If that doesn't make sense, think of it like this. Inflation is similar to nuclear fusion and deflation is like nuclear fission. When the former goes critical, you can just shut off the spigots and things more or less fix themselves(albeit with some collateral damage) without the whole system crashing. However, with the latter, there may be no fixing without dismantling everything and starting over.
I think this argument can be discounted simply by looking at the current state of things--people are still spending bitcoins even though the recent appreciation dwarfs any built-in deflation. Sellers may need to discount their price to get people to pay in bitcoins, but even that doesn't seem to be happening yet.
People aren't really spending bitcoins in a meaningful way. They're using it as a passthrough for the dollar, basically. I have a Bioshock Infinite key that I want to sell. Will let it go for 1.5 btc. Why won't this offer be taken up now, when just a couple of weeks ago it would've been considered a fair deal, and just a couple of months ago it would have been considered a GREAT deal?
But that's not to say that centrally-managed currencies don't fluctuate either, because they do--just, typically, in the other direction. If I tried to find a gas station that would sell me a gallon of gas for $2USD today I'd be out of luck, but 2-3 years ago I'd be able to go anywhere in America and get that deal.
That illustrates that the price of oil fluctuates. The USD hasn't dropped in value by 50% in the last two years.
Most of currency is fluctuation is fluctuation relative to other currencies. If the price of the Icelandic krona plummets relative to USD and GBP, it doesn't mean that all the prices in Iceland immediately rise to compensate. People in Iceland are still paid in krona and buy things in krona for approximately the same number of krona.
But if the price of BTC rises suddenly, prices do suddenly decrease because at the moment it's just a proxy. There's no real internal market: there aren't people who are paid in BTC and have their savings account in BTC and make their mortgage payments in BTC and buy their food in BTC.
So BTC really isn't like other currencies. It's fluctuating massively even from an internal market perspective.
Regardless, it is certainly a consumer's right to store their assets in something that is not inflationary, as most do. Is the population holding empty real estate or gold instead of currency really that much better for the economy? No.
Smart money will simply shift out of cash in an inflationary environment, and the value will not necessarily be productively invested.
An opposing viewpoint more thoroughly articulated:
Owning Real Estate (and making money off of it) entails taking care of it. People taking care of their land (so that it can appreciate in value) is a good thing. The typical Real Estate "investor" adds a ton of value to their home, not just through maintenance, but also additions (ie: a new deck).
This maintenance is true value added to the economy. True value that wouldn't have been added if the investor just left his cash in something else.
No one wants to buy a 30-year old home that had no maintenance on it. Unless you're a fan of buying homes with leaky roofs and a flooded basement...
Relative to what? The USD?
Gold is an asset that holds its purchasing power pretty well. It is what it is. It is not however a "piss poor" investment.
After all, Gold reached a glorious bubble of inflation-adjusted $2200+ / ounce in 1970s, and has fallen since then. (yes, even with today's inflated prices, Gold is no where near its inflation-adjusted high).
Lets take a more reasonable graph of Gold, ehh? Something longer term... and see what happens to your trend.
Gold's trend is downward compared to the majority of the market. Each valley is lower, and each peak is lower than the last (with exception of stagflation period in the 70s)
VIX for the S&P 500 is 13.58, while Gold VIX is 13.13. Stocks are both holding their buying power as well as Gold, and still offering better returns right now.
Gold's "stability" is a myth. It is no more stable than any other investment. Bonds offer a conservative, stable investment platform. Gold does not.
Stocks as investment:
And of course, ycombinator. You know... the angel fund / venture capitalist firm that runs this website? We're all here because of investors investing into technology. They do so because they believe they can ultimately make money with technology investments. At least, more so than Gold, Real Estate, or even Stocks.
You might be able to make a little bit of money, but unless the global economy collapses entirely, I doubt we'll see another major increase. Gold actually has gone down in value before, so it could easily happen again again.
Do you know something that the Chinese, Germans and Russians don't ?
"Central Banks Bought Most Gold in Nearly 50 Years"
"The Russian central bank will continue to buy gold as it seeks to diversify its foreign reserves away from paper assets it views as risky"
"The startling news that Germany is repatriating its gold reserves from the United States and France has got precious metals speculators worried that this is the first major sign that trust between central banks across the globe could be deteriorating."
