So let's assume at some point in the future bitcoin has replaced fiat currencies and we thus have a fixed money supply. Let's also assume we have increasing production and therefore deflation.

It seems that wealth could then be preserved simply by holding onto it without even taking some investment risk as one has to do today.

Wouldn't the effect of this be to make the wealthy extremely risk-averse? Wouldn't this increase wealth inequality and make social mobility more difficult?

Footnote: Defending Some Premises

As one can see below, there is an extensive discussion below with @david-schwartz on whether the premise is correct in the first place. To keep this a bit more readable I'll update this post with what I think are his main arguments and my view on these.

Is (predictable) deflation even possible?

He argues that no such thing as predictable deflation can exist. I think that is incorrect. If you have constant monetary base and increasing productivity (e.g. technological innovation), you will have deflation. There is nothing contradictory about that.

Investment & Deflation

He also argues that if you don't invest you become poorer thus if the wealthy don't invest they won't remain so. But let's say you have 10% deflation and spend 8% of your money, then you are becoming richer every year (i.e. your purchasing power increases). This massively diminishes incentives to invest and it seems that would reduce social mobility (all else being equal).

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    I think you'll need to restructure the question to have the discussion between yourself and David as a footnote (<sub />) or a block quote subsection (---). Otherwise most readers can't tell where the question ends and the commentary starts. :-) Oct 28 '13 at 7:06
  • @LateralFractal Right. Hope this makes it easier to follow. Oct 29 '13 at 0:37

As Bitcoin is a digital-specie currency, if it replaced all fiat currencies it would be the equivalent of reverting to a (digital) gold standard and can be answered in much the same way.

Firstly, a gold standard is deflationary. Explaining this again and again is tedious, so I'll summarise:

  • People provide goods or services to others and receive IOUs for other goods and services, redeemable on the rest of the world; this is the essence of money.
  • As more people interact and do so faster and faster, the money supply must expand to reflect the transaction volume; otherwise earlier unredeemed IOUs are worth more than new IOUs for the same goods and services.
  • A currency with a fixed limit (be it Satoshis or Gold atoms) will either not expand (everything has been mined) or will expand slower than the rate required by the economy for its money supply1.
  • Hence, either society cheats and detaches their promissory notes from an exact gold amount (fractional reserve banking and the like) and thus moves towards a fiat currency; or suffers the acute boom and bust cycles of purchasing power and liquidity depending on when hoarders hoard vs sell their stockpile. If you are that lucky. Strictly speaking, hoarders as rational actors would hoard forever and the entire economy would need to bootstrap from barter or a different currency.

Secondly, possession of a deflationary currency encourages hoarding if the society is forced to use only that currency.

A person with a large amount of deflationary currency will consider it an investment as its purchasing power will increase the longer they don't spend it (sell the IOU for goods and services). Everyone receiving the currency will do the same2. The economy slows down both directly through forgone purchases and indirectly through no investment in endeavours with a risk greater than zero.

Wouldn't the effect of this be to make the wealthy extremely risk-averse?

The wealthy are already extremely risk-averse. This isn't as apparent in a fiat currency as those currencies reflect (however poorly due to manipulation) the underlying economy3 where inflation driven by productivity growth, population growth and the price/wage spiral requires equity to be put into risky investments that outpace inflation. Indeed this relentless hunt by the wealthy for places to park money without the risks of normal productive investment created the sub-prime mortgage and financial derivatives market. And the counter-reaction of deflationary cryptocurrencies, when in practice honest propagation of risk information would have prevented the same crash.

So yes, a deflationary currency would allow the wealthy to better express their existing risk aversion.

Wouldn't this increase wealth inequality and make social mobility more difficult?


Both inflation and deflation entrench existing wealth inequality as the countermeasures require discretionary wealth to begin with. But while inflation forces the rich to continuously re-inject their wealth into society to keep it4, deflation requires them to hoard their money unless they just want to give it away. A lower and middle classes (i.e. those without sufficient assets to thrive without working) must spend what they earn and thus are essentially subsidising the rich in a deflationary economy; at the cost of their own social mobility.

1. A true post-growth society wouldn't need an expanding money supply. But then the key differences between specie and fiat currency would be irrelevant to an "economically static" society anyway. Money itself would simply be a token of energy or entropic appraisal with culturally-specific multipliers.
2. Except poor people living hand to mouth. Which is why widespread poverty is considered to be an excellent way to keep money circulating in an economy that would otherwise be deflating.
3. As more accurate currency price signals out-compete inaccurate signals over time due to exchange velocity and trustworthiness of face value; hence the slow and often belated but forward progression towards currencies that better reflect the global economy.
4. This doesn't make them any poorer as they own, to use a trite Marxist phrase, the means of production. But it does circulate the money which is a good thing. Consider it the objective of lending the serfs ploughs to work their allotment instead of hoarding the ploughs uselessly in the castle.


There is no hard fixed requirement that Bitcoin remain a deflationary currency.

