4 ms·

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

by ph0rque 14y ago

1053r 14y ago
The flaw in the argument is that BitCoin is not (currently) a unit of account (we don't price contracts or goods or services in BTC), and is (nearly) infinitely divisible. So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can be divided up for use in transactions. That much speculations will cause wild gyrations in value and massive short term volatility, but the people using BTC to transact JUST DON'T CARE. I really don't care if I'm buying my $1000 flat screen with 1 BTC or 0.0001 BTC. Neither does the merchant. I bought the BTC, sent it to the merchant, and the merchant sold it so quickly that the value didn't change much, and we are happy. So that's the short term. In the long run, the volatility might decrease as the total market capitalization increases to 10x or 1000x of its current value. Then we can start to think about using it as a unit of account. If we do, we may enter a deflationary spiral, but by then BTC will already be used in an enormous swath of the economy. So I interpret Krugman's argument not so much that BTC CAN'T take over the world, but that it SHOULDN'T take over the world. (I'm not sure if I agree. Many economists have been arguing over this point for decades, and I'm not smart enough to sort it all out.)
- danielweber 14y ago
  That's using Bitcoin merely as a payment mechanism, where both the buyer and the seller hold onto it for as short a time as possible.
  - mcantelon 14y ago
    I think Bitcoins role as a store of value that can be used for payments makes for a pretty good tool. Like gold, except able to have ownership transferred, even in small micropayment-sized portions, without a cost incurred.
    - pyoung 14y ago
      I agree that this is the appropriate way to look at bitcoin. It is not so much a currency at the moment, it is more like an asset, like stocks, bonds, or gold. If we assume bitcoin is an asset, we are not seeing deflation per se, we are seeing an increase in value. A store of value that can be anonymously transferred and exchanged without significant costs has some inherit value in society. The only problem with bitcoin, is that if we consider bitcoin to be an asset, than it's price is entirely determined by speculation and nothing else. At least with gold, there are industrial/commercial uses for it that put a lower bound on the price. Not so much with bitcoin. Personally, I don't need an anonymous store of value, so if I am going to be speculating, I would rather do so with stocks of companies, as those are actually backed by the value of the company itself. I may throw some money into bitcoin just for fun, but I wouldn't do it to use it as a currency. My gut is telling me that most people jumping in are not interested in using it as a currency either. Of course, this doesn't necessarily mean bitcoin won't become more like a currency in the future. It is possible that it will stabilize. Considering that the world has never really seen anything like this before (well there were a few attempts that failed in the past), it is impossible to predict what is going to happen.
      - mcantelon 14y ago
        >it's price is entirely determined by speculation and nothing else Its price is based on the work required to make the coins and the properties of a minted coin (can't be forged, etc). The coin has virtual properties, but they're still useful properties.
- ars 14y ago
  That is not a flaw in the argument - that is a flaw in your understanding of the argument, which makes you think this is a valid rebuttal. Money is supposed to represent value. Not to actually be value. There are new humans arriving in the world all the time. And new resources are being mined from the earth, and created intellectually all the time. If the money supply does not match these new things then the currency fails. You can't just do a "currency split" and issue more notes - doing that effectively tells everyone their resources are half as valuable which is clearly wrong - the value of the resources didn't change. You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails.
  - danielweber 14y ago
    You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. I think many of the bitcoin fans reject this. They want to be able to hold (say) 1/1000th of the world's wealth, and be able to keep on holding 1/1000th of the world's wealth as long as they don't spend any of their hoard. It's like trying to create a financial crisis because you expect to be on the right side of it.
  - crazygringo 14y ago
    > You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. That's only if you want the currency to maintain a stable value, neither inflationary nor deflationary. Alternatively, the currency will have deflation. It's not obvious that that necessarily implies "failing".
    - james1071 14y ago
      No one will be able to use it for transactions because everyone will hoard it-buying the currency will be impossible.
  - trhtrsh 14y ago
    > sum total of money available is equal to the sum total of value in the world. This part is not completely accurate when you consider that money changes hands over time as value is created. (Multipliers) If the someone produces 1 widget per day (different person each day), and someone else consumes 1 widget per day (and becomes the producer the next day), 1 widget-dollar is needed forever to help move the widgets. If the pattern of production and consumption is more complicated, we need more dollars (debt) to keep track. The sum total of money needs to be something like the sum total of all current unsettled debt, and it needs to be less than the amount of future production of the debtors, in each's share (or else they will default). It gets more complicated from there.
- mncolinlee 14y ago
  Unfortunately, deflation is not so simple a concept. If your currency quickly deflates and hoarders EXPECT it to deflate, no one will be interested in lending and the economy will suffer. Lending is not an optional feature in a modern economy. You need some level of lending to have credit balances with merchants or investment in stocks and bonds. An economy without lending can take few risks on innovation, such as YCombinator has. They also have less incentive to spend money hiring employees because the risk/reward ratio is higher. A currency that continuously deflates is also likely to hit a liquidity crisis when everyone attempts to sell at once and the exchanges stop buying. We've already seen exchanges stop selling or choose to impose hurdles to buyers because Bitcoin demand was too high. Until they resolve the money supply issues, the Bitcoin is likely to remain merely an expensive and risky proxy for illicit drugs.
