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Deflationary, sure. But where are the problems? More people are CHOOSING to conduct transactions in bitcoin. If we can tolerate 2-8% inflation yearly surely

Deflationary, sure. But where are the problems? More people are CHOOSING to conduct transactions in bitcoin. If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation.

NegativeK 14y ago
> surely we could tolerate that much deflation. This does not follow.
- msandford 14y ago
  You say it does not, I say it does. If an economy can handle fluctuation in the value of money in one direction surely it could do so the other way too. In fact, this is precisely what has happened over thousands of years. The constant loss of value of money without limit is a relatively recent invention. In centuries past prices would go up, then back down, then back up, then back down and so on. If our unsophisticated, foolish and stupid ancestors could handle such fluctuations certainly the enlightened and modern people of today could as well. EDIT: Here's a graph of inflation vs deflation in the US over a few hundred years. http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_the_US http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t...
  - codex 14y ago
    Before the modern era, economies were quite fragile, falling into crisis frequently and severely (see http://en.wikipedia.org/wiki/File:US_Unemployment_1800-1890.gif http://en.wikipedia.org/wiki/File:US_Unemployment_1800-1890....). The one saving grace was that in those times most people were farmers, and thus were self-employed (and could at least eat).
    - msandford 14y ago
      In my lifetime the economy has been quite fragile too. I'm not convinced that the booms and bust of old are any worse than they are today. Sure these days they're smoothed out more but the pain lasts longer. When removing a bandaid do you simply rip it off all at once or slowly peel it back? Which is the superior method?
twoodfin 14y ago
Except: - Deflation of prices denominated in Bitcoin has been massive, several orders of magnitude higher than 2-8%. - Inflation encourages you to spend money. Deflation encourages you to save it. An economy where no one spends money isn't much of one.
- msandford 14y ago
  And yet despite all the deflation people are conducting transactions in bitcoin. How long do you have to hold on to money before it's hoarding? A second? A minute? An hour? A year? The vast majority of money is hoarded because most people don't earn a dollar on one hand an immediately spend it on the other.
  - baddox 14y ago
    Any USD to bitcoin exchange price reflects both a bitcoin buyer and a bitcoin spender (seller). The bitcoin exchange price can only increase through people spending bitcoins on USD. Besides, if this argument that "the only rational thing to do if you own a deflationary currency is to hoard it" is correct, then that implies that "the only rational thing to do with an inflationary currency is to buy a deflationary currency regardless of the exchange price."
    - JPKab 14y ago
      Ummm, no. The bitcoin price can only go up if people are spending US dollars, Euros, etc on Bitcoins, not the other way around as you describe it. You do understand how currency exchanges function, do you not? If people are goign to an exchange, giving the exchange bitcoins, and then taking dollars for said bitcoins, the ratio of bitcoins to dollars within the exchanges holdings has just gone up, lowering the number of dollars it takes to buy a bitcoin....... so if the bitcoin takes MORE dollars, euros, etc to buy, then the opposite must be occurring. This really isn't very complicated.
  - JPKab 14y ago
    "And yet despite all the deflation people are conducting transactions in bitcoin." Yes, because how else are they going to buy weed, ecstacy, cocaine, illegal electronics, steroids or any other banned substances that form the backbone of the commodities people are actually purchasing with bitcoins. Have you ever been to the Silk Road site? I bet you haven't. Here's a hint: you won't be able to use your browser to go, so look up Tor. Edit: For the noninformed who say "dollars?" There is a huge incentive to use Bitcoins on Tornet sites like Silk Road to trade black market goods. This is because Bitcoins can cross international borders and are encrypted, are not subject to bank regulations, etc. They are essentially difficult for Law Enforcement Agencies to trace, but not impossible.
JPKab 14y ago
Deflation will pretty much guarantee that Bitcoin will never replace a "real" currency. It prevents a key economic activity: borrowing money. I'll let you put together why deflation kills incentives to loan money, hence making it impossible for people to borrow.
- msandford 14y ago
  The loan argument is a good one, to be sure. Alas it does not play out in reality. Check out the graph here: http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_the_US http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t... Once you've done that, please explain to me how there were loans made over the last 400 years in light of the fact that only the last 80 years has had reliable consistent inflation.
  - JPKab 14y ago
    What do you think were the interest rates on these loans? Historically loan interest rates were extremely high, for multiple reasons: 1) To cover the opportunity cost of holding the money during actual deflation 2) To cover the risk of a possibility of deflation 3) To allow the loaning institution to profit even when deflation occurs 4) The high demand for loans, due to a vastly diminished supply of loans If you live in a time of high barriers to borrowing money, you will live in a time of vastly decreased social mobility. You know, kind of like the time prior to the last 80 years. That wonderful age you gold-standard lovers wish you lived in.
    - codex 14y ago
      Deflation also requires more collateral, because in case of default, the bank won't be able to sell the collateral for the value it had when the loan was made, which risks insolvency and the loss of depositors' funds.
    - msandford 14y ago
      I'm not opposed to "high" interest rates. It encourages thrift and thrift is what built the modern world. The economy can only grow if production is greater than consumption on a macro level. How do you ensure that production is greater than consumption? You encourage savings via a "high" (some might say reasonable) interest rates.
tptacek 14y ago
2-8% deflation? Where did that number come from?
dragonwriter 14y ago
> Deflationary, sure. But where are the problems? With the "deflationary" part. > More people are CHOOSING to conduct transactions in bitcoin. Which isn't really an issue now because the total volume is small enough as to be irrelevant to any well-defined economy. It would be an issue if it was to become used, globally or in any region, as the principal currency, which is the only situation where its supply characteristics would actually be deflationary. > If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation. This relies on the premise that inflation and deflation of similar percentage magnitude are equally tolerable. I would suggest that the justification for making this assumption is, at best, non-obvious.
- msandford 14y ago
  You can't just say that "deflationary is a problem because it is" as that's a non-argument rather than an argument. I will address the notion of deflation and inflation of a similar percentage being tolerable: http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_the_US http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t... That graph shows that inflation and deflation largely canceled out for many, many years here in the US. And the world survived those times or else we would not be here today. As such I would argue that it is possible for an economy to handle deflation as well as inflation. One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has. I'm not convinced of the causal link between modernity and inflation; just because they happened at the same time doesn't mean there's causality. http://xkcd.com/552/ http://xkcd.com/552/
  - dragonwriter 14y ago
    > That graph shows that inflation and deflation largely canceled out for many, many years here in the US. Which doesn't actually support the position it is offered as defense for, that similar levels of inflation and deflation have the same harms. Them tending in the long term to be equal (leaving no long-term net inflation/deflation) doesn't mean that variation from 0 on each side is equally harmful. > And the world survived those times or else we would not be here today. The world survived the times when chattel slavery, autocracy, de jure religious prosecutions were the norm, too. That doesn't mean that those things are good, or even no worse than the features of the modern developed world that have replaced them. > One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has. As its not one that either Krugman nor anyone in the exchange leading up to your post made, that's a strawman.
scott_s 14y ago
Bitcoin as payment is a novelty. And it's difficult to point to activity on the exchanges as evidence for bitcoins acceptance as a currency, since it's not possible to separate out the speculators from those that honestly think bitcoin has a future.
- danielweber 14y ago
  I did some bitcoin transactions as a lark a few years ago. It was an interesting experiment and I wanted to try it up close. If it wasn't for the deflationary aspect, I might love it; but it's not, and it won't be changed to it, because the bitcoin community thinks deflation is the bestest thing ever.

