deflation

A sign of the times? Conservatism and denial of reality.

Bitcoin's deflation problem by Ryan Avent

TWO weeks ago we published a Free exchange column examining whether Bitcoin could be considered a true money, and if not, why not. Mike Hearn, one of Bitcoin's most prominent software developers, responded to the column somewhat dismissively. I wrote an e-mail response to Mr Hearn, the gist of which I will reproduce here. He makes two broad criticisms. The first is that we have lazily repeated the argument that deflation will kill Bitcoin, which in his view has been debunked. And the second is that we are naive to think put much faith in official inflation statistics. 

I think Mr Hearn may have misunderstood the piece's argument. It was not that deflation would kill Bitcoin. Rather, it is that deflation will prevent Bitcoin from becoming a unit of account, and that, in turn, will keep it from displacing traditional currencies. But Bitcoin could survive and indeed thrive without becoming the coin of the realm. 

The issue, as the piece explains, is that deflation in the unit of account leads to unemployment, thanks to the fact that wages generally don't adjust downward. Mr Hearn suggests that the idea that deflation might be costly is controversial among economists. I must disagree; it really isn't. Economists would love it if he were right that deflation didn't matter—that money, in economists' parlance, is neutral. If wages adjusted quickly and cleanly then they could go back to applying really straightforward classical economic models and everyone's life would be simpler. But the data are very clear on this point; wages are "sticky", and so deflation in the currency in which wages are set is costly.

(emphasis added.)

Baker has a contrarian take which has some truth to it.