HN Books @HNBooksMonth

I’m not the OP, but there’s a whole book on the topic. Fascinating read if you ever get the chance.

A Keystone Cops level of professionalism displayed by the central bankers at the time.

Lords of Finance - https://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/...

Lords of Finance: The Bankers Who Broke the World

https://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/...

I agree that technology advances would have lead to massive deflation without all the money printing. The point of money printing is to do precisely this, so that the measure of economy does not get out of sync with the size of the economy. https://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/... is a great book that touches the topic -- it also shows this discussion is not new.

I also agree that the chosen transmission mechanism of money creation (buying bonds and stocks by central banks) might have lead to worsening inequality. I like the Yudkowsky treatment at https://www.lesswrong.com/posts/tAThqgpJwSueqhvKM/frequently... .

But I still think that the inflation is low and if we want to describe the problems that are happening even though it's low, we should create new language, not shift the current one.

Chapters 1 and 2 of Karl Polanyi's The Great Transformation provide one popular theory as to why it collapsed around World War 1, from a cultural anthropology perspective.

http://uncharted.org/frownland/books/Polanyi/POLANYI%20KARL%...

Liaquat Ahamed's _Lords of Finance: The Bankers Who Broke The World_ provides another congruent account, from a more detailed historical/economic perspective, as to why gold was abandoned.

http://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/0...

Why is deflation bad?

Let's look at a single-currency country first. Prices fall. Including wages. Credit is tight - money appreciates without being invested and borrowers have to repay debts in more expensive currency tomorrow, making them more likely to default [Fisher]. People with money benefit - the rich get richer and the banks hoard capital, refusing to make loans. Inflation fuels asset bubbles as the economy over-invests; deflation fuels the opposite as the economy starves itself.

Yes, we have seen deflation. The U.S. and U.K. both experienced crippling deflation in the 1930s [1]. Before that, remember the American populist movement's "Cross of Gold" speech [2]? That wasn't a reaction to an inflationary gold standard. The euro zone offers a more contemporary view of the effects of deflation, as does my Switzerland [3].

Uncertainty in the future path of deflation that is more toxic than deflation per se. The U.S. grew through the Great Deflation in the 1870s and Japan has had mixed real effects from its almost two decade deflation [Morana]. Theoretically, if deflation proceeded at a steady clip, markets could accommodate (Milton Friedman advocated for an economy deflating at the real interest rate [Friedman]).

But what if we have two currencies, e.g. U.S. dollars and Bitcoin? Argentinians have a choice between black market (or "blue") dollars and an available but inflating peso. Tellingly, Argentinians buy dollars primarily for overseas vacations [4]. This is an example of a bad currency (the peso) and a good (the greenback). The Argentinians still execute the bulk of their transactions in pesos, not dollars.

Deflation is not likely to be Bitcoin's death knell, but rather a ceiling on its usage. A deflating Bitcoin will crimp transaction demand for the currency as spenders shift preference to more easily borrowed and spent dollars. Sellers would respond in kind (or, alternatively, sellers who respond in kind would gain market share).

Caveat: if Bitcoins are treated as a financial asset, for speculating versus spending. If so, deflation would proceed un-checked, with speculators driving out the transaction value of the currency. That said, gold has survived both deflation and speculation, so this isn't a fatal blow either.

[Fisher] http://www.jstor.org/stable/10.2307/i332559 The Debt Deflation Theory of Great Depressions (1933)

[1] http://www.amazon.com/gp/aw/d/0143116800/ref=redir_mdp_mobil... See Norman Montagu; British depression

[2] http://en.m.wikipedia.org/wiki/Cross_of_Gold_speech

[3] http://www.ft.com/intl/cms/s/0/1c23c088-60c3-11de-aa12-00144... Swiss central bank moves to weaken franc (June 2009)

[Morana] http://www.icer.it/docs/wp2004/Morana29-04.pdf (2004)

[Friedman] http://www.amazon.com/gp/aw/d/1412804779/ref=redir_mdp_mobil... The Optimum Quantity of Money (1969)

[4] http://blogs.ft.com/beyond-brics/2013/01/17/argentinas-blue-... Argentina’s “blue” dollar blues (January 2013)

⬐ lenazegher

With an inflationary currency, you can pay your workers nominally slightly more each year while paying them the same amount or even slightly less in real terms.

With a deflationary currency, you can pay your workers nominally slightly less each year while paying them the same or even slightly more in real terms.

How would the average person on the street react to being told "You've performed really well this year, so we're only going to decrease your salary by 1%. Congratulations on your raise!"?

⬐ JumpCrisscross

That would seem to be the case à la Fisher. But the evidence from Japan, a slowly, albeit steadily, deflating advanced economy is compelling.

From January 1995 to January 2010, Japan's CPI (2005=100) has fallen from 100.8797 to 99.5851, or or -0.08% per year. In that time, real wages grew 0.23% [1]. Real GDP/capita at 0.61%. Hell, from 2010 to 2013 their CPI has fallen at 0.27% annually, but the hit has been mixed. Note that the Japanese monetary base (M2) has expanded at 2.5% annually from 1995 to 2010, so this is a demand-driven deflation, consistent with Morana. But the deflation we base our analysis on, the Great Depression, was similarly spurred by demand.

Similarly, Germany, through the Hartz reforms, engineered a wage deflation at the beginning of this century. Helping power the American recovery is wage deflation. The hope is austerity, structural re-alignment through deflation, will similarly fix peripheral Europe's bloated labour costs.

Yes, it appears people will take falling wages if forced. All this said, I do not believe a deflating national currency is the right model for Bitcoin. Instead, look to arguments levied as the world switched off gold, an international deflationary currency, to inflationary fiat ones.

[1] Own calculations from St. Louis Federal Reserve Economic Database

⬐ NkVczPkybiXICG

Bitcoin isn't that deflationary, and won't be at all until 2140.

When 2140 comes around, and all the bitcoin is mined, then it will only deflate at the rate which coin is "lost into the ether" from people losing their wallets, etc. I highly doubt the deflation rate will be anywhere near 1%.

⬐ JumpCrisscross

Bitcoins are already rapidly deflating. The purchasing power of a Bitcoin today is a multiple of what it was a year ago. You can see this in its rapidly appreciating exchange value vis-à-vis the U.S. dollar.