Hacker News Reader

Comment by lolcraft | Hacker News Reader

Some people here seem to think that this is temporary, that sometime in the future Bitcoin will stabilize into a glorious future global currency -- never mind the new class of cryptobarons it will have created from its inner circle, through shameless hoarding.

My question is, what then will happen when Bitcoin stabilizes, that is, when the time to new coin mined approaches practically infinity? Let's assume the global economy grows at 4% per year. Do Bitcoin's proponents believe a constant 4% deflation rate will be somehow compatible with capitalism? Why lend, why build new companies, when simply storing it is more than enough? Take shocks such as bubbles and demand-side crises. Could a economy based on Bitcoin survive them, and not crash inevitably into a deflationary spiral? I claim it won't.

The party line usually argues for the evils of inflation. What they don't understand, I think, is that capitalism, in its revolutionary (in the sense of production) facet, needs inflation, feeds from it. Inflation might screw lenders, and favor debtors, sure. But deflation is just the inverse: a gift for the leecherous rentier class, and a massive "fuck you" to entrepreneurs.

View on HN

There are a few replies here that seem to be reacting negatively to the OP due to the tone of the submission instead of the content. To be clear, deflation is categorically bad for a currency. It's terrible, like great depression terrible. The reason it's bad is that deflation makes it more profitable to do nothing than to invest. When this happens, people react by not spending money. The market dies. While inflation can be bad, it's at least manageable. In fact, some inflation is actually heathly as it encourages investing.

If that doesn't make sense, think of it like this. Inflation is similar to nuclear fusion and deflation is like nuclear fission. When the former goes critical, you can just shut off the spigots and things more or less fix themselves(albeit with some collateral damage) without the whole system crashing. However, with the latter, there may be no fixing without dismantling everything and starting over.

> The reason it's bad is that deflation makes it more profitable to do nothing than to invest.

This makes no sense to me. If keeping 100 units makes one richer because they are worth more in a year, then any investment which has a positive return (that is, you end up with more than 100 units in a year) must be that much better... What am I missing?

I don't see why any investment would necessarily need to be much better. For one thing, investment is risky, while hoarding money is not.

On a macro scale, hoarding money stops the economy, as people no longer produce and consume.

If you thing sitting in an empty room counting bit coins is better than buying caviar or plane travel or curing malaria or whatever, then hoarding is good.

Risk.

Those investments may not exist. Investments can yield a positive return only if somebody else spends money. But what if every potential customer also sits on their money to exploit the deflation instead of spending any?

Deflation increases the value of holding cash. By definition deflation occurs when the price of a basket of goods decreases. Why invest your money in a basket of goods today when it is going to be cheaper to buy that same basket tomorrow?

Nope, by definition deflation occurs when the authority controlling the money supply (eg the Fed) contracts said money supply.

Prices going down is merely a symptom of deflation, but it is not deflation.

Only the Austrians use that definition and they're not a serious school of economics.

"Austrians" are quite serious. Few people take them seriously.

And python is not a serious language. Java is.

Why is this definition good? I mean, why should I or anyone care about changes in the money supply, except in how they affect prices?

It separates (theoretically, as it can't be measured) the price change due to faith-in-currency from price change due to market forces on the products.

That is, the price of good may fluctuate as function of how much current labor you need to buy it, or as a function of how much of your past savings it will cost. The diference between those measurements is due to money supply (in part, for there are other complicating factors)

Why buy a smartphone when next year's smartphone will be better in every way?

Deflation would refer to the value of the same good. Obviously new smartphones are pitched as "new, improved" goods, and marketing sways consumers to get the latest and greatest.

Not so for staples.

Well, you buy staples now because you need them now to survive.

I'm actually more of a paperclip person myself. I haven't stapled anything in years, and I've survived just fine.

Because today (and every day between now and next year) you can use that smartphone to do things that you can't do without a smartphone. So yes, the smartphone has lost money value, but you as a person and in your life, have gained.

Not so with bitcoin.

Unless, you know, you actually want bitcoin. Maybe you want to buy something now with bitcoin (especially something that's more difficult to buy with government currency, like online gambling or illegal drugs), or maybe you just think bitcoin is cool.

Because you want to use your smartphone. Smartphones are a horrible investment and you really shouldn't buy one if you're planning on storing it in the basement in its original packaging.

In 30-200 years, they'll probably be a great investment. How many original iPhones will be left? It'll be a priceless piece of history.

Because next year's smartphone will be too large to fit in your pocket, and will make you look like this:

http://www.mp4nation.net/blog/wp-content/uploads/2011/03/Ano...

Eventually, those suppliers of unwanted goods will stop supplying, and prices will start to rise as demand drops, reversing the deflation.

Why should prices rise when demand drops? Decreased demand yields lower prices.

Let's pretend the deflation is at 3% (i.e. there's a inflation rate of -3%). Then your 100 units will be worth 103 units (in today's money) in 1 years time. This is a guaranteed rate of deflation (bitcoin has a guaranteed rate of deflation, I don't know if it's 3%)

So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it.

So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone. So that's only a 2.5% interest rate. Again, why loan it out if you can get a guaranteed 3% by doing nothing?

etc.

Assuming they pay you back in the same currency, they're actually paying you 2% on top of the 3%, giving you a 5% return.

Today, with dollars, you can get a risk-free return by investing in T-bills. Riskier investments pay a higher return in exchange for higher risk. The risk-free return from holding a deflationary currency plays essentially the same role as the risk-free return in T-bills.

> bitcoin has a guaranteed rate of deflation.

This is not true. There is no guaranteed rate of deflation.

The rate at which you can 'mine' bitcoin is limited and there is a hard limit to the total amount of bitcoin that can be mined.

Assuming the economy grows, a fixed amount of currency causes deflation.

>So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone.

I know it's just an example, but no-one should ever lend at 5% if there's a 50% chance of losing the total sum, regardless of the currency involved and whether it's deflationary or inflationary. The EV of such a loan is -$47.50 for a one-year term.

>So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it.

Because if you don't lend, you keep your $100. If you lend, you get back $103. $103 will always be worth more than $100, regardless of whether your currency is inflationary or deflationary.

Because the money supply of BTC is fixed, BTC are effectively proxies for the value of the entire economy that they're a part of. When the economy grows by 5%, so does the value of your BTC. It's at the absolute optimimum point of the risk/reward curve: you could hypothetically invest in a way that performs better than the average, but when factoring in the risk, your expected value is slightly worse than if you'd simply held on to your money.

With USD, you know the value of your currency will drop due to inflation. In order to keep up with inflation, you have to put your money in an investment vehicle that stands in as a proxy for the overall economy. Hypothetically, you could buy a perfectly proportional amount of every single listed stock, every bond, piece of real estate, and so on (this is what index funds attempt to approximate).

In the latter example, you also have managed to convert your currency into an ideal proxy for the entire economy. Any attempt to pick winners or losers will, statistically, give you slightly worse results on average than had you simply tracked the market as a whole.

Both examples are similar, except in the latter example, you've actually put your money back into the economy: a company issued the stock in order to raise the capital to expand and grow. In the former, your money is essentially removed from the overall money supply. It is available to no-one, and causes further deflation. The more money you hoard, the less money available for financial transactions. The less money available for transactions, the more valuable each unit of currency becomes.

So Keynesian economics forces everyone to invest in order to avoid the inflation tax while Austrian economics encourages saving allowing savers to reap the benefits of deflation. Both serve as proxies for the economy, so tell me again the downside of saving and prices going down over time?

Money you are saving that isn't being used for monetary exchange is effectively dead weight in an economy. Due to modern inflation rates, nobody really "saves" in any modern economy by just hoarding fiat currency - and because of this, the vast majority of the monetary supply is being used for exchange and commerce, and you get peak utility of the currency that way.

If you sit on money you get from the economy, you are taking it out of the exchange system as long as you don't spend it, which slows exchange.

That money sits... forever? Prices don't respond to money being removed?

Savings would still be invested with a fixed money supply, because investment provides a return whether nominal prices are falling or rising.

Sound investments will account for either inflationary or deflationary trends, just as they do now.

Savings would be invested significantly less with a fixed money supply, because every possible alternative investment is statistically guaranteed to have a lower expected value than simply holding onto your money. Obviously, there are still going to be people who attempt to beat the market. But it will happen significantly less often since the "default" of holding onto your money is both the safest possible investment and the most optimal.

This is clearly the case when nominal prices are falling. But when prices are rising, the reason they are rising is a contraction of the economy… and again, your money is still best left alone. Because while your investments might pay off when the economy rebounds, you'd still be statistically better off with your money sitting under the digital equivalent of your mattress; when the economy rebounds, prices will fall again, and your untouched money will be worth more in direct proportion to how much the economy has rebounded.

It increases the return on investment needed for a project to succeed. Simple example: I grab the 100btc and buy machinery to support my new factory. Right after buying, I'm losing money, because machinery won't appreciate like BTC does. So, I'm only interested I machinery investments that return over the BTC deflation rate.

This is a simple example. Some of this already occurs in the real world, since machinery depreciates over time. it's just that currency deflation is another force opposing investment and braking money flow.

This is part of the issue. The other part is that no one has any incentive to spend money, which can cause a recession. You can either 100 units of something today, or buy 110 units of it tomorrow. This gives you a very strong incentive to wait and not spend money. This means that no one buys anything, so no one needs to make or manufacture anything. People lose their jobs, so they don't have money, so they can't buy things... and so on.

Of course, inflation can be very bad, too.

I can buy a 2014 Cadillac or iPhone 5 next year for 30% less than I can this year. People seem to be buying these things.

In a deflationary environment, people buy less stuff they don't need today, which leads to a higher quality of economic growth.

What do you mean "higher quality"? Almost everything everyone buys is something they don't need. I would guess that almost everyone using Hacker News produces things people don't need. No one needs Google or Amazon or whatever your favorite tech company is.... The economy is built on things people don't need.

The problem is that if I won't buy it for $100 today because I can buy it for $50 tomorrow, I won't buy it for $50 tomorrow because I can buy it for $25 the next day, so you NEVER buy an iPhone

I just have a hard time believing deflation leads to perfect demand inelasticity at $0.

Because it is completely unrealistic and total rubbish. That's why you have a hard time believing it.

Of course, all those who insist that inflation is a superior state can't explain the economic effects of everyone deciding to purchase today before the prices go up, leading to much weaker demand and production in the future.

