While I can't say with certainty whether mild and predictable deflation is bad for the economy, I don't think that these standard arguments that are used are sufficiently persuasive.
1) It is clear that a deflationary spiral, defined as possessing the characteristics of being unexpected, not written into contracts or loans, and relatively severe (double digits) while accelerating is bad. The great depression makes this clear. We can also see it in the current Greek situation. However, runaway inflation is equally bad, as we can see from post WW1 Germany, and modern day Venezuela and Argentina. Is it the fact that the change in the buying power of money is large and unexpected, or is it the sign of the inflation percentage that is bad?
2) Under the current debt based money system, the negative effects of inflation fall primarily on the poor. The wealthy purchase government bonds, which protect them inflation. They also have bank accounts, or finance debt either directly or indirectly. This means that instead of inflation falling on the populace evenly, it falls doubly on the poor.
3) Under a constant money supply system that eschews debt, the rich must seek out investment that actually increases productivity, rather than doing parasitic zero-sum investments (such as bond purchases and loan giving) that merely transfer value from one person to another. This would tend to grow the economy faster.
4) Under a constant money supply (like Bitcoin in a few years), wages and prices would tend fall by however much the economy was growing (2% - 3% a year), but the raises that people give out for seniority would tend to overwhelm the wage issues.
1) Large unexpected changes in the value of money wreak havoc on contracts but the economy can generally deal with equivalent levels of inflation better than deflation. A 2%-3% deflation per year is terrible for an economy and will result in greater than depression levels of unemployment but 2-3% inflation obviously doesn't have this effect.
2) Unexpected inflation actually benefits the poor because they tend to owe more debt, and own less fixed interest assets such as bonds.
3) Bond purchases and loans aren't zero sum investments. If we banned loans today the economy would not expand faster but would start to shrink very quickly. Contemplating banning loans from a demand side would be terrible for our economy because the velocity of money would shrink considerably and we would end up with incredibly painful deflation.
4) With mild long term deflation you run into demand problems and lack of investment. Deflation makes investments look less profitable then they are because hoarding money has great risk free returns, and the nominal future cash flows will be smaller because money will be more valuable. For instance if you buy a house for $100,000 and it returns $10,000 a year in rent. After 30 years of deflation it will only be returning $2,500. This means that many productive investments are not made because it makes more sense to hoard the money, leading to under investment and an underutilized economy.
The only economy that in recent history has experiences predictable deflation is Japan, and it does not look like an economy we would want to emulate :P.
The fix for any deflationary concerns is to denominate prices and contracts in the price level, not a currency. If Bitcoin deflates and increases in value, Bitcoin-denominated prices and wages go down automatically. If you wanted to save for near-term spending, you'd purchase derivatives that reduce your exposure to Bitcoin swings relative to your price level, and since Bitcoin's value would increase at a relative predictable rate in a Bitcoin-saturated economy, competition in this derivative market would drive the issuer to pay the buyer some fraction of the expected increase in value.
Instead of most of humanity having to suffer through losses of wealth because their currencies are small and volatile, everyone will have stable currency pegged to their local price level, and they'll be paid to hold it.
Great depression was caused not by deflation, but by previously unleashed inflation (as in "inflated money supply"). Collapse of the bubble is a logical consequence of any bubble. Alternative - ever-increasing inflation was experimented in Weimar Germany, Zimbabwe and few other places. Hard money (Bitcoin or physical scarce collectibles) prevents people from inflating money supply, thus preventing global bubbles and thus preventing subsequent depressions.
Of course, local stock-specific bubbles can still exist, but they are always subject for arbitrage and voluntary exits. Global money bubble is more destructive because use of a certain money is enforced by laws and therefore people cannot easily exit or switch to alternative.
Even if the supply of money was predictable, the growth of the economy wouldn't be. This also means that the deflation effect of something like Bitcoin wouldn't be predictable, as the need for money is very much linked to the value of what is exchanged (and thus to economic growth).
Accounting issues with wages are not as important when savings are possible. In today's ever-inflated economy many people have zero savings and a lot of debt. People live from pay cheque to pay cheque. But when savings are enabled by Bitcoin, then wage is merely an addition to the existing balance and its adjustment to the market prices is not so dramatic.
This proposal has nothing to do with Bitcoin, though. This FT-coin is a currency (parallel to the Euro) issued by a central authority, just as any other fiat currency.
This is completely different from Bitcoin, whose value arises from the cost of mining (hardware purchase, power, maintenance, and time spent), and people's willingness to exchange that for other currencies and/or goods.
whose value arises from the cost of mining (hardware purchase, power, maintenance, and time spent)
This is not true, and represents a fundamental misunderstanding.
The value of bitcoin arises solely from the demand for it. The cost of mining is driven by the value of bitcoin, not the other way around - if demand for bitcoin were to collapse, the price would drop, and all rational miners whose current operating costs exceed the new price would stop mining. This would result in the next blocks being mined very slowly, and would eventually result in the mining difficulty dropping, bringing the cost of mining back into line with the market price.
> I'd ask him one question: how is the idea of regulated, political and centralized money working out for you?
