The Myth Of The Deflationary Spiral

spiral stairs

“Legal tender money” is simply a euphemism for the money the state forces its citizens to use. The permanent state of inflation to which we have been habituated (courtesy of the government) is nothing but an unnecessary evil, and as such cannot be sustained without resorting to violence; this i.e. nobody would welcome money that tends to depreciate, eroding the purchasing power and the people’s ability to save.

And what solution to this immemorial problem can provide Bitcoin? (Please take note of the word “offer”, as in the case of Bitcoin people are free to accept or reject the solutions it brings and they cannot be imposed by the powers that be). Something pretty simple and straightforward actually: a clear no-nonsense limit to printing money. Like it or not – there will never be issued more than 21 million bitcoins.

Just as a fish cannot imagine a world beyond its natural habitat of water, most of us would probably struggle to imagine a world without inflation; one where we wouldn’t have to spend or invest our money just to avoid “natural” depreciation, but, instead, would be encouraged to spend on products and services we really need.

Owning to a mixture of early indoctrination and common life-related inertia, most of us would probably find it hard to envision an economic system based on a “deflationary currency” that rewards us for saving and spending rationally, thus promoting the ability of general public to invest in longer term projects; projects that will benefit even those lacking inclination to save. For the same reasons, some wouldn’t imagine an economic system based on a currency that no government can gain control over and excessively borrow against, thanks to which the Business cycle would be bound to become but a relic of the past and render expensive and costly state projects (e.g. war) unfeasible.

And the deflationary spiral? … It’s a myth – just like the unicorn, or more precisely, the boogieman. What some economists call “deflationary spiral” (systemic and prolonged fall in prices) actually takes place during the stage of a necessary reallocation of resources in the economy (if the State does not interfere); a process that usually happens after a major financial collapse. What about the financial collapses then?  What causes them? … The reason for most, if not all, financial crisis is the widespread malinvestment and misallocation of capital induced by years of unhealthy credit inflation. In other words, the deflationary spiral is indeed a spiral, but a natural (so long as the government meddling in the economy remains the rule rather than the exception) and self-limiting phenomenon that repairs the effects of state intervention (see “Austrian business cycle theory“).

Okay, but … who would spend money the value of which steadily increases with the passage of time, rather than hoard it indefinitely? Answer: anyone who sees the potential purchase as having the higher value than the money to-be-spent itself. Trust me on this, people have pretty much the same needs and desires regardless of the monetary system they live in and these have to be satisfied.

A good example of this comes from the IT industry: you noticed people are still buying computers and laptops today, knowing that, in the very near future, they are bound to have more memory and longer battery life, and will be faster or more user-friendly… All that for the same or lower price.

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