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Bitcoin Deflation and Economic Activity

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Re: Bitcoin Deflation and Economic Activity

#41

Post by lukifer »

dragontamer wrote: post #32
lukifer wrote: post #7

Earlier quoted context omitted.

If the deflation ever becomes stable(ish), the increase of value can be accounted for in the price, as sellers will have a reason to prefer BTC and offer discounts (not to mention eliminating all those 2.9% credit card fees). We already buy all sorts of optional goods, even if those goods will depreciate compared to letting money sit in a bank account and accrue interest.

Bingo, we have a winner. What is important is NOT deflation vs inflation, but to keep that value _stable_. USD inflates at a rate of 3% year over year, so we can compare investment vehicles against the rate of inflation and see whether or not they are good deals. But since BTC is extremely volatile, its impossible to use it as a unit of value. Until it settles down and becomes predictable, it will become impossible t…

I think of it as owning shares of stock in a DAC (Distributed Autonomous Corporation). At some point, those shares of stock might become worthwhile as a day-to-day currency.

As is, though, I think it's already more stable than local currencies for some parts of the world (though perhaps still not more so than the dollar).

Re: Bitcoin Deflation and Economic Activity

#42

Post by jwallaceparker »

tokenizer wrote: post #30
jwallaceparker wrote: post #22

> why buy something today if it will be cheaper tomorrow? Because you want it today. The "fear of deflation" argument is now pervasive among monetary theorists. The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity. This ignores the time preference aspect of economic decision making. For example, I will buy my cup of coffee today rather than wait a day or week…

What's your opinion on inflation as an economic driver? I'm also a fan of deflation (as I want to save my money) but the Federal Reserve and other central banks (Japan being a notable example) are advocating for higher inflation, which begs another question: Are they right and both deflation and inflation can supply economic growth? If so, does that mean another factor is the main proponent for growth?

> What's your opinion on inflation as an economic driver?

My opinion is that inflation does not drive economic growth.

> Are they right and both deflation and inflation can supply economic growth?

Neither one supplies economic growth.

> does that mean another factor is the main proponent for growth?

Increased productive capacity is the source of economic growth. Not the supply of currency.

Take a simple example.

Three people live on an island after a plane crash.

They fish, build huts, make tools. To facilitate exchange, they use paper money from the game Monopoly happened to survive among the wreckage.

One day a new box of Monopoly washes ashore, including a fresh supply of Monopoly money.

Their money supply has doubled.

Will they experience any economic growth? Clearly not.

The next day a power saw and generator wash ashore. They have new tools and increased productive capacity.

Will they experience any economic growth? Clearly they will.

Re: Bitcoin Deflation and Economic Activity

#43

Post by jude- »

jswinghammer wrote: post #24
gahahaha wrote: post #12

Earlier quoted context omitted.

Currencies are stable (and losing 2% value per year) because governments actively manage the supply of money to keep it stable in the face of very volatile demand (caused by what Keynes called "animal spirits". Since demand will fluctuate Bitcoin will fluctuate wildly for the foreseeable future like the value of gold has done and is doing. Bitcoin will never be a stable, safe place to store wealth for that reason. It…

The government could keep currency stable by simply not permitting more to be created. Done. That's not the intention. The intention is to make sure the banks can loan out as much as they want when they want and then get bailed out when crashes occur.

Not true. If the amount of money in circulation was fixed, the fluctuating demand for it would cause its value (i.e. what goods/services it will purchase) will fluctuate with it.

Re: Bitcoin Deflation and Economic Activity

#45

Post by nardi »

brownbat wrote: post #6
marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

> In the long run, bitcoin will stabilize, Why would this be true? Gold and silver have been around a long time, but both are still relatively volatile. I mean, I hope you're right, I'm just curious where you think volatility ends up and why you think so.

Volatile by what measurement? Hopefully you don't mean volatile with regard to the exchange rate with fiat currencies. Because that says more about the currencies than it does about gold and silver.

