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Comment by lxgr | Hacker News Reader

The price is completely irrelevant, what matters is the perceived/expected rate of change in prices.

A deflationary currency disincentivizes spending, which reduces velocity, which aggravates deflation – a death sentence for two of the three properties of money (it's not a medium of exchange if nobody is exchanging it; it's not a unit of accounting if prices fluctuate strongly – and that includes falling prices).

I was also fascinated by Bitcoin in its very early days, from both a technical and an economical/monetary angle – the former fascination remains, but I'm pretty disillusioned on the latter after learning more about the nature of money and inflation (and especially how Bitcoin maximalists use a fringe economical model and definition of inflation to justify the design).

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It has been a nice experiment to prove our intuition about deflationary currency and hording correct.

The other interesting aspect is in terms of Robert Shiller's narrative economics. What is most interesting to me is that the narrative economics and contagion were able to morph the currency narrative into something else so that the hording became a feature and not a bug in the narrative.

It is interesting how people can call BTC digital gold but disregard the downsides of gold at the same time in the exact same way deflation/velocity was ignored in the currency narrative. Gold was the "new" anti-central banking currency in the 70s that had its crescendo because of narratives and central bank policy at around a $3,200 all time high inflation adjusted price that we can't touch even 40+ years later. At the same time macro conditions were set up to take out that all time high price but BTC itself grabbed so much of that flow from gold.

Following the narrative dispersion that the all time inflation adjusted high for BTC is already in will be fun for years to come.

It's been so volatile, with the prices dependent entirely on hype regarding adoption, so there is certainly no conclusion at all to be made about deflationary currency - the impact of inflation on prices is essentially negligible compared to other factors. It also remains to be seen if the hype cycles will continue, because it hasn't been long since the last one.

Adoption as a payment method has likewise been dominated by regulation and expectation about hype cycles affecting the price.

I can't see why any of that would be different if the narrative differed to not include deflation. As long as it's new tech and a new unit of value to distribute, this is what you get

Yeah, this was a similar kind of journey that I went on - heard about Bitcoin, was fascinated, started learning about money (started with things like the 'money multiplier', 'fractional reserve banking' etc., realised they didn't actually follow accounting rules and aren't how real banks work, eventually found the answers of how it works with stock-flow consistent accounting, endogenous money in banking, sectoral balances etc. - Monetary Economics by Godly and Lavoie is a good resource - I think a PDF is available if you look for it) and realised Bitcoin couldn't really work as actual money. It's still a very interesting thing from a theoretical point of view, but it's a shame the grifter culture that's grown up around it, and the huge amount of energy being used to run the system...

Deflation has a bad rap because its insidious form is caused by economic contraction. But other causes of deflation are neutral / positive and there isn't anything inherently wrong with it.

Go look up how much a 400 MHz processor (e.g. Pentium II) cost in 1997 vs. today. Processors get cheaper all the time, but it doesn't seem to harm demand.

Both (too much) inflation and deflation are ultimately very bad for money:

Too much inflation ruins the "store of value" aspect; deflation disincentivizes trading it for goods and services, cutting into the "medium of exchange" aspect. Any drastic change of value/purchasing power, i.e. both inflation and deflation, make it useless as a unit of account.

> Processors get cheaper all the time, but it doesn't seem to harm demand.

Processors aren't purported to be money, though.

Deflation really only has a bad name because the definition of inflation was effectively changes in the 80s.

We used to consider inflation to be the expansion of the money supply, deflation being the opposite. For whatever reason the word inflation was repurposed to describe and increase in *prices*. That metric is effectively useless though as prices are just a side effect of multiple factors including the total money supply, supply and demand of a particular good, technological innovations, etc.

Deflation as we see it today was actually a common thing historically. Prices for a good decrease in time as we become more efficient at producing it and as demand decreases when something better comes out.

> Deflation really only has a bad name because the definition of inflation was effectively changes in the 80s.

I wasn't alive at the time, but the modern definition makes a lot of sense to me: Monetary base is one of several factors impacting inflation, so conflating inflation and (an increase of) the monetary base seems quite confusing.

> Prices for a good decrease in time as we become more efficient at producing it and as demand decreases when something better comes out.

It's totally fine if some prices go down, but the more useful notion here is that of purchasing power.

When people expect the purchasing power of a currency to increase meaningfully, they start deferring purchases and investments (since most/all goods and services are expected to be cheaper tomorrow than they are today), which can cause inefficiencies just like inflation can.

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