Deflationary, sure. But where are the problems? More people are CHOOSING to conduct transactions in bitcoin. If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation.

NegativeK 14y ago

> surely we could tolerate that much deflation. This does not follow.

msandford 14y ago
You say it does not, I say it does. If an economy can handle fluctuation in the value of money in one direction surely it could do so the other way too. In fact, this is precisely what has happened over thousands of years. The constant loss of value of money without limit is a relatively recent invention. In centuries past prices would go up, then back down, then back up, then back down and so on. If our unsophisticated, foolish and stupid ancestors could handle such fluctuations certainly the enlightened and modern people of today could as well. EDIT: Here's a graph of inflation vs deflation in the US over a few hundred years. http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_the_US http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t...
- codex 14y ago
  Before the modern era, economies were quite fragile, falling into crisis frequently and severely (see http://en.wikipedia.org/wiki/File:US_Unemployment_1800-1890.gif http://en.wikipedia.org/wiki/File:US_Unemployment_1800-1890....). The one saving grace was that in those times most people were farmers, and thus were self-employed (and could at least eat).
  - msandford 14y ago
    In my lifetime the economy has been quite fragile too. I'm not convinced that the booms and bust of old are any worse than they are today. Sure these days they're smoothed out more but the pain lasts longer. When removing a bandaid do you simply rip it off all at once or slowly peel it back? Which is the superior method?

twoodfin 14y ago

Except: - Deflation of prices denominated in Bitcoin has been massive, several orders of magnitude higher than 2-8%. - Inflation encourages you to spend money. Deflation encourages you to save it. An economy where no one spends money isn't much of one.

