I know the the correct, rational answer to this question: "I won't buy it today, or ever, because it will always be cheaper the next day." (And then the deflationary spiral begins!)

But if this is really true, why has anyone bought a Playstation 4 or Xbox One? They will undoubtedly be cheaper in two or three or ten years. Well, consumers might be totally irrational; what about firms? Why has any company in history ever bought a computer when the price of computing power has been falling rapidly and (mostly) predictably for fifty years?

I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts?

* Buy it now for $300 and play it for 10 years

* Buy it in ten years for $30 and play it then

(I have no idea how much an Xbox actually costs.)

So the question is whether that $270 is worth those ten years of playing it. A lot goes into that: what interesting things could I do with $270? How about in 10 years? How much do I want to play the games available for Xbox? Won't all my friends want to come over and play with me? Etc. Buying now might be perfectly rational, depending on your utility function.

"I won't buy it today because it will be cheaper tomorrow" is an argument on the margins. That's why temporary bouts of deflation don't cause everyone to starve to death because they keep putting off buying food.

But those margins do matter a great deal! There's some set of stuff that I really am going to wait on, because I only kinda want them now. There's certainly a discount rate for the Xbox that could cause all but the hardest-core fan to wait. So the deflation spiral doesn't take much to get started.

I'm not saying humans are rational (though I will argue that corporations do better here), only that the Xbox One example doesn't prove they're not, and that it's still consistent with the deflation spiral concept.

You also mention that this limited ability to defer purchases in the face of deflation is what makes short bouts of deflation not catastrophic -- it is somewhat difficult to get the deflationary spiral going if you can't actually wait to purchase things.

Given all this, the interesting question to me is, how much deflation does it take to actually cause a deflationary spiral? The answer is likely complicated, given that it depends on the specific utility functions for each consumer of all the goods and services that they consume.

Empirically, we seem to be able to cope with a decent amount of deflation, at least when it is limited to certain goods, like video game consoles, computing power, other manufactured goods, etc. (In some cases, even over very long timespans.)

One specific observation here is that short-lived deflations may not cause much behavior change because everyone expects them to be short lived. And changing your behavior is hard work, and your standard of living is sticky; you don't adapt right way, even if you're a business. Easier to just ride it out. But as the deflation period drags on, that consumption floor starts to fall (everything here is mutable!) as you get acclimated to the new normal. Since consumer confidence actually lags the other economic metrics a bit, an economy has a bit of time to pop out of deflation before the spiral really sets in. On the other hand, it makes it worse when it does.

It's also important to look at context: in that empirical evidence, we should note that the central banks were fighting deflation as hard as they could withe somewhat limited tools they had, so it isn't a spiral in a vacuum. Even then, Japan lost an entire decade of economic progress to deflation.

On specific items like video games consoles and computing power, I'd guess it's some combination of a) the utility of the items actually being quite compelling at their launch prices and b) a trick of psychology: in 10 years, there will be new, better video games and you'll want those instead, so you don't even really consider buying it later. (b) is irrational, because the console you're buying now is either worth it or not now; you don't actually have to buy it later at all. But it strikes me as very human. I think public has largely just accepted the premise the technology costs a certain amount; it just looks forward to having new features that fall into its locked-in price range.

On the other hand, one way to think about the technology stuff is that perhaps it really has held back a lot of the industry. For example, perhaps the price of the Xbox is artificially low at launch time because otherwise everyone would just wait for it to come down anyway; it's competing with its future self. The thought experiment is to ask how different purchasing decisions would be if an industry-wide announcement came out saying, "Moore's law is over. This is as good as computers get. They're going to cost X and do Y for the foreseeable future." Because I suspect a lot of people do put off technology purchases, waiting for everything to get better and cheaper. The complement of early adoption.

I should caveat that this is basically all speculation on my part; I don't actually know anything about any of this stuff.

The problem is that the economic theories often cited by Bitcoin supporters presume certain fanciful behaviors.

For example, in economic-theorist world, a frictionless spherical perfectly-informed perfectly-rational actor does not buy a six-pack of beer. Instead, the actor makes decisions:

* I will buy one beer at this unit price. Will I buy two?

* I will buy two beers at this unit price. Will I buy three?

* I will buy three beers at this unit price. Will I buy four?

* I will buy four beers at this unit price. Will I buy five?

* I will buy five beers at this unit price. Will I buy six?

* I will buy six beers at this unit price. Will I buy seven?

* I will not buy seven beers at this unit price.

* Therefore I will buy six beers.

I've long assumed that all the people who actually make decisions in this way are locked up in the laboratories of mad economists, who observe their behaviors in the way a biologist might observe a terrarium.

I think you haven't really looked into deflation in detail, quite frankly.