That's kind of a straw man, because the Euro is all of the burdens of a centralized fiat currency while lacking almost all of the benefits (or at least the ones most relevant to Greece's current situation).
Having a unified monetary policy among countries with incredibly fragmented and disparate fiscal policies is a recipe for disaster. Even in the US, fiscal policies are relatively unified at the federal level and states are prohibited from backing their own debt the way nation-states (like the US federal government and Eurozone countries) can.
And on that note, look at the USD. It's the strongest fiat currency in the world and the preferred medium of exchange worldwide, even despite all of the outstanding issues with the US economy and the state of the US national debt. Clearly a centralized, fiat currency can be powerful if you don't set it up for failure from day one (as the Euro was).
If Greece had BTC instead of the euro, he would have again closed the banks and campaign for the blockchain to "forgive the debts of greece before i open them again". The situation with the euro is a lot closer to having BTC than drachma. You chose a bad example to defend BTC.
This is actually nothing to do with Bitcoin - it's about using blockchain technology to issue what is effectively government debt in crypto-currency form - i.e. what Overstock have done.
But if it's government-issued, why not use a centralized server manage the ledger? Since the government is going to be capable of producing as much currency as it wants, at will, there's no reason to have a blockchain.
He agrees that there are a lot of goods and services that are getting cheaper. But then he says that they only are getting cheaper because the buyer spends more time informing himself and not just because time passes by. This is wrong. There are widespread deflationary effects in current economies.
as if greece was a-ok when it had the drachma. exposes the underlying problem that the greek economy in itself is pretty useless, hence all the drama right now is focused on financial shenanigans.
the EU expansion to the east broke greece's neck. a well educated, motivated workforce entered the EU, but smartly like Poland did not join the Euro. Amazing growth in Poland throughout the crisis of the last 7-8 years, catastrophe in Greece.
See comments from Lithuania's prime minister and others who are getting fed up with Greece.
Interestingely enough this fits Samuel P. Huntington's predictions of the Clash of Cultures. He had Greece as part of the orthodox area, separated from catholic/protestant Europe which spanned from UK to Poland. He got a lot of shit for his theories at the time, was quite prescient in hindsight.
With an added "bitcoin is bad but if we take the idea and reshape it so it works in tandem with the existing financial system as a support system then it could be good"
Although right now he may well be thinking about some way to increase liquidity, and future taxes look appealing. I doubt if it will be blockchain based though, unless they have had a lot of prep work going on.
Saying deflation is the cause of a bad economy is like saying a wet head causes rain.
Chain of causation is:
money printing used to buy debt ->
underpricing of debt risk ->
unsustainable debt funded malinvestment ->
debt collapse ->
deflation as effective money supply shrinks
The irony is that they use fear of deflation to justify the very act that causes the malinvestment and debt collapse.
To be fair it would not help Greeks now as they cannot access Euros with which to buy BTC. It would have helped them if they could have had access 3 weeks ago, before capital controls were enacted.
However I would be surprised if Spanish, Irish and Portuguese citizens are not looking at the Greek situation and wondering if they need to take some action. Coinbase, circle etc need to target these markets before they experience capital controls.
[+] [-] thomasfoster96|10 years ago|reply
[+] [-] celticninja|10 years ago|reply
[+] [-] ExpiredLink|10 years ago|reply
[deleted]
[+] [-] 1053r|10 years ago|reply
1) It is clear that a deflationary spiral, defined as possessing the characteristics of being unexpected, not written into contracts or loans, and relatively severe (double digits) while accelerating is bad. The great depression makes this clear. We can also see it in the current Greek situation. However, runaway inflation is equally bad, as we can see from post WW1 Germany, and modern day Venezuela and Argentina. Is it the fact that the change in the buying power of money is large and unexpected, or is it the sign of the inflation percentage that is bad?
2) Under the current debt based money system, the negative effects of inflation fall primarily on the poor. The wealthy purchase government bonds, which protect them inflation. They also have bank accounts, or finance debt either directly or indirectly. This means that instead of inflation falling on the populace evenly, it falls doubly on the poor.
3) Under a constant money supply system that eschews debt, the rich must seek out investment that actually increases productivity, rather than doing parasitic zero-sum investments (such as bond purchases and loan giving) that merely transfer value from one person to another. This would tend to grow the economy faster.
4) Under a constant money supply (like Bitcoin in a few years), wages and prices would tend fall by however much the economy was growing (2% - 3% a year), but the raises that people give out for seniority would tend to overwhelm the wage issues.
[+] [-] JamesBarney|10 years ago|reply
2) Unexpected inflation actually benefits the poor because they tend to owe more debt, and own less fixed interest assets such as bonds.
3) Bond purchases and loans aren't zero sum investments. If we banned loans today the economy would not expand faster but would start to shrink very quickly. Contemplating banning loans from a demand side would be terrible for our economy because the velocity of money would shrink considerably and we would end up with incredibly painful deflation.
