I hope there are better arguments for the deflationary nature of Bitcoin than this article.<p>The author uses the utterly senseless definition of deflation as a change in the <i>total</i> money supply, instead of <i>per capita</i> money supply. If Bitcoin becomes more popular, its asset value increases because demand for it has increased, not due to "political numéraires" (whatever those are). Increasing the population but keeping the money supply fixed is fundamentally deflationary, and Bitcoin's "population" has the potential for large growth.<p>Second, it's astonishing that the author would approvingly quote a passage like this:<p><i>Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. In other words, by saving, not borrowing.</i><p>This is naive bullionism taken to a whole new level of insanity, with physical gold replaced by numbers in a file. Saving is equated with producing, as if putting my bitcoin wallet on a thumb drive and stuffing it under my mattress starts up a factory. Entirely absent from this morality play is the prudent investor, who borrows or spends out of savings to buy capital goods with the hope of increasing production, and is punished.
Deflation is a disaster for anyone with debts as the value of them grows rather than being inflated away. So while it may be OK in the bit coin world (as I don't believe there are any significant bit coin denominated debts) deflation would cause massive economic contraction in the real world as debts would grow reducing spending and there is reason to believe it would not converge rapidly to an equilibrium (certainly not one that people would like).<p><a href="http://www.debtdeflation.com/blogs" rel="nofollow">http://www.debtdeflation.com/blogs</a>
<a href="http://www.complexity.org.au/ci/vol06/keen/keen.html" rel="nofollow">http://www.complexity.org.au/ci/vol06/keen/keen.html</a>
Since neither Forbes nor the author, Jon Matonis, saw fit to point this out, I will.<p>This is an op-ed piece, written by a board member of the Bitcoin Foundation. Regardless of the merit of the article, it should have been explicitly stated in the piece.
Personally, I don't consider mild deflation to be any worse than mild inflation. A stable currency is better for everyone. Things get increasingly bad as the rate moves away from 0% in either direction, especially, if it occurs in an unpredictable way.<p>As it happens, most central banks aim for a stable currency with a slight tendency towards inflation. My policy change would really only be minor: make the inflation target -1% to 1% rather than 1% to 3% (I didn't completely pull that number out of my ass; apparently, that is the Bank of Canada target range).
Sorry for off topic but I must say I'm shocked at how bad is the experience browsing forbes site - popup, ad redirect page, ridiculously overcrowded article page (<a href="http://i.imgur.com/uARSR.jpg" rel="nofollow">http://i.imgur.com/uARSR.jpg</a>). Just wow.
I really wish Ripple got more press. Instead we get stupid articles like this that is downright painful to read. Eli explained why it was stupid way better than I ever could, so read that comment for motivation.<p>Basically Ripple is the anti-thesis of bitcoin as it works solely on trust between the participant and does therefore catch the essential mechanism of how all fiat economies work.
This has got to be one of the dumbest fucking things I've ever seen. Its only real point is that commodity-based currencies and deflations weaken government.<p>Furthermore, its idiotic praise of <i>societal-level saving</i> is pure nonsense. My income is someone else's expenditure, my credit is someone else's debt. Money can obscure this fact, not alter it. In order for me to save, someone else must spend.<p>Do they <i>have</i> to spend beyond their means and go into debt or reduce their own savings for me to save? Well, <i>that's</i> where the issue of money comes in.<p>If we have a standard-issue modern currency, ie: slow but steady rate of inflation targeted by a central bank, then some amount of <i>new money</i> enters the economy each year. As long as total new savings in the year don't exceed this amount, <i>then and only then</i> can everyone save at the same time.<p>In a gold-backed inherently-deflationary currency without fractional reserve banking or government fiat to create inflation.... all savings is zero-sum. Such a currency is indeed inherently deflationary, and the deflation <i>spirals</i> as those who can actually afford to save come to own larger and larger portions of the total bullion supply -- which they are of course saving!<p>You end up with only one way to put aggregate demand back into the system: credit. Which is exactly what has happened to our real societies in the past three decades of anti-inflationary, anti-labor public policies! Problem is, that makes the deflation truly become a <i>crisis</i>, because even a 2% annual deflation is in fact an extra 2% interest compounding on any and all nominal debts.<p>Deflation is bad for the same reason inflation is bad, namely that an unexpected change in currency value alters the real terms of almost all business contracts <i>ex post facto</i>. But deflation is also <i>distinctly</i> bad for <i>another</i> reason: once it kicks in, there is no incentive for net creditors/savers to engage in <i>any</i> real production of <i>anything</i>. Their biggest incentive becomes the generation and continuation of nominal debts (whose real value accumulates a deflation bonus). Worse, as the deflation happens and alters contracts ex-post-facto, people's debts become unpayable. So now the <i>creditors</i> go bankrupt too, and the only people left safe are the savers who <i>literally</i> stored physical bullion in a physical location. Anyone with so much as a <i>bank account</i> finds out they were actually a creditor, and are now <i>completely fucked</i>.<p>Deflation is a wet dream of survivalist "gold, beans, and ammo" nutters, and the world's worst preventable nightmare for everyone else!
tell it to the guy who goes from an 80% loan-to-value on his house to owing way more than the house is worth.<p>who's going to build a factory if building the factory is going to be significantly cheaper next year, not to mention everything it produces?<p>who's going to hire anyone if you can hire them cheaper next year?<p>especially in a country like the US, where everyone is in debt up to their eyeballs, deflation is a disaster.
I agree with the author of TFA that Krugman is wrong. Just as every single Keynesians out there: they have never predicted anything more than short term (and what really hurts them is that there are economists from other school of thought who can repeatedly predict correctly over the long term. Ouch.).<p>And I also agree that we should not fear deflation.<p>However hoping that deflation will happen would be like waiting for some pink unicorn to show up: both the U.S. and the Japan have announced "unlimited QEs".<p>In order words: endless money printing to prevent the utter failure of the Keynesian system.<p>We'll not discuss the fact that if money is free to print this is not true capitalism at work (because the amount of new money in circulation doesn't correspond to the new wealth created)... But hey, this is a Keynes' world right, so what do you expect.<p>Could <i>anyone</i> explain me how we'll anything other than inflation (and possibly a <i>very</i> severe inflation) when, worldwide, the biggest economies are doing "unlimited QEs"?<p>If deflation takes place I'd be very surprised (and very happy too, because I'm a "saver"). I did hedge myself against inflation/hyper-inflation but I still do have lots of cash/savings.<p>I'd <i>love</i> deflation to take place but with unlimited QEs it's never going to happen.