Bringing forward spending excessively is just as problematic as send it backward into the future.

Except I do buy an iPhone. Because I want one. Today.

Technology always gets cheaper rapidly. Lots of people seem to buy it.

A 4% annual deflation rate would stop unhealthy debt expansion, which only stimulates short term growth and long term pain.

Higher quality growth comes when real economic value is created through transactions rather than speculation or inefficient investment.

>You can either 100 units of something today, or buy 110 units of it tomorrow.

People make this kind of tradeoff all the time. I can either purchase a product for $100 from Best Buy, or, I can wait for two days and get the same product for $80 from amazon (or $83.99 and get it the next day).

There are times when I choose to be prudent and save the extra cash and wait 48 hours until the amazon package shows up. Other times, I would prefer the product sooner, rather than later and spend more money for the item.

Which is why everyone in Washington was freaking out and throwing cash out the window in 2009. Crony capitalism aside, they were terrified of deflation(and rightly so).

They weren't throwing nearly enough cash out the window to make up for everyone suddenly wanting to hold more money. NGDP still crashed. Inflation dropped. The spread on inflation-indexed Treasury bonds warned that monetary policy was far too tight and the market knew it and was signalling this well in advance. Low interest rates do not mean loose money... oh, never mind, everyone just needs to go read The Money Illusion.

> no one has any incentive to spend money

> This means that no one buys anything

Think about technology. Every day, the cost of a new computer drops by $0.27 on average, let us say, or about $100 per year. Last year's models have a $100 discount, three-year-old machines have a $300 discount, five-year-old or older machines are bargain basement or even negative value (you have to pay someone to haul them away for recycling).

Every day, your money increases relative to the value of computers. Every day, when you wake up, you face an economic choice: You could buy that new machine today, and have it today, or you could buy it tomorrow, and have the new machine and $0.27 left in your pocket.

By your logic, everyone would always choose to postpone buying a computer.

Yet people buy new computers all the time, and have for several decades. How can you explain that? It's a real deflationary market that doesn't have this problem.

> The reason it's bad is that deflation makes it more profitable to do nothing than to invest. When this happens, people react by not spending money. The market dies.

If this is holds true, why do people buy from markets where prices regularly decrease? Wouldn't it follow that they will wait in perpetuity and never buy that new phone/laptop/etc?

> Wouldn't it follow that they will wait in perpetuity and never buy that new phone/laptop/etc?

People derive utility from those things. They make calls with their phone and do work on their laptop.

Bitcoin is entirely different. It's only purpose is to allow you to buy other stuff.

> It's only purpose is to allow you to buy other stuff.

There is certainly utility in being able to buy stuff that cannot easily be bought with traditional (government) currencies. Namely, things that are illegal in various countries, like drugs or gambling.

You're saying that drugs cannot easily be bought with government-issued cash? It's totally the other way around: drugs are easily and frequently bought using cash, and vanishingly rarely bought with bitcoins.

I would consider the Silk Road to be fairly large. Obviously, it's tiny relative to the entire USD drug market, but bitcoin is also tiny relative to USD. But the point is, you simply cannot deny that there is actual demand for bitcoins caused by the fact that the Silk Road only uses bitcoin.

That's the "use it to buy things" which isn't utility. The laptop I'm typing on will not be worth more later. Ever. This very second is as much as it'll be worth, which is perhaps half of what I bought it for a year and a half ago. But I bought it, because I need a laptop. I fully expect it to be continually worth less, just like the couch I'm sitting on, the watch I'm wearing, the table I keep the laptop on, etc. But I put up with that because I'm using them. Bitcoins are useful for these things, but that's not utility - you don't buy a bitcoin and (supposing they dropped heavily in value year after year) shrugged and said "Oh well, I need this bitcoin for this so I'm keeping it even if I get very little in return for it in five years when I craigslist it as '1 used bitcoin, still in pretty good shape'".

In the example of buying a laptop, the laptop is not the deflationary thing. The deflationary thing is the one that increases in value, not decreases. Dollars (or whatever) are the deflationary thing in that example. They increase in value compared to the laptop (you get more laptop for the same number of dollars).

Therefore when you compare Bitcoins to the laptop, you're comparing the wrong things. The argument is:

"People will not spend deflationary currency [Bitcoin] on stuff [anything] because it's better to simply keep the deflationary currency [Bitcoin]"

the reply is:

"People do spend deflationary currency [Dollars] on stuff [laptops] even though it would be better to simply keep the deflationary currency [Dollars]"

Dollars are deflationary relative to laptops.

That is one theory, and is the prevailing one. It is not necessarily correct.

Regardless, it is certainly a consumer's right to store their assets in something that is not inflationary, as most do. Is the population holding empty real estate or gold instead of currency really that much better for the economy? No.

Smart money will simply shift out of cash in an inflationary environment, and the value will not necessarily be productively invested.

An opposing viewpoint more thoroughly articulated:

http://mises.org/daily/4618

"Is the population holding empty real estate or gold instead of currency really that much better for the economy? No."

A population holding productive factories, tools, and land is a whole lot better for the economy than people hoarding gold.

And a population withholding investment capital when those (actually very heterogeneous) tools when they're for unsustainable business plans is better than one in which people have to invest in some business plan to preserve what they have.

It's really not as simple as "investment = good". It's good when it's for stuff that produces value. It's not good when it's invested for the sake of investing and ends up in the stocks of corrupt corporations and shady ventures.

Gold is a piss poor investment.

Owning Real Estate (and making money off of it) entails taking care of it. People taking care of their land (so that it can appreciate in value) is a good thing. The typical Real Estate "investor" adds a ton of value to their home, not just through maintenance, but also additions (ie: a new deck).

This maintenance is true value added to the economy. True value that wouldn't have been added if the investor just left his cash in something else.

No one wants to buy a 30-year old home that had no maintenance on it. Unless you're a fan of buying homes with leaky roofs and a flooded basement...

> Gold is a piss poor investment.

Relative to what? The USD?

http://pricedingold.com/us-dollar/

Real estate?

http://pragcap.com/real-estate-gold-ratio-falls-to-30-year-l...

Gold is an asset that holds its purchasing power pretty well. It is what it is. It is not however a "piss poor" investment.

USD is a worse investment, and it seems like Real Estate is not much better than Gold :-p

Stocks as investment:

http://www.macrotrends.org/1378/dow-to-gold-ratio-100-year-h...

And of course, ycombinator. You know... the angel fund / venture capitalist firm that runs this website? We're all here because of investors investing into technology. They do so because they believe they can ultimately make money with technology investments. At least, more so than Gold, Real Estate, or even Stocks.

Indeed. And a 4% deflation rate would not seem to deflate their appetite for 100x gains.

we dont know why they are investing, or maybe you do. i wpyldnt be aurprised if they did invest in gold real estate and stocks simply for diversification

You know, comparing a commodity against a currency isn't very sensible. I don't know many (sensible) people who say "I'm just going to keep a load of dollar bills under my bed" when it comes to investing (which is what your first link compares to gold).

There is really little difference between a commodity and a currency other than how the supply is constrained. It is perfectly sensible to compare them.

The price of gold is so ridiculously inflated right now that it's insane to invest in it. For people back in 2000, it was a great idea, but now the price is high. The most basic rule of investing is buy low, sell high. It sounds like a stupid catch phrase, but even people like Warren Buffet have said that it's true.

You might be able to make a little bit of money, but unless the global economy collapses entirely, I doubt we'll see another major increase. Gold actually has gone down in value before, so it could easily happen again again.

I just noticed something: your links are "lying with statistics". Everyone knows that if you want to "prove" that Gold is a good investment, just start your graphs at 1970s.

After all, Gold reached a glorious bubble of inflation-adjusted $2200+ / ounce in 1970s, and has fallen since then. (yes, even with today's inflated prices, Gold is no where near its inflation-adjusted high).

Lets take a more reasonable graph of Gold, ehh? Something longer term... and see what happens to your trend.

http://www.macrotrends.org/1437/gold-to-s-p-500-ratio

Gold's trend is downward compared to the majority of the market. Each valley is lower, and each peak is lower than the last (with exception of stagflation period in the 70s)

I am saying gold is better than commodities. I'm saying gold is not a "piss poor" investment, as it holds its buying power quite well. That is the function of a conservative investment.

The S&P 500 (which you can easily buy with Vanguard Mutual Funds or SPY ETFs) has approximately the same volatility index as Gold right now.

http://finance.yahoo.com/q?s=^VIX http://finance.yahoo.com/q?s=^GVZ

VIX for the S&P 500 is 13.58, while Gold VIX is 13.13. Stocks are both holding their buying power as well as Gold, and still offering better returns right now.

Gold's "stability" is a myth. It is no more stable than any other investment. Bonds offer a conservative, stable investment platform. Gold does not.

Gold is a commodity.

Why would you compare gold to one mediocre and one bad investment? It seems that few people here understand opportunity costs.

> Gold is a piss poor investment.

Do you know something that the Chinese, Germans and Russians don't ?

"Central Banks Bought Most Gold in Nearly 50 Years"

http://www.cnbc.com/id/100458951

"The Russian central bank will continue to buy gold as it seeks to diversify its foreign reserves away from paper assets it views as risky"

http://www.reuters.com/article/2013/01/24/russia-cbank-idUSL...

"The startling news that Germany is repatriating its gold reserves from the United States and France has got precious metals speculators worried that this is the first major sign that trust between central banks across the globe could be deteriorating."

http://www.forbes.com/sites/robertlenzner/2013/01/19/the-ger...

"How Much Gold Does China Really Have?... China is the world’s leading gold producer and also the world’s leading gold importer. And surprisingly their official gold holdings haven’t risen an ounce in over three years."

http://www.moneymorning.com.au/20130211/how-much-gold-does-c...

Did you read your articles?

Germans are bringing gold back into their own country, as opposed to holding it in other exchanges. They have neither increased nor decreased their supply.

China and India are world-class consumers of gold for jewelry, as expected of the world's most populous countries with a rising middle class. Gold is also used in microelectronic components. Chinese Banks on the other hand, have not increased their holdings according to your link. IE: China is not investing into Gold. They're using it.

As for Russian and Iraqi Central Banks buying up Gold between 2012 and today... well... they've already lost 10% on their investment as Gold has dropped in value between last year and today. I mean, if you wanna follow the example of Russian and Iraqi banks, you're welcome to do so. But I don't think anyone considers them a paragon of the investing world.

