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I was mystified about how infinite divisibility addresses the deflation argument. Then I found the author make this priceless statement in the comments: "I agr

I was mystified about how infinite divisibility addresses the deflation argument. Then I found the author make this priceless statement in the comments: "I agree with folks that I basically dodged the argument about deflation. I did it deliberately. Talking about deflation is like talking about God. Basically as soon as you mention the word all dialogue stops. People already have an idea in their head about whether it is good or bad and nobody listens any more. I admit I am no economic expert." http://bitcoinmagazine.com/9359/charles-stross-doesnt-know-thing-bitcoin/#comment-1193079788 http://bitcoinmagazine.com/9359/charles-stross-doesnt-know-t... That pretty much answers the question of whether he's a libertarian. At this point does anybody besides hard libertarians like the mises institute think deflation can be a good thing?

javert 13y ago
First, I agree that libertarians are intellectually embarassing, and I am sad to see them arguing poorly for so many things I agree with. Second, addressing deflation. From the point of view of production: deflation would get priced into the value of the currency so that it wouldn't at all be clear that holding onto deflationary currency will net you more than actually investing it in productive activity. From the point of view of consumption: Arguing that people will hold onto currency to eek out a little more value is like arguing that people in an inflationary economy will withohold selling goods and services to eek out a little more value. It just doesn't happen that way. In an inflationary society, consumption can't and won't be deferred indefinitely (the rich would rather have their new boat now and the poor don't have an option to wait and buy food later). Same goes for production in an inflationary society.
- mwsherman 13y ago
  Yes, these are good insights. If consumers hoard currency in a deflationary economy, we should expect producers to hoard in an inflationary one. (I’d also argue that there is nothing special about “zero”, that slight inflation or deflation are not different in kind.) Further, the tech industry fits every definition of deflationary – your dollars will buy more next year, and consumers hold expectations of same. But it has grown in wages, revenues, consumer benefit, persistently.
  - etchalon 13y ago
    1. The only "producer" of fiat currency is the government that issues it. There is no incentive for a government to hoard money it creates to pay its own bills. 2. Even if we imagine a currency which must be produced, it's a matter of degrees. A little inflation is good, a little deflation isn't terrible. 3. Arguing that, because your dollar buys a better computer next year, it is the same as your dollar buying more food tomorrow than what it can today is beyond ridiculous. They are not the same thing in any rational way.
    - msandford 13y ago
      If consumers (of goods) hoard currency in a deflationary environment then producers (of goods) should hoard commodities in an inflationary environment. In both cases they're acting rationally to maximize value.
      - Jtsummers 13y ago
        Inflation: A producer should hoard goods because it will (likely) be worth more tomorrow than it is today. In the mean time they have to spend money to maintain storage of the good. They have to maintain the condition of the goods so it's still useful when they sell it. They have to pay people to maintain these things. Which means eventually they have to sell something in order to pay these costs associated with their hoarding. Very few goods (outside of raw materials like metals) can sit around for years at a time and gain value. If it's food, it'll rot. If it's a technology good, it'll be obsoleted. Even oil and many other non-dietary consumables will succumb to decay of some sort over time. Deflation: A consumer should hoard cash because it will (likely) be worth more tomorrow than it is today. Outside of home security they don't need much to store it. They'll eventually spend some of it, because they need to eat and feed and clothe their family. But overall, the hoarding here is relatively cheap. These may both be rational positions, but they are not equivalent positions or mirrors of each other. There is a symmetry, but similarity is not the same as equality.
  - bmm6o 13y ago
    Planets would have to align to make hoarding profitable for producers. Consider: - The firm would need to choose potential future income over current income i.e. not need the cash flow and have no good way of investing that money (internally or externally) - Current sales would have to cannibalize future sales, or else they would sell now and in the future - The value of the future sale would have to be discounted by the chance that the customer buys from a competitor. So either you're talking about a monopoly or staggering inflation I don't see this ever happening under what anyone would consider acceptable levels of inflation. What annual rate do you think you'd have to see before this makes any sense?
