5 ms·

You may think that deflation and hoarding is bad. However people are drawn to it. Fortunately, you can't tell people what to do and where to store their money.

by snitko 14y ago

You may think that deflation and hoarding is bad. However people are drawn to it. Fortunately, you can't tell people what to do and where to store their money. Thus, a currency that allows hoarding will always be more attractive to people than the one which doesn't. Soon enough people will learn that there is no deflationary spiral. They will also learn that currency can be both deflationary and move around. Bitcoin is divisible, so it doesn't matter if someone hoards a significant amount of it - trade will still flourish and enough transactions will take place precisely because you can divide one bitcoin into smaller parts.

agravier 14y ago
This point disturbs some people because it implies that they should not mind hoarders, and continue business with BTC as usual. But people mind (more or less) hoarders because they are: 1> worried about their apparent (and seemingly growing) power over the value of the currency, or/and 2> jealous.
pyoung 14y ago
I like your point about adoption. It makes sense that a deflationary currency would attract more people due to its speculative nature. Without this aspect of bitcoin, it would still probably be trading for pennies and languishing in relative obscurity. Any digital currency designed with an inflationary system will probably fail to attract a critical mass of users, because outside of anonymity, which is only important for a small minority, there is no significant upside to owning the currency. Where I don't agree with you is that the divisible nature of bitcoin somehow makes it viable (most currencies are divisible by the way, 100 cents = $1). The fact is deflation suppress spending (and hence economic activity) because the currency will be worth significantly more in the future than it is now, and therefore, I would prefer to hold onto it rather than spend it. Divisibility does not change this. Where I am still up in the air, is whether or not a digital currency needs to be inflationary. Gold has some industrial uses, but it's value is largely due to tradition and speculation. It has long been used as a common store of value and is bought by traders as a hedge against fluctuations in the global economy. Bitcoin could become the 'Gold of the internet'. A new way to hedge against the global economy, but other than that, not something that really affects everyday life, except maybe at the fringes (when was the last time you bought something with gold).
- snitko 14y ago
  Please read this short thread where I explain why investment is still an attractive option with Bitcoin: https://news.ycombinator.com/item?id=5403360 https://news.ycombinator.com/item?id=5403360 I hope this changes your mind.
  - zanny 14y ago
    My problem with this and BTC is that it isn't even a truly fixed currency supply - as people lose wallets, the bitcoins they contained are permanantly lost because only those wallets (that are now destroyed) are lost. So either you brute force the signing key and try to imitate the wallets or you will never get those coins back. So it isn't just that BTC will (in a hundred odd years) stop growing the money supply, it will probably (sooner than that) start leaking bitcoins from lost wallets, and as the money supply drops deflation grows faster than with a fixed money base.
    - snitko 14y ago
      There won't be a lot of lost wallets. At least not enough to cause any kind of noticeable effect.
      - dragonwriter 14y ago
        > There won't be a lot of lost wallets. At least not enough to cause any kind of noticeable effect. With a fixed upper limit on the number of BTC ever issued, if wallets are lost at any non-zero rate, there will eventually be exactly 0 BTC that can be spent.
  - pyoung 14y ago
    "Nobody invests. If that's the case, then the amount of goods and services in the economy remains constant" No, if nobody invests, then there will be NO goods and services at all. That is a recipe for economic calamity, and would create a situation where guns and ammo would end up more valuable than any currency (what is the point of holding a currency if you can't buy anything with it?). I have yet to read a convincing explanation as to how deflation is a good thing. The general premise is that a 'little' deflation is a good thing because it encourages people to save, but the authors always fail to address the fact that deflation leads to more deflation and hence the 'deflationary spiral' that eventually causes things like the great depression. One author actually argues that the Great Depression was a good thing, but I don't exactly agree with that sentiment. Once again, Gold is a better comparison to bitcoin than any fiat currency, because bitcoin is not a form of exchange for any particular economy and the dangers of deflation do not necessarily apply. More than anything, bitcoin is being used as a store of value. While this doesn't make for a good currency, it does not necessarily mean bitcoin is doomed.
Nursie 14y ago
Why on earth would I participate in an economy with a deflationary currency? Every day I would have to work harder or be paid less, all the while my economic output would be increasing the wealth of those who are unproductive but happen to possess currency. No thanks.
- snitko 14y ago
  You won't be paid less. The money you'll be paid would worth the same, numbers don't matter. Also, your savings would increase in value as everyone else's. I find it very common even here on HN that many people fall for this fallacy that money == value.
  - Nursie 14y ago
    You miss my main point - that the rewards of any economic growth produced by those doing productive work in a BTC economy is enjoyed by those hoarding, not by those producing. Work performed in the past is valued higher than work performed in the present. As a result anyone with enough old money can parasitise on productive society forever, to the nth generation. And instead of doing so by (at the very least) stimulating the economy through investment, they can do it just by sitting on their mattress full of cash. Again, why would I participate in an economy where my hard work is of direct benefit to people just sitting on cash?
    - snitko 14y ago
      That's a valid concern but it doesn't stand scrutiny. Production itself doesn't create deflation. If the number of goods and services in the world remains more or less constant, it means there is no deflation. At the same time, people will still be working and producing things. It's only when money are invested then you have a surplus of things in the economy which deflates the money. By investing, hoarders allow others not-yet-rich people access to capital. Thus, if hoarders want to become richer they will have to make rich others too.
      - Nursie 14y ago
dragonwriter 14y ago
> You may think that deflation and hoarding is bad. However people are drawn to it. People are drawn to lots of things which are destructive. (Theft, rape, etc.) So what? > Fortunately, you can't tell people what to do and where to store their money. You actually can, and, more usefully, you can adopt a social convention in which the generally accepted "money" isn't particularly attractive to hoard. > Thus, a currency that allows hoarding will always be more attractive to people than the one which doesn't. Well, to people who are ignorant of its harms or who maliciously seek to cause them, sure. > Soon enough people will learn that there is no deflationary spiral. They will also learn that currency can be both deflationary and move around. A deflationary currency (if it was the only one around) might still move around in exchange, especially for necessary consumables, but it creates a disincentive for investment, because the appreciation of the value of the currency makes it compete with investment vehicles, which encourages hoarding over investment -- and the more hoarding that occurs, the faster the money supply shrinks and the faster the exchange value of the currency rises, increasing the incentive to hoard. Its a classical positive feedback loop, which inevitably lasts until the currency is reformed in such a way that removes the deflationary features (impossible with BTC), external social/legal factors are imposed which limit hoarding, or until it is displaced as a currency and reverts to its commodity value (which, for BTC, is zero.)

