[gigantor]

I have one new appreciation for fiat currencies - they're designed to circulate with a steady rate of inflation. It seems there's a hesitation of spending bitcoins knowing if you just wait a day it will go up, so it's being treated like a precious metal rather than a new way of paying for things.

Edit: Thanks for the correction, meant to say fiat currencies tend to 'inflate', not deflate.

[brc]

Yes, but fiat currencies are designed to lose value over time, which makes it difficult for people to save effectively. Governments and large banks get the newly-inflated money first, which gives them first bite at the existing value of money with money essentially made from nothing.

Encouraging people to spend money for the sake of it sounds like a good idea when people have created the concept of 'hoarding' - which is just saving with a scary name. But future productivity has to come through capital appreciation, which has to come through saving. By working against this, wrong investment choices are made because the time horizon is altered.

The concept of fiat currencies in terms of being able to expand the money supply is superior to having a fixed money supply, but the way in which it is implemented works directly against capital formation and feeds directly into misdirected investment and speculation by allowing money creation to run ahead of sensible investment. As aptly experience by the excessive amounts of capital diverted into residential real estate, caused by excessive amounts of new money. Without the easy money, the level of investment in real estate would have been much lower, and the subsequent crash much less destructive.

Fiat currencies have been around for 250 years or so, and not one single one of them have survived that long.

[Patient0]

"Encouraging people to spend money for the sake of it sounds like a good idea when people have created the concept of 'hoarding' - which is just saving with a scary name."

But to be clear: there's a fundamental difference between "saving" and "investment".

1. Saving/Hoarding: Keeping money/cash under the mattress - nobody else has the ability to "spend" the money in the mean time. Also called "sinking funds" by Keynes. This is money kept in a bank deposit. The important point is that you can, at any time, choose to "stop saving" the money and spend it. i.e. you keep the right to spend the money at any time. Nobody else can make use of it. It effectively is out of circulation until you choose to spend it.

2. Investment: Lending the money to someone else for a fixed term - you can't ask for the money back before the end of the fixed term. They can spend it on goods/services for that period of time after which they have to pay it back. The money stays "in circulation".

Absent fractional reserve banking, #2 is the only thing that can actually generate a real return. i.e. real, profitable, economic activity that makes people better off. Without FRB, a checking account cannot pay interest, because #1 cannot be used in any risk-free way to generate value.

For economic productivity, #2 is a good thing, #1 is a bad thing. The fact that everyone is trying to do #1 right now with US dollars and the like is what is considered to be the source of our current economic malaise (according to the economists that I agree with anyway). Fractional reserve banking, QE and the like to some extent lets money that is in category #1 be used for "economic good" in category #2 - effectively fooling the hoarders into "investing" their money.

Of course, bitcoin doesn't have fractional reserve banking - and pretty much by design seems to make it impossible for things in category 1 to be used as category 2. This is why the "hoarding" of bitcoins is considered to be deflationary.

[brc]

>Saving/Hoarding: Keeping money/cash under the mattress - nobody else has the ability to "spend" the money in the mean time. Also called "sinking funds" by Keynes. This is money kept in a bank deposit. The important point is that you can, at any time, choose to "stop saving" the money and spend it. i.e. you keep the right to spend the money at any time. Nobody else can make use of it. It effectively is out of circulation until you choose to spend it.

One of the big problem with Keynes.

Money stuffed in a mattress = hoarding.

Money in a bank deposit = still in circulation, able to be lent by the bank.

There is a massive difference. Other people can make use of funds deposited in accounts. This is why banks take in deposits, to lend it out at a higher rate and pocket the spread.

I would also quibble with your definition of investment. Investment should be classified as spending in the expectation of a financial return (ie, not the joy of owning a new shirt, but actual cash returned on cash outlaid). You can say 'a fixed term' but that is a nebulous concept. 24 hours is a fixed term, so is a week, so is a year, so is 30 years. Lending someone money overnight so they can arbitrage some goods by moving them physically from one location to another one is just as much investment as sinking the money into a toll road for 50 years. The definition has to be on the intention rather than the time horizon, otherwise you're just being arbitrary to support an argument.

>(according to the economists that I agree with anyway)

Highly likely you agree with Krugman. I think he speaks out of his hat. We'll leave it at that.

[Patient0]

> There is a massive difference. Other people can make use of funds deposited in accounts. This is why banks take in deposits, to lend it out at a higher rate and pocket the spread."

Only because of fractional reserve banking. Absent fractional reserve banking, if I 'lend' something to another party but reserve the right to demand it back at any time, then there is simply no way that they can "use" what I have lent them. They can't use the money while still honouring my right to demand the money back at any time.

So "money" which can be demanded back at any time has he same status as money kept under the mattress - it can't be profitably "used" by anyone.

