Difference between revisions of "Deflationary spiral"
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==Counterargument== | ==Counterargument== | ||
| − | + | There is lots of confusion about this topic from modern-day economists.<br /> | |
| − | + | The ‘deflationary spiral’ is a real condition that affects the fiat fractional reserve back system. Understanding why Bitcoin isn't affected by this problem you must first understand why it is a problem for our current system.<br /> | |
| − | + | In our current monetary system there is no ‘money’ as an asset but a whole lot of ‘principle to loans.' When the money supply is contracting (deflation) people are paying back their loans. (or saving). The other thing is to understand is there is more loans (principle to be repaid) issued than ‘money,’ so when loans are paid back, the available money supply to pay back all the other outstanding loans gets smaller.<br /> | |
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| + | When the economy is booming or growing, more and more people take out loans to fund their future endeavours, thus increasing the monetary supply. Because the economy is growing, this masks the real inflation (of the monetary supply). The deflationary spiral happens when people start saving because of a slowing or contracting economy. The money supply gets smaller (as the loans get paid off), finding money for repaying the remaining loads becomes disproportionally harder to find.<br /> | ||
| + | |||
| + | People who hoard (are debt free) are making it harder for those who have loans to repay them. The loans get harder and harder to repay (the value of money goes up), and people start defaulting. Thus in the current economic system, dollars will become very expensive stopping people spending, slowing the economy. Not because they are saving (for future spending), but because they are paying back their loans (so they don't have to pay interest).<br /> | ||
| + | |||
| + | Bitcoins are different. Bitcoins go up in value when the bitcoin economy grows, and go down in value when it contracts. Everything is the opposite to the fiat fractional reserve banking system (because bitcoin isn't a debt but an assist). Bitcoins '''only''' deflate in value when the Bitcoin Economy is '''growing'''. Becasue the Deflationary spiral is a problem in the traditional monetary system, doesn't necessitate that it can also a problem in the Bitcoin economy. | ||
==See Also== | ==See Also== | ||
Revision as of 04:45, 24 April 2011
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Deflationary spiral is an economic argument that proposes that a runaway deflation would eventually lead to the collapse of the currency. It is a common criticism made against the viability of Bitcoin.
Deflationary spiral occurs when the price of a commodity increases at some given rate which causes people to hoard it. As people hoard the commodity, less and less of it is available thus causing the price to go up even more. In turn, even more people hoard the commodity. Thus a feedback loop or spiral of deflation occurs.
Effects
Deflation, like inflation, includes winners and losers.
The losers are borrowers, especially those who would have to pay principle plus interest rate. Since the value of loan increase due to inflation, that means they will have to pay more in real term.
The winners include anybody who had saved. Thus, a deflationary environment would automatically encourage more people to save for the expectation of increasing purchasing power.
Economic history
The first deflationary phase in Bitcoin's economic history is a phase of economic growth caused by the slashdot effect. From there, we see the the price of bitcoin rose to 0.06 USD. This price level remain stable until early October, when a rally cause the price to touch .50 USD before settling at the .20-30 USD equilibrium.
There will only be 21 million bitcoin in the world, ever. Thus, the expected value of bitcoin rise in correlation with the number of people using it, as well increase in productivity. Further deflation occurs with people losing their wallet, thus all access to their bitcoin. While the destruction of bitcoin never occurs, the loss of key to access it effectively mean that bitcoin can never be used again.
Over the long term, as long as the combination of the two causes hold true, deflation will continue to an absurd level.
Counterargument
There is lots of confusion about this topic from modern-day economists.
The ‘deflationary spiral’ is a real condition that affects the fiat fractional reserve back system. Understanding why Bitcoin isn't affected by this problem you must first understand why it is a problem for our current system.
In our current monetary system there is no ‘money’ as an asset but a whole lot of ‘principle to loans.' When the money supply is contracting (deflation) people are paying back their loans. (or saving). The other thing is to understand is there is more loans (principle to be repaid) issued than ‘money,’ so when loans are paid back, the available money supply to pay back all the other outstanding loans gets smaller.
When the economy is booming or growing, more and more people take out loans to fund their future endeavours, thus increasing the monetary supply. Because the economy is growing, this masks the real inflation (of the monetary supply). The deflationary spiral happens when people start saving because of a slowing or contracting economy. The money supply gets smaller (as the loans get paid off), finding money for repaying the remaining loads becomes disproportionally harder to find.
People who hoard (are debt free) are making it harder for those who have loans to repay them. The loans get harder and harder to repay (the value of money goes up), and people start defaulting. Thus in the current economic system, dollars will become very expensive stopping people spending, slowing the economy. Not because they are saving (for future spending), but because they are paying back their loans (so they don't have to pay interest).
Bitcoins are different. Bitcoins go up in value when the bitcoin economy grows, and go down in value when it contracts. Everything is the opposite to the fiat fractional reserve banking system (because bitcoin isn't a debt but an assist). Bitcoins only deflate in value when the Bitcoin Economy is growing. Becasue the Deflationary spiral is a problem in the traditional monetary system, doesn't necessitate that it can also a problem in the Bitcoin economy.
