Essentially, if you think that a currency will be worth more tomorrow than it is today there is little reason for investment (or even spending!). It quickly becomes a spiral where no one wants to spend. Inflation provides a nice kick in the pants for people to put their money to good use.
This isn't a concern yet for Bitcoin because in the scheme of world economies BTC simply doesn't matter (it could go away tomorrow without any noticeable effects), but if in the future it becomes a critical thing it would be a major concern.
Deflationary spirals are a hypothetical concern and mostly a fringe neo-Fisherian idea that has recently gained some mainstream nodding, but is otherwise difficult to verify in any way.
For one thing it assumes a massive collective irrationality where people's expectations are all rendered berserk and plunged into a negative time preference. It's a very tough gambit to make that people can withdraw their propensity to consume to such a high extent. It's tough to presume that the heterogeneous stock of capital and the time structure of production will just stand still to a deflationary pressure and not readjust to add more stages or adjust the price spreads in between. [1] Of course, BTC being a global currency means it exists in competition and per Gresham's law can always be driven out. Not a catastrophe.
>For one thing it assumes a massive collective irrationality where people's expectations are all rendered berserk and plunged into a negative time preference.
One of the more idiotic ideas to come out of neoclassical economics is the assumption that a negative time preference is irrational or impossible, when most of us have one (pension, passing wealth on to one's kids, saving up to buy big ticket items, etc.).
Indeed, what would really be irrational is spending all of your money immediately.
I am uncertain as to why you imply that a) I think a negative time preference is irrational or impossible apodictically, b) that the former is necessarily a neoclassical idea when the neoclassical synthesis in fact eschews it, c) that there is a natural rate of time preference, d) that time preferences do not differ per subjective valuations and units of goods on an individual scale, or that they are not dynamic, and e) that to respond to the assertion that deflationary spirals are unrealistic in presupposing a fixed natural rate of negative time preference with the opposite straw man idea of extremely high time preferences that favor immediate consumption is a convincing line of argument (indeed, the latter cannot be true for it would make capital investment an impossibility).
The three activities you list in parentheses apply only for those goods, and do not even imply a negative time preference. Saving doesn't have to be a result of negativity at all, per se.
>the opposite straw man idea of extremely high time preferences that favor immediate consumption is a convincing line of argument (indeed, the latter cannot be true for it would make capital investment an impossibility).
Under the neoclassical synthesis capital investment is done purely by investors who have a positive time preference but are being paid enough to offset their desire to spend absolutely all of their money right this second.
the irony is that in order to satisfy these 'negative time preferences', inflation forces people into risky investment behavior, which is basically regressive wealth redistribution. And then we complain how the rich get richer and the poor get poorer, and blame it on capitalism.
Aren't we learning in today's environment where prices of many things are going down (or with recent Japan as an example), that deflation isn't necessarily bad? In the past it is associated with recessions, but it may be a side effect of the recession or depression, or an over-adjustment by governments trying to reign in inflation.
I'm no economist, but it seems like a lot of things (most, by dollar amount) I buy are simply not things I could feasibly defer for long. Food and rent (shelter) are the obvious examples by necessity, but also plenty of discretionary spending is obviously time-sensitive. I want to see a movie now, go skiing now, fly home for the holidays now, etc. It's unlikely that deflation stop me from making these purchases, unless it was some guaranteed short-term high-percentage deflation.
It doesn't take a big change of behavior if there are a lot of people doing it. If everyone reduced spending by just a couple of percent it would radically change the economy and growth forecasts (we'd be in a recession). Lowered growth forecasts would then incentivize savings, further pushing down future growth. There is no Bitcoin Fed that could cut rates and incentivize investment, a Bitcoin dominated world in recession would be a dire place to be.
It is not so much that it stops people from spending - it is that it makes the real interest rate high relative to the nominal and so discourages borrowing.
Actually with negative interest rates proving possible (almost nobody thought they were a few years ago) if you had a deflationary currency you could always use negative interest rates to control demand. I am sure some smart economist has looked into this.
When the real interest rate is high, business retained earnings are more valuable. Thus, economic power is transferred from lending institutions to profitable corporations. Who do you think does a better job investing?
Well the theory of a bank is to act as an efficient mechanism to transfer capital from businesses and consumers with excess capital to those with a need for more capital. Of course in practice banks have got pretty good at capturing almost all the value out of this process.
Business should not really be in the business of retaining earnings. If it was not for tax reasons it would be best to return any excess funds to the shareholders and raise new capital when needed.
