Bitcoin Forum

Coming from a financia and economics background, I'm always hit with this same question. I'm playing devils advocate here, and would like to see other responses

My big question on Bitcoin is: What happens after 21 million?

According to the quantity theory, zero growth of the money supply (here, the Bitcoin supply) implies that prices will rise if velocity grows at a faster rate than the Bitcoin economy. Similarly, prices will fall if velocity grows more slowly than the Bitcoin economy. But why would velocity grow? In the Bitcoin economy, velocity may rise as economic actors become more active in the Bitcoin economy and engage in more digital transactions. However, in traditional currencies, velocity tends to be fairly constant, so it stands to reason that growth of Bitcoin velocity will slow as the Bitcoin economy matures.

Then, when the upper bound of 21 million is reached, zero growth of the Bitcoin supply coupled with constant velocity implies that prices in the Bitcoin economy will have to fall at the same rate that the Bitcoin economy grows. But how will prices fall? In traditional currencies however, we observe "price stickiness." Why wouldn't we observe the same in the Bitcoin economy?

If prices don't fall, then constant money supply and constant velocity would bring the Bitcoin economy to a halt. If prices do fall, then the deflation may induce economic actors to "hold out for a better price," slowing the pace of spending.

In practice, we would observe some combination of the two. But regardless of how you conceptualize the collapse, it's important to emphasize that holding the money supply constant would push the Bitcoin economy into a death spiral. As every economic actor tries to save more (e.g. by holding out for the better price), total spending in the Bitcoin economy would slow. Bitcoin interest rates would skyrocket because no monetary authority can step in to provide liquidity. Then -- given the equality of spending and income (what is spending for me is income for you and vice versa) -- the lower income would further discourage economic actors from spending, thus deepening the slump.

In my view, such a collapse would occur despite the fact that participants in the Bitcoin economy are well-aware of the upper bound of 21 million. Even though participants expect deflation, they will still be individually unwilling to lend at negative nominal interest rates. "Why should I lend you 100 BTC today, if you will only repay me 95 BTC tomorrow?" That's the rational position of each individual economic actor, but it's collectively ruinous to the economy.

The granularity of the currency does not change the basic math. The fact that infinite deflation is technically feasible because "eight bits in a byte" takes the number of units all the way to 2.1 quadrillion does not change the fact that the total supply of Bitcoins will have stopped growing.

And that halt will cause a deflation death spiral.

UNLESS the Bitcoin economy avoids that spiral by becoming a freely floating, highly liquid, alternative means of payment for all electronically purchased goods and services. In such a scenario, the Bitcoin would appreciate over time, allowing it to serve as an investment vehicle.

Although I would like to fully understand this topic, Im afraid some of the first 2 paragraphs went over my head.  So if your reasoning already explains some of my questions, I apologize.

Why is this statement assumed to be true?

"As every economic actor tries to save more (e.g. by holding out for the better price), total spending in the Bitcoin economy would slow."

The way I look at it is, even if deflation was guaranteed, and I knew the the price of goods tomorrow would be less than the price of good today,  Im still going to buy those goods at some point, because the only other alternative is to hoard money until you die.  And the dead dont need money.

Also if you look to the technology industry you will find goods and services that are better and cheaper today than they were yesterday.  Following the deflationary death spiral logic, no one should ever buy PCs becasue they will be better and cheaper next year...

Gresham and Thier advise against flipping the yield curve with all those assumptions.  ;)

Yes, this is the "Big Question"... does an economy work without perpetual debasement of the money supply? In the way I have phrased it, it almost answers itself, doesn't it? Stated differently to further point out the absurdity of the notion, will human beings stop trading with each other if the means of exchange they use isn't made increasingly worthless over time? :)

The answer, of course, is that yes, humans will trade with each other even if their money does not get debased. In fact, I would argue that in a world in which the currency is NOT debased, we might observe much healthier economic activity.

Charlie's points are representative of most of the world's opinion of monetary economics. We learn economics in school, and schools teach us (invariably) that inflation should be "low and constant", and that if we observe "deflation" the world will, in fact, end! We've been taught extensively that no matter what happens, the worst thing for an economy is deflation. The mere utterance of the word sends children crying for the hills.

Yet, what if the economics taught in school is wrong? What if deflation is, in fact, not the end of the world? Is this possible? Would people continue to buy and sell goods if they know the nominal price of those goods is likely to fall in the future? I argue that yes, absolutely people will buy things. There is certainly a question of extent here - if my grocery bill will be 1% of the price tomorrow (a 99% discount from today), then I might actually go without eating for the day, and enjoy more food tomorrow. BUT, I will not wait to eat forever. And it is in this phenomenon which the scary demon of deflation is slain.

For just as I won't wait forever to eat food (even if prices are falling), neither will I wait forever for other things. I need a car, and a house, and clothes, and a million goods that I enjoy. If prices are falling, I'll make a judgement - should I buy now, or later? The argument of the Scary Deflationists is that people will continually make the judgement "later" and will halt their purchases indefinitely, sending the economy into Paul Krugman's favorite terrifying term, a "deflationary spiral". Yikes!  But upon just a bit of consideration, we know people will not halt their purchases forever. They will buy things, and consume things, and produce things. While the patterns of these behaviors may differ under and environment of inflation vs deflation, it cannot be true that trade simply stops under the latter.

In reality, what you would find is that people may spend and consume less than they would under inflation. This means they will necessarily save more. Inflation incentivizes people to save less, spend more. Deflation incentivizes people to save more, spend less. Why is it that economic text books (those found in public schools) argue in favor of the lower savings, and against the higher savings?

The reason tends to come from a misunderstanding of how economies work. Most people think that "consumption" is what drives an economy... basically that "eating things" is what makes economies strong. Those of the Austrian School of economics, on the other hand, argue that it is in fact "production" which drives an economy. That "making things" is what makes economies strong. And thus if you understand and agree with the production argument, you would find that an environment of high savings is much more suited to permit economic growth - for most development tends to come from capital that is saved and invested. Capital that is consumed cannot be invested. And thus a deflationary environment, where people are encouraged to save more and consume less, permits a fertile ground for investment and growth.

This big argument comes down to one's fundamental view of how economies work. The majority of the world advocates consumption, and a minority advocates production. I happen to be in the minority, and thus I look forward to a world where money is not debased in perpetuity - where instead of ongoing inflation we have a money supply that tends toward constancy. The constancy of money (even if it causes falling prices) will enable a vastly stronger economy than we have today, where savings is punished and destroyed.

Now, there are Nobel Prize winning economists on both sides of this debate. One side is right, and one is wrong... and again I refer back to my first remark. Will people trade with each other without their currency being debased? I think they will, and I think they'd come to prefer it.

We all live in a world where prices are always rising. It can be scary to imagine a world where they are falling. But perhaps, just perhaps, that is actually how an economy is supposed to work.


 

OMG,  TEH DEFLATIONS!


Economists and others stuck on this deflationary spiral never consider transaction costs in their arguments.  

Why not?

When I spend a $100 on something and pay using a payment card, the person I'm making the purchase from gets $97.  So the merchant that accepts payment cards raises the price charged for the good 3% more than it would otherwise need to be.   When I spend using bitcoin, that transaction cost -- even when exchanging to and from fiat on both ends -- is a fraction of that level.  

So with USD you have a currency that inflates at 1.5% per year but has transaction costs of 3% for each time the funds are turned over.  With Bitcoin you have a currency that will (eventually) inflate at a much lower level but whose transaction costs are just 1% or less, for example, with each turn of the money.

So at the point-of-sale, the customer is asked to choose:

Option A.) For about $103 USD using your payment card you get $100 worth of goods.    

Option B.) Optionally, you can pay using bitcoins, first convert $101 of your USDs to get $100 worth of Bitcoins and then with that you are able to purchase $100 worth of goods.

Which option will the consumer choose?

And thus, even with an expected increase in the value of bitcoin, using Bitcoins will continue to be the choice made when making payments.

