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Falling prices and strong growth tend to be mutually exclusive in the real economy. Suppose you’re an investor and an entrepreneur comes to you with a proposal

Falling prices and strong growth tend to be mutually exclusive in the real economy. Suppose you’re an investor and an entrepreneur comes to you with a proposal to build a factory, and the business plan shows next year the factory will cost 5% less to build, and the products will sell 5% cheaper. Why build a factory today if you can get 5% a year increase in purchasing power just by hoarding currency? You need much bigger margins than are currently typical outside tech and zero marginal cost products. Incur debt, and even at the zero interest rate bound, you need 5% more real income next year to pay it back. In a modern economy, especially where there's a lot of debt finance, price deflation is death. Anyway, since Bitcoin isn't a currency in the sense of a transaction medium, a stable store of value, and a unit of account, but more akin to a digital pet rock or Beanie Baby, deflation doesn't really matter very much.

nandemo 13y ago
Why build a factory today if you can buy your country's bonds and enjoy a risk-free x% a year? Why buy a smart phone today if you can wait 1 year and get a much better one for the same price?
- deleted 13y ago
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- RockyMcNuts 13y ago
  The short answer is, you don't. When real interest rates are at 5%, that is not normal and those are not usually good times. Bonds in the US have earned a real 2.3% since 1926. From 1937 to 1981 bonds lost a real -0.72% per year. You don't buy bonds to earn the rate of growth of real GDP or better. If you want to do that, you have to take risk. The last 30 years of declining inflation have been the anomaly. People built businesses instead of buying bonds because bonds looked pretty unattractive, but when inflation kept surprising to the downside, bonds did better than expected.
clamprecht 13y ago
re: "since Bitcoin isn't a currency in the sense of a transaction medium" $2M per month of transactions on SilkRoad beg to differ.
- RockyMcNuts 13y ago
  A minor airline's frequent flier mile transactions are 10 times that. An average Target store does more than that. What convertible currency doesn't have a giant multiple of that? And Silk Road isn't even legit, enforceable transactions.
wyager 13y ago
>Why build a factory today if you can get 5% a year increase in purchasing power just by hoarding currency? You don't; but the reality is that if the need for something becomes great enough, the potential profits from investing in production of that thing surpass the potential profits of saving. And if no one is investing in production, prices increase, combatting deflation. As usual, the market will solve this problem given a little time. >In a modern economy, especially where there's a lot of debt finance, price deflation is death. Then I guess businesses can continue to use deflationary currency while everyone who wants to save can use Bitcoin or some other non-deflationary holding. >Anyway, since Bitcoin isn't a currency in the sense of a transaction medium, a stable store of value, and a unit of account, but more akin to a digital pet rock or Beanie Baby, deflation doesn't really matter very much. A deflationary currency is certainly not a stable store of value either. Bitcoin is, of course, a transaction medium and a unit of account. I guess if you wanted, you could conduct transaction in beanie babies, but it would be much less convenient.
ahomescu1 13y ago
You might want to build that factory now to be the first on the market, and reap all the benefits from that. The guy who waits until next year will have to face more competition.

nandemo 13y ago

Why build a factory today if you can buy your country's bonds and enjoy a risk-free x% a year? Why buy a smart phone today if you can wait 1 year and get a much better one for the same price?

deleted 13y ago
[deleted]
RockyMcNuts 13y ago
The short answer is, you don't. When real interest rates are at 5%, that is not normal and those are not usually good times. Bonds in the US have earned a real 2.3% since 1926. From 1937 to 1981 bonds lost a real -0.72% per year. You don't buy bonds to earn the rate of growth of real GDP or better. If you want to do that, you have to take risk. The last 30 years of declining inflation have been the anomaly. People built businesses instead of buying bonds because bonds looked pretty unattractive, but when inflation kept surprising to the downside, bonds did better than expected.

clamprecht 13y ago

re: "since Bitcoin isn't a currency in the sense of a transaction medium" $2M per month of transactions on SilkRoad beg to differ.

RockyMcNuts 13y ago
A minor airline's frequent flier mile transactions are 10 times that. An average Target store does more than that. What convertible currency doesn't have a giant multiple of that? And Silk Road isn't even legit, enforceable transactions.

wyager 13y ago

>Why build a factory today if you can get 5% a year increase in purchasing power just by hoarding currency? You don't; but the reality is that if the need for something becomes great enough, the potential profits from investing in production of that thing surpass the potential profits of saving. And if no one is investing in production, prices increase, combatting deflation. As usual, the market will solve this problem given a little time. >In a modern economy, especially where there's a lot of debt finance, price deflation is death. Then I guess businesses can continue to use deflationary currency while everyone who wants to save can use Bitcoin or some other non-deflationary holding. >Anyway, since Bitcoin isn't a currency in the sense of a transaction medium, a stable store of value, and a unit of account, but more akin to a digital pet rock or Beanie Baby, deflation doesn't really matter very much. A deflationary currency is certainly not a stable store of value either. Bitcoin is, of course, a transaction medium and a unit of account. I guess if you wanted, you could conduct transaction in beanie babies, but it would be much less convenient.

ahomescu1 13y ago

You might want to build that factory now to be the first on the market, and reap all the benefits from that. The guy who waits until next year will have to face more competition.