by snitko 14y ago

agravier 14y ago

This point disturbs some people because it implies that they should not mind hoarders, and continue business with BTC as usual. But people mind (more or less) hoarders because they are: 1> worried about their apparent (and seemingly growing) power over the value of the currency, or/and 2> jealous.

pyoung 14y ago

I like your point about adoption. It makes sense that a deflationary currency would attract more people due to its speculative nature. Without this aspect of bitcoin, it would still probably be trading for pennies and languishing in relative obscurity. Any digital currency designed with an inflationary system will probably fail to attract a critical mass of users, because outside of anonymity, which is only important for a small minority, there is no significant upside to owning the currency. Where I don't agree with you is that the divisible nature of bitcoin somehow makes it viable (most currencies are divisible by the way, 100 cents = $1). The fact is deflation suppress spending (and hence economic activity) because the currency will be worth significantly more in the future than it is now, and therefore, I would prefer to hold onto it rather than spend it. Divisibility does not change this. Where I am still up in the air, is whether or not a digital currency needs to be inflationary. Gold has some industrial uses, but it's value is largely due to tradition and speculation. It has long been used as a common store of value and is bought by traders as a hedge against fluctuations in the global economy. Bitcoin could become the 'Gold of the internet'. A new way to hedge against the global economy, but other than that, not something that really affects everyday life, except maybe at the fringes (when was the last time you bought something with gold).

