When discussing the distributed cryptocurrency Bitcoin, I frequently get the question from reporters and economists if a deflationary currency really can survive.
It’s an interesting thought. We’re so used to living in an inflationary economy, where money gradually loses its value, that we have a hard time imagining what it would be like in an economy where a certain amount of money slowly became more valuable as prices fell.
Since we have only lived in inflationary (and hyperinflationary) economies, there are bucketfuls of assumptions of why a deflationary economy wouldn’t work. The strongest objection I hear is that nobody would buy anything today, since the same thing would be cheaper tomorrow. And they wouldn’t buy it then either, because it would be cheaper the next day again. And so on, so nobody would buy anything, ever: we would all be waiting indefinitely for everything to drop in price.
No, really. This is an argument that’s being presented as absolutely serious and spoken like an undeniable truth.
Conversely, the only reason we buy something today must therefore be that it will cost more tomorrow, and even more the day after, so we must hurry to spend our money: that is the only reason we would ever buy something. (It is when the argument is reversed, that its somewhat… narrow… point of view is exposed.)
But the assumptions fall earlier than that: they fall already with the premise that we’ve never lived in a deflationary economy. While the economy as a whole may not have been deflationary, parts of it have been for decades.
So let’s assume just for a second, that if a specific thing you needed would cost less in three months, you would wait to buy it. In three months, you would repeat the exercise and wait for three months more. If there was a particular type of item that would just cost less and less, nobody would never buy them at all. If you subscribe to this view —
What are you using to read this article?
Electronics have been deflationary since the 1970s. A gadget with a certain performance can always be bought much cheaper a few months later, and for practically zero cost some two years later. This is deflation. Prices fall and your money becomes more valuable. Maybe this is not just deflation, this is even approaching hyperdeflation.
In this scenario, using the argument above, nobody would buy any electronic gadgets since they can be had cheaper a bit later; everybody would hold on to their money. So are you buying any gadgets? Again, what are you using to read this article?
In reality, Apple Computer Co. is the world’s most or second-most valuable company, competing with an oil giant for the top spot. And Apple is operating in a deflationary sector of the economy.
Bitcoin may have its flaws, but its deflationary characteristic is not one of them.
The argument against deflation may have one point correct, though. In a deflationary economy — and we see this coming true with electronics, too — people are not buying more than they need at the moment, since it will be cheaper to buy for next year’s needs when next year comes around.
But people only buying what they need — is that really a bad thing?