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Comment by jstalin | Hacker News Reader

Expect lots and lots of arguments against bitcoin because of its deflationary nature. Nearly the entire universe of modern academic economics rests on the Keynesian and/or Monetarist foundation that increasing money supply (thus inflation) is a good thing.

Most people don't connect the fact that their money is worth less year after year with the fact that it is the government itself devaluing their money. Heck, most people don't even realize their money is losing value. Only savers, especially in our current zero interest rate policy environment, come close to understanding what is going on.

Nothing illustrates better what has happened to our money than the current market value of US coins made before 1965. For instance, a 1964 dime (nominally worth 10 cents) is actually worth $1.64 in silver content. That's somewhere around a 95% devaluation in just the last 50 years!

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Iosif, I appreciate your strong opinions about inflation. I'm sure Lenin would be proud [1]. However, you're too into the politics of it. We in HN should try to do some rational armchair economics, try to see the inflation/deflation debate as about tradeoffs, not principles of morality. "Government steals through insidious inflation!". "Rent seekers fatten when deflation happens!". Yeah, very useful.

First, the Keynesian/Monetarist Block does emphatically not claim that inflation is good, since last time I checked ethics was not a sub-field of economics. Inflation is a tool.

Second, deflation really is a big deal. Unless you're ready to argue that debt-deflation does not exist. Please spare us from such "deep" arguments such as found on the Bitcoin Wiki [2].

Third, the main problem of Bitcoin is not that it is deflationary, because it's not. Well, it is now, but not necessarily forever. The problem is that it imposes, through its fixed supply, a senseless corset on economic growth. It's neither central planning, which would have at least the possibility of being a somewhat enlightened planning, nor a rigorous market mechanism, that responds to shocks on the economy. It's just fixed because Satoshi said so. This lack of rigor in economic thought is what's really problematic in Bitcoin.

[1] https://en.wikipedia.org/wiki/Inflationism#Political_debate

[2] https://en.bitcoin.it/wiki/Deflationary_spiral . A sample from the well of deepness: "The key difference is that people don't foresee a fixed cost (unit amount) that they must pay with Bitcoin". Yes, they do, or will when lending in Bitcoins begins. It's called the principal. You should laugh now.

I apologize ahead of time for going off topic but I have to argue against the bashing of Keynesianism that is getting so popular lately.

Keynesian economics works, and it is responsible for the longest and largest sustaining economic growth ever seen on this planet. It works, and moreover it is shown to be the only thing that works over a long period of time.

The fact that the competing theory is simpler does not mean that the competing theory works. Simplicity does not mean accuracy. Also expansion of the money supply does not necessarily mean inflation. Remember that the amount of goods and services produced in the world is also expanding.

There's a difference between "works" and "has worked". And it hasn't existed for "a long period of time", just long when compared against the lifetime of modern economics.

Which is not to say it's wrong. Merely that the world hasn't settled on Keynesianism as the One True Path™, and there exists no logical proof that it is successful, much less the only successful scheme, because you can't construct irrefutable proofs when you have to include human behavior.

The bashing may be popular now, but Keynesianism has been popular for quite a while, during a period of great wealth increase (which you cannot attribute solely to it, for the same reasons you cannot prove it works), and I suspect it has blinded people to other possibilities. At least this gets people talking about it, and it has generally been civil as far as I have seen.

"Keynesian economics works"

well, yes, if you call a increasing gap between the wealthy and the poor "work"ing.

Are you saying there is something wrong with nominal inflation? 2% a year is scary when you talk big numbers like that, but the only time that money spans that large of time spans is retirement, which is invested at well over inflation even if you choose something like government guaranteed bonds.

To my knowledge the only way to lose money to inflation is to sit on cash (stupid for other reasons), have it in short term treasury bonds (which are bought by companies that have nothing to do with their flex cash), or have a bad savings account.

> short term treasury bonds

Hold on. If those are worse than even savings accounts.. why would said companies not put their money in a normal savings account?

I do not run the fiscal policy of a huge company, so I am speculating, but here goes:

Savings accounts are considered perfectly safe due to FDIC. If you have $10 million for six months you can't do anything with but don't want to invest, Treasury Bonds are zero risk and have some kind of return. In contrast there is a minor risk that a bank could go under.

Especially when you consider that you have several accounts with a bank, and you have say $20 million in your accounts total, why add to that?

Well and the FDIC doesn't really apply here since it only covers $250k. You're right on why the treasuries are appealing though, it's basically a bank account for large amounts.

Yes, it is harmful, particularly to savers. Of course, the Holy Keynesian view is that savings is bad and that we all need to be encouraged to spend.

Tell me right now where I can save and earn more than 2%. Maybe 30 year treasuries (with nominal values at 30 year highs, meaning that they have no where to go but down, further eroding savings), but certainly not in savings, a CD, or any other classic savings product. 2% compounding per year is a 22% loss in value over just 10 years. Chasing yield over that 2% per year further distorts savings and markets, and of course that 2% loss per year is good for what? It's just confiscation by the money printers to devalue future debt payments, making it seem all the easier to borrow and spend unsustainably.

But, of course, a steady 2% per year is the pipe dream of central planners and doesn't happen in real life. See, e.g., the 1970s.

Treasury Inflation Protected Securities (TIPS) adjust your principal accordingly with the CPI. You also get the coupon rate.