"How Much Gold Does China Really Have?... China is the world’s leading gold producer and also the world’s leading gold importer. And surprisingly their official gold holdings haven’t risen an ounce in over three years."
Germans are bringing gold back into their own country, as opposed to holding it in other exchanges. They have neither increased nor decreased their supply.
China and India are world-class consumers of gold for jewelry, as expected of the world's most populous countries with a rising middle class. Gold is also used in microelectronic components. Chinese Banks on the other hand, have not increased their holdings according to your link. IE: China is not investing into Gold. They're using it.
As for Russian and Iraqi Central Banks buying up Gold between 2012 and today... well... they've already lost 10% on their investment as Gold has dropped in value between last year and today. I mean, if you wanna follow the example of Russian and Iraqi banks, you're welcome to do so. But I don't think anyone considers them a paragon of the investing world.
Why are Germany repatriating their gold? Why do they want it in their own hands? Why go through all that trouble instead of just selling? Why would they want to keep holding onto a "piss poor investment"?
Regarding China, the article's author believes that China has been accumulating gold. The last known official figure is from 2009 and since then imports continue to rise, which in the authors opinion, have been destined for the Central Bank.
As for Russia, they have been accumulating gold for a few years now, and it's right there in the article. "It owned 400 tonnes of gold at end of 2006... At the end of last year, the central bank held nearly 950 tonnes of gold".
If you want to dismiss gold as a "piss poor investment" that's fine, but not everyone shares your view or your investment objectives.
Kraut here. Quite easy to explain, really.
The tabloids and some politicians made up a story along the lines that none of our politicians or central bankers has ever had access to the gold stash in the US and that probably this stash no longer exists.
So as to calm down people, the German central bank has declared they will repatriate 700 tons of gold (out of ~2000t stored in the US, UK, and France).
I still disagree with you of course, but that is what the free market is for. Good luck with your investments.
"Morgan Stanley and Goldman Sachs, the last two investment banks left standing, will become traditional bank holding companies, marking the end of an era for Wall Street.
The Federal Reserve's surprise announcement, which came at 2.30am London time, places the banks under the supervision the bank regulators and gives them easier access to credit to help them ride out the financial crisis."
This is a foolish statement no matter what the subject:
>dotcom stocks are a piss-poor investment
>railroads area piss-poor investment
>Apple is a piss-poor investment
All of these are true and false at some point. You can't make blanket statements like that. There are times when Gold as a store of value makes more sense than a central-bank inflated currency. There are times when the opposite is true.
What is certainly true is that Gold is a very good long-term store of value, and the prices of Gold relative to other things, such as a loaf of bread, a barrel of oil, a parcel of land are quite stable over a long period of time.
People often make the mistake of comparing Gold against fiat currencies and decide that Gold may be going up or down in value. What they don't do is look at Gold vs other things, which typically are rising in price just as fast as Gold.
Certainly one thing is for certain, putting your savings into a fiat currency is a very bad long term plan.
Wanna take a bet on that?
Gold is out there, sometimes swinging by 1,700% over a decade... while the CPI doesn't change any more than ~100% / decade.
Dollars (and investments measured in dollars: ie Inflation-protected Bonds like TIPS) retain their value better than Gold, while providing a more stable platform. A 10-year note at even 2% offers you 21% growth over 10 years... much better than the long "valleys" that Gold investments suffered across the last century. (And with historic rates sometimes hitting 14.56%, it was possible for 10-year notes to hit 370% growth over 10 years).
Gold doesn't grow in value in the long term. And as shown in Gold Volatility Index, Gold is also a very unstable investment historically.
In fact, Gold's volatility today is the same as the S&P 500 Index.
So it is just as volatile as stocks... while offering poor gains historically. Neither the conservative nor aggressive investor would want this kind of investment. That makes gold a "piss poor" investment in my books.
Meanwhile, most consumer price indices don't include the things which increase in price the most, like fuel and food. So the inflation numbers you're seeing are already artificially low.
In this kind of environment, it seems pretty likely that gold has further to climb.
Also, most stocks these days don't give dividends, which makes them pretty much equivalent to gold from an investor's perspective. Greater fool and all that.
