Comment by ryan_j_naughton | Hacker News Reader

Comment by ryan_j_naughton | Hacker News Reader

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ryan_j_naughton

>"People underestimate the amount of resources required to articulate monetary policy by a central bank. Bitcoin can already do that much better than maybe 70% of the worlds central banks."

Bitcoin only has totally clear monetary policy because it's increase of the money supply is entirely predetermined: It is created at an ever decreasing rate approaching a limit.

The result of this certainty in monetary policy is a currency that is naturally deflationary (literally by definition). This makes Bitcoin perfect as digital gold but shit as a functional unit of currency. You don't want to spend an asset that will naturally appreciate in value, discouraging using it.

You could have a cryptocurrency that generally trends at the same inflation rate as regular currencies: 2-3% annual and use that to pay the miners (or just give everyone a wealth endowment through giving any current owners a 1% increase in their current wallets and use the other 1-3% for the miners) and you would have a currency that could stay price stable with out Fiat currencies instead of always increasing in price like BTC has (at least over a sufficient moving average to reduce the volatility from speculation).

That's like saying the decreasing price of hard disk space discourages people from purchasing it.

Knowing that there will be better hard drives in the future for less money has some effect on your willingness to purchase. Expectations of the future matter. The US Treasury is getting considerably less revenue right now from capital gains than usual because tons of financial entities are holding off on realizing returns from their investments now and are holding them until possible tax reform in the hopes of paying future taxes and thus getting greater returns.

In your example, HDD space is purely a good to be consumed though and not a currency (or an investment beyond an actual capital investment because it does work for data storage). Thus, if you need to store data, you will buy storage simply because you need it then. But you can't sell that storage in the future for a positive return, so the incentive I'm talking about doesn't really exist in the example you used.

You can make a positive return in terms of hard disk space. Refrain from swapping USD for hard disk space, and you can get more hard disk space in the future. This applies to all sorts of goods, like TV's, music players, etc. The value of USD is increasing against these goods, yet people still make the trade of USD for goods. I suppose if we increase the inflation of USD such that the price of hard disk space increases in USD terms, then people will be more inclined to swap USD for hard disk space sooner, and it will be a boon for the hard disk industry. But is that real economic growth? It smells more like malinvestment to me. One could even make the argument deflation is good for the environment, people are only inclined to consume that which is necessary, and the structure of the economy's physical capital will be realigned to support that pattern of consumption instead.

If you believe that we should have UBI (and it seems like many here do), deflation is the exact opposite of it -- it slowly concentrates wealth with those who already have it, and all they have to do is hold the currency.

Whereas inflation at least basically forces the wealthy to invest in real assets or else slowly transfer the value of the cash towards debtors.

Currency isn't wealth - wealth is real estate, stock, furniture, computers. Deflation makes it easier for wage earner savers to increase their tangible wealth. The economic data matches this - economy was a lot more equal on the gold standard until 1971, and have become a lot less equal once a policy of inflation is implemented. Are we going to act on theories that match the data or does not match the data? With deflation, UBI income will increase in value over time, the deflation occurring from technological change accruing to UBI receivers.

> Currency isn't wealth - wealth is real estate, stock, furniture, computers. Deflation makes it easier for wage earner savers to increase their tangible wealth.

Yes, we agree on that. However, I think we need to also acknowledge that 1) a large proportion of wage earners have very few, or negative net assets, so deflation actually hurts them and 2) even though deflation helps savers, the biggest savers in the economy are actually the rich. Deflation helps savers, but the people with 80%+ of nominal assets are the already-wealthy.

In fact, the most common form of household wealth is a house, where you own a real asset and owe a nominal debt.

Under inflation, your house value grows at inflation while your debt remains constant, so this even benefits the saver. Under deflation the opposite happens.

> Are we going to act on theories that match the data or does not match the data?

You need more data. The developed world has been on the gold standard since the late 19th century through to the 1970s. During that time the US has seen:

- the Robber Baron age and the Long Depression (where the rich got much richer)

- the roaring 20s, when wealth was more distributed

- the subsequent crash and the Great Depression, where the entire world was in misery (but inequality was very high)

- WW2 and the post-war era, which saw large decreases in wealth inequality

Seems a bit silly to say that 'the gold standard was responsible for lowering wealth inequality', given the huge swings back and forth in inequality while we were on the gold standard over 100+ years.

Production can't easily saved in grain silos, so money must be used to buy it, or it should be lent to someone that will use that production productively. If no one needs to buy hard drives ATM, then the hard drive company goes under and there is no better next generation.

Money is a means of allocating production. If it is just stored under a mattress, it isn't being useful and production is being wasted. We capture the negative effects of that waste with inflation.

Deflationn is basically a death spiral for an economy, as everyone consumes only essentials because everything will be cheaper tomorrow; lots of production is wasted because it can't be saved easily for tomorrow, people are laid off, companies go out of business, it sucks. Wars have even been started over silver and gold's deflationary tendencies (e.g. See the opium wars).

Don't confuse inflation with hyperinflation, the latter of which just destroys trust in the currency and makes it useless to save at all, causing runs on all production and starving investment. A bit of inflation is all that is needed to put money's use into a positive state without flipping in the other direction.

"Knowing that there will be better hard drives in the future for less money has some effect on your willingness to purchase."

