6 ms·

> 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 riche

> 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.
  - Locke1689 14y ago
    Only the Austrians use that definition and they're not a serious school of economics.
    - fnordfnordfnord 14y ago
      "Austrians" are quite serious. Few people take them seriously.
    - solistice 14y ago
      And python is not a serious language. Java is.
  - millstone 14y ago
    Why is this definition good? I mean, why should I or anyone care about changes in the money supply, except in how they affect prices?
    - Evbn 14y ago
      It separates (theoretically, as it can't be measured) the price change due to faith-in-currency from price change due to market forces on the products. That is, the price of good may fluctuate as function of how much current labor you need to buy it, or as a function of how much of your past savings it will cost. The diference between those measurements is due to money supply (in part, for there are other complicating factors)
- baddox 14y ago
  Why buy a smartphone when next year's smartphone will be better in every way?
deleted 14y ago
[deleted]
rmc 14y ago
Let's pretend the deflation is at 3% (i.e. there's a inflation rate of -3%). Then your 100 units will be worth 103 units (in today's money) in 1 years time. This is a guaranteed rate of deflation (bitcoin has a guaranteed rate of deflation, I don't know if it's 3%) So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it. So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone. So that's only a 2.5% interest rate. Again, why loan it out if you can get a guaranteed 3% by doing nothing? etc.
- DennisP 14y ago
  Assuming they pay you back in the same currency, they're actually paying you 2% on top of the 3%, giving you a 5% return. Today, with dollars, you can get a risk-free return by investing in T-bills. Riskier investments pay a higher return in exchange for higher risk. The risk-free return from holding a deflationary currency plays essentially the same role as the risk-free return in T-bills.
- jasonlingx 14y ago
  > bitcoin has a guaranteed rate of deflation. This is not true. There is no guaranteed rate of deflation. The rate at which you can 'mine' bitcoin is limited and there is a hard limit to the total amount of bitcoin that can be mined.
  - moultano 14y ago
    Assuming the economy grows, a fixed amount of currency causes deflation.
- lenazegher 14y ago
  >So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone. I know it's just an example, but no-one should ever lend at 5% if there's a 50% chance of losing the total sum, regardless of the currency involved and whether it's deflationary or inflationary. The EV of such a loan is -$47.50 for a one-year term. >So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it. Because if you don't lend, you keep your $100. If you lend, you get back $103. $103 will always be worth more than $100, regardless of whether your currency is inflationary or deflationary.
stouset 14y ago
Because the money supply of BTC is fixed, BTC are effectively proxies for the value of the entire economy that they're a part of. When the economy grows by 5%, so does the value of your BTC. It's at the absolute optimimum point of the risk/reward curve: you could hypothetically invest in a way that performs better than the average, but when factoring in the risk, your expected value is slightly worse than if you'd simply held on to your money. With USD, you know the value of your currency will drop due to inflation. In order to keep up with inflation, you have to put your money in an investment vehicle that stands in as a proxy for the overall economy. Hypothetically, you could buy a perfectly proportional amount of every single listed stock, every bond, piece of real estate, and so on (this is what index funds attempt to approximate). In the latter example, you also have managed to convert your currency into an ideal proxy for the entire economy. Any attempt to pick winners or losers will, statistically, give you slightly worse results on average than had you simply tracked the market as a whole. Both examples are similar, except in the latter example, you've actually put your money back into the economy: a company issued the stock in order to raise the capital to expand and grow. In the former, your money is essentially removed from the overall money supply. It is available to no-one, and causes further deflation. The more money you hoard, the less money available for financial transactions. The less money available for transactions, the more valuable each unit of currency becomes.
- reedlaw 14y ago
  So Keynesian economics forces everyone to invest in order to avoid the inflation tax while Austrian economics encourages saving allowing savers to reap the benefits of deflation. Both serve as proxies for the economy, so tell me again the downside of saving and prices going down over time?
  - zanny 14y ago
    Money you are saving that isn't being used for monetary exchange is effectively dead weight in an economy. Due to modern inflation rates, nobody really "saves" in any modern economy by just hoarding fiat currency - and because of this, the vast majority of the monetary supply is being used for exchange and commerce, and you get peak utility of the currency that way. If you sit on money you get from the economy, you are taking it out of the exchange system as long as you don't spend it, which slows exchange.
sergiosgc 14y ago
It increases the return on investment needed for a project to succeed. Simple example: I grab the 100btc and buy machinery to support my new factory. Right after buying, I'm losing money, because machinery won't appreciate like BTC does. So, I'm only interested I machinery investments that return over the BTC deflation rate. This is a simple example. Some of this already occurs in the real world, since machinery depreciates over time. it's just that currency deflation is another force opposing investment and braking money flow.