Er, yes, I can read:

Why are Germany repatriating their gold? Why do they want it in their own hands? Why go through all that trouble instead of just selling? Why would they want to keep holding onto a "piss poor investment"?

Regarding China, the article's author believes that China has been accumulating gold. The last known official figure is from 2009 and since then imports continue to rise, which in the authors opinion, have been destined for the Central Bank.

As for Russia, they have been accumulating gold for a few years now, and it's right there in the article. "It owned 400 tonnes of gold at end of 2006... At the end of last year, the central bank held nearly 950 tonnes of gold".

If you want to dismiss gold as a "piss poor investment" that's fine, but not everyone shares your view or your investment objectives.

Fair enough :-)

I still disagree with you of course, but that is what the free market is for. Good luck with your investments.

>Why are Germany repatriating their gold? Why do they want it in their own hands?

Kraut here. Quite easy to explain, really.

The tabloids and some politicians made up a story along the lines that none of our politicians or central bankers has ever had access to the gold stash in the US and that probably this stash no longer exists.

So as to calm down people, the German central bank has declared they will repatriate 700 tons of gold (out of ~2000t stored in the US, UK, and France).

Central banks and average people have vastly different goals. Also, large investment banks don't seem to keep their immense wealth in gold.

Large investment banks don't really exist anymore :-)

http://www.guardian.co.uk/business/2008/sep/22/wallstreet.mo...

"Morgan Stanley and Goldman Sachs, the last two investment banks left standing, will become traditional bank holding companies, marking the end of an era for Wall Street.

The Federal Reserve's surprise announcement, which came at 2.30am London time, places the banks under the supervision the bank regulators and gives them easier access to credit to help them ride out the financial crisis."

This point is utterly irrelevant to jonkee's point. For all intents and purposes MS and GS are large investment banks.

You are severely miscategorizing real estate. Look at what happened in the 2000s bubble. Property was flipping with no value adds, and even with added wear and tear.

Buying desert property today and selling it for profit in 10 years when the city next door expands-- that is not wealth creation.

Actually, it is. Speculators help in price discovery, and that is a real service.

>Gold is a piss poor investment

This is a foolish statement no matter what the subject:

>dotcom stocks are a piss-poor investment >railroads area piss-poor investment >Apple is a piss-poor investment

All of these are true and false at some point. You can't make blanket statements like that. There are times when Gold as a store of value makes more sense than a central-bank inflated currency. There are times when the opposite is true.

What is certainly true is that Gold is a very good long-term store of value, and the prices of Gold relative to other things, such as a loaf of bread, a barrel of oil, a parcel of land are quite stable over a long period of time.

People often make the mistake of comparing Gold against fiat currencies and decide that Gold may be going up or down in value. What they don't do is look at Gold vs other things, which typically are rising in price just as fast as Gold.

Certainly one thing is for certain, putting your savings into a fiat currency is a very bad long term plan.

Gold is a good investment to mitigate against "tail risk" -- and so is BitCoin (although now because it is growing, it's good for taking an extreme log position is / hoarding).

So you'll see it spike in value right before panics, and slowly lose value after things stabilize.

Of course, gold or any commodity is a worse investment than a stock market index over time.

"What is certainly true is that Gold is a very good long-term store of value, and the prices of Gold relative to other things, such as a loaf of bread, a barrel of oil, a parcel of land are quite stable over a long period of time."

Wanna take a bet on that?

http://www.macrotrends.org/1340/gold-vs-the-cpi-historical-c...

Gold is out there, sometimes swinging by 1,700% over a decade... while the CPI doesn't change any more than ~100% / decade.

Dollars (and investments measured in dollars: ie Inflation-protected Bonds like TIPS) retain their value better than Gold, while providing a more stable platform. A 10-year note at even 2% offers you 21% growth over 10 years... much better than the long "valleys" that Gold investments suffered across the last century. (And with historic rates sometimes hitting 14.56%, it was possible for 10-year notes to hit 370% growth over 10 years).

Gold doesn't grow in value in the long term. And as shown in Gold Volatility Index, Gold is also a very unstable investment historically.

In fact, Gold's volatility today is the same as the S&P 500 Index.

http://finance.yahoo.com/q?s=^VIX http://finance.yahoo.com/q?s=^GVZ

So it is just as volatile as stocks... while offering poor gains historically. Neither the conservative nor aggressive investor would want this kind of investment. That makes gold a "piss poor" investment in my books.

Pretty much every big economy is trying to inflate away its debts. The Bank of England recently revised their inflation target upwards. Now Japan's central bank is talking about doing the same thing. As far as the US goes: I've got two words for you: quantitative easing.

Meanwhile, most consumer price indices don't include the things which increase in price the most, like fuel and food. So the inflation numbers you're seeing are already artificially low.

In this kind of environment, it seems pretty likely that gold has further to climb.

Also, most stocks these days don't give dividends, which makes them pretty much equivalent to gold from an investor's perspective. Greater fool and all that.

Investing in just one thing is dumb, of course. But not investing in commodities and gold at all seems equally dumb.

Get your facts straight. Have you ever read a CPI report? Do you even know how the CPI is calculated? Here's the list of CPI weights.

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiri2010.txt

Food: 14.792% Housing: 41.460% Fuel: 5.079% Energy (included inside of "housing category"): 5.096%

If you're curious, you can further subdivide that into milk and eggs. But the list becomes way too unwieldy at that point. The averages are then computed using a geometric mean.

Also, Bond bankers are willing to accept a loss on TIPS, because a fair number of them are betting the opposite of inflation: the potential of deflation between 2008 and 2012.

http://www.nber.org/papers/w14701 http://www.frbatlanta.org/research/inflationproject/dp/

When big banks were buying up US Treasuries constantly because they're worried about deflation... to the point where some bonds are offering a negative return... the switch of Monetary Policy that favors inflation is the obvious move. Notice: Gold Dropped in value since last year, while big investors continue to run towards the safety of US Treasuries... pushing yields to absolute lows. Why? Because during 2012, the major banks and investors were worried about deflation risk.

Buying commodities and gold when there is considerable deflation risk is dumb.

According to wikipedia: "The core CPI index excludes goods with high price volatility, such as food and energy. This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile and non-systemic. More specifically, food and energy prices are widely thought to be subject to large changes that often fail to persist and do not represent relative price changes."

The Core CPI is used to calculate "Core Inflation," which is the main thing that the Federal Reserve tries to monitor. See http://en.wikipedia.org/wiki/Core_inflation. So although there are alternative CPIs which do include food and energy prices, they are not as important to the people making monetary policy in the United States.

I'm not really sure what you're trying to show with that graph of deflation probabilities. If I'm reading it right, the probability of deflation through 2017 is currently 0%. Since the year is currently 2013, the "probability of deflation between 2008 and 2012" is also 0%, since I just lived through those years, and... it didn't happen.

The reason why people were buying treasury bonds in 2008-2012 is because the rest of the economy was imploding and they wanted a safe port in the storm. I lived through those years and so did you. You ought to know this already.

I don't really know what else to say. If you think it's a good idea to buy a bunch of treasury bonds with super-low interest rates in 2013, knock yourself out! I think anyone with an ounce of sense can see that our government is going to inflate away its debts over the next few years. In the meantime, you'll be helping to keep USGov in the black, so... thanks, I guess.

So... what does "Core CPI" have to do with anything? I have never used that value in my argument, and have instead preferred CPI-U and CPI-W. These CPI are used for Social Security, Minimum Wage calculations, and so forth.

You're creating the ultimate strawman. You're ignoring the statistics I've presented (statistics using "real" CPI which include food values), and then criticizing statistics that I'm not using. Why don't you read my argument?

Second, even including food prices / energy prices, there were periods of deflation through 2008. Yes, I lived through those periods, do you know what happened to bond investments during that time? I got something like a 20% gain during that period of deflation while the rest of the market crashed.

Anyway, this is the free market. You can continue to invest into Gold if you think its best! We'll both know the answer in a year, so there's no real need to argue about it.

What does this have to do with anything? Let's ask wikipedia.

The Federal Reserve's policy of ignoring food and energy prices when making interest rate decisions is often confused with the Bureau of Labor Statistics' measurement of the CPI. The BLS publishes both a headline CPI which counts food and energy prices, and also a CPI for All Items Less Food and Energy, or "Core" CPI. None of the prominent legislated uses of the CPI excludes food and energy.[9] However, with regard to calculating inflation, the Federal Reserve no longer uses the CPI, preferring to use core PCE instead.

So the people making the monetary policy decisions are ignoring food and energy prices, and hence, in my opinion, underestimating inflation.

Anyway, as someone else said in this thread, everything is a good investment at some period in time. The question is whether we are in that period of time.

> deflation makes it more profitable to do nothing than to invest

Saving is investing. You're investing in your ability to manage your risk at a future date. If you have no savings, then you are at risk of any minor problem (e.g. an injury, decreased revenue, or a natural disaster) causing you a major setback.

The "common wisdom" you've heard about inflation being necessary for an economy is a lie. It's a lie that justifies the wealthiest class of individuals in this society to be "bailed out" again and again.

No, it's not a lie. Why in heaven's name would the investor class want higher inflation? They don't. The really don't. Our understanding of the benefits of a small amount of inflation comes in spite of the interests of those who already possess of a lot of wealth.

The investor class doesn't want bail-outs, though I'm sure they appreciate bail-outs when they happen. The wealthiest lost the most (in money, though not in utility/standard of living) in the 2008 crash. They'd have much rather avoided the 2008 crash's happening in the first place.

The lie, in actuality, is the idea deliberately promulgated by certain members of the investor class that inflation is evil. They do this for obvious reasons. It is precisely this lie to which you evidently subscribe.

The investor class doesn't benefit from inflation, it's the banker class that benefits.

Here's how it works: The banks have a balance sheet of debts owed to them. Some of the debts come from companies like General Motors and United Airlines. If one of those companies threatens to go bankrupt, then the bankers simply lobby the congress to "bail out" the troubled company. This allows the banks to keep the troubled asset on their balance sheet, and continue making an ongoing revenue stream. Of course, the "bail out" results in an increase in the money supply, which means every single holder of USD pays through a decrease in spending power of their dollars.

