Bitcoin Forum

The problem: suppose all global transactions are done using bitcoins. Then the value of a bitcoin should grow at the rate of GWP. This means that instead of investing in the stock market, I can just hold bitcoins and expect similar growth. I get the advantages of: liquidity, no fees, and maybe no taxes on gains. The more people do this, the less resources are invested in productive endeavors, and the lower GWP is. Unfortunately, it's in any individual's interest to hold bitcoins rather than invest them in an index fund. Maybe as a result GWP grows at 2% instead of 4%, and the world is worse off.

One might argue that the value of bitcoins would be bid up so that the expected rate of return would be closer to other extremely safe assets. Suppose at year t, each bitcoin is bid up to $X. Then at year t+1 bitcoins have gained less value than a share of GWP, as expected. The total value held in bitcoins has decreased in relation to GWP. But if rational people were OK with this new ratio of bitcoin price to GWP, why did they bid it up higher than this in the first place? And shouldn't that same reason apply at t+1, causing them to bid up the price again so that bitcoins do in fact grow in value at the rate of GWP?

NOTE: I am not claiming that individuals will not spend enough bitcoins. My argument is only about what happens to bitcoins that a person decides to save/invest.

population of the planet is increasing and resources are limited. I would worry more about this instead of what you are asking, especially that bitcoin to become worldwide currency is a matter of many years which means we could not live long enough to experience this.

actually if bitcoin is used by everyone we would see no growth at all. The world GDP would be forever no bigger than 21 million BTC, which would mean no wealth can be produced anymore and everytime you try to do some work some magic force will forbid you to do it because simply no wealth can be ever produced anymore

you would see in newspapers "china gdp decrease 0.1%, usa 0.3% - we are in the worst crisis after 1929 and 2008 combined"

hehehehe

the only thing that grows endless is cancer.

Bitcoin is in long term deflationary and that means people will tend to hoard it and not spend it. And that is bad for the economy.

It depends. I would argue that even if people hoard 90% of their bitcoin holding until a large enough percentage of the world adopts it to increase the velocity and stabilize the price, if bitcoin enables countries without banking infrastructure to compete globally; it would actually increase economic growth. In other words; Bitcoin the enabler.

I may hold more BTC than I spend, but you bet your ass if bitcoin enables a farmer in Africa to sell me cheaper goods than I can find at home, I will spend bitcoin to import it.

Exactly!

You could have said the exact same thing at any point in human history, yet we continue to get richer and richer. Don't worry about it.


I don't think personal hoarding is an issue for the following reason. Suppose I am thinking of buying a jacket from you for 1 BTC. But I think the price of BTC will rise in the future, so I have an impulse to hold onto it. The solution is simple: I decide I'm willing to pay 0.5 BTC for the jacket, to make up for the expected rise in BTC value. There is always some price at which people will spend their BTC. Think about if someone offered you a new Ferarri for 1 Satoshi. Even if you're very bullish on Bitcoin, you'd do it immediately. Spending BTC will only not happen if people fundamentally disagree about the value of BTC.


I agree that making transactions easier in the 3rd world will tend to increase GWP, all else being equal. But it would still be the case that in the long term Bitcoin would be worse for the economy than an alternative concurrency (probably based on Bitcoin) which was not deflationary.

Bad news guys: I emailed Scott Sumner about this. For anyone who doesn't follow economics, Scott has been the one of the most influential economists in the world over the past several years. His thought was that "Your analysis sounds reasonably good" (referring to the exact analysis at the top of this post). I was hoping he'd find a problem with my reasoning, but now it's looking more likely that Bitcoin would be fairly destructive if it ever became the main world currency.

IMO there is a big opportunity to come up with a cryptocurrency similar to Bitcoin (maybe built on top of Bitcoin) which solves this problem.

traditional fiat only made rich richer , no economy growth  ;D

Yeah but its almost flat line because of the inflation that they did. $1,000 way back in 1920 right now would be $100,000 worth. So you can use the graph for paper, but what sucks the cash are the huge corporations having the proportion of the entire money pie a chunk bigger each year.