It is possible - though perhaps not likely - that exchanges and mining consortiums will transform into (or be purchased as) off-blockchain central banks with the capacity to manage Bitcoins as a fractional reserve or outright fiat currency.


Yes and Yes + Caveat.

  • When wealthy people invest money, they're just choosing where resources go. That doesn't make any more resources available to anyone. Had they hoarded the money instead of investing it, the same actual resources would be available to everyone else, just different forces would be deciding where it goes. Investing money and spending money are like voting -- they decide where existing resources go, but more or less of them don't directly make any more or less resources available. Essentially, hoarding just means wealthy people are steering the economy less. Oct 28 '13 at 14:07
  • @LateralFractal Thanks for your excellent answer. I have been having very similar thoughts. The one point where I'm not sure I agree with you is that deflation necessitates boom and bust cycles. It seems a stable equilibrium may be quite possible. Also historically, though I'm not an expert on this, during the time when we actually had a proper gold standard (1870 - 1914) growth was very stable and fairly strong. Oct 29 '13 at 0:52
  • Suppose an island economy uses a 100,000 seashells from an extinct species for currency. The chieftain then removes 1000 of them from circulation each month. The islanders quickly realise that hoarding their shells will provide the equivalent of 13.6% interest per annum. The seashells quickly lose any reliable utility as a currency and people resort to barter or switch to a coconut currency. If the chieftain spends his hoarded seashells before the bottom falls out of the currency, he essentially receives extra resources for free. Oct 29 '13 at 0:54
  • @DavidSchwartz So the wealthy steer the economy more when they can hoard and sell a deflationary currency. Your hypothesis only holds if currency is removed very slowly and is then permanently destroyed. You can not have it both ways - either Bitcoin has a utility value notably greater than its intrinsic energy value, in which case any supply shocks make or break the currency; or Bitcoin has no utility value, in which case the currency is out-competed by fiat currencies. Oct 29 '13 at 0:54
  • @BrianFabianCrain Growth is more a feature of population and productivity increases. The real volatility metric for a currency is PPP (purchasing power parity/"predictability"). For inelastic fungible goods this should stay fairly even over short to medium time frames without odd spikes. Boom and cycles due to deflation are in part due to perverse incentives to expand and contract the money-supply independently of what the economy actually needs. The depth and duration of Great Depression is often blamed on perverse contraction of the gold supply (size) plus trade tariffs (velocity). Oct 29 '13 at 1:08

No, this is basically impossible. What you're saying is that we would have stable, predictable deflation that could be relied on. This is not possible because it creates a direct contradiction.

Think about it -- which is worth more: One bitcoin today or one bitcoin next year?

Clearly, one bitcoin today must be worth more because one of the things you can do with one bitcoin today is hold it until next year and have a bitcoin next year. But you also retain the option to spend it before then if that should be preferable. So a bitcoin today must be worth at least as much as a bitcoin next year.

But if you say we have stable, predictable, risk-free deflation, that's equivalent to saying that a bitcoin next year is worth more than a bitcoin today and that a rational person should prefer to have a bitcoin next year to a bitcoin today.

If you assume that the value of a bitcoin is predictable and stable, then the value of a bitcoin today always includes the present value of a bitcoin next year. So it can't be less than it.

Wouldn't the effect of this be to make the wealthy extremely risk-averse? Wouldn't this increase wealth inequality and make social mobility more difficult?

Your assumption is that wealthy people hold onto money rather than investing or spending it while productivity is increasing. This would just mean that a greater share of that productivity is controlled by people other than the wealthy.

It makes little difference whether money is spent or invested. One man's spending causes another man's investment to be profitable.

If the wealthy never spend their money, they control a smaller fraction of the increasing productivity. If they do, they cause other people to make money.

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    I'm not quite sure where you're going with this, but it doesn't answer the question. Sure, at the moment the value of a bitcoin is anything but predictable and that will stay like that for years. But in a world where bitcoin has replaced fiat, I would expect it to change predictably. I don't see what's impossible about this. (I also understand what present value and deflation are so I'm not sure how you're explanation of those relates to the question.) Oct 27 '13 at 8:53
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    @BrianFabianCrain I think I explained why it's impossible. It would require people to value a future bitcoin more than a present bitcoin, which makes no sense because a present bitcoin includes a future bitcoin plus additional opportunity value. Oct 27 '13 at 13:50
  • I mostly agree with what David Schwartz has to say, however that doesn't really say anything about people's proclivity to actually spend their money, as soon as a bitcoin is spent for a physical item then the deflationary aspect comes into play. Also poor people generally need to spend more of their wealth on non-investment purposes. Oct 27 '13 at 14:48
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    @david-schwartz What you're saying is tantamount to saying 'there is no such thing as deflation'. With deflation money in the future is obviously worth more than money today. There is nothing impossible about that. Oct 27 '13 at 14:50
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    This answer is such a mess of contradictions and a priori assumptions it makes my head hurt. David Schwartz is not an economist and should be adding a byline to each of his answers stating that he works for a cryptocurrency company; to reduce conflict of interest. Oct 28 '13 at 2:34

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