That's awfully convoluted. You're asserting that this Glenn-Beck's-whiteboard-esque arrangement holds more sway on banker's behavior than the effects of inflation on bankers' own personal wealth holdings.

Do banks want to be bailed out? Sure. Who doesn't. Do rich bankers benefit more than the working class from higher inflation? Certainly not.

>Do rich bankers benefit more than the working class from higher inflation? Certainly not.

Yes, they do, because they are the first to get to spend the inflated money.

If you go back to a point in time when the royal mint could produce an inflated currency by diluting the metal content in coins, then they were the beneficiary of the inflated money by getting to spend it at the current price levels. By the time that money filters through the system to the poor, the prices have risen and the currency is worth less.

The same happens now when the central bank provides newly-minted funds to banks. The banks get first use of the money and get to use it at current price levels, before the flow-on effect of the increased supply takes hold.

In a hyperinflationary environment, here's how a million bucks in new money plays out: In week one, it buys you a new house In week two, it buys you a new car In week three, it buys you a new friday In week four, it buys you a restaurant meal In week five, it buys you a newspaper

That is a necessarily exaggerated example, but the beneficiaries of newly inflated money are those that first get to use it. And that is the banks. This is all entirely by design; the true purpose of having a central bank and a fiat currency.

Deflation is just one form of asset appreciation. If this line of reasoning were true then we would never see anyone selling anything that appreciates in value. But this is a very one-sided way to consider this scenario--it only takes into account the supply side. When the asset is appreciating, the demand side takes this into account as well and is willing to discount their asking price to take this into account. You saw this play out with real estate several years ago, and with gold more recently. It may blow out the bid/ask spread a bit, but eventually there will be people who need to sell their asset to buy something else, or there will be people who want the asset badly enough to pay what people are asking.

I think this argument can be discounted simply by looking at the current state of things--people are still spending bitcoins even though the recent appreciation dwarfs any built-in deflation. Sellers may need to discount their price to get people to pay in bitcoins, but even that doesn't seem to be happening yet.

One problem here is that you're considering the currency as an asset that should appreciate. The argument of most economists today is that currency should not appreciate because it encourages hoarding what is essentially a useless non-good, it's just a token for convenience of value transfer. If real goods appreciate, it's because the value offered by that good to the marketplace has increased, so the market pays a commensurately larger price. If currency appreciates on its own, people will want to hoard it, and will only spend it on things they deem highly valuable. Perhaps you can argue that this is better in the long run and would stop rampant consumerism, but it's pretty obvious that without rampant consumerism, many people would be making less money.

People aren't really spending bitcoins in a meaningful way. They're using it as a passthrough for the dollar, basically. I have a Bioshock Infinite key that I want to sell. Will let it go for 1.5 btc. Why won't this offer be taken up now, when just a couple of weeks ago it would've been considered a fair deal, and just a couple of months ago it would have been considered a GREAT deal?

You're just noting the difference between a centrally-managed currency and one that's not. The value of bitcoins tends to move quite a lot lately, so it's like trying to price something in AAPL stock or something right now--you have to peg the value to a slower-moving reference currency. (And that's typically how BTC-denominated goods are priced, for example on the Silk Road the product prices are pegged to the USD.)

But that's not to say that centrally-managed currencies don't fluctuate either, because they do--just, typically, in the other direction. If I tried to find a gas station that would sell me a gallon of gas for $2USD today I'd be out of luck, but 2-3 years ago I'd be able to go anywhere in America and get that deal.

>If I tried to find a gas station that would sell me a gallon of gas for $2USD today I'd be out of luck, but 2-3 years ago I'd be able to go anywhere in America and get that deal.

That illustrates that the price of oil fluctuates. The USD hasn't dropped in value by 50% in the last two years.

Most of currency is fluctuation is fluctuation relative to other currencies. If the price of the Icelandic krona plummets relative to USD and GBP, it doesn't mean that all the prices in Iceland immediately rise to compensate. People in Iceland are still paid in krona and buy things in krona for approximately the same number of krona.

But if the price of BTC rises suddenly, prices do suddenly decrease because at the moment it's just a proxy. There's no real internal market: there aren't people who are paid in BTC and have their savings account in BTC and make their mortgage payments in BTC and buy their food in BTC.

So BTC really isn't like other currencies. It's fluctuating massively even from an internal market perspective.

Isn't the value(not necessarily the price) of a currency the size of the market in which it trades divided by the number of units of currency in circulation.

If the market reduces because of a lack of investment, wouldn't the currency reduce because you hold the same proportion of a smaller thing, creating an incentive to stop negative growth.

There is also the factor of the OP's so-called CryptoBarons. Money is just an idea until you actually spend it. If there are a number of people living it up because they got a bunch of bitcoin really early the result would be essentially another form of bitcoin creation. Those CryptoBarons would be adding currency into circulation as they spend, currency that was effectively frozen before that point.

I'm not sure what will happen in the end, but it will certainly be an interesting ride.

Yeah, there is nothing stopping "bytecoins" if early bitcoin holders hoard too much. Same as with dollars and bankers. As long as the system produces more value than the barons seize, people will get value from the system.

> To be clear, deflation is categorically bad for a currency. It's terrible, like great depression terrible.

I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right? We've never (recently) been in a period of significant deflation, so how can we be so certain of its effects?

> deflation makes it more profitable to do nothing than to invest.

Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it.

People will still work, and spend what they need to. And there's a limit to how much a currency can deflate before it cycles back. And hell, how do we even know that inflationary/deflationary cycles are unhealthy? Even if it causes some businesses to die, maybe this improves an economy in the long term by churning things up a bit.

>Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it.

But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything?

To use a case from the bitcoin economy, we all know the story of the pizza that someone bought when the x-rate was something like 3 cents per coin. Today, the 10k btc spent on that pizza would have been worth $100k! This story is often told to try to incent people to get into btc, with the implication that "if you forgo the cost of one pizza, in a little while that will be worth thousands of dollars", without realizing that this exactly is the problem with a btc-based economy; if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.

People loans each other bitcoin in the bitcoin economy all the time, abiet with high interest rate.

if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.

The demand for pizza will be low, but not zero, because the desire for pizza competes with desire for monetary profit. At some point in the future, people decides that the waiting is enough, and they will buy pizza as reward for all their patience.

Good luck. You're swimming against a tide of people minted from education with the mindset of deflation bad, inflation good.

Of course, everyone likes deflation when it means they can buy more for less. Of course, if prices of things get so low that people start to purchase, then deflation will eventually reverse, unless you assume that deflation will continue forever until prices reach zero and everything is free. Of course, everyone force-fed a diet of Keynes assumes that hoarding relates to stuffing mattresses full of money instead of holding cash in banks, where the bank can lend the money out and still invest. They uncritically swallow the line that a central bank inflating at will is the best thing for an economy.

Inflation/deflation are just two phenomena with different winners and losers, the same as high/low currency values. Deflation favors lenders and savers, and inflation favors borrowers and spenders.

The inflationists always assume that the borrow/spend nexus is far more important than the lend/save. But of course saving drives all investment, so a period of deflation isn't necessarily a bad thing. In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion.

Once you clear your head of the foolish 'borrow and spend' mantra of the last 80 or so years, and realise that investment and production are more important than spending and consuming, it becomes obvious that a bit of mild deflation isn't necessarily the hobgoblin it is made out to be.

The simple fact is that no economy and social order has ever imploded due to deflation, but inflation has some pretty terrible economic and social effects when it gets out of control. Deflation, like any long position, can only ever go down to zero. Inflation, however, is like any short position and can go to infinity.

Just because people hold money in bank does not mean that the banks will lend people money. In fact, after being bailed out with TARP, many banks did not turn around and increase the amount of lending that they were doing. However, most of them did pay back their lender (the Fed).

As with anything, too much of any extreme is bad. Too much inflation or too much deflation. But with fiat currency, it's natural to expect steady inflation over time -- especially if it's not tied to a commodity (e.g. after we got off the gold standard). That's because there's value in lending money to some enterprise, and that's the time value of money. Organizations with good credit (e.g. banks) issue and lend money to organizations with worse credit. So they will expect a return in the enterprise, and overall if they guess right, the enterprise will have returned principal + interest to the lender. If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest.

So it's like an elastic money supply that's being prodded by lenders / banks looking for a return.

> If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest.

The financial systems works different.

You seem to be conflating wealth and money. Money doesn't disappear from the system when someone fails to repay a loan. (Unless you are taking a rather wide, but still sane, definition of money, and hold that lending increases the money supply.)

No extra money needs to be printed to pay back all that interest. That's because central banks pay a dividend to their governments.

I am talking about M2 money supply shrinking when borrowers default and/or banks fail, as in the great depression -- right?

http://en.wikipedia.org/wiki/Money_supply#United_States

Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. On the contrary, governments like the US use their central banking system to do open market operations on bonds they issue to finance their operations, and usually have to pay interest on that debt. No?

> Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments.

Please see e.g. https://en.wikipedia.org/wiki/Central_bank#Currency_issuance:

"The European Central Bank remits its interest income to the central banks of the member countries of the European Union. The US Federal Reserve remits all its profits to the U.S. Treasury."

https://de.wikipedia.org/wiki/Deutsche_Bundesbank#Gewinn has some more information, but you have to speak German (or use Google Translate). Lower than expected profits of the Bundesbank have been in the news in 2011.

>"In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion."

Periods of asset deflation after over-investment/economic distortions may act as a balance, but it isn't "good". Having your net worth halved is crippling.

>"The simple fact is that no economy and social order has ever imploded due to deflation"

No economy implodes due to deflation or inflation alone. Countries like Germany or Zimbabwe had production capacity collapse. That led to printing money (to stave off deflation), which in turn led to hyperinflation. Too much money chasing too few goods, remember? In order to have too few goods, the country's production has to go into the toilet.

Saying deflation isn't bad flies in the face of many of the greatest economic minds we know, with tons of research and theory to back it up.

I'm actually genuinely curious what research and theory you are referring to, and I wouldn't know where to start looking. Could you give me some pointers?

You could start with Friedrich Hayek and the Austrian school if you're interested in a serious defense of anti-Keynesianism.

Note: I'm not saying I agree with them, just answering your question.

You can start with anything by Bernanke related to the subject, both writings and speeches.

Careful with reading bias into what I have written.

I have not said deflation is good, or said that it is not bad.

I have merely stated it creates winners and losers, and that inflation isn't automatically better. The same as a 'high' or 'low' currency - the goodness or badness depends on the reference frame.