What if we didn't need to keep growing but rather, become more efficient and start cutting costs?

I hope so! "Economic growth" is a distracting and distorting metric that says nothing of the health of society nor its environment. In fact, the greater economic growth, the worse off the world is, because the system rewards inefficiency, overconsumption and severe deprivation and inequality. Bitcoin seems to discourage frivolous spending and since it's immune to inflation, can't encourage or create world economy destroying bubbles.

$1000 in 1920 has the buying power of $11,707 today. http://data.bls.gov/cgi-bin/cpicalc.pl

If you invested $1000 in the stock market in 1920, it would be worth $130,412. Even if you think the government's inflation stats are not accurate, there's no way that inflation has been anywhere close to stock market returns. http://stockcharts.com/freecharts/historical/djia1900.html


Then we'd be poorer, would have to work more, and could do less of what we wanted to do. We would also be more diseased and unhealthy and would die earlier. No thanks.



Anyone have thoughts on ways to mitigate the issue mentioned in the original post?

Yep that sounds about right, pro-inflation economists and newspapers would be up in arms going "It's a disaster" meanwhile people will be able to afford houses for a couple of hundred Bitcoins and people would have to work less in order to afford what they want because the living standards would be so good since all the prices would be low. If you look at what we're trading in most like Electronics and Gold/Silver etc. you can already easily see the benefits, currently you can get a 1kg gold Bar for only 210BTC whereas with 'proper' money you need to have around £30,000 or so and then with electronics you could get a good computer easily for around 5BTC, in paper terms it would cost hundreds so that's taking out a big chunk of your cash but in Bitcoin it's barely anything.

I can't wait to see when we stop using paper currency for pricing because then we can finally start seeing the proper affects of a deflationary economy.

It looks like you are confusing money with value. Money is just a unit of account. If everyone's amount of USD doubled or was cut in half tomorrow, it would make no difference.

A trend that I see here: people expect to become rich and basically get value just from holding bitcoin. With an inflationary currency, to get value you have to earn it -- you have to produce something. With a deflationary currency, you can get value by free riding on people who actually create things if you start out with a decent amount of money.

+1

Economic growth is a farce, we need a steady state economy where we live in balance with our surroundings. We only push for constant growth because governments have buried themselves so deep in debt that they need growth to be able to keep them and the entire system afloat. Very unhealthy situation and the sooner we get rid of that the better.

Wow, I continue to be amazed by all the Bitcoiners who don't like economic growth. I guess you did pick the right currency to discourage growth though, so props for that.

I am curious though, if growth is so bad, do you want to stay at the steady state of how we live in 2013? Or maybe go back to 1950? (No personal computers), or maybe 1450? What is the ideal amount of wealth for you guys?

I'm not really against growth if the growth is natural and not forced. Technology is the main thing that makes our lives better and easier and I'm sure we will continue to make advancements in that area even with bitcoin as a main currency. GDP growth right now is only making the banks and big corporations wealthier, not the middle class.

Development of new technologies is not the same as economic growth and it is not at all proven that one requires the other. Consequently you should avoid equating the two.

Since your understanding of steady state economics (organizing an economy to be stable or mildly fluctuating in size) seems to be lacking perhaps you should do some more research starting here before you write the idea off:

http://en.wikipedia.org/wiki/Steady_state_economics
http://steadystate.org/

Some basic principles for achieving a steady state economy are:

(1) Maintain the health of ecosystems and the life-support services they provide.
(2) Extract renewable resources like fish and timber at a rate no faster than they can be regenerated.
(3) Consume non-renewable resources like fossil fuels and minerals at a rate no faster than they can be replaced by the discovery of renewable substitutes.
(4) Deposit wastes in the environment at a rate no faster than they can be safely assimilated

Perpetual economic growth in an environment with limited/scarce resources stands at odds to these principles.

in your calculation's you should also include technologies which in not that distant future will allow us to send robots that will work for us, so we don't have to. This alone will change all currently known world order and our conceptions about economy growth with it.