- Daniel_Newby 13y ago
  > From the point of view of production: deflation would get priced into the value of the currency ... The discount rate cannot be negative. That is, lenders will never pay people to borrow money from them. The natural interest rate since ancient times is about 10%/year. So if there is 1% annual deflation, lenders can charge 9%. If the deflation is 8%, lenders can charge 2%. But if deflation is 13%, lenders cannot charge -3% interest. You cannot possibly pay people to borrow money from you. At that point all the mortgaging, public works bonding, factoring, revolving credit, etc. comes crashing to a halt. And firey politicians start saying that mankind shall not be crucified on a cross of gold.
  - saalweachter 13y ago
    Apologies for the friendly fire, but we did manage to achieve negative real interest rates in recent history. People bought debt from governments at a negative discount at several points during the Great Recession because it was perceived as less risky than a bank (they were afraid the bank would go under, and take with it their money), and less costly than a cash vault. So that once self-evident fact now has a couple of exceptions. Of course, this doesn't help consumers, since they aren't safer than banks, and it doesn't apply to Bitcoins, since the cost to store them securely is zero.
  - javert 13y ago
    I learned from this, and boy, was it elegant. Anyway, in a hypothetical bitcoin economy, I can't _imagine_ annual deflation in the range you are talking about (e.g. close to 10% or greater), because that should be "priced in" ahead of time. I mean, there should/could be some deflation (or even inflation) on a year-by-year basis, but it shouldn't be that high. Right?
    - Daniel_Newby 13y ago
      Hint: when a thing is deflating, it costs more to buy.
lingben 13y ago
Yet another bitcoin article written by someone who knows absolutely nothing about economics. Deflation is a devastating influence to a currency and economy. It is like a neutron bomb! To see such buffoons wave it away without even approaching a cursory understanding of it is truly tragic. If there are any doubters out there, let me spell it out: "infinite divisibility" does NOT address the built in deflationary character of bitcoin. While the bitcoin protocol is interesting in some aspects and even innovative at the margins, the currency portion of it is asinine. All it takes to understand this is to learn very basic economics and some knowledge of what exactly makes a currency a currency.
- wyager 13y ago
  > [Deflation] is like a neutron bomb! What a fair and emotionally unladen assessment of an economic phenomenon.
  - lingben 13y ago
    You're right, it is bombastic short-hand to concisely communicate how devastating deflation is and why central banks do everything they possibly can to avoid it. Here's just one recent example: http://www.marketwatch.com/story/draghi-faces-deflation-threat-as-ecb-boe-meet-2014-01-08 http://www.marketwatch.com/story/draghi-faces-deflation-thre... Everyone is free to access wealth of information out there about deflation, starting with wikipedia.
    - wyager 13y ago
      >why central banks do everything they possibly can to avoid [deflation]. Right. It can't possibly be because inflation makes it easier for governments to repay debt obligations and increase their cash flow without overtly increasing taxes.
    - AndrewBissell 13y ago
      It doesn't make sense to take a notion of deflation you've picked up from the recent histories of fiat, credit-driven currencies and apply it to Bitcoin. The "neutron bomb" kind of deflation you have in mind is the sort that gets touched off when a massive credit bubble bursts, and a huge volume of credit money disappears from the economy as bad debts are written off en masse. Since the issuance of credit is severely curtailed under Bitcoin (which may doom it as a currency for other reasons), I don't see how that kind of deflation can happen with it. The U.S. dollar was essentially a gradually deflationary currency throughout the latter half of the 19th Century. Despite modern attempts to paint the period as a horror show of volatility and panics, there was actually quite robust economic progress and growth. The trend toward lower prices was widely appreciated and seen as a sign of material progress (assuming you weren't, say, a farmer with a vested interest in higher prices). There were some hard times following the panic of 1893, but nothing like the sort of calamity that happened in the 1930s, long after inflationary forces had already wrested a significant amount of control over the dollar.
knowtheory 13y ago