The assumption that inflation is automatically better is 'common knowledge' based on theories of economics developed that classify savings as bad, and spending as good, based on the assumption that deflation will cause consumption to be postponed, but which hand-waves away the problem of inflation bringing forward consumption with the trite statement of 'in the long run we are all dead'.

My point is that deflation isn't the bogeyman many have been trained to believe it is. Spending-based assumptions of economics have led the world down a garden path of unsustainable debt in the name of endless 'stimulus' and inflationary policies. Periods of mild deflation and creative destruction would have served the world better than endless shots of new cheap money.

>"The assumption that inflation is automatically better is 'common knowledge' based on theories of economics developed that classify savings as bad, and spending as good, based on the assumption that deflation will cause consumption to be postponed, but which hand-waves away the problem of inflation bringing forward consumption with the trite statement of 'in the long run we are all dead'."

That's only part of the argument.

Another part is that wages also must decrease with deflation (wages are an input price). And that's very difficult to pull off in a modern economy, and leads to unemployment. We are seeing that right now.

The fact of the matter is, we should be indifferent to either inflation or deflation, as long as we can see the changes coming and adjust quickly enough. In reality, we can't. Hence an ever-increasing money supply (to coincide with an ever-increasing demand for money) is the best bet.

>"based on theories of economics developed that classify savings as bad"

I've never encountered that argument.

>My point is that deflation isn't the bogeyman

Look at this thread. Look at Seeking Alpha. Look at Reddit. You think people are over-reacting to deflation? People everywhere are hyperventilating over out of control inflation, when, in fact, our current problems are associated with a deflationary event ($3.5TT wiped from the collective financial sector sheets).

> Having your net worth halved is crippling.

"Having your net worth halved" happens in the inflation scenario. Deflation increases your net worth.

If you have $10,000 and there's inflation, then eventually it will only buy half as much stuff. If you have $10,000 and there's deflation, then eventually it will buy twice as much.

>""Having your net worth halved" happens in the inflation scenario. Deflation increases your net worth."

Interesting. We've been in a positive inflation environment since I've been born, and my net worth has increased exponentially.

Deflation will increase the purchasing power of your money due to the fall in prices, but decrease the value of assets you own priced in that currency. Something people seem to be forgetting around here are that wages also fall during deflation, and that results in lower purchasing power and unemployment. Your "work" isn't worth as much anymore. You get paid less. Good deal!

What happened when the housing bubble collapsed and there was massive deflation in home prices? Did those people get wealthier? Did it become easier for other people to spend their dollars on homes at the new low prices? The answer is no and no.

> Did it become easier for other people to spend their dollars on homes at the new low prices?

Why is the answer to this question "no"?

>"I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right?"

And which have collapsed from inflation? None, directly. Hyperinflation (and deflation) is an effect of an economy collapsing. Not a cause.

From Wiki: "Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation."

Note "decrease in tax revenue". Economic crisis > deflation > country can't pay the bills > hyper-inflates currency.

A curious retelling of history.

The Weimar Republic intentionally inflated their currency to reduce the WW1 reparations payments, which got out of control and reduced the value of the Mark to nothing.

Inflationary policies collapsed the tax base due to destroying the ability of the economy to function normally, not the other way around.

This is easily shown by the fact that as soon as the Weimar Republic re-introduced an asset-backed stable currency, the economic problems improved greatly, though there were deflationary periods after that caused by the massive economic upheaval.

>A curious retelling of history.

By you, perhaps.

Economic crisis, couldn't pay the bills, so they inflated the currency. Just like I said. Are you really going to argue that there was no war or aftermath, social upheaval or other crisis (like, say, debilitating war reparations) that led to hyperinflation? Crisis comes first.

So often Wiemar Germany is trotted out as the example of what can happen when the government prints excessively. "It can happen to you! Wheel-barrows full of money to buy bread!" The reality, the country and its economy was in shambles. Not because of inflation.

Your turn: point to an economy that was happily chugging along, and hyperinflation came out of nowhere and took it down.

> I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right?

The Weimar Republic, arguably.

> deflation makes it more profitable to do nothing

Isn't deflation for the buyer seen as inflation for the seller and vice versa?

Why would you then not (applying your deflationary spiral model) expect a "market death" from sellers not selling under currency inflation?

Think of it this way:

Person A: one who gives Bitcoins in exchange for Widgets. Person B: one who gives Widgets in exchange for Bitcoins.

Notice the symmetry. The name buyer and seller are arbitrary designations depending on what you consider the currency and what you consider the good being sold.

The inflation/deflation symmetry exists but it is not in the same terms. Deflation for bitcoins is the same as inflation for widgets. The widget holders are desperate to trade their widgets for bitcoins since their widgets's purchasing power is decreasing, but bitcoin holders are reluctant to buy widgets since their value is decreasing.

> If that doesn't make sense, think of it like this. Inflation is similar to nuclear fusion and deflation is like nuclear fission.

Ohhh, now I get it.

Why is deflation bad?

Let's look at a single-currency country first. Prices fall. Including wages. Credit is tight - money appreciates without being invested and borrowers have to repay debts in more expensive currency tomorrow, making them more likely to default [Fisher]. People with money benefit - the rich get richer and the banks hoard capital, refusing to make loans. Inflation fuels asset bubbles as the economy over-invests; deflation fuels the opposite as the economy starves itself.

Yes, we have seen deflation. The U.S. and U.K. both experienced crippling deflation in the 1930s [1]. Before that, remember the American populist movement's "Cross of Gold" speech [2]? That wasn't a reaction to an inflationary gold standard. The euro zone offers a more contemporary view of the effects of deflation, as does my Switzerland [3].

Uncertainty in the future path of deflation that is more toxic than deflation per se. The U.S. grew through the Great Deflation in the 1870s and Japan has had mixed real effects from its almost two decade deflation [Morana]. Theoretically, if deflation proceeded at a steady clip, markets could accommodate (Milton Friedman advocated for an economy deflating at the real interest rate [Friedman]).

But what if we have two currencies, e.g. U.S. dollars and Bitcoin? Argentinians have a choice between black market (or "blue") dollars and an available but inflating peso. Tellingly, Argentinians buy dollars primarily for overseas vacations [4]. This is an example of a bad currency (the peso) and a good (the greenback). The Argentinians still execute the bulk of their transactions in pesos, not dollars.

Deflation is not likely to be Bitcoin's death knell, but rather a ceiling on its usage. A deflating Bitcoin will crimp transaction demand for the currency as spenders shift preference to more easily borrowed and spent dollars. Sellers would respond in kind (or, alternatively, sellers who respond in kind would gain market share).

Caveat: if Bitcoins are treated as a financial asset, for speculating versus spending. If so, deflation would proceed un-checked, with speculators driving out the transaction value of the currency. That said, gold has survived both deflation and speculation, so this isn't a fatal blow either.

[Fisher] http://www.jstor.org/stable/10.2307/i332559 The Debt Deflation Theory of Great Depressions (1933)

[1] http://www.amazon.com/gp/aw/d/0143116800/ref=redir_mdp_mobil... See Norman Montagu; British depression

[2] http://en.m.wikipedia.org/wiki/Cross_of_Gold_speech

[3] http://www.ft.com/intl/cms/s/0/1c23c088-60c3-11de-aa12-00144... Swiss central bank moves to weaken franc (June 2009)

[Morana] http://www.icer.it/docs/wp2004/Morana29-04.pdf (2004)

[Friedman] http://www.amazon.com/gp/aw/d/1412804779/ref=redir_mdp_mobil... The Optimum Quantity of Money (1969)

[4] http://blogs.ft.com/beyond-brics/2013/01/17/argentinas-blue-... Argentina’s “blue” dollar blues (January 2013)

With an inflationary currency, you can pay your workers nominally slightly more each year while paying them the same amount or even slightly less in real terms.

With a deflationary currency, you can pay your workers nominally slightly less each year while paying them the same or even slightly more in real terms.

How would the average person on the street react to being told "You've performed really well this year, so we're only going to decrease your salary by 1%. Congratulations on your raise!"?

That would seem to be the case à la Fisher. But the evidence from Japan, a slowly, albeit steadily, deflating advanced economy is compelling.

From January 1995 to January 2010, Japan's CPI (2005=100) has fallen from 100.8797 to 99.5851, or or -0.08% per year. In that time, real wages grew 0.23% [1]. Real GDP/capita at 0.61%. Hell, from 2010 to 2013 their CPI has fallen at 0.27% annually, but the hit has been mixed. Note that the Japanese monetary base (M2) has expanded at 2.5% annually from 1995 to 2010, so this is a demand-driven deflation, consistent with Morana. But the deflation we base our analysis on, the Great Depression, was similarly spurred by demand.

Similarly, Germany, through the Hartz reforms, engineered a wage deflation at the beginning of this century. Helping power the American recovery is wage deflation. The hope is austerity, structural re-alignment through deflation, will similarly fix peripheral Europe's bloated labour costs.

Yes, it appears people will take falling wages if forced. All this said, I do not believe a deflating national currency is the right model for Bitcoin. Instead, look to arguments levied as the world switched off gold, an international deflationary currency, to inflationary fiat ones.

[1] Own calculations from St. Louis Federal Reserve Economic Database

Bitcoin isn't that deflationary, and won't be at all until 2140.

When 2140 comes around, and all the bitcoin is mined, then it will only deflate at the rate which coin is "lost into the ether" from people losing their wallets, etc. I highly doubt the deflation rate will be anywhere near 1%.

Bitcoins are already rapidly deflating. The purchasing power of a Bitcoin today is a multiple of what it was a year ago. You can see this in its rapidly appreciating exchange value vis-à-vis the U.S. dollar.

> shameless hoarding

Hoarding is a derogatory term, intended to evoke an emotional response from the reader. I prefer the term "saving".

> Why lend, why build new companies, when simply storing it is more than enough? Take shocks such as bubbles and demand-side crises.

Most bitcoin proponents to indeed reject Keyensian, demand-side economics.

I, for one, think entrepreneurs would typically benefit from not relying on debt.

>capitalism[...] needs inflation, feeds from it

Increasing the money supply helps one class of people: the bankers. It doesn't help the middle class, it doesn't help entrepreneurs, and it definitely doesn't help the common person. It's an insidious hidden tax.

