I have always question who says this. What makes you think deflation would be bad?
My conspiracy is that governments require inflation to print themselves out of bad policy. Without government abilities to do this, the government performs poorly. Common citizens do not lose 2-4% of their income in inflation.
Without inflation, i.e. fixed money supply, it would be impossible for a majority of loans to be repaid with interest, or give a positive return to investments. Note that this fact is independent of how well the borrower or business performs. (This is like a zero-sum game).
So, it would be irrational for investors or lenders to part with their deflationary money, as the net profit is always zero (or negative because of other costs).
I am very interested to know if there is a way around this problem.
Regardless of whether or not a deflationary end-state is better or worse, it seems non-controversial that the transition from our current situation to a deflationary one would be absolutely brutal. We're talking about turning the global economy on it's head.
It won't help how choosy investors are, or how well the economy performs. The money supply is fixed. So for someone to make 120 bitcoins from an investment of 100 bitcoins, someone else has to lose 20 bitcoins, which would be other investors, or the public (workers / consumers).
We currently have many currencies, if Bitcoin is so absurdly better, then maybe there would be a transition. Otherwise I'm sure many currencies will be used based on the application.
Bitcoin seems to be best for hording and spending. It holds value and can be transferred easy and cheap.
You can still have companies using currencies that incentivise loan/investing. Bitcoin currently exists and the loans keep being written.
I think as bitcoin grows its going to become big and boring. No 10x gains, not even 2x gains, like 10% swings over the course of a year. It wont be fun, it will be a store of value if you dont trust fiat. Right now I think its crazy undervalued which is causing the explosion of crypto. As BTC gets bigger, investment will start to look better as it provides better returns.
It can't get any bigger, the transaction limits, the "halvings", the liquidity issues after over a decade of operation, so I guess that experiment has run its course.
Ergo, there must be a hole in your theory somewhere.
Literally economics 101. Investment grinds to a halt and progress along with it.
Also, inflation means everyone needs to be investors or the money they worked hard for evaporates. Why should we force Joe Sixpack into being an investor for the good of the economy? He should be able to focus on earning money from his trade without having to worry about investing due to inflation being forced upon him.
Well, it's discouraged, but yes, basically. Under inflation, you need to invest money just to stay even. The lower inflation is, the less urgent the need to invest. With deflation, you're somewhat incentivized not to lend. A fixed money supply guarantees deflation, so yes, this would significantly reduce lending and the economic growth that lending stimulates.
> Also, inflation means everyone needs to be investors or the money they worked hard for evaporates. Why should we force Joe Sixpack into being an investor for the good of the economy?
If Joe Sixpack lives paycheck-to-paycheck he can ignore inflation entirely, it doesn't affect him a whit. Once he gets some savings, if he doesn't like risk he can buy bonds or something and continue ignoring inflation. But since you brought it up and since this seems to be a point of confusion for a lot of people, yes, let's see how a fixed money supply would affect Joe Sixpack.
If the government stops printing money, we are guaranteed to get deflation any time the GDP grows, right? With money supply held constant, "The US currency deflated by 2% last year" is equivalent to saying "The US GDP grew by 2% last year." And what makes the GDP grow? Joe Sixpack and his friends, out there mining ore or building furniture or otherwise increasing the amount of value in the world.
2% deflation also means that anyone with savings sees the buying power of their savings increase by 2%. If Scrooge McDuck has $5M in his mattress, his inflation-adjusted net worth increased by $100,000. He can retire and spend the rest of his life living very comfortably on the equivalent of $90k/year, and despite him doing no work, despite him incurring no financial risk, somehow every year he'll get a little wealthier.
How is that possible? Who's paying for his life of luxury? Joe Sixpack. Deflation is quite literally a tax by capital on labor. As long as the GDP is increasing, arguing for deflation is tantamount to saying, "I think some of that GDP growth created by workers should go to anyone with money." AFAIK this is universally understood to be a Bad Thing (tm) by virtually everyone.
He'll have to part with some of his wealth whenever buying something, and eventually it will still run out. It's not a stock that produces dividends, you have to spend the principal to take advantage of the value growth. Think of it as owning a $5M home that you have to sell a part of each time you buy something, even though the house increases in value.
> How is that possible? Who's paying for his life of luxury? Joe Sixpack. Deflation is quite literally a tax by capital on labor.
Joe Sixpack's salary would increase in value by default. As in, by default salaries would track GDP growth, how does that look like a tax to you? Companies will have to actively tell people "we're going to reduce your salary", which helps workers in the negotiation.