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.
- Locke1689 14y ago
  Only the Austrians use that definition and they're not a serious school of economics.
  - fnordfnordfnord 14y ago
    "Austrians" are quite serious. Few people take them seriously.
  - solistice 14y ago
    And python is not a serious language. Java is.
- millstone 14y ago
  Why is this definition good? I mean, why should I or anyone care about changes in the money supply, except in how they affect prices?
  - Evbn 14y ago
    It separates (theoretically, as it can't be measured) the price change due to faith-in-currency from price change due to market forces on the products. That is, the price of good may fluctuate as function of how much current labor you need to buy it, or as a function of how much of your past savings it will cost. The diference between those measurements is due to money supply (in part, for there are other complicating factors)
baddox 14y ago
Why buy a smartphone when next year's smartphone will be better in every way?

deleted 14y ago

[deleted]

rmc 14y ago

Let's pretend the deflation is at 3% (i.e. there's a inflation rate of -3%). Then your 100 units will be worth 103 units (in today's money) in 1 years time. This is a guaranteed rate of deflation (bitcoin has a guaranteed rate of deflation, I don't know if it's 3%) So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it. So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone. So that's only a 2.5% interest rate. Again, why loan it out if you can get a guaranteed 3% by doing nothing? etc.

DennisP 14y ago
Assuming they pay you back in the same currency, they're actually paying you 2% on top of the 3%, giving you a 5% return. Today, with dollars, you can get a risk-free return by investing in T-bills. Riskier investments pay a higher return in exchange for higher risk. The risk-free return from holding a deflationary currency plays essentially the same role as the risk-free return in T-bills.
jasonlingx 14y ago
> bitcoin has a guaranteed rate of deflation. This is not true. There is no guaranteed rate of deflation. The rate at which you can 'mine' bitcoin is limited and there is a hard limit to the total amount of bitcoin that can be mined.
- moultano 14y ago
  Assuming the economy grows, a fixed amount of currency causes deflation.
lenazegher 14y ago
>So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone. I know it's just an example, but no-one should ever lend at 5% if there's a 50% chance of losing the total sum, regardless of the currency involved and whether it's deflationary or inflationary. The EV of such a loan is -$47.50 for a one-year term. >So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it. Because if you don't lend, you keep your $100. If you lend, you get back $103. $103 will always be worth more than $100, regardless of whether your currency is inflationary or deflationary.

stouset 14y ago

Because the money supply of BTC is fixed, BTC are effectively proxies for the value of the entire economy that they're a part of. When the economy grows by 5%, so does the value of your BTC. It's at the absolute optimimum point of the risk/reward curve: you could hypothetically invest in a way that performs better than the average, but when factoring in the risk, your expected value is slightly worse than if you'd simply held on to your money. With USD, you know the value of your currency will drop due to inflation. In order to keep up with inflation, you have to put your money in an investment vehicle that stands in as a proxy for the overall economy. Hypothetically, you could buy a perfectly proportional amount of every single listed stock, every bond, piece of real estate, and so on (this is what index funds attempt to approximate). In the latter example, you also have managed to convert your currency into an ideal proxy for the entire economy. Any attempt to pick winners or losers will, statistically, give you slightly worse results on average than had you simply tracked the market as a whole. Both examples are similar, except in the latter example, you've actually put your money back into the economy: a company issued the stock in order to raise the capital to expand and grow. In the former, your money is essentially removed from the overall money supply. It is available to no-one, and causes further deflation. The more money you hoard, the less money available for financial transactions. The less money available for transactions, the more valuable each unit of currency becomes.

reedlaw 14y ago
So Keynesian economics forces everyone to invest in order to avoid the inflation tax while Austrian economics encourages saving allowing savers to reap the benefits of deflation. Both serve as proxies for the economy, so tell me again the downside of saving and prices going down over time?
- zanny 14y ago
  Money you are saving that isn't being used for monetary exchange is effectively dead weight in an economy. Due to modern inflation rates, nobody really "saves" in any modern economy by just hoarding fiat currency - and because of this, the vast majority of the monetary supply is being used for exchange and commerce, and you get peak utility of the currency that way. If you sit on money you get from the economy, you are taking it out of the exchange system as long as you don't spend it, which slows exchange.

sergiosgc 14y ago

It increases the return on investment needed for a project to succeed. Simple example: I grab the 100btc and buy machinery to support my new factory. Right after buying, I'm losing money, because machinery won't appreciate like BTC does. So, I'm only interested I machinery investments that return over the BTC deflation rate. This is a simple example. Some of this already occurs in the real world, since machinery depreciates over time. it's just that currency deflation is another force opposing investment and braking money flow.