Investing in just one thing is dumb, of course. But not investing in commodities and gold at all seems equally dumb.
Energy (included inside of "housing category"): 5.096%
If you're curious, you can further subdivide that into milk and eggs. But the list becomes way too unwieldy at that point. The averages are then computed using a geometric mean.
Also, Bond bankers are willing to accept a loss on TIPS, because a fair number of them are betting the opposite of inflation: the potential of deflation between 2008 and 2012.
When big banks were buying up US Treasuries constantly because they're worried about deflation... to the point where some bonds are offering a negative return... the switch of Monetary Policy that favors inflation is the obvious move. Notice: Gold Dropped in value since last year, while big investors continue to run towards the safety of US Treasuries... pushing yields to absolute lows. Why? Because during 2012, the major banks and investors were worried about deflation risk.
Buying commodities and gold when there is considerable deflation risk is dumb.
The Core CPI is used to calculate "Core Inflation," which is the main thing that the Federal Reserve tries to monitor.
See http://en.wikipedia.org/wiki/Core_inflation. So although there are alternative CPIs which do include food and energy prices, they are not as important to the people making monetary policy in the United States.
I'm not really sure what you're trying to show with that graph of deflation probabilities. If I'm reading it right, the probability of deflation through 2017 is currently 0%. Since the year is currently 2013, the "probability of deflation between 2008 and 2012" is also 0%, since I just lived through those years, and... it didn't happen.
The reason why people were buying treasury bonds in 2008-2012 is because the rest of the economy was imploding and they wanted a safe port in the storm. I lived through those years and so did you. You ought to know this already.
I don't really know what else to say. If you think it's a good idea to buy a bunch of treasury bonds with super-low interest rates in 2013, knock yourself out! I think anyone with an ounce of sense can see that our government is going to inflate away its debts over the next few years. In the meantime, you'll be helping to keep USGov in the black, so... thanks, I guess.
You're creating the ultimate strawman. You're ignoring the statistics I've presented (statistics using "real" CPI which include food values), and then criticizing statistics that I'm not using. Why don't you read my argument?
Second, even including food prices / energy prices, there were periods of deflation through 2008. Yes, I lived through those periods, do you know what happened to bond investments during that time? I got something like a 20% gain during that period of deflation while the rest of the market crashed.
Anyway, this is the free market. You can continue to invest into Gold if you think its best! We'll both know the answer in a year, so there's no real need to argue about it.
The Federal Reserve's policy of ignoring food and energy prices when making interest rate decisions is often confused with the Bureau of Labor Statistics' measurement of the CPI. The BLS publishes both a headline CPI which counts food and energy prices, and also a CPI for All Items Less Food and Energy, or "Core" CPI. None of the prominent legislated uses of the CPI excludes food and energy. However, with regard to calculating inflation, the Federal Reserve no longer uses the CPI, preferring to use core PCE instead.
So the people making the monetary policy decisions are ignoring food and energy prices, and hence, in my opinion, underestimating inflation.
Anyway, as someone else said in this thread, everything is a good investment at some period in time. The question is whether we are in that period of time.
So you'll see it spike in value right before panics, and slowly lose value after things stabilize.
Of course, gold or any commodity is a worse investment than a stock market index over time.
Buying desert property today and selling it for profit in 10 years when the city next door expands-- that is not wealth creation.
A population holding productive factories, tools, and land is a whole lot better for the economy than people hoarding gold.
It's really not as simple as "investment = good". It's good when it's for stuff that produces value. It's not good when it's invested for the sake of investing and ends up in the stocks of corrupt corporations and shady ventures.
I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right? We've never (recently) been in a period of significant deflation, so how can we be so certain of its effects?
> deflation makes it more profitable to do nothing than to invest.
Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it.
People will still work, and spend what they need to. And there's a limit to how much a currency can deflate before it cycles back. And hell, how do we even know that inflationary/deflationary cycles are unhealthy? Even if it causes some businesses to die, maybe this improves an economy in the long term by churning things up a bit.
But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything?
