Mister Mister Posted October 28, 2015 Posted October 28, 2015 I have heard it argued by some, that the problem with a deflationary currency like gold or bitcoin, is that it screws debtors. For example, if you are a dairy farmer and you borrow $1000, at interest, but over the course of several years, the price of milk goes from $5 a gallon to $1 a gallon, you now need to do 5 times the work in order to pay back your debt. Does this make sense? Am I missing something?
RCali Posted October 29, 2015 Posted October 29, 2015 Sorry, but how is gold a deflationary currency? I can't see that it would disappear (losing it by dropping on the ground, or some other way) faster than it would mined and made part of the economy, and thus, inflated. Please, enlighten me.
Mister Mister Posted October 29, 2015 Author Posted October 29, 2015 Sorry, but how is gold a deflationary currency? I can't see that it would disappear (losing it by dropping on the ground, or some other way) faster than it would mined and made part of the economy, and thus, inflated. Please, enlighten me. My understanding is, when gold was the main currency, prices consistently deflated. This is because productivity increased massively, much faster than more gold was mined. Also, because gold has other utilities than currency - jewelry back then, and now electronics as well, if more is mined than is needed for currency, some of it will be redirected towards other uses, keeping the money supply relatively stable.
David Ottinger Posted October 29, 2015 Posted October 29, 2015 I have heard it argued by some, that the problem with a deflationary currency like gold or bitcoin, is that it screws debtors. For example, if you are a dairy farmer and you borrow $1000, at interest, but over the course of several years, the price of milk goes from $5 a gallon to $1 a gallon, you now need to do 5 times the work in order to pay back your debt. Does this make sense? Am I missing something? If your currency is gold, then why does your example use dollars?
jughead Posted October 29, 2015 Posted October 29, 2015 The "deflation" you are describing is not a monetary phenomenon, it is a result of productivity increases. In theory this could also occur with fiat money if the central bank maintained a constant money supply. Under this scenario I don't believe that debtors would suffer as you have described, but if they did then the capital markets would find a way to deal with it, much like how in an inflationary environment lenders require a higher interest rate to compensate for the decline in value of the currency.
Alan C. Posted October 29, 2015 Posted October 29, 2015 Deflation isn't something to be concerned about. As others have pointed out, it's the result of increased productivity. It means that less labor is required to maintain the same standard of living.
Crallask Posted October 29, 2015 Posted October 29, 2015 Market actors would also take into account the decreased profits from their products and make adjustments to the risks they take.
Agalloch Posted October 29, 2015 Posted October 29, 2015 I have heard it argued by some, that the problem with a deflationary currency like gold or bitcoin, is that it screws debtors. For example, if you are a dairy farmer and you borrow $1000, at interest, but over the course of several years, the price of milk goes from $5 a gallon to $1 a gallon, you now need to do 5 times the work in order to pay back your debt. Does this make sense? Am I missing something? If milk goes from $5 a gallon to $1 a gallon, that means the farmer must do much less work, not more. Deflation is a signof increased productivity and potential distribution. If he's doing more work, he's wasting resources in that sector. If the farmer couldn't afford lowering the price that much so soon after taking out a loan then he wouldn't have done it. If he has no choice because competitors have lowered to that point it's a signal that taking a loan out wasn't a good decision. While currency pressures deflate the prices in an entire economy, it doesn't happen immediately or uniformly. Any deflation you'd notice in the lifetime of a loan is either due to the product or because your loan was too long term for that market, which is likely already saturated by better capital sources. For example, imagine a monopoly on a highly desirable good in a sector with high costs to enter. Do you think deflatiinnin the economy would affect competitors who go a large long term loan to enter that area? Probably not, the monopoly would keep prices high because of the demand for alternatives being much more effective than currency deflation. If the competitor is providing a better alternative, the price will be determined by them as they enter the market and the massive demand they'd receive would make up for any expected deflation.
mlsv2f Posted October 29, 2015 Posted October 29, 2015 Lending rates would reflect a deflationary currency. This is no different than the current system, as lenders take inflation into account for loans in the same way they would deflation. As a whole, peoples behavior would adjust accordingly and they less likely to get themselves into crippling debt when there is more incentive to hold liquid assets and no longer exist the coercive incentive that almost forces people to invest in order to avoid inflationary losses. Instead, people would invest for opportunistic reasons, not as a reaction to inflation as they do currently. Honestly the "fear of deflation" is about as logical as the fear ghosts. Not sure how media gets away with their mongering. 3
Very Ape Posted October 29, 2015 Posted October 29, 2015 If your currency is gold, then why does your example use dollars? Bingo
Spenc Posted November 4, 2015 Posted November 4, 2015 does inflation screw creditors? Not really, at leas tnot when it's reasonably predictable. If I loan you $1000 so you can buy books for school and let you pay me back in a few years after you graduate and get a job, I ought to have the presence of mind that if you give me $1000 back, I'm probably going to lose 10% of my purchasing power. Since inflation is ever present and systemic, I would have to reasonably expect the consequences of loaning out money. Likewise, if gold is systemically deflationary, then once the common economic actor has adapted to the new conditions, he would reasonably expect that to borrow that $1000 from me might cost him more in purchasing power in the future. the 5 books he needs this year for his studies are bought with the same gold that in three years can buy 7 books. ihe isn't being screwed, because everybody becomes accustomed.
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