msandford 14y ago
And yet despite all the deflation people are conducting transactions in bitcoin. How long do you have to hold on to money before it's hoarding? A second? A minute? An hour? A year? The vast majority of money is hoarded because most people don't earn a dollar on one hand an immediately spend it on the other.
- baddox 14y ago
  Any USD to bitcoin exchange price reflects both a bitcoin buyer and a bitcoin spender (seller). The bitcoin exchange price can only increase through people spending bitcoins on USD. Besides, if this argument that "the only rational thing to do if you own a deflationary currency is to hoard it" is correct, then that implies that "the only rational thing to do with an inflationary currency is to buy a deflationary currency regardless of the exchange price."
  - JPKab 14y ago
    Ummm, no. The bitcoin price can only go up if people are spending US dollars, Euros, etc on Bitcoins, not the other way around as you describe it. You do understand how currency exchanges function, do you not? If people are goign to an exchange, giving the exchange bitcoins, and then taking dollars for said bitcoins, the ratio of bitcoins to dollars within the exchanges holdings has just gone up, lowering the number of dollars it takes to buy a bitcoin....... so if the bitcoin takes MORE dollars, euros, etc to buy, then the opposite must be occurring. This really isn't very complicated.
- JPKab 14y ago
  "And yet despite all the deflation people are conducting transactions in bitcoin." Yes, because how else are they going to buy weed, ecstacy, cocaine, illegal electronics, steroids or any other banned substances that form the backbone of the commodities people are actually purchasing with bitcoins. Have you ever been to the Silk Road site? I bet you haven't. Here's a hint: you won't be able to use your browser to go, so look up Tor. Edit: For the noninformed who say "dollars?" There is a huge incentive to use Bitcoins on Tornet sites like Silk Road to trade black market goods. This is because Bitcoins can cross international borders and are encrypted, are not subject to bank regulations, etc. They are essentially difficult for Law Enforcement Agencies to trace, but not impossible.

JPKab 14y ago

Deflation will pretty much guarantee that Bitcoin will never replace a "real" currency. It prevents a key economic activity: borrowing money. I'll let you put together why deflation kills incentives to loan money, hence making it impossible for people to borrow.

msandford 14y ago
The loan argument is a good one, to be sure. Alas it does not play out in reality. Check out the graph here: http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_the_US http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t... Once you've done that, please explain to me how there were loans made over the last 400 years in light of the fact that only the last 80 years has had reliable consistent inflation.
- JPKab 14y ago
  What do you think were the interest rates on these loans? Historically loan interest rates were extremely high, for multiple reasons: 1) To cover the opportunity cost of holding the money during actual deflation 2) To cover the risk of a possibility of deflation 3) To allow the loaning institution to profit even when deflation occurs 4) The high demand for loans, due to a vastly diminished supply of loans If you live in a time of high barriers to borrowing money, you will live in a time of vastly decreased social mobility. You know, kind of like the time prior to the last 80 years. That wonderful age you gold-standard lovers wish you lived in.
  - codex 14y ago
    Deflation also requires more collateral, because in case of default, the bank won't be able to sell the collateral for the value it had when the loan was made, which risks insolvency and the loss of depositors' funds.
  - msandford 14y ago
    I'm not opposed to "high" interest rates. It encourages thrift and thrift is what built the modern world. The economy can only grow if production is greater than consumption on a macro level. How do you ensure that production is greater than consumption? You encourage savings via a "high" (some might say reasonable) interest rates.

tptacek 14y ago

2-8% deflation? Where did that number come from?

dragonwriter 14y ago

> Deflationary, sure. But where are the problems? With the "deflationary" part. > More people are CHOOSING to conduct transactions in bitcoin. Which isn't really an issue now because the total volume is small enough as to be irrelevant to any well-defined economy. It would be an issue if it was to become used, globally or in any region, as the principal currency, which is the only situation where its supply characteristics would actually be deflationary. > If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation. This relies on the premise that inflation and deflation of similar percentage magnitude are equally tolerable. I would suggest that the justification for making this assumption is, at best, non-obvious.

msandford 14y ago
You can't just say that "deflationary is a problem because it is" as that's a non-argument rather than an argument. I will address the notion of deflation and inflation of a similar percentage being tolerable: http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_the_US http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t... That graph shows that inflation and deflation largely canceled out for many, many years here in the US. And the world survived those times or else we would not be here today. As such I would argue that it is possible for an economy to handle deflation as well as inflation. One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has. I'm not convinced of the causal link between modernity and inflation; just because they happened at the same time doesn't mean there's causality. http://xkcd.com/552/ http://xkcd.com/552/
- dragonwriter 14y ago
  > That graph shows that inflation and deflation largely canceled out for many, many years here in the US. Which doesn't actually support the position it is offered as defense for, that similar levels of inflation and deflation have the same harms. Them tending in the long term to be equal (leaving no long-term net inflation/deflation) doesn't mean that variation from 0 on each side is equally harmful. > And the world survived those times or else we would not be here today. The world survived the times when chattel slavery, autocracy, de jure religious prosecutions were the norm, too. That doesn't mean that those things are good, or even no worse than the features of the modern developed world that have replaced them. > One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has. As its not one that either Krugman nor anyone in the exchange leading up to your post made, that's a strawman.

scott_s 14y ago

Bitcoin as payment is a novelty. And it's difficult to point to activity on the exchanges as evidence for bitcoins acceptance as a currency, since it's not possible to separate out the speculators from those that honestly think bitcoin has a future.

danielweber 14y ago
I did some bitcoin transactions as a lark a few years ago. It was an interesting experiment and I wanted to try it up close. If it wasn't for the deflationary aspect, I might love it; but it's not, and it won't be changed to it, because the bitcoin community thinks deflation is the bestest thing ever.