Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.
So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can be divided up for use in transactions. That much speculations will cause wild gyrations in value and massive short term volatility, but the people using BTC to transact JUST DON'T CARE.
I really don't care if I'm buying my $1000 flat screen with 1 BTC or 0.0001 BTC. Neither does the merchant. I bought the BTC, sent it to the merchant, and the merchant sold it so quickly that the value didn't change much, and we are happy.
So that's the short term. In the long run, the volatility might decrease as the total market capitalization increases to 10x or 1000x of its current value.
Then we can start to think about using it as a unit of account. If we do, we may enter a deflationary spiral, but by then BTC will already be used in an enormous swath of the economy.
So I interpret Krugman's argument not so much that BTC CAN'T take over the world, but that it SHOULDN'T take over the world. (I'm not sure if I agree. Many economists have been arguing over this point for decades, and I'm not smart enough to sort it all out.)
A store of value that can be anonymously transferred and exchanged without significant costs has some inherit value in society. The only problem with bitcoin, is that if we consider bitcoin to be an asset, than it's price is entirely determined by speculation and nothing else. At least with gold, there are industrial/commercial uses for it that put a lower bound on the price. Not so much with bitcoin. Personally, I don't need an anonymous store of value, so if I am going to be speculating, I would rather do so with stocks of companies, as those are actually backed by the value of the company itself. I may throw some money into bitcoin just for fun, but I wouldn't do it to use it as a currency. My gut is telling me that most people jumping in are not interested in using it as a currency either.
Of course, this doesn't necessarily mean bitcoin won't become more like a currency in the future. It is possible that it will stabilize. Considering that the world has never really seen anything like this before (well there were a few attempts that failed in the past), it is impossible to predict what is going to happen.
Its price is based on the work required to make the coins and the properties of a minted coin (can't be forged, etc). The coin has virtual properties, but they're still useful properties.
Money is supposed to represent value. Not to actually be value. There are new humans arriving in the world all the time. And new resources are being mined from the earth, and created intellectually all the time.
If the money supply does not match these new things then the currency fails.
You can't just do a "currency split" and issue more notes - doing that effectively tells everyone their resources are half as valuable which is clearly wrong - the value of the resources didn't change.
You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails.
I think many of the bitcoin fans reject this. They want to be able to hold (say) 1/1000th of the world's wealth, and be able to keep on holding 1/1000th of the world's wealth as long as they don't spend any of their hoard.
It's like trying to create a financial crisis because you expect to be on the right side of it.
That's only if you want the currency to maintain a stable value, neither inflationary nor deflationary.
Alternatively, the currency will have deflation. It's not obvious that that necessarily implies "failing".
This part is not completely accurate when you consider that money changes hands over time as value is created. (Multipliers)
If the someone produces 1 widget per day (different person each day), and someone else consumes 1 widget per day (and becomes the producer the next day), 1 widget-dollar is needed forever to help move the widgets. If the pattern of production and consumption is more complicated, we need more dollars (debt) to keep track.
The sum total of money needs to be something like the sum total of all current unsettled debt, and it needs to be less than the amount of future production of the debtors, in each's share (or else they will default).
It gets more complicated from there.
Lending is not an optional feature in a modern economy. You need some level of lending to have credit balances with merchants or investment in stocks and bonds. An economy without lending can take few risks on innovation, such as YCombinator has. They also have less incentive to spend money hiring employees because the risk/reward ratio is higher.
A currency that continuously deflates is also likely to hit a liquidity crisis when everyone attempts to sell at once and the exchanges stop buying. We've already seen exchanges stop selling or choose to impose hurdles to buyers because Bitcoin demand was too high.
Until they resolve the money supply issues, the Bitcoin is likely to remain merely an expensive and risky proxy for illicit drugs.
2. Lenders seek profit, not revenue. 6% interest on 4% deflation is hardly greedy. You're ignoring the risk/reward ratio. Deflation causes defaults because existing loan costs become more onerous. 6% on 4% would almost certainly be a net loss after defaults. The high risk of default during deflation is part of why interest rates hit 18% in the 1980s.
3. Deflation is typically a product of most people having less access to your currency. Debtors would make an estimation that they could afford your loan at a lower-priced Bitcoin (in currency and labor costs). They'll be more likely to default when the currency is more scarce either due to the worse exchange rate of money or exchange rate of labor.
Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.
For a cartoon example, with high enough deflation and a less than perfect job market, that debt might represent more years of work when you are 35 than it did when you were 25.
But I really want to talk about it in terms of units of productivity. If the value of bitcoin goes up over time, then each unit of productivity will be worth less bitcoin over time. Meaning that relative to units of productivity, a debt will increase.
In your first example, you relied on the assumption that your boss or customers or whatever would not take the current BTC value of your productivity into account. In your new example, you are relying on the people you hire not taking the value of their labor in BTC into account. Neither of those are reasonable assumptions.
Is that the retarded idea that no one will buy anything if prices keep falling? Look no further than computers, cell phones and all manner of electronic gadgets. Their prices keep going down, but everyone keeps buying them.
If you need/want something now, you'll buy it now.
Here's a summary of the article: "The State-Controlled Mainstream Media paints a gloomy picture of a currency that can't be controlled by the State."
EDIT: Perhaps a downvoter might want to point out a flaw in what I said?
In some future world where no one wants the new gadget the price of the old one will stop falling!
> In some future world where no one wants the new gadget the price of the old one will stop falling!
What's the point here? It's not like the old gadget would get sold at the same price for ever and ever.
I take it you're referring to the word "retarded"? It was meant to criticize the idea of a "deflationary spiral", not the poster.
Deflation and hoarding was never a real problem. Baby-Sitting Co-op IS a silly story that does not scale. Gold had similar deflationary property as bitcoin and somehow it was used in trade for ages. Critics miss the point that monetary wealth is useless if you can't spend it, so at some point hoarders will say: enough, it's time to use some life. At the end of the day, money is just numbers with the potential to convert it to comfortable life.
My selfish, self-interested side says: I would wish more hoarders who collect numbers and don't convert it, so they don't use real world resources. They leave more for me!
To me it seems that for the time being (e.g. the next 50? 100? years), as long as we have a currency alternative to bitcoin such as USD, these problems can be avoided by just switching currencies to be able to buy/sell/borrow/invest in, as long as other parties agree to it.
Or am I missing something?