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I have read that bitcoins are relatively immune to inflation and will actually deflate in value:

Once 21 million coins exist, they become deflationary since no new coins are issued and, as naturally occurs, money falls out of circulation as wallets are lost.

Deflationary currency sounds terrible as this would encourage people NOT to spend the bitcoins they have. Which is the opposite of what you want in a capitalist society dependent on transactions. Inflation exist for a reason, it encourages people to spend the money they have because holding on to it would mean losing value in the long run.

  • Correct. Didn't find that question before. Deleting. Wait..., can't delete because it has an answer, dang it. – Aaron Klap Feb 14 '14 at 21:17
  • Don't worry, I think people will vote to close it as a duplicate timely. – Murch Feb 14 '14 at 21:19
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I would suspect that most Bitcoin advocates would disagree with you. The simplest counter-argument is this -- wouldn't that mean inflation discourages people from selling things? And you can't spend if nobody wants to sell to you, can you?

Another way to make the same counter-argument is this: Actually, no, deflation encourages people to spend the bitcoins they have. A deflationary currency should be very desirable to hold. So, if I have a deflationary currency, sellers should go out of the way to encourage me to give that currency to them (with low prices, easy transaction, stronger guarantees, whatever it takes). That will make me more likely to buy things.

Of course, all of these arguments are nonsense. The characteristics of the money affect the buyer and seller equally. So while they may change the price, they won't change the likelihood the transaction will occur.

But it won't even matter. Long-term predictable monetary deflation is impossible (for a low friction, demurrage-free currency) because it entails a direct contraction. If you assume long-term, predictable monetary deflation, you get the following paradox:

  1. One unit of currency today must be worth less than one unit of currency tomorrow. Otherwise, you don't have long-term, predictable deflation.

  2. One unit of currency today must be worth more than one unit of currency tomorrow. This is because one of the things you can do with a unit of currency today is hold it until tomorrow. But you can also spend it today if you want. So it has to be worth at least as much.

These two arguments directly contradict each other.

Yes, you have been lied to by economists who want to convince you that the economy will explode if the government doesn't enrich itself and favored bankers at the expense of everyone else. That's not to say deflation can't cause real problems, just not this kind of deflation and these kinds of problems.

  • I disagree with point number 2. Just because you hold onto the money doesn't mean it is worth more today. The whole point of holding onto the money is to spend less of it the next day, this supports point number 1, not number 2. – Aaron Klap Feb 14 '14 at 20:53
  • This also seems to fly in the face of economics, as deflation was present during most economic depressions in US history. Historically, deflationary currency equates to massive poverty. – Aaron Klap Feb 14 '14 at 21:02
  • "The simplest counter-argument is this -- wouldn't that mean inflation discourages people from selling things?" - No, people take this money and invest it in real world assets which have a higher rate of return than inflation. – Aaron Klap Feb 14 '14 at 21:04
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    As to your third, that affects buyers and sellers equally -- both want to invest to get a higher return than inflation -- so it cancels out. Say you want to sell me a car. That car must be worth more to me than you or we won't trade regardless of currency. All we have to do is agree on an amount of currency that is worth more than the car is worth to you but less than the car is worth to me. Since we both agree on the value of the currency, there should be no problem. (This is not a good place for debate though. Maybe the Bitcoin forums? Or chat?) – David Schwartz Feb 14 '14 at 21:14
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    @Gracchus I agree. Trust no one. Keep your laser handy. – David Schwartz Feb 14 '14 at 21:14

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