There are two ways in which "deflation" could occur.
One is that people start dumping their fiat for BTC at an obnoxious rate, leading to rapid currency appreciation. If the money that jumped into BTC decides to randomly jump out, this could cause major disruptions to the BTC economy, as inflation rates might jump up and down and even be forced below zero for periods of time. If the fluctuations are at least somewhat predictable, intelligent business owners could deal with it adequately.
The other is that the rate of currency destruction exceeds that of currency creation. Eventually (100+ years, probably) this would lead to a loss of fungibility of BTC, and the smallest unit of coin would end up buying more than the smallest items you would want to buy. As long as the rate of currency deflation is slow enough, and as long as people don't suddenly lose huge chunks of coins (ie maybe 10% of the coinbase disappears overnight), this will have virtually zero effect on the BTC economy. Interest rates will remain low to reflect the appreciation of the currency, and that is all.
Compare to USD, where the rate of inflation is 8% and the usual interest rate is under 5%. If you have USD in a savings account, you're
losing money. With BTC, you still make < 5% interest, but since the currency is increasing in value you're actually making more than what the interest rate reflects.
- But putting such theoretical plutocrats aside, here is the argument that convinced me to not be so concerned about the Bitcoin's deflationary properties: on this Earth, there has never been a deflationary currency. There has never been a currency whose supply increases predictably and significantly more slowly than the supply of the goods it represents. We do not actually know how such a currency will behave in the wild, and while we may speculate, we are speculating. Bitcoin is, in some ways, still an experiment.
Gold?
Well, if you talk about extremely long periods of time, decades, generations, ...., then you can't really have a net-deflationary currency forever; it's like the energy or mass preservation law in physics. But for sure, whenever a currency is fully tied (not partial reserve or other monetary instruments) to the value of a scarce commodity (such as gold) then you will get a deflationary currency. And we already know how that works: Value of the currency rises (other goods drop) to the point where the economy cannot sustain it any longer, then a depression follows as correction, and then it starts again. In the process, more and more assets are transferred to the money power.
I already mentioned an example of a failed forced re-introduction of the gold-standard by Winston Churchill, and the result was massive deflation and a depression that followed.
I understand there are always other factors at work, and Austrian Economists will ignore most of the evidence that's there and tell you "human nature cannot be predicted".
But the statement "we do not actually know how such a currency will behave" is simply untrue; we have a really good idea how it behaves, that's why the money power would love to have it.
Austrian economics doesn't say "human nature cannot be predicted", it only makes that assumption to simplify the effects of various economic events. Also, Churchill's failure with trying to return to the gold standard occurred for one reason and one reason only (I had to look this up, thanks a lot):
"The error they defended was in restoring the Pound to its pre-war gold content of 123.27 grains of fine gold, its old exchange rate of $4.87. In 1920, the Pound had fallen to as low as $3.40 in gold-based Dollars. Though it had since gained and was still gaining, the pre-war gold content and Dollar exchange rates were far too high. That was because, for these rates, British prices were far too high. Because of this high British prices anyone possessed of gold or Dollars could do better by exchanging them for the money of one of Britain's competitors and buying there. And Englishmen likewise could do better by exchanging pounds for Dollars, gold or other currencies at the favourable Churchillian rate and buying abroad. In 1925, the price advantage in doing so was about 10%. Exports, as always, were essential for Britain. So, other things equal, British coal, textiles and other manufactured tools could only become competitive at the new exchange rates if their prices were to come down by approximately 10%. A very uncomfortable process."
Full ArticleIf the US government put a price fix on gasoline at say, $0.50, nobody would be able to sell gasoline in the US because it would cost more to procure than what they could sell it for. If that happened it would be a disaster. Do the same thing to your currency, and you get the same result.
Since BTC is immune to this sort of manipulation, that sort of economic disaster basically cannot happen to BTC. Governments today can even control the price of gold and silver through fraudulent futures contracts and by stealing bullion from other countries (*cough*Libya*cough*). Again, they have very little ability to steal BTC, although if BTC were traded on major stock exchanges they could try to push the value down by naked shorting futures in the same way that they do with gold and silver. If you take a quick peek at the price of gold, you can see how well that's working out for them.[/list]