I never understand the counter-inflation argument...most economists understand inflation is something to be managed, but it is far from proven that target inflation is bad. There are many useful economic properties of inflation.
Meanwhile, Bitcoin has undergone such massive speculative appreciation that everything around it has deflated in comparison. As a result, bitcoin is spectacularly less useful than it would have been. It is no longer useful as a method of transaction and really only a ledger and store of value.
this inflation argument is specious. It just isn't the problem that demanded an unregulated anonymous deflationary currency.
> it is far from proven that target inflation is bad
Target inflation is specifically intended to promote consumption. Consumption, particularly in the form of atoms, not bits, is approximately 90% correlated with greenhouse gas emissions, despite all our efforts to roll out renewables.
Setting the "inflation is good" argument alongside an article decrying the climate impact of inflation-resistant currencies is . . . well, it's an interesting take.
Unless and until we are manufacturing/growing and transporting consumptive goods via renewable and sustainable means, promoting inflation is most certainly contrary to climate stability.
It does do that, but the primary purpose is to push investment. To protect money from inflation you have to put it to work. Wealth is a verb, not a noun.
It also erodes real salaries, which is a useful way to adjust salaries in a world with sticky prices (where nominal contracts are not easily adjusted).
No that's not how it works in the typical case. Lenders set their interest rates based on expected future inflation rates over the term of the loan. Debts only really get eroded when interest rates are fixed and actual inflation greatly outpaces expected inflation. Like in the hyper inflation that occurred in Zimbabwe, Venezuela, Serbia, etc.
This is valid, but not quite the same. Inflation encourages consumption of Goods. Bitcoin encourages the consumption of goods too. To just maintain bitcoin takes a lot of energy. It is a bigger stretch to blame environmental degradation on the math of inflation than it is to look at the direct environmental costs of actually maintaining the bitcoin network.
inflation encourages investment in renewables. the deflationary nature of bitcoin appreciation means owners of bitcoin are going to defer current investment in renewables because the future value of bitcoin is greater than the present value of clean energy.
Inflation has been encouraging investment in oil and gas companies. Just look at the stock market returns by sector since Jan 2021 and see which one stands out! >.>
Investors like oil & gas because has a low enough Price to EPS ratio to feel like an undervalued safe haven and it still pays dividends like nothing else.
Don’t forget: every $100 invested in bitcoin is $100 of bitcoin sold. There is always somebody on the sell-side. When they receive the money, they may also do productive (likely technology-based) work with it.
Things brings up a side point I can't quite understand.
How does the price of BTC, which is almost infinitely divisible, affect usage?
I see comments like "We're early, price can still rise, etc". Outside of a store of value any usage / institutional use for transactions wouldn't matter right? The BTC is a proxy for the money / collateral on the sides.
If I buy a hamburger with BTC:
If it is settled in BTC then the burger price would adjust often.
If it is settled in anything else, I just adjust the sat / slice of BTC I use.
Am I missing something? Outside of a store of value.
Deflation. The price of the burger in BTC has largely been falling. Why spend your appreciating* bitcoins when they will bu worth more tomorrow. If the price is stable this effect goes away and you might as well spend them.
Even if BTC hadn’t had it’s ridiculous boom since October, it’s still deflationary from the simple fact every day there are fewer bitcoins as people lose keys.
If the price of BTC keeps increasing then you would be foolish to spend it, lest you lose out on gains from holding onto it. There are lots of people who "punch themselves" for not buying Bitcoin back in 2013 or something but they forget that they wouldn't have the hindsight necessary to follow this strategy. For all we know you could have spent 10 Bitcoin on a pizza. But once you understand the deflationary nature, it becomes obvious that you shouldn't buy pizza, just hold onto it and do absolutely nothing.
Because to complete a bitcoin transaction it needs to be accepted on the block chain.
That incurs a relatively high flat fee (somewhere between $5-$50 dollars in recent times).
It doesn't make sense to pay this fee for small amounts (though is great for large amounts).