snitko 14y ago
Please read this short thread where I explain why investment is still an attractive option with Bitcoin: https://news.ycombinator.com/item?id=5403360 https://news.ycombinator.com/item?id=5403360 I hope this changes your mind.
- zanny 14y ago
  My problem with this and BTC is that it isn't even a truly fixed currency supply - as people lose wallets, the bitcoins they contained are permanantly lost because only those wallets (that are now destroyed) are lost. So either you brute force the signing key and try to imitate the wallets or you will never get those coins back. So it isn't just that BTC will (in a hundred odd years) stop growing the money supply, it will probably (sooner than that) start leaking bitcoins from lost wallets, and as the money supply drops deflation grows faster than with a fixed money base.
  - snitko 14y ago
    There won't be a lot of lost wallets. At least not enough to cause any kind of noticeable effect.
    - dragonwriter 14y ago
      > There won't be a lot of lost wallets. At least not enough to cause any kind of noticeable effect. With a fixed upper limit on the number of BTC ever issued, if wallets are lost at any non-zero rate, there will eventually be exactly 0 BTC that can be spent.
- pyoung 14y ago
  "Nobody invests. If that's the case, then the amount of goods and services in the economy remains constant" No, if nobody invests, then there will be NO goods and services at all. That is a recipe for economic calamity, and would create a situation where guns and ammo would end up more valuable than any currency (what is the point of holding a currency if you can't buy anything with it?). I have yet to read a convincing explanation as to how deflation is a good thing. The general premise is that a 'little' deflation is a good thing because it encourages people to save, but the authors always fail to address the fact that deflation leads to more deflation and hence the 'deflationary spiral' that eventually causes things like the great depression. One author actually argues that the Great Depression was a good thing, but I don't exactly agree with that sentiment. Once again, Gold is a better comparison to bitcoin than any fiat currency, because bitcoin is not a form of exchange for any particular economy and the dangers of deflation do not necessarily apply. More than anything, bitcoin is being used as a store of value. While this doesn't make for a good currency, it does not necessarily mean bitcoin is doomed.

Nursie 14y ago

Why on earth would I participate in an economy with a deflationary currency? Every day I would have to work harder or be paid less, all the while my economic output would be increasing the wealth of those who are unproductive but happen to possess currency. No thanks.

snitko 14y ago
You won't be paid less. The money you'll be paid would worth the same, numbers don't matter. Also, your savings would increase in value as everyone else's. I find it very common even here on HN that many people fall for this fallacy that money == value.
- Nursie 14y ago
  You miss my main point - that the rewards of any economic growth produced by those doing productive work in a BTC economy is enjoyed by those hoarding, not by those producing. Work performed in the past is valued higher than work performed in the present. As a result anyone with enough old money can parasitise on productive society forever, to the nth generation. And instead of doing so by (at the very least) stimulating the economy through investment, they can do it just by sitting on their mattress full of cash. Again, why would I participate in an economy where my hard work is of direct benefit to people just sitting on cash?
  - snitko 14y ago
    That's a valid concern but it doesn't stand scrutiny. Production itself doesn't create deflation. If the number of goods and services in the world remains more or less constant, it means there is no deflation. At the same time, people will still be working and producing things. It's only when money are invested then you have a surplus of things in the economy which deflates the money. By investing, hoarders allow others not-yet-rich people access to capital. Thus, if hoarders want to become richer they will have to make rich others too.
    - Nursie 14y ago

dragonwriter 14y ago

> You may think that deflation and hoarding is bad. However people are drawn to it. People are drawn to lots of things which are destructive. (Theft, rape, etc.) So what? > Fortunately, you can't tell people what to do and where to store their money. You actually can, and, more usefully, you can adopt a social convention in which the generally accepted "money" isn't particularly attractive to hoard. > Thus, a currency that allows hoarding will always be more attractive to people than the one which doesn't. Well, to people who are ignorant of its harms or who maliciously seek to cause them, sure. > Soon enough people will learn that there is no deflationary spiral. They will also learn that currency can be both deflationary and move around. A deflationary currency (if it was the only one around) might still move around in exchange, especially for necessary consumables, but it creates a disincentive for investment, because the appreciation of the value of the currency makes it compete with investment vehicles, which encourages hoarding over investment -- and the more hoarding that occurs, the faster the money supply shrinks and the faster the exchange value of the currency rises, increasing the incentive to hoard. Its a classical positive feedback loop, which inevitably lasts until the currency is reformed in such a way that removes the deflationary features (impossible with BTC), external social/legal factors are imposed which limit hoarding, or until it is displaced as a currency and reverts to its commodity value (which, for BTC, is zero.)