  - wmf 14y ago
    This is a bit of a nit, but the real exchange(s) does not buy or sell anything; it just matches orders. So you should probably say "...a liquidity crisis when everyone attempts to sell at once and the noobs stop buying".
  - drcode 14y ago
    If deflation is (let's say) 4%, why wouldn't people be greedy and let people borrow it at 6% or something?
    - mncolinlee 14y ago
      1. Deflation isn't fixed. Lenders have to make a guess about the spectrum of possible future rates of deflation, inflation, or even the abandonment of the currency. 2. Lenders seek profit, not revenue. 6% interest on 4% deflation is hardly greedy. You're ignoring the risk/reward ratio. Deflation causes defaults because existing loan costs become more onerous. 6% on 4% would almost certainly be a net loss after defaults. The high risk of default during deflation is part of why interest rates hit 18% in the 1980s. 3. Deflation is typically a product of most people having less access to your currency. Debtors would make an estimation that they could afford your loan at a lower-priced Bitcoin (in currency and labor costs). They'll be more likely to default when the currency is more scarce either due to the worse exchange rate of money or exchange rate of labor.
- deleted 14y ago
  [deleted]
- james1071 14y ago
  Your scenario of an ever increasing currency is impossible, because everyone will hoard it. No transactions will be possible because it will be impossible to buy.
narrator 14y ago
Krugman is talking about "The Paradox of Savings". Here's F.A Hayek's rebuttal to the argument when it was originally proposed back in the 30s: (http://mises.org/daily/2804 http://mises.org/daily/2804) (Sorry if I'm a bit of a broken record on this but it applies too well to bitcoin).
white_devil 14y ago
> provide a counterpoint to the deflationary spiral criticism? Is that the retarded idea that no one will buy anything if prices keep falling? Look no further than computers, cell phones and all manner of electronic gadgets. Their prices keep going down, but everyone keeps buying them. If you need/want something now, you'll buy it now. Here's a summary of the article: "The State-Controlled Mainstream Media paints a gloomy picture of a currency that can't be controlled by the State." EDIT: Perhaps a downvoter might want to point out a flaw in what I said?
- ars 14y ago
  Why do you think they constantly make more gadgets - always at the same price point? And they work really hard to make sure you want the new one. In some future world where no one wants the new gadget the price of the old one will stop falling!
  - white_devil 14y ago
    True, some gadgets stay at certain price points, but you keep getting more and more value for your money. We could rephrase "electronics getting cheaper" as "your purchasing power towards electronics increasing", if that's better. > In some future world where no one wants the new gadget the price of the old one will stop falling! What's the point here? It's not like the old gadget would get sold at the same price for ever and ever.
- Jtsummers 14y ago
  Not a downvoter (can't, probably won't when I can), but your tone is unnecessarily aggressive and dismissive, especially considering GP just wanted a rebuttal and made no claims of their own.
  - white_devil 14y ago
    > your tone is unnecessarily aggressive and dismissive I take it you're referring to the word "retarded"? It was meant to criticize the idea of a "deflationary spiral", not the poster.
bdr 14y ago
Just because an asset perpetually appreciates does not mean it has a present value of infinity. I hope to write a deeper rebuttal soon in the form of a blog post.
johnny4000 14y ago
Seems to me it's an argument for the status quo, so if you are say Warren Buffet it is a vary valid concern. If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in. Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.
- maxerickson 14y ago
  If you are going to insist on a deflationary economy, you have to admit the possibility of wages going down over time. For a cartoon example, with high enough deflation and a less than perfect job market, that debt might represent more years of work when you are 35 than it did when you were 25.
  - johnny4000 14y ago
    Wages in what currency? Bitcoins or USD or? If wages in USD decrease by a huge amount and I get paid in Bitcoins, I can eventually hire more people for a cheaper amount if I pay them in USD.
    - maxerickson 14y ago
      Wages in bitcoin. But I really want to talk about it in terms of units of productivity. If the value of bitcoin goes up over time, then each unit of productivity will be worth less bitcoin over time. Meaning that relative to units of productivity, a debt will increase. In your first example, you relied on the assumption that your boss or customers or whatever would not take the current BTC value of your productivity into account. In your new example, you are relying on the people you hire not taking the value of their labor in BTC into account. Neither of those are reasonable assumptions.
ph0rque 14y ago
Thanks for all the replies made in the sibling comments and their descendants. To me it seems that for the time being (e.g. the next 50? 100? years), as long as we have a currency alternative to bitcoin such as USD, these problems can be avoided by just switching currencies to be able to buy/sell/borrow/invest in, as long as other parties agree to it. Or am I missing something?
gluczywo 14y ago
Note the contradiction: It was diagnosed that the recession of recent years was caused by uncontrolled lending which was possible thanks to issuing money by central banks and keeping low interest rates in this way. At the same time bitcoin that is free of this flaw and prevents reckless lending is criticized. Deflation and hoarding was never a real problem. Baby-Sitting Co-op IS a silly story that does not scale. Gold had similar deflationary property as bitcoin and somehow it was used in trade for ages. Critics miss the point that monetary wealth is useless if you can't spend it, so at some point hoarders will say: enough, it's time to use some life. At the end of the day, money is just numbers with the potential to convert it to comfortable life. My selfish, self-interested side says: I would wish more hoarders who collect numbers and don't convert it, so they don't use real world resources. They leave more for me!