4) With mild long term deflation you run into demand problems and lack of investment. Deflation makes investments look less profitable then they are because hoarding money has great risk free returns, and the nominal future cash flows will be smaller because money will be more valuable. For instance if you buy a house for $100,000 and it returns $10,000 a year in rent. After 30 years of deflation it will only be returning $2,500. This means that many productive investments are not made because it makes more sense to hoard the money, leading to under investment and an underutilized economy.
The only economy that in recent history has experiences predictable deflation is Japan, and it does not look like an economy we would want to emulate :P.
[+] [-] natrius|10 years ago|reply
Instead of most of humanity having to suffer through losses of wealth because their currencies are small and volatile, everyone will have stable currency pegged to their local price level, and they'll be paid to hold it.
[+] [-] oleganza|10 years ago|reply
Of course, local stock-specific bubbles can still exist, but they are always subject for arbitrage and voluntary exits. Global money bubble is more destructive because use of a certain money is enforced by laws and therefore people cannot easily exit or switch to alternative.
[+] [-] danmaz74|10 years ago|reply
[+] [-] oleganza|10 years ago|reply
[+] [-] mike_hock|10 years ago|reply
This is completely different from Bitcoin, whose value arises from the cost of mining (hardware purchase, power, maintenance, and time spent), and people's willingness to exchange that for other currencies and/or goods.
[+] [-] caf|10 years ago|reply
This is not true, and represents a fundamental misunderstanding.
The value of bitcoin arises solely from the demand for it. The cost of mining is driven by the value of bitcoin, not the other way around - if demand for bitcoin were to collapse, the price would drop, and all rational miners whose current operating costs exceed the new price would stop mining. This would result in the next blocks being mined very slowly, and would eventually result in the mining difficulty dropping, bringing the cost of mining back into line with the market price.
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] dataker|10 years ago|reply
I'd ask him one question: how is the idea of regulated, political and centralized money working out for you?
[+] [-] chimeracoder|10 years ago|reply
That's kind of a straw man, because the Euro is all of the burdens of a centralized fiat currency while lacking almost all of the benefits (or at least the ones most relevant to Greece's current situation).
Having a unified monetary policy among countries with incredibly fragmented and disparate fiscal policies is a recipe for disaster. Even in the US, fiscal policies are relatively unified at the federal level and states are prohibited from backing their own debt the way nation-states (like the US federal government and Eurozone countries) can.
And on that note, look at the USD. It's the strongest fiat currency in the world and the preferred medium of exchange worldwide, even despite all of the outstanding issues with the US economy and the state of the US national debt. Clearly a centralized, fiat currency can be powerful if you don't set it up for failure from day one (as the Euro was).
[+] [-] return0|10 years ago|reply
[+] [-] jackgavigan|10 years ago|reply
[+] [-] fragsworth|10 years ago|reply
[+] [-] kspaans|10 years ago|reply
0 - http://www.wired.com/2015/04/overstock-files-offer-stock-wor...
[+] [-] madez|10 years ago|reply
[+] [-] mcguire|10 years ago|reply
[+] [-] plasmid0h|10 years ago|reply
[+] [-] 666_howitzer|10 years ago|reply
[+] [-] salibhai|10 years ago|reply
[+] [-] pinaceae|10 years ago|reply
the EU expansion to the east broke greece's neck. a well educated, motivated workforce entered the EU, but smartly like Poland did not join the Euro. Amazing growth in Poland throughout the crisis of the last 7-8 years, catastrophe in Greece.
See comments from Lithuania's prime minister and others who are getting fed up with Greece.
Interestingely enough this fits Samuel P. Huntington's predictions of the Clash of Cultures. He had Greece as part of the orthodox area, separated from catholic/protestant Europe which spanned from UK to Poland. He got a lot of shit for his theories at the time, was quite prescient in hindsight.
[+] [-] yc1010|10 years ago|reply
See this graph http://i.imgur.com/vRsIMvt.png
edit: Oh I see now who the author is :D well euros or bitcoins the way Greece is going inlation or deflation will be the least of their worries....
[+] [-] nabla9|10 years ago|reply
Bitcoin is deflationary (as negative inflation) in the first sense and this is the deflation yanisv is talking about.
[+] [-] celticninja|10 years ago|reply
[+] [-] HugoDaniel|10 years ago|reply
[+] [-] Havoc|10 years ago|reply
Nothing against BT...but sheesh.
[+] [-] pjc50|10 years ago|reply
[+] [-] chinathrow|10 years ago|reply
Blogging? Yes
http://yanisvaroufakis.eu/2015/07/03/imf-backs-ever-so-pecul...
[+] [-] wslh|10 years ago|reply
[+] [-] justincormack|10 years ago|reply
[+] [-] stevedekorte|10 years ago|reply
Chain of causation is: money printing used to buy debt -> underpricing of debt risk -> unsustainable debt funded malinvestment -> debt collapse -> deflation as effective money supply shrinks
The irony is that they use fear of deflation to justify the very act that causes the malinvestment and debt collapse.
[+] [-] rurban|10 years ago|reply
[+] [-] celticninja|10 years ago|reply
However I would be surprised if Spanish, Irish and Portuguese citizens are not looking at the Greek situation and wondering if they need to take some action. Coinbase, circle etc need to target these markets before they experience capital controls.