-----

Faced with competition at the point of sale, an argument would be that the payment card transaction will drop to a more competitive level.  A 2% or so difference is enough of an incentive to switch for many consumers.  1% ... not so much.

What might happen though is normal payment flow will move over to bitcoin to take advantage of the discount, but the payments occurring from fraud can't (or at least if it does those losses won't be borne by the banks or the issuer) and as a result that 3% truly might be the actual floor that payment cards can still function at profitably.

Incidentally, Bitcoin's currency inflation rate just dropped below 30% per annum and slowing each and every day.  When the block reward drops in half around December, its currency inflation rate will drop from about 25% to just 12.5% per annum.  So Bitcoin still is at a rapid inflationary level yet hoarding also is happening at the same time.

tl;dr: The appreciating value of the currency is not the only factor used when choosing which method to use when making a payment.  The cost savings from using Bitcoin more than offsets the cost to replenish the amount of bitcoins used for spending, thus protecting it from any deflationary spiral.

(this is a cross-post from here: https://bitcointalk.org/index.php?topic=3040.msg876761#msg876761 )

"Perpetual debasement" is the insurance premium we pay against deflation risk.

Suppose we have already reached the point where the Bitcoin supply is constant. How does the Bitcoin financial system respond to velocity and exchange rate shocks? What happens when a capital-inflow bonanza goes into reverse? What natural force pushes Bitcoin real interest rates back down to levels at which borrowing and lending occurs?

If no such natural force exists, then ONLY a central bank can provide the liquidity needed to avert a financial meltdown.

This isn't true. Satoshi and other bitcoin elites will happily step in and liquidate the market for the price of a few islands in the bahamas. JP Morgan did it prior to the fed on several occasions.

Now the real question is how often will this be necessary, and how likely are the the wealthy to collude and manipulate to cause these financial messes?

I'd rather not pay money to ensure that my purchasing power is continually reduced. That's a pretty silly insurance policy. Should we also argue that our 35% income tax rate is the "insurance policy" we pay against anarchy risk? :)


Yes let's assume Bitcoin supply is constant at 21m. How does the Bitcoin financial system respond to velocity and exchange rate shocks?  Prices are self-correcting, they don't need to be managed or shepherded over. If the USD/BTC exchange rate goes out of whack, then speculators will tend to take advantage of the discrepancy and the rate will be corrected (this happens everyday using BitInstant!).

Interest rates are also self-correcting. When they go too high, they encourage savers to deposit funds and invest them, and money becomes less scarce. Interest rates then fall, and the savers lose the incentive. Thus, it's constantly rebalancing. The interest rate cannot shoot off in one direction forever, except in cases of extreme hyper-inflation or hyper-deflation. Both of which are impossible with Bitcoin (let's also remember Bitcoin is not actually deflationary... it's merely neither inflationary or deflationary, because the money supply is constant).

Let's also remember that "financial meltdowns" are more common and more serious when central banks exist. Great Depression? Central Bank. Post WWI currency crises in Europe? Central Banks. 20% interest rates in the 80's? Central Banks. 98% devaluation of USD happened since Central Bank was created (currency had no devaluation prior). Current global financial crisis and destruction of Europe? Central Banks.

The central banks are what CAUSE the financial problems, because they are trying to centrally plan the price of money. Just as the Soviet Union learned that central planning fails when it comes to food and clothing, it also fails (and for the same reason) when it comes to money itself.

Except that we're forgetting that interest rates will be going high if money is scarce. By putting money back into circulation by investing at interest, you are lowering the scarcity of the money and lowering its value. Ergo the whole negative interest problem.


God this board is such a trolling economist's wet dream. "Deflation is good, here is why (give examples of price deflation). Inflation is bad, here is why (give examples of monetary base inflation)." MAKE UP YOUR MIND. Money supply = currency in circulation. The supply can deflate and inflate even against a fixed monetary base.


Let's also forget the yearly banking panics prior to central banking because it suits our point of view better.

Someone recommended this book, when I showed him this thread

http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640/ref=tmm_pap_title_0


Overnighting this one!

Sigh. Those were due to A) fraction reserve banking and B) US laws which prevented banks in the 19th century from having multiple branches, thus preventing them from diversifying their risk pools (if anything bad happened in a town, there'd be a run on the bank, since it was known that bank couldn't by itself cover the deposits).

And let's also remember that even regardless of those short-term banking panics (which were not as common as you seem to indicate), the 19th century saw the rise of the most productive and powerful economy in the world, lifting tens of millions of people out of poverty and raising living standards immeasurably, even with multitudes of immigrants arriving. I'll take that over the stagnant, debt-riddled socialist mires of the modern era.

The more you look into the "problems of free market capitalism" the more you will discover they tend to stem in fact from government policy. The free market is not perfect, but it gets unfairly shit on by people who seek to control others.

Did you bother to read the rest of evoorhees' reply?

Yes,

Albeit, him and I have been discussing this on skype before/after/during.

Full disclosure, Erik is part of the Bitinstant team as well.

Yep, we argue Econimics in work all day- don't you wanna work for us  8)

I'm not an economist but if deflation becomes a problem won't they just add a a few digits to the eight bitcoin has already got?

Ah, ok. It seemed like you took one minor part of his post and ran with it, where he addressed the myths that falling prices leads to delaying purchases indefinitely, and that purchasing is what drives an economy rather than production. If those two assumptions are not proven true, I see no further argument against having a fixed money supply and letting improved capital drive down prices.

Separate issues.

"Deflation" deals with the supply of money. The eight (or more) decimals of Bitcoin deals with notation. Adding zeros doesn't increase or decrease supply, it just changes the way it's notated, allowing smaller pieces (of the same supply) to be transferred.

Fun how you only respond to the part of the post for which you have an answer.

http://en.wikipedia.org/wiki/Panic_of_1907


You go from bashing FRB to praising it within two sentences. http://www.economicsreform.com/index.php/the-industrial-revolution-a-new-view/ - this guy claims it is a new view but I have read it before and it does make sense. Although I will not claim it is the defining force of the industrial revolution like you would equate Mises to being an infallible economic god. Btw, he agrees that money supply != monetary base.


I think you mean free market banking, not capitalism. And what bitcoin is most certainly not is free market banking. It is the most extreme form of banking regulation you could possibly imagine.

A graphical representation:

Alright since you require a response to each part of your initial posting, I'll oblige. I singled out your last point originally because I thought it was the most important to address.


I'm not forgetting that interest rates increase as money becomes scarce. That's no different from what I'm saying. Prices rise when goods are scarce. When money is scarce, the price of money (interest rate) rises. This brings incentive for savers to deposit their money with those interest-bearing accounts and through this mechanism the supply and demand for money is brought into balance.

I don't see what you mean by a "negative interest problem." Who cares if interest rates go negative? Is it that odd that under a world of falling prices, a rate of -2% might still be a good deal? If prices fall at a rate of -3% per year, then one should be happy with a -2% interest rate. It is not the nominal rate which is important for enabling an economy to function, but the real rate.  I see no reason to think interest rates can't or shouldn't go negative in a world of falling prices.



Sorry, what am I being unclear about? Both monetary inflation and deflation are equally bad. Money supply should tend toward constancy. A rate of 0% inflation/deflation means money is unchanging, and this enables a market economy to better use it as a unit of measurement, in the same way that a yard stick ought to remain at one length, or that a foot shouldn't be 13" next year and 14" after that.

Bitcoin is the first money that is neither inflationary nor deflationary - it approaches constancy. This is good.

Another great chart... :) 

"In other words, the value of the dollar remained extremely stable for 150 years, then The Fed was created in order to "stabilize the value of the dollar" and the result has been a 95% devaluation of the dollar in less than 100 years following its creation. "

http://www.lewrockwell.com/orig10/voorhees1.1.1.html (http://www.lewrockwell.com/orig10/voorhees1.1.1.html)


http://www.lewrockwell.com/orig10/cpi3.jpg

Yeah so if there was deflation then smaller amounts would be more valuable and therefore more desired to be transferred.  I'm not saying it's the answer to deflation but it's very likely due to deflation.

