Let’s hear your economic system design where anyone can gain real wealth by simply putting their cash under mattresses (as would be true if deflation were the norm). Who needs to invest in the actual productive economy?
Your argument seems to imply that the existence of even one deflationary good is sufficient to destroy an entire economy. Surely if this were the case then the law of large numbers would have killed us by now.
My understanding is that one good wouldn’t do it, but persistent, overall deflation would in fact devastate the economy.
Sure, right now you can stick money under a mattress for 6 months and buy more Core 2 laptops than you could today. But that doesn’t seem the same as “getting richer”.
Where’s the line? Good question. Obviously if you could buy more of anything that would be getting richer without investing the money. Or if you could buy more (houses or food or cars or Internet access or electricity or sex or drugs or rock n’ roll).
If you consider only cash and laptops, then it looks reasonable to call cash deflationary, but if you consider the economy as a whole, then it’s more accurate to say that laptops are inflationary.
What makes the deflation of bitcoins an “overall” deflation, as opposed to the deflation of one good?
The implied context of all this is: what if Bitcoin (or something similar) became a/the dominant currency, that paychecks, debts, etc. are denominated in?
If it doesn’t then it doesn’t really matter, societally, if it inflates, deflates, mutates, or defenestrates (other than to the people who invest in it...) It’d just be another good, as you say.
You seem, then, to be arguing that the behavior of our currency has an importantly different kind of effect on the overall economy than the behavior of any other asset.
...on reflection, I think that’s actually right. Under hyperinflation, people tend to run around with wheelbarrows of banknotes rather than reverting to barter. I’ll have to think about it some more.
Nevertheless, I would expect the effects of currency deflation to be limited or mitigated by the fact that you eventually have to buy food.
Under hyperinflation, people tend to run around with wheelbarrows of banknotes rather than reverting to barter. I’ll have to think about it some more.
Hyperinflation only happens precisely because people have less and less interest in wheelbarrows full of bank notes. The reason it feeds on itself is that people desperately want to turn their notes into real goods or exchange for more stable currencies. That lowers the value of the notes even further since there are more notes chasing the same amount of desirable goods.
I’m not sure a hyper-deflation can really happen. What would that look like, merchants lining up outside my house trying to sell me another Blueray player for increasingly small fractions of a coin?
If no one wants to spend this money, can it really retain value for very long? I’m genuinely perplexed.
I think a key factor is that humans don’t actually behave as rational utility-maximizing agents. Most people will treat the value of an asset as being approximately its current market spot price, and only slightly adjust in the direction of what they expect its long-term value to be.
I wouldn’t expect merchants to line up outside your house, but their websites might list prices like “Blueray player -- 3.89 millicoins”.
The price itself doesn’t indicate hyper-deflation. That price could be the product of years of single digit deflation. Hyper-deflation I think can only happen if there is a run on most real goods—where people are literally in a panic to exchange their goods for rapidly decreasing numbers of bitcoins. Otherwise how would it feed on itself the way hyper-inflation does?
Unfortunately I don’t know enough economics to sustain this discussion past this point, so I’m going to refrain from further making things up. I assume you have a good question, and I recommend you put it to someone who can answer it.
Let’s hear your economic system design where anyone can gain real wealth by simply putting their cash under mattresses (as would be true if deflation were the norm). Who needs to invest in the actual productive economy?
Your argument seems to imply that the existence of even one deflationary good is sufficient to destroy an entire economy. Surely if this were the case then the law of large numbers would have killed us by now.
My understanding is that one good wouldn’t do it, but persistent, overall deflation would in fact devastate the economy.
Sure, right now you can stick money under a mattress for 6 months and buy more Core 2 laptops than you could today. But that doesn’t seem the same as “getting richer”.
Where’s the line? Good question. Obviously if you could buy more of anything that would be getting richer without investing the money. Or if you could buy more (houses or food or cars or Internet access or electricity or sex or drugs or rock n’ roll).
There was persistent overall deflation in various periods in the 19th century, and it didn’t devastate the economy.
If you consider only cash and laptops, then it looks reasonable to call cash deflationary, but if you consider the economy as a whole, then it’s more accurate to say that laptops are inflationary.
What makes the deflation of bitcoins an “overall” deflation, as opposed to the deflation of one good?
The implied context of all this is: what if Bitcoin (or something similar) became a/the dominant currency, that paychecks, debts, etc. are denominated in?
If it doesn’t then it doesn’t really matter, societally, if it inflates, deflates, mutates, or defenestrates (other than to the people who invest in it...) It’d just be another good, as you say.
You seem, then, to be arguing that the behavior of our currency has an importantly different kind of effect on the overall economy than the behavior of any other asset.
...on reflection, I think that’s actually right. Under hyperinflation, people tend to run around with wheelbarrows of banknotes rather than reverting to barter. I’ll have to think about it some more.
Nevertheless, I would expect the effects of currency deflation to be limited or mitigated by the fact that you eventually have to buy food.
Hyperinflation only happens precisely because people have less and less interest in wheelbarrows full of bank notes. The reason it feeds on itself is that people desperately want to turn their notes into real goods or exchange for more stable currencies. That lowers the value of the notes even further since there are more notes chasing the same amount of desirable goods.
I’m not sure a hyper-deflation can really happen. What would that look like, merchants lining up outside my house trying to sell me another Blueray player for increasingly small fractions of a coin?
If no one wants to spend this money, can it really retain value for very long? I’m genuinely perplexed.
I think a key factor is that humans don’t actually behave as rational utility-maximizing agents. Most people will treat the value of an asset as being approximately its current market spot price, and only slightly adjust in the direction of what they expect its long-term value to be.
I wouldn’t expect merchants to line up outside your house, but their websites might list prices like “Blueray player -- 3.89 millicoins”.
The price itself doesn’t indicate hyper-deflation. That price could be the product of years of single digit deflation. Hyper-deflation I think can only happen if there is a run on most real goods—where people are literally in a panic to exchange their goods for rapidly decreasing numbers of bitcoins. Otherwise how would it feed on itself the way hyper-inflation does?
Unfortunately I don’t know enough economics to sustain this discussion past this point, so I’m going to refrain from further making things up. I assume you have a good question, and I recommend you put it to someone who can answer it.