg 14y ago
  Just because people hold money in bank does not mean that the banks will lend people money. In fact, after being bailed out with TARP, many banks did not turn around and increase the amount of lending that they were doing. However, most of them did pay back their lender (the Fed). As with anything, too much of any extreme is bad. Too much inflation or too much deflation. But with fiat currency, it's natural to expect steady inflation over time -- especially if it's not tied to a commodity (e.g. after we got off the gold standard). That's because there's value in lending money to some enterprise, and that's the time value of money. Organizations with good credit (e.g. banks) issue and lend money to organizations with worse credit. So they will expect a return in the enterprise, and overall if they guess right, the enterprise will have returned principal + interest to the lender. If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest. So it's like an elastic money supply that's being prodded by lenders / banks looking for a return.
deleted 14y ago
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tatsuke95 14y ago
>"I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right?" And which have collapsed from inflation? None, directly. Hyperinflation (and deflation) is an effect of an economy collapsing. Not a cause. From Wiki: "Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation." Note "decrease in tax revenue". Economic crisis > deflation > country can't pay the bills > hyper-inflates currency.
- brc 14y ago
  A curious retelling of history. The Weimar Republic intentionally inflated their currency to reduce the WW1 reparations payments, which got out of control and reduced the value of the Mark to nothing. Inflationary policies collapsed the tax base due to destroying the ability of the economy to function normally, not the other way around. This is easily shown by the fact that as soon as the Weimar Republic re-introduced an asset-backed stable currency, the economic problems improved greatly, though there were deflationary periods after that caused by the massive economic upheaval.
  - tatsuke95 14y ago
    >A curious retelling of history. By you, perhaps. Economic crisis, couldn't pay the bills, so they inflated the currency. Just like I said. Are you really going to argue that there was no war or aftermath, social upheaval or other crisis (like, say, debilitating war reparations) that led to hyperinflation? Crisis comes first. So often Wiemar Germany is trotted out as the example of what can happen when the government prints excessively. "It can happen to you! Wheel-barrows full of money to buy bread!" The reality, the country and its economy was in shambles. Not because of inflation. Your turn: point to an economy that was happily chugging along, and hyperinflation came out of nowhere and took it down.
eru 14y ago
> I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right? The Weimar Republic, arguably.

randallsquared 14y ago

> The reason it's bad is that deflation makes it more profitable to do nothing than to invest. This makes no sense to me. If keeping 100 units makes one richer because they are worth more in a year, then any investment which has a positive return (that is, you end up with more than 100 units in a year) must be that much better... What am I missing?

xyzzyz 14y ago
I don't see why any investment would necessarily need to be much better. For one thing, investment is risky, while hoarding money is not.
- Evbn 14y ago
  On a macro scale, hoarding money stops the economy, as people no longer produce and consume. If you thing sitting in an empty room counting bit coins is better than buying caviar or plane travel or curing malaria or whatever, then hoarding is good.
api 14y ago
Risk.
T-hawk 14y ago
Those investments may not exist. Investments can yield a positive return only if somebody else spends money. But what if every potential customer also sits on their money to exploit the deflation instead of spending any?
pg_bot 14y ago
Deflation increases the value of holding cash. By definition deflation occurs when the price of a basket of goods decreases. Why invest your money in a basket of goods today when it is going to be cheaper to buy that same basket tomorrow?
- adventured 14y ago
  Nope, by definition deflation occurs when the authority controlling the money supply (eg the Fed) contracts said money supply. Prices going down is merely a symptom of deflation, but it is not deflation.

teebs 14y ago

This is part of the issue. The other part is that no one has any incentive to spend money, which can cause a recession. You can either 100 units of something today, or buy 110 units of it tomorrow. This gives you a very strong incentive to wait and not spend money. This means that no one buys anything, so no one needs to make or manufacture anything. People lose their jobs, so they don't have money, so they can't buy things... and so on. Of course, inflation can be very bad, too.