I think price stickiness refers to certain types of prices on (usually) short timescales. When there are strong economic incentives one way or the other prices will adjust. So I don't think it can be invoked as a serious factor when talking about whole economy destruction.

Other than that, the idea that people will always hold off on buying because their money will be worth more or (equivalently) prices are expected to be lower is empirically wrong.

The amount forfeit can be HUGE too. Like walking hungry into a burger place that has a half off sale on their Big Juicy Burger tomorrow. Or renting a hotel room on the weekend. Getting something today really is a different and more valuable (often) than getting it tomorrow and that keeps things moving very reliably.

Addressed above. Don't be so snide.



Again, 1907 still had those issues I mentioned. Fractional reserve banking, and laws which prevented banks from branching. Even regardless of this, let's assume such panics can happen in a free banking environment. So what? If you don't like banks that are prone to runs, don't bank with fractional reserve banks! In a free market, vulnerable institutions go away, because people don't like risk when they bear it themselves. Today instead, the Federal Government bails out banks meaning everyone has to pay for their failures. If a bank is so vulnerable that a panic/run ensues, then that bank shouldn't exist and the market will get rid of it in due time.



When did I praise the FRB (I assume this stands for Federal Reserve Board?)? The Fed was created in 1913... and I was referring to the 19th century, which is the 1800's, as a time of massive economic growth that occurred without the Fed.



Free market banking = capitalism. Capitalism refers to the absence of state coercion in the marketplace, meaning a free market in everything. And yes, Bitcoin permits "free market banking." I'm doing it right now, actually. Bitcoin is not "the most extreme form of banking regulation." Bitcoin is not regulation... regulation means mandates which come from the State. The fact that a bank can't "print" a Bitcoin doesn't mean the bank is "regulated." I can't magically make gold appear in my hands either, but I'm not "regulated" by gold. You need to work on your terminology I think.

+1

Price stickiness is always a short-term phenomenon, and economics is at its best when it tends to focus on the long-term effects of things.

What is odd that anyone would lend if they would make more profit by not lending. And the act of not lending actually helps this. How does this not compute for you?


Let's see, equating monetary base with monetary supply whenever it suits your view, blaming government regulation for all ills whenever it suits you, basically using any pseudo-facts to help your view and ignoring the rest. Basically a typical bitmiseslibtard.

If you believe you can honestly answer this question: "Is Bitcoin a form of currency that prevents the underlying unfairness of wealth transfer through monetary manipulation?" with a "yes", then there is obviously no hope for you. If you cannot see that wealth transfer via money manipulation is at the root of all recession, then I don't know what to tell you. It isn't that there are less productive people or less products/services available during recession, it is that money is less available per person. What causes this? Or, what does bitcoin do to fix it? Nothing. It even brandishes it in your face.

Here you go again. Blind to the reality. The overall issue is the retraction of market liquidity; it always is when there is a recession. And then again moving on to issues with the Fed which are irrelevant. The Fed didn't exist in 1907 broseph. Stop going off on tangents.



lol wtf now I know you're just a troll. the fkin link talked about fractional reserve banking. Which did exist during the 1800s. Oh and by the way, most European countries already had a central bank by that point and experienced the same growth.


Meaning that free market banking is a subset of capitalism, not capitalism. Capitalism is not the issue at hand, so you again try to conflate instead of making any real point.


Uh, the hell it does. "2.  A principle, rule, or law designed to control or govern conduct." There is no "state" in there. You just decided to, once again, exclude information that does not suit your view. Bitcoin has the most strict rules possible when it comes to money. It cannot change in supply and the supply cannot expand to meet demand. These are rules that are laid down and enforced by the protocol. That is regulation. The supply is highly regulated.


No, actually, I don't.

You're talking about stock to flow (http://en.wikipedia.org/wiki/Stock_and_flow) ratios. Provide a definition for common ground in relation to monetary base and supply.


Good book. I call that "growing pains (http://en.wikipedia.org/wiki/Growing_pains)" :)


Forgive him, his reasoning and conclusions are often juvenile, lacking any practical or logical basis. Much like his failed efforts at creating a competing currency to Bitcoin. His discussions tend to devolve rapidly, so I quickly learned to ignore him when he's antagonistic over semantics. Don't feed the troll.

Moving on, as Bitcoin grows and the value of its base unit increases, prices denominated in BTC will decline. As they continue to decline, the decimal can be shifted to the right as market forces demand. Therefore, savings is preserved while prices are maintained within a stable range as seen in this chart (which assumes the base limit of 21mm units has been achieved):

http://noblenomads.com/wp-content/uploads/2012/05/bitcoin_division.png (http://noblenomads.com/)

In the reverse, when Bitcoin unit value decreases, the decimal simply shifts back to the left and prices rise. Off-the-cuff calculations extrapolating based on historical world economic growth placed a decimal shift occurring once every 12-20 years, creating a "reset" cycle of sorts in prices. Market infrastructure such as futures, options and the like may smooth the transition period significantly, if not entirely - instead of an instantaneous move in prices, it may be as gradual as a sine wave.

More in-depth:

Post 666 mark of the beast ban him!  Going on about the early 20th centuary pfft.  As any good Jehovah's Witness will tell you that's when Satan returend to earth FFS!

Sorry been missing all the trolling on bitcointalk.org recently ;)

But wages are not falling which would be the case in a deflationary economy.

And I'll link to this again: http://austrianeconomics.wikia.com/wiki/Deflation as to why this is such a piss-poor argument.

Hehehe... you are so enamored with inflationary money that you forgot in a free market people (at least before Bitcoin) would use metals as a currency, not fiat. Metals require storage, and thus it is possible for interest to be negative, and for you to still lend. You don't want $1m in gold in your house, I assure you. But, if talking about Bitcoin with no storage cost, indeed there may never be a negative interest rate in a free market.



I've never "equated" monetary base with monetary supply. Base is a portion of supply. They are not equivalent. We agree on that point, right?

The issue of "money being less available" is only a problem if you assume prices do not adjust to money supply. Why do you assume this? It wouldn't matter if there were 2 million or 21 million or 210 thousand billion bitcoins. Prices will adjust to the supply. If prices are free to move (absent government price controls) then the supply of money really doesn't matter, so long as it doesn't change too quickly and so long as nobody gets special printing privileges (both of these are addressed by Bitcoin).

And what's with the namecalling? Your arguments aren't THAT bad that you need to reduce yourself to insults. Have some respect for yourself.

LOL alright look man, this is just too careless of you.

1. I tell you that "regulation" in this context means "from the state" and that Bitcoin is unregulated because there is no state involvement.
2. You then retort by selecting a definition from The Free Dictionary of "regulation," citing "2.  A principle, rule, or law designed to control or govern conduct."
3. You then insult me by saying "I only select information that suits my view"
4. Then you go on to suggest Bitcoin IS regulated, because it fits the definition you cited.

Here's there full definition from the site you used:


As you can see, the THIRD definition discusses the State, "governmental order." This is the kind of regulation to which I'm referring, as I mentioned specifically. I know Bitcoin has its own rules. But it is not REGULATED by the State, and thus exists within a free marketplace.

So basically, you selectively used information to counter my claim, then lampoon me for "selectively using information"...  ::)

I understand you think currencies need to inflate with "economic activity" and grow at the pace of the economic growth. You're welcome to that opinion, but it is false. The world can operate just fine with a fixed money supply, so long as prices are free to move. I understand you like Altcoins, but it offers no advantage over Bitcoin. If I'm wrong, and your money wins in the end, then I'll buy you dinner and apologize.

My god, how do you write so much that has so little to do with anything?


So does this mean you agree that there will be hardly any lending bitcoin? That means in a few posts you no longer believe this:


Because that "balance" can only mean negative real interest rates, or rates that are lower than simply holding currency.


How could the base be a portion of supply? Perhaps you mean supply is a portion of base?