This post really is less of a rebuttal and more of a DoS attack. The tl;dr amounts to: * author agrees with Stross that bitcoin is energy intensive. * author says there have been improvements to carbon footprint (as if that some how address the issue of theft of other people's electricity/CPU cycles being more efficient than spending your own electricity) * An argument about deflation that amounts to "there's no consensus in economics so it's fine if we run speculative experiments with economies" * A non-argument assertion that bitcoin is somehow no worse than cash as a vehicle for illegal/unethical behavior. Somehow this is suppose to amount to a take down of a dude who wrote literally an entire book about how algorithmically mediated systems which do not depend on human judgement are inherently inhuman and unconcerned about human ethical concerns. "It’s hard to believe that an author who wrote about algorithmically run 2.0 economies and trading exchanges for personal reputations can fail to see the precursors of that tech in the real world." wat. Seems like the author seems to be the primary source of misunderstanding.
- dllthomas 13y ago
  "Theft of other people's electricity" in the form of botnets, for the purpose of mining bitcoin is addressed by raising the difficulty to the point where you cannot meaningfully mine on CPUs or GPUs. This is done by prevalence of ASIC miners. In theory a botnet would still generate some revenue eventually, for any difficulty level, but there are expenses (time, if nothing else) to setting up a botnet; most importantly, there are more profitable uses a botnet could be put to if you're going to the trouble of building one.
- wyager 13y ago
  No one steals CPU cycles to mine Bitcoin. CPUs are no longer profitable in the wake of Bitcoin ASICs, even with huge botnets. Most of theoretical economics is, at best, approximations that only work sometimes. I don't care if Krugman tells you otherwise; economic theory is, at best, a feeble attempt to find a pattern that matches experimentally observed behaviors. So yes, it is fine to run economic experiments. And the great thing about Bitcoin is that no one is being forced to use it, which I can't say is true for most economic systems. Do you disagree that Bitcoin is no worse than cash for illegal behavior? Stross didn't actually describe or design any of the economic systems he wrote about; he just imagined them from an external perspective and wrote some vague description of what they might accomplish.
wyager 13y ago
I keep hearing this meme of "inflation is always great, deflation is always bad" with nothing to support it but the same tired "inflation makes you spend money" argument. Inflation encourages spending money but discourages earning it. Deflation encourages earning money but discourages spending it. People need to eat, so in the end these competing interests will always balance out, whether your currency is inflationary or deflationary.
- msandford 13y ago
  What a concise way of stating the tradeoffs, and in a fairly value-neutral way to boot!
- ewoodrich 13y ago
  Sure, but we have a economy that's extremely reliant on consumer spending, in fact it's about 70% of GDP these days [1]. Major deflation of the USD and the resulting decrease in spending would be devastating to the national economy [2]. Moderate inflation, however, serves to stimulate economic growth (while a similar degree of deflation would have a proportionally negative effect on growth). Is this an ideal economic system? Maybe not, who knows. It's what we have though. And it is a direct consequence of an economy driven by growth, and one that encourages liberal individual consumption. [1] http://en.wikipedia.org/wiki/Consumer_economy http://en.wikipedia.org/wiki/Consumer_economy [2] http://en.wikipedia.org/wiki/Panic_of_1837 http://en.wikipedia.org/wiki/Panic_of_1837
  - wyager 13y ago
    >Sure, but we have a economy that's extremely reliant on consumer spending, in fact it's about 70% of GDP these days What a meaningless statement in this context. "Consumer spending" refers to private sector spending. This is as opposed to, for example, Government spending, which might also fluctuate with changes in monetary policy. What percentage of the GDP is estimated to come from consumer spending has little bearing on the effect changes in inflation rate might have on the economy. You are trying to oversimplify a vastly complex system. If what you are implying (that there is a causal positive relationship between inflation and production) were true, it would be economically advantageous to adopt zimbabwe-style inflation. >...would be devastating to the national economy Please actually read the article you linked. "Speculative lending practices in western states, a sharp decline in cotton prices, a collapsing land bubble, international specie flows, and restrictive lending policies in Great Britain were all to blame." Deflation was a result of this panic, not the cause of it.