Re: Bitcoin Deflation and Economic Activity

#46

Post by pyduan »

jwallaceparker wrote: post #22

> why buy something today if it will be cheaper tomorrow? Because you want it today. The "fear of deflation" argument is now pervasive among monetary theorists. The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity. This ignores the time preference aspect of economic decision making. For example, I will buy my cup of coffee today rather than wait a day or week…

Your argument only holds if your time discounting factor is greater than the rate of deflation. In the case of Bitcoin this is clearly not the case since prices can double overnight, unless you're arguing that you're so adverse to waiting that you'd rather purchase something today than tomorrow at half price.

Re: Bitcoin Deflation and Economic Activity

#47

Post by brownbat »

dragonwriter wrote: post #18
jquery wrote: post #16

Earlier quoted context omitted.

> Gold and silver have been around a long time, but both are still relatively volatile. Are gold and silver not less volatile than government-issued currencies, the long-term value of which has traditionally ended at $0?

> Are gold and silver not less volatile than government-issued currencies Which government issued currencies? Government issued currencies are not all alike. > the long-term value of which has traditionally ended at $0? Fiat currencies only end if the issuing entity ceases to exist or abandons them, and even so the market value of currency issued may not become zero, so the claim about ending value is suspect. More i…

>> the long-term value of which has traditionally ended at $0

> More importantly, though, volatility isn't even related to ending value

Yeah, come heat death of the universe, ending value of all currencies will look pretty similar.

Re: Bitcoin Deflation and Economic Activity

#48

Post by dragonwriter »

jwallaceparker wrote: post #22

> why buy something today if it will be cheaper tomorrow? Because you want it today. The "fear of deflation" argument is now pervasive among monetary theorists. The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity. This ignores the time preference aspect of economic decision making. For example, I will buy my cup of coffee today rather than wait a day or week…

> The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity.

No, it doesn't. It goes if people know that the future purchasing power of currency will increase, they will shift more investment to currency itself and invest less in things like real estate improvements, businesses, etc. -- and that investments in the latter have a multiplier effect and whereas money invested in the currency itself does not, such that, ceteris paribus, shifting to deflationary currency would reduce the overall level of economic activity.

It is not that people would direct defer economic activity, and even less that they would defer all such activity.

> We've seen periods of significant economic growth coupled with falling prices.

And we've seen periods of stunning economic collapse tied to deflation. But individual examples without considering other contributing factors and underlying processes and incentives aren't particularly useful.

Re: Bitcoin Deflation and Economic Activity

#49

Post by jwallaceparker »

wsxcde wrote: post #39
jwallaceparker wrote: post #22

> why buy something today if it will be cheaper tomorrow? Because you want it today. The "fear of deflation" argument is now pervasive among monetary theorists. The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity. This ignores the time preference aspect of economic decision making. For example, I will buy my cup of coffee today rather than wait a day or week…

You're missing the point. We all have to buy food today, but we have a choice on whether we use bitcoins or dollars to pay for it. If you believe that bitcoin will get more valuable with time, due to Bitcoin's deflationary design, it's always the rational choice to spend dollars rather than bitcoin.

I am well aware of "Gresham's law" that bad money drives out good.

I'm just referring to the idea of deflation in general and the fear mongering that happens around it.

I'm not talking about Bitcoin versus USD.

Re: Bitcoin Deflation and Economic Activity

#50

Post by narrator »

jwallaceparker wrote: post #22

> why buy something today if it will be cheaper tomorrow? Because you want it today. The "fear of deflation" argument is now pervasive among monetary theorists. The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity. This ignores the time preference aspect of economic decision making. For example, I will buy my cup of coffee today rather than wait a day or week…

F.A. Hayek thoroughly demolished the Keynesian anti-deflation argument in the 30s in his critique of "The Paradox of Savings"

http://mises.org/daily/2804

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