A rate of 0% inflation/deflation means the monetary base is unchanging. It doesn't directly affect how much money is in circulation, or its velocity. This can be controlled and manipulated by the people who have a large portion of the currency. They can retract market liquidity (here I go using that phrase again which has nothing to do with FRB or central banks) by not spending/lending.


I wouldn't assume this. I am assuming that most people with wealth are smart enough to understand how easy it is to game this system. The entire world economy was just gamed to the tune of trillions of dollars. Of course you'll blame this on FRB and inflation and government intervention and whatnot, but the truth is they had won either way. If the government doesn't bail them out, millions of people lose retirement savings et al, so there really was no difference in the outcome, the one that happened is just going to hurt more slowly for much longer.

Now I'm quite sure some smart people will figure out a good way to lend bitcoins. It will be tougher without Federal Reserve Board, er I mean Fractional Reserve Banking, but no matter what there will be successful businesses, loaning money or not, and they will be able to start acquiring significant portions of the total bitcoin supply. Then say, oh a new country adopts bitcoin as a currency and the forex markets take a sharp upturn. Well before any money supply is actually constricted to these big businesses, they can begin demanding lower prices from their suppliers. By spending less, they are now taking currency out of the supply. They can choose to expand their business with this "extra money" or they can hold it and wait for the price to rise even more.

Where in inflation, banks get the advantage by getting new money first, banks/big business get the advantage by having the money already and demanding cheaper goods/services before the price hike actually affects them. This will allow them to cheaply and unfairly expand, or to hoard money at no cost and then eventually release it into the market when the market least expects it and gain massive amounts of profit by only withholding money. Or if lending does somehow make a large portion of the economy, banks can just pretend there is a panic and stop lending like they're doing now and cause massive recessions where they get to buy up all kinds of actual wealth for bitpennies on the bitcoin. It is the exact same bunk as inflation except, for now, the power will be in the hands of early adopters instead of big banks. People will manipulate the money to earn wealth from nothing productive. Even if they don't do it on purpose, making money from money is not productive and wealth transfer to unproductive things is what leads to recession.

In bitcoin's case, people will simply just wise up and stop using the seesawing currency in favor of controlled inflation. To expect that prices will just fall in a happy, orderly fashion was already fantastically disproven in the summer of last year.

No, you are telling me what I meant by the word I used. It is obvious that I was not referring to government regulation (is there any point to saying "government" regulation if all regulation is government? I guess so in your mind) unless you have a learning deficiency, so we can assume I meant by "rule". And, btw, "rule" does not necessarily mean "by decree of a king." Just in case that was your counter. Words can have more than one meaning, especially similar but slightly different meanings. Picking and choosing which definition you think I meant when it is clearly not what I meant and then using this as an argument against my point just makes you look like a complete assclown.

Ohhhhhhhhh I see!!! Etlase2 has a problem with wealth inequality. THAT is why he hates bitcoin, because someone with more coins could "influence" the market more than someone without.

Etlase how does Altcoin counter this phenomenon?

ohhh hey look evoorhees is a complete assclown!!! can't actually counter any argument I have with actual logic, so must resort to strawmen!

Tread lightly my friend, tread lightly.

oh man I just shat myself. internet threats from evoorhees's business partner

No threat, Im sorry you see everything as a threat.

My point was, let's not turn this into a troll fest and attempt to stay on topic.

I see you already kinda ruined that.

And you make that point by telling me to "tread lightly"?

What did you expect this thread to be? It's either gonna be filled with bitmiseslibtards who think a fixed supply is the cat's meow and will extol all its many virtues, or you'll have one of the rare non-groupthinkers around here like me who will actually argue against it. And what do I get for my arguments? "lol 2+2 equals potato" as a counter-argument. You've got two libtards in this thread using themselves as sources for crying out loud.

I expect this to be an argument and discussion where we can have a decent economic conversation without resorting to immature personal insults.

Hence the reason I said 'Tread lightly'

i can just picture the spittle as he's screaming at his monitor.     :D

The clear resolution to this is that consumption can not go to zero, as its necessary for existence, and especially for modern existence. This lower bound establishes at least some supply, limiting the deflationary spiral.

I don't understand why people view banks and lending as so critical... but I agree with voorhees argument that if the bitcoin 'GDP' is growing at e.g. 4% with a constant money supply, lending at -3% would be making a profit

-s.

When can we do that without evoorhees resorting to immature obfuscation and meandering, most likely intentionally misleading trains of thought and arguments?

I'm probably missing something here, but why would anyone make a loan at -2% interest?

I can 'loan' to my cat and get 0% interest (she doesn't know how to spend it, so gives it all back untouched), so why would I loan to you and get less than that?

In an environment where real rates are negative, lending at a less negative rate will still result in loss, but it'd be less of a loss than it would be otherwise.

In other words:

At a -5% real rate, earning -2% would be 3% better. You therefore only lose 2% instead of losing 5%.

That assumes your primary business is lending, and the business is a long-term venture. Typically, there are other areas of economic activity that will balance out, meaning that a return of 5% may be earned elsewhere.

It's a classic loss leader (http://www.investopedia.com/terms/l/lossleader.asp) situation that is seen especially with electronics - below-cost mobile phones with profitable contracts, cheap game consoles with online subscriptions, etc.

Since I know that you have, and will continue to, be hammered by the Austrians in the crowd for echoing this Monetarist theory position, I'm going to address the questions posed about 'price stickiness' and velocity.

Fiat currencies, as they are used today in a functionally digital form (i.e. bank accounts, credit cards, debit cards etc; not cash in hand transactions), all have a maximum velocity that is largely constrained by the settlement period of these payment methods on the one end, and the payday cycle on the other.  To illustrate this point, the laborer may be able to spend on credit, but only to a point.  Over his lifetime average, he tends to spend paycheck to paycheck, like most people.  So he earns his money, and that money cannot (generally) be spent before payday.  If he buys something with credit, he has it before payday but the funds are not (practically) available to the vendor until the cc transaction clears; so his velocity cycle is no faster than the 30 day average clearing time for credit cards or the average 7 day clearing time for personal checks.  Prices appear sticky for many reasons, but the max velocity time for the consuming public is one major contributor to that perception.  However, it's just a perception.

Of course, cash or bullion used in person have a near instant max velocity, limited mostly by the time & costs of moving physical objects from person to person & marketplace to marketplace.  While Bitcoin doesn't have an instant max velocity, since it generally requires a minimum of 6 confirmations for turnover; nor does it suffer from the physical limitations of transportation.  Overall, the delays of cash & bullion versus bitcoin are likely a wash; or perhaps even favor bitcoin.  (After all, an hour after you pay for your groceries in bitcoin at wal-mart, they could be paying a cashier in Bangladesh with those same coins, and in another hour that same cashier's wife could be buying cloth in another business while her husband is still at work)  Therefore, bitcoin doesn't have the constraints on velocity, or economic 'friction' as many here refer to it, as any other secure distance payment option available before bitcoin.  The illusion of 'sticky' prices in bitcoin will either not exist, or be a local pricing issue.

While no one would loan at a loss, investors might invest at a potential loss, if the investment is ideal.  Take the example of Warren Buffet 'loaning' money to General Electric following the crash of the GE stock price around 2007.  His loan rate was below market, but he had a clause that permitted him to convert those bonds directly into preferred stock, if the stock price turned around during the loan payback cycle.  Thus, the official interest rate represented a loss limit, not a certain loss.  So Warren Buffet did risk losing a small amount of money on the actual corporate bond rates (compared to other similar investments) but stood at least as much chance of being able to turn a very nice profit if the stock price rose significantly over the following several years, which is what happened.

If running the local client or Blockchain.info, for instance, the coins can be spent after just one confirmation.  Ten minutes.


I used that as the basis for a question on Quora:
- http://www.quora.com/Inflation/Are-PayPal-Dwolla-M-Pesa-and-Bitcoin-responsible-for-inflation

You assume that Bitcoin will be the only currency in a country. If its not, its not a problem.

We have this situation in reality with prices on mobilephone and computer. Which half in price quickly after a year but we still consume them because sooner or later we want that new phone eventhough we know it will be half the price in a year.

