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I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin So deflation is a general decline in prices which usua

I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin So deflation is a general decline in prices which usually caused by the reduction in the money or credit supply (in Bitcoin’s case it’s the Money Supply). However if prices are falling through deflation then, you’re not incentivised to spend because; you’re going to get a better deal tomorrow. Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed. In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Raising the prices is the essential foundation of an economic recovery because; businesses can increase their profits which takes pressure off debtors etc and an example of this is the fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[1]. However, Bitcoin can only produce 25 Bitcoins every 10 minutes (which is being halved every 4 years from 2017) and this can create a liquidity trap because the injections of cash fail to stimulate economic growth – as a result, if Bitcoin is in a recession and is unable to stimulate economic growth it will eventually turn into deflation & deflation is only bad for people who cannot borrow more and unlike fiat currencies who can borrow more, Bitcoin has a fixed supply (and isn't even backed by a commodity) which means that, there could potentially be serious issues for the economy’s wealth. [1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009 http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...

crazygringo 14y ago
Thanks for writing all that up. What I still don't understand is, > Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed. Well, if people are expecting deflation, then that expectation becomes built into the value of the currency, such that there exists an equilibrium between people expecting it to deflate further, and people expecting it do the opposite, because it's already overly valuable. I can't see how everyone would just hoard it until there's infinite demand and zero supply, and a bitcoin has infinite value. There's always a semi-stable price. And like I said, I don't see how the standard macroeconomic arguments apply, because right now bitcoin is just a currency "on the side", totally unable to affect economies on a large scale. And if it ever did reach that scale, governments could do things like force contracts to be denominated in some government-controlled ratio to bitcoins, so that the government would still be able to "control" the money supply, and increase or decrease it as desired. (That's just one crude example of how.) Just because people are using bitcoins, doesn't mean that long-term contracts have to be denominated in bitcoins. So I guess this is what confuses me about people saying that bitcoin deflation is bad. Deflation=bad arguments seem to rest on entire countries being solely dependent on a single currency, which is not the case with bitcoin. And even that became the case, it would presumably take place in a whole new way. But I still don't see anything inherently wrong with a deflationary currency, especially one used alongside "official" ones.
- itsprofitbaron 14y ago
  So by the "economy" think of Bitcoin like they are a country (a really small one) and that’s the only currency for them and in some cases deflation can be beneficial to some people in an economy. For instance as I was saying in the previous comment it's beneficial for those with the cash and income streams as they become more valuable as time goes on and its good for the debtor. However, you are correct in that there is always going to be a semi-stable price (or a price floor) when the money supply starts to help create inflation and grow the economy again. In terms of how it’s bad for Bitcoin building on the previous comment, let’s pretend that people have bought coins at $200 and deflation kicks which means that, people either hoard it (to try and get something cheaper tomorrow) OR once it hits a certain level everyone tries to recover their losses and starts selling the coins which causes an economic crash to a highly volatile market (a $500k trade can usually cause a lot of issues) and the market will not level out until, there are enough buyers interested to buy back into Bitcoin.
  - waps 14y ago
    Maybe I'm misunderstanding the argument, so can anyone please point out the flaw in my dismissal of this argument ? 1) assuming bitcoin will deflate 2) this means that existing bitcoin holders will be able to exchange their bitcoins for more $ than ever on mtgox/... 3) the conclusion is that this will make people leave bitcoin Needless to say, if this is the argument, that people will leave bitcoin because they earn too much without doing anything, good luck with that one. So where is the flaw in my thinking here ? I would also like to point out that a deflationary system won out over a debt based one many times in history. Saying it can't happen doesn't seem like it's based on anything. The obvious big example would be the end of the (west) Roman Empire, but there's dozens of examples in the last 2 centuries alone. This is yet one more case of people in the west thinking that because it hasn't happened in the west in the last 60 years, that it cannot happen (and they simply don't know just how often it happened before that). Debt based currencies are fundamentally pyramid schemes, slightly obscured by the fact that the growth phase can last a very long time, but that doesn't change anything, not really (except opening up the possibility of a person being born into a pyramid scheme and aging and dying normally while the pyramid scheme is still growing). This will not work for bitcoin because bitcoin itself depends on infrastructure that depends on those existing pyramid schemes (ie. USD/EUR/...). It will work for house ownership and maybe for gold ownership.
uiri 14y ago
Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed. Please correct me if I am wrong, but isn't the value of the total money supply supposed to equal something like the total value of the goods and services in the economy that that money supply represents (not sure if the wording is correct but hopefully I got the idea across). If that is the case, then won't a decrease in spending cause the total value of the money supply to decrease, meaning the expectation of deflation will cause some amount of inflation, such that the system stabilizes? Because of this, I don't see how you can have a deflationary spiral in a depressed economy based on anything other than speculation (and thus a Bitcoin bubble which will eventually pop). I do agree that Bitcoin is naturally deflationary; if there is economic growth, the money supply can't expand to keep up. And Bitcoin's deflationary nature slows this economic growth. Thus, I think that Bitcoin will eventually reach a stable real value. I think there must be a flaw in this reasoning because I'm sure many economists would disagree but I can't seem to find it myself.
Houshalter 14y ago
>Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed. People not spending money is generally a good thing. There are more resources to go around for everyone else and other people can afford more things with the same amount of money. Most people who save money invest it, which benefits the economy in the long term. >In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. This hurts everyone though. Everyone has the same amount of money they did before, but suddenly everything costs more. No wealth is actually created by doing this, the same amount of goods are in the economy. But the person who gets the printed money buys a bunch of them, and then has a larger share of the pie, leaving everyone else with less. Yes bitcoin has a mechanism for creating new currency, but this was a necessary evil in order to distribute the first bitcoins relatively fairly. It doesn't actually benefit anyone to give free bitcoins to some people just for running their computers a lot.

