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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 a

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.

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.