Just to add more confusion (who me?) I’ve been worrying this week about the fixed supply of Safecoin and the problems of deflation this brings (ultimately).
What I mean is that for a non-inflationary currency, which is rising in value (as @Seneca has recently explained it will once the network stabilises - due to fixed supply but ever expanding need for utility)… for a currency that rises in value (deflation) rather than has built in inflation, then people perceive that they can benefit by holding alone, which further reduces the supply in circulation. This creates a well known deflationary spiral.
This just happens to be the problem that governments and central banks around the world are terrified of right now, and as any observer can see, they are taking desperate measures (near zero interest rates plus massive quantitive easing - effectively printing money and injecting it into the economy by buying up government debt) - all in order to try and introduce inflation, so far with little result. UK inflation blipped up from 0.0% to 0.1% yesterday and the GBPUSD ended up 0.6%, against the USD trend simply because of this unexpected, tiny rise in UK inflation. Almost everywhere deflation (or likely a long period of stagflation) threatens like a dark shadow. Anyway, what I’m saying is that without any inflation in the Safecoin economy, it seems we’re programming the system to move ever more towards hoarding and deflation at some point (having a fixed limit on supply ensures this unless utility of Safecoin falls, and we want and expect utility to increase).
I don’t know if there’s a way to stop this in the long run, but I do think the system could attempt to reduce the impact / likelihood. At the moment it seems set up to cause problems. This is probably another thread, so I’m poised to kick that off if this post triggers debate around that. Or maybe @dyamanaka will ride to the rescue!?
There’s a lot that can be said about deflation, and I’d be interested in a topic on it for sure.
My first comment on it is that deflation is a more serious problem in the current financial system where money is solely backed by debt than in a crypto-currency ecosystem where money is more like a commodity. In a debt-based monetary system, deflation will cause the real value of debts to increase, which makes defaults more likely. Defaults destroy outstanding debts, which may cause even more defaults and also decreases the money supply (since money = debt). In addition, the fractional reserve banking system is severely threatened by deflation for the same reasons. If banks collapse, even more money (debt) is destroyed.
Since SafeCoin isn’t debt-based in the sense fiat money is, and because SafeCoins don’t have direct counterparty risk due to the absence of fractional reserve banking, the only deflationary effect is the one you mentioned. An interesting paper on that topic is this one, I highly recommend to read this if you are interested in economics!
In short, the paper tells us we should discern between two different causes of deflation: Collapses in aggregate demand on one hand, considered malign, and increases in aggregate supply on the other hand, considered benign. I think deflation due to ever expanding utility is an increase in aggregate supply, and thus that type of deflation is benign. The deflation in the world economy is clearly due to collapses in demand because of over indebtedness.
Another interesting view that I encountered when researching this question, is that in the age of the crypto-currencies, it doesn’t matter what we believe should happen concerning inflation/deflation, because we don’t have any control over it. If SAFE would be build with permanent monetary inflation, a fork would be made quickly enough without permanent inflation. Since people look for store of values, over time people abandon the inflationary currencies and will store their coins in “deflationary” currencies, whether we want them to or not.
An inflationary monetary system can’t really allow a stable store of value currency to exist alongside it. Either the stability of the store of value must go, or the inflationary currency will fail. This is why I believe Bitcoin isn’t considered by governments a real threat to fiat, it isn’t stable enough to be both a viable short and long term store of value.
I think this is the interesting point - I agree with the logic, and I think there is a fundamental problem that governments face trying to control economies (e.g. even out boom and bust, avoid a big depression etc.) but I also think that one can make things better, or make them worse. So while I agree with the underlying point that we can’t control everything, I think we can still work to do better.
In the case of world economy, it seems that (as everywhere) a piecemeal, non-holistic / non-systems approach is a fundamental part of the problem. No one economy can be controlled (or the levers used sensibly) in isolation from all the other economies, yet this is of course how things are done (and I’m not advocating if or how we change that - just saying this is one of the fundamental problems of economics).
Core to the problem with money as we know it, is the conflation of assets and credit instruments. They are quite different things and throwing them all into the same box causes some strange problems.
@seneca nailed it in his first post above. Deflation is the enemy of debt, which makes it a very dangerous foe indeed to a monetary system built upon it.
Stuff getting cheaper through progress is benign though… Maybe even desirable. Computers are the obvious case study and people buy technology regardless of imminent obsolescence.
Personally, I think there is a place for assets and credit instruments. However, the latter must always have risk balanced against the former. To disregard or ignore that risk is a recipe for disaster in the long run.
I do wish that SafeCoin was nearly infinitely divisible as bitcoin is…
Seems to me that the functions of inflation or deflation are caused by the need to have a fixed amount of physical currency that allows everybody to buy what they need to buy and sell what they need to sell. If you have a nearly infinitely divisible currency. Then the invisible hand can just move the decimal point, and inflation and deflation don’t mean the same thing as it does when you can’t get smaller than a penny.
People will use the same arguments, but really it is a different (And rather unstudied) animal than traditional money.
But if you are only divisible down to a fixed unit that is not massively smaller than a penny, the limitations of traditional currency are likely to apply.
Inflation is the worse thing ever existed. It makes product more expensive, and the currency less value. It encourages you to spend it now, rather than save. Saving is GOOD for the economy but when living in inflationary world, it is better to spend it on commodities that is deflationary such as precious metals.
