Can deflation be a good thing?

Deflation Criticism for Bitcoin

I have seen some posts, videos, comments from some crypto-enthusiasts recently, who were answering the criticisms for bitcoin. One of the biggest criticisms is; since there is a finite amount bitcoins, it will only increase in value and it will only benefit hoarding instead of utilising the currency, eventually causing deflations.

In that way, bitcoin is resembles "gold", which also doesn't have any utility value itself - although gold is at least demanded to make shiny earrings, rings, bracelets, necklaces. In any case, people have moved from gold to fiat money for a reason (deflation); and in that way economists criticise bitcoin to be actually "a step back" from progress.

Defending Deflation

Proponents of bitcoin on the other hand argue that, deflation can actually be a positive thing for us. One of the biggest problems in our society is consumerism and harming the environment because of our over-consumption. Knowing that our coins will hold a much higher value tomorrow will probably make us to spend less, which might benefit the environment.

Going Deeper

On the other hand, this view neglects two very important problems.

1. In a deflationary scenario, the wages go down quicker than the price of goods

While the goods and services will be cheaper tomorrow, they will be so by cutting the wage of the people who produced it. This lag -that the wages decrease quicker than price of goods or services- causes a reduced income for working people. Also, the very same lag might cause significant volatilities in the economy as well.

Here's a quote from Yanis Varoufakis, an economy professor, founder of DiEM25, and one of the figures hated the most by EU establishment:

Deflation rewards the patient just for being patient, rather than being a reward to costly searching activity. Under deflation everyone benefits from waiting and aggregate demand thus collapses (penalising us all). This was the terrible flaw of the Gold Standard, in the mid-war period. And it is the Achilles Heel of Bitcoin today.

Source: https://www.yanisvaroufakis.eu/2014/02/15/bitcoin-a-flawed-currency-blueprint-with-a-potentially-useful-application-for-the-eurozone/

2. There is a huge difference between investors and the rest of the population.

If you're familiar with crypto-currency related posts, you might have seen one of the first rules of investment:

"Only invest what you can afford to lose."

This is a great way to describe the "investor profile". Those who invest in a non-utility & non-deflationary crypto-currency (like bitcoin), have enough money to get shelter, eat food and live normally. They invest what they can afford to lose. On the other hand, a big chunk of the population in the world can barely make ends meet. Let's look at the population groups in a deflationary scenario where we use bitcoin for daily transactions:

• Paul (super rich). Paul has 1000 bitcoins. He spends %0.1 of his bitcoins to cover his monthly costs; such as house, food, transportation. He spends another 1% for extremely luxurious stuff; a villa, a Ferrari, reserving a night club every night for himself. Probably doing drugs. The rest of his 98.9% of his bitcoins will just stay in his wallet, and he will get richer next month without doing any work.

• Kate (upper middle class). Josh has 50 bitcoins. He will spend %2 of his bitcoins to cover his costs; such as house, food, transportation. The rest will just stay in his wallet, and he will get richer without doing any work. Plus, the cost of whatever luxury he wants to spend on will go down tomorrow, so why buy today? But eventually, he WILL buy.

• Ryan (lower middle class). Ryan has 1 bitcoin (he earns this much every month by working). He will spend the same amount of bitcoins to cover the same amount of basic needs. He ends up having nothing left in his wallet. In 2 months, the price of these basic needs will decrease to 0.9 bitcoins, but already next month he will be earning 0.9 bitcoins when the prices are still 1 bitcoin. So he'll be in debt after next month.

• Michelle (poor) Michelle also earns 1 bitcoin every month, but she had some medical emergency and has only 0.5 bitcoins left this month to cover basic expenses. She's 0.5 bitcoin in debt by the end of the month, which, in value, will go higher next month.

As you can see, in this scenario, those who go hungry today will have an even less likelihood to buy food tomorrow.

We investors fall into the fallacy of Ignoratio Elenchi. The purpose of a global cryptocurrency for all-humanity-adoption is not to make money for investors. Bitcoin might be good for investors to make money now. But it should and will never be adopted as a currency for all humanity.

I suggest reading @clicketyclick 's series on creating a coin for all humanity. Here's where he/she suggests a coin based on energy.