You can get around this by using exchanges and the equivalent of credit cards where multiple transactions are rolled up into one wallet to wallet transaction. This comes at the expense of volatility or if your bullish it comes at the expense of having to float a growing bitcoin reserve.
This is not an option for a lot of businesses, basically you need a 3rd party provider for it to make sense for these businesses and realistically that means they're getting cash value at time of trade and it's the provider that is taking on the volatility risk/reward of waiting to trade there bitcoin.
It has never been proven that deflation is bad - Keynesians claim this is the worst thing in the world, but I still have never had it explained to me coherently way deflation is inherently a bad thing.
If your currency deflates, that means a dollar today is worth less than a dollar tomorrow. When you invest money (via loans or buying equity), you trade currency for tangible assets, like stocks or capital.
In order for the investment to make sense, the growth on the asset needs to be larger than the growth of the value of the money, plus risk. So in a deflationary currency, loan interest rates must be higher to be worth it. If loan interest rates are higher, then the cost of doing business increases. If the cost of doing business grows, the price of goods to increases. And when the price of goods increases, this causes the amount of goods sold to drop. This causes the income of the business to drop. Which increases the risk of investment, causing interest rates to go up.
This cycle continues until everyone is holding on to their cash, and no one is spending. The way to break the cycle is to have cash start to lose value, or inflate. Then the interest rates drop, and people start to spend their money.
Another way to think about it is:
Say it costs 1.00$ to make a loaf of bread in 2020. By 2030, there's a robot that can make a loaf of bread for 0.10$ in 2020 dollars. So because society has become more productive in those 10 years, the work you did in 2020 is now worth 0.10$ 2020 dollars. So we can think of a dollar as representing the cost of goods, at the time that you did it. So if you make 1$ worth of bread in 2020, it should be able to buy the same amount of bread in the future. So we inflate the currency 10x, so bread still costs for 1$ in 2030, but now there's 10x the amount of bread to go around, and people make 10x the salary, so for people who are currently making money, bread is 10x cheaper.
Now, you still want some inflation on top of this, since you want to push people away from sitting on money and towards putting that money to productive use. But that's the core rationale.
> The way to break the cycle is to have cash start to lose value, or inflate. Then the interest rates drop, and people start to spend their money.
If people's money starts losing value, the last thing they would do is to be concerned with interest rates. With less valuable money, people would simply be able to afford a smaller consumption basket and, thus, spending will stay flat & consumption will decrease.
> ... people make 10x the salary ...
Where did this come from? Just because the productivity would increase 10x / cost would decrease 10x, it does not mean that workers would receive 100% of the relevant benefits. Most likely, 90%, if not more, of those would be routed to business owners (and robots' owners, if the machines are leased instead of bought).
> If people's money starts losing value, the last thing they would do is to be concerned with interest rates. With less valuable money, people would simply be able to afford a smaller consumption basket and, thus, spending will stay flat & consumption will decrease.
If your money starts losing value, do you A) put it under the mattress or B) trade it for things that you can either use now or that retain/grow their value in the future?
Now, if you're talking about erosion of wages over, that's less of an issue of inflation, and more an issue of the power dynamic between owners of capital and owners of labour.
> Where did this come from? Just because the productivity would increase 10x / cost would decrease 10x, it does not mean that workers would receive 100% of the relevant benefits. Most likely, 90%, if not more, of those would be routed to business owners (and robots' owners, if the machines are leased instead of bought).
Sorry, I understand the confusion given I used the term 'salary'. I should have said something along the lines of 'value' or 'goods'. The split between workers and owners depends on the surrounding conditions.
The point is that dollars are tokens that represent goods produced, at the time they were produced. Not how much energy or effort went into those goods.
> If your money starts losing value, do you A) put it under the mattress or B) trade it for things that you can either use now or that retain/grow their value in the future?
It depends on the situation. For example, if one lives paycheck to paycheck or close to that, then I don't see how they would not put a bit "under the mattress" (emergency fund) and spend the rest on basic needs. There is only so much food one can buy to store at home for future consumption. On the other hand, if income >> costs, that's a totally different story ...
