I suspect I am probably preaching to the choir here, but I know in the Reddit Bitcoin sub there are a surprising amount of people in the community that still express concerns in the comments because Bitcoin lacks inflation. This is, of course, a feature, not a bug.

The most pernicious claim is that of the “Deflationary Spiral” which is the most cited reason however, it also makes no sense. This is the theory that as the value of money increases, it incentivizes hoarding of cash and harms the economy.

(1) The claim is that as prices decrease, demand will decrease. This is in direct contradiction to the base economic model, no one makes this claim outside of the deflationary spiral argument. They reference human psychology, not math or controlled experiments, yet they have no psychological studies to back this claim.

(2) The same claim can be made in reverse for inflation, with similarly damaging effects in the other direction. Nobody makes this claim because chronic low-level inflation does not trigger a spiral. Inflation artificially promotes spending that would not have otherwise occurred, increasing malinvestment and conspicuous consumption. The central bank actually guarantees debasement of the currency (unlike deflation, where there is no explicit guarantee) which should trigger people to try to get rid of the currency, which should trigger more inflation, which would trigger more people to dump the currency. This doesn’t happen because people are not hyper-rational and it is too burdensome for the average person to try to figure out how to protect themselves against such low levels of inflation. If you think about it there are actually more factors that incentivize inflationary spirals than deflationary spirals.

(3) Well-off individuals store a majority of their wealth in appreciating assets, this has the same net effect as storing wealth in a deflationary currency but no one extends the claim to these stores of wealth.

(4) Technology is inherently deflationary, and probably the only sector that has regularly sustained predictable deflation. It is also the most productive element of the economy.

(5) The time value of money states that money with a fixed value is worth more today than it is worth in a year from now purely on the fact that you can spend or invest it now and with no delayed gratification. Compensating those that abstain from spending money is actually the more rational position. There is no natural law that says money must decay over time.

The truth is a currency that goes from stable to highly variable, inflationary or deflationary, is damaging because most economies are built on the assumption of price stability. This includes fixed wages of people, locked-in interest rates, long-term contracts, and psychological expectations, none of these things are actually fixed or mandatory in an economy. One could just as easily tie these arrangements to the value of a basket of goods rather than fiat currency. A low level of deflation, the final stage of Bitcoin, also does not challenge this paradigm.

Inflation also eats away at wages and savings and for that reason enriches the current power structure. Of course, to these people, slowly siphoning off other people’s wealth is an integral part of their job and their future wealth accumulation, so anything that threatens that game “threatens the economy”. Or rather, threatens “their” economy.

  • @Kainsmasquerade
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    21 year ago

    I’m no expert on inflation, but if I can buy one cone of ice cream today and know that (due to inflation) I won’t be able to buy one tomorrow, I’ll buy it today. If I can buy one cone of ice cream today, but for the same money two cones tomorrow, I might wait.

    If I know consider different wares, this behaviour might change. Essentials to survive, I won’t postpone to buy.

    So as I understand it, in case of deflation you’d only hoard cash for luxuries.

    • @PopularUsernameOP
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      41 year ago

      You’re talking about hyper-inflation and hyper-deflation in your examples, both are terrible for the economy (and also not unique to deflation, which proves my point). If you knew ice cream would cost 2% less next year, you would not delay that purchase for such insignificant savings. In fact, a large portion of the population doesn’t even delay consumption to save on the >20% credit card interest rate.

      It’s also not a great example because there is no productivity return on ice cream purchases. I can’t measure if the economy is better or worse off if you abstain from or buy ice cream. If you have items that are easier to measure the cost/benefit of, then we can do the math and determine if there is a net increase or decrease in productivity at the personal level and the societal level. Consumption for consumption’s sake is another one of the big lies in the modern economy.