Quote from: unk on June 05, 2011, 07:40:51 AM

i've mostly ignored all the discussions of deflation because i think the whole thing's a red herring, but it seems like many people are making the same kind of mistake. neither inflation nor deflation of a voluntarily chosen instrument matters on its own, theoretically; the expected inflation or deflation will be factored into the price of the commodity. what matter are unexpected inflation and deflation.

if i sell you a device that i advertise as inflationary, it's just the inverse of seignorage (ex post reduction in value rather than an ex ante payment). if i sell you a device that i advertise as deflationary, presumably you're willing to pay more for it, which thus makes it more expensive than the inflationary commodity for those who haven't yet bought it.

bitcoin's strength in this regard is that it has fixed rules, at least as long as it remains secure and as long as the network participants don't change the rules. whether it's inflationary or deflationary doesn't matter fundamentally. it may matter as a component of marketing, of course, and it may of course affect the distribution of the seignorage or its equivalents. (e.g., one model can encourage and enrich early adopters while another might not. as another example, 'there are only a limited number; get them while they last' can fuel psychological demand, but that may be either helpful or misleading depending on context.) deflation is neither a strength nor a weakness otherwise, any more than the number 21,000,000 is a strength or a weakness compared to ten times that amount. conceptually that may be hard to understand, but it's exactly analogous technically.

(if it's still conceptually hard, consider the following thought experiment: functionally and economically, what are the differences between bitcoin and a system just like it except for two differences: (1) the block subsidy never halves, but (2) the block chain itself pays 'interest' for all holders of bitcoins each block, computed to make up for the difference between deflation in bitcoin and the moderate inflation in the hypothetical alternative?)

Tell me, how much are you willing to pay for..

1. A magical dollar which pops 30 cents each year?
2. As if that wasn't difficult enough, how much are you willing to pay for it if it pops anywhere between 20>infinity cents each year?
3. I see you're getting irritated. That's why I'll add a notion that there's a possibility of it malfunctioning all of a sudden without a warning.
4. And to make things worse, I'm offering this magical dollar for everyone on the market, which has led to people like you speculating and investing in it.

Now it's totally impossible to accurately and objectively price it, right?

That's bitcoin.

Now compare that to selling a normal, boring dollar and you'll immediately realize which one makes life much easier.