If bitcoin replaces current monetary system wouldn't deflation be a problem?

Question

Basically that's the whole question.

From what I understand in current monetary system inflation is intentional(not high, but moderate). It is done to motivate people to actually spend money instead of hoarding it. Which will promote economic growth because people will be looking for products they want or invest in businesses.

If bitcoin replaces the current monetary system, and bitcoin is deflationary wouldn't it work opposite? If we assume inflation promotes economic growth then we also assume deflation does the opposite.

It's kind of open question. Just interested in thoughts on it.

Answer 1

First, is deflation a problem?

Do you want me spending my time

looking for products they want or invest in businesses

when I would rather be sitting at home reading, consuming nothing? Does worrying about my wealth evaporating with the passage of time, forcing me to use it now or lose it, make society better off?

Ultimately, it is a philosophical argument whether this is better than the alternative. It certainly creates more transactions when everyone effectively has use-it-or-lose-it value stored, vs stable value stored.

Keep in mind though, that 2% (or 8% now!) inflation you experience isn't coming from nothing. It occurs due to banks getting the newly-created money from the fed, and spending it at today's prices (when it goes the farthest, before the effects of the money printing are realized with prices). This objectively increases inequality.

The new economy running on Bitcoin doesn't have to be perfect. It just has to be better.

Answer 2

Well I believe you have some misconceptions, which, if you think them through, you may change your mind on.

First we should define inflation, in this case we talk about monetary inflation, which means, inflating the supply of currency units. Secondly, my grandparents did not use the term hoarding money, they called it saving for later. Third, inflation does not promote economic growth, what it does in the current monetary system is misallocate capital.

Imagine the following:

There are 20 bills of 1 dollar in existence in the world, and you have 10 of them and I have 10 of them. You have a farm that produces potatoes and you have 30 potatoes in stock and I have a farm that produces eggs and I have 6 eggs in stock. Now you want to buy eggs and I want to buy potatoes, I sell 2 eggs for 1 dollar and you sell 10 potatoes for 1 dollar. Great, so 2 eggs equal 10 potatoes.

So you buy 2 eggs and I buy 10 potatoes, we are both satisfied, we currently don't need any more of each others products.

Then our local town government says, well, we must keep the economy flowing, we will add 20 more bills, and you get 10 bills extra and I get 10 bills extra. So now there are 40 bills of 1 dollar in circulation, you have 20 and I have 20.

Now I could say, hey, I'll give you another dollar for 10 more potatoes, but you think, well I have enough of those dollars, I don't really need more of them, besides, these dollars are worth less, because they doubled, while at the same time, there are still only 30 potatoes and 6 eggs to go around, so no thank you, giving me more dollars won't allow me to produce more potatoes.

So I don't know if I did a good job with that story, but creating more fictional money, does not increase the amount of potatoes or eggs, the only thing that can increase the stock of potatoes and eggs is time and energy. I can put effort in raising more chicken to produce more eggs, you can put in more effort in planting more potatoes and nurturing them better to produce more potatoes, but these extra dollars won't help with that.

Now of course in a debt based monetary system, you need inflation or it will implode, but Bitcoin is not debt based, it is a bearer asset, so you don't need inflation.

Furthermore, if we have deflation, everything gets cheaper, if everything gets cheaper, you surely would want to buy some things to make your life easier wouldn't you? Hoarding money is all fine, but when you are 100 years old, wouldn't you want to spend some before you die?

Also, I don't consider the Bitcoin monetary policy inflationary or deflationary, it is fixed, so it is neutral. It is only because we humans become better at producing more potatoes and more eggs in less time and with less energy, that 1 Bitcoin can buy more eggs and more potatoes and so if Bitcoin does what it is designed to do, it will rise in purchasing power as long as humans keep improving our production of of eggs and potatoes. If we as a society first hyperbitcoinize but later we stagnate and do not improve our production capacity, the purchasing power of Bitcoin will also stagnate.

But we can assume that we humans will improve, I mean I see a lot of potential for improvement, so I expect everything to get cheaper in Bitcoin terms. Now if I worked hard and saved some bitcoin, and I bought everything I need and also have enough for my retirement, but still have some bitcoin left over and someone asked me to invest in their interesting project, I surely would do that, not even to gain more bitcoin, which could be a welcome side effect, but just because I am interested in this project. But I am sure others would only want to invest to gain more bitcoin, which would be fine as well. The thing is that we would have a surplus, and with this surplus we can explore new ideas and possibilities.

Finally, if Bitcoin did not exist, I would consider a fixed 2% inflation rate pretty good. I believe gold has around a 2% inflation rate and the population growth was around 2%, so that aligned nicely. If no one could change the inflation rate and it would always be 2%, then we could adjust our calculations accordingly and depend on these calculations. The problem with the Fiat system is that we can not depend on it, nor is it transparent and the ones that get new dollars first benefit the most. So it is distributed unfair and no one really knows how much anything is worth.

But Satoshi made Bitcoin fixed supply, which I think is better, but the thing is, we can not change it even if we wanted it, because if we could ever change core consensus rules, Bitcoin would fail. It wouldn't be Bitcoin anymore. It are not the rules itself that are the most important, but the fact that we can not change the rules.

Answer 3

Excellent topic. Let me write down comparaisons and exemples I know

Inflation currencies

First, the inflation of FIAT currencies was certainly not created to "boost spending". Inflation is mainly the result of central banks increasing money supply (wich make existing money less valuable). Motivating people to spend their saving is actualy a side effect of this, and actuaully lot of ppl don't know about it.

Deflation/Stagnation currencies

Bitcoin is actually also an inflation "currency". It inflation is programmed (mining reward) wich is reducing at every halving to end up with 0 inflation. Other crypto like Etherum pos are delfationarry because there is burn mecanism (some token are destroyed making the supply reducing over time).

Is Inflation good or bad ?

There is several pros and cons and exemple about inflation.

First we can speak about switzerland and CHF. One of the world FIAT with smallest inflation. Now if you look at the Swiss economy you'll see it is in the top GDP, top economy stabilitty and top innovative country worldwide.

Pros of spending that "boost economy" can also be considered as unfair and push to bad spending decisions, wich in the end is dommageable for economy.

Pros of using a stagnation or deflation currency will promote people to save more for themself and be more responsible in their spending. People will become more picky on their spending, spending in intrinsic value will be more attractive and pointless product will be less attractive. This will give more space for innovations and in the end, promote economy grow in the long run.

Answer 4

In some ways you are arguing against your own argument already. The only reason that Bitcoin even has a chance at replacing the current monetary system ( a huge undertaking no matter how likely it is ) is if the deflationary / fixed supply notion is honored. If it is not Bitcoin would suffer from the same monetary policy diseases that classical fiat systems suffer from, and such would not "replace" such a system in any meaningful way.