The important point about "investment" is that the money trully is "tied up" - if only for a day. The shorter the term, the more like "cash" it is.

> Highly likely you agree with Krugman. I think he speaks out of his hat. We'll leave it at that.

You're right I do agree with Krugman (for the most part). I've been reading his blog since 2007 and you know what, he's been right in his predictions pretty much the whole time!

If you think Krugman is speaking out of his hat, who do you recommend instead?

[clarkmoody]

I believe you're speaking of CPI-style inflation, or in the case of Bitcoin, deflation.

The rate of money supply inflation of Bitcoin is around 12% at the moment[1]. Until 2025 or so, the supply inflation rate of Bitcoin will be greater than 1%.

I fully expect the exchange rate to fluctuate wildly until a much larger supply of fiat and Bitcoin sits on both sides of the exchange order book. As it stands, a moderately-capitalized trader could throw the exchange rate around at a whim.

[1] https://bitcointalk.org/index.php?topic=130619.0

[wamatt]

>"It seems there's a hesitation of spending bitcoins knowing if you just wait a day it will go up"

So this argument seems to be rather popular, and on the surface it does seems to make sense. However, it glosses over an important consideration.

Are you buying goods in USD or BTC?

Now if it's the latter, then yes there may be stronger psychological pressure (even though rationally there is not much difference).

However, increasingly goods are being traded in USD using BTC as a backing, in which case it would make little difference if you spend in USD from a bank account, or USD with a bitcoin wallet. Because it is possible to trade USD for BTC almost instantly. (Let's ignore the issue of wire transfer delays for now, because that doesn't change the overall argument).

Consider the person holding say 200 bitcoins today. In this situation, if the transaction is a small amount (say a cup of coffee ($3), at 180USD/BTC is about 0.016 BTC at todays rate. I'd have no problem spending that.

In fact psychologically it may be more likely that people trade with their BTC "winnings", because like a casino it has been shown that that is treated as more disposable than "real money".

Thus if one is spending a fraction of a bitcoin priced in USD, and this amounts to a small percentage of your overall position, it's unlikely to endure as a significant purchasing disincentive.

[treeface]

I've spent many years studying economics, but I'm also a programmer. One thing that annoys me about the discussion that tends to crop up on Hacker News is that you have too many of the latter issuing too many uninformed opinions on the former. Currencies that are doomed to deflate are doomed to enter liquidity traps. There is nothing special about BitCoin that prevents this from happening, regardless of its position against other currencies. There are probably ingenious ways to implement distributed digital currencies, but I'm fairly sure that in the long term BitCoin is not one of those ways.

[drcode]

I was wondering why no one ever buys or sells houses. But your post makes it perfectly clear: Since no more land is created, real estate is deflationary, so obviously no one would ever sell a house.

</sarcasm>

Also, I'm happy you're patting yourself on the back for all your training and experience. But you still need to make a compelling argument instead of just saying "Things are just so."

[dragontamer]

But the housing industry is barely recovering from a "liquidity trap" in 2008! People weren't selling houses because they expected home prices to constantly go up. You had people flipping homes and adding no value to them. Eventually, the market crashes after too many people buy homes that they didn't need...

Note, its not that people "don't sell homes", it is that homes are prone to rampant speculation that can bring down the entire industry.

His claim is that a fiat currency (ie: Dollar), can repel the liquidity trap with monetary policy. IE: Carefully controlled inflation or deflation.

[drcode]

OK, you made some good points I will have to think about more. I would think the type of deflation we're discussing had only a small role to play in that crisis, but I admit it probably played some.

Of course the irony is that monetary policy causing unreasonably low interest rates (i.e. controlled inflation) was a large factor of that crisis as well.

[dragontamer]

Got an argument to back that up?

Why don't you go through the charts. Find me the year that the Fed caused too much inflation, and then tell me how much the dollar was inflated that year.

I doubt you can, because during the housing crisis, the dollar experienced deflation. The Fed acted swiftly, although not swift enough! The dollar failed to hit inflation targets in 2008-2009 as we experienced -0.4% inflation.

For the 2009 to 2010 years, we only experienced 1.4% inflation. Both years, we missed inflation targets of 3%. Worse, the dollar deflated in value in one year.

Every other year, inflation has been the same as always: ~3% since 1990.

Economic data does not match your words. The US hasn't had inflation over 4% for the last 22 years. There is no inflation problem.

If the goal of ~3% inflation is a poor goal, then tell me why.

[wamatt]

The difference between a normal currency and bitcoin with regards to deflation is that bitcoin is almost infinitely divisible, whereas traditional currencies are not.

Divisibility acts in opposition to deflation to create liquidity.

The idea is in the future you don't trade bitcoins per se, but microbits, or picobits etc (or whatever they will be called).