There are two ways I could see safecoin end up…
One would be the economical value of the coin. Proof of Resource. Since it is finite, the value of the coin will always be above 0. People could live off of safecoin like what bitcoin users are currently doing.
Or the safecoin would be worthless due to dividing up safecoin, and it is inflationary. It will always be at zero however it is still functional. It is basically a encrypted packet inside of encrypted network. Think like TCP/UDP. It sends packets from one end to another. This means that safecoin name needs to be changed to safepackets.
However, if you take the second strategy, then we need another (bitcoin like) inside of network. The second option also removes the concept of assets. Since coin itself can be as asset given any time. But how does one purchase data? Or how does one buy property? What about proof of resource? It gets thrown out of window because there is no value. I can’t trade you 1 safecoin property for 1000 safecoins. It is not fungible. Rather I have to trade you 1 safecoin property for 100btc since btc has value.
I say keep safecoin as it is. Then create division assetcoin for messaging/email coin, and other purpose. Thus, keeping safecoin value for purchasing products, apps, and harddrives.
This is all because the system is hierarchical and based upon debt rather than value. It also pushes people to borrow rather than save for what they want to build in the future. Prior to the death grip of central banks, companies accumulated capital in anticipation for expansion. Families and individuals the same way. What better reason to save than that your money will be worth more later if you defer spending it now. When you want something enough, you’ll spend the money, but business-wise, only if it will help you be more productive. On the family/personal basis, the incentives may be different, but the effect the same.
The reason the powers-that-be are terrified of deflation is that it makes their racket impossible. It will also explode their game. When that happens, everybody will feel the explosion. The only reason it will be bad is that the inevitable has been postponed over and over and over, till the adjustment can’t help but be catastrophic.
But currencies based upon value are the only long-term way out of the hole. Until such currencies stablize, they will certainly be deflationary. No way around it.
If a currency just exists, and is not being pumped and dumped by some central bank or other issuing authority, the decimal point oughta float naturally… You don’t divide it to infinity just for sport – the economy is x big and the number of units of currency is y big, and the values float proportionally, without intervention.
Imagine you need to go to the toilet that collects fees in a deflationary environment
People believe that deflation indefinitively postpones spending. That’s not true.
After a while your shoes fall apart, your HDD fails, etc. And if you need something, like food, you don’t wait just because it’ll be cheaper 3 months down the road.
@seneca and others made very good comments about that.
I agree with this point (that spending won’t be delayed indefinitely) but I still question the degree to which economies can be controlled (whether debt based or not). So I’m still not clear if ultimately we can stop boom and bust. I do believe that we can make it better or worse.
I have the impression that this postponement of spending argument against deflation is mostly used in easy explanations to the general public. I personally never see it mentioned in academic papers and the like. There the increase of the real value of debt is always the main reason why deflation is considered dangerous.
Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
A still greater fall in the net worths of business, precipitating bankruptcies and
A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
pessimism and loss of confidence, which in turn lead to
Hoarding and slowing down still more the velocity of circulation.
The above eight changes cause complicated disturbances in the rates of interest, in particular, a
fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
I feel like we’re between step 3 and 4 for a long time already due to quantitative easing (reflation), which it seems at best only suspends a debt crisis rather than stopping it. In relation to crypto-currencies, the big question is if the banks all over the world are going to get into real trouble, which would lead to capital controls and then either to bank collapses or bail-outs and/or bail-ins. If that happens, crypto-currencies may have their shot at mainstream adoption.
Governments and central banks use inflation to steal, so they love it. All they do all day is think up new excuses to print and spend more of our unborn children’s money. So deflation has to be presented as an enemy. Bankers talk about the evil horrors of deflation long before there is any real deflation. That’s the cover they use to print more money. Safecoin does not need to be inflationary.
I get this impression too…not really my area though, but I know that in my position, inflation would be bad…I can see all the ways it will impact me quite soon, but I struggle to see how deflation is all that bad, if not in fact desirable.
I wonder if @Seneca or someone could explain in simple terms the negative impacts on a person who’s income is roughly equivalent to their expenditure, who worked for themselves and say on a lowish wage? I mean could deflation even actually result in more people like me being around as a knock on effect and would this be a good thing really ?
Why would one (assuming you’re NOT a banker or associated elite) want debt based currency? Why would you defend the concept of money = debt? There is more national debt to the banks than there are resources on the planet or that one could EVER pay off. The concept of money = debt is not mathamatically feasible. It’s insane! P = P + I does not work! If safecoin makes banks around the world collapse I say it’s the best thing that happened to humanity. It’ll have done what whole nations and wars have failed to do. It’ll do what civil wars and great patiots of various nations have failed to do and that is take down the banks. Fiat currency and the banking cartel have resulted in mass corruption and the usurping of power and oppression of multiple nations around the world for CENTURIES and here we are debating whether deflation or inflation is better? Forget anyone or any nation that wants to keep using fiat currency! Let them rot and go bankrupt for they deserve it. Safecoin offers an easy safe alternative and function entry point for the use of cryptocurrency and value based assets. The banks must burn! We cannot continue on like this. We need value based currencies. So what if there’s deflation? That’s just the currency value returning to normal. Compare the value of things (like a loaf of bread for example) back in the thirties, or even the 70s, or even 1990s, to what it is now and you’ll see the inflation and rise in cost. now imagine the reverse. Imagine spending a couple cents (or a fraction of a safecoin) for a sandwich or whatever. Imagine the reintroduction of the millray (or a crypto value equivalant). Are we so used to being sick we’re now afraid of being healthy?