Small nominal inflation encourages investment, whereas deflation incentivizes people to just hold their money in the form of cash.

Of course, the other option is stability. I'm not saying that bitcoin's deflationary behavior is good, only that it challenges the accepted collective wisdom.

Saving is not harmful nor beneficial. It all depends on what you do with your savings. If you stuff them under the mattress, saving is harmful. If you invest, then it's beneficial.

An inflationary currency promotes investment. A deflationary one promotes mattress stuffing. You may draw the conclusion yourself.

> If you stuff them under the mattress, saving is harmful.

I don't see how. Isn't this equivalent to a distributed loan to everyone who holds dollars?

It is unstable. The currency is deflationary by design and the mattress effect effectively reduces monetary mass, creating more deflationary pressure. Up until the point price drops suddenly. It is the poster example of a bubble: artificial valuation, self feeding cycle, disruptable only by change of public perception.

Milton Friedman wasn't a Keynesian, and yet he advocated monetarism, which is essentially the same as inflation targeting, except instead of keeping inflation constant, you keep the rate of increase of the money supply constant.

In academic economics, even Keynes never advocated permanently distorting the economy towards consumption and away from spending. Of course people who like government spending for other reasons will incorrectly cite Keynes to justify their position.

Real interest rates determine the saving vs consumption decision, not inflation.

See here for the arguments that real economists use to justify a 2% inflation rate

http://econfan.blogspot.com/2011/07/why-target-inflation-at-...

You are always losing money to inflation. First, you always need to have cash because there is no cashless economy and you need cash to pay for everyday expenses, and that is a significant amount of money impacted by inflation.

Second, there is no serious rationale to have inflation (except to make it easy for governments to pay their debt and make everyone else poor), despite what Keynesians bring back on the table every single time without evidence (and citing the current "economist consensus" as a proof, even though they fail to realize economists were thought and raised the believe in Keynes' theory for dozens of years - hardly convincing). As another poster mentioned, even without inflation the money you have now is worth more than the money you have tomorrow, therefore there would still be time-value attached to a currency even if no inflation is there.

Inflation is punishing savers, in turn punishing investment and lowering the economic expectations.

The opposite of inflation is deflation, and that's much worse than inflation.

so, the US from 160X-1900 must have been a horrifying wasteland.

Please provide examples of the "horrors" of deflation. I am far from being convinced.

http://en.wikipedia.org/wiki/Deflation

> First, you always need to have cash because there is no cashless economy and you need cash to pay for everyday expenses, and that is a significant amount of money impacted by inflation.

How long do you hold onto your cash? I mean an actual bill. Remember inflation only impacts cash while you have a particular bit of cash.

If I hold onto $200 cash as an emergency fund, that $200 is impacted by inflation. If my wallet goes from $200 to $10 every week, then only $10 is impacted by inflation.

> Second, there is no serious rationale to have inflation

You are going to have to try much harder to debunk inflation than you are doing here. Most of the modern economic theory calls for a nominal amount of inflation (1-2%) as good for the economy. I was correlating time-value to inflation, as they are similar impactors.

> Inflation is punishing savers, in turn punishing investment and lowering the economic expectations.

Except every system I have ever seen that isn't your mattress is designed to give you inflation coverage + an ROI to compensate you for potential loss. How is that hurting savers?

"Nearly the entire universe of modern academic economics rests on the Keynesian and/or Monetarist foundation that increasing money supply (thus inflation) is a good thing."

Imagine my shock that user jstalin is a monatery crank.

If your currency is worth X today and more than X tomorrow you will see less economic activity than otherwise. That simple fact that is true whether or not you agree with the rest of Keynesian or Monetarist economics.

> If your currency is worth X today and more than X tomorrow you will see less economic activity than otherwise.

This is something that's confused me for a while. If the value of your currency is going up, doesn't that mean your purchasing power is going up too? Which means you feel richer because the relative prices of goods are going down.

So your argument seems to be saying: falling prices depress economic activity. Which is true in some cases, but isn't true as a general rule. I think it's more of a threshold effect.

No one ever says "I'm never going to buy an iPhone because the price keeps going down." They say "Once the price drops to $X, I'll buy one."

"Once the price drops to $X, I'll buy one."

This is a naive view of how supply works. If fewer people are buying today this lowers the demand curve. This decreases the amount of the good that will be produced in the first place. You don't get a chance to buy those lost phones later because they never got made.

Yes, but the standard supply and demand model makes assumptions about the nature of money markets that I don't think apply in this case, which is why I'm confused.

Bitcoin has some unique features (e.g. non-repudiable "teleporting") that aren't normally considered -- Econ 101 assumptions prove too little. However, this doesn't take a deflationary death spiral off the table. It could easily be Bitcoin's downfall, I just think other things are more likely.

...And this whole time I thought supply-side conservative economics was all about propping up and subsidizing the holders of capital.

> That's somewhere around a 95% devaluation in just the last 50 years!

And a good thing! Everything was shit in 1964. Cars, computers, retail logistics, cancer treatments, surgical techniques, metallurgy, airplanes, the telephone network, movies, animation, TV, air conditioning, the relative strength of the USSR: all shit.

It all needed to be burned to the ground to get the wonders we live with today. If Grandma Retard's pass-book account had to go with it, so be it. If the deflationists had their way, we'd still be using stable, value-preserved stone knives and bear skins.

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