While an increase in velocity across an entire market can have the effect of inflation, velocity isn't inflation.  The effects of velocity are reversible, and therefore naturally balancing.  Bitcoin will find it's own velocity, eventually.  After which time whatever effects on overall prices that bitcoin's ever changing velocity has will be lost in the daily transaction noise, too small an effect for anyone to define nor care about.

I think an objective observer can review all the posts, both from myself and Etlase2. Then, tally the number of times each person calls the other a name. Then, from that data, figure out who has the better arguments.

Hopefully, Etlase2, we can both agree that one of us is gravely mistaken about that which he purports to know.

If you think about it the 21Million hard limit will never be reached as the block reward keeps half'ing the block reward will just keep getting exponentiation'ly smaller and smaller.  So at some point in the future the supply of bitcoins will be like the supply of gold into the current gold market and for quite some time.  That where we are now with the block reward is like a gold-rush.    

So if more and more digits keep getting added to bitcoin then the reward will keep on going just getting smaller and smaller as bitcoins value hopefully keeps going up and up.

I, for one, find Etlase2 amusing.  I doubt that it's in any way that was intended by himself, however.

But I suppose that I'm just another Mises libtard anyway, so I admit that I'm biased upfront.

In a pure bitcoin economy prices will be deflating, but as mentioned the decimal will be moved.

The bitcoin protocol can be updated to allow extremely small amounts such as nano-satoshi, there is no limit.

Alternatively 1 satoshi could be made the permanent block reward and coins unmoved for 200-1000 years could be deleted to save harddisk space.


Those and cryptographic updates are the only ones anyone will really accept when it comes to their OWN bitcoins, nor will I update my client for anything else.


Deflationary death spiral?
1. Bitcoin deflation will be small once adoption is broad - people are unlikely to loose very many coins with better and better software helping them.
2. Even if it was high investments in the important things would still happen, if not people or their economies would die and smarter ones rise.
3. Consumerism and its slavery might well die, who will miss it? Only the looter elite.
Those who opt out with bitcoin and choose the important things in life will come out as the new more rightful elite.


If BTC deflation was 20% and no one worked I would still make bread and as the only guy with bread sell it for something that gave me minimum 21% return on investment.

It is weak currencies that invariably die, not strong ones like gold which is a useful today as in biblical times.

Think inflation protects the little man? Think again; the poor hold most value in pure currency as they need it all from day to day while the rich protect themselves with stocks etc..

Bitcoin is for the poor and the smart.
Inflating fiat is for the stupid to use and the filthy rich to control others.

Even if BTC continually grew that wouldn't provide any protection from the shocks that you describe.  The only thing (in theory) that could is monetary intervention.  Looking at the last 50 years I would say in practice given the constraints of fallable humans and fallable models intervention is equally futile.

Gold has essentially being experiencing price deflation for some time.   Demand has grown over decades at a faster rate that supply expansion.

Supply expansion alone isn't sufficient to prevent price deflation. 
If supply grows 5% but demand grows 10% you are still going to experience price deflation. 

Given the goal of BTC model is to be uncontrollable I see no value in having a preset supply growth as opposed to a supply growth of zero.  The difference should be immaterial.  Unless we are accepting central control and intervention deflation is going to occur.  It is simply unavoidable. 

Given the strength of market segments which face continual price deflation I feel the risk hasn't been proven by the economist.  Rather it has just been taken on faith that chaotic and corrupt interventions are BETTER than even the risk of deflation.  I no longer accept that argument without hard evidence.

I'm no student of economics. My understanding of the issues at play is novice-level at best.

But the reason I've ceased to be so worried about this is because of thinking over what it means for deflation (in the sense of a rising value-per-currency ratio) to be happening.

See, we have this assumption that the value side of the equation - the total "worth" of the goods and services being traded in an economy - will always increase. And in a sense, yeah, that's inevitable; right now we have a worldwide population growth of 1.32% per year, so unless everyone is getting worse and worse off, there'd better be at least a 1.32% growth in the value that moves within the world economy.

So where is that growth coming from? Short answer, from invested capital.

You take money. You use it to buy goods and services that allow you to produce something valuable at over-unity - that creates more value than was invested. That's business. That's economies. That's why all this works.

So let's say that money stays constant. 21 million bitcoins, in saecula saeculorum. Then, if the value in the economy is growing at 1.32% per year, a bitcoin becomes 1.32% more valuable every year. And people have a choice to make: do I bury this coin in the ground, and spend it for a bit more in a month? Or do I spend it now?

But really, they have three options: hoard the money, or spend it, or invest it.

Because, really, some people are just going to spend. And for those who would hoard, they are trying to figure out how to have the most purchasing power they can get at X time down the line. And if the value in the economy is growing at 1.32% per year, someone is definitely getting at least 1.32% per year on their investments, or else value is being created ex nihilo and you've got something very strange going on. In fact, if the value is growing at a rate of 1.32% per year, someone is getting many times 1.32% return on their investments, because people consume valuable goods, which means you can only direct value which is not being consumed towards the creation of new value.

So in the case of a constant money supply, the expected return from sound investments must always be greater than the expected return from hoarding, because otherwise where would the value be coming from? And so, someone who could be convinced to hoard instead of spend could be even more easily convinced to invest, which means the money is turning in the wheels of the economy and being used to create value - the stated goal of Keynesian "modest inflation".

A graphical representation:


Deflationary economics will reverse consumer oriented economy into resource based economy. Reverse the graph on the right side and you'll see how it will look like with bitcoins. Economy will stabilize, people will spend BTC on things they really need. Nothing more, nothing less. ;)

That is incorrect: Invested capital moves human effort towards some endeavor, but that endeavor may well fail and produce nothing at all.

The overall success rate of human adventures is what will give you the true growth rating.

If there is crisis (such as now) due to fundamental factors such as resource scarcity (such as now) everyone may indeed see worse times (such as now, especially in the west that has the most to loose).


Some of the few things really growing today is bitcoin and renewable energy - which are both things I am invested in.

I disagree that the current crisis is rooted in resource scarcities.  I would say that the past several years are the result of bad investments trying to clear from the previous two decades.

The "textbook" deflationary spiral happens when "scarcity of money" combines with price deflation, further accelerating it.
Trouble is for economists, it's the first time in history there is money (bitcoin) that is indefinitely divisible (even beyond the granularity of satoshis).
So there is no such thing as scarcity of money in bitcoin.
As a result, if worst comes to worst, we have deflation of prices but no "spiral" in the classical sense.

In the absence of a spiral, there is room for an equilibrium point because we have opposite forces: slowing the pace of spending will reduce the attractiveness of bitcoins as a medium of exchange, reducing the value of bitcoins since the attractiveness of bitcoins as a store of value can be considered fairly inelastic in relation to the medium of exchange function.
In other words, if the value of bitcoins (determining the face value of goods and services in bitcoin) is the sum of two components e + s (where e represents the value as a medium of exchange, s as store of value), we have yet to see a proof that the is a unique equilibrium point where e = 0 knowing that s has an upper limit (our capacity of saving is obviously limited).

So what you're saying is pennies were scarce during the great depression? Do you even think about what you're saying?

No that's not what I am saying. Do you read before you write ?

Ok then, so if pennies had been infinitely divisible, the great depression would have been averted then. Is that what you're saying?

First of all, yes, pennies were hoarded during the great depression.
Second, yes the effects of the depression would have been alleviated with more complementary currencies such as bitcoin, had they been available at the time.
In the absence of internet, cities started then issuing local "fiat" currencies that were beneficial to the local economies but insufficient in scope.
Wall Street lobbyist after WWII made sure that a law be passed forbidding cities from issuing local currencies.

Got a source? What were people using as currency? Only barter? Isn't one of the main arguments that a deflationary spiral isn't possible in bitcoin because "people will still buy bread"?

Nobody asked this question, and this is not what you said in your post. You're right though, if it looks like deflation is getting out of control, people will start bailing on bitcoin and this fact may actually help bitcoin be saved from itself. But, that means bitcoin isn't a particularly good medium of exchange.