javert 13y ago

First, I agree that libertarians are intellectually embarassing, and I am sad to see them arguing poorly for so many things I agree with. Second, addressing deflation. From the point of view of production: deflation would get priced into the value of the currency so that it wouldn't at all be clear that holding onto deflationary currency will net you more than actually investing it in productive activity. From the point of view of consumption: Arguing that people will hold onto currency to eek out a little more value is like arguing that people in an inflationary economy will withohold selling goods and services to eek out a little more value. It just doesn't happen that way. In an inflationary society, consumption can't and won't be deferred indefinitely (the rich would rather have their new boat now and the poor don't have an option to wait and buy food later). Same goes for production in an inflationary society.

mwsherman 13y ago
Yes, these are good insights. If consumers hoard currency in a deflationary economy, we should expect producers to hoard in an inflationary one. (I’d also argue that there is nothing special about “zero”, that slight inflation or deflation are not different in kind.) Further, the tech industry fits every definition of deflationary – your dollars will buy more next year, and consumers hold expectations of same. But it has grown in wages, revenues, consumer benefit, persistently.
- etchalon 13y ago
  1. The only "producer" of fiat currency is the government that issues it. There is no incentive for a government to hoard money it creates to pay its own bills. 2. Even if we imagine a currency which must be produced, it's a matter of degrees. A little inflation is good, a little deflation isn't terrible. 3. Arguing that, because your dollar buys a better computer next year, it is the same as your dollar buying more food tomorrow than what it can today is beyond ridiculous. They are not the same thing in any rational way.
  - msandford 13y ago
    If consumers (of goods) hoard currency in a deflationary environment then producers (of goods) should hoard commodities in an inflationary environment. In both cases they're acting rationally to maximize value.
    - Jtsummers 13y ago
      Inflation: A producer should hoard goods because it will (likely) be worth more tomorrow than it is today. In the mean time they have to spend money to maintain storage of the good. They have to maintain the condition of the goods so it's still useful when they sell it. They have to pay people to maintain these things. Which means eventually they have to sell something in order to pay these costs associated with their hoarding. Very few goods (outside of raw materials like metals) can sit around for years at a time and gain value. If it's food, it'll rot. If it's a technology good, it'll be obsoleted. Even oil and many other non-dietary consumables will succumb to decay of some sort over time. Deflation: A consumer should hoard cash because it will (likely) be worth more tomorrow than it is today. Outside of home security they don't need much to store it. They'll eventually spend some of it, because they need to eat and feed and clothe their family. But overall, the hoarding here is relatively cheap. These may both be rational positions, but they are not equivalent positions or mirrors of each other. There is a symmetry, but similarity is not the same as equality.
- bmm6o 13y ago
  Planets would have to align to make hoarding profitable for producers. Consider: - The firm would need to choose potential future income over current income i.e. not need the cash flow and have no good way of investing that money (internally or externally) - Current sales would have to cannibalize future sales, or else they would sell now and in the future - The value of the future sale would have to be discounted by the chance that the customer buys from a competitor. So either you're talking about a monopoly or staggering inflation I don't see this ever happening under what anyone would consider acceptable levels of inflation. What annual rate do you think you'd have to see before this makes any sense?
Daniel_Newby 13y ago
> From the point of view of production: deflation would get priced into the value of the currency ... The discount rate cannot be negative. That is, lenders will never pay people to borrow money from them. The natural interest rate since ancient times is about 10%/year. So if there is 1% annual deflation, lenders can charge 9%. If the deflation is 8%, lenders can charge 2%. But if deflation is 13%, lenders cannot charge -3% interest. You cannot possibly pay people to borrow money from you. At that point all the mortgaging, public works bonding, factoring, revolving credit, etc. comes crashing to a halt. And firey politicians start saying that mankind shall not be crucified on a cross of gold.
- saalweachter 13y ago
  Apologies for the friendly fire, but we did manage to achieve negative real interest rates in recent history. People bought debt from governments at a negative discount at several points during the Great Recession because it was perceived as less risky than a bank (they were afraid the bank would go under, and take with it their money), and less costly than a cash vault. So that once self-evident fact now has a couple of exceptions. Of course, this doesn't help consumers, since they aren't safer than banks, and it doesn't apply to Bitcoins, since the cost to store them securely is zero.
- javert 13y ago
  I learned from this, and boy, was it elegant. Anyway, in a hypothetical bitcoin economy, I can't _imagine_ annual deflation in the range you are talking about (e.g. close to 10% or greater), because that should be "priced in" ahead of time. I mean, there should/could be some deflation (or even inflation) on a year-by-year basis, but it shouldn't be that high. Right?
  - Daniel_Newby 13y ago
    Hint: when a thing is deflating, it costs more to buy.