That's absolute nonsense, when did I ever talk about money and value? Have you ever looked up a word in a dictionary before? Inflationary currencies are ridiculous, they don't benefit people for their work in the slightest, in fact, because inflationary currencies always push prices up higher and higher they actually force people to work more for less. Deflationary currencies are the opposite because the prices are so low it's easier to buy things and you can work less and still live comfortable.

Are you going to tell us now that having stupidly high mortgage payments and debt that you can never pay off is a good thing because they have something to work for? Fuck that, that's neo-keynesian logic, the sort that Ben Bernanke tries to use in order to get poor countries to do all their work for them. The problem with this logic is that eventually people are going to wake up and realise they're getting conned out of their money.

Robots are already used in manufacture process, I doubt about change of currently known world order

Achieving GDP growth "at any price" as many governments do it now is full insanity - it destroys ecology, depletes non-renewable fossils, makes capital owners richer and 99% people poorer. I would be extremely happy if/when Bitcoin will halt this growth. Technological progress will definitely win from the Bitcoin as reserve currency because corporations must offer revolutionary new products or services to motivate consumers spend their continuously appreciating Bitcoins.

The problem with this question is that nobody knows what the "economic growth" is.
If it is the increase of GDP, then it is manipulated by:
- value of currency
- the calculation of exports, imports and government spending
Basically, whatever the "economic growth" is - it is calculated by some government agency.
I would not trust it at all. Because they need to have GDP as high as possible to make
sure that interest rates on bonds stay low.

Perhaps, you really wanted to ask this:
Would widespread Bitcoin adoption reduce investments into new business?

My answer is "I don't know", but I am leaning towards "Yes".
BTC is what would be considered "hard money" in today's economy.
"Hard money" thinks twice before investing into anything.
After "widespread adoption" the "easy money" would be harder to come by.

What we want is maximizing wealth, that is we want to have lots of goods and services. The wants and needs are unlimited, but the resources are scarce. We want high productivity to make as much value as we can. Only each individual can decide what is valuable.

Saving defined: Keep some money (bitcoins) in reserve.
Investment defined: Buy capital goods with the intention to produce something for a profit.

The value of bitcoin is defined by supply and demand. Supply is predefined and inelastic. Demand is the individuals' wish to have a certain real value (measured in other goods) in reserve. All individual's demands are summed to get an overall demand. Therefore the most important parameter for bitcoin's value is the number of users.

GWP (GDP) is a made up number that does not say anything really. Look up how it is computed. It include lots of waste and wealth destruction.
Money has minimal use value, and the only effect on saving on the total economy is that the remaining money units appreciates in value. This is the same as saying that the saver refrains from consumption or investment, the others can consume or invest what the saver does not consume or invest. There should be no direct consequence for the total investment.
Correct, but it is not unfortunate. Saving is the precursor to any investment. It is not possible to invest before saving. Saving and investment does not have to be done by the same person.
No, others will consume or invest, see above
Didn't understand, except ditch this GWP concept.

Saving increases the value of each remaining bitcoin.
Investing, if succesful, increases the productivity for the benefit of everyone.

FTFU

it's not a problem but a feature.
Word Economy Grows, = Bitcoin's Purchasing power increases (price deflation)
World Economy Shrinks = Bitcoin's Purchasing power deceases (price inflation)

Result is:
Hold, invest in savings when the economy is growing - benefit by deferred consumption.
(no need for CB to raise interest rates to cool off)

Spend Savings or earnings - invest in new businesses when the economy is shrinking - prompt spending preserves your wealth by avoiding inflation.
(no need for CB to lower interest rates or QE)

The overall new benefit is inflation doesn't rob the poor, and Environmental exploitation is held in check by lust for greed or more.

Anyone investing in Bitcoin wouldn't want it any other way.

GWP grows at 2% or 4% is an arbitrary target, GWP is a measurement not a target and should be determined by the market and number of participants in the market. Continues GWP with an increase of 2% per year will consume the planet as it grows exponentially.

A lot of nonsense in this thread. Saved bitcoins only increase the purchasing power of bitcoins being spent/invested. Bitcoins can only gain in real value (assuming no changes to adoption) at the rate of global economic growth. Unless literally no bitcoins are being spent, they will gain real value at a rate less than the rate of return on investment.

