Economist Robert Murphy Explains Why Deflation is Not a Problem for Bitcoin

By Kyle Torpey Aug 13, 2015 8:00 AM EST

Robert Murphy Bitcoin

In his latest appearance at the Texas Bitcoin Conference in Austin, Texas, Economist Robert Murphy attempted to debunk a few arguments that are generally made against bitcoin by various economists. Murphy comes from the Austrian school of economic thought, so it should be no surprise to find that he is at least somewhat interested in what Bitcoin has to offer the world. In his talk, which was titled “Mises Theory of Money, Bitcoin, and Saving the Economy Explained in 10 Minutes,” Murphy was able to illustrate the reasons why some Austrian economists are fascinated by bitcoin.

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Falling Prices Don’t Cause a Bad Economy, It’s the Opposite

The first myth that Murphy wanted to hit was deflation. As many know, bitcoin is inherently deflationary as a currency due to its hard cap at 21 million — or at least it will be deflationary when that cap is finally hit (the current inflation rate is roughly 9%). Most economists, such as Paul Krugman, find deflation to be a horrible thing, which is why they do not think bitcoin could work well as a currency. Murphy made the point that economists who think this way may have it all backwards:

“Part of where this fear of deflation comes from is, historically, it’s associated with very bad economies. So, during the Great Depression of the 30s, there were falling prices. And there are other periods where prices fell when things were bad, but I would argue that the causality was the other way around. Partly what was going on there was people were concerned because the economy was so terrible. And, so what do you do when you’re afraid? You don’t want to invest in companies and things like that. You rush to liquidity. You rush to hard money. That’s why you often see in periods of panic people will rush to the money, so you see prices of all other things quoted in money fall. So, it’s not that the falling prices caused the bad economy. It’s the other way around.”

Prosperity Can Exist with Falling Prices

Murphy went on to point out that there have also been periods in history where consumers prices have fallen during times of prosperity. Perhaps the most often-cited example here — at least from the Austrian perspective — would be the period in world history that is usually referred to as the Long Depression. Although prices fell during these years, other measurements of economic activity seemed to be moving in the right direction. A.E. Musson explained this in his book, The Great Depression in Britain, 1873-1896: a Reappraisal:

“Prices certainly fell, but almost every other index of economic activity – output of coal and pig iron, tonnage of ships built, consumption of raw wool and cotton, import and export figures, shipping entries and clearances, railway freight clearances, joint-stock company formations, trading profits, consumption per head of wheat, meat, tea, beer, and tobacco – all of these showed an upward trend.”

Of course, whether or not deflation is a net good for the entire economy does not matter when it comes to the adoption of bitcoin as a currency. If one currency is deflationary and another currency is inflationary, which one would the general public rather store over the long term? Obviously, individuals will choose the one that rises in value over time. Even if many economists are right in that bitcoin’s deflationary nature is “evil,” it won’t necessarily stop people from choosing it over other available options.

Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, RT’s Keiser Report, and many other media outlets. You can follow @kyletorpey on Twitter.

Facebook Comments

  • Tomer Tzadok

    Hahah. Look at Bitcoin now Vs 1 Year ago. Heck. Look at Bitcoin now vs 5 years ago!

  • saraha180

    It’s worth pointing out that this guy is a believer in intelligent design who believes he has disproved the Theory of Evolution. He went on record insisting that the US CPI inflation rate would be more than 20% by 2013 and that the US Dollar would be abandoned worldwide by 2017.

    He’s still running around the world talking about how all the mainstream economists are wrong about everything, but his track record here is pretty poor.

  • madtechnician

    The game will continue until the compounding interest burden is so great that the interest can no longer be paid. They reduce Interest Rates to try to reduce that burden , next move rates will go negative.

  • wonky tonky

    i think thats just a side effect.. mostly they want inflation to boost economy which it always does for a little while.. but then it starts to fail.; and then they print more money again.. repeat… it also makes their debts go down by inflating…. not sure if this will ever collaps.; it sounds logical but it might not happen.. .; we could be looking at 1million dollar bills in 20 years and dont realy think about it .. and the game continues

  • madtechnician

    Inflation is a Stealth Tax.

  • madtechnician

    You cannot have an infinite money supply on a planet with finite resources. It’s mathematically impossible. Once the Compounding Interest Burden of fiat money loaned into existence (of which atleast 97% is) becomes too high then it begins to collapse in on itself. This process started in 2008. The process will hit the weakest economies first ie Greece. The past gold standard saw economic stability for 200 years.

  • chadananda

    It’s all about banking really. Banks hate deflation because it rewards thrift and penalizes debt-holding. Monetary inflation, on the other hand encourages borrowing and penalizes saving. The 20th century was an experiment in using artificially cheap financing and monetary inflation to replace capital with credit and move banks to the center of all economic activity. Contrast that with the 19th century during which business loans were mostly short-term and transactional.

    Since capital was more important back then, even the common worker could made decent income from thrift, savings and investment. That is why social mobility was so much greater under 19th century capital-based capitalism. Even the so-called robber-barons mostly started out poor.

  • The reason is simple. They want to tax your savings via inflation. 😉

  • Anon Wibble

    Yes, imagine the value of your savings don’t go down but go up!

    For some reason, people are seriously arguing that a deflationary currency is a bad thing!

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