3 ms·

Just little deflation nearly destroyed the world economy I don't think you can interpret the causation as going that direction.

by cbr 13y ago

squozzer 13y ago
In simpler English it wasn't the deflation that nearly destroyed the world economy, it was the near-destruction of the world economy that triggered the deflation.
beat 13y ago
Something else caused the deflation (basically the collapse of CDOs). But the deflation caused the damage. It's like the difference between "his car slammed into that other car" and "he was drunk". Drunk caused the accident. Accident caused the damage.
AndrewBissell 13y ago
> Something else caused the deflation (basically the collapse of CDOs). But the deflation caused the damage. You talk about that deflation as if it just appeared out of thin air, but it was the market's natural reaction against over 25 years of Fed policy of papering over asset price corrections with massive credit injections. 1987, the Latin American debt crisis, LTCM, the tech bubble bust ... every single time, the Fed's solution to the "problem" of falling asset prices is to bail out the speculators with easy credit. It will be much harder for similar credit bubbles to form in Bitcoin in the absence of a central bank (or even, as far as I can tell, a means of fractional reserve banking). Of course, we are witnessing periodic non-credit driven bubbles right now, but I think these will become fewer and far between if the BTC market becomes more liquid, and particularly if a means of shorting BTC comes into existence.
- SeanLuke 13y ago
  > Of course, we are witnessing periodic non-credit driven bubbles right now, but I think these will become fewer and far between if the BTC market becomes more liquid, and particularly if a means of shorting BTC comes into existence. I don't understand this logic at all. BTC is primed for speculation, bubbles, and deflation, because it has a fixed or slow-growing supply and no automated procedure for fighting deflation by printing money. In other words, it has no central bank. There's no way it can prevent deflation and speculative bubbles. And yet as the BTC population grows, you think that speculation bubbles will reduce? That's a pretty out-there argument.
  - AndrewBissell 13y ago
    > ... and no automated procedure for fighting deflation by printing money. Depending on how you measure it, the share of credit which comprises the USD money supply dwarfs the amount of actual cash by something like 100:1. The cause of the deflation in the 2008 crisis was a sharp contraction in the amount of that credit, and the crisis only ended when that contraction stopped, not because of the Fed's relatively much less significant cash injections. The sorts of sharp, catastrophic deflations that took hold in 2008 (or 1929 for that matter) are always caused by the bursting of a preceding credit bubble, usually created by central bank policy. I don't see how that kind of bubble can happen in Bitcoin. So the argument that "Bitcoin is deflationary" is true as far as it goes, but that doesn't mean that a Bitcoin-based economy would necessarily look exactly like, say, the Depression-era U.S. They're two very different kinds of deflation. In the absence of major inflows & outflows of credit, the addition of liquidity to a market usually reduces the severity and frequency of big price swings. The very difficulty of issuing credit in BTC may very well prevent it from becoming a viable currency, but I think it's also an important brake on speculation.
    - SeanLuke 13y ago
      > The sorts of sharp, catastrophic deflations that took hold in 2008 (or 1929 for that matter) are always caused by the bursting of a preceding credit bubble, usually created by central bank policy. I don't see how that kind of bubble can happen in Bitcoin. So the argument that "Bitcoin is deflationary" is true as far as it goes, but that doesn't mean that a Bitcoin-based economy would necessarily look exactly like, say, the Depression-era U.S. Bitcoin has already had catastrophic deflations: factors of two in less than a week and factors of three in less than a month. And equally spectacular speculative crashes. The reason for this is really very simple: there's no one at the tiller, printing money to tamp down the speculation. The kind of deflation I'm talking about -- and I think everyone on HN is talking about -- is the kind associated with speculation. If Bitcoin can't discourage speculation, and it appears by design it cannot, it is dead in the water.
      - kalleboo 13y ago
- beat 13y ago
  I don't disagree with your interpretation of the central banks using easy credit to patch over popping bubbles, but I don't think your logic on bitcoins is right at all. Basically, as bad as central bank meddling is, the alternatives are far, far worse - look at the boom/bust cycles of the 19th century. For the most part, competent central banks prevent both hyperinflation and deflation through controlled expansion of the money supply.
  - AndrewBissell 13y ago
    I disagree with your reading of history in terms of the boom/bust cycles of the 19th century allegedly being "far, far worse" than central bank (mis)management of the money supply. As bad as the volatility of that period was, economic growth was still quite robust. And our system is now so dependent on massive levels of credit -- which could not exist without Fed backstops -- that when a panic hits there are legitimate fears of a total seizure in the economy and widespread social disorder (Hank Paulson's "tanks in the streets"). Maybe my reading of the history is flawed, but it seems to me that the panics of the 19th Century were at least faced with a bit more composure than that. But more to the point, even the 19th century cycles were intimately tied to the credit cycle. It was just created by private banks operating on fractional reserves, as opposed to a central bank. There is no fractional reserve banking in Bitcoin. (Which, again, may be a reason it will never take off as a currency, I'm not sure.)
    - beat 13y ago
      Bitcoin, if it takes off at all as something more significant than Dutch tulips, will probably be relegated to commodity rather than currency, much as gold and silver are (with a little black market currency behavior on the side, just like gold). As you point out, there's no obvious way to do fractional reserves, so it can't be used for debt-based capitalism unless someone comes up with a clever mechanism for that, something deeper than commodity-as-collateral. Avoiding the currency hazards of modern capitalism by not being able to perform the underlying operations of modern capitalism is kind of cheating. And if you can do lending on fractional reserves, how do you know the hazards of reserve currencies aren't a function of fractional reserves rather than a scalable money supply?

