This can make the 'rate of deflation' that occurs worse:
* https://en.bitcoin.it/wiki/Deflationary_spiral
* https://isps.yale.edu/news/blog/2014/06/the-perils-of-bitcoi...
* https://crypto.bi/deflationary/
† I am aware of satoshis.
Considering this, while it is true that all this makes deflation worse, I’d assume most bitcoin hodlers would not mind this.
It's a compelling rival to multi-level marketing for women in that both prospects entice low-socioeconomic standing peoples into thinking they are building value instead of consuming it.
The only "problem" Bitcoin poses for economies is for governments to fine-tune their local economies via currency production and related controls. In that sense, we should watch how events unfold in Turkey.
* among major "regular" economies, Turkey has the highest % of people holding crypto (≈20%). Second only to special zones UAE and Singapore (31%, 24%).
* Turkish lira is steadily inflated over the last 30-40 years, well over 10% and recently over 50%.
* Turkey does not have mandate for pricing goods in local currency: you can pay in dollars or euros, along the local lira.
* When you enter Istanbul airport, Every. Single. Gate. is marked with BTCTurk ad, inside and outside - the major crypto exchange in the country.
* Istanbul city market is full of traders who use USDT on Tron.
The experiment of social game "Bitcoin" boils down to this: will the people self-organize the functioning economy with monetary freedom, while the gov loses its grip on it; or will the economy collapse without government's regulation and protective management?
Which can limit economic growth. When money was based the amount of gold available, there were long periods of economic stagnation because of liquidity issues:
* https://en.wikipedia.org/wiki/Long_Depression
* https://en.wikipedia.org/wiki/Great_Bullion_Famine
The stagnation only ended when new sources of shiny rocks were found (California; New World).
I find it a dumb idea what whether or not people can get credit to start/expand businesses would be dependent of solving math problems. Yes, credit creation can be "too easy" and become a problem, but making it "too hard" (or physically/mathematically impossible) is even more dumb.
> The original bitcoin whitepaper was titled: “a peer to peer electronic cash system”
The goalposts, they move.
And is deflation a good or bad thing for the livelihood and well-being of human beings?
How many people in the US has a mortgage or some kind of debt (student, medical)? Inflation makes the burden of debt easier, deflation makes it worse.
And the Top (0.)1% already has an easy enough time with parking/generating value. Deflation would only help them more (and make things hard for everyone under them).
Deflation is built into Bitcoin by design and is one of its most notable features regarding its coin growth schedule. This pros and cons of that approach have been discussed ad infinitum in the crypto community.
During the "long depression" GDP was still growing at 3-4% so it was hardly stagnation.
So I think it's the issue of thinking people will use it as a currency, not that it is not a valuable asset
So the finite amount of base money would just mean that derivative products would be used as practical money.
Deflation inherently disincentivizes doing anything with the currency other than sitting on it. Want to buy something? You’d be better off waiting and buying it tomorrow because it will be worth less in your deflationary currency at that point. No one has an incentive to lend their money to others to use it more productively, so no growth occurs. No one buys anything, producers can’t sell anything, and no one can get capital to start any business ventures. The sole, viable way to accumulate wealth is to take the currency and stuff it under the mattress.
This results in a society much like Europe described in a Jane Austen novel, where wealth is simply inherited and the upper class doesn’t actually serve an economic function. They just exist to perpetuate their wealth and dole out subsistence wages to those who work their estates and have absolutely no chance of improving their station.
It’s an inherently broken system and a perfect example of Chesterton’s fence by tech types assuming they know better than everyone else.
Quite the opposite.
Deflation encourages hoarding of cash because it just sits there and increases in value. "If you want to retain the purchasing power of your money, it should participate in society via investment." — Nick Maggiulli
Because the authoritarian government took over the previously independent central bank and lowered interest rates. Higher inflation was predicted by mainstream economists, and they were right.
* https://www.aljazeera.com/news/2021/3/20/turkeys-erdogan-sac...
* https://en.wikipedia.org/wiki/Currency_interventions_under_E...
I don't know of many things that are viewed positively that have been given a label with "depression" in it.