All this talk about inflation reminded me of a funny (in a dark way) propaganda video made in 1933 regarding inflation: https://www.youtube.com/watch?v=JUvm9UgJBtg.

I don't understand how something completely unsupported by the data is repeated as truth.

Historically, deflation is disastrous for everyone, and high inflation also disastrous for everyone. Moderate inflation has the effect of redistributing wealth from capital to work, and tight money the effect of redistributing wealth from work to capital. Compare Australia (loose money) to the Eurozone or America or Japan (tight money) for example.

I don't understand how something completely unsupported by the data is repeated as truth.

Simple; it has never been conclusively and irrefutably disproven. Ergo, it must be true, or else it would have been disproven.

Religion isn't the only one with nutjobs ;)

inflation is an absolutely necessary force in an economy; without inflation there is little incentive to spend money and as a result there is no real liquidity.

tl;dr; money is useless if no one spends it, that's the whole point.

another way to think about it is a stock. if a stock is priced, and no one is buying or selling at that price, is that price really valid? whats to keep another actor in the economy from pricing a stock totally different if there is a 'dumb' actor wiling to buy at that price.

> inflation is an absolutely necessary force in an economy

I don't think there is good evidence of this "fact". Economics is not a hard science.

A few points, one, you can't argue that bitcoin deflates and therefore is worthless. The is an obvious inconsistency there. Second, imagine if bitcoin had built-in inflation. What would happen if someone would release bitcoin+ with inflation equal to zero (i.e. current bitcoin)? Obviously the "good money" would drive out the bad and everyone would save bitcoin+.

It's not related to your comment, but I'd also like to comment on the Ponzi scheme arguments. My question is, how would you design a cypto-currency to avoid to problem of early adopters getting wealthy (the new ripple has a different scheme, a terrible one, IMHO)? You have to introduce the currency somehow. If you are an early adopter of bitcoin, should you sell now at $100? Maybe you should have sold out when it got to $1.

there are no real facts in economics, but there are some pretty easy concepts to grasp. here is another explanation:

"Inflation is bad, but deflation is worse. The reason is that in a deflationary environment, no one spends money — because whatever you want to buy is sure to become cheaper in a few days or weeks. People hoard their cash, and spend it only begrudgingly, on absolute necessities" from https://medium.com/money-banking/2b5ef79482cb

> Most bitcoin proponents to indeed reject Keyensian, demand-side economics.

That's why we're laughing at you.

"Saving" fails to distinguish between different uses of assets.

"Investing" one's resources means putting them to work to create value. "Hoarding" them means the assets are as good as if they were buried in the ground. Investing is riskier and takes more work and more smarts, but any idiot can hoard.

What creates (or is more likely to create) more value? 1 million dollars distributed among promising startups, or 1 million dollars spent on mining gold? 1 billion dollars spent creating an airline, or 1 billion dollars spent on vast swaths of real estate?

That depends entirely on whether the investments are producing genuine value or, say, new ways to hide the risk in mortgages.

Yes, sometimes saying "no" in the aggregate is the right call.

> cryptobarons it will have created from its inner circle, through shameless hoarding.

This isn't 1941 England and bitcoins aren't sugar. Early adopters in the right thing often make money. Usually on HN they are called investors and congratulated. Sour grapes on missing out? (I did too)

I bought 30,000 bitcoins when they were worth less than a penny and sold them all when the value went up to $0.80. Lol, oops.

If you don't want to miss out again, buy Litecoins and Namecoins. Litecoin will never be worth as much as BTC (because there will be 80million of them as opposed to 20something million BTC) but it will slowly gain in value as it has some impressive features especially suited for online gaming payments with fast confirmation, secure online voting apps, or of course online gambling.

Litecoin is presently $1.30/each I see that going up to $4 at least by end of year now that more people are using it.

You are assuming that the demand for any cryptocurrency responds linearly to the completely arbitrary total "quantity" assigned: Litecoin can't be worth more than Bitcoin because there are more units of them. That's simply not true.

I am a fan of cryptocurrency in principle, but not of this particular oversimplification that was borrowed from some very sloppy thinking on the part of gold enthusiasts.

Limited supply does not reliably ensure certain price behavior independent of demand.

What you should be worrying about is the money supply, not the individual coin value.

Is there any acceptance in commerce of these competitors? Unless there is an underlying demand created by available products, these coins will be worth nothing.

In my opinion, features won't matter. Bitcoin has critical mass, and it's unlikely to face real competition.

Read about namecoin here: http://dot-bit.org/Main_Page It works perfectly as an open DNS p2p system, a decentralized p2p magnet tracker (think pirate bay but impossible to shut down), secure online voting, plenty of other possible uses.

There's also PPcoin a low energy coin compatible with BTC miners that's getting more popular.

Another advantage to Litecoin is you don't see it in the news everyday with the words 'Drugs' and 'Blackmarket' beside it, meaning correspondent banks will still deal with you if you want to set up an exchange whereas a lot of banks now are dumping bitcoin startups out of paranoia

>>Another advantage to Litecoin is you don't see it in the news everyday with the words 'Drugs' and 'Blackmarket' beside it...

You should qualify that with the word "yet". Is there anything in Litecoin's design that doesn't allow it to be used for drugs and by black markets? No. Honestly, Litecoin doesn't even have that going for it. Acceptance as an actual currency is the difference between a cryptocurrency becoming a legitimate investment versus a speculative pump-and-dump scheme.

I've been getting pretty interested in PPcoin.

I assume that mining will tend to be modestly profitable. As Bitcoin scales up and as the reward goes down, either it will have to increase transaction fees and use an enormous amount of energy, or the mining reward will be too low compared to Bitcoin's value, there won't be enough miners, and 51% attacks will start to be profitable.

This isn't a problem for PPcoin, which gradually transitions to proof-of-stake instead of proof-of-work. It seems to me like it'd be more viable as a major currency.

"Lol, oops."

I'm sure there are a lot of other "oops" and "fuck" moments in many bitcoin watchers' moments. If you can laugh about it, then more power to you. From what I've read, when they first came out, they were very hard to obtain and people were actually excluded from it (is this true?), so someone must have seen the value. I first came across it on github in late 2009 when searching for project ideas but skipped over it as some type of scam. Others only saw value in building bitcoin apps, rather than simply holding the coins.

What are you looking at now?

I am not sure about namecoins. Nobody is developing namecoin for a year, there are bugs and security holes and tons of weird decisions in the design.

I don't know enough about litecoins to say.

1. Unjustified moral reference to "shameless hoarding". Where is the magical date when your property belongs to you for "too long" and you should give it to someone? And to whom exactly?

2. Why take credit for business if you can save your own earned money which appreciates over time and have 100% stake at your own project?

3. How deflationary spiral is supposed to happen? Will people be paralyzed and dead of hunger and thirst holding their precious coins? Or they will trade with each other to get stuff done?

Property rights are a fiction invented and enforced by society. Therefore, it's not inappropriate for society to occasionally have opinions on how property should work.

Some of the ways people handle their property is detrimental to society. If enough people do it, hoarding capital is one of them.

You did not answer my questions regarding hoarding. If you don't have an answer, how are you so sure about moral character of "hoarding"?

Re: 3. The deflationary spiral doesn't end in a whole bunch of people dying of hunger, exactly, it ends with them all starting their own subsistence farms rather than spending on food, and making their own clothing rather than buying pre-made. Basically it retards progress, sends people back into the dark ages where they have to fend for themselves. I can't imagine a country ever allowing that to happen, so you had better believe that they wouldn't allow something as deflationary as bitcoin to become the de-facto currency. When you need a loan, the banks will be giving you something other than bitcoins. So I don't worry too much about this particular dystopia, it will never come about.

You are espousing one form of economics which many consider unsustainable.

Regardless, many assets are deflationary. Rich people buy real estate and commodities because they are deflationary, or at least not inflationary. There is nothing wrong with assets that grow or maintain value.

Bitcoin is a liquid and easily transferrable deflationary value store, just like gold. Telling people they should submit to inflation for the greater good is ridiculous. Inflation works because it keeps those too poor to have real assets on the gerbil wheel. The wealthy (or smart) just store their money in non-inflationary assets and sit pretty.

Besides, if you can't get better than a 4% return, you probably shouldn't be investing in whatever it is you're considering anyhow.

Sustainability is really the achilles heel of inflationary economics. The Earth is finite. Exponential growth cannot continue forever. When a steady state is reached, that's apocalyptic to inflationary money systems since debts all the sudden can never be repaid.

Edit: I don't think space colonization matters here. Sure, it may be possible. But Mars is sufficiently far from Earth and the energy cost of transport sufficiently high that a populated Mars would effectively be an entirely separate economy for everything but intangibles. I don't think a Mars colony would permit Earthly exponential growth to continue, even though Martian exponential growth could occur for quite some time. (Until Mars' own unique limits were reached.)

> everything but intangibles

So, everything but 90% of the economy in forty years' time?

Why would you want to repay the debts in the first place?

If the interest rate drops.

People will find plenty of ways to kill each other before the Earth's resources are exhausted. We have a billion year energy supply and raw materials are never lost, only converted from one form to more annoying forms.

That is backwards. Inflation helps debtors, punished capital holders, and is irrelevant to hand-to-mouth wage earners.

Price inflation only hurts wage earners when it is coupled with flat nominal wages-- but that is merely a (too powerful) psychological trick that people don't notice.

All wrong:

- Inflation does not help debtors, unless they don't pay interest. Inflation is added to interest rates, so it has no effect. Inflation only helps debtors if they have a fixed interest rate and inflation goes up, which clearly not desirable or sustainable over a long period. In fact, inflation encourages debt, which creates a further enslaves debtor class and enriches capital holders.

- Inflation does not hurt capital holders. Anyone with sufficient capital holds assets that are not inflationary, such as gold or real estate.

- Price inflation hurts wage earners because real wages drop rapidly and requires nominal "raises" which creates a false reward, thus the hamster wheel. Got that 10% raise after 3 years? Congratulation, you make the same amount of real wage. Further, low wage earners can not afford or don't have the savvy to purchase inflation resistant assets, so what little they do have either depreciates or is inflated, thus the hamster wheel.

I may sound like a Marxist, but I am not. I believe in the free market and real currency, not the modern mess we have.

Inflation works because it keeps those too poor to have real assets on the gerbil wheel.

Quite to the contrary, it gets the proletarians out of debt!