aneth4 14y ago
I can buy a 2014 Cadillac or iPhone 5 next year for 30% less than I can this year. People seem to be buying these things. In a deflationary environment, people buy less stuff they don't need today, which leads to a higher quality of economic growth.
- teebs 14y ago
  What do you mean "higher quality"? Almost everything everyone buys is something they don't need. I would guess that almost everyone using Hacker News produces things people don't need. No one needs Google or Amazon or whatever your favorite tech company is.... The economy is built on things people don't need. The problem is that if I won't buy it for $100 today because I can buy it for $50 tomorrow, I won't buy it for $50 tomorrow because I can buy it for $25 the next day, so you NEVER buy an iPhone
  - Judson 14y ago
    I just have a hard time believing deflation leads to perfect demand inelasticity at $0.
    - brc 14y ago
      Because it is completely unrealistic and total rubbish. That's why you have a hard time believing it. Of course, all those who insist that inflation is a superior state can't explain the economic effects of everyone deciding to purchase today before the prices go up, leading to much weaker demand and production in the future. Bringing forward spending excessively is just as problematic as send it backward into the future.

walkon 14y ago

> The reason it's bad is that deflation makes it more profitable to do nothing than to invest. When this happens, people react by not spending money. The market dies. If this is holds true, why do people buy from markets where prices regularly decrease? Wouldn't it follow that they will wait in perpetuity and never buy that new phone/laptop/etc?

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AnIrishDuck 14y ago
> Wouldn't it follow that they will wait in perpetuity and never buy that new phone/laptop/etc? People derive utility from those things. They make calls with their phone and do work on their laptop. Bitcoin is entirely different. It's only purpose is to allow you to buy other stuff.
- baddox 14y ago
  > It's only purpose is to allow you to buy other stuff. There is certainly utility in being able to buy stuff that cannot easily be bought with traditional (government) currencies. Namely, things that are illegal in various countries, like drugs or gambling.
  - rwmj 14y ago
    You're saying that drugs cannot easily be bought with government-issued cash? It's totally the other way around: drugs are easily and frequently bought using cash, and vanishingly rarely bought with bitcoins.
    - baddox 14y ago
      I would consider the Silk Road to be fairly large. Obviously, it's tiny relative to the entire USD drug market, but bitcoin is also tiny relative to USD. But the point is, you simply cannot deny that there is actual demand for bitcoins caused by the fact that the Silk Road only uses bitcoin.

aneth4 14y ago

That is one theory, and is the prevailing one. It is not necessarily correct. Regardless, it is certainly a consumer's right to store their assets in something that is not inflationary, as most do. Is the population holding empty real estate or gold instead of currency really that much better for the economy? No. Smart money will simply shift out of cash in an inflationary environment, and the value will not necessarily be productively invested. An opposing viewpoint more thoroughly articulated: http://mises.org/daily/4618 http://mises.org/daily/4618

betterunix 14y ago
"Is the population holding empty real estate or gold instead of currency really that much better for the economy? No." A population holding productive factories, tools, and land is a whole lot better for the economy than people hoarding gold.
- SilasX 14y ago
  And a population withholding investment capital when those (actually very heterogeneous) tools when they're for unsustainable business plans is better than one in which people have to invest in some business plan to preserve what they have. It's really not as simple as "investment = good". It's good when it's for stuff that produces value. It's not good when it's invested for the sake of investing and ends up in the stocks of corrupt corporations and shady ventures.
dragontamer 14y ago
Gold is a piss poor investment. Owning Real Estate (and making money off of it) entails taking care of it. People taking care of their land (so that it can appreciate in value) is a good thing. The typical Real Estate "investor" adds a ton of value to their home, not just through maintenance, but also additions (ie: a new deck). This maintenance is true value added to the economy. True value that wouldn't have been added if the investor just left his cash in something else. No one wants to buy a 30-year old home that had no maintenance on it. Unless you're a fan of buying homes with leaky roofs and a flooded basement...

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jamoes 14y ago

> deflation makes it more profitable to do nothing than to invest Saving is investing. You're investing in your ability to manage your risk at a future date. If you have no savings, then you are at risk of any minor problem (e.g. an injury, decreased revenue, or a natural disaster) causing you a major setback. The "common wisdom" you've heard about inflation being necessary for an economy is a lie. It's a lie that justifies the wealthiest class of individuals in this society to be "bailed out" again and again.