> Sorry, I understand the confusion given I used the term 'salary'. I should have said something along the lines of 'value' or 'goods'. The split between workers and owners depends on the surrounding conditions.
No problem. Re: "depends on the surrounding conditions" - it is a very diplomatic way of avoiding touching the core of the income inequality issue.
> The point is that dollars are tokens that represent goods produced, at the time they were produced. Not how much energy or effort went into those goods.
Not sure I understand this point. It seems to be against one of the basic economic principles that I remember (price of goods = cost of production + margin / added value) - where cost of production implies exactly "how much energy or effort went into those goods". Perhaps, I'm dumb as rock or completely forgot Economics 101. :-) For example, if a TV model A costs $200 and model B costs $2000, it is not just because they "represent [different] goods produced", but because model B is much more expensive to produce and/or it has much more added value [real and/or perceived] than model A.
> On the other hand, if income >> costs, that's a totally different story ...
I'm looking at excess capital used for funding loans, business, etc. So I'm more focused on this case. I take you point that inflation eats up ~2% of cash savings yearly, and that it's a bigger deal the less wealthy you are.
> it is a very diplomatic way of avoiding touching the core of the income inequality issue.
I'd say that deflation is much worse for income inequality, since sitting on cash becomes profitable, so the people who can afford to do it the longest win out.
I don't think either inflation or deflation will solve income inequality. I think that's controlled by taxation of capital gains vs. income. Specifically, the lower capital gains tax, and the ability to sit on unrealized capital gains without paying taxes on them in the mean time.
> For example, if a TV model A costs $200 and model B costs $2000, it is not just because they "represent [different] goods produced", but because model B is much more expensive to produce and/or it has much more added value [real and/or perceived] than model A.
I think where we're diverging is:
- You're comparing two different goods produced at the same time.
- I'm comparing two identical goods produced at different times.
So if you make a baguette in 1921 and sell it for 5$, and then try and buy a baguette in 2021, it should cost 5$, despite the fact that the amount of energy/work it takes to produce a baguette in 2021 is much lower than in 1921. The money represents the value of the end good, not the work that went into producing it. And so if the good becomes cheaper to produce over time, you'd want to inflate the cost of it to keep it level.
Money is a debt from society to its holder. You can exchange work or stuff for it, with the expectation that society will accept it at a later time for some stuff. So it's just a matter of deciding how the debt evolves over time.
That part is specifically meant to contrast deflation with either stagflation or inflation. If you drop the nominal price over time, you're setting a Ponzi scheme. By virtue of selling something in the past and holding on to the token, you're entitled to more of it in the future, without any risk. And you're preventing the token from being spent by someone now who could use it.
And likewise, I appreciate the line of questioning, it helps me reflect and think about this. The details are a bit fuzzy, and I'll need to think more about some goods that seem deflationary (computers for example)
I disagree. Money is a store of value that is separate from society - gold is an international currency accepted organically because of its useful and intrinsic properties, with thousands of years of history in a wide variety of cultures that had no link before trade began.
There is no "debt" here. Society doesn't "owe" the holder of money anything, necessarily.
I think your confusion stems from the imperfect wording in the original phrase. What @karpierz meant (and his/her subsequent sentence supports it) is a) that society in this context implies government and b) that money is a legal tender that, upon tendering (i.e., offering as payment), discharges any debts (e.g., loans, purchases, taxes).
By the way, you're wrong in that money a) is only a store of value (it also functions as a medium of exchange and a unit of account) and b) is separate from society (in the modern world, in most countries, it is only government who has legal right to issue [primary] money).
No. It’s worth $10 because you saved your (non-inflationary) money. And you spent the last 10 years making a bread robot instead of working in the financial sector.
And how is ‘investing’ a productive use of capital? In deflationary regime, business is about cash flow. Inflationary regime investments are all speculation, and everybody has to play the game.