Nobody asked this question.

Source?


Anyways, you don't have a very good understanding of what effect a major deflationary event has on a currency. Debts cannot be repaid (credit shrinks), bankruptcies run amok, unemployment skyrockets, etc. Allowing it to be used in smaller and smaller amounts does not solve anything. To think that it would... whatever, not like I've come to expect more around here.

Your analysis is flawed because you consider bitcoin like central money when it is meant to be a complementary currency: no suggestion to issue bitcoin-denominated debt (silly idea) or to end the dollar (other silly idea).
No such thing as deflationary "event"..
Divisibility is a benefit that is leveraged by velocity: bitcoin provides increased velocity by removing unnecessary frictions (something I did not repeat because it is obvious for most people )

If there is no bitcoin debt, there will be no significant bitcoin industry. There will be no real demand from businesses for bitcoins. Why would they bother accepting bitcoins when they have to spend the same amount or more (vs. CCs) just to get the currency they actually need? And overall the costs will probably be much higher since people need to pay those same fees to actually buy the currency. You seem to suggest that bitcoin is just a payment processor with a few extra benefits, namely those that hold get to profit when there is an activity spike. Everyone who actually uses will face lots and lots of fees.

A lot of people around here think that it will take down "gubment fiat." Or at least put a big chink in its armor. Or at least they hope so. If it can't even attempt that, then it is relegated to online porn, drugs, laundering, and other black and grey market type stuff.

And as far as velocity, MoonShadow made a pretty good point which I agree with:

Granted. The "average investment" is the standard here, with that average including investments that produce nothing. But the other side of the equation isn't all the money - just all the money used for investment.

So I guess the question is, do you think you're smart enough, or that your bank/mutualfund/&c is smart enough, to make an investment that is at least (all invested money)/(all money in the economy) as good as the average? Personally I don't think that that's a weird thing to expect, especially assuming that they hedge properly.

Well, first off, the money necessary to cash out bitcoins is less than CCs by a significant margin if you're running a business and can wait a week or two for the money to get through the pipeline; going through Mt. Gox + Dwolla has fees of (25c for Dwolla + 0.6% for MtGox + 5c network transaction fees) which is going to work out to much less than the 3%-ish charged by the Big Two credit card companies. And if you're worried about exchange rate volatility, you can always use Bitcoinica to hedge (about 1.4% fees, which still puts you in a better position than using credit cards).

But if you can get enough people accepting Bitcoin as a transaction processor, you stop having to cash out; you can just spend the coins again. And if you can get enough people who you can count on accepting Bitcoin for the foreseeable future, then that's currency confidence and all of a sudden it isn't just a transaction processor anymore.

Have you ever exchanged one money for another before? Have you ever noticed you get 2-4% less than the forex conversion rate? Yeah, there is no magical cure with bitcoin that is going to prevent the profit of currency exchange. And I'm not even talking about what MtGox charges, I'm talking about what the people actually selling will charge in an established market. Sure, really large businesses will be able to get better pricing, but the same is true for credit cards.

Again, this is not the case. There needs to be an actual reason for someone to demand bitcoin. Businesses need to be able to pay their bills and salaries in it. If the bitcoin economy cannot expand via debt, and the act of taking on debt is a dodgy affair with deflation, you are not going to have many investment opportunities in bitcoin. This leaves black & grey markets as I mentioned.

And if you followed the rest of the conversation about why a deflationary spiral won't happen.... confidence will flow right out of the currency at the beginnings of any spiral, and you can be quite sure that no one will want to take on bitcoin debt again after.

Bitcoin will never get far as a medium of exchange when the people willing to take on debt are burdened further whenever the market expands. This leaves it as probably a good store of value, but a very so-so payment processor, and a niche medium of exchange.

Then why is it not happening right now? Why can I convert dollars to bitcoins, and then back to dollars, and only pay 1.5% for the round trip?

This isn't a rhetorical question; I'm actually curious. If converting your money always costs about 3%, is there a reason why aren't we seeing that in the wild?

Go straight out to a couple of mom and pop stores and ask them out of curiosity how much they pay in bank fees.

Dont be surprised if they tell you they lose something like $1000 a month in banking fees.

There is your huge incentive to start using Bitcoin.

Ofcourse the no chargeback.

The only problem right now is that business dont know about Bitcoin, or think of Bitcoin as a serious project.
That will change with time.

And about the exchange fees.

There are plenty of ways to get Bitcoin without exhanging them.
Selling things, services etc.

And if they have to spend 2.5% to exchange Bitcoins.
Well it only need to increase 2.5% in value for them to make a profit.

They could pay services or work done in Bitcoin.

Bitcoin is designed to increase in value over time that is also an incentive for business to accept Bitcoins.

Another incentive is that Bitcoin works a bit like giftcards, thus the first business that deals in Bitcoins,
ties customers to them if they give change in Bitcoin.



 

We are.  Search the forum for OTC.

This argument seems like an awful idea to me. You can't base a currency's usefulness on expectations that its value will appreciate.

Why on earth would a business - even a small business - trade their coins OTC at a 3% commission when they could do it on an exchange for a quarter of the fees?

Edit: I mean, I can see why individuals would do so; setting up the Gox<->Dwolla<->Bank pipeline is a hassle, requires identity documents, and it can take up to a month to get it working. For such people, the convenience of OTC makes sense. But if you're already running a business, it seems like the fixed cost of setup effort is completely overshadowed by the marginal savings of only paying 1.5% to instantly process a payment.

That is an interesting perspective, and it may very well prove true.  Yet, Bitcoin was designed to be cash on the Internet, and thus in person transactions are actually an expansion of the protocol in the same way that Paypal is an expansion of the 'protocol'  for fiat currencies on the Internet.  So even if Bitcoin is always a niche medium of exchange, that's still a huge niche.

I have no idea.  I was just responding to the simple question, "why haven't we seen this in the wild?"

Ah, okay. So we have seen it in the wild, just not in the use cases that are relevant to "Bitcoin as a payment processor".

From the perspective of a (progressive) business owner there are several reasons, of which a major one is the potential of reporting requirements for the major Bitcoin exchanges. This can lead to a frightening and expensive mess of legal uncertainty if an authority decides that Bitcoin is taxable and demands exchange transaction history. The contemporary equivalent would be a retroactive tax with an arbitrary amount, payable immediately and with possible penalties applied retroactively as well.

The benefits that Bitcoin offers in borderless transaction accessibility remain more than worthwhile, and if the legal issues can be mitigated or avoided altogether by using OTC, a 3% or even greater fee can easily be less than what it would cost to remain tax compliant (esp. considering tax payments and the cost/effort expended to insure the appropriate amount is paid).

For a company the size of IBM or Volkswagen, such practices would have to be disclosed to shareholders. That would subject those companies to tax obligations. Fully private companies with no requirement for disclosure would be able to take advantage of OTC benefits, developing a large margin of profitability over public corporations.

These "dark pools" already exist and are growing very rapidly. How do you think the Bitcoin exchange price has managed to stay steady for the past few months? ... but I've already said too much :)

I'm not sure of the point you're trying to make with cash on the internet. Businesses accept CCs online, and they still pay a fee. If online businesses want to accept BTC and convert it to something else, they're going to pay a fee.

And not that you are the only one guilty of this, but I'm tired of the "but bitcoin is this" statements whenever it seems to apply in the most beneficial way to make a point. Lots of people believe bitcoin is the second coming of currency, and I'm just pointing out that it is going to have an incredibly difficult if not impossible time trying to fulfill that role. No, the deflation aspect and 21 million limit don't really mean anything if bitcoin is mostly just a payment processor with a few speculative nerds hoping to make money on volatility here and there.