To use a case from the bitcoin economy, we all know the story of the pizza that someone bought when the x-rate was something like 3 cents per coin. Today, the 10k btc spent on that pizza would have been worth $100k! This story is often told to try to incent people to get into btc, with the implication that "if you forgo the cost of one pizza, in a little while that will be worth thousands of dollars", without realizing that this exactly is the problem with a btc-based economy; if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.
People loans each other bitcoin in the bitcoin economy all the time, abiet with high interest rate.
if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.
The demand for pizza will be low, but not zero, because the desire for pizza competes with desire for monetary profit. At some point in the future, people decides that the waiting is enough, and they will buy pizza as reward for all their patience.
Of course, everyone likes deflation when it means they can buy more for less. Of course, if prices of things get so low that people start to purchase, then deflation will eventually reverse, unless you assume that deflation will continue forever until prices reach zero and everything is free. Of course, everyone force-fed a diet of Keynes assumes that hoarding relates to stuffing mattresses full of money instead of holding cash in banks, where the bank can lend the money out and still invest. They uncritically swallow the line that a central bank inflating at will is the best thing for an economy.
Inflation/deflation are just two phenomena with different winners and losers, the same as high/low currency values. Deflation favors lenders and savers, and inflation favors borrowers and spenders.
The inflationists always assume that the borrow/spend nexus is far more important than the lend/save. But of course saving drives all investment, so a period of deflation isn't necessarily a bad thing. In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion.
Once you clear your head of the foolish 'borrow and spend' mantra of the last 80 or so years, and realise that investment and production are more important than spending and consuming, it becomes obvious that a bit of mild deflation isn't necessarily the hobgoblin it is made out to be.
The simple fact is that no economy and social order has ever imploded due to deflation, but inflation has some pretty terrible economic and social effects when it gets out of control. Deflation, like any long position, can only ever go down to zero. Inflation, however, is like any short position and can go to infinity.
As with anything, too much of any extreme is bad. Too much inflation or too much deflation. But with fiat currency, it's natural to expect steady inflation over time -- especially if it's not tied to a commodity (e.g. after we got off the gold standard). That's because there's value in lending money to some enterprise, and that's the time value of money. Organizations with good credit (e.g. banks) issue and lend money to organizations with worse credit. So they will expect a return in the enterprise, and overall if they guess right, the enterprise will have returned principal + interest to the lender. If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest.
So it's like an elastic money supply that's being prodded by lenders / banks looking for a return.
The financial systems works different.
You seem to be conflating wealth and money. Money doesn't disappear from the system when someone fails to repay a loan. (Unless you are taking a rather wide, but still sane, definition of money, and hold that lending increases the money supply.)
No extra money needs to be printed to pay back all that interest. That's because central banks pay a dividend to their governments.
Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. On the contrary, governments like the US use their central banking system to do open market operations on bonds they issue to finance their operations, and usually have to pay interest on that debt. No?
Please see e.g. https://en.wikipedia.org/wiki/Central_bank#Currency_issuance:
"The European Central Bank remits its interest income to the central banks of the member countries of the European Union. The US Federal Reserve remits all its profits to the U.S. Treasury."
https://de.wikipedia.org/wiki/Deutsche_Bundesbank#Gewinn has some more information, but you have to speak German (or use Google Translate). Lower than expected profits of the Bundesbank have been in the news in 2011.
Periods of asset deflation after over-investment/economic distortions may act as a balance, but it isn't "good". Having your net worth halved is crippling.
>"The simple fact is that no economy and social order has ever imploded due to deflation"
No economy implodes due to deflation or inflation alone. Countries like Germany or Zimbabwe had production capacity collapse. That led to printing money (to stave off deflation), which in turn led to hyperinflation. Too much money chasing too few goods, remember? In order to have too few goods, the country's production has to go into the toilet.
Saying deflation isn't bad flies in the face of many of the greatest economic minds we know, with tons of research and theory to back it up.
I have not said deflation is good, or said that it is not bad.
I have merely stated it creates winners and losers, and that inflation isn't automatically better. The same as a 'high' or 'low' currency - the goodness or badness depends on the reference frame.
The assumption that inflation is automatically better is 'common knowledge' based on theories of economics developed that classify savings as bad, and spending as good, based on the assumption that deflation will cause consumption to be postponed, but which hand-waves away the problem of inflation bringing forward consumption with the trite statement of 'in the long run we are all dead'.