> Quite to the contrary, it gets the proletarians out of debt!

Yes. All the proletarians whose debt is at an interest rate under the rate of inflation. Which is exactly zero of them.

You are saying that there won't be any growth because people will hoard all money because they want to participate in the (non-existing) growth? Isn't that self-contradictory?

I think you are wrong. Imagine living in such an economy and facing the choice between hoarding (4% deflationary gain) and a good investment (10% gain). What would you do? All I see happening is that less money is being spent on bad investments due to artificially low interest rates as it happens to today.

Clearly, since new land isn't being created anymore, everyone is going to shamelessly hoard real estate. Why would anyone ever buy or sell a house anymore? REAL ESTATE IS ALL A BIG DEFLATIONARY SCAM- You heard it here first.

The realtors were lying to you when they said real estate always goes up in value. ;-)

Jokes aside, any sort of investing in illiquid assets is fraught with risks. We are talking about a currency here which by definition requires liquidity to be useful, these are two very different things.

Actually in the UK this is exactly what has happened since nobody pays property taxes over there. My fiancee owns her house but still pays rent to a land lord.

When there are no liabilities for holding an asset, there's not a big incentive to sell it.

Not sure what you mean, since someone who owns a house doesn't have a land lord.

if she owns the property but not the land (i.e. the house is a leasehold instead of a freehold), she has a landlord

Sounds like feudalism.

that is where it all originates from: our property/land laws are all built on medieval law, as we haven't had a revolution to shake things up!

houses are nearly always freeholds, whereas flats (apartments) are normally leaseholds, as it would be unfair if one flat owning tenant has land rights over the others.

recently the government has given leaseholders the right to purchase the freehold from their landlord (if they all agree), but this involves setting up a company that all leaseholders are shareholders/directors of, with all the rights and responsibilities that that entails.

"whereas flats (apartments) are normally leaseholds"

Must be an English thing, that is certainly not the case in Scotland.

Interesting- But in that case the problem (probably) is that you have to pay super high taxes when you sell land (or they wouldn't have such weird arrangements.) This is a separate issue from the deflationary aspects of land I think.

>My fiancee owns her house but still pays rent to a land lord.

How... what...? Please explain.

UK land rights are much different then the US owing to their history of kings and lords. You don't pay property tax[1] on the land you hold. As a result there isn't much incentive to ever sell your land. Since other people still want to live on your land though you set up a deal so that they can build houses and live on that land, but they have to pay you rent. You are effectively a landlord in the truest sense of the word.

[1] If you rent out your land you start paying property tax, the government wants there own piece of that pie.

I would point out that outside of London this is not exactly common.

The entire crown estate is held as a lease holding, and they have a lot of property in England. I know that in Northern Ireland there are many semi-detached houses on leasehold.

This is not false but the majority of people and properties are freehold, not leasehold. Around 3 million properties are leasehold, the majority are flats, with 1 million being houses. There are about 25 million residential properties overall, so leasehold is only about 12% of the market.

Plus, in the UK there are certainly liabilities for holding land that has a residential property on it. As the landowner, you'll be paying the council tax on it if you have no tenants, and with many councils now, that'll be a more expensive rate too (currently 150% of the standard rate for unoccupied property in my area). Of course, council tax isn't really a property tax, though it can act like one in some situations and basically covers similar things that US property taxes do.

You totally wrong, and the reason you are wrong, is because you do not understand growth. Like... totally.

Yes, I'm arrogant and I'll deal with an idealized model where the same set of resources is transformed into final goods, but bear with me.

In order to get a real growth of 4% be it per year or per century in such a scenario, you need to find a better use of resources so that with the same resources you may produce an output which is 4% greater than before.

Which is the same as saying the the only way to grow is to find ways to produce final goods cheaper.

And because production is cheaper, more goods could be sold but.. entrepreneurs will still make a profit. Pretty much the same.

And the fact that final goods get cheaper means just that.. That goods get cheaper.

And you will not get rich by just holding bitcoins, or any other fixed supply money. Yes, you will be able to get more stuff for but only because the stuff get cheaper..

You'll still hold the same fraction of total purchasing power that as the day you decided to "hoard" your money for a while.

That's not what I call getting rich, and that's why loans and interest make sense and are safe with bitcoin.

P.S. Take you time. It's late in my TZ.

> In order to get a real growth of 4% be it per year or per century in such a scenario, you need to find a better use of resources so that with the same resources you may produce an output which is 4% greater than before

Let's work through an example. I buy 100 seeds for $1 each. I plant them, let them grow, and harvest the result. I now have 104 seeds. My real growth is 4%!

Now I want to sell the seeds back to recoup my investment. But I discover that prices have dropped by 4%: seeds now go for 96 cents apiece. My 104 seeds now are worth $99.84! I would have been better off not buying seeds at all, and instead just holding on to my money. Real output is reduced.

This illustrates how deflation inhibits growth.

Do you suppose that there is some sort of seed-factory producing the seeds at no cost and selling them into the market, or do the other seeds in the market come from plants which produce only 4% y/o/y growth in the number of seeds? In the latter case, has the entire seed-planting industry taken a loss over the last year? And if so, would less people plant the seeds this year, so that planting the seeds would again be profitable (assuming demand is static relative to decreased production)?

Do the seeds or plants have any purpose other than the production of more seeds to eventually be sold?

I like using seeds as an example, because they make a nice toy model. They last a long time, and more of them can be produced through capital goods (that is, other seeds) and labor alone.

In this model, seeds have no inherent depreciation, and our hero would have bought them from a seller, e.g. a storefront. In a deflationary environment, the nominal value of capital goods decreases, so anyone holding seeds, whether as inventory (the seed store) or investment (planted in the ground), would take a loss.

You are correct that, given deflationary expectations, fewer people would plant seeds. That is exactly what this scenario is meant to illustrate. Fewer people doing work is called unemployment!

And to your last question, let us say that seeds can be used as food. As seed suppliers drop out of the market, this inescapable demand for food will indeed drive their price up. Deflationary spirals do not terminate in starvation: equilibrium is reached, because of basic necessities. But the equilibrium is at a lower output level, and with higher unemployment.

Thanks. I found this helpful.

If the market wants more seeds won't the price increase as a result of the increased demand? If it doesn't want additional seeds, should we create them just to "reduce unemployment"?

It seems like the market will price seeds in a way that incentivizes optimal production.

You are joking right?

But if you are serious, error is here: But I discover that prices have dropped by 4%

You do not simply drop prices, like that. Why did prices drop? (Price) deflation is just a descriptive name not a moving cause. (Price) deflation is not a knob which someone simple turns up and down.

Now depending on why exactly the prices did drop, and by how much you may be either in or out of luck.

Let me paraphrase that the way I understood you.

In a case where monetary supply is fixed (ie gold), if you hold on to it for a period of time, you will get more goods for it than now. That 'more' will correspond to economic growth over the period. You will have the same fraction of the purchasing power pie as before, but now the pie is larger. Does not look like a win to me, but this is the judgement call for the reader.

PS. Yes, I am simplifying and ignoring some thing like velocity of money and fluctuations in economic output, and growth of capital, human resources, and technology.

Yes, that is it. Contrary to the popular belief, just holding money under fixed supply monetary regime doesn't make you rich.

A Rip van Winkle with a year savings (say clerks' job) falling asleep for a 100 years will not wake up a Rockefeller.

If you want to take the red pill: Please read F.A Hayek's critique of "The Paradox of Savings" (http://mises.org/daily/2804) for a refutation of inflationist monetary policy. This was an essay he wrote during the debate with Keynes and others, explaining the flaws in the Keynesian theories. It was written in the 1930s , but explains better than any other theory the dynamics of a fixed money supply currency like bitcoin vs a constantly inflating money supply.

Too many nested critiques of refutations of theories for a novice to make sense of that article.

It's hard to do a TL;DR on this. Here's a link to a meta reddit post I made of all my debates with traditionally trained economists :(http://www.reddit.com/r/austrian_economics/comments/kufu2/ca...). It should be somewhat easier to understand.

Prices change to reflect new knowledge, not "very old knowledge". Everyone buying bitcoins knows the supply growth path, and this expectation is priced in when non-stupid traders buy or sell them.

It's not like ~2035 (or whatever) rolls around and everyone's like "Holy crap! There aren't going to be any more of these! Better quadruple my bids!" No -- there's no profit to be made simply from the fact of supply increase stopping at some point, not when the entire market knows it as well.

So you can't really compare it to a situation in which a government (or affiliated central agency) controls the money supply, changing its mind at future dates, to arbitrarily hold the supply steady when it had been growing before -- which is what is required to get the results you've described.

I have never understood the inflation is good argument.

Looking at PCs, DVD players, etc. it seems price deflation has been great for the consumer and overall "market". Perhaps it has been bad for the manufacturers, but the overall society has benefited from the deflation of those goods.

Electronics become cheaper due to technological improvements, that is, positive supply shocks. That means our real wealth is increasing. That's a good thing!

Electronics might also became cheaper due to, say, someone setting money on fire, so there's less to go around. Clearly in this case our real wealth would not be increasing, so it's not good. But it's not obvious why it should be bad, either.

The reason it's bad is due to our psychology. If the money supply shrinks (and nothing else changes), prices and wages must both go down. But people hate the idea of negotiating a lower wage, so instead wage drops are accomplished through layoffs and unemployment. That's bad because it means that people aren't working: the economy's real output is reduced.

So inflation provides a buffer that allows the economy to adjust wages downwards in a way that we find more palatable than negotiated nominal wage decreases.

The price of Bitcoin won't stabilise. The best you could hope for would be a similar volatility to a commodity like gold or silver. So products and services will never be priced in Bitcoin while there is a better alternative like the dollar which is relatively stable.

A mistake 'economists' make with bitcoin is to draw macroecomic conclusions based on theories suited to single currency economies. Actually we need theories that allow for multiple currencies circulating that have different strengths to understand the effects.

Tl;dr Bitcoin won't change the way we price things, it just provides another option to transfer wealth.

Agreed, but isn't international trade economics the study of economics over multiple currencies?

What we're seeing there is competitive devaluations through printing and recently confiscations. Fixed supply commodities like gold fare well, but their existence doesn't drag the world into a deflationary spiral. Bitcoin's existence won't have macroeconomic implications either.

