Cryptocurrencies like Bitcoin, that have fixed supplies, are deflationary by the format they create their native tokens in and offer some unique insights into the dynamics of deflation versus inflation.
Inflationary, government-issued currencies have dominated the global financial system in recent history, but that was not always the case, and its implications are important to recognize.
The History and Perception of Deflation
Deflation is generally defined as the general decline in the price of goods and services when the inflation rate reaches a negative value. While inflation decreases the value of a currency over time, deflation increases it due to having a fixed supply, which creates a form of scarcity for the money.
Deflation can either refer to the general decline in goods in services, but it distinctly can also apply to the increased purchasing power of a currency, for instance, the US Dollar. Historically, the notion of deflation in the modern financial system has been very polarizing. On the one hand, concepts such as the Friedman Rule — while not actively promoting consistent deflation — argue that limited deflation can mitigate against inflation and help maintain currency as a store of value over time. On the other hand, many economists argue that deflation is dangerous because it increases the value of debt. Increasing debt over time puts an enormous strain on individuals with debt and is an accelerant in times of recession that aggravates a downwards deflationary spiral.