Bitcoin and positive vs. normative economics

So would another planet colliding into the earth, fortunately we're in danger of neither.

> 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.

No. Deflation is a part of bitcoin, not of crypto currencies in general. When deflation shows itself to be the problem it likely will be, we'll just switch to a better crypto currency that has predictable inflation built in; they exist already.

Historically (you should read http://www.amazon.com/Great-Wave-Revolutions-Rhythm-History-...) inflationary money systems have been the tools of those in power to quietly take from the poor and less powerful. Whether or not the current era of central banking was intended to be that way is a question for conspiracy theorists - but it's very clear that that is exactly what it has become. These inflationary systems were ALWAYS less stable than their preceding deflationary systems, and ALWAYS ended in revolution, or conquering, or plagues, or what not.

Even Keynes knew this to be true:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

This sounds backwards to me. If I think the value will increase, I'm not going to transfer them to you at today's price. So this will decrease the amount of transactions, making it less and less useful as a transfer mechanism. Which is exactly what people say is the problem with deflationary currencies.

It's very simple: Suppose you used Bitcoins only to facilitate transactions. You'd identify some good/service you want to purchase, buy the appropriate amount of Bitcoin on the open market. You then transfer them to the merchant who then sells the Bitcoin in his or her local currency. In order for that to work, the value of Bitcoin must be relatively stable over the timescale of the transaction. If ratio of Bitcoin to USD (for example) goes up a few percent over a period of ten minutes, then you're either giving the merchant a "tip" or he is giving you a discount. Either way, both you and he don't really know the cost of the good you are purchasing until sometime after the transaction.

More relevantly, if Bitcoin were to catch on, people would probably keep some assets in the form of Bitcoin so that they don't need to pay Bitcoint USD transaction fees on every purchase. People will not do that if the value of a Bitcoin often changes radically between paychecks. Frankly, I can't see Bitcoin being used by "normal" people until the value is relatively stable (say, in most months the Bitcoin-USD exchange rate varies by less than 10% over the course of most 30-day periods) for this very reason. Unfortunately, the 21 million coin limit will prevent this from ever happening.

There seem to be a large number of people who operate under the misapprehension that "Inflation Bad -> Deflation Good." Inflation is bad, but deflation can be just as destructive to an economy, and having the ability to conduct transactions in a femtoSatoshi does nothing to fix that.