lingben 13y ago

Yet another bitcoin article written by someone who knows absolutely nothing about economics. Deflation is a devastating influence to a currency and economy. It is like a neutron bomb! To see such buffoons wave it away without even approaching a cursory understanding of it is truly tragic. If there are any doubters out there, let me spell it out: "infinite divisibility" does NOT address the built in deflationary character of bitcoin. While the bitcoin protocol is interesting in some aspects and even innovative at the margins, the currency portion of it is asinine. All it takes to understand this is to learn very basic economics and some knowledge of what exactly makes a currency a currency.

wyager 13y ago
> [Deflation] is like a neutron bomb! What a fair and emotionally unladen assessment of an economic phenomenon.
- lingben 13y ago
  You're right, it is bombastic short-hand to concisely communicate how devastating deflation is and why central banks do everything they possibly can to avoid it. Here's just one recent example: http://www.marketwatch.com/story/draghi-faces-deflation-threat-as-ecb-boe-meet-2014-01-08 http://www.marketwatch.com/story/draghi-faces-deflation-thre... Everyone is free to access wealth of information out there about deflation, starting with wikipedia.
  - wyager 13y ago
    >why central banks do everything they possibly can to avoid [deflation]. Right. It can't possibly be because inflation makes it easier for governments to repay debt obligations and increase their cash flow without overtly increasing taxes.
  - AndrewBissell 13y ago
    It doesn't make sense to take a notion of deflation you've picked up from the recent histories of fiat, credit-driven currencies and apply it to Bitcoin. The "neutron bomb" kind of deflation you have in mind is the sort that gets touched off when a massive credit bubble bursts, and a huge volume of credit money disappears from the economy as bad debts are written off en masse. Since the issuance of credit is severely curtailed under Bitcoin (which may doom it as a currency for other reasons), I don't see how that kind of deflation can happen with it. The U.S. dollar was essentially a gradually deflationary currency throughout the latter half of the 19th Century. Despite modern attempts to paint the period as a horror show of volatility and panics, there was actually quite robust economic progress and growth. The trend toward lower prices was widely appreciated and seen as a sign of material progress (assuming you weren't, say, a farmer with a vested interest in higher prices). There were some hard times following the panic of 1893, but nothing like the sort of calamity that happened in the 1930s, long after inflationary forces had already wrested a significant amount of control over the dollar.

