Deflation Isn’t Bitcoin’s Problem, It’s Bitcoin’s Solution

Two weeks ago, Bitcoin “Core Dev”i Mike Hearn wrote in Medium about deflation, focusing on the USG’s misleading calculations of inflation. Despite his calculated fellatioii, he at least recognized deflation’s potential to make the world a better place.

Missing this point, in response to Hearn’s piece, The Economist‘s “R.A.” published a response earlier today. Not that I’m in (or will ever be in) the habit of defending Hearn, but defending Bitcoin’s deflationary nature is certainly worth my time. So, for your enlightenment and enjoyment, I shall now rebuke some of R.A.’s lulzier gems:

Deflation will prevent Bitcoin from becoming a unit of account, and that, in turn, will keep it from displacing traditional currencies.

Firstly, “traditional currencies” aren’t what R.A. thinks they are.iii National currencies, like the nation-states themselves, have a brief record and are well on their way to reducing themselves to footnote status. Also, saying “will” implies as much assuredness as saying “never”. Didn’t Peter Pan teach R.A. anything?

Next, R.A. weakly meets Hearn’s jabs about the way inflation is calculated:

There is good reason to expect that inflation is actually being overstated in some areas of the economy. Statisticians aren’t very good at taking into account rapid improvements in the quality of technological goods, nor do they do a good job capturing when technology sends the market price of some goods (like encyclopedias, for instance) to zero.

So while whiz-bang non-essentials are getting cheaperiv, staples like food and shelter are taking off like a motherfucker. So now we can just live with our parents, eating fast food, and buying ever-cheaper and ever-shittier digital gadgets. Sweet. Also, since when is Wikipedia any good?v

R.A. then expands his “thoughts” to GDP:

Calculating nominal output does not require any value judgments about the comparability of certain goods, or much in the way of statistical wizardry, so we can feel reasonably confident that such figures are not especially biased.

Measuring the size of an economy is considerably more difficult than measuring a cup of flour, particularly when you have both a tide-dollar and a bezzle-dollar to account for. Even assuming that the non-wizards can measure “output”vi within a few dozen percent, measuring GDP is more a function of measuring what they can measure rather than what’s worth measuring.

What’s worth measuring is art.vii Wouldn’t you agree?

So after failing to demonstrate knowledge of history, statistics, and culture, R.A. expresses his confusion about money itself:

Money is not a natural thing. It’s a technology that society deploys to meet certain needs.

Money is a very natural thing. In every society complex enough to have what could reasonably be called “an economy”, money has everywhere and always existed. Dude needs to read David Graeber.viii Or Aristotle. Or even just a book.

But R.A. doesn’t quit there in his critiques of Bitcoin, and by extension, sound money:

More broadly, a hard supply cap or built-in deflation is not an inherent strength for a would-be money. A money’s strength is in its ability to meet society’s needs.

And what, pray tell, does “society need”? Sound money has always been a check on the power of government to expand its influence, be it in foreign wars or domestic welfare. A departure from sound money appears to favour the masses and can therefore be used purchase their support, but paper currencies have a funny way of unwinding, leaving behind untold misery.ix In the past, the solution was gold, but then along came a spider: Bitcoin.

Bitcoin takes what gold has done so well for so long and improves upon each and every one of the characteristics that have made it, ahem, the gold standard for the past xx thousand years.  These characteristics are those of Aristotle’s definition of a “good money”, namely durability, portability, divisibility, and intrinsically value. Let’s break each one down and examine how Bitcoin > Gold:

Durability: As long as there’s a copy of the blockchain somewhere in the world,x Bitcoin will persist. It doesn’t even need electricity. We’re past the point of no return.

Portability: Gold is heavy, Bitcoin is as light as a private key scrawled on the back of a napkin. Gold is also a nuisance to ship overseas. Bitcoin is technically challenging to use but has so far only come across one pirate.

