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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

by 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.
- stretchwithme 14y ago
  Yeah, just because a currency is deflating doesn't mean you can't charge interest and have it be worth your while. You get back your principal plus whatever amount it take to make you take the risk. Inflation is worse for lenders than deflation. Each dollar they get back is worth less when it is returned, not more. Borrowers love inflation. If there was great deflation, it gets quite painful to pay back loans. The lender is quite happy about it though. I think I read, though, that both severe deflation and inflation push up rates. If deflation is severe, it can push many borrowers into bankruptcy, making lending more risky.
bsbechtel 14y ago
In a country drowning in debt, both public and private, limits on the ability to borrow money could be a welcome development. It all depends on how much deflation discourages people from lending money. This is derived from the expected rate of return of the borrowed money vs the current rate of deflation.
- JPKab 14y ago
  This would be a limit on borrowing money for EVERYONE, regardless of their ability to pay it back. Lots of people overeat, so I guess we should jack up the price of food. What you have just proposed is an increase in the cost of starting a new business, no matter how good an idea is. Just because the banks are bad at determining who can and can't pay back a loan doesn' mean those who CAN should pay a tax.
  - bsbechtel 14y ago
    So inflation isn't a tax on people who save their money? Or, by artificially preventing deflation through a central bank we aren't subsidizing the cost of borrowing through this tax?
- tptacek 14y ago
  This is a statement of political ideology and not one of settled fact. If the comparison you're making is to the USD, our borrowing costs are so low that there are lots of activities for which short-term potential inflation is more than offset by gains to the economy. This isn't voodoo macroeconomics; it's no more complicated than the decision between paying down a home mortgage and investing that money for a return.
stretchwithme 14y ago
Nonsense. You can simply state that can simply agree to pay back an amount of bitcoin equivalent to a certain amount of gold, the most stable commodity there is. Or dollars. Or bread sticks. Or anything else you prefer.
- JPKab 14y ago
  What you are describing is a currency peg. This is what the Silk Road does with the black market items people buy on there with bitcoins. This is an acknowledgement by the Silk Road of bitcoins being a great medium of exchange due to the difficulty of tracing them, but a horrible holder of value due to their volatility.
- scott_s 14y ago
  Funny you should say that. "Gold, Long a Secure Investment, Loses Its Luster": http://www.nytimes.com/2013/04/11/business/gold-long-a-secure-investment-loses-its-luster.html http://www.nytimes.com/2013/04/11/business/gold-long-a-secur...
- jongleberry 14y ago
  i'm not sure what his definition of a "real" currency is, but to me, a "real" currency is one in which all transactions occur within that currency. if you use bitcoin, but somewhere along the lines of a transaction you exchange mediums, it's no longer "real", you're just bartering.
- kamkazemoose 14y ago
  But then you aren't really borrowing/loaning bitcoins. The transaction is taking place in whatever currency you're agreeing to pay it back as. Say currently 10bitcoins = 1oz gold. So I agree to loan you 10bitcoins, and you agree to pay me back their equivalent price of 1oz of gold +interest in 5 years in bitcoins. The loan is being taken out based on gold, and bitcoins are just an intermediary, but they are essentially acting as a certificate for that gold.
nickik 14y ago
So Gold that was deflationary over long periods was not a 'real' currency? Your economic arguments are simply wrong. Deflation by money destruction will hurt the economy, like in the Great Depresion. Deflation that happens because of increased in production will not destroy lending. The real intrest rate will still be positiv. The real story is more complicated since I have ignored money demand. Note that I have not said Bitcoin will become a 'real' currency. There are real problems, Im just saying that your argument is wrong.
- jongleberry 14y ago
  your argument is tangential. bitcoin's inherent deflation is not by money destruction nor increases in production, thus these arguments are not relevant, although true within its own context. since bitcoin, like gold, has a finite quantity, deflation is mostly due to demand, which you have chosen to ignore in your argument.

