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> According to the Bureau of Labor Statistics, a 2013 dollar has one-tenth the purchasing power of the 1950 version. By contrast, bitcoins have been skyrocketin

> According to the Bureau of Labor Statistics, a 2013 dollar has one-tenth the purchasing power of the 1950 version. By contrast, bitcoins have been skyrocketing in value. This sounds like a good thing, but for a currency it's really not. An economy where bitcoins were the means of exchange would have experienced 98% deflation over the past year. No one would be able to repay any loans, or really do business at all. What we want out of a currency is not price appreciation but stability. Monetary economists differ on whether the optimal stability is inflation of 0% or in the low single digits. Nobody thinks 98% deflation is healthy, and all but a small minority seem to think any deflation at all is a bad thing. This needs to be repeated until exhaustion.

venomsnake 14y ago
Krugman has been doing it for 10 years now ... no effect.
- zenocon 14y ago
  That's because he's wrong on so many levels.
jl6 14y ago
It's not yet clear whether Bitcoin is money, or whether it is some strange new hybrid of asset and currency for which conventional wisdom does not apply and for which historical analogies fail.
- jwr 14y ago
  Exactly. I'm also growing tired of people endlessly repeating the 'deflation is bad' mantra. Even if we agree to call what will happen to bitcoin 'deflation', the argument that people will just stop producing and just hold on to their money is bogus. Does it describe you? Because it certainly does not describe me.
  - dragontamer 14y ago
    Are you willing to loan out your bitcoins? Do you believe that you will be able to purchase say... a house or a car using bitcoins? Do you think any financial institution will come out and loan you bitcoins? As a financial instrument, this massive deflation will prevent any form of financing (ie: Credit Cards, Mortgages, Car Loans, etc. etc.) from growing inside of the Bitcoin world.
  - rjtavares 14y ago
    Are you willing to provide services for a BTC denominated amount?
mtgx 14y ago
The guy who's been the head of the central bank in my country for about 20 years or so, once said to make sure you get loans in the same currency you have your income, so any volatility in the currency of the loan is matched by the same currency of the income. The only reason you think having to repay a loan in Bitcoin would be a problem, is because you think your income comes in dollars. And doing that would indeed be very unwise. But if we get to the point where we can get loans in Bitcoin, I think it's safe to assume the income of many people would be based on Bitcoin, too, so it wouldn't be a problem at all for them.
- jmharvey 14y ago
  Even if you get paid in bitcoin, if the real value of bitcoin increases, it's unlikely that you'll maintain the same nominal wage. Your real output is relatively constant, so your real wage (whether it's paid by an employer or is the profit from a business) can't dramatically rise every time the currency fluctuates. So even if you're paid in BTC, deflation makes it very difficult to repay a loan.
  - viraptor 14y ago
    What do you mean by "real wage"? I think you're still taking the wage relative to a dolar in this case. The point is that if you get paid in X, you get paid in X. If X has any traction, your employer also has income in X, so relation of X to other currencies is not that much relevant to your salary or debts if they're both in X. Sure - 100x change over a year is going to be a problem for other reasons, but have a look at GBP/EUR exchange rate. It changed between 1,28 and 1,16 over the last couple of months. Nobody corrected my salary by 10% just because of this.
    - dragontamer 14y ago
      But companies such as Nintendo post losses in Revenue because of USD / Yen fluctuations. When all USD transactions are hurt by 7% because of a stronger Yen, Nintendo's business in America is worth 7% less all of a sudden. True, wages in Nintendo probably didn't change, but their American Investments have been damaged by the stronger Yen.
snitko 14y ago
What do you mean nobody? Austrian economists are a legitimate school of economics and they are in favor of deflation. It was Austrians who were able to predict most of the collapses we've seen over the century. When Keynesians said it's impossible to have inflation and high rates of unemployment, it was Austrians who said they were wrong, which was proved in the 1960-70s.
- pkulak 14y ago
  [citation needed]
  - hadronzoo 14y ago
    Here's a list of predictions: http://wiki.mises.org/wiki/Austrian_predictions http://wiki.mises.org/wiki/Austrian_predictions
    - Aloisius 14y ago
      I would like to point out that the Austrian school teaches that economic predictions are impossible to make which is incredibly convenient when one of their theories breaks down completely (e.g. the Austrian Business Cycle Theory has been shown to be empirically false during all recessions we have data for). Also, mises.org isn't exactly an objective third party.
- splat 14y ago
  Austrians are fine with price deflation, but not monetary deflation: "If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the opposition direction." -- Ludwig von Mises (http://mises.org/mmmp/mmmp5.asp http://mises.org/mmmp/mmmp5.asp)
  - hadronzoo 14y ago
    Just to clarify, Austrians define monetary deflation as a contraction in the total supply of a given money. In this case, it would mean a decrease in the total number of Bitcoins.
julespitt 14y ago
Not to make excuses about this issue and Bitcoin, but the main problem here is that while Bitcoins limited supply solution brings with it lots of other problems (including frequent but not 100% reliable deflation) - no one has yet even postulated a fully distributed and mathematical means of reliably producing either inflation, deflation, or steady-state value. Limited supply is a dirty, sloppy hack - but the only known one to most likely maintain the value of a cryptocurrency over time.
- pixelcort 14y ago
  Before Bitcoin no one thought it was possible to solve the double spend problem using a P2P network. Maybe someday we'll learn how to control inflation of future crypto currencies using P2P networks as well. Even today there is at least one crypto currency with a built in 5% internal demurrage rate (freicoin). One idea is, for each block mined in a crypto currency, the miner votes on a target inflation rate. Every so many blocks, perhaps every month or so, the P2P network would take the median proposed inflation rate and either demurrage all existing coins or adjust the number of newly generated coins for the next month.
  - julespitt 14y ago
    I'm not downplaying the innovations that Bitcoin introduced and demonstrating - just honing in that the money supply issue is not yet well understood. I would love to see what would happen with a miner-voting system - actually, while I'm dreaming, I'd like to see a proof-of-stake inflation voting mechanism. Too bad all of this hype is about Bitcoin instead of the general concept of cryptocurrencies.
    - pixelcort 14y ago
      There is a growing subreddit for discussion of cryptocurrencies: http://www.reddit.com/r/cryptocurrency http://www.reddit.com/r/cryptocurrency
Unoeufisenough 14y ago
A thousand times this. A currency that is designed to be radically unstable in value is not a currency. Out of control deflation is just as bad as out of control inflation. Bcoin is nothing but a bunch of runaway tulip bulbs. Have fun if you want to buy on the way up and... sell in time, woe to you if don't.
nwzpaperman 14y ago
Deflation is when counterfeited money (deposit liabilities/other side of debt-asset journal entry) are written off. Deflation in a debt-asset based financial system means money is destroyed and becomes more scarce and valuable. Since debts are exponentially increasing cost contracts, when the monetary supply--based on exponentially increasing cost contracts--contracts, you get exponentially increasing appreciation of the currency. Governments are running trillion dollar deficits because they have to because the private sector isn't borrowing enough to expand the debt-assets required to service previous debt contracts that require service in debt contracts. Bitcoin's relative appreciation to fiat currencies and other benchmarks is not driven by a contraction in money supply due to debt-asset write-offs. Bitcoin itself could be declared legal tender and suitable for payment of taxes if a government decided so. Financial crises are ALWAYS about lenders lending money that doesn't exist. The fancy name used to be fractional reserve lending, but since we went to a floating currency system, it's just asset-based lending and no reserves required. Value isn't something anyone can "fix."
YokoZar 14y ago
You will see similar arguments happen about real life currencies backed by small nation-states. It's entirely plausible for mass market speculation to, say, quintuple the price of the Botswanan note.
mike-cardwell 14y ago
It's basically a brand new currency. Of course it hasn't settled down yet. It wont for a long time. Maybe the price it's being sold at is increasing so much, because they're worth a lot and they haven't reached as high as their stable value is going to yet?

