Deflationary spiral

This page is a stub. Help by expanding it. Deflationary spiral is an economic argument that propose that price falling below cost in a runaway deflation would eventually lead to the collapse of the currency. It is a common criticism made against the viability of Bitcoin.

Effects

Deflation, like inflation, include winners and losers.

The losers are borrowers, especially those who would have to pay principle plus interest rate. Since the value of loan increase due to inflation, that mean they will have to pay more in real term.

The winners include anybody who had saved and would encourage more people to save.

Economic history

The first deflationary economic growth is a phrase of economic growth caused by the slashdot effect. From there, we see the the price of bitcoin rose to 0.06 USD. This price level remain stable until early October, when a rally cause the price to touch .50 USD before settling at the .20-30 USD equilibrium.

There will only be 21 million bitcoin in the world, ever. Thus, it is expected that the value of bitcoin to rise in correlation with the number of people using it. Further deflation can occurs with people losing their wallet, thus all access to their bitcoin. While the destruction of bitcoin never occurs, the loss of key to access it effectively mean that bitcoin can never be used again.

Over the long term, as long as the combination of the two causes hold true, deflation will continue to an absurd level.

Counterargument

Opponents counter that the deflationary spiral is not possible because of the Time Preference theory and the necessary end goal of money; to purchase goods and services.

Opponents had argued that humans will prefer something now rather than latter, all things being equal. Thus, something that happen sooner is more valuable than what happens further down the road.

Furthermore, there is a natural limit to human's time preference. A human being cannot wait indefinitely to not spend money on food, milks, and other goods without suffering some kind of hit to a human being's health.