My point is that deflation isn't the bogeyman many have been trained to believe it is. Spending-based assumptions of economics have led the world down a garden path of unsustainable debt in the name of endless 'stimulus' and inflationary policies. Periods of mild deflation and creative destruction would have served the world better than endless shots of new cheap money.
That's only part of the argument.
Another part is that wages also must decrease with deflation (wages are an input price). And that's very difficult to pull off in a modern economy, and leads to unemployment. We are seeing that right now.
The fact of the matter is, we should be indifferent to either inflation or deflation, as long as we can see the changes coming and adjust quickly enough. In reality, we can't. Hence an ever-increasing money supply (to coincide with an ever-increasing demand for money) is the best bet.
>"based on theories of economics developed that classify savings as bad"
I've never encountered that argument.
>My point is that deflation isn't the bogeyman
Look at this thread. Look at Seeking Alpha. Look at Reddit. You think people are over-reacting to deflation? People everywhere are hyperventilating over out of control inflation, when, in fact, our current problems are associated with a deflationary event ($3.5TT wiped from the collective financial sector sheets).
"Having your net worth halved" happens in the inflation scenario. Deflation increases your net worth.
If you have $10,000 and there's inflation, then eventually it will only buy half as much stuff. If you have $10,000 and there's deflation, then eventually it will buy twice as much.
Interesting. We've been in a positive inflation environment since I've been born, and my net worth has increased exponentially.
Deflation will increase the purchasing power of your money due to the fall in prices, but decrease the value of assets you own priced in that currency. Something people seem to be forgetting around here are that wages also fall during deflation, and that results in lower purchasing power and unemployment. Your "work" isn't worth as much anymore. You get paid less. Good deal!
What happened when the housing bubble collapsed and there was massive deflation in home prices? Did those people get wealthier? Did it become easier for other people to spend their dollars on homes at the new low prices? The answer is no and no.
Why is the answer to this question "no"?
Note: I'm not saying I agree with them, just answering your question.
And which have collapsed from inflation? None, directly. Hyperinflation (and deflation) is an effect of an economy collapsing. Not a cause.
"Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation."
Note "decrease in tax revenue". Economic crisis > deflation > country can't pay the bills > hyper-inflates currency.
The Weimar Republic intentionally inflated their currency to reduce the WW1 reparations payments, which got out of control and reduced the value of the Mark to nothing.
Inflationary policies collapsed the tax base due to destroying the ability of the economy to function normally, not the other way around.
This is easily shown by the fact that as soon as the Weimar Republic re-introduced an asset-backed stable currency, the economic problems improved greatly, though there were deflationary periods after that caused by the massive economic upheaval.
By you, perhaps.
Economic crisis, couldn't pay the bills, so they inflated the currency. Just like I said. Are you really going to argue that there was no war or aftermath, social upheaval or other crisis (like, say, debilitating war reparations) that led to hyperinflation? Crisis comes first.
So often Wiemar Germany is trotted out as the example of what can happen when the government prints excessively. "It can happen to you! Wheel-barrows full of money to buy bread!" The reality, the country and its economy was in shambles. Not because of inflation.
Your turn: point to an economy that was happily chugging along, and hyperinflation came out of nowhere and took it down.
The Weimar Republic, arguably.
This makes no sense to me. If keeping 100 units makes one richer because they are worth more in a year, then any investment which has a positive return (that is, you end up with more than 100 units in a year) must be that much better... What am I missing?
So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it.
So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone. So that's only a 2.5% interest rate. Again, why loan it out if you can get a guaranteed 3% by doing nothing?
I know it's just an example, but no-one should ever lend at 5% if there's a 50% chance of losing the total sum, regardless of the currency involved and whether it's deflationary or inflationary. The EV of such a loan is -$47.50 for a one-year term.
>So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it.
Because if you don't lend, you keep your $100. If you lend, you get back $103. $103 will always be worth more than $100, regardless of whether your currency is inflationary or deflationary.
This is not true. There is no guaranteed rate of deflation.
The rate at which you can 'mine' bitcoin is limited and there is a hard limit to the total amount of bitcoin that can be mined.
