Something I've been wondering about Bitcoin: If Bitcoin is going to be used as a currency, you'll need to be able to get loans, short term like a credit card and long term like a mortgage. But isn't taking a loan in a deflationary currency very risky? Kinda like short selling, possible to lose/be in debt an infinite amount of money?
Assuming Bitcoin becomes widespread, how do you convince people to take a salary that goes down every year? It's going to take a lot of re-education -- a completely different way of looking at money.
A loan could be delivered and repaid in Bitcoin... but have the calculation of its interest/principal be in some other unit.
An example is the Chilean "Unidad de Fomento", which does not circulate, and varies against the peso which does circulate. But the Unidad de Fomento is used for loan terms.
> If Bitcoin is going to be used as a currency, you'll need to be able to get loans, short term like a credit card and long term like a mortgage. But isn't taking a loan in a deflationary currency very risky? Kinda like short selling, possible to lose/be in debt an infinite amount of money?
No, the amount of money is fixed by the terms of the loan.
The potential value might be unbounded (but any currency can be deflationary, even those that are actively managed to avoid deflation, so that's not entirely a unique risk.)
The real issue with a designed-to-be-deflationary currency is that the rate of deflation puts an effective lower bound on interest rates, which means there becomes no economic sense to lending money below a certain interest rate. If such a currency becomes dominant with more than very mild deflation, it could have a serious negative effect on the availability of credit.
To be a bitcoin believer, its not necessary to think it will displace fiat. Bitcoin is deflationary like gold, so it shouldn't be much different then the gold commodity market or returning to a gold standard. For most of the united States growth and prosperity, it was on the gold standard.
Most people are not expecting Bitcoin to completely replace any government-issued currencies. If you take a job with remuneration in Bitcoin it will likely be a certain dollar amount worth of BTC rather than a certain amount of BTC.
This isn't specific to Bitcoin, although Bitcoin prompted the question. For a non-superficial answer, you'd want to read papers by Austrian economists.
Well. Assuming an efficient market, and given equal levels of price stability: taking a loan in a deflationary currency should not be more any more risky than taking a loan in an inflationary currency. Nor should the real price substantially differ.
Of course, psychological perceptions are a trickier matter, which is why we hear about "sticky wages"...
Assuming Bitcoin becomes widespread, how do you convince people to take a salary that goes down every year? It's going to take a lot of re-education -- a completely different way of looking at money.