Divisibility: Gold chunks can be shaved off a bar, but agreeing on purity and the accuracy of the weighing scale is a good deal more complicated. With bitcoin, each satoshi is equivalent to each other satoshi. And there are a lot of satoshis.xi

Intrinsic Value: Since all inferred value is subjective, humans confer “intrinsic” value on scarce goods.xii In addition to subjectivity, the problem with determining if a good is scarce is everywhere and always a knowledge problem.xiii The amount of gold presently in existence is roughly known, but the amount that could yet be mined depends entirely on the effectiveness of doing so. The amount of bitcoin yet to be mined is not dependent on the cost-effectiveness of mining. The difficulty is, but not the amount. Bitcoin is deterministically scarce, unlike any other supposedly scarce asset yet devised by man. As such, Bitcoin mining will continue because of the incentives to do so. Given a sufficiently long ROI horizon and the continued appreciation of the mined coins, miners won’t lose (much) money and will be satisfied in their procurement of untainted coins.xiv

The world didn’t die of deflation on the gold standard, nor did it toil in a dry pool of unmet needs, but it is unquestionably suffering under the present inflationary regime. Everywhere, plastic is replacing tangible, useful goods. Your car is made of plastic because steel is too expensive, your cellphone is made of plastic because aluminum is too expensive, the foods at the grocery storexv are made of plastic or covered in plastic pesticides because local food is too expensive, etc. Then there’s the rampant social confusion and associated mental illness, to say nothing of the debt. Oh, the debt! And people still want to increase merchant adoption in Bitcoin?

To further the point, Mirchaxvi wrote a pointed article on deflation way back in 2012, from which:

Let’s make a simple mental experiment. We both sit down at a table in your favourite fast-food-joint-masquerading-as-an-eatery. I wouldn’t eat there more than I’d eat at the gas station, but you’re you. I place in front of you a complete menu of whatever they have on tap and a note, which says “Redeemable tomorrow for two complete menus”. You get to pick one, and just one. Either the note or the “food”. So what do you do ? Do you eat the shit or wait till tomorrow ? Depends on how hungry you are, right ?

Tomorrow comes, and here we are again : me stuck nine feet under the biofilm, disgustedly mingling with the lower classes and you in your natural element. I place in front of you two complete menus of their crap, and two notes. Each note says, “Redeemable tomorrow for two complete menus”. Do you eat the shit or wait another day ?

One thing’s for sure : you will not be waiting forever. So, does a deflationary currency prevent all spending ? No, it does not. Does it prevent useless, meaningless and ultimately stupid spending ? Yes, it does. That’s incidentally why welfare and big governments will be the first to go : because they are stupid expenditures. That’s why it will be soon impossible to collect any sort of taxes whatsoever : because in their current incarnation taxes are stupid expenditures.


So show me the problems that deflation causes.

All I’m seeing are solutions.

