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While I can't say with certainty whether mild and predictable deflation is bad for the economy, I don't think that these standard arguments that are used are su
by 1053r 11y ago
While I can't say with certainty whether mild and predictable deflation is bad for the economy, I don't think that these standard arguments that are used are sufficiently persuasive.
1) It is clear that a deflationary spiral, defined as possessing the characteristics of being unexpected, not written into contracts or loans, and relatively severe (double digits) while accelerating is bad. The great depression makes this clear. We can also see it in the current Greek situation. However, runaway inflation is equally bad, as we can see from post WW1 Germany, and modern day Venezuela and Argentina. Is it the fact that the change in the buying power of money is large and unexpected, or is it the sign of the inflation percentage that is bad?
2) Under the current debt based money system, the negative effects of inflation fall primarily on the poor. The wealthy purchase government bonds, which protect them inflation. They also have bank accounts, or finance debt either directly or indirectly. This means that instead of inflation falling on the populace evenly, it falls doubly on the poor.
3) Under a constant money supply system that eschews debt, the rich must seek out investment that actually increases productivity, rather than doing parasitic zero-sum investments (such as bond purchases and loan giving) that merely transfer value from one person to another. This would tend to grow the economy faster.
4) Under a constant money supply (like Bitcoin in a few years), wages and prices would tend fall by however much the economy was growing (2% - 3% a year), but the raises that people give out for seniority would tend to overwhelm the wage issues.
- oleganza 11y agoGreat depression was caused not by deflation, but by previously unleashed inflation (as in "inflated money supply"). Collapse of the bubble is a logical consequence of any bubble. Alternative - ever-increasing inflation was experimented in Weimar Germany, Zimbabwe and few other places. Hard money (Bitcoin or physical scarce collectibles) prevents people from inflating money supply, thus preventing global bubbles and thus preventing subsequent depressions. Of course, local stock-specific bubbles can still exist, but they are always subject for arbitrage and voluntary exits. Global money bubble is more destructive because use of a certain money is enforced by laws and therefore people cannot easily exit or switch to alternative.
- JamesBarney 11y agoIf deflation didn't cause unemployment and the great depression, why did the collapse of the bubble lead to unemployment and the great depression? Hard money prevents the Fed from changing the inflation rate but it doesn't prevent random and severe changes in inflation and deflation. From 2010 to 2013 bitcoin had a deflation rate of 96%. Which is insane any normal economy would turn Mad Max if it had that type of deflation. If I had received a loan for my house for 100k in 2010 I would have had to repay $1.5 BILLION in 2013. Then from 2013 to 2014 it had an inflation rate 353%. If inflation leads to bubbles and we all used bitcoin this inflation would led to the mother of all bubbles.
- oleganza 11y agoAccounting issues with wages are not as important when savings are possible. In today's ever-inflated economy many people have zero savings and a lot of debt. People live from pay cheque to pay cheque. But when savings are enabled by Bitcoin, then wage is merely an addition to the existing balance and its adjustment to the market prices is not so dramatic.
- maxerickson 11y agoInflation makes debt cheaper to hold. So a thesis that says that saving is easier if you make debt more expensive has some problems.
- oleganza 11y agoDebt does not create savings. Savings are created by putting the real money for later spending (not IOUs, but real collectible: land, commodities, bitcoin). Making debt cheaper via inflation is simply a form of taxation: money is being reallocated from savers to spenders without asking savers' opinion. While savings are made 100% voluntarily without extracting anything from anyone. Also: people need less debt if they have savings. And it's much safer to save your own money (when it's allowed) and have 100% control of your business/investment, than to borrow capital and be a slave.
- maxerickson 11y agoI guess I don't understand what step 2 would be here: 1. Bitcoin 2. ? 3. Savings
- oleganza 11y agoThere are two steps only and they are already happening since Jan 3rd 2009.
- JamesBarney 11y ago1) Large unexpected changes in the value of money wreak havoc on contracts but the economy can generally deal with equivalent levels of inflation better than deflation. A 2%-3% deflation per year is terrible for an economy and will result in greater than depression levels of unemployment but 2-3% inflation obviously doesn't have this effect. 2) Unexpected inflation actually benefits the poor because they tend to owe more debt, and own less fixed interest assets such as bonds. 3) Bond purchases and loans aren't zero sum investments. If we banned loans today the economy would not expand faster but would start to shrink very quickly. Contemplating banning loans from a demand side would be terrible for our economy because the velocity of money would shrink considerably and we would end up with incredibly painful deflation. 4) With mild long term deflation you run into demand problems and lack of investment. Deflation makes investments look less profitable then they are because hoarding money has great risk free returns, and the nominal future cash flows will be smaller because money will be more valuable. For instance if you buy a house for $100,000 and it returns $10,000 a year in rent. After 30 years of deflation it will only be returning $2,500. This means that many productive investments are not made because it makes more sense to hoard the money, leading to under investment and an underutilized economy. The only economy that in recent history has experiences predictable deflation is Japan, and it does not look like an economy we would want to emulate :P.
- natrius 11y agoThe fix for any deflationary concerns is to denominate prices and contracts in the price level, not a currency. If Bitcoin deflates and increases in value, Bitcoin-denominated prices and wages go down automatically. If you wanted to save for near-term spending, you'd purchase derivatives that reduce your exposure to Bitcoin swings relative to your price level, and since Bitcoin's value would increase at a relative predictable rate in a Bitcoin-saturated economy, competition in this derivative market would drive the issuer to pay the buyer some fraction of the expected increase in value. Instead of most of humanity having to suffer through losses of wealth because their currencies are small and volatile, everyone will have stable currency pegged to their local price level, and they'll be paid to hold it.
- danmaz74 11y agoEven if the supply of money was predictable, the growth of the economy wouldn't be. This also means that the deflation effect of something like Bitcoin wouldn't be predictable, as the need for money is very much linked to the value of what is exchanged (and thus to economic growth).