by JPKab 14y ago

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.
stretchwithme 14y ago
Yeah, just because a currency is deflating doesn't mean you can't charge interest and have it be worth your while. You get back your principal plus whatever amount it take to make you take the risk. Inflation is worse for lenders than deflation. Each dollar they get back is worth less when it is returned, not more. Borrowers love inflation. If there was great deflation, it gets quite painful to pay back loans. The lender is quite happy about it though. I think I read, though, that both severe deflation and inflation push up rates. If deflation is severe, it can push many borrowers into bankruptcy, making lending more risky.

bsbechtel 14y ago

In a country drowning in debt, both public and private, limits on the ability to borrow money could be a welcome development. It all depends on how much deflation discourages people from lending money. This is derived from the expected rate of return of the borrowed money vs the current rate of deflation.

JPKab 14y ago
This would be a limit on borrowing money for EVERYONE, regardless of their ability to pay it back. Lots of people overeat, so I guess we should jack up the price of food. What you have just proposed is an increase in the cost of starting a new business, no matter how good an idea is. Just because the banks are bad at determining who can and can't pay back a loan doesn' mean those who CAN should pay a tax.
- bsbechtel 14y ago
  So inflation isn't a tax on people who save their money? Or, by artificially preventing deflation through a central bank we aren't subsidizing the cost of borrowing through this tax?
tptacek 14y ago
This is a statement of political ideology and not one of settled fact. If the comparison you're making is to the USD, our borrowing costs are so low that there are lots of activities for which short-term potential inflation is more than offset by gains to the economy. This isn't voodoo macroeconomics; it's no more complicated than the decision between paying down a home mortgage and investing that money for a return.

stretchwithme 14y ago

Nonsense. You can simply state that can simply agree to pay back an amount of bitcoin equivalent to a certain amount of gold, the most stable commodity there is. Or dollars. Or bread sticks. Or anything else you prefer.

JPKab 14y ago
What you are describing is a currency peg. This is what the Silk Road does with the black market items people buy on there with bitcoins. This is an acknowledgement by the Silk Road of bitcoins being a great medium of exchange due to the difficulty of tracing them, but a horrible holder of value due to their volatility.
scott_s 14y ago
Funny you should say that. "Gold, Long a Secure Investment, Loses Its Luster": http://www.nytimes.com/2013/04/11/business/gold-long-a-secure-investment-loses-its-luster.html http://www.nytimes.com/2013/04/11/business/gold-long-a-secur...
jongleberry 14y ago
i'm not sure what his definition of a "real" currency is, but to me, a "real" currency is one in which all transactions occur within that currency. if you use bitcoin, but somewhere along the lines of a transaction you exchange mediums, it's no longer "real", you're just bartering.
kamkazemoose 14y ago
But then you aren't really borrowing/loaning bitcoins. The transaction is taking place in whatever currency you're agreeing to pay it back as. Say currently 10bitcoins = 1oz gold. So I agree to loan you 10bitcoins, and you agree to pay me back their equivalent price of 1oz of gold +interest in 5 years in bitcoins. The loan is being taken out based on gold, and bitcoins are just an intermediary, but they are essentially acting as a certificate for that gold.

nickik 14y ago

So Gold that was deflationary over long periods was not a 'real' currency? Your economic arguments are simply wrong. Deflation by money destruction will hurt the economy, like in the Great Depresion. Deflation that happens because of increased in production will not destroy lending. The real intrest rate will still be positiv. The real story is more complicated since I have ignored money demand. Note that I have not said Bitcoin will become a 'real' currency. There are real problems, Im just saying that your argument is wrong.

jongleberry 14y ago
your argument is tangential. bitcoin's inherent deflation is not by money destruction nor increases in production, thus these arguments are not relevant, although true within its own context. since bitcoin, like gold, has a finite quantity, deflation is mostly due to demand, which you have chosen to ignore in your argument.