This Keynesian argument comes from a nihilistic disregard for social structures, the environment, and future generations. Look him up. “In the long run, we’ll all be dead” - Keynes
When you earn money in 1800 and use it in 2021 then a baker in 1800 failed to get your money and his time was wasted. He could have used that time to bake bread but you didn't buy bread. Now that it is 2021 you are asking the baker to bake twice as much bread for your sake even though you did nothing to help the baker run his business. In fact, you did the opposite. Turns out there are less bakers in the future and your money becomes worthless anyway.
>This Keynesian argument comes from a nihilistic disregard for social structures, the environment, and future generations. Look him up. “In the long run, we’ll all be dead” - Keynes
Is this supposed to be a joke? How are old people becoming rich through no work, no productive investment whatsoever supposed to help future generations? Future generations receive greater incomes than their previous generations thanks to inflation. With deflation they receive lower incomes than their previous generations.
When you own deflationary money and you do nothing with it you basically create a claim to future work in the past. By working at a simple 1800s job you have created a claim to the labor of someone working a software job even though you took no part in enabling that job to exist in the first place. Same with the bread baker robot. By holding onto the currency you never created an economic environment that enabled such an investment to be made. You just held onto the currency and once someone was foolish enough to build the robot you obtained a claim to its productivity.
These are all valid arguments in the extreme. As are all arguments about inflation in the extreme.
There is actually no difference between inflation and deflation. For every inflationary asset basis, there is a deflationary asset basis. Flip bread/money in your own text and you see the problem.
The only difference is taxes. Tax basis could be anything. Let’s say, SHA-256 hashes. Every year, the hash value of your dollar investment account quadruples. You need to pay for half of those gains, or else you go to jail, and if you resist, you can be legally killed. The price of food and shelter is irrelevant to me. Pay me. Can’t? Okay, we’ll collect tax in Bitcoin, but we’ll have to raise the tax rate to 90%. We can go back and forth on this as much as you want. In the end, I guarantee the guy with the legal right to kill you ends up owning everything.
In conclusion: inflation and deflation are both the same thing, and they both suck.
If in a deflationary environment people hold onto their money, then there will be less spending. That means less business income. That means small business close, and big businesses hire less people. That means people get less money, which leads to less spending, etc.
If we want to have something like UBI to take care of income instead of work, that still comes from tax dollars, which relies on economic activity (capital gains from investment, income tax, sales tax, etc).
In other words, less economic activity has specific impact on real world people and how much money they can get. It’s not just about investing, not just about billionaires.
Investing is a productive use of cash. Cash is a token that represents the goods produced to earn it. You can redeem it for goods, or lend it to someone if they can make better use of it. If they can make better use of it now, you make a deal that they'll give you more of these tokens later.
If you hold onto cash, it does nothing. If you invest it, either directly, or by giving it to another entity to invest on your behalf (IE, a chequeing account at a bank or mutual fund), it allows someone else to make use of it, and in exchange, you will be repaid with more cash in the future.
Deflation can be devastating to those in debt. If you take out a loan for a house or a tractor, then subsequently discovering that you have to pay back substantially more than you borrowed (before even factoring in interest!) could be quite a shock.
To give a simplified example, if a farmer takes out a $50k loan, then at current prices they might be thinking that can be repaid by selling 10,000 bushels of produce at $5/bushel. However, if there is subsequently 20% deflation, then the price would fall to $4/bushel and the farmer would all of a sudden find they have to sell an additional 2500 bushels to get out of debt. If they can't, they risk losing everything to foreclosure.
Exactly - in a deflationary world debt would be far less common. There would be much wider and typical use of equity, and innovations around equity to make it as common as debt is today.
Deflation by definition implies means that stuff will be worth less in future than it is now.
This is bad for investors and producers spending money now in the hope of earning more money in future.
On the other hand, simply holding onto cash is risk free, and that cash will have increased purchasing power in future (at the expense of the producers forced into offering lower prices to get money circulating again)
An economic system which deters investment, production and consumption but rewards inactivity is not a healthy one.
On the contrary, inflation forces you to buy products and invest in things you don't necessarily need, in order to escape the intentional destruction of your wealth. In a world where we are trying to avoid mindless consumption, inflation encourages that.