> Figures from Milton Friedman and Anna Schwartz show net national product increased 3 percent per year from 1869 to 1879 and real national product grew at 6.8 percent per year during that time frame.[32] However, since between 1869 and 1879 the population of the United States increased by over 17.5 percent,[33] per capita NNP growth was lower. Following the end of the episode in 1879, the U.S. economy would remain unstable, experiencing recessions for 114 of the 253 months until January 1901.[34]
> The dramatic shift in prices mauled nominal wages – in the United States, nominal wages declined by one-quarter during the 1870s,[14] and as much as one-half in some places, such as Pennsylvania.[35] Although real wages had enjoyed robust growth in the aftermath of the American Civil War, increasing by nearly a quarter between 1865 and 1873, they stagnated until the 1880s, posting no real growth, before resuming their robust rate of expansion in the later 1880s.[36] The collapse of cotton prices devastated the already war-ravaged economy of the southern United States.[17]
> Thousands of American businesses failed, defaulting on more than a billion dollars of debt.[35] One in four laborers in New York were out of work in the winter of 1873–1874[35] and, nationally, a million became unemployed.[35]
* https://en.wikipedia.org/wiki/Long_Depression#United_States
Seems like a grand-ol time.
To those that have, more will be given. What about those that do not have?
The Bitcoin paper came out in 2009, and the deflationary criticism was already recorded in 2010:
* https://en.bitcoin.it/w/index.php?title=Deflationary_spiral&...
2014 article:
* https://isps.yale.edu/news/blog/2014/06/the-perils-of-bitcoi...
Which is the bug:
> No currency should be able to buy the same basket of goods over very long timespans through hoarding. If you want to retain the purchasing power of your money, it should participate in society via investment.
* https://twitter.com/dollarsanddata/status/159265180975079833...
Being deflationary I agree is a problem, but not the idea that there aren’t enough usable coins left.
That’s quite a mischaracterization. We can at least agree that Bitcoin’s supply is set up to increase at a pre-set rate over time. The math problems are the means to enforce that rate. Not the controlling factor.
And there's no way Turkiye is behind the value of BTC. It's still driven by speculators.
Look at it this way. If your money (in money form) is worth less tomorrow than today, you are incentivised to spend it, thus fueling economic activity of all sorts (from going out and buying a drink to buying a car, traveling, investing). If your money is worth more tomorrow, then you are incentivised to tighten your belt and not spend for as long as you can. At scale, this negatively affects production, economic mobility, and so forth; the rich get richer and hoard the money. I do not believe any of today’s economies can be healthy and competitive (or even functional) with a deflationary currency.
I disagree that it is the cause.
The mechanism does not distinguish between “bad economic activity” and “good economic activity”. I.e., the same mechanism applies to positive progress (carbon dioxide sequestration, more expensive technology and techniques reducing environmental impact, etc.), it just requires proper incentive alignment and accounting for bad faith actors via regulation.
A deflationary system with limited supply makes kings and ultimately defeats itself, as your money is decreasingly evidence of your effort and work and increasingly evidence of you having held to it for a while. (It is also a quality of the current system, but less so, and it should be even less so, not more so.)
The same goes for technology. We all know next year’s iPhone will be better than this year but we still buy them…because we need them now.
I’d argue inflation’s incentives are worse - the constant need to invest/spend so that your money doesn’t lose value. It means money flows into anything and everything like zombie companies, over consumption, property. Those on the poorest end are just trapped because as soon as they get any money it starts depreciating.
Next year’s iPhone will not only be better, but also (even with the same price tag) cost more, inflation-adjusted. That factors into the decision to buy now.
> I’d argue inflation’s incentives are worse - the constant need to invest/spend so that your money doesn’t lose value.
It is a problem when it is at extreme, like in unstable countries where money can be a liability to unhealthy degree. However, I’d argue it should be a liability to a smaller degree.
What you highlight is the ever-present conflict between personal benefit and societal benefit. Obviously for an individual it is more preferable that the value of their money increases; I would never argue that. However, for society as a whole it is more preferable if the value of money decreases at a stable rate.