venomsnake 14y ago

Krugman has been doing it for 10 years now ... no effect.

zenocon 14y ago
That's because he's wrong on so many levels.

jl6 14y ago

It's not yet clear whether Bitcoin is money, or whether it is some strange new hybrid of asset and currency for which conventional wisdom does not apply and for which historical analogies fail.

jwr 14y ago
Exactly. I'm also growing tired of people endlessly repeating the 'deflation is bad' mantra. Even if we agree to call what will happen to bitcoin 'deflation', the argument that people will just stop producing and just hold on to their money is bogus. Does it describe you? Because it certainly does not describe me.
- dragontamer 14y ago
  Are you willing to loan out your bitcoins? Do you believe that you will be able to purchase say... a house or a car using bitcoins? Do you think any financial institution will come out and loan you bitcoins? As a financial instrument, this massive deflation will prevent any form of financing (ie: Credit Cards, Mortgages, Car Loans, etc. etc.) from growing inside of the Bitcoin world.
- rjtavares 14y ago
  Are you willing to provide services for a BTC denominated amount?

mtgx 14y ago

The guy who's been the head of the central bank in my country for about 20 years or so, once said to make sure you get loans in the same currency you have your income, so any volatility in the currency of the loan is matched by the same currency of the income. The only reason you think having to repay a loan in Bitcoin would be a problem, is because you think your income comes in dollars. And doing that would indeed be very unwise. But if we get to the point where we can get loans in Bitcoin, I think it's safe to assume the income of many people would be based on Bitcoin, too, so it wouldn't be a problem at all for them.