Deflationary currency vs. a (predictable) inflationary one is simply immaterial with respect to real macro factors. If you disagree and think that eg. nobody will spend their bitcoin, think about how you would respond to this argument: "With an inflationary currency, the interest rate is going to be about equal to the sum of the inflation rate and the real interest rate. Why would anybody spend their money if they can just save it and collect a xx% return to buy more next year?"

The answer, of course, is that investment vs. consumption is a dynamic process. If more people want to consume, the real interest rate will be higher until there is an equilibrium.

Fully agree. Another point that is not often mentioned: Whenever you make a decision to purchase something, the new demand marginally increase the price of that something and everything like it. But at the same time, since you supply money, the value of the money marginally decreases. The reason is that a trade always is composed of two things, money and goods. You buy the thing and sell the money, the other party sells the thing and buys the money.

This thread is getting unfocused, so I'll only reply directly to people who make some attempt to address the argument in the OP.

To everyone else arguing against GWP as a measure of wealth, I suggest reading up on how it's calculated and how much disagreement there is among economists about GWP. To those saying only the rich are getting richer, the poor are getting poorer, I'll leave you guys with an image showing the poorest people in the world have seen their lives improve vastly over the past 40 years. This is the graph of extreme poverty over time from the wikipedia article on poverty.

http://upload.wikimedia.org/wikipedia/commons/2/2c/Extreme_poverty_1981%E2%80%932008.png


In another thread (https://bitcointalk.org/index.php?topic=322619.0), I suggest that the price of a bitcoin must obey this inequality:

(price of 1 BTC) >= [(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(fraction of bitcoins used in transactions)*(bitcoin velocity)]

Do you agree?

I agree with you that if people attempt to save half of the total bitcoins, the unsaved bitcoins will go up in value.  Are you sure they will go up 2x though? People will know that the people who are saving bitcoins could decide to re-introduce them into the market at any time, so I'd expect the remaining bitcoins to have less than 2x the value as if no one saved any bitcoins. If the remaining bitcoins did go up 2x in value, then any investments that those people make with the remaining bitcoins will have 2x the impact, and the command of resources being controlled by people needing investment would be the same as if everyone invested directly (although maybe there are some bad effects of investment decisions being concentrated into too few people).


Here is the puzzle though: Bob decides to save all his bitcoins in his basement. So the value of all other bitcoins adjusts upward. Bob's bitcoins grow in value if everyone else does something productive with the other bitcoins. After a few years, Bob sells all his bitcoins and makes a profit because the economy grew as a whole. The question is: what real value did Bob provide to society, which allowed him to capture this extra value which he did not have before? Bob is apparently being paid for not doing anything. Call what I just described Scenario A. We can imagine a situation of 0 inflation where Bob doesn't profit from holding onto money and doing nothing. After years of hoarding, Bob sells his bitcoins and made no profit. Call this Scenario B. Exactly the same amount of goods and services were produced in the non-Bob part of economy in both scenario A and B. In scenario A, Bob gets more command over resources, and everyone else (people who actually created wealth) gets slightly less. The rest of the world is basically paying Bob for not having spent his bitcoins. It seems like Bob is free riding on the productivity of others.

If Bob does nothing but sit and home and check the price of his bitcoins on Mt.Gox during all this time, then neither situation is better/worse for total wealth. But suppose in Scenario B, bob knows that his bitcoins are not gaining in value, so he goes out to produce something of value in his spare time so that he can support himself. In Scenario A, he knows his livings expenses will be paid by the appreciation in value of his bitcoins, so he doesn't create anything. Won't having a money supply like in scenario B result in more wealth in the world?

Btw, you've made me start thinking of the problem in a new way, thank you.


Can you explain this? What would make bitcoins grow at a rate less than the ROI on investment? Are you claiming above that the ROI on investment (on average I assume) is larger than the rate of GWP increase?


I have a strong intuition saying that this should be the case. I just haven't been able to find an error in my argument yet. I think Erdogan might have pointed me to the flaw though... gotta think about it more.