leot 14y ago
No, it's not a lie. Why in heaven's name would the investor class want higher inflation? They don't. The really don't. Our understanding of the benefits of a small amount of inflation comes in spite of the interests of those who already possess of a lot of wealth. The investor class doesn't want bail-outs, though I'm sure they appreciate bail-outs when they happen. The wealthiest lost the most (in money, though not in utility/standard of living) in the 2008 crash. They'd have much rather avoided the 2008 crash's happening in the first place. The lie, in actuality, is the idea deliberately promulgated by certain members of the investor class that inflation is evil. They do this for obvious reasons. It is precisely this lie to which you evidently subscribe.
- jamoes 14y ago
  The investor class doesn't benefit from inflation, it's the banker class that benefits. Here's how it works: The banks have a balance sheet of debts owed to them. Some of the debts come from companies like General Motors and United Airlines. If one of those companies threatens to go bankrupt, then the bankers simply lobby the congress to "bail out" the troubled company. This allows the banks to keep the troubled asset on their balance sheet, and continue making an ongoing revenue stream. Of course, the "bail out" results in an increase in the money supply, which means every single holder of USD pays through a decrease in spending power of their dollars.
  - leot 14y ago
    That's awfully convoluted. You're asserting that this Glenn-Beck's-whiteboard-esque arrangement holds more sway on banker's behavior than the effects of inflation on bankers' own personal wealth holdings. Do banks want to be bailed out? Sure. Who doesn't. Do rich bankers benefit more than the working class from higher inflation? Certainly not.

jasonkolb 14y ago

Deflation is just one form of asset appreciation. If this line of reasoning were true then we would never see anyone selling anything that appreciates in value. But this is a very one-sided way to consider this scenario--it only takes into account the supply side. When the asset is appreciating, the demand side takes this into account as well and is willing to discount their asking price to take this into account. You saw this play out with real estate several years ago, and with gold more recently. It may blow out the bid/ask spread a bit, but eventually there will be people who need to sell their asset to buy something else, or there will be people who want the asset badly enough to pay what people are asking. I think this argument can be discounted simply by looking at the current state of things--people are still spending bitcoins even though the recent appreciation dwarfs any built-in deflation. Sellers may need to discount their price to get people to pay in bitcoins, but even that doesn't seem to be happening yet.

cookiecaper 14y ago
One problem here is that you're considering the currency as an asset that should appreciate. The argument of most economists today is that currency should not appreciate because it encourages hoarding what is essentially a useless non-good, it's just a token for convenience of value transfer. If real goods appreciate, it's because the value offered by that good to the marketplace has increased, so the market pays a commensurately larger price. If currency appreciates on its own, people will want to hoard it, and will only spend it on things they deem highly valuable. Perhaps you can argue that this is better in the long run and would stop rampant consumerism, but it's pretty obvious that without rampant consumerism, many people would be making less money. People aren't really spending bitcoins in a meaningful way. They're using it as a passthrough for the dollar, basically. I have a Bioshock Infinite key that I want to sell. Will let it go for 1.5 btc. Why won't this offer be taken up now, when just a couple of weeks ago it would've been considered a fair deal, and just a couple of months ago it would have been considered a GREAT deal?
- jasonkolb 14y ago
  You're just noting the difference between a centrally-managed currency and one that's not. The value of bitcoins tends to move quite a lot lately, so it's like trying to price something in AAPL stock or something right now--you have to peg the value to a slower-moving reference currency. (And that's typically how BTC-denominated goods are priced, for example on the Silk Road the product prices are pegged to the USD.) But that's not to say that centrally-managed currencies don't fluctuate either, because they do--just, typically, in the other direction. If I tried to find a gas station that would sell me a gallon of gas for $2USD today I'd be out of luck, but 2-3 years ago I'd be able to go anywhere in America and get that deal.

Lerc 14y ago

Isn't the value(not necessarily the price) of a currency the size of the market in which it trades divided by the number of units of currency in circulation. If the market reduces because of a lack of investment, wouldn't the currency reduce because you hold the same proportion of a smaller thing, creating an incentive to stop negative growth. There is also the factor of the OP's so-called CryptoBarons. Money is just an idea until you actually spend it. If there are a number of people living it up because they got a bunch of bitcoin really early the result would be essentially another form of bitcoin creation. Those CryptoBarons would be adding currency into circulation as they spend, currency that was effectively frozen before that point. I'm not sure what will happen in the end, but it will certainly be an interesting ride.

