Whether deflationary spirals can actually occur is controversial.
Now I'm not an economist, but I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin.
Suppose the value keeps going up, and a few years from now it's at $1,000 / bitcoin -- lots of poeple have been buying bitcoins wherever they can, and not spending them. Well, at some point people will decide that the price is ridiculous, because it's all based on speculation -- suppose it's $10,000 / bitcoin. And it will either stop increasing in value, or crash a bit.
Well, I don't see how this has prevented it from acting as a currency at any point in this, since it always has a value. There are always going to be some people willing to trade some bitcoins for some price -- and that's just the price, and whether you're dealing with whole bitcoins, or millionths of bitcoins, I don't see what further consequences this has.
And when you're talking about the macro-economic level, running a whole economy on bitcoins would be a separate issue, but there could be tools to deal with that too. For example, not denominating debt or salaries or goods in Bitcoins, but in a multiple of a consumer-price-index or something, that can change relative to current Bitcoin values.
[1] http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
So deflation is a general decline in prices which usually caused by the reduction in the money or credit supply (in Bitcoin’s case it’s the Money Supply). However if prices are falling through deflation then, you’re not incentivised to spend because; you’re going to get a better deal tomorrow. Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Raising the prices is the essential foundation of an economic recovery because; businesses can increase their profits which takes pressure off debtors etc and an example of this is the fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[1]. However, Bitcoin can only produce 25 Bitcoins every 10 minutes (which is being halved every 4 years from 2017) and this can create a liquidity trap because the injections of cash fail to stimulate economic growth – as a result, if Bitcoin is in a recession and is unable to stimulate economic growth it will eventually turn into deflation & deflation is only bad for people who cannot borrow more and unlike fiat currencies who can borrow more, Bitcoin has a fixed supply (and isn't even backed by a commodity) which means that, there could potentially be serious issues for the economy’s wealth.
[1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...
> Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
Well, if people are expecting deflation, then that expectation becomes built into the value of the currency, such that there exists an equilibrium between people expecting it to deflate further, and people expecting it do the opposite, because it's already overly valuable.
I can't see how everyone would just hoard it until there's infinite demand and zero supply, and a bitcoin has infinite value. There's always a semi-stable price.
And like I said, I don't see how the standard macroeconomic arguments apply, because right now bitcoin is just a currency "on the side", totally unable to affect economies on a large scale. And if it ever did reach that scale, governments could do things like force contracts to be denominated in some government-controlled ratio to bitcoins, so that the government would still be able to "control" the money supply, and increase or decrease it as desired. (That's just one crude example of how.)
Just because people are using bitcoins, doesn't mean that long-term contracts have to be denominated in bitcoins.
So I guess this is what confuses me about people saying that bitcoin deflation is bad. Deflation=bad arguments seem to rest on entire countries being solely dependent on a single currency, which is not the case with bitcoin. And even that became the case, it would presumably take place in a whole new way. But I still don't see anything inherently wrong with a deflationary currency, especially one used alongside "official" ones.
However, you are correct in that there is always going to be a semi-stable price (or a price floor) when the money supply starts to help create inflation and grow the economy again. In terms of how it’s bad for Bitcoin building on the previous comment, let’s pretend that people have bought coins at $200 and deflation kicks which means that, people either hoard it (to try and get something cheaper tomorrow) OR once it hits a certain level everyone tries to recover their losses and starts selling the coins which causes an economic crash to a highly volatile market (a $500k trade can usually cause a lot of issues) and the market will not level out until, there are enough buyers interested to buy back into Bitcoin.
1) assuming bitcoin will deflate 2) this means that existing bitcoin holders will be able to exchange their bitcoins for more $ than ever on mtgox/... 3) the conclusion is that this will make people leave bitcoin
Needless to say, if this is the argument, that people will leave bitcoin because they earn too much without doing anything, good luck with that one. So where is the flaw in my thinking here ?