crazygringo 14y ago

Thanks for writing all that up. What I still don't understand is, > Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed. Well, if people are expecting deflation, then that expectation becomes built into the value of the currency, such that there exists an equilibrium between people expecting it to deflate further, and people expecting it do the opposite, because it's already overly valuable. I can't see how everyone would just hoard it until there's infinite demand and zero supply, and a bitcoin has infinite value. There's always a semi-stable price. And like I said, I don't see how the standard macroeconomic arguments apply, because right now bitcoin is just a currency "on the side", totally unable to affect economies on a large scale. And if it ever did reach that scale, governments could do things like force contracts to be denominated in some government-controlled ratio to bitcoins, so that the government would still be able to "control" the money supply, and increase or decrease it as desired. (That's just one crude example of how.) Just because people are using bitcoins, doesn't mean that long-term contracts have to be denominated in bitcoins. So I guess this is what confuses me about people saying that bitcoin deflation is bad. Deflation=bad arguments seem to rest on entire countries being solely dependent on a single currency, which is not the case with bitcoin. And even that became the case, it would presumably take place in a whole new way. But I still don't see anything inherently wrong with a deflationary currency, especially one used alongside "official" ones.

itsprofitbaron 14y ago
So by the "economy" think of Bitcoin like they are a country (a really small one) and that’s the only currency for them and in some cases deflation can be beneficial to some people in an economy. For instance as I was saying in the previous comment it's beneficial for those with the cash and income streams as they become more valuable as time goes on and its good for the debtor. However, you are correct in that there is always going to be a semi-stable price (or a price floor) when the money supply starts to help create inflation and grow the economy again. In terms of how it’s bad for Bitcoin building on the previous comment, let’s pretend that people have bought coins at $200 and deflation kicks which means that, people either hoard it (to try and get something cheaper tomorrow) OR once it hits a certain level everyone tries to recover their losses and starts selling the coins which causes an economic crash to a highly volatile market (a $500k trade can usually cause a lot of issues) and the market will not level out until, there are enough buyers interested to buy back into Bitcoin.
- waps 14y ago
  Maybe I'm misunderstanding the argument, so can anyone please point out the flaw in my dismissal of this argument ? 1) assuming bitcoin will deflate 2) this means that existing bitcoin holders will be able to exchange their bitcoins for more $ than ever on mtgox/... 3) the conclusion is that this will make people leave bitcoin Needless to say, if this is the argument, that people will leave bitcoin because they earn too much without doing anything, good luck with that one. So where is the flaw in my thinking here ? I would also like to point out that a deflationary system won out over a debt based one many times in history. Saying it can't happen doesn't seem like it's based on anything. The obvious big example would be the end of the (west) Roman Empire, but there's dozens of examples in the last 2 centuries alone. This is yet one more case of people in the west thinking that because it hasn't happened in the west in the last 60 years, that it cannot happen (and they simply don't know just how often it happened before that). Debt based currencies are fundamentally pyramid schemes, slightly obscured by the fact that the growth phase can last a very long time, but that doesn't change anything, not really (except opening up the possibility of a person being born into a pyramid scheme and aging and dying normally while the pyramid scheme is still growing). This will not work for bitcoin because bitcoin itself depends on infrastructure that depends on those existing pyramid schemes (ie. USD/EUR/...). It will work for house ownership and maybe for gold ownership.

uiri 14y ago

Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed. Please correct me if I am wrong, but isn't the value of the total money supply supposed to equal something like the total value of the goods and services in the economy that that money supply represents (not sure if the wording is correct but hopefully I got the idea across). If that is the case, then won't a decrease in spending cause the total value of the money supply to decrease, meaning the expectation of deflation will cause some amount of inflation, such that the system stabilizes? Because of this, I don't see how you can have a deflationary spiral in a depressed economy based on anything other than speculation (and thus a Bitcoin bubble which will eventually pop). I do agree that Bitcoin is naturally deflationary; if there is economic growth, the money supply can't expand to keep up. And Bitcoin's deflationary nature slows this economic growth. Thus, I think that Bitcoin will eventually reach a stable real value. I think there must be a flaw in this reasoning because I'm sure many economists would disagree but I can't seem to find it myself.

Houshalter 14y ago

>Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed. People not spending money is generally a good thing. There are more resources to go around for everyone else and other people can afford more things with the same amount of money. Most people who save money invest it, which benefits the economy in the long term. >In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. This hurts everyone though. Everyone has the same amount of money they did before, but suddenly everything costs more. No wealth is actually created by doing this, the same amount of goods are in the economy. But the person who gets the printed money buys a bunch of them, and then has a larger share of the pie, leaving everyone else with less. Yes bitcoin has a mechanism for creating new currency, but this was a necessary evil in order to distribute the first bitcoins relatively fairly. It doesn't actually benefit anyone to give free bitcoins to some people just for running their computers a lot.