___ ___ ___

  1. “Core Dev” is slang for a member of the “Core Development Team”. This “Team” might as well be Team America, for they consist (mostly) of Americans who speak at conferences and preach about making bitcoin accessible. Thus you’ll sometimes see them referred to, hilariously, as “Power Rangers“.
  2. Hearn: “The way the [Consumer Price Index] statistics are calculated is very transparent and the integrity of the agencies that compile them are not in question.” Right…
  3. In the late 18th century, the saying “not worth a Continental” was used by colonialists to refer to the increasingly worthless paper currency used to finance the Revolutionary War against the British. The Continental Congress was issuing the currency unbacked by sound money like gold or silver, and instead backed by “anticipation of tax revenues”, exactly like every central bank today. People have always preferred to have their paper monies backed by gold and, to a lesser degree, silver. “Traditional currencies” were deposit receipts on precious metals held with goldsmiths, not the central bank jestery we currently bear. Gold-backed paper monies were perfectly acceptable units of account.
  4. Remember the first iPod? It was CAD$ 500 for 5GB in 2001 bucks. Since housing and non-plastic food and are up about ~10%/year since then, that iPod was worth ~$1,726.14 of rent and groceries today. Shelter or 1000 songs in your pocket?
  5. See MP’s “Wikipedia: the special olympics for the mentally retarded“.
  6. Output, incidentally, is really a measure of friction. With this lens, a car accident is “good” for the economy because insurers, lawyers, autobody repairmen, surgeons, and police are all given more work to do. This, as a basis for economy and society, is as ridiculous as a farcical aquatic ceremony, which is why it isn’t working.
  7. Bitcoin is art, which is why there’s no Bitcoin 2.0. Also, two millennia on, we still look to the Ancient Greeks for their mastery of philosophy, pottery, architecture, etc., not their inexpensive and widely available anything. Even the Romans, at the height of their mighty military empire, taught their aristocracy Greek and sent them to Greece to learn real culture. And for the same reason, we still study Plato, Socrates, and Aristotle today. For the modern US’ part, if Jeff Koons and Andy Warhol are any indication, they won’t be remembered for much. I mean, isn’t it weird that the great and powerful United States of America is leaving little more than Mount Rushmore?
  8. Specifically and exclusively Graeber’s Debt: The First 5000 years.
  9. The median lifespan of a paper currency is 15 years. The pound Sterling has lasted 300 years, but has lost 99.5% of its value in that time.
  10. Or in space!
  11. 2.1 x 10^15 (two quadrillion) is the total cap, set to be reached around 2140 A.D.
  12. If you’re near starvation, and food is very scarce, an apple is worth 1000 Manhattans. If not, then not.
  13. The biggest knowledge problem: How long do we have left in these mortal coils?
  14. Although MP has a convincing article on the nonexistence of bitcoin taint.
  15. eg. azodicarbonamide(ADA). The WHO says that there’s  “abundant evidence that azodicarbonamide can induce asthma, other respiratory symptoms and skin sensitization”, despite the fact that the US FDA says it’s no big deal. ADA is used, like all other plastics, because it’s cheap and allows food companies to keep their prices down, masking the effects of money printing. Clearer evidence of welfare, there is not.
  16. Turns out I was pronouncing “Mircea” wrong this whole time. The two Romanian architects who lived with me last summer were over for dinner last night and, of course, I had to mention the Timişoaran who’s catalyzing my IRC Yeshiva. Turns out it isn’t pronounced “Mir-see-ah”, but rather “Mir-cha”. Whaddyaknow!

30 thoughts on “Deflation Isn’t Bitcoin’s Problem, It’s Bitcoin’s Solution

  1. […] known scams.1 This is not a favourable portrait I’m painting here, which is precisely why, for your enlightenment and enjoyment, we’re going to pick apart the Annual Letter from the Chairman of the Fundation’s […]

  2. […] lies not in the generosity of its community, though that’s certainly nice, but rather in its anti-consumerist and […]

  3. […] up.” Didn’t we talk about using the word “will” before? That’s right, we did. Oh, and of course smart contracts. John: You are clearly giving them enough by pouring $10m usd […]

  4. […] our living standards are far outstripping our finite planet’s ability to support us. Thus, plasticized foods, poisoned rivers, etc. This is, of course, […]

  5. […] “affordable luxury” and a planet burdened by plastic dishwashers, plastic cars, and plastic food. Low-quality X has no place in this world and neither does some philosophaster’s definition […]

  6. […] whatever the Core Devs say and do the exact […]

  7. […] around for as long as he has. You can still run a full node to confirm transactions, even if the Power Rangers fucked up the newer versions of the core client. Run 0.6.x and you’ll be laughing. And who […]

  8. Rassah says:

    Bit late to this party, but there’s something quite important to consider with regards to the CPI and inflation. One of the biggest factors in calculating the CPI is food stuffs. And so, we have this:

    US government wants to get off oil (or at least politicians put up a facade as such), is looking to expand into bio fuels, and decides to subsidize corn as a source of bio fuel. (This begins a few decades ago). This corn subsidy is on top of the general big farma corp subsidies, and has only increased over the years.

