In modern economies, there's a central authority that decides the currency's inflation. If there's much unemployment (and specifically
cyclical unemployment), the government can lower the interest rates to strengthen private businesses financially. The opposite happens respectively. These tasks are done to make the symptoms of cyclic fluctuations less painful.
The deflationary spiral argument goes as following: Let's imagine an economy that only uses Bitcoin, solely, as currency. When the productivity rises, the price of goods and services decreases. But, this has a negative effect: People are more discouraged to hoard their currency, than to let it circulate. This stagnates the economy as consumption drops. And when consumption drops, so does the production, because the profit decreases along with the demand.
There's a nice writeup in our
wiki regarding this matter, but I can't understand the following conclusion:
The key difference is that people don't foresee a fixed cost (unit amount) that they must pay with Bitcoin. If the value of the Bitcoins that they own increases, then any future cost will take a proportionally smaller amount of Bitcoins. There isn't any fixed incentive to holding Bitcoin other than speculation.
If the economy that uses Bitcoin grows, the per-unit value of Bitcoin proportionally increases also.
Everything is the opposite of the popular fractional reserve banking system (because Bitcoin isn't a debt but an asset). Bitcoins only deflate in value when the Bitcoin Economy is growing.
Because the Deflationary spiral is a real problem in the traditional monetary system, doesn't necessarily mean that it will also be a problem in the Bitcoin economy.
Bitcoins deflate in value when the Bitcoin economy is growing, but doesn't deflation often contribute to lower economic growth?
The central bank does not decide inflation, although it tries to engineer its course to a level that is deemed acceptable. We see currently in countries like the UK and US inflation approaching 10%, where in pre-covid years the target and actual level tended to stay around 2%. This created a relatively stable environment but at present the number is exceptionally high. Inflation can be effected by all sorts of external issues like supply chains, crop/commodity prices and even oil availability which are disrupted by big events like Covid and Ukraine.