knowtheory 13y ago

This post really is less of a rebuttal and more of a DoS attack. The tl;dr amounts to: * author agrees with Stross that bitcoin is energy intensive. * author says there have been improvements to carbon footprint (as if that some how address the issue of theft of other people's electricity/CPU cycles being more efficient than spending your own electricity) * An argument about deflation that amounts to "there's no consensus in economics so it's fine if we run speculative experiments with economies" * A non-argument assertion that bitcoin is somehow no worse than cash as a vehicle for illegal/unethical behavior. Somehow this is suppose to amount to a take down of a dude who wrote literally an entire book about how algorithmically mediated systems which do not depend on human judgement are inherently inhuman and unconcerned about human ethical concerns. "It’s hard to believe that an author who wrote about algorithmically run 2.0 economies and trading exchanges for personal reputations can fail to see the precursors of that tech in the real world." wat. Seems like the author seems to be the primary source of misunderstanding.

dllthomas 13y ago
"Theft of other people's electricity" in the form of botnets, for the purpose of mining bitcoin is addressed by raising the difficulty to the point where you cannot meaningfully mine on CPUs or GPUs. This is done by prevalence of ASIC miners. In theory a botnet would still generate some revenue eventually, for any difficulty level, but there are expenses (time, if nothing else) to setting up a botnet; most importantly, there are more profitable uses a botnet could be put to if you're going to the trouble of building one.
wyager 13y ago
No one steals CPU cycles to mine Bitcoin. CPUs are no longer profitable in the wake of Bitcoin ASICs, even with huge botnets. Most of theoretical economics is, at best, approximations that only work sometimes. I don't care if Krugman tells you otherwise; economic theory is, at best, a feeble attempt to find a pattern that matches experimentally observed behaviors. So yes, it is fine to run economic experiments. And the great thing about Bitcoin is that no one is being forced to use it, which I can't say is true for most economic systems. Do you disagree that Bitcoin is no worse than cash for illegal behavior? Stross didn't actually describe or design any of the economic systems he wrote about; he just imagined them from an external perspective and wrote some vague description of what they might accomplish.

wyager 13y ago

I keep hearing this meme of "inflation is always great, deflation is always bad" with nothing to support it but the same tired "inflation makes you spend money" argument. Inflation encourages spending money but discourages earning it. Deflation encourages earning money but discourages spending it. People need to eat, so in the end these competing interests will always balance out, whether your currency is inflationary or deflationary.

msandford 13y ago
What a concise way of stating the tradeoffs, and in a fairly value-neutral way to boot!
ewoodrich 13y ago
Sure, but we have a economy that's extremely reliant on consumer spending, in fact it's about 70% of GDP these days [1]. Major deflation of the USD and the resulting decrease in spending would be devastating to the national economy [2]. Moderate inflation, however, serves to stimulate economic growth (while a similar degree of deflation would have a proportionally negative effect on growth). Is this an ideal economic system? Maybe not, who knows. It's what we have though. And it is a direct consequence of an economy driven by growth, and one that encourages liberal individual consumption. [1] http://en.wikipedia.org/wiki/Consumer_economy http://en.wikipedia.org/wiki/Consumer_economy [2] http://en.wikipedia.org/wiki/Panic_of_1837 http://en.wikipedia.org/wiki/Panic_of_1837
- wyager 13y ago
  >Sure, but we have a economy that's extremely reliant on consumer spending, in fact it's about 70% of GDP these days What a meaningless statement in this context. "Consumer spending" refers to private sector spending. This is as opposed to, for example, Government spending, which might also fluctuate with changes in monetary policy. What percentage of the GDP is estimated to come from consumer spending has little bearing on the effect changes in inflation rate might have on the economy. You are trying to oversimplify a vastly complex system. If what you are implying (that there is a causal positive relationship between inflation and production) were true, it would be economically advantageous to adopt zimbabwe-style inflation. >...would be devastating to the national economy Please actually read the article you linked. "Speculative lending practices in western states, a sharp decline in cotton prices, a collapsing land bubble, international specie flows, and restrictive lending policies in Great Britain were all to blame." Deflation was a result of this panic, not the cause of it.