It'd probably be surprising to know how many businesses have been killed by intentionally or inadvertently releasing information about an upcoming product.

At a certain point, it does

Do you think people were queuing to buy the iPhone 7 once Apple announced the September event? No, because there's a new model and old models would become cheaper

Let's say you need to store an extra 1Tb per year, for the next 5 years. Do you think it's better to buy 5 1TB HDs now or one every year? (disregarding backups/raid/etc, this is an economics question, not a storage question)

The answer is obvious

I don't get why people are obsessed with inflation. It is not the only thing that is required to stimulate an economy. On the other hand for majority of developing nations, it is a sink hole that eats their earnings alive. You can still use a deflationary currency just like an inflationary one. Just use satoshis to track bitcoin increments. I'm sure if Zimbabwe was using bitcoin, they wouldn't have ended up in the shit hole they were a few years back.

Think about it: for every dollar you earn, the government can print its own one dollar to basically halve your earnings. Why would anyone want such a thing. With bitcoin, you don't need to invest in stocks/real estate and other inflation resistant things to beat inflation. You can hold your earnings in it and you are already beating inflation.

Significant inflation is obviously a bad thing. Zimbabwe or Venezuela prime examples. But being deflationary where the currency increases in value obviously causes a disincentive for spending that currency. You are encouraged to buy and hold it because it will be worth more in the future relative to the cost of goods, services, and other fist currencies.

Even just minor deflation is disastrous for economies because if there is 3% deflation, you could get 100% of what was generally typical GDP growth for developed countries without spending any money to produce anything. This encourages everyone to be risk averse towards spending money on anything at all.

Thus, monetary policy over the past century has settled on a steady but small amount of inflation as the ideal policy for balancing economic growth and unemployment.

Even just minor deflation is disastrous for economies because if there is 3% deflation, you could get 100% of what was generally typical GDP growth for developed countries without spending any money to produce anything. This encourages everyone to be risk averse towards spending money on anything at all.

What are some real world examples of this?

Japan's the classic one - they've been stuck in a deflationary trap since 1990:

https://en.wikipedia.org/wiki/Lost_Decade_(Japan)

The Great Depression in the U.S. as well.

There's a possible counterexample with the Long Depression in the U.S:

https://en.wikipedia.org/wiki/Long_Depression

Here, prices fell slowly: 1-2%/year, caused by sharply rising productivity. The period was also called the Gilded Age, and it was a mixed bag economically. On one hand, the structure of American society dramatically changed through massive technological advance, consumer goods became abundant, and businesses who adopted those techniques became fabulously wealthy. OTOH, many small farmers went bankrupt and were forced to sell off their land to service debts they couldn't pay with money that was now more valuable than when they took out the debt. Ditto lower-class laborers, who were squeezed into tenements with dozens of families living together as their wages remained stagnant for a generation but their employers became fabulously wealthy and bought up much of the prime real estate.

The Long Depression is largely forgotten today (unless you're an economic history geek), but it was a prime impetus for the monetarist school of thought. The whole idea that the government needs to continually print money to catch up with rising productivity and availability of goods is largely based on the experience of the U.S. in the Long Depression, when they didn't print money.

Also, there's a good amount of evidence that our current period of history resembles the Long Depression a lot more than either the Great Depression or 1970s stagflation, and will play out in similar ways. I'd personally put us around the mid-1890s in terms of historical parallels.

The late Roman republic also fell into a deflationary spiral, as the currency was repeatedly debased by successive governments desperate to fund the military.

This triggered massive hoarding of currency, despite harsh legal measures that tried to outlaw it. Everyone had an incentive to hoard the old, higher silver coins while shunning the new debased coins being issued [1]. 'Bad money drives out good' [2].

Eventually, the majority of the Roman economy became demonetized, and people had to resort to barter again. Welcome to the feudal ages.

[1] http://money.visualcapitalist.com/currency-and-the-collapse-...

[2] https://en.wikipedia.org/wiki/Gresham%27s_law

* Note that there is a confusion of terminology here -- things look inflationary if you are counting the number of coins it takes to buy something, but highly deflationary if you measure the amount of silver to buy the same item, as silver was sucked out of the economy and then hoarded.

From a certain perspective, both factors actually came together to destroy the late Roman monetary system -- the real 'store of value', silver, was removed from the system and hoarded because it was deflationary. And hyper-inflation in the fiat currency simultaneously made the coins totally worthless and therefore unsuitable for doing transactions.

> You are encouraged to buy and hold it because it will be worth more in the future relative to the cost of goods, services, and other fist currencies.

A currency being inflationary shouldn't really affect spending because lots of different investments already exist, so you can make money holding them instead of the dollar. The dollar being inflationary (or shouldn't, for rational actors) incentivizes trading it for something else, but not necessarily increase spending in unnecessary, depreciating, products.

> lots of different investments already exist, so you can make money holding them instead of the dollar

That's true, but someone has to end up holding the nominal assets.

Like yes, a saver can trade all their fiat currency for real assets by buying a house or stocks, but then the person who sold them those stocks would get hit by inflation. At the end of the day, if the 'real assets' in the economy are worth say $10 trillion and there is $1 trillion of currency in circulation, then whoever is holding those dollars will pay for the inflation.

Btw, the most common nominally-denominated asset is debt. Savers who hold debt (Treasuries, mortgages, etc.) get hit the most by inflation.

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