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

by ph0rque 14y ago

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

1053r 14y ago

The flaw in the argument is that BitCoin is not (currently) a unit of account (we don't price contracts or goods or services in BTC), and is (nearly) infinitely divisible. So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can be divided up for use in transactions. That much speculations will cause wild gyrations in value and massive short term volatility, but the people using BTC to transact JUST DON'T CARE. I really don't care if I'm buying my $1000 flat screen with 1 BTC or 0.0001 BTC. Neither does the merchant. I bought the BTC, sent it to the merchant, and the merchant sold it so quickly that the value didn't change much, and we are happy. So that's the short term. In the long run, the volatility might decrease as the total market capitalization increases to 10x or 1000x of its current value. Then we can start to think about using it as a unit of account. If we do, we may enter a deflationary spiral, but by then BTC will already be used in an enormous swath of the economy. So I interpret Krugman's argument not so much that BTC CAN'T take over the world, but that it SHOULDN'T take over the world. (I'm not sure if I agree. Many economists have been arguing over this point for decades, and I'm not smart enough to sort it all out.)

danielweber 14y ago
That's using Bitcoin merely as a payment mechanism, where both the buyer and the seller hold onto it for as short a time as possible.
- mcantelon 14y ago
  I think Bitcoins role as a store of value that can be used for payments makes for a pretty good tool. Like gold, except able to have ownership transferred, even in small micropayment-sized portions, without a cost incurred.
  - pyoung 14y ago
    I agree that this is the appropriate way to look at bitcoin. It is not so much a currency at the moment, it is more like an asset, like stocks, bonds, or gold. If we assume bitcoin is an asset, we are not seeing deflation per se, we are seeing an increase in value. A store of value that can be anonymously transferred and exchanged without significant costs has some inherit value in society. The only problem with bitcoin, is that if we consider bitcoin to be an asset, than it's price is entirely determined by speculation and nothing else. At least with gold, there are industrial/commercial uses for it that put a lower bound on the price. Not so much with bitcoin. Personally, I don't need an anonymous store of value, so if I am going to be speculating, I would rather do so with stocks of companies, as those are actually backed by the value of the company itself. I may throw some money into bitcoin just for fun, but I wouldn't do it to use it as a currency. My gut is telling me that most people jumping in are not interested in using it as a currency either. Of course, this doesn't necessarily mean bitcoin won't become more like a currency in the future. It is possible that it will stabilize. Considering that the world has never really seen anything like this before (well there were a few attempts that failed in the past), it is impossible to predict what is going to happen.
    - mcantelon 14y ago
      >it's price is entirely determined by speculation and nothing else Its price is based on the work required to make the coins and the properties of a minted coin (can't be forged, etc). The coin has virtual properties, but they're still useful properties.
ars 14y ago
That is not a flaw in the argument - that is a flaw in your understanding of the argument, which makes you think this is a valid rebuttal. Money is supposed to represent value. Not to actually be value. There are new humans arriving in the world all the time. And new resources are being mined from the earth, and created intellectually all the time. If the money supply does not match these new things then the currency fails. You can't just do a "currency split" and issue more notes - doing that effectively tells everyone their resources are half as valuable which is clearly wrong - the value of the resources didn't change. You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails.
