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Bitcoin Deflation and Economic Activity

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Re: Bitcoin Deflation and Economic Activity

#51

Post by nardi »

john_b wrote: post #37
zcarter wrote: post #10

The 'depreciating currency is a problem' argument is true for the existence of any asset having a higher yield than your widget factory. Why wouldn't you invest in that high yield asset instead of your widget factory? In this way, you can view _any_ appreciating asset as a reference unit of account. It is just as easy to see your egg and milk purchases as units of the high yield asset and delay your purchases for the…

The critical difference is that Bitcoin is intended to be a currency and not an asset . People use assets to store (and hopefully appreciate) value over time. People use currencies to conduct business and as mediums of exchange. If you think of or use Bitcoin as an asset, you immediately nullify any comparisons with currencies because the two serve different purposes. You could, in principle, buy a house with, say, 1…

How you "think of or use" things has no meaning. Everything that is traded, whether "currency" or "asset" has a value that changes over time. Or do you not know that people invest in currencies?

Re: Bitcoin Deflation and Economic Activity

#52

Post by jwallaceparker »

atmosx wrote: post #28
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 analogy is flawed and completely unrealistic. BitCoin's fluctuations are insane, we're talking about ~ 15 times compared to last year. Would you seriously use a bitcoin to buy a cup of coffee today ?

I don't use Bitcoin at all.

I'm just talking about the general idea of inflation.

I'm not arguing the merits of Bitcoin.

Re: Bitcoin Deflation and Economic Activity

#53

Post by [deleted] »

InclinedPlane wrote: post #20
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…

There's no such thing as free money. It's gotta come from somewhere, and it has to impose a cost somewhere. Inflation in other currencies has a moderate, and mostly beneficial, cost. It encourages people to invest their money instead of just saving it, which leads to enhanced economic activity. Deflation in bitcoin only has value to the people "saving" their bitcoins, which sets up perverse incentives in regards to u…

[deleted]

Re: Bitcoin Deflation and Economic Activity

#54

Post by dragonwriter »

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.

> The government could keep currency stable by simply not permitting more to be created.

That would keep one measure of money supply stable. It wouldn't keep the value of the dollar stable, though.

Re: Bitcoin Deflation and Economic Activity

#55

Post by jwallaceparker »

pyduan wrote: post #46
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.

I'm just talking about deflation in general. Bitcoin is a new phenomenon but the 'fear of deflation' argument has been used by monetarists for decades.

Bitcoin is hardly viable as a unit of account at this point. It's a speculative investment at the moment.

Re: Bitcoin Deflation and Economic Activity

#56

Post by mpg33 »

This is trying fit a deflationary currency into a debt/consumption driven economy. Who says the best way to drive the economy is by taking on debt to consume good and services? I would argue that debt counteracts a lot of the gains set by consumption.

The falling wages argument seems irrelevant...what's the difference between wages increasing 2% to keep up with 2% inflation and decreasing wages 2% to keep up with 2% deflation. Don't confuse numbers with value.

I would argue however that the RATE of deflation is important. 90% is brutal...2% not so bad. Theoretically the rate of deflation of bitcoin's should decrease as time goes on.

Re: Bitcoin Deflation and Economic Activity

#58

Post by wsxcde »

jwallaceparker wrote: post #49
wsxcde wrote: post #39

Earlier quoted context omitted.

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.

Well then maybe you should point that out in your initial comment.

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

You'll have to do a little better to support your claim that deflation can result in economic growth. One data point from a rather unique point in history isn't enough.

Re: Bitcoin Deflation and Economic Activity

#59

Post by dragontamer »

lukifer wrote: post #41
dragontamer wrote: post #32

Earlier quoted context omitted.

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).

It isn't a stock however, and never will be. The reason why people invest in companies is to make more money. Companies may not offer dividends today, but eventually they will. (IE: Even Apple, once allergic to the idea of dividends, offers a regular one to its investors). Any company that churns a profit will eventually share those profits with its investors.

"Owning" BTCs is not about churning profits eventually, its 100% about speculating about its future value. Building BTC Mining equipment is where the real "value" of owning BTCs is in, since that puts you in control over a number of BTC transactions.

The BTCs themselves can NOT be compared to stocks. Stocks mean you actually own the company, you eventually partake in that company's profits... and even partake in choosing the board of directors. (who then in turn... choose the CEO).

A BTC on the other hand, is like speculating on Oil, Gold, or Timber. Its a commodity, not a "share".

Re: Bitcoin Deflation and Economic Activity

#60

Post by knowitall »

I think the "deflation can't work" people are making the same mistake as the "interest can't work because one penny will eventually be worth as much as the weight of the earth in gold" crowd ("Joseph's Pfenning"). They interpolate incorrectly.

In the case of interest, some borrowers go bankrupt (which is fine, because the world needs risk taking). In the case of deflation, presumably at some point people will want to buy things. They can not hold on spending forever because they might starve.

In any case it seems obvious that the price of one Bitcoin can not go to infinity, because there is nothing of value "infinity" on earth. From that it follows that the deflationary dread scenario has to come to an end at some point, just like Joseph's penny can not accumulate interest long enough to be worth the earth in gold because all his lenders will go bankrupt before that.

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