Deflation doesn't discourage investment and consumption. You still need to eat, have shelter, and pursue happiness. It increases the bar at which you will part with your money, as merely holding it has a high level of return. This is a superior system to me.
> Deflation doesn't discourage investment and consumption...it increases the bar at which you will part with your money
Euphemistically rephrasing something is not a refutation. Inflation does not make investment decisions "mindless", but deflation does make the average risk adjusted return on an investment negative.
> It increases the bar at which you will part with your money, as merely holding it has a high level of return. This is a superior system to me.
The "high level of return" is at the expense of people who are not freeloading, who are forced to create this return for others by making more stuff for less money. Why is it superior for the monetary system to be designed to reward those who put in no effort and take no risks at the expense of those who do?
I am philosophically opposed to a system where by intentional design, everyone’s money is debased continuously. It’s weird and immoral. You are forcing everyone to be a mini-hedge fund manager, or hire someone else to be one for them, to avoid the government-decision of destroying your wealth. It’s just stupid.
You can have an economy with a single dollar, if it can split far enough. Printing new money isn’t increasing the total amount of wealth in the world. It is redistribution.
> On the contrary, inflation forces you to buy products and invest in things you don't necessarily need, in order to escape the intentional destruction of your wealth. In a world where we are trying to avoid mindless consumption, inflation encourages that.
Or you can just put your money onto a bank account that nets interest. The fact that interest rates are down is actually the sort of result of deflation. The reserve currency status puts immense deflationary pressure onto the USD. The government is forced to go into debt to cancel this pressure. If it did not do so employment would plummet.
This used to be true, until bank accounts started to pay 0%, or a very small amount of interest which is less than even the official inflation rate (let alone the unofficial (and more accurate!) inflation rate).
There is not deflation happening right now. There is massive and sustained inflation, which you can see all around you in terms of high quality food prices (meat, cheese, seafood), housing, all forms of education not subsidized by the government, medicine, cars, and on and on.
The reserve currency status of the US dollar is a side effect of the US' relatively brief global hegemony which is rapidly collapsing, plus the reduced global importance of oil which has been priced almost exclusively in USD. There will be many threats to USD from other countries (China, the EU) and experimental technologies (Bitcoin, Ethereum).
Several generations of economists have bought full-on to a failed economic system. We have been seeing many problems with it over 40 years since we removed any pretense of the gold standard,[0] but we have seen it over and over and over with various crises. Anyone who thinks our current monetary system is the best humanity can do is not thinking critically.
Because deflation means less jobs and less jobs means less people being able to buy food, and starving people are dangerous.
Deflation seems good if you're sitting on wealth. You'd be happy to wait things out just buying the basics and let the economy kind of reset from necessities upwards. But lots of other people are starving by that point.
No. Deflation slaughters the wealthy in the markets. No need for the uprising.
It’s great for anybody that can provide a useful service for cash. Especially farmers. Farmers suffered all through the 1920s because they mortgaged their land during WW1 to massively increase supply, and then the demand disappeared. The problem, they said was not starving people, but that food was too cheap! So the big indebted farms banded together to stop food shipments from family farms, and the government responded by giving the big farms a handout.
So no, deflation doesn’t mean starving people. I talked to a bunch of old people about this. Work was rare, but you only needed a few unskilled labor hours a week to pay for food and housing, and that was always available. They said life was pretty good if you didn’t have a mortgage.
But really we’re talking about lack of inflation here. Not deflation. Deflation only and necessarily must occur with inflation preceding it.
That's your opinion - I don't see any source. My opinion is that it doesn't cause less jobs - I think it would eventually cause more sustainable jobs as malinvestment is removed from the economy.
Just look at any random crypto forum. You can see an endless number of threads about people who made millions and stopped working and they are proud about that. Just think about Bitcoin. If you bought Bitcoin in 2013 and held onto them you would be rich today. If you spent them on pizza you would hate yourself.