I believe we'll see some form of inflation through the introduction of new currencies. when the price (ie. deflation) of one cryptocurrency becomes too high other currencies will jump in. the outcome however is unclear, because we are now at an unprecedented point in history. because of the openness of the bitcoin protocol everybody has now the possibility to create his own currency - and the price of adopting a new currency will become marginal for businesses, thanks to new APIs. I have no idea what the long term equilibrium will be.

In testament to this, Litecoin, a bitcoin-alike that creates 4x as many coins and has been designed to be harder to do ASIC mining, has just recently gone above $1

Since Bitcoin can be subdivided and is used (rather than held) primarily as a medium of exchange, there's no reason for increased price in dollars to decrease its use as a medium of exchange... let alone a store of value. Unfortunately.

So you claim hoarding will kill Bitcoin. You are wrong for a very simple reason: the ultimate goal of hoarders is to eventually profit from their fortunes by spending it. They may spend slowly, but they will spend it, and this spending is what will ("should", to sound less pretentious) keep the Bitcoin economy alive.

Basically Bitcoin hoarders are not going to sit on their fortunes and passively watch Bitcoin dies.

"My question is, what then will happen when Bitcoin stabilizes, that is, when the time to new coin mined approaches practically infinity? Let's assume the global economy grows at 4% per year. Do Bitcoin's proponents believe a constant 4% deflation rate will be somehow compatible with capitalism? Why lend, why build new companies, when simply storing it is more than enough? Take shocks such as bubbles and demand-side crises. Could a economy based on Bitcoin survive them, and not crash inevitably into a deflationary spiral? I claim it won't."

This makes the assumption that people won't make their own forks of bitcoin. If there's a shortage of bitcoins, and not enough is being mined to meet demand, I think that will give more incentive to people to make their own forks of the currency. Maybe will see various communities forming their own currencies for their own trading purposes.

Surely the problem solves itself - if nobody invests, then there is no growth. If there is somehow growth without investment (because everyone is hoarding currency)... then that's a problem I'd like to have.

Bitcoin will never be a government backed cryptocurrency they will make their own like Canada is doing. Governments want to track all money, and be able to print trillions to fight illegal wars bitcoin/gold standard prevent that behaviour.

To me bitcoin is excellent for e-commerce because of it's secure signatures you can use for escrow, proof of payment, decentralization so nobody can interfere with your commerce and safety for me as a merchant to prevent fraud.

Most businesses are started with savings and money borrowed from family. Most entrepreneurs would do just fine in a deflationary environment.

You seem to misunderstand certain aspects. If economy will grow at 4% it means that people get on avarage 4% on their investment be that work, assets, capital. Its still beneficial for them. Even with deflation at this assumed 4% they will simply invest in things that have better ratio of roi/risk.

Deflation is not obviously bad. We had deflation during the whole industrial revolution and things were running smooth. If people hold on to savings rather than invest suppliers will quote higher prices in order to put the money back into system or hoard the money for themselves.

One thing for sure. You wont be robbed out of thin air and that whats inflation is for. Central bank has no money for retirment... fiiiine, let print more -> market will stabilize itself.

Plus if the value of bitcoin goes sky high. It will be lucrative to mine again. It has the mechanisms of selfhealing.

The deflationary nature of bitcoin is by design, yes, but the thing with cryptocurrencies is - if it's somehow unsucessful, people can either ditch the currency and make a new one, or if most of the miners agree by consensu, even change the bitcoin protocol with its deflationary nature itself.

For example, if the economy will be in such a terrible state thanks to the deflation, somebody can do a fork of bitcoin that will not have halved mining reward (and thus not having finite number of bitcoins in existence), and if the miners will jump to this new version (and probably clients, too, not sure about that), this new currency will be used as easily as the old bitcoin.

If I am wrong technically, please correct me.

The nice thing about bitcoin is - nobody enforces anything.

the need for inflation is a widespread belief, not a fact. Of course people would still spend their coins. How would they buy services otherwise? what monetarists do not understand is that if you could save money, that would free many resources now used to hedge against inflation, and they would be available to better use and cheaply. Furthermore we all would be inflation-protected, and not just the rich who can afford to do investment. Furthermore deflation revalue your salary, and you should not be fighting with your boss for a payment increase, but he would have to give that fight you to decrease it. We wouldn't have an economy based on the ever growing, ever spending

It's thoughtful yet mistaken posts like this one that make it clear how early we still are in the Bitcoin game.

Capitalism doesn't need inflation. Capitalism works best with a hard currency. Money gaining 4% per year in purchasing power isn't "deflation". The notion of "4% growth" is ill-posed.

I could back these statements up with logic and evidence, but experience shows that virtually no amount of rational argument ever convinces anyone of these points. Luckily, rather than arguing till we are hoarse, those of us who have swallowed the hard-money red pill can now put our money where our mouth is and buy some bitcoins.

while Bitcoin is deflationary due to monopoly, crypto-currency is inflationary.

Bitcoin's value is not held by how hard it is to mine them. It's held by how bad people want to use crypto-currency for trading behaviours.

When bitcoin's value become too high to be used for normal trading, it's value will decrease, simply because people will invent new types of crypto-currency(i.e litecoin, namecoin) to replace its function. When less people using bitcoins, no matter how 'hard' its mining algorithm gets, its price will drop.

Therefore crypto-currency is inflationary, and that's why Bitcoin will become inflationary eventually.

That is a good point and that is a big weakness of bitcoin. Fact of the matter is this crazy appreciation is not very good for the currency. It encourages hoarding and discourages commerce. For all the stories about appreciation I do not hear many stories about bitcoin actually being used as a currency. And why would it be. Most people holding it believe it will go up in the future. Why would they spend their bitcoins on commerce if they think those bitcoins will be worth ten times their value in the future.

Currently bitcoin is not a currency but a very speculative investment.

Deflation generally benefits almost everyone. Things get cheaper and cheaper over time, while the amount of money you make stays the same. Technology is a beautiful example of this. Almost every year technology gets cheaper and cheaper, and better and better for the same amount of money spent. And of course this is great for everyone and I don't think many would dispute that.

Imagine a world where that wasn't true. Imagine you had to spend more and more every year just to get the same quality of phone or computer or TV. Now ideally, and depending on what's causing the inflation, your income would increase at exactly the same amount and so it wouldn't make a difference. The same quality TV would cost the same percent of your wage in 1960 as it would in 2013.

But with deflation it's the opposite. Your income will (on average) remain the same, since the amount of money in the economy hasn't changed and it's being divided over the same number of people. But prices will go down due to the economy growing, increasing efficiency, technological improvements, and all that good stuff.

You may see a slight flaw in my argument. Presumably the same amount of stuff is being produced in both economies, regardless how the currency is changing in value over time, and presumably there are the same amount of people to receive all the stuff being produced. So how can people in the deflationary economy be richer, on average, than people in the inflationary one?

Well on average, they aren't. Inflation as you are talking about it is caused by the money supply increasing. Usually due to the government printing more. Whoever gets the money first is suddenly richer, because prices haven't increased in response to inflation yet. The amount of money they have relative to everyone else has increased. Therefore everyone else has become poorer relative to them.

Only on average does everything stay the same, but it's a zero sum game where for one person to benefit, someone else has to lose. The amount of goods in the economy hasn't changed. But the person with more money (obtained through printing money) gets a bigger piece of the pie and therefore everyone else gets less.

Inflation is just a really confusing, inefficient, and indirect form of wealth redistribution. Whoever gets the printed money obviously gets to benefit from it, and everyone else is therefore poorer, including your entrepreneurs and investors and consumers and everyone else.

The only way this isn't true is if the money is distributed perfectly equally so the percentage everyone has is exactly the same as before. However this is not the case in the real world at all.

> Things get cheaper and cheaper over time, while the amount of money you make stays the same.

This can't be universally true. If food gets continually cheaper, unless the cost of owning land and farming it goes down by the same amount, farmers must eventually make less money than before (or be driven out of business entirely).

And I don't quite buy the comparison between technological progress (where things get cheaper due to massive amounts of competition and research) and switching to a fiat currency which is arbitrarily limited (bitcoin). Using bitcoin doesn't guarantee technological progress.

> Inflation as you are talking about it is caused by the money supply increasing. Usually due to the government printing more. Whoever gets the money first is suddenly richer, because prices haven't increased in response to inflation yet. The amount of money they have relative to everyone else has increased. Therefore everyone else has become poorer relative to them.

Yes, printing money is in effect a government tax for usage of that currency.

>This can't be universally true. If food gets continually cheaper, unless the cost of owning land and farming it goes down by the same amount, farmers must eventually make less money than before (or be driven out of business entirely).

Or the same farmer could be producing more food than before, but at a reduced cost. He would make the same amount but the price of food would be lower.

>And I don't quite buy the comparison between technological progress (where things get cheaper due to massive amounts of competition and research) and switching to a fiat currency which is arbitrarily limited (bitcoin). Using bitcoin doesn't guarantee technological progress.

No but technological and economic progress is almost guaranteed anyways. A currency like bitcoin means you actually get the reward from it in the form of cheaper prices over time.

>Yes, printing money is in effect a government tax for usage of that currency.

Exactly. In that sense bitcoin and currencies like it are free of that form of taxation which is a good thing for everyone using them.

inflation vs. deflation: I have three points for your consideration

1) High tech sector has been experiencing massive deflation for decades and is thriving. Why? Is deflation really that bad when it comes from productivity? We know deflation due to massive decrease in money supply or velocity is bad, but what is wrong with slow, steady deflation from productivity?

2) With 2-3% steady deflation, won't interest rates adjust? People will lend their money out to earn a better risk adjusted rate than deflation. There isn't some magical number or percentage where people will start or stop lending. It's more like behavioral economics where people have several choices at different risk profiles.

3) The biggest proponent for an inflationary system is the banking system and economists who are funded/trained/selected by the banking system. This casts a lot of doubt on 'inflation is bad for lenders' statement. In a deflationary system, productivity gains go to the consumers (via lower prices). In an inflationary system, productivity gains go to capital owners (via debt and higher prices).

The US experienced very strong but volatile economic growth under a capitalistic fixed currency system (gold standard) that had periods of deflation and inflation in the 19th century. There is no historical basis that shows that capitalism needs inflation.

One thing to consider: In 30-50 years the world population starts shrinking, however, amount of bitcoins will stay the same. Which in turn is likely to inflate it's value and possibly offset the deflation.

Reply on news.ycombinator.com