I think it's clear that from the POV of an individual, inflation/deflation makes no difference. Arguments that people won't spend money when there is deflation seem bad, because there will always be some price where the consumer will buy. That argument assumes that the seller values bitcoins less than the buyer.

I agree with you about the investment vs. consumption equilibrium. My concern is about the choice to "passively invest" via holding onto bitcoins, vs. actively invest by buying equity in companies or lending. I thought the passive investment strategy was free riding on the productivity of others and would lead to less productive behavior across the economy if lots of people did that, but after Erdogan's comments I have to think about it more.

I will comment only on "my" parts of this message.
No
I agree on this.
He forgoes immediate consumption or investment, allowing others to do that first. This is the reason he is awarded. He has a different time preference for his consumption.

When he finally decides to use his money, the opposite takes place, now he consumes, and the others will have to consume less. But remember, it is like he is getting out of the queue for resources and places himself at the tail of the queue.
Finally someone listens  :) I am not used to it!

You started the scenario at the wrong point in time. What did Bob do to acquire these bitcoin? Mining? Then he contributed to the network and was rewarded. Buying? Then he contributed to the overall bitcoin economy. Gift? Then someone else had to have acquired them and did the work/transactions necessary to acquire them. Offering product/service? Then he contributed to the economy in some way. Stealing? Then he contributed to the economy in a non-standard way and maybe spurred an increased sense of security awareness for others.

You miss the most fundamental fact about bitcoin. It cannot be acquired with zero effort.

Is it really? I realize that consumption/consumerism is good for business for the moment, but its not sustainable long term - especially when you throw population growth into the mix. Total collapse and/or destruction of our entire society is worse for the economy, perhaps a deflationary currency will encourage sustainability and discourage people from consuming for the sake of consuming and encourage them to consume when actually relevant and needed, while otherwise being more fiscally - and thus environmentally/socially - conservative.

Just a thought.

/\ this, can't be repeated enough,  once I got it my conventional view of the conflicting economic growth and environmental sustainability and economic prosperity changed and all aligned and Bitcoin became a solution not an unsustainable crazy economic experiment.

 

Only debt-based (= state based) economies grow. No debt - no growth. Or has anyone seen the selfsufficient, untaxed, stateless communities in the rain forests or in the arctic tundras growing rampant? Without debt, there is simply no need to grow (rampant).

Is your assertion based only on this eminent statistics, or do you have something else?

Just thinking about this in another context, prompted me to post here.

Would widespread Bitcoin adoption reduce global economic growth?

If growth is defined as more: then yes most defiantly Bitcoin will reduce global economic growth.

If growth is defined as better: then no Bitcoin will not reduce global economic growth.

Well said.  Unsustainable growth, low-quality growth, is a recipe for disaster.  Bitcoin is anti-fragility incarnate.

Well, it would be if it had a body.

Okay, it's the *avatar* of anti-fragility.

I've still been thinking about this issue now and then, though haven't satisfied myself that I've found the answer. I agree that when people save in normal circumstances, what you describe is the root of the reason for their reward in the form of interest. In the situation with Bitcoin, anyone with more than 10-100 bitcoin now will never have to work again if it really takes off. I suppose one could argue that they deserve this huge windfall because they supported the price in the early days by sending a signal to miners and other people that they should help Bitcoin along. It may also be true that the loss of productivity from everyone suddely rich due to their Bitcoin holdings would be more than made up for by greater payment efficiency in the global economy. I think the main issue really has nothing to do with deservedness though, so I'll drop that and get to the main issue:

It is true that when Bob saves his bitcoins, the value of everyone else's bitcoins rises. However if he does this, he is only helping people working on long term investment to the degree that they are already holding bitcoins. If Bob had invested his bitcoins in an index fund, then almost all of the direct benefit would be to those trying to increase our productive capabilities. So while the total benefit to the rest of the world at the moment might be the same in either case, it does seem like hoarding bitcoins will still lead to reduced investment, because it puts less resources in the hands of businesses in general.

