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> If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation.

> If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation. Good luck with that. You've just said something along the lines of, "we'll just have to figure out how to live with terminal cancer." Now, I'm no economist, but deflation is standardly seen as really, really bad, and for good reason. It's not just 'the opposite of inflation', as you probably know: it's an accelerating, self-intensifying brake on commerce. How? Ask yourself: why buy today what can be bought tomorrow cheaper?

holmak 13y ago
> Ask yourself: why buy today what can be bought tomorrow cheaper? I know the the correct, rational answer to this question: "I won't buy it today, or ever, because it will always be cheaper the next day." (And then the deflationary spiral begins!) But if this is really true, why has anyone bought a Playstation 4 or Xbox One? They will undoubtedly be cheaper in two or three or ten years. Well, consumers might be totally irrational; what about firms? Why has any company in history ever bought a computer when the price of computing power has been falling rapidly and (mostly) predictably for fifty years? I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts?
- ubernostrum 13y ago
  I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts? The problem is that the economic theories often cited by Bitcoin supporters presume certain fanciful behaviors. For example, in economic-theorist world, a frictionless spherical perfectly-informed perfectly-rational actor does not buy a six-pack of beer. Instead, the actor makes decisions: * I will buy one beer at this unit price. Will I buy two? * I will buy two beers at this unit price. Will I buy three? * I will buy three beers at this unit price. Will I buy four? * I will buy four beers at this unit price. Will I buy five? * I will buy five beers at this unit price. Will I buy six? * I will buy six beers at this unit price. Will I buy seven? * I will not buy seven beers at this unit price. * Therefore I will buy six beers. I've long assumed that all the people who actually make decisions in this way are locked up in the laboratories of mad economists, who observe their behaviors in the way a biologist might observe a terrarium.
- icambron 13y ago
  Yes, remember that this is a utility calculation. The cool thing about buying Xbox One now is that I can play it now. So let's say these are my options: * Buy it now for $300 and play it for 10 years * Buy it in ten years for $30 and play it then (I have no idea how much an Xbox actually costs.) So the question is whether that $270 is worth those ten years of playing it. A lot goes into that: what interesting things could I do with $270? How about in 10 years? How much do I want to play the games available for Xbox? Won't all my friends want to come over and play with me? Etc. Buying now might be perfectly rational, depending on your utility function. "I won't buy it today because it will be cheaper tomorrow" is an argument on the margins. That's why temporary bouts of deflation don't cause everyone to starve to death because they keep putting off buying food. But those margins do matter a great deal! There's some set of stuff that I really am going to wait on, because I only kinda want them now. There's certainly a discount rate for the Xbox that could cause all but the hardest-core fan to wait. So the deflation spiral doesn't take much to get started. I'm not saying humans are rational (though I will argue that corporations do better here), only that the Xbox One example doesn't prove they're not, and that it's still consistent with the deflation spiral concept.
  - holmak 13y ago
    I agree with your assessment -- utility with respect to time is the first explanation I thought of as well. People (and firms) have a limited ability to anticipate or defer purchases. (I can't wait 50 years to buy a lifetime supply of food to feed myself!) You also mention that this limited ability to defer purchases in the face of deflation is what makes short bouts of deflation not catastrophic -- it is somewhat difficult to get the deflationary spiral going if you can't actually wait to purchase things. Given all this, the interesting question to me is, how much deflation does it take to actually cause a deflationary spiral? The answer is likely complicated, given that it depends on the specific utility functions for each consumer of all the goods and services that they consume. Empirically, we seem to be able to cope with a decent amount of deflation, at least when it is limited to certain goods, like video game consoles, computing power, other manufactured goods, etc. (In some cases, even over very long timespans.)
    - 13y ago
patrickg_zill 13y ago
Could you maybe point to some examples? I think you haven't really looked into deflation in detail, quite frankly.

holmak 13y ago

> Ask yourself: why buy today what can be bought tomorrow cheaper? I know the the correct, rational answer to this question: "I won't buy it today, or ever, because it will always be cheaper the next day." (And then the deflationary spiral begins!) But if this is really true, why has anyone bought a Playstation 4 or Xbox One? They will undoubtedly be cheaper in two or three or ten years. Well, consumers might be totally irrational; what about firms? Why has any company in history ever bought a computer when the price of computing power has been falling rapidly and (mostly) predictably for fifty years? I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts?

ubernostrum 13y ago
I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts? The problem is that the economic theories often cited by Bitcoin supporters presume certain fanciful behaviors. For example, in economic-theorist world, a frictionless spherical perfectly-informed perfectly-rational actor does not buy a six-pack of beer. Instead, the actor makes decisions: * I will buy one beer at this unit price. Will I buy two? * I will buy two beers at this unit price. Will I buy three? * I will buy three beers at this unit price. Will I buy four? * I will buy four beers at this unit price. Will I buy five? * I will buy five beers at this unit price. Will I buy six? * I will buy six beers at this unit price. Will I buy seven? * I will not buy seven beers at this unit price. * Therefore I will buy six beers. I've long assumed that all the people who actually make decisions in this way are locked up in the laboratories of mad economists, who observe their behaviors in the way a biologist might observe a terrarium.
icambron 13y ago
Yes, remember that this is a utility calculation. The cool thing about buying Xbox One now is that I can play it now. So let's say these are my options: * Buy it now for $300 and play it for 10 years * Buy it in ten years for $30 and play it then (I have no idea how much an Xbox actually costs.) So the question is whether that $270 is worth those ten years of playing it. A lot goes into that: what interesting things could I do with $270? How about in 10 years? How much do I want to play the games available for Xbox? Won't all my friends want to come over and play with me? Etc. Buying now might be perfectly rational, depending on your utility function. "I won't buy it today because it will be cheaper tomorrow" is an argument on the margins. That's why temporary bouts of deflation don't cause everyone to starve to death because they keep putting off buying food. But those margins do matter a great deal! There's some set of stuff that I really am going to wait on, because I only kinda want them now. There's certainly a discount rate for the Xbox that could cause all but the hardest-core fan to wait. So the deflation spiral doesn't take much to get started. I'm not saying humans are rational (though I will argue that corporations do better here), only that the Xbox One example doesn't prove they're not, and that it's still consistent with the deflation spiral concept.
- holmak 13y ago
  I agree with your assessment -- utility with respect to time is the first explanation I thought of as well. People (and firms) have a limited ability to anticipate or defer purchases. (I can't wait 50 years to buy a lifetime supply of food to feed myself!) You also mention that this limited ability to defer purchases in the face of deflation is what makes short bouts of deflation not catastrophic -- it is somewhat difficult to get the deflationary spiral going if you can't actually wait to purchase things. Given all this, the interesting question to me is, how much deflation does it take to actually cause a deflationary spiral? The answer is likely complicated, given that it depends on the specific utility functions for each consumer of all the goods and services that they consume. Empirically, we seem to be able to cope with a decent amount of deflation, at least when it is limited to certain goods, like video game consoles, computing power, other manufactured goods, etc. (In some cases, even over very long timespans.)
  - 13y ago

patrickg_zill 13y ago

Could you maybe point to some examples? I think you haven't really looked into deflation in detail, quite frankly.