On Deflation

me quotes bitcoin deflation exchange

28 Feb 2014

Senator Joe Manchin recently called for a ban on Bitcoin. One of the cornerstones of the Senator’s argument is that Bitcoin is a deflationary asset. The Senator writes:

In addition, its deflationary trends ensure that only speculators, such as so-called “Bitcoin miners,” will benefit from possessing the virtual currency. There is no doubt average American consumers stand to lose by transacting in Bitcoin. As of December 2013, the Consumer Price Index (CPI) shows 1.3% inflation, while a recent media report indicated Bitcoin CPI has 98% deflation. In other words, spending Bitcoin now will cost you many orders of wealth in the future. This flaw makes Bitcoin’s value to the U.S. economy suspect, if not outright detrimental.

His argument is shallow. In fact, we exchange the type of deflationary assets he is talking about all the time. Why burn a tank of gas on a long road trip today if it could be worth more tomorrow? Why send a letter with a Forever Stamp today if could be worth “many orders of wealth” more in the future? People also speculate on gasoline. Perhaps people speculate on Forever Stamps too. It is also possible that the U.S Postal Service could go bankrupt in the future, or that Gasoline could be replaced by a cheaper fuel just like it is possible that Bitcoin could be replaced by a better technology in the future. None of this seems to be inhibit the use of these assets.

Despite their deflationary nature, regular people continue to exchange these assets everyday. That is because value is determined by both time and circumstance. Exchanging a tank of gasoline for a road trip today might be worth more to me than exchanging that same tank of gas for something else in the future. Here is someone who bought pizza in 2010 for 10,000 Bitcoins reflecting on his/her purchase 4 years later:

I was pretty happy to trade 10,000 coins for pizza. I mean people can say I’m stupid, but it was a great deal at the time.

As much as those 10,000 Bitcoins could be exchanged for today, this person stands by his/her exchange because he/she recognizes the meaning of value.

As far as I can tell, deflationary assets such as gasoline and Forever Stamps have not had an “outright detrimental” effect on the U.S. economy. I don’t expect Bitcoin will either.