As far as 3% for currency exchange vs the current 1.5ish mtgox fee, convenience does always come into play. If BTC is popular enough for banks to do the conversion for businesses, then they may well pay the extra percent or so. I don't know how easy or hard it is to become a forex trader and what the fees are like there (and how many int'l businesses bother with it instead of a bank? no idea) and it's hard to predict how the exchange situation will play out with bitcoin in the future, so it's hard to predict what businesses/people will typically be paying for this service. You have to keep in mind though that it is unlikely that many people will be paid in BTC, so they will be buying it and there is the fee involved there too. How much that fee matters depends on how often each coin gets used in trade before being exchanged, which is impossible to predict. Without a fully up and down bitcoin economy, I don't see it being that often. Regardless, it is unlikely people will be seeing any "massive savings over credit cards" in pricing by using bitcoin.

I think an assumption here is

Fixed monetary quantity = deflation.

The increase or decrease in money value is not entirely based upon scarcity.

A major factor in inflation is monetary velocity (how much the money flows around). If all holders of bitcoin suddenly started using bitcoins for the majority of their transactions, we would face rapid inflation.

Also, whatever equation you use to quantify the value of money goes out the window once it hits perception. How people view a currency is more important to its value than anything else.

Yes, people might hold bitcoins for some time as the price goes up, but if it doesn't go up forever, and starts to flatline, people will want to start getting rid of it, and this will cause a feedback loop that might make it so people will jump ship as fast as they can.

In the end, without some large economic event, I think bitcoins are fairly stable, and will just get more stable over time. That means they will become a pretty piss poor investment, especially if they end up only deflating at <5% annually. Investing in revenue generating businesses would end up being more lucrative. Also, investing in things that would provide immediate happiness would be more valuable.

Only about 7200 per day are being produced right now, and I am sure speculators are already adjusting their valuations for output halving (it is not like it is a surprise). So we are looking at moving from $36000 per day to $18000 per day in "quantitate easing." With the number of people in bitcoin, I consider that to mean that for all purposes, we have practically reached the end of money production.

So here you are. The train has basically reached the $21M quantity. Look around you, because at this point, I think speculators are going to get bored soon, and move on to some other new beanie baby. We have some stuff you can buy and sell, and it makes a great currency for gambling and buying drugs. I see a super bright future in its use in games, and if the USD ever falls apart, bitcoin and precious metal holders will be laughing all the way to the bank (not to say they will be rich, but just that they have weathered a storm). Bitcoins will go up and down in value, but really I think it is pretty much in the right ballpark now. The economy will grow one storefront at a time, and hopefully it will be a boring useful part of the economy, and not a long dead fad.

The point that you're missing is that bitcoin isn't just a payment processor.  It can function in that role for a very large portion of it's economy for decades, but that isn't it's only use.  CC's & paypal have no other use and therefore those transaction fees are truely unavoidable.  With bitcoin, there and will be many different wasy to exchange.  In teh early stages, yes, any bitcoin accepting business is going to have to deal with the exchanges & the costs that they can impose.  This will limit early adoption rates.  However at some point (usually aroun 12% of the general public in any given area or market) bitcoin is suddenly 'mainstream' and the savvy business owner doesn't have to depend upon the exchanges for all of their conversions.  I'll concede that a future that involves never needing to deal with the exchanges if you are a bitcoin business owner isn't going to happen in my lifetime, but it's all a matter of degree.  These are not sudden events, they're transitions.  The business owners who deal with bitcoin early on are as likely to keep a portion of those funds as not.  No business just hangs onto checks or credit card receipts on the possibility of appreciation or the possibility of reduced conversion costs.  Such things will never happen.  Again, bitcoin is much more than a payment processor, even though that is a large part of it's current functions.

And the less bitcoin is used as just a payment processor the more likely a deflationary spiral and people bailing. We're going in circles here. Bitcoin is not going to be an effective medium of exchange by my logic. We can agree to disagree, but I most certainly did not miss the point that bitcoin is not just a payment processor.

And through all this, anyone holding runs the risk that satoshi decides to just utterly collapse the market one day and buy his private island.

There remains no evidence that a deflationary spiral is a real threat, or even a real economic theory.  I find this to be one of the most amusing things about this viewpoint, let's explore it a bit, please.

The theory, at it's root, is that if the value of the bitcoin increases too much, people will
hoard' it, increasing it's value further.  This leads to a crash in the exchange volume as some other comparable currency is used in it's place.  Grisham's law in effect.   While this sounds reasonable to an academic, it ignores the reality that we are talking about common people doing common things, not the rational speculator looking for an ideal exit.  Real people don't hold currency for it's own sake, nor to trade for some other currency in the hopes of turning a nominal profit on arbitrage.  Real people hold currency in order to spend it later, and real people don't consider only the future value of a currency in choosing to spend it now or later.  Real people have real problems that often require them to spend money sooner rather than later, and for those people the future value of the currency is irrelevant.

Whatever, I just use the term deflationary spiral because it basically gets the gist across. I don't think bitcoin will ever have a deflationary spiral--and I basically said as much in that post but explicitly said it a couple posts up too; so enjoy your amusement. What it will have are deflationary "jerks" where there are sharp periods of deflation among more mellow periods. This causes massive problems for debt (and massive problems with adopting bitcoin as a replacement currency). But the "real people" argument still doesn't hold water. "Real people" aren't the ones that control the wealth of a nation (for example). Real people aren't the ones packaging subprime mortgages into a CDS. Real people aren't the ones who cause credit crunches--whether real or imagined(/fabricated). This all falls into the hands of the top 1% or so. Real people have no power to retract liquidity, only the wealthy/banks do. So what real people do or do not do is irrelevant.

Wealthy people are going to find themselves in positions to be able to manipulate the bitcoin economy in unnatural ways. This is never good news for "real people."

Real people are quite relevant for bitcoin.  Much like a gold standard, there is no way for the "one percent" to leverage liquidity flucuations, which is really the condition that you are describing.  This is one major reason that bankers don't like the idea of a gold standard, and why they won't like bitcoin either.  That's one effect of fractional reserve lending, which has practical limits under a true gold standard or a bitcoin standard that do not exist under a pure fiat currency.

How do the ones who provide liquidity and debt leverage liquidity? Leveraging liquidity to leverage liquidity? I don't get it, but maybe it's just over my head rather than three words cobbled together.

I'm curious to where you get the idea that "bankers don't like the gold standard." First off, bitcoin really should stop being compared to the gold standard. The gold standard as we know and talk about it is a complete bastardization of gold as money. Governments would add and drop the standard when it suited them; they would raise and lower the conversion price at will; and fractional reserve made it essentially meaningless. As long as paper money is legal tender, the reserve can drop to 5% by law to effectively double the money supply. Instead of going that route, we have central banks and interest rates. It's really not much different from fiat other than the warm feeling that your money is backed by 10% of what it says it's worth in pretty metal.

Gold standard as we know it was a banker's paradise, just like modern fiat. Until I understand how to leverage liquidity fluctuations and what that may or may not have to do with retracting liquidity, I can't really respond an appreciable way. I agree though that traditional bankers will not like bitcoin very much because they cannot hope to retain the power that they have now. 50% of the currency to ever be in circulation will already be in circulation by the end of this year. However, this most certainly does not preclude some kind of bitcoin cartel from emerging.

 
you're confusing fractional reserve banking with a gold standard.  A gold standard is, generally speaking, referring to the convertability of a national currency note into a predefined weight of gold.  Fractional reserve banking is the idea that a bank can lend out more in loans than it actually has on deposit.


If the gold standard was a bankers' paradise, we would have never left it anywhere on Earth.  Are you really going to claim that bankers don't have influence over governments?  Or that the Federal Reserve system wasn't created by and for bankers?  The Federal reserve system is why inflation occurs to begin with, and why there was too much cash chasing too little gold.  Nixon didn't have any choice, the gold was probably long gone before he ever got there.

MY POINT, my dear, is that they have been intertwined for hundreds of years. This is why I say things like "gold standard as we know it."


Central banking is just the next step. The gold standard and central banking coexisted, and inflation has risen about the same with and without the gold standard during that time. Nixon could have just decreased the amount of gold per dollar, but why bother with the farce and potentially lose all our gold?

