Then we have to ask, bad for whom? For those who take loans certainly it's bad. For those who loan, it's great. Inflation creates a reverse situation. It is possible, I would imagine, to create contracts that adjust for the fluctuations in currency valuation, but it is unwise to blame deflation for all the bad luck of those who take loans. Deflation would only mean that people taking those loans would think really hard about the prospects of any future profit they are hoping to get from investing the loaned money. Which means we'll have a more, not less, stable economy.
Actually, deflation is bad for both lenders and borrowers, since it increases the likelihood of default. Let's put it this way: if you knew that it would be hard for me to repay a loan during an economic boom, and even harder during a recession, would you want to lend money to me? Deflation actively discourages lending, by creating an incentive to hold money.
It is easy to think that lending is a bad thing, but let's put it this way: it is because we are able to take out loans (of various kinds) to start businesses that non-wealthy non-aristocrats are able to participate in the market. Too much credit is a bad thing, but too little credit denies capital to anyone who is not already wealthy.
You have a point, however I would like to note that Bitcoin is not actually a deflationary currency as I explained in this comment: https://news.ycombinator.com/item?id=5403360
The bigger issue we should be focusing on is not deflation or inflation but rather who controls it. If it is controlled by one player (government) then it ultimately decides who benefits and who loses from it. It is a much more honest situation when market controls it. Once there are too many people taking loans and going bankrupt, then investors stop investing until a point is reached at which it is more profitable to invest than to hoard again.
In any case, the extent to which people are denied access to capital is almost exactly the same as the extent to which they benefit from hoarding.The distribution of capital changes, rewarding less opportunistic and more hardworking people during deflation. Ironically, it's exactly the opposite of what governments in almost any country tell people.
Finally, I would like to add that even though capital is important, it is not the only component responsible for creating value and wealth. Thus, economy would reward not only people capable of obtaining capital, but also those who have great ideas and skills to implement those ideas.
It is deflationary.
I have 1€, I can buy one loaf of bread with it today.
One year from now:
Inflation - I can buy 0.5 loafs of bread.
Deflation - I can buy 2 loafs of bread.
Have any loans ever been denominated in bitcoin? Given the disadvantages of a bitcoin loan, some of which you cite, when should we expect such to occur? Is there any reason to believe bitcoin could affect the supply or demand of loans denominated in other currencies?
I am not aware of any major Bitcoin lending, nor would I expect to see any major Bitcoin lending at any point. The reason is simple: Bitcoin is not a legal tender anywhere, nor does it enjoy any legal status as a currency anywhere. Courts deal in fiat currencies, and both lenders and borrowers need to deal with the court system in case of default; until courts start dealing in Bitcoin, issuing a Bitcoin loan will only add complication to such proceedings.
In my view, Bitcoin will ultimately be little more than another way to make electronic payments. Merchants will accept Bitcoin only to immediately trade the Bitcoin units for some fiat currency on a Bitcoin exchange. Bitcoin exchanges will basically be payment processors. This, of course, assumes that technical problems do not destabilize everyone's trust in Bitcoin as a secure payment system (and given that it fails to meet the formal definition of security used by cryptographers, I suspect that this is bound to happen).
All of this makes sense, which leads me to think that when you said "deflation is bad" above you meant it in a very general sense rather than as a criticism of bitcoin. After all if there will never be significant loans in bitcoin it can't very well be implicated in a breakdown of the lending system. Sorry for misunderstanding.
Yes. Ripple[1] has allowed for the use of bitcoins to denominate loan-like credit extended between people for quite some time[2]. You just have to be careful.
By the way I back my ripple credit entirely with bitcoin -- if you can make a payment go through the network to me, you are entitled to it.
Comments
Then we have to ask, bad for whom? For those who take loans certainly it's bad. For those who loan, it's great. Inflation creates a reverse situation. It is possible, I would imagine, to create contracts that adjust for the fluctuations in currency valuation, but it is unwise to blame deflation for all the bad luck of those who take loans. Deflation would only mean that people taking those loans would think really hard about the prospects of any future profit they are hoping to get from investing the loaned money. Which means we'll have a more, not less, stable economy.
Actually, deflation is bad for both lenders and borrowers, since it increases the likelihood of default. Let's put it this way: if you knew that it would be hard for me to repay a loan during an economic boom, and even harder during a recession, would you want to lend money to me? Deflation actively discourages lending, by creating an incentive to hold money.
It is easy to think that lending is a bad thing, but let's put it this way: it is because we are able to take out loans (of various kinds) to start businesses that non-wealthy non-aristocrats are able to participate in the market. Too much credit is a bad thing, but too little credit denies capital to anyone who is not already wealthy.
You have a point, however I would like to note that Bitcoin is not actually a deflationary currency as I explained in this comment: https://news.ycombinator.com/item?id=5403360
The bigger issue we should be focusing on is not deflation or inflation but rather who controls it. If it is controlled by one player (government) then it ultimately decides who benefits and who loses from it. It is a much more honest situation when market controls it. Once there are too many people taking loans and going bankrupt, then investors stop investing until a point is reached at which it is more profitable to invest than to hoard again.
In any case, the extent to which people are denied access to capital is almost exactly the same as the extent to which they benefit from hoarding.The distribution of capital changes, rewarding less opportunistic and more hardworking people during deflation. Ironically, it's exactly the opposite of what governments in almost any country tell people.
Finally, I would like to add that even though capital is important, it is not the only component responsible for creating value and wealth. Thus, economy would reward not only people capable of obtaining capital, but also those who have great ideas and skills to implement those ideas.
It is deflationary. I have 1€, I can buy one loaf of bread with it today. One year from now: Inflation - I can buy 0.5 loafs of bread. Deflation - I can buy 2 loafs of bread.
Have any loans ever been denominated in bitcoin? Given the disadvantages of a bitcoin loan, some of which you cite, when should we expect such to occur? Is there any reason to believe bitcoin could affect the supply or demand of loans denominated in other currencies?
I am not aware of any major Bitcoin lending, nor would I expect to see any major Bitcoin lending at any point. The reason is simple: Bitcoin is not a legal tender anywhere, nor does it enjoy any legal status as a currency anywhere. Courts deal in fiat currencies, and both lenders and borrowers need to deal with the court system in case of default; until courts start dealing in Bitcoin, issuing a Bitcoin loan will only add complication to such proceedings.
In my view, Bitcoin will ultimately be little more than another way to make electronic payments. Merchants will accept Bitcoin only to immediately trade the Bitcoin units for some fiat currency on a Bitcoin exchange. Bitcoin exchanges will basically be payment processors. This, of course, assumes that technical problems do not destabilize everyone's trust in Bitcoin as a secure payment system (and given that it fails to meet the formal definition of security used by cryptographers, I suspect that this is bound to happen).
All of this makes sense, which leads me to think that when you said "deflation is bad" above you meant it in a very general sense rather than as a criticism of bitcoin. After all if there will never be significant loans in bitcoin it can't very well be implicated in a breakdown of the lending system. Sorry for misunderstanding.
Yes. Ripple[1] has allowed for the use of bitcoins to denominate loan-like credit extended between people for quite some time[2]. You just have to be careful.
By the way I back my ripple credit entirely with bitcoin -- if you can make a payment go through the network to me, you are entitled to it.
[1] http://www.ripple.com
[2] http://ripplepay.com
https://btcjam.com/