The historical incidents of deflation are insignificant and very few. The incidents of hyperinflation are common, and incidents of high inflation are guaranteed with fiat currencies with very few exceptions.
It's quite simple. Future prices go down which means future business incomes go down which means future wages go down. People who inherited money 100 years ago can just sit on it and do nothing with it and still earn more than you will from hard work. The inverse situation is that you invest your money to beat inflation and that investment creates jobs which then fuel consumption.
When you consider that we cannot just produce everything we need for the next 200 years in 1800 it becomes pretty obvious that we must keep working from 1801 to 2020 to get to 2021. We can't just sit and do nothing. After all, what are you going to buy with your paper wealth, if nobody is working on the farms and the population has shrunk?
You act is if people who inherit money now have to work? They hire wealth managers to protect and grow their capital. There is no need to work.
What deflation does is reduce the cost of everything. People who are ambitious and want to better their situation will still work, earning an income. People still require goods and services to survive (and thrive). In a deflationary world you reward savers, who delay their gratification, rather than an inflationary world that rewards debtors, who desire instant gratification.
Again, there is nothing inherently useful nor required about inflation. We can live in a world where prices are stable, decreasing, or increasing. I like the one where prices are decreasing.
the Keynesian wisdom was that Inflation is good for borrowers and that deflation is good for lenders. Most governments are managing for borrowers since borrowers tend to be investing and it has been a long-held economic axiom that investment is good.
Deflation decreases the value of work you have already done.
>Deflation decreases the value of work you have already done.
Are you sure? Deflation increases the value of work you have already done and decreases the value of work you will do in the future.
Simple example: If I immediately convert my paycheck in BTC then I would have earned more BTC in 2013 than in 2021. My work in 2013 would be worth more than the work I did in 2021.
You have a misunderstanding of "value", "worth", "cost", "price", etc. In our inflationary environment, you would (ideally) be paid more for the same service in the future. This does not mean you are automatically worth more every second that passes - rather, the value of the money you are paid in declines. A loaf of bread is a loaf of bread, but the dollar declines in value continuously. You do not automatically think your skills are "worth more" with every second that passes in an inflationary world, just as your skills aren't "worth less" in a deflationary world by virtue of time passing.
In a deflationary environment, you would naturally be paid less over time, rather than paid more. Rather than a default of losing money, you are in default of gaining money. Prices adjust lower, and by saving money you are naturally gaining wealth vs. people with lower time preference who are spending money.
But in reality, all of this is psychology. There is an amount of wealth in the world, and this is the sum total of all owned assets. We can use any unit of measurement we like to value this. If today there is $1 million total in existence, and tomorrow we double the money supply and there is $2 million, we aren't all suddenly 2x richer. Just as when the central banks print money, people aren't richer - we are redistributing wealth away from people's savings and towards the receivers of money. Wealth is only truly created when useful and productive enterprises grow.
The fears over deflation are mostly just hand waving without much support from real world data. As a prime example consider computers. How much computing capacity could you purchase for $1000 in 2001 versus today? The deflation in that market has been huge, and yet customers keep buying new computers.
Actually, the entire problem with the economy of the USA (and EU) is that it suffers massively from deflationary pressures. Trade deficits cause savings gluts which fuel underemployment and cause stocks and other assets to go up. The secondary effects of trade deficits are the primary cause of growing wealth inequality.
I cannot disagree harder. The primary cause of the entire world’s stagnation is the endless money printing by the world’s central banks, and the lack of currency competition as more countries join currency unions (the EU).
The closer you are to the money printer, the more money you get. This is the cause of inequality - we have so much fresh money printed with nowhere productive to go, so it goes to inflate the value of housing, education, medicine, and any good that is widely desirable yet scarce. The rich get richer, the poor poorer.
Meanwhile, Bitcoin has undergone such massive speculative appreciation that everything around it has deflated in comparison. As a result, bitcoin is spectacularly less useful than it would have been. It is no longer useful as a method of transaction and really only a ledger and store of value.
this inflation argument is specious. It just isn't the problem that demanded an unregulated anonymous deflationary currency.