One could also argue that in making all other consumers more wealthy (by hoarding Bitcoins), businessmen will have a greater incentive to create products and services which capture this wealth for themselves. It seems hard to analyze whether this will offset the effect in the previous paragraph. Anyone have thoughts on this?

I think you raise some good points. Bitcoin hoarders do send valuable signals and contribute to the growth of Bitcoin.

I disagree that theft is necessarily good for the economy. Sometimes it might be, but likely mostly it isn't. I also disagree with your last sentence, which is too absolute. Likely a lot of people will benefit much more from Bitcoin than any contribution they made to the world. It is possible to luck into Bitcoin. But like I said in my previous message, I think talking about whether early adopters deserve their future wealth is a side-issue. I mainly care about GWP. I'm curious to hear your thoughts on the issue I raised in my last post in this thread, about how Bitcoin will still discourage productive investment compared to a moderately inflationary currency, because of how the benefits of Bob's hoarding are distributed to the rest of society.

Humans will always have basic needs that require being met. In a monetary system, where money and profit are desired and promoted above all else, meeting those needs demands economic activity of some kind. Humans are also natural explorers and innovators, so there will always be people trying new things, sharing their ideas and inventions and pushing society toward new frontiers. Diminished investment will not greatly slow down human productivity, mainly because human productivity is no longer as productive as machine productivity, which is the driving force behind diminishing employment. Sooner than later, we will be forced to abandon the crippling and destructive idea of money in favor of a more enlightened resource based economy or destroy ourselves in the name of profit.

1) Bob may not be skilled enough to choose a fund. If he chooses poorly, he wastes the resources of society on failing ventures. Better for him to just save unless he knows what he's doing, letting the rest of society have access to those resources he would otherwise be using.

2) Or he may just leave the investing to others who are better at it; stock brokers or fund managers. But that again assumes he knows how to pick a good fund manager or stock broker.

So you're probably right that merely saving isn't the best thing he could theoretically do with the money, from society's point of view, but that's only true if we arbitrarily specify that he has above-average skill at investing. But then by definition half the rest of society has below-average skill at investing, meaning it was already true by hypothesis that saving is not the best course of action. That's a circular argument.

Therefore all we can say is that if Bob has any skill at investing he should invest, and if not he should save, leaving investment and resource allocation to everyone else. Or else something in between, like leaving his money for a broker to allocate.

In any case, Bitcoin presents absolutely no problem. Instead, through its disruption of just about every bastion of the establishment, it will make civilization many orders of magnitude better off by any reasonable standard, with extra perks on top of for the prescient ones. So relax, pull up of a deck chair and a margarita, and enjoy the cryptocurrency revolution ;D

Just because money is highly valued doesn't mean it's desired above all else. Would you give someone $1000 in exchange for them lopping off one of your limbs or taking your daughter? A million dollars?

There's nothing evil about money. Money just means an indirect medium of exchange. A bucket of oysters for your cow, so that you can get bread from a baker that wants oysters but doesn't want your cow (or doesn't want your whole cow). Those oysters are not evil.

Unless you want to make the argument that trade itself is evil or harmful.

Money distorts reality and the values a society holds. Even Eddie Izzard can tell you that.

Some people do. Most of them somewhere in between.


Rico

I think you are mixing up what the best course of action is for the individual, and for society. Even if an individual trying to invest isn't the best way to maximize that individual's wealth, it can still be beneficial due to positive the externalities of more experimentation being encouraged.

Also if we look at the bulk of the money invested in the world, probably very little of it is invested in individual stocks by unsophisticated people. I imagine that at least 80% is under the management of someone relatively sophisticated. If we believe that markets are mostly efficient, this shouldn't really matter though. No matter what an unsophisticated person invests in in an efficient market, they'll be expected to get close to the return of the overall market.


So you think a world with bitcoin is at least 100x better off than one without? You're claiming GWP will be 100x higher with Bitcoin than without? By when?

I agree that Bitcoin will make transactions more frictionless and efficient and has lots of value. The question is whether a version of Bitcoin where the bitcoin supply always increases at at least 3% per year would lead to more prosperity than Bitcoin as it exists now, due to this effect on investment.