Evbn 14y ago
Yeah, there is nothing stopping "bytecoins" if early bitcoin holders hoard too much. Same as with dollars and bankers. As long as the system produces more value than the barons seize, people will get value from the system.

stevedekorte 14y ago

> deflation makes it more profitable to do nothing Isn't deflation for the buyer seen as inflation for the seller and vice versa? Why would you then not (applying your deflationary spiral model) expect a "market death" from sellers not selling under currency inflation?

fr0sty 14y ago
Think of it this way: Person A: one who gives Bitcoins in exchange for Widgets. Person B: one who gives Widgets in exchange for Bitcoins. Notice the symmetry. The name buyer and seller are arbitrary designations depending on what you consider the currency and what you consider the good being sold. The inflation/deflation symmetry exists but it is not in the same terms. Deflation for bitcoins is the same as inflation for widgets. The widget holders are desperate to trade their widgets for bitcoins since their widgets's purchasing power is decreasing, but bitcoin holders are reluctant to buy widgets since their value is decreasing.

arthulia 14y ago

> If that doesn't make sense, think of it like this. Inflation is similar to nuclear fusion and deflation is like nuclear fission. Ohhh, now I get it.

JumpCrisscross 14y ago

Why is deflation bad? Let's look at a single-currency country first. Prices fall. Including wages. Credit is tight - money appreciates without being invested and borrowers have to repay debts in more expensive currency tomorrow, making them more likely to default [Fisher]. People with money benefit - the rich get richer and the banks hoard capital, refusing to make loans. Inflation fuels asset bubbles as the economy over-invests; deflation fuels the opposite as the economy starves itself. Yes, we have seen deflation. The U.S. and U.K. both experienced crippling deflation in the 1930s [1]. Before that, remember the American populist movement's "Cross of Gold" speech [2]? That wasn't a reaction to an inflationary gold standard. The euro zone offers a more contemporary view of the effects of deflation, as does my Switzerland [3]. Uncertainty in the future path of deflation that is more toxic than deflation per se. The U.S. grew through the Great Deflation in the 1870s and Japan has had mixed real effects from its almost two decade deflation [Morana]. Theoretically, if deflation proceeded at a steady clip, markets could accommodate (Milton Friedman advocated for an economy deflating at the real interest rate [Friedman]). But what if we have two currencies, e.g. U.S. dollars and Bitcoin? Argentinians have a choice between black market (or "blue") dollars and an available but inflating peso. Tellingly, Argentinians buy dollars primarily for overseas vacations [4]. This is an example of a bad currency (the peso) and a good (the greenback). The Argentinians still execute the bulk of their transactions in pesos, not dollars. Deflation is not likely to be Bitcoin's death knell, but rather a ceiling on its usage. A deflating Bitcoin will crimp transaction demand for the currency as spenders shift preference to more easily borrowed and spent dollars. Sellers would respond in kind (or, alternatively, sellers who respond in kind would gain market share). Caveat: if Bitcoins are treated as a financial asset, for speculating versus spending. If so, deflation would proceed un-checked, with speculators driving out the transaction value of the currency. That said, gold has survived both deflation and speculation, so this isn't a fatal blow either. [Fisher] http://www.jstor.org/stable/10.2307/i332559 http://www.jstor.org/stable/10.2307/i332559 The Debt Deflation Theory of Great Depressions (1933) [1] http://www.amazon.com/gp/aw/d/0143116800/ref=redir_mdp_mobile/178-3104233-1254858 http://www.amazon.com/gp/aw/d/0143116800/ref=redir_mdp_mobil... See Norman Montagu; British depression [2] http://en.m.wikipedia.org/wiki/Cross_of_Gold_speech http://en.m.wikipedia.org/wiki/Cross_of_Gold_speech [3] http://www.ft.com/intl/cms/s/0/1c23c088-60c3-11de-aa12-00144feabdc0.html#axzz2PIBbW6hp http://www.ft.com/intl/cms/s/0/1c23c088-60c3-11de-aa12-00144... Swiss central bank moves to weaken franc (June 2009) [Morana] http://www.icer.it/docs/wp2004/Morana29-04.pdf http://www.icer.it/docs/wp2004/Morana29-04.pdf (2004) [Friedman] http://www.amazon.com/gp/aw/d/1412804779/ref=redir_mdp_mobile http://www.amazon.com/gp/aw/d/1412804779/ref=redir_mdp_mobil... The Optimum Quantity of Money (1969) [4] http://blogs.ft.com/beyond-brics/2013/01/17/argentinas-blue-dollar-blues/#axzz2PI6FE7Uo http://blogs.ft.com/beyond-brics/2013/01/17/argentinas-blue-... Argentina’s “blue” dollar blues (January 2013)