- danielweber 14y ago
  You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. I think many of the bitcoin fans reject this. They want to be able to hold (say) 1/1000th of the world's wealth, and be able to keep on holding 1/1000th of the world's wealth as long as they don't spend any of their hoard. It's like trying to create a financial crisis because you expect to be on the right side of it.
- crazygringo 14y ago
  > You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. That's only if you want the currency to maintain a stable value, neither inflationary nor deflationary. Alternatively, the currency will have deflation. It's not obvious that that necessarily implies "failing".
  - james1071 14y ago
    No one will be able to use it for transactions because everyone will hoard it-buying the currency will be impossible.
- trhtrsh 14y ago
  > sum total of money available is equal to the sum total of value in the world. This part is not completely accurate when you consider that money changes hands over time as value is created. (Multipliers) If the someone produces 1 widget per day (different person each day), and someone else consumes 1 widget per day (and becomes the producer the next day), 1 widget-dollar is needed forever to help move the widgets. If the pattern of production and consumption is more complicated, we need more dollars (debt) to keep track. The sum total of money needs to be something like the sum total of all current unsettled debt, and it needs to be less than the amount of future production of the debtors, in each's share (or else they will default). It gets more complicated from there.
mncolinlee 14y ago
Unfortunately, deflation is not so simple a concept. If your currency quickly deflates and hoarders EXPECT it to deflate, no one will be interested in lending and the economy will suffer. Lending is not an optional feature in a modern economy. You need some level of lending to have credit balances with merchants or investment in stocks and bonds. An economy without lending can take few risks on innovation, such as YCombinator has. They also have less incentive to spend money hiring employees because the risk/reward ratio is higher. A currency that continuously deflates is also likely to hit a liquidity crisis when everyone attempts to sell at once and the exchanges stop buying. We've already seen exchanges stop selling or choose to impose hurdles to buyers because Bitcoin demand was too high. Until they resolve the money supply issues, the Bitcoin is likely to remain merely an expensive and risky proxy for illicit drugs.
- wmf 14y ago
  This is a bit of a nit, but the real exchange(s) does not buy or sell anything; it just matches orders. So you should probably say "...a liquidity crisis when everyone attempts to sell at once and the noobs stop buying".
- drcode 14y ago
  If deflation is (let's say) 4%, why wouldn't people be greedy and let people borrow it at 6% or something?
  - mncolinlee 14y ago
    1. Deflation isn't fixed. Lenders have to make a guess about the spectrum of possible future rates of deflation, inflation, or even the abandonment of the currency. 2. Lenders seek profit, not revenue. 6% interest on 4% deflation is hardly greedy. You're ignoring the risk/reward ratio. Deflation causes defaults because existing loan costs become more onerous. 6% on 4% would almost certainly be a net loss after defaults. The high risk of default during deflation is part of why interest rates hit 18% in the 1980s. 3. Deflation is typically a product of most people having less access to your currency. Debtors would make an estimation that they could afford your loan at a lower-priced Bitcoin (in currency and labor costs). They'll be more likely to default when the currency is more scarce either due to the worse exchange rate of money or exchange rate of labor.
deleted 14y ago
[deleted]
james1071 14y ago
Your scenario of an ever increasing currency is impossible, because everyone will hoard it. No transactions will be possible because it will be impossible to buy.