[marcosdumay]

Economies get in a liquidity trap must faster than division becomes a problem. The difference is so marcant that almost nobody even talked about divisibility before the bit coin people.

Anyway, I'm not sure the expression "liquidity trap" means anything when talking about bitcoins.

[drakeandrews]

Satoshis are the lowest denominator of bitcoin, being .00000001BTC

[richcollins]

The reason people aren't paying for things is because its hard to do, not due to deflationary concerns. If I were confident that the purchasing power of bitcoin was going to continue increasing relative to the USD, and all vendors accepted BTC, I'd immediately move over all of my USD to BTC and spend my BTC on a daily basis.

[dj2stein9]

I don't believe the argument that a deflationary currency, by itself, will make people not be willing to buy things. Consider a savings account - why would anyone take money out of their savings account to buy things? If all you need to do is keep it in the account, it will make more money, so why spend it?

[omni]

It's a question of degree. Your savings account with $100,000 in it will probably be worth about $100,002 tomorrow at current rates. The equivalent amount in Bitcoin might be worth much, much more at the rate it's been climbing.

[SkyMarshal]

Or much much less, and it has been known to fall precipitously as well.

[richcollins]

It doesn't matter if you keep converting your income to BTC as it comes in, because if you spend your USD income instead of buying BTC then you've effectively done the same thing.

[SkyMarshal]

That bit of economics common knowledge was also developed before our modern, dynamic, fast, globally interconnected economy. I'm sure there's still some technical truth to it, but I wonder if it's as true now to the degree it was back in, say, the Depression era.

It would be interesting to see how a currency with a set rate of deflation instead of inflation worked now. Say your money gained 3% per year purchasing power instead of lost it, everyone would be incentivized to spend or invest it in ways that returned either ROI or utility worth at least 3% per year, or otherwise hoard it. Spending and investment (or at least malinvestment) would slow, but capital formation would increase.

Too bad there's no way to test such a thing, see how it works out in practice. BTC unfortunately does not seem to provide a stable rate of deflation, at least for the foreseeble future.

[dragontamer]

You mean... the Japanese Yen?

Nintendo and Sony posting record losses as the Yen continues to get stronger and stronger. The $200 Wii console sold the best in 2010 and 2011, but because the Yen deflated so much Nintendo lost money on the USD -> Yen conversion and overall didn't do so well.

[deelowe]

Savings accounts don't beat inflation. No guaranteed and insured investment does to my knowledge(if you find one that's not a ponzi scheme, let me know). If savings accounts were paying out double digit % point gains, you can bet your ass people would be shoveling money into the accounts and not cashing out.

[gibybo]

They aren't beating inflation right now, but historically they have. ~5 years ago interest rates on savings accounts were roughly 5% and inflation was 3-4%. Empirically, people actually saved less during that time (although there were many other confounding factors).

[deelowe]

Point taken, but we're still arguing apples and oranges. Savings accounts historically maybe earned a percent or two above inflation. There's very little incentive to just let money sit in a savings account at those rates. Even extremely low risk investments are better.

[Andrew_Quentin]

Where does an investment get its value from? If saving gives me 3% but investing 5%, how does the deflationary nature of the currency change these two numbers? Surely investing gives a greater return as value is created regardless of whether the economy is inflationary or deflationary. You know, we have only had pure fiat money for the past 40 years. Before the we advanced from the dark ages to the 21st century with a deflationary system.

[Nursie]

Most savings accounts pay under the rate of inflation, and rely on someone (usually a bank) being willing to pay you that rate to get you to give them your money. Presumably the utility they derive from this makes it profitable for them.

BTC on the other hand, if we reach a steady deflationary state, beats the rate of deflation by definition, and just by you sitting on it. Slightly different situation.

--edit-- Also see here - http://eprint.iacr.org/2012/584.pdf It seems the ~80% of bitcoin are long-term dormant, so people are just holding on to them, regardless of the reason.

[jvm]

Yeah parent would have been precise referring to the low volatility rather than the inflation of fiat money.

[nawitus]

According that argument you shouldn't spend any fiat currencies either, because it's more profitable to convert all of it to bitcoins.

[doyoulikeworms]

Isn't that spending it on bitcoins?

[asperous]

The problem with bitcoins is as they become more popular, the demand is rising faster than the bitcoins are 'minied'. Technically speaking, if the demand stayed constant, the supply would slowly raise and the value would inflate (until all the coins are mined).

[loceng]

This would solve the issue of people buying Bitcoin for investment purposes, though I wonder if people would be able to spend Bitcoin fast enough to not keep the people / exchanges that act as banks negatively affected - or could this be differentiated easily?

[asperous]

I think you mean inflation, where the longer you hold on to it , the more worthless it becomes.

[gigantor]

Thanks and you're correct, I was thinking how deflationary bitcoin was while writing. Fixed.