jmharvey 14y ago
Even if you get paid in bitcoin, if the real value of bitcoin increases, it's unlikely that you'll maintain the same nominal wage. Your real output is relatively constant, so your real wage (whether it's paid by an employer or is the profit from a business) can't dramatically rise every time the currency fluctuates. So even if you're paid in BTC, deflation makes it very difficult to repay a loan.
- viraptor 14y ago
  What do you mean by "real wage"? I think you're still taking the wage relative to a dolar in this case. The point is that if you get paid in X, you get paid in X. If X has any traction, your employer also has income in X, so relation of X to other currencies is not that much relevant to your salary or debts if they're both in X. Sure - 100x change over a year is going to be a problem for other reasons, but have a look at GBP/EUR exchange rate. It changed between 1,28 and 1,16 over the last couple of months. Nobody corrected my salary by 10% just because of this.
  - dragontamer 14y ago
    But companies such as Nintendo post losses in Revenue because of USD / Yen fluctuations. When all USD transactions are hurt by 7% because of a stronger Yen, Nintendo's business in America is worth 7% less all of a sudden. True, wages in Nintendo probably didn't change, but their American Investments have been damaged by the stronger Yen.

snitko 14y ago

What do you mean nobody? Austrian economists are a legitimate school of economics and they are in favor of deflation. It was Austrians who were able to predict most of the collapses we've seen over the century. When Keynesians said it's impossible to have inflation and high rates of unemployment, it was Austrians who said they were wrong, which was proved in the 1960-70s.

pkulak 14y ago
[citation needed]
- hadronzoo 14y ago
  Here's a list of predictions: http://wiki.mises.org/wiki/Austrian_predictions http://wiki.mises.org/wiki/Austrian_predictions
  - Aloisius 14y ago
    I would like to point out that the Austrian school teaches that economic predictions are impossible to make which is incredibly convenient when one of their theories breaks down completely (e.g. the Austrian Business Cycle Theory has been shown to be empirically false during all recessions we have data for). Also, mises.org isn't exactly an objective third party.
splat 14y ago
Austrians are fine with price deflation, but not monetary deflation: "If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the opposition direction." -- Ludwig von Mises (http://mises.org/mmmp/mmmp5.asp http://mises.org/mmmp/mmmp5.asp)
- hadronzoo 14y ago
  Just to clarify, Austrians define monetary deflation as a contraction in the total supply of a given money. In this case, it would mean a decrease in the total number of Bitcoins.

julespitt 14y ago

Not to make excuses about this issue and Bitcoin, but the main problem here is that while Bitcoins limited supply solution brings with it lots of other problems (including frequent but not 100% reliable deflation) - no one has yet even postulated a fully distributed and mathematical means of reliably producing either inflation, deflation, or steady-state value. Limited supply is a dirty, sloppy hack - but the only known one to most likely maintain the value of a cryptocurrency over time.

pixelcort 14y ago
Before Bitcoin no one thought it was possible to solve the double spend problem using a P2P network. Maybe someday we'll learn how to control inflation of future crypto currencies using P2P networks as well. Even today there is at least one crypto currency with a built in 5% internal demurrage rate (freicoin). One idea is, for each block mined in a crypto currency, the miner votes on a target inflation rate. Every so many blocks, perhaps every month or so, the P2P network would take the median proposed inflation rate and either demurrage all existing coins or adjust the number of newly generated coins for the next month.
- julespitt 14y ago
  I'm not downplaying the innovations that Bitcoin introduced and demonstrating - just honing in that the money supply issue is not yet well understood. I would love to see what would happen with a miner-voting system - actually, while I'm dreaming, I'd like to see a proof-of-stake inflation voting mechanism. Too bad all of this hype is about Bitcoin instead of the general concept of cryptocurrencies.
  - pixelcort 14y ago
    There is a growing subreddit for discussion of cryptocurrencies: http://www.reddit.com/r/cryptocurrency http://www.reddit.com/r/cryptocurrency

Unoeufisenough 14y ago

A thousand times this. A currency that is designed to be radically unstable in value is not a currency. Out of control deflation is just as bad as out of control inflation. Bcoin is nothing but a bunch of runaway tulip bulbs. Have fun if you want to buy on the way up and... sell in time, woe to you if don't.

nwzpaperman 14y ago

Deflation is when counterfeited money (deposit liabilities/other side of debt-asset journal entry) are written off. Deflation in a debt-asset based financial system means money is destroyed and becomes more scarce and valuable. Since debts are exponentially increasing cost contracts, when the monetary supply--based on exponentially increasing cost contracts--contracts, you get exponentially increasing appreciation of the currency. Governments are running trillion dollar deficits because they have to because the private sector isn't borrowing enough to expand the debt-assets required to service previous debt contracts that require service in debt contracts. Bitcoin's relative appreciation to fiat currencies and other benchmarks is not driven by a contraction in money supply due to debt-asset write-offs. Bitcoin itself could be declared legal tender and suitable for payment of taxes if a government decided so. Financial crises are ALWAYS about lenders lending money that doesn't exist. The fancy name used to be fractional reserve lending, but since we went to a floating currency system, it's just asset-based lending and no reserves required. Value isn't something anyone can "fix."

YokoZar 14y ago

You will see similar arguments happen about real life currencies backed by small nation-states. It's entirely plausible for mass market speculation to, say, quintuple the price of the Botswanan note.

mike-cardwell 14y ago

It's basically a brand new currency. Of course it hasn't settled down yet. It wont for a long time. Maybe the price it's being sold at is increasing so much, because they're worth a lot and they haven't reached as high as their stable value is going to yet?