> How is that possible? Who's paying for his life of luxury? Joe Sixpack.
Or whoever is after the currency, just like whoever wants to buy a house pays for equity value growth.
> "I think some of that GDP growth created by workers should go to anyone with money." AFAIK this is universally understood to be a Bad Thing (tm) by virtually everyone.
As opposed to "I think some of that GDP growth created by workers should go to banks so that they can charge interest on everyone else and make easy profits."
Deflation via credit default has shown to be harmful to wider economy 2x times in US history (monetary shocks). I am not aware of any conclusive study that a deflationary currency is bad for investment and progress. The easy counterpoint is Gold, which is often deflationary (when economic growth outpaces gold mining). We have had 10k years of investment that have shown your basic statement is false (deflationary currency causes investment to grind to a halt).
Inflationary fiat or credit based currency is a relatively new invention (1972 in the US). I have not seen any serious analysis showing that real investment has radically improved since going off the gold standard. Real investment has been growing for decades as real wealth increases, inflationary currency hasn't changed that very much AFAIK.
The dollar has been fiat since the 1930s. The gold standard from 1933-1972 was essentially in name only.
45-72 was bretton woods era which was still fixed price to gold.
It was only after 1972 that the value was allowed to be free floating, not tied to an amount of gold https://en.wikipedia.org/wiki/Nixon_shock
I wouldnt use an entry level economics class to judge technology that eliminates risk of government hyperinflation and lowers/eliminates cost of transactions.
The economic benefits of free/low cost transactions and money that can be saved/spent rather than invested may have its own benefits.
I didn't, the question was "What makes you think deflation would be bad?". That is entry level economics and has nothing to do with technology.
From what I can tell, the evidence on the expected deflation you're talking about paints a different picture: https://www.bis.org/publ/work186.pdf
You ask why people would buy stuff when they'll be cheaper later, but then again, why do people buy stuff now when they could put the money on the stock market and take it out later, when it will be worth more than the product costs?
How will you pay for things if you dont spend Bitcoin?
I find 0 of those good. Upgrading your car when you dont need to is wreckless spending. Maybe the Economy changes to become more conservative and less environmentally damaging.
Going out to eat + vacations are unnecessary expenses. And btw, I completely doubt people are going to stop doing those 3.
I'm sure you do. But the chef who makes their living cooking food doesn't. The person who makes their living running tours doesn't. And the people employed by both definitely don't.
> Upgrading your car when you dont need to is wreckless spending.
But that's what creates the used car market, which is much bigger than the new car market. When people stop buying new cars it means tons of layoffs, which means tons of reduced spending by all the previously employed auto workers, which means more businesses lay people off, etc etc.
Personal Consumption Expenditures make up ~70% of the US GDP. Unless you really enjoy recessions you don't want to see it go down.
The alternative really is between low inflation and price stability. Government tends to prefer low inflation because it encourages people to invest their assets in a productive way and because it's actually pretty difficult to avoid any inflation via monetary policy.
Intentional monetary inflation creates a value gradient, wherein the first spend of a new dollar can buy more than the second spend, and so on, until the knowledge that the new dollar is in circulation has normalized.
Now, what happens when you always spend new dollars into circulation through the same entity, but then remove old dollars at the same rate from those who only acquire dollars after they have been value-normalized? If you are an entity that can create new money, and destroy old money, you effectively get a discount on everything you buy. To a lesser extent, the same applies to anyone that can hoard a large enough quantity of money. You can withdraw a quantity from circulation, wait for prices to normalize for the new money supply, then buy at a lower price from hoarded money until people realize the circulating supply is now larger and raise their prices.
The counter to this is to restrict fiat money creation and discourage hoarding. Bitcoin already has a fixed-in-stone schedule for the creation of its money supply, but there is no way to stop someone from accumulating a large quantity, and then using the size of that hoard to act like a central bank.
In a deflationary model, old money gets more and more valuable with time. In 50 years, it's possible that one Bitcoin will be worth 10M€.
What happens then when someone finds a stash of 100k BTC on their grandpa's attic? They can destabilise the whole economy.
With inflationary currencies it's never an issue - a money is either in circulation, or "evaporates". If you find your grand-grandfather's savings on the attic, they won't be worth too much (even if it's still a fortune). If you find your grand-grandfather's crypto-savings, you're a trillionaire, and a king of the world.
these happened all the time before central banks were created; see the two-century CPI plot: http://www.businessinsider.com/chart-inflation-since-1775-20...