Today, with dollars, you can get a risk-free return by investing in T-bills. Riskier investments pay a higher return in exchange for higher risk. The risk-free return from holding a deflationary currency plays essentially the same role as the risk-free return in T-bills.
With USD, you know the value of your currency will drop due to inflation. In order to keep up with inflation, you have to put your money in an investment vehicle that stands in as a proxy for the overall economy. Hypothetically, you could buy a perfectly proportional amount of every single listed stock, every bond, piece of real estate, and so on (this is what index funds attempt to approximate).
In the latter example, you also have managed to convert your currency into an ideal proxy for the entire economy. Any attempt to pick winners or losers will, statistically, give you slightly worse results on average than had you simply tracked the market as a whole.
Both examples are similar, except in the latter example, you've actually put your money back into the economy: a company issued the stock in order to raise the capital to expand and grow. In the former, your money is essentially removed from the overall money supply. It is available to no-one, and causes further deflation. The more money you hoard, the less money available for financial transactions. The less money available for transactions, the more valuable each unit of currency becomes.
If you sit on money you get from the economy, you are taking it out of the exchange system as long as you don't spend it, which slows exchange.
Savings would still be invested with a fixed money supply, because investment provides a return whether nominal prices are falling or rising.
Sound investments will account for either inflationary or deflationary trends, just as they do now.
This is clearly the case when nominal prices are falling. But when prices are rising, the reason they are rising is a contraction of the economy… and again, your money is still best left alone. Because while your investments might pay off when the economy rebounds, you'd still be statistically better off with your money sitting under the digital equivalent of your mattress; when the economy rebounds, prices will fall again, and your untouched money will be worth more in direct proportion to how much the economy has rebounded.
Not so with bitcoin.
Not so for staples.
Prices going down is merely a symptom of deflation, but it is not deflation.
That is, the price of good may fluctuate as function of how much current labor you need to buy it, or as a function of how much of your past savings it will cost.
The diference between those measurements is due to money supply (in part, for there are other complicating factors)
If you thing sitting in an empty room counting bit coins is better than buying caviar or plane travel or curing malaria or whatever, then hoarding is good.
This is a simple example. Some of this already occurs in the real world, since machinery depreciates over time. it's just that currency deflation is another force opposing investment and braking money flow.
If this is holds true, why do people buy from markets where prices regularly decrease? Wouldn't it follow that they will wait in perpetuity and never buy that new phone/laptop/etc?
People derive utility from those things. They make calls with their phone and do work on their laptop.
Bitcoin is entirely different. It's only purpose is to allow you to buy other stuff.
Therefore when you compare Bitcoins to the laptop, you're comparing the wrong things. The argument is:
"People will not spend deflationary currency [Bitcoin] on stuff [anything] because it's better to simply keep the deflationary currency [Bitcoin]"
the reply is:
"People do spend deflationary currency [Dollars] on stuff [laptops] even though it would be better to simply keep the deflationary currency [Dollars]"
Dollars are deflationary relative to laptops.
There is certainly utility in being able to buy stuff that cannot easily be bought with traditional (government) currencies. Namely, things that are illegal in various countries, like drugs or gambling.
Saving is investing. You're investing in your ability to manage your risk at a future date. If you have no savings, then you are at risk of any minor problem (e.g. an injury, decreased revenue, or a natural disaster) causing you a major setback.
The "common wisdom" you've heard about inflation being necessary for an economy is a lie. It's a lie that justifies the wealthiest class of individuals in this society to be "bailed out" again and again.
The investor class doesn't want bail-outs, though I'm sure they appreciate bail-outs when they happen. The wealthiest lost the most (in money, though not in utility/standard of living) in the 2008 crash. They'd have much rather avoided the 2008 crash's happening in the first place.
The lie, in actuality, is the idea deliberately promulgated by certain members of the investor class that inflation is evil. They do this for obvious reasons. It is precisely this lie to which you evidently subscribe.
Here's how it works: The banks have a balance sheet of debts owed to them. Some of the debts come from companies like General Motors and United Airlines. If one of those companies threatens to go bankrupt, then the bankers simply lobby the congress to "bail out" the troubled company. This allows the banks to keep the troubled asset on their balance sheet, and continue making an ongoing revenue stream. Of course, the "bail out" results in an increase in the money supply, which means every single holder of USD pays through a decrease in spending power of their dollars.