Growth is not needed with bitcoin.
Its only needed to keep the fed/ecb happy , bitcoin will promote modesty in use of resources  and that wath the earth needs.

eco growth is none of people's business , only gov like damn growth

Consumerism is a byproduct primarily of technological progress, not "inflation". A deflationary side-currency will do nothing to stop this because it will be discarded if it gets in the way. Western countries benefit heavily off of the USD/EUR reserve status and take advantage of weaker economic markets (outsourcing). As bitcoin will do absolutely squat to level that playing field, it will do nothing to spur environmental conservation. When and if that playing field does become more level, it becomes a matter of directing resource consumption into knowledge consumption - education.


I would suggest adding thoughts on the business cycle to your argument. A whole lot of human suffering is caused by the machinations of money. It is easy to point the finger at the fed or governments in fiat, and it is easy to pretend that there won't be a BitStreet in the bitcoin economy, but that is foolhardy.

The thought checks out, Etlase2 rebuttal is the textbook economic view that got us here today. More critical thought is how we progress, more of the same is potentially devastating.

I think this is akin to the fallacy of the broken window.   Is it good to break the Window so we create jobs and give people an opportunity to work? 

I believe we agree that GDP measures spending in the system.   In a community if one day somehow all of the Windows get broken due to hail suddenly people would buy many Windows.  The spending of the community would go up, but that community wouldn't be better off. 

Some metrics for convenience lack common sense.  You must take them with a grain of salt.

There is a textbook economic response to the bullshit fabricated on this message board to make bitcoin's terrible economic principles sound more valid?

If there is anything to take away from that post, it is that bitcoin will have *zero* effect on consumerism. The consumers simply won't use it in favor of something else (likely fiat) that does not impede it.

I'd like to first completely understand the simpler case. I don't think anyone has yet provided a strong argument that Bitcoin wouldn't make the world poorer if it was the main global currency. There have been some hints at some possible arguments. Unless you think the business cycle is a key component of the argument either for or against?


GDP is supposed to measure production, which is easiest to measure by looking at spending. If you look at my examples where Bitcoin makes the world poorer, it does so by causing less goods to be produced, meaning we are genuinely poorer. It's not just some accounting trick.

If want to borrow 100 BTC from you and I can guarantee you a 1% real return which comes from real value produced, you won't make that loan because you can get a 3% real return by just holding bitcoin, and the world will have to do without that 1% of genuine value that I wanted to produce.

I think you already understand the simpler case.


The hints are inane. "I will save until I have enough, then I will consume which is an economic net zero [presuming investment of non-saved real value increases as a result of this saving], or I will invest which is usually a personal net negative." One silly side pretends that this saving will cause economic output to respond more sensibly, while the other side says economic output remains relatively unchanged because of the increasing value of the rest of the currency. These are obviously at odds. If bitcoin could somehow be the one world currency, then there is possibly an argument to be made for the former (but the counter is that it is silly that idle money earns the productivity of others). However, because of the nature of it being deflationary, it may have the exact opposite effect where all investment is high-risk and highly destructive to provide the quickest profit turnaround, regardless of other costs, and which applies to both arguments.


No, but it is the next step, I think. A lot of bitcoinomists tend to borrow heavily from Austrian ideology where the key to a happy, healthy economy is one where the business cycle's effects on productivity are as low as possible. Although these arguments haven't really started yet in this thread, they are usually the next step as to how bitcoin solves problem X after a "simple" analysis such as yours seems to show quite the flaw.


Implied but not stated that you are actually losing nominal value by investing. Quite the conundrum.

Anyone who states anything about time preferences in relation to saving-but-not-investing bitcoins is quite clearly outside of any school of Austrian economic thought as saving is implied to mean investing. Hayek even wrote some very interesting stuff on what it actually means when saving means saving-but-not-investing. You may find this thread interesting: https://bitcointalk.org/index.php?topic=110708.0

I think I've 80% convinced myself that bitcoin as the global currency would lead to less investment, but I am still not certain that there could be no scheme or workaround that would cause the idle resources in this scenario to be as utilized in a situation with mildly inflationary currency. Maybe something where private institutions use 'colored coins' to say "this bitcoin represents my billion dollar basket of commodities", then these colored coins are used to invest in things with lower expected ROI. Still haven't worked it through though.

