Deflation and Bitcoin, the last word.
forum.bitcoin.org
forum.bitcoin.org
There is a key aspect of knowing something in terms of a rigorous scientific understanding that is forgotten so often in conversations about it that it just drives me insane. In any experiment with a control, all your other variables have to be fixed...
... or you don't know shit.
Now apply this to the bitcoin debate. Let's take it for granted that deflation in a debt, fiat, gold based currency system is a bad... bad thing. We're going to grant it for the sake of argument.
Well - you still don't know crapola about whether or not deflation in a bitcoin based currency system is bad. For there are key differences in each case. Once you move from any of these to bitcoin, certain variables flip.
In a debt based currency system, deflation amounts to the actual destruction of available cash in the system. That's the chief reason why deflation is so bad for our economies. If you get to the point where we're at now where the system can't soak up any more debt, then your deflation becomes a real problem since you no longer have any means to create the inflation you need to stimulate growth.
But deflation in bitcoin does NOT entail cash destruction. For that is fixed by the algo. So here is a key difference. And it's just one of many I could mention for this case.
In a fiat based currency system - where a government prints the money (as opposed to having a central bank buy government debt) - any deflation can be offset easily because printing more money is not limited to debt saturation. Bitcoin is just not comparable to this kind of system for this reason. We need to compare it to systems where deflation is a real possibility.
Maybe it's closest to a gold backed system? Maybe. But there are flipped variables here too. Gold is not infinitely divisible. It can't be exchanged with any degree of ease like bitcoin can... etc...
Now of course, a little bit of a priori speculation is all well and good, and a necessary part of hypothesis formulation. But for heaven's sake stop getting into these discussions under the pretext of actually knowing anything.
The article is essentially right. We don't know. Run the experiment... wait and see.
Oh but of course, we have governments that will shut it down before the experiment has had a chance to yield results...
The author is only partially correct. The debate isn't whether inflation/deflation is good or bad. They are both, depending on where you sit. In some situations inflation is good (when you have a fixed interest rate and a pile of debt to pay off) and some times it's bad (when you have a pile of cash sitting in an account). It's the same for deflation.
I think the argument from Quora was that if you're trying to make Bitcoin a universal currency, you'll have a tough time obtaining "reach" when everyone knows there will be deflation. In other words, you know the currency you own will be able to buy more goods in the future (as it becomes relatively more scarce). So, you don't spend it.
Of course, it looks like the post explains that they just don't care. It's a technological experiment. And that's also fine.
The best way to allay fears is to issue a royal edict. I mean, surely it's not a problem if the king commands it not to be?
Central banks are independent for this very reason: GHW Bush wanted to turn on the printing presses and inflate the economy's way out of the recession, while the Fed wanted to preserve the value of the dollar.
I don't think anyone's going to claim that the system is anywhere near perfect, especially given the events of the last few years, but I have no idea how anyone can run through some simple thought experiments and not come to the conclusion that a finite currency pool is lunacy.
"Normal" people like going into their year-end review at work and getting that 2% cost of living increase. Or maybe they'll bitch that they didn't get it. Or they might even picket and protest if their union hasn't gotten this bonus in a few years. But they will absolutely not accept a situation where ever year their salary has to float around because it's tied to a fixed money supply that they don't understand.
Could you imagine this? "Hey great job this year, but the economy is really taking off, so we need to cut your salary a bit to make up for that! Trust us, you come out ahead because the cost of goods has gone down and you can buy more with less."
Gentle inflation means gentle rising salaries, spending money, and happy people. ANY deflation means decreasing salaries, hoarding money, and people freaking out.
(Ignore for the moment that, though the dollar did decline in value from 2002 to 2008, it's actually not clear what it's currently doing; it may be experiencing deflation itself.)
The irritating and incorrect thing about this anger is that nobody's forced to hold the currency that they're upset at. Even for "fiat currency" that needs to be used to pay taxes or offset debts, nothing requires that it be held long-term and thus subject any individual to inflation. Choosing to experience inflation in a government's currency is thus, in all modern governments, an investment choice like any other investment choice. Many people hedge against inflation, and it's very easy for any even moderately aware investor to do this. The argument that Bitcoin's needed even partly because people have no way to avoid the oppressive inflation of a corrupt regime is, basically, economic, financial, and political nonsense.
Inflation in and of itself is not harmful. Unexpected inflation and lack of accounting for it can be.