Perhaps this is why all major economies settled on the idea that an amount inflation is crucial to have.
None of the links in this chain is perfect†, but one of the weaker ones is where investors are willing to accept risk. A guaranteed deflationary currency is a risk-free way to get a return on your investment, so companies have to offer a higher rate of return, narrowing the set of goods that can justify such investment.
But the same criticism can be leveled at Treasury bonds and (to many people's minds) real estate, so I'm skeptical of it, and anyway "risk-free" is not a good description of Bitcoin.
______
† Consumers knowingly buy socially harmful goods such as cigarettes, they unintentionally buy worthless goods because producers lie to them, investors are largely speculators driven by herd mentality rather than rational assessors of future returns, corporations cheat investors due to principal–agent problems, and externalized costs and benefits such as pollution aren't measured at all. Still, it's a damn sight better at organizing economic production than the Great Leap Forward, the Southern slave plantations, or the medieval guilds.
He wasn't specifically calling it out as having a fixed money supply or even fungible tokens, though. And it wasn't until Satoshi figured out how to do without a central issuer like Xanadu, Digicash, or e-gold that we realized it was possible. At the time that Satoshi cut the knot, we were all convinced it was impossible because of Zooko's Triangle.
Chaum founded DigiCash in 01989, incidentally, based on a paper he wrote in 01982 presenting a cryptocurrency design for untraceable payments, but backed with dollars by a central issuer, like Tether.
However, there was always a strong association between cypherpunks and right-libertarian free-market ideology, which is where you find gold bugs and Austrian economists. You may remember that one of the minor plot points in Atlas Shrugged was that Galt's Gulch went back to specie money (tiny pennies stamped from gold) because its value wasn't dependent on government fiat.
We’ve already seen the negative side of fiat currencies in how they eventually collapse (Zimbabwe, Venezuela, Argentina) and even in more developed countries wages have not kept up with inflation. Money is trending to zero People are trending to destitution.
We saw it recently in the UK - where public sector workers were not given pay rises because the government argued it would fuel inflation. So how does that even make sense.
By your logic, bonds are bad for the economy.
Approximately zero of them have debt denominated in Bitcoin. Meaning that the main drawback of deflation does not apply to Bitcoin.
The only reason you can provide examples of failed states with inflationary currencies is because all currencies are inflationary. This is not a coincidence, perhaps because deflation does not correlate with things going well. For some famous examples of deflations, read on The Great Depression in US and Lost Decades in Japan.
In broad strokes, this is perhaps the most important question of environmental sustainability which stems from monetary policy.
Second most important is the matter of how much energy is spent on security (eg, in the case of bitcoin, the horrifying amounts of power spent on SHA256 hashing, and in the case of USD, the perhaps even more horrifying energy consumption of the global petrodollar empire).
We spend so much deliberation on this second question that we often ignore the first: what monetary policies will make us chill out on the whole importing-plastic-shit-we-don't-need-from-the-other-side-of-the-earth thing?
In the US it was nothing good either after a few years since WWI: manufacturing fell, unemployment rose[0], etc. I guess it did not help that Britain ended the gold standard which helped their exports, and US adopted protectionist policy which tanked its trade. I don’t need to retell this all but basically the depression ended with the US abandoning the gold standard and entering controlled inflation.
Perhaps the reason for these rosy takes on deflationary currencies in the US is that not many people are still alive who lived through the depression…
By the way, the US did suspend the gold standard during WWI. Why, you ask? Well, it so happened that some debt was due, plus people from across the pond were selling stocks in US companies, and so what happens at that point (when you don’t have much monetary control) is ships full of US gold floating off into the misty ocean.
Correct me if I am wrong, of course.
[0] “Did you know that every 1% the unemployment goes up, 40 000 people die?” — The Big Short.
> But the same criticism can be leveled at Treasury bonds
Not to the same extent. Bond returns are usually barely above inflation. e.g. back in the second half of the 1800s you’d get 4% interest plus 1.5-2% average yearly deflation (since the economy was growing due to technological progress/etc. yet money was relatively very scarce).