I would also like to point out that a deflationary system won out over a debt based one many times in history. Saying it can't happen doesn't seem like it's based on anything. The obvious big example would be the end of the (west) Roman Empire, but there's dozens of examples in the last 2 centuries alone. This is yet one more case of people in the west thinking that because it hasn't happened in the west in the last 60 years, that it cannot happen (and they simply don't know just how often it happened before that).
Debt based currencies are fundamentally pyramid schemes, slightly obscured by the fact that the growth phase can last a very long time, but that doesn't change anything, not really (except opening up the possibility of a person being born into a pyramid scheme and aging and dying normally while the pyramid scheme is still growing). This will not work for bitcoin because bitcoin itself depends on infrastructure that depends on those existing pyramid schemes (ie. USD/EUR/...). It will work for house ownership and maybe for gold ownership.
Please correct me if I am wrong, but isn't the value of the total money supply supposed to equal something like the total value of the goods and services in the economy that that money supply represents (not sure if the wording is correct but hopefully I got the idea across). If that is the case, then won't a decrease in spending cause the total value of the money supply to decrease, meaning the expectation of deflation will cause some amount of inflation, such that the system stabilizes? Because of this, I don't see how you can have a deflationary spiral in a depressed economy based on anything other than speculation (and thus a Bitcoin bubble which will eventually pop). I do agree that Bitcoin is naturally deflationary; if there is economic growth, the money supply can't expand to keep up. And Bitcoin's deflationary nature slows this economic growth. Thus, I think that Bitcoin will eventually reach a stable real value. I think there must be a flaw in this reasoning because I'm sure many economists would disagree but I can't seem to find it myself.
People not spending money is generally a good thing. There are more resources to go around for everyone else and other people can afford more things with the same amount of money. Most people who save money invest it, which benefits the economy in the long term.
>In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation.
This hurts everyone though. Everyone has the same amount of money they did before, but suddenly everything costs more. No wealth is actually created by doing this, the same amount of goods are in the economy. But the person who gets the printed money buys a bunch of them, and then has a larger share of the pie, leaving everyone else with less.
Yes bitcoin has a mechanism for creating new currency, but this was a necessary evil in order to distribute the first bitcoins relatively fairly. It doesn't actually benefit anyone to give free bitcoins to some people just for running their computers a lot.
Also, the fact that the supply of bitcoins is fixed by the population of the human race is not means that bitcoins are inherently deflationary.
The only problem is that Bitcoin does have an end use—as an anonymous digital currency (c.f. Silk Road). And furthermore, whether you believe it to be 'macroeconomic cancer' or not, it exists and cannot be shut down as a matter of policy.
Simply checking out with a QR code and sending the Bitcoin from my phone would have been easier and not required any of my personal information. Instead I had to enter everything required for identity theft and to make fraudulent charges. It was the only way to pay and it was a hassle.
15 seconds? Including your address and phone number? With a PS3 controller?
BC is better understood as a commodity market with a simpler financial instrumentation. Instead of trading contracts for goods, you are able to trade the good itself, at internet speed and scale. That's a big innovation and we've only started to realize the consequence of it.
With the FED and Monetary Easing the total amount of dollars in the economy is increasing, but the actual value (purchasing power) of every dollar is decreasing. But since the number of dollars (numerically) that people are holding is increasing there is no speak of deflation because prices aren't going down due to the inflation of the amount of dollars. The actual purchasing power is deflating but due to economic slieght of hand everyone has more dollars. Win win!
The value of money is not the number of dollars but the distribution of the dollars throughout society. Double everyone's bank account and nothing would change after the initial emotional frenzy - prices would settle at twice the original values.
Deflation may be an 'economic carcinogen' but what name is given to the systematic reduction of value and spending power in an economy where there is almost no saving and for what saving there is there's no interest?
