Deflationary, sure. But where are the problems? More people are CHOOSING to conduct transactions in bitcoin. If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation.
With the "deflationary" part.
> More people are CHOOSING to conduct transactions in bitcoin.
Which isn't really an issue now because the total volume is small enough as to be irrelevant to any well-defined economy. It would be an issue if it was to become used, globally or in any region, as the principal currency, which is the only situation where its supply characteristics would actually be deflationary.
> If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation.
This relies on the premise that inflation and deflation of similar percentage magnitude are equally tolerable. I would suggest that the justification for making this assumption is, at best, non-obvious.
I will address the notion of deflation and inflation of a similar percentage being tolerable: http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t... That graph shows that inflation and deflation largely canceled out for many, many years here in the US. And the world survived those times or else we would not be here today. As such I would argue that it is possible for an economy to handle deflation as well as inflation.
One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has. I'm not convinced of the causal link between modernity and inflation; just because they happened at the same time doesn't mean there's causality. http://xkcd.com/552/
Which doesn't actually support the position it is offered as defense for, that similar levels of inflation and deflation have the same harms. Them tending in the long term to be equal (leaving no long-term net inflation/deflation) doesn't mean that variation from 0 on each side is equally harmful.
> And the world survived those times or else we would not be here today.
The world survived the times when chattel slavery, autocracy, de jure religious prosecutions were the norm, too. That doesn't mean that those things are good, or even no worse than the features of the modern developed world that have replaced them.
> One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has.
As its not one that either Krugman nor anyone in the exchange leading up to your post made, that's a strawman.
Once, there was a huge investment in, get this, Wooden Roads. Everyone knows wood rots, but somehow these wooden road investments developed a huge bubble. http://www.stocklobster.com/9998mhpr.html
If you take the time to read The Wealth of Nations, there is a pretty good description of banking and how it works without a common currency backed by the government. If bitcoin became the entrenched currency, what would happen is banks would issue Bitcoin vouchers to people, "This voucher from Bank of XXX is redeemable for 1 Bitcoin upon presentation." This would increase the supply of bitcoins. What the bank would actually do is probably transfer some of these bitcoins and continue on being a fractional bank, retaining say 10 Bitcoins, and investing 90 Bitcoins. If these bitcoins investments go to buying stuff from other countries, you get new capital(In the Smith sense of Capital) into the buying country, if you just lend your bitcoins to the foreign country, you get the profit, but you lose some capital (your bitcoins are in another country now, not producing capital in your own country, so even though you get a small percentage of profit, you don't grow the total capital in your country).
Uh, well, read Wealth of Nations, and take notes.
So these banks would still be fractional and exposed to the dangers of a bank run, because they are fractional. If you don't want a fractional bank, you need a bank that charges a storage fee. So you need deflation that outpaces the storage fee, or your stored bitcoins are losing value all the time. You can keep Bitcoins in cold storage, but then they are a) harder to use and b) must be protected. An encrypted hard drive is not a good solution because of hard drive failures. Printing them out essentially turns them into cash.
It prevents a key economic activity: borrowing money. I'll let you put together why deflation kills incentives to loan money, hence making it impossible for people to borrow.
Once you've done that, please explain to me how there were loans made over the last 400 years in light of the fact that only the last 80 years has had reliable consistent inflation.
If you live in a time of high barriers to borrowing money, you will live in a time of vastly decreased social mobility. You know, kind of like the time prior to the last 80 years. That wonderful age you gold-standard lovers wish you lived in.
Inflation is worse for lenders than deflation. Each dollar they get back is worth less when it is returned, not more.
Borrowers love inflation. If there was great deflation, it gets quite painful to pay back loans. The lender is quite happy about it though.
I think I read, though, that both severe deflation and inflation push up rates. If deflation is severe, it can push many borrowers into bankruptcy, making lending more risky.
What you have just proposed is an increase in the cost of starting a new business, no matter how good an idea is. Just because the banks are bad at determining who can and can't pay back a loan doesn' mean those who CAN should pay a tax.
The real story is more complicated since I have ignored money demand.
Note that I have not said Bitcoin will become a 'real' currency. There are real problems, Im just saying that your argument is wrong.
bitcoin's inherent deflation is not by money destruction nor increases in production, thus these arguments are not relevant, although true within its own context. since bitcoin, like gold, has a finite quantity, deflation is mostly due to demand, which you have chosen to ignore in your argument.
- Deflation of prices denominated in Bitcoin has been massive, several orders of magnitude higher than 2-8%.
- Inflation encourages you to spend money. Deflation encourages you to save it. An economy where no one spends money isn't much of one.
How long do you have to hold on to money before it's hoarding? A second? A minute? An hour? A year? The vast majority of money is hoarded because most people don't earn a dollar on one hand an immediately spend it on the other.
This really isn't very complicated.
Yes, because how else are they going to buy weed, ecstacy, cocaine, illegal electronics, steroids or any other banned substances that form the backbone of the commodities people are actually purchasing with bitcoins. Have you ever been to the Silk Road site? I bet you haven't. Here's a hint: you won't be able to use your browser to go, so look up Tor.
Edit: For the noninformed who say "dollars?" There is a huge incentive to use Bitcoins on Tornet sites like Silk Road to trade black market goods. This is because Bitcoins can cross international borders and are encrypted, are not subject to bank regulations, etc. They are essentially difficult for Law Enforcement Agencies to trace, but not impossible.
With dollars?
Deflation is something that happens to an economy; it can be a result of constrained supply of currency in the economy, but constrained supply of bitcoin now, which accounts for a very small share of the currency used in exchanges in any coherent economy isn't deflationary, even if the supply characteristics of bitcoin are such that it would be deflationary if it were a dominant currency.
> How long do you have to hold on to money before it's hoarding? A second? A minute? An hour? A year?
Probably best to say that any money held in cash is "hoarded", and characterize hoarding by degree rather than as a binary quantity.
> The vast majority of money is hoarded because most people don't earn a dollar on one hand an immediately spend it on the other.
People who deposit money in a bank (which amounts to a loan, even though it may be at an effective zero or, given fees charged by the institution, negative interest rate for some accounts) are not hoarding it. And, neither, for the most part, is the bank, who is turning around and investing/lending most of the funds deposited.
If people are cashing their paychecks and stuffing the money in their mattresses, then, yeah, they are hoarding it, but that's not all that typical.
Did you know that prices in Silk Road are pegged to USD? As it should. Either way, that's called argument ad populum. "And yet despite no revenue sources people are buying dotcom stocks"...
> How long do you have to hold on to money before it's hoarding?
This is called moving the goalposts. It's also a stupid argument in many other ways, by the way, and you should know better. "Evolution does not happen because not every single organism gives birth to one of another species"...
If it wasn't for the deflationary aspect, I might love it; but it's not, and it won't be changed to it, because the bitcoin community thinks deflation is the bestest thing ever.
This does not follow.
EDIT: Here's a graph of inflation vs deflation in the US over a few hundred years. http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t...
When removing a bandaid do you simply rip it off all at once or slowly peel it back? Which is the superior method?