I also haven't completely convinced myself that the "economic output remains relatively unchanged because of the increasing value of the rest of the currency" argument is wrong. Any bitcoins that companies were holding grows in value as more people save. Any bitcoins that the remaining people do invest in companies/loans grows in value. The purchasing power of consumers grows in value, meaning that more command of resources is 'up for grabs' that businesses can try to capture. I'm not sure how strong these effects are, and how much of the reduction in direct investment will be canceled out by these factors.



Looks interesting! I will add it to my huge reading list on this topic, and post again if it spawns any new thoughts. Thanks.

I made some realizations tonight that changed my thinking on this:

Premise: bitcoins will grow in value roughly as fast as GWP does. So people will be able to expect around a 3% real rate of return from hoarding bitcoins.

Claim #1: No one will loan bitcoins for less than a 3% real rate, because they could always just hold the bitcoins instead.

I think this is false now. Banks today face a similar decision. Any bank could choose to invest all its money in a global index fund, which would perform as well as hoarding bitcoins would. Banks don't do this, because there is a desire for safer, more stable investments. People's opportunity cost is roughly the same now as it would be when making loans with bitcoin, because they always have the option to invest in global index funds now. Loans could be made relative to an inflation/deflation index to reduce risk from bitcoin price fluctuation.

Fun fact: this is similar to why "people won't spend bitcoin because it's deflating" is false. People face the exact same decision today, when they consider buying anything. They have the alternative right now to put the money into a global index fund instead and get an expected 3% real return, but they generally don't.

Claim #2: People who otherwise would have invested in a global index fund will still hoard bitcoins though, to preserve their liquidity, their anonymity, and to avoid taxes that would be levied on gains from stocks.

This still seems likely to me. I've still got to think through the "increasing the value of everyone else's bitcoins is just as good as investing them" argument.

As long as you keep bitcoin for years instead of weeks, it is not a problem.  Which global index fund's have gone up by factors of ten in recent history?

In the world of bitcoins, a 1% real rate = 4% assuming the value of bitcoins is expanding at 3%.

The fallacy of economic growth in current environment is that credit speculation into useless assets counts as economic growth. See china as example.

If bob does nothing and the world is becoming more productive by 3%, why shouldn't he enjoy the benefits of a better world?

That wouldn't stop Jane from using her bitcoins to invest and generating a return of 1% because she would be moving forward at a rate of 4%.

In any event, bitcoins will complement fiat for the foreseeable future. I see people earning fiat, paying tax in fiat, paying expenses and wages in fiat but investing some of their savings in deflationary bitcoins.

I see bitcoins as being less wasteful than the inflationary credit/speculation asset price driven economy we have today. For example, rich people can earn more in one hour by investing in empty property than a fast food worker earns in a whole day of hard work.

Thank you for the common-sense.

I'll try to put it another way for OP:

The only thing that influences the rate of growth of an economy is the relative proportion of investment vs. consumption. There's no reason to think that having a background deflation of e.g. 2% (equal to GWP growth) would change this proportion.

Sure, it might change the value of cash balances that people hold, but that will just affect general price levels.

In essence, you just need to keep in mind that the real rate of return is the only thing that matters. Inflation and deflation are just background.

Short answer: no.

Long answer: World economic growth is caused by reduction of cost and discovery of resources. Endless growth is completely possible, but at a certain point that growth becomes so small it's statistically 0. That point is where we are teleporting and instantly communicating, in a disease-free utopia where everyone lives forever. No further transaction needs to take place beyond that point, and no additional transaction would grow the economy. Bitcoin's transaction ability alone has the potential to greatly improve economic growth by reducing the cost that the entire currency industry incurs to keep running.

Now, individual country's wealth is a completely different story, since there are always more resources on the other side of the fence, unlike the earth, which has to eventually extent to another planet to discover more.