The price of gold has been increasing to greater and greater highs for the past decade due to the monitary policies during that time. Bitcoin is reaching a point where it can stand along side with it in some people's minds because it has a strong Mathematical backing rather than a flimsy backing by governments. Gold was taken over as a currency by paper; maybe BTC will end up the same way some day.
"Backing" is also grossly misunderstood in general.
Any "Backing" a currency has can generally be thought of as an put option on something fungible.
For example, gold will never drop below $10-$20 per Oz because of the industrial/jewelry/etc uses people find for it. However, that "backing" only makes up a small percent of the price of gold.
True; in a sense, its a formalized potlatch system in which the publicly-demonstrated destruction of wealth (energy and wear-and-tear on hardware, demonstrated via computation proofs) is rewarded instead of with informal social regard, with concrete exchangeable tokens.
It's unusual in that it does have a cost of creation - the expense of the machinery and power required to mine a bitcoin. So it does have a "base value" of a sort, you just can't redeem it.
Not true. QE is a swap. Take away a bond, replace with reserves. No net change. If anything it's deflationary, as the bond yields more interest than reserves.
Even if the amount of net financial assets in the private sector does increase, it doesn't necessarily follow that the purchasing power of the dollar decreases. It all depends on the capacity of the economy to absorb the extra spending. If there is excess capacity that is mobilized by the extra spending, you get more dollars chasing after more goods. If there is no excess capacity, you get more dollars chasing after the same amount of goods.
2. Time preference exists.
3. If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?
http://www.comedycentral.com/video-clips/tw2ltp/chappelle-s-...
The conclusion that Bitcoin will only get more valuable as time goes on depends on the assumption that it will acheive and then durably retain a certain degree of importance as a currency.
The people that are pointing to the problems associated with that are not arguing that they believe that will occur, they are making an argument about either why it shouldn't occur or why they believe it will not occur (and, often, both simultaneously.)
If you don't expect it to always rise, then you don't have the issue (not that it would necessarily be one) in the first place.
Imagine I need to buy a house. Today, I would go to the bank, ask them for money and they will give it to me under the condition of giving it back, plus inflation, plus a fee. I need to give back more money than I received in order to pay the government (inflation) and the 'professional' lender (fee), for their 'services'.
In a Bitcoin world, if I needed to buy a house, I have two choices: Pay it now, if I have enough money (exactly as today) or pay it later (in several installments). As simple as that. Then, the housing market will decide if this is acceptable or not, or how much time the seller is willing to wait. The only difference is that in the Bitcoin world the "professional" lender will cease to exist (the seller will be at the same time the lender). And since there is no inflation, I will not need to pay the government either.
Actually it would be much easier to buy a house.
> it will always be tempting to keep your Bitcoins in your pocket and let them appreciate instead of using them for needed goods and services.
What's wrong with this? If you choose to take a choice which actually makes you better off, how is that a bad thing? Shouldn't people saving/investing their money be encouraged?
>And certainly, no one will take on debt denominated in Bitcoins.
They would if the interest rates became low enough to make up for deflation. As you claim, more people would save a deflating currency, which will further push down interest rates (since when people save money they usually invest it or put it in a bank which loans 90% of it back out.)
Inflation necessarily makes everyone worse off. The person that prints money can now buy more goods. But the amount of goods in the economy doesn't change. So there is less for everyone else. It's effectively a very confusing and indirect method of wealth redistribution.
You can readily hock a car for money, so that's a few levels closer to being a currency. You can sell used media.
But there are people in the business of buying and selling gold for the sole purpose of readily converting it to currency and vica versa so that gold can be used as an alternative to paper currency managed by a nation's central bank. That's almost all that gold is used for, and that's what dealers in gold coin and gold bars are in business to enable.
Well, now there are few. Historically, though...
I have a suspicion that many people are spending their "hoarded" bitcoins, and also immediately moving to buy/mine more...
[1] Kindleberger, Charles P. and Aliber, Robert (2005 [1978]), Manias, Panics and Crashes. A History of Financial Crises, New York, ISBN 0-465-04380-1