Just little deflation nearly destroyed the world economy I don't think you can interpret the causation as going that direction.

by cbr 13y ago

Just little deflation nearly destroyed the world economy I don't think you can interpret the causation as going that direction.

squozzer 13y ago

In simpler English it wasn't the deflation that nearly destroyed the world economy, it was the near-destruction of the world economy that triggered the deflation.

beat 13y ago

Something else caused the deflation (basically the collapse of CDOs). But the deflation caused the damage. It's like the difference between "his car slammed into that other car" and "he was drunk". Drunk caused the accident. Accident caused the damage.

AndrewBissell 13y ago

> Something else caused the deflation (basically the collapse of CDOs). But the deflation caused the damage. You talk about that deflation as if it just appeared out of thin air, but it was the market's natural reaction against over 25 years of Fed policy of papering over asset price corrections with massive credit injections. 1987, the Latin American debt crisis, LTCM, the tech bubble bust ... every single time, the Fed's solution to the "problem" of falling asset prices is to bail out the speculators with easy credit. It will be much harder for similar credit bubbles to form in Bitcoin in the absence of a central bank (or even, as far as I can tell, a means of fractional reserve banking). Of course, we are witnessing periodic non-credit driven bubbles right now, but I think these will become fewer and far between if the BTC market becomes more liquid, and particularly if a means of shorting BTC comes into existence.

SeanLuke 13y ago
> Of course, we are witnessing periodic non-credit driven bubbles right now, but I think these will become fewer and far between if the BTC market becomes more liquid, and particularly if a means of shorting BTC comes into existence. I don't understand this logic at all. BTC is primed for speculation, bubbles, and deflation, because it has a fixed or slow-growing supply and no automated procedure for fighting deflation by printing money. In other words, it has no central bank. There's no way it can prevent deflation and speculative bubbles. And yet as the BTC population grows, you think that speculation bubbles will reduce? That's a pretty out-there argument.
- AndrewBissell 13y ago
  > ... and no automated procedure for fighting deflation by printing money. Depending on how you measure it, the share of credit which comprises the USD money supply dwarfs the amount of actual cash by something like 100:1. The cause of the deflation in the 2008 crisis was a sharp contraction in the amount of that credit, and the crisis only ended when that contraction stopped, not because of the Fed's relatively much less significant cash injections. The sorts of sharp, catastrophic deflations that took hold in 2008 (or 1929 for that matter) are always caused by the bursting of a preceding credit bubble, usually created by central bank policy. I don't see how that kind of bubble can happen in Bitcoin. So the argument that "Bitcoin is deflationary" is true as far as it goes, but that doesn't mean that a Bitcoin-based economy would necessarily look exactly like, say, the Depression-era U.S. They're two very different kinds of deflation. In the absence of major inflows & outflows of credit, the addition of liquidity to a market usually reduces the severity and frequency of big price swings. The very difficulty of issuing credit in BTC may very well prevent it from becoming a viable currency, but I think it's also an important brake on speculation.
  - SeanLuke 13y ago
    > The sorts of sharp, catastrophic deflations that took hold in 2008 (or 1929 for that matter) are always caused by the bursting of a preceding credit bubble, usually created by central bank policy. I don't see how that kind of bubble can happen in Bitcoin. So the argument that "Bitcoin is deflationary" is true as far as it goes, but that doesn't mean that a Bitcoin-based economy would necessarily look exactly like, say, the Depression-era U.S. Bitcoin has already had catastrophic deflations: factors of two in less than a week and factors of three in less than a month. And equally spectacular speculative crashes. The reason for this is really very simple: there's no one at the tiller, printing money to tamp down the speculation. The kind of deflation I'm talking about -- and I think everyone on HN is talking about -- is the kind associated with speculation. If Bitcoin can't discourage speculation, and it appears by design it cannot, it is dead in the water.
    - kalleboo 13y ago
beat 13y ago
I don't disagree with your interpretation of the central banks using easy credit to patch over popping bubbles, but I don't think your logic on bitcoins is right at all. Basically, as bad as central bank meddling is, the alternatives are far, far worse - look at the boom/bust cycles of the 19th century. For the most part, competent central banks prevent both hyperinflation and deflation through controlled expansion of the money supply.
- AndrewBissell 13y ago
  I disagree with your reading of history in terms of the boom/bust cycles of the 19th century allegedly being "far, far worse" than central bank (mis)management of the money supply. As bad as the volatility of that period was, economic growth was still quite robust. And our system is now so dependent on massive levels of credit -- which could not exist without Fed backstops -- that when a panic hits there are legitimate fears of a total seizure in the economy and widespread social disorder (Hank Paulson's "tanks in the streets"). Maybe my reading of the history is flawed, but it seems to me that the panics of the 19th Century were at least faced with a bit more composure than that. But more to the point, even the 19th century cycles were intimately tied to the credit cycle. It was just created by private banks operating on fractional reserves, as opposed to a central bank. There is no fractional reserve banking in Bitcoin. (Which, again, may be a reason it will never take off as a currency, I'm not sure.)
  - beat 13y ago
    Bitcoin, if it takes off at all as something more significant than Dutch tulips, will probably be relegated to commodity rather than currency, much as gold and silver are (with a little black market currency behavior on the side, just like gold). As you point out, there's no obvious way to do fractional reserves, so it can't be used for debt-based capitalism unless someone comes up with a clever mechanism for that, something deeper than commodity-as-collateral. Avoiding the currency hazards of modern capitalism by not being able to perform the underlying operations of modern capitalism is kind of cheating. And if you can do lending on fractional reserves, how do you know the hazards of reserve currencies aren't a function of fractional reserves rather than a scalable money supply?