This all comes down to "MV=PQ", a description of the relation between money supply and real economic activity. Normally as the real economy expands (+Q) the amount of money is increased to keep it growing (+M). Without that either the quantity of transactions falls (-V) or the price level falls (deflation, -P).
Alternatively, think about what price stability really means. If a loaf of bread costs $1, an hour of work $10, a barrel of oil $50, and a house $500k today ... how do you really ensure that they cost exactly that in 50 years when you come to retire? You can't. In a real economy there are real reasons for shifts in the price level.
If you have a fixed money supply that is infinitely divisible, prices would be expected to fall due to deflation and increased purchasing power. Relative values of bread, hour of work, barrel of oil and a house should remain the same (with the caveat that their real values actually change - eg if we become an electric car economy then the relative price of oil in big macs will change). This makes no difference to anything of substance, it is just mathematics and psychology. The only real substantive issue is with debt repayments with deflationary currency, in which case I'd advise thinking hard about your loan terms.
I think your point about infinite divisibility is an interesting one. But the main downside is that there is no incentive to exchange the currency (a pizza or ownership in a business) when you know that the currency will be more in a year than it is worth today.
Inflation is a desirable feature in a currency. A currency should be a medium of exchange. Deflation encourages people to hold currency rather than exchange it.
I don't find it at all desirable that some people have the right to devalue my holdings. It is farcical to think that people would hold the medium of exchange forever if it kept increasing in value because at some point they would either have so much that they would prefer to convert (some of) it into material wealth or chase something with a higher rate of return. Alternatively they would have so little that they would have no choice but to convert it to survive. You cannot eat the medium of exchange.
There must some ironic meaning of "economy" that I'm not aware of. Societies have gone through many recessions and depressions. Is that what you're advocating?
Don't take this the wrong way, but you sound illiterate since you clearly don't understand the words I wrote in context "medium" and "exchange". The statement "You can't eat the medium of exchange" implies that it is to be spent.
There already many ways to exchange cash for assets that are likely to appreciate in value (gold, real estate, equities, bitcoin). Won’t a depreciating asset like cash always make for better incentives to participate in trade than an appreciating one?
Please explain the advantages you see in the simplest terms you can.
The features that make cash good as a medium of exchange are not appreciation or depreciation, but all of the other features of divisibility, fungibility, transferability, common acceptance etc. A good medium of exchange need to be valued such that it can be reliably exchanged. Ideally you don't want it going up too fast nor down two fast, but stable enough to make trade. It just happens that Bitcoin is/ was very small relative to the global economy. It also has the benefit that it can't be debased, which makes it a better money - even for trade as well as saving. I just wouldn't consider it "investing" despite the fact it still has room to grow as a currency. It still needs much more work on the fungibility side.
If the primary medium of exchange is an inflating currency then possessors are incentivized to exchange it. If debt is owed in a deflating currency than the burden of all debts will only grow. Could you address these points rather than simply dismiss them as irrelevant?
Please note that I haven't dismissed any point you have made despite your initial dismissal of me.
To your point, is a currency is inflating then you are incentivised to not hold it. But who has the right to benefit from the inflation of the supply? How do you fairly determine that? Often inflation is conflated with the rise in prices rather than strictly the inflation of supply, so strictly referring to the latter - inflation occurs, while at the same time economic growth is also occurring, so it isn't 100% clear that the incentive scheme for devaluing a currency will work as it must balance against this growth. Even if it is not balanced, and successfully devalues for your incentive, what is the appropriate rate? Is VEF too much, USD just enough? Wouldn't it make more sense to just have a fixed/known rate of currency supply - eg Bitcoin - decreases to 0, Monero decreases to small.
The problem isn't so much the inflation, it is the unpredictable nature of the debasement and the fairness of who benefits from it. A currency doesn't need to incentivise people to spend it so long as it can always be available as a medium. Infinite divisibility ensures this. Having the medium be a universal standard measure as a unit of account by virtue of being a stable and accessible medium is also essential. Bitcoin achieves this. As for debt burdens growing, this is not always true. If I take a low interest BTC loan for mining equipment and have measured my risk and profit correctly I should be able to pay it off since I am working in this currency. If I borrow USD to start a Venezuelan corner store, I might be in for a bad time.
Inflation benefits borrowers more than hoarders. Your example is strange because in the one you compare a base currency to economic activity in that currency and in the other you take a loan in one currency in order to transact in another. If you borrow bolivars to start a Venezuelan corner store, at least your debt would lose value as rapidly as the currency you receive from your customers. If the price of BTC continues to rise indefinitely, you would be in for an even worse time if you borrowed BTC to start your Venezuelan corner store.
I also don't see how infinite divisibility helps. It's still deflation. Let's say the world converts to BTC. Now if I take a loan of 1 BTC to start my corner store, the value of that 1 BTC will continue to increase, but if the goods selling do not increase in price, I will have to charge less and less for them over time. There's the same amount of space between 1 and 0 as there is between 1 and infinity.
You can rephrase that as inflation benefits borrowers more that savers. And borrowers benefit lenders. In the opposite paradigm, savers benefit savers and savers benefit investors. Think of a scenarios that is made up of an economy of a single currency, that is deflationary and everybody saves as much as they can, but they have to eat, so trade still occurs. Those that can save more accumulate more purchasing power until they think it wise to invest and get a greater return. Assuming all perfect investment execution, wealth would tend to aggregate as we see, but overall everybody benefits and see the rising tide lift all boats.
Savers can choose to loan their currency to a bank for some guaranteed returns, they can loan it to corporations and public institutions in the form of bonds, or they can purchase ownership of real estate and businesses through equities. They can buy bitcoin if they consider it a wise investment. Only lenders and the people who insist on hoarding cash suffer from inflation.
Historically deflation has resulted in economic stagnation and depression. The reason is that there is no incentive to borrow or spend money on a risky investment when increasing value of currency over time is guaranteed. What exactly is supposed to be different this time?
That's not really something that can be taken as anything other than an insult. On HN we like points to be made without personal swipes. Aside from making this place a more pleasant place to be, points are often more persuasive that way.
You can just deliver the counterpoint, explanaining how you think the parent was mistaken, without the personal insult. “The key point this comment fails to recognise is [useful new info]” might work well.
Thanks Tom, I felt bad making the retort as well as I like HN to be a happy place. For the record, I am majored in finance, mathematics and cryptography well before these things were linked. I discussed Bitcoin with Hal Varian in 2011 and staked our differing positions. It may be too early to call, but Bitcoin seems quite successful so far, and has served me well. I prefer not to rely on my credentials to make a point about economics since this is a logical fallacy.