    Corn gets to the point where it can actually be sold for LESS than the cost to grow it (i.e. you can spend $1 growing an ear of corn, sell it for $0.25, and still make money thanks to the subsidies).

    Thanks to this cheap food staple, corn is now included in almost everything we eat, either as corn syrup substituting sugar, corn flour and starch, and even some corn-based plastics and gellies used as filling. I’ve heard estimates of how much of our food contains some type of corn products to be anywhere from 75% to 90% range.

    In the end, we have continuously declining cost and quality of food, subsidized by government “tax” dollars, which is itself subsidized by government borrowing and printing, causing the inflation numbers to stay low, thanks to the cost of food being kept low.

    In summary, inflation itself is being used to suppress inflation figures.

  9. […] loss to explain. Even more curiously, the most popular article for this robust readership has been Deflation Isn’t Bitcoin’s Problem, It’s Bitcoin’s Solution followed in a distant seconds and thirds by Analysis: Annual Letter From Bitcoin Fundation […]

  10. […] and still thinks consumers matter for Bitcoin, when, in fact, it’s the exact opposite: Bitcoin smashes consumerism. […]

  11. […] From the earliest days of human history, man has used money as a tool and symbol of power. In the civilized days of Monarchy, gold was the embodiment this power. Durable, divisible, portable, having some intrinsic value, and known to be scarce, gold was quite simply the best possible choice at the time. It was sound money: […]

  12. […] As economists are fond of saying “There’s no such thing as a free lunch.” The same is true for computing as it is for health care as it is for monetary policy. […]

  13. […] supply is was what made the Depression not so bad is just so much state-sponsored braindamage. Deflation bad, inflation good! Sound money bad, central banks […]

  14. […] in food prices, art prices, stock markets, movie sales, hey, how could our old friend anti-deflation not peek his head into the house of football? […]

  15. […] more on the subject of quality, see Deflation isn’t Bitcoin’s problem, it’s Bitcoin’s solution. […]

  16. […] again, Lanier presents solutions as problems. Life isn’t Gaussian, not really, and certainly not on any appreciable timescale. […]

  17. […] are running away with the moon, art’s on the loose, Bitcoin’s doing things that shouldn’t be possible, and even obscure rare earths are making men very wealthy indeed, there remains a devout orthodoxy […]

  18. […] as seen in the trailer above, is a smartphone cum humanoid companion that I’m willing to bet sound money will easily surpass the firm’s 5`000 monthly unit sales […]

  19. […] produced, and definitely more than 5`000 units, is likely more expense-hole than anything else. It’s what it is. Still, no matter what nation holds they key to your automotive heart, if it’s any single […]

  20. […] whatever the “Core Devs” say and do the exact […]

  21. […] Though maybe we’ll take back one of those notches for New York when comparing culinary scenes. Take this chicken and beef shawarma platter in Iqaluit. It was B- quality at best but it also came from the only shawarma restaurant within several thousand miles in any direction. That’s how they got away with charging C$40 for the plate and water bottle you see here. Scarcity rules everything around you, but you already knew that. […]

  22. […] Or Not. 7. On Making High-Entropy Paper Wallets 8. There Is No “Bitcoin 2.0″ 9. Deflation Isn’t Bitcoin’s Problem, It’s Bitcoin’s Solution 10. Ex-Post: Toronto Bitcoin Expo 11. The Brokenness of MaidSafe.ii 12. Bitcoin: Killer of […]

  23. […] timepieces hold their value better (at least in fiat terms, obviously nothing holds its value in bitcoin terms, as evidence by the recent auction of Paul Newman’s Rolex Daytona for 17.8x the pre-auction […]

  24. […] it’s in the nature of Bitcoin not to move. In fact, miners even used to priviledge the movement of older coins by incorporating “coin […]

  25. […] be surprisingly close. In BTC terms, of course, this G-Wagen will be much, much, much cheaper. Hurray deflation! […]

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>