narrator 14y ago

Krugman is talking about "The Paradox of Savings". Here's F.A Hayek's rebuttal to the argument when it was originally proposed back in the 30s: (http://mises.org/daily/2804 http://mises.org/daily/2804) (Sorry if I'm a bit of a broken record on this but it applies too well to bitcoin).

white_devil 14y ago

> provide a counterpoint to the deflationary spiral criticism? Is that the retarded idea that no one will buy anything if prices keep falling? Look no further than computers, cell phones and all manner of electronic gadgets. Their prices keep going down, but everyone keeps buying them. If you need/want something now, you'll buy it now. Here's a summary of the article: "The State-Controlled Mainstream Media paints a gloomy picture of a currency that can't be controlled by the State." EDIT: Perhaps a downvoter might want to point out a flaw in what I said?

ars 14y ago
Why do you think they constantly make more gadgets - always at the same price point? And they work really hard to make sure you want the new one. In some future world where no one wants the new gadget the price of the old one will stop falling!
- white_devil 14y ago
  True, some gadgets stay at certain price points, but you keep getting more and more value for your money. We could rephrase "electronics getting cheaper" as "your purchasing power towards electronics increasing", if that's better. > In some future world where no one wants the new gadget the price of the old one will stop falling! What's the point here? It's not like the old gadget would get sold at the same price for ever and ever.
Jtsummers 14y ago
Not a downvoter (can't, probably won't when I can), but your tone is unnecessarily aggressive and dismissive, especially considering GP just wanted a rebuttal and made no claims of their own.
- white_devil 14y ago
  > your tone is unnecessarily aggressive and dismissive I take it you're referring to the word "retarded"? It was meant to criticize the idea of a "deflationary spiral", not the poster.

bdr 14y ago

Just because an asset perpetually appreciates does not mean it has a present value of infinity. I hope to write a deeper rebuttal soon in the form of a blog post.

johnny4000 14y ago

Seems to me it's an argument for the status quo, so if you are say Warren Buffet it is a vary valid concern. If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in. Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.

maxerickson 14y ago
If you are going to insist on a deflationary economy, you have to admit the possibility of wages going down over time. For a cartoon example, with high enough deflation and a less than perfect job market, that debt might represent more years of work when you are 35 than it did when you were 25.
- johnny4000 14y ago
  Wages in what currency? Bitcoins or USD or? If wages in USD decrease by a huge amount and I get paid in Bitcoins, I can eventually hire more people for a cheaper amount if I pay them in USD.
  - maxerickson 14y ago
    Wages in bitcoin. But I really want to talk about it in terms of units of productivity. If the value of bitcoin goes up over time, then each unit of productivity will be worth less bitcoin over time. Meaning that relative to units of productivity, a debt will increase. In your first example, you relied on the assumption that your boss or customers or whatever would not take the current BTC value of your productivity into account. In your new example, you are relying on the people you hire not taking the value of their labor in BTC into account. Neither of those are reasonable assumptions.

ph0rque 14y ago

Thanks for all the replies made in the sibling comments and their descendants. To me it seems that for the time being (e.g. the next 50? 100? years), as long as we have a currency alternative to bitcoin such as USD, these problems can be avoided by just switching currencies to be able to buy/sell/borrow/invest in, as long as other parties agree to it. Or am I missing something?

gluczywo 14y ago

Note the contradiction: It was diagnosed that the recession of recent years was caused by uncontrolled lending which was possible thanks to issuing money by central banks and keeping low interest rates in this way. At the same time bitcoin that is free of this flaw and prevents reckless lending is criticized. Deflation and hoarding was never a real problem. Baby-Sitting Co-op IS a silly story that does not scale. Gold had similar deflationary property as bitcoin and somehow it was used in trade for ages. Critics miss the point that monetary wealth is useless if you can't spend it, so at some point hoarders will say: enough, it's time to use some life. At the end of the day, money is just numbers with the potential to convert it to comfortable life. My selfish, self-interested side says: I would wish more hoarders who collect numbers and don't convert it, so they don't use real world resources. They leave more for me!