Do banks want to be bailed out? Sure. Who doesn't. Do rich bankers benefit more than the working class from higher inflation? Certainly not.
Yes, they do, because they are the first to get to spend the inflated money.
If you go back to a point in time when the royal mint could produce an inflated currency by diluting the metal content in coins, then they were the beneficiary of the inflated money by getting to spend it at the current price levels. By the time that money filters through the system to the poor, the prices have risen and the currency is worth less.
The same happens now when the central bank provides newly-minted funds to banks. The banks get first use of the money and get to use it at current price levels, before the flow-on effect of the increased supply takes hold.
In a hyperinflationary environment, here's how a million bucks in new money plays out:
In week one, it buys you a new house
In week two, it buys you a new car
In week three, it buys you a new friday
In week four, it buys you a restaurant meal
In week five, it buys you a newspaper
That is a necessarily exaggerated example, but the beneficiaries of newly inflated money are those that first get to use it. And that is the banks. This is all entirely by design; the true purpose of having a central bank and a fiat currency.
Of course, inflation can be very bad, too.
In a deflationary environment, people buy less stuff they don't need today, which leads to a higher quality of economic growth.
The problem is that if I won't buy it for $100 today because I can buy it for $50 tomorrow, I won't buy it for $50 tomorrow because I can buy it for $25 the next day, so you NEVER buy an iPhone
Technology always gets cheaper rapidly. Lots of people seem to buy it.
A 4% annual deflation rate would stop unhealthy debt expansion, which only stimulates short term growth and long term pain.
Higher quality growth comes when real economic value is created through transactions rather than speculation or inefficient investment.
Of course, all those who insist that inflation is a superior state can't explain the economic effects of everyone deciding to purchase today before the prices go up, leading to much weaker demand and production in the future.
Bringing forward spending excessively is just as problematic as send it backward into the future.
People make this kind of tradeoff all the time. I can either purchase a product for $100 from Best Buy, or, I can wait for two days and get the same product for $80 from amazon (or $83.99 and get it the next day).
There are times when I choose to be prudent and save the extra cash and wait 48 hours until the amazon package shows up. Other times, I would prefer the product sooner, rather than later and spend more money for the item.
> This means that no one buys anything
Think about technology. Every day, the cost of a new computer drops by $0.27 on average, let us say, or about $100 per year. Last year's models have a $100 discount, three-year-old machines have a $300 discount, five-year-old or older machines are bargain basement or even negative value (you have to pay someone to haul them away for recycling).
Every day, your money increases relative to the value of computers. Every day, when you wake up, you face an economic choice: You could buy that new machine today, and have it today, or you could buy it tomorrow, and have the new machine and $0.27 left in your pocket.
By your logic, everyone would always choose to postpone buying a computer.
Yet people buy new computers all the time, and have for several decades. How can you explain that? It's a real deflationary market that doesn't have this problem.
If the market reduces because of a lack of investment, wouldn't the currency reduce because you hold the same proportion of a smaller thing, creating an incentive to stop negative growth.
There is also the factor of the OP's so-called CryptoBarons. Money is just an idea until you actually spend it. If there are a number of people living it up because they got a bunch of bitcoin really early the result would be essentially another form of bitcoin creation. Those CryptoBarons would be adding currency into circulation as they spend, currency that was effectively frozen before that point.
I'm not sure what will happen in the end, but it will certainly be an interesting ride.
Isn't deflation for the buyer seen as inflation for the seller and vice versa?
Why would you then not (applying your deflationary spiral model) expect a "market death" from sellers not selling under currency inflation?
Person A: one who gives Bitcoins in exchange for Widgets.
Person B: one who gives Widgets in exchange for Bitcoins.
Notice the symmetry. The name buyer and seller are arbitrary designations depending on what you consider the currency and what you consider the good being sold.
The inflation/deflation symmetry exists but it is not in the same terms. Deflation for bitcoins is the same as inflation for widgets. The widget holders are desperate to trade their widgets for bitcoins since their widgets's purchasing power is decreasing, but bitcoin holders are reluctant to buy widgets since their value is decreasing.
Let's look at a single-currency country first. Prices fall. Including wages. Credit is tight - money appreciates without being invested and borrowers have to repay debts in more expensive currency tomorrow, making them more likely to default [Fisher]. People with money benefit - the rich get richer and the banks hoard capital, refusing to make loans. Inflation fuels asset bubbles as the economy over-invests; deflation fuels the opposite as the economy starves itself.
Yes, we have seen deflation. The U.S. and U.K. both experienced crippling deflation in the 1930s . Before that, remember the American populist movement's "Cross of Gold" speech ? That wasn't a reaction to an inflationary gold standard. The euro zone offers a more contemporary view of the effects of deflation, as does my Switzerland .
Uncertainty in the future path of deflation that is more toxic than deflation per se. The U.S. grew through the Great Deflation in the 1870s and Japan has had mixed real effects from its almost two decade deflation [Morana]. Theoretically, if deflation proceeded at a steady clip, markets could accommodate (Milton Friedman advocated for an economy deflating at the real interest rate [Friedman]).
But what if we have two currencies, e.g. U.S. dollars and Bitcoin? Argentinians have a choice between black market (or "blue") dollars and an available but inflating peso. Tellingly, Argentinians buy dollars primarily for overseas vacations . This is an example of a bad currency (the peso) and a good (the greenback). The Argentinians still execute the bulk of their transactions in pesos, not dollars.
Deflation is not likely to be Bitcoin's death knell, but rather a ceiling on its usage. A deflating Bitcoin will crimp transaction demand for the currency as spenders shift preference to more easily borrowed and spent dollars. Sellers would respond in kind (or, alternatively, sellers who respond in kind would gain market share).
Caveat: if Bitcoins are treated as a financial asset, for speculating versus spending. If so, deflation would proceed un-checked, with speculators driving out the transaction value of the currency. That said, gold has survived both deflation and speculation, so this isn't a fatal blow either.
[Fisher] http://www.jstor.org/stable/10.2307/i332559 The Debt Deflation Theory of Great Depressions (1933)
 http://www.amazon.com/gp/aw/d/0143116800/ref=redir_mdp_mobil... See Norman Montagu; British depression
 http://www.ft.com/intl/cms/s/0/1c23c088-60c3-11de-aa12-00144... Swiss central bank moves to weaken franc (June 2009)
[Morana] http://www.icer.it/docs/wp2004/Morana29-04.pdf (2004)
[Friedman] http://www.amazon.com/gp/aw/d/1412804779/ref=redir_mdp_mobil... The Optimum Quantity of Money (1969)
 http://blogs.ft.com/beyond-brics/2013/01/17/argentinas-blue-... Argentina’s “blue” dollar blues (January 2013)
With a deflationary currency, you can pay your workers nominally slightly less each year while paying them the same or even slightly more in real terms.
How would the average person on the street react to being told "You've performed really well this year, so we're only going to decrease your salary by 1%. Congratulations on your raise!"?
From January 1995 to January 2010, Japan's CPI (2005=100) has fallen from 100.8797 to 99.5851, or or -0.08% per year. In that time, real wages grew 0.23% . Real GDP/capita at 0.61%. Hell, from 2010 to 2013 their CPI has fallen at 0.27% annually, but the hit has been mixed. Note that the Japanese monetary base (M2) has expanded at 2.5% annually from 1995 to 2010, so this is a demand-driven deflation, consistent with Morana. But the deflation we base our analysis on, the Great Depression, was similarly spurred by demand.
Similarly, Germany, through the Hartz reforms, engineered a wage deflation at the beginning of this century. Helping power the American recovery is wage deflation. The hope is austerity, structural re-alignment through deflation, will similarly fix peripheral Europe's bloated labour costs.
Yes, it appears people will take falling wages if forced. All this said, I do not believe a deflating national currency is the right model for Bitcoin. Instead, look to arguments levied as the world switched off gold, an international deflationary currency, to inflationary fiat ones.
 Own calculations from St. Louis Federal Reserve Economic Database
When 2140 comes around, and all the bitcoin is mined, then it will only deflate at the rate which coin is "lost into the ether" from people losing their wallets, etc. I highly doubt the deflation rate will be anywhere near 1%.
Ohhh, now I get it.