There is a difference between pre- and post- central banking modified "gold standard" though, and that is the point I have tried to make time and time again as the reason why bitcoin will fail as a replacement currency. Inflation is not obvious theft; wealthy elites liquidating stock markets and large banks to restore the economy in a bust cycle is very visible and very irksome to the public. People demand change, and the bankers (JPM specifically) are more than happy to "help" the politicians write some laws to "regulate this problem." The first time a major event like this happens in bitcoin, the public will be running back to their inflationary ignorance. It may have already happened with last year's run-up. How many entrepreneurs were turned off by it? Who knows.

Bitcoin will absolutely fail as a replacement currency because of the 21 million limit and other factors, in my typically not so humble opinion. So scream for liberty and freedom from government and all that jazz, but you're screaming at the wall. People will not adopt bitcoin as anything more than a token novelty or for the occasional black/grey market purchase. With all the problems we both recognize with fiat currency, I had hoped bitcoin was that replacement currency. But then I researched it more and understood how flawed it was. And then I loudly made my opinion known and you deleted my posts and got my original account squelched, thus the notorious 2 on my user name. :-* I was really disappointed with bitcoin and obviously still am. And I will create a competitor, it's just a matter of time.

Yet you crucify others for nebulous definitions. Quite the double-standard.


There is no problem with debt in any situation, deflation or inflation, unless it is leveraged or there is no means to pay it back. FRB is a form of leverage. Bitcoin is not the issue here. Derivatives that develop based on it may be.


What liquidity needs to be retracted from the Bitcoin system? That's like saying gold needs to be destroyed. There is no sensibility to that whatsoever.

Attempts will be made to profit off of the Bitcoin base, no doubt. That has nothing to do with Bitcoin itself. At this point, technical issues have far greater potential for impacting the system than economic concerns.


That's what it boils down to. Currencies today have no direct connection to real assets, and no real restrictions on liquidity due to management decisions. FRB provides the mechanism by which liquidity begets liquidity. Who would agree to give up the digits in their account to drain liquidity when necessary? The only solution is to provide more.


Gold is the closest to an abstract form of money that a physical item can get (http://noblenomads.com/2012/04/11/fitting-bitcoin/). Because it has physical limitations, it forces deleveraging issues with liquidity. Bankers cannot continue business as usual, ignoring debts and deficits, when gold acts as a brake on their levering of financial instruments.

No government has ever willingly picked up the gold standard. It has always been due to duress of instability. The gold standard is as pure a monetary function for gold as there can be. Are you suggesting that you're smarter than Isaac Newton (http://www.econlib.org/library/Enc/GoldStandard.html)?

Fractional reserve did not make the gold standard meaningless: it simply allowed for expansion of the monetary benefits further from the foundation. Scarcity in a common form of capital restrains real economic growth. Additional supply allows for accelerated progress, just as a larger pot can allow a plant to grow bigger than a smaller one.

The difference is not just a "warm feeling" - with FRB, there is a chance that you might not get back but a fraction of your wealth should a collapse occur. The longer FRB continues, the greater the probability that a collapse will occur. With a 100% reserve system, there is no danger of losing any of your wealth; the only difference is that progressively smaller shares of it are necessary to conduct commerce. The real danger there is concentration of wealth, absent any other dynamics that would cause accumulation ratios to shift.

See the image below, where Bitcoin value is comparable to economic growth, and subunit value is comparable to price levels:

http://noblenomads.com/wp-content/uploads/2012/05/bitcoin_division_reflecting_gold.png (http://noblenomads.com/)

Gold has stringent limitations because it is physical: it is not infinitely divisible. If it were, there would never have been any need for another currency - just keep dividing gold smaller and smaller. MMT should love Bitcoin because it creates a form of gold in a purely abstract sense. The only problem current economists have is that they can't get past their fervent attachment to fractional fiat.

What gold can do is act as a large scale reserve. It could theoretically function as a currency as well. There are close to 170,000 metric tons of gold, which equates to over 5,400,000,000 troy ounces (~32,150 t ozs per metric ton), or approximately 169,000,000,000 grams (~31 grams per t oz). That supply could support global commerce, but would soon need to be subdivided if prices were to be kept stable.

An increasing fiat base is necessary to maintain price stability in accordance with economic growth. Without that expansion, prices would plummet just as they would with gold at the limits of its divisibility.

Instead of succumbing to the unreliable course of managed fiat, Bitcoin eschews unit expansion for decimal expansion, allowing it to maintain price stability with a static base. Available supply (stock to flow ratios here again) will vary, but doing so within a static base container strongly limits the range.


MMT works wonderfully when there is no connection to reality - monetary actions can make the numbers do what's intended. When coming back to the notion of physical supply & demand, MMT falls apart. Bitcoin recognises this and ingeniously accommodates the function of both a store of value and means of exchange; it satisfies Triffin's dilemma (http://en.wikipedia.org/wiki/Triffin_dilemma).


Lose all our gold through balance of payment transfers? You mean, like gold as a reserve currency? Shocking.


Some will be scared back to fiat, but when has fear ever stopped progress? Hint: never.

Delays and setbacks are not death knells, no matter how bitter you may be over the fact that your own bright idea for a crypto-currency failed. My apologies, it never even got off the ground, so it couldn't have failed: it was still-born.


See the diagram from earlier. You would do well to grow some humility before you fade into irrelevance. I've seen your kind come and go like so many gnats.

Oh, and your "competition" is based on laughably idiotic assumptions backed only by Byzantine rationale and a hostile persona. Were you wondering why not even the reputable fellow behind Solidcoin wouldn't help you? Now you know. Your strategy of dazzling people or, failing that, blinding them with bullsh*t is best left to professional bankers and politicians.

Stop trolling and grow up.

lol are you talking about the FRB nebulousity? Anyways, again I never did claim a deflationary spiral would happen, I always added a caveat. It was MoonShadow who ignored the caveat and ran with it.


I am not saying that debt is the problem; the repayment of it is.


:le sigh: Wealthy elites/bankers can retract liquidity; the regular joe cannot. The point I was making is that under a bitcoin-like currency, the regular joe will once again be at the whims of the wealthy elite and will be poorer for it through no fault of his own.


This thread is about economic concerns so let's try to stick with that, ok?


This infinitely divisible crap is so outside anything relevant. Infinitely divisible is not some panacea, it just allows the currency to have a physical limit and still allow for some semblance of expansion. The equivalent with gold is moving on to silver or copper or whatever else for smaller denominations if necessary.


When has fear allowed bad legislation to pass? oops. And I am not referring to potential future legislation that may hurt bitcoin.


How benevolent of you.


What in the hell are you talking about?


I could say the same for anyone who argues for bitcoin as a solid foundation for money. It's practically evoorhees's MO

It depends on what you mean by "work". Obviously, it works in the sense that it exists and is a pervasive phenomenon. I would also argue that it is not necessarily a violation of property rights (unlike some Austrians). I would also argue that it is the expected outcome of the conditions, similarly to what the freebanking branch of the Austrian School claims, except my reasoning is different.

However, if the leveraged instruments are accepted as a medium of exchange, it leads to business cycles, as explained in the Austrian Business Cycle Theory. It creates a boom by misleading the investors into thinking that the resources in the economy are more abundant than they really are. This leads to unsustainable projects. Once it turns out that there really are less resources available than the investors assume there were (which eventually it must, since otherwise the supply/demand is in a disequilibrium), the projects go bankrupt. This leads to a depression and a credit contraction. The central bank can also attempt an exponentially increasing money supply to postpone the bust, which eventually ends up in a hyperinflation.

How can it be irrelevant when it is a key feature of bitcoin, one that never existed before in any monetary system ?

I thought the excellent post by miscreanity above made that point clear..

I doubt that there really is a deflationary spiral effect in a truely free market. I suspect the deflationary situations we have had, have been engineered by central banks.

People cannot delay all purchases forever. If it is *necessary* to have it then people will buy it, regardless if it gets cheaper later.

If there are unnecessary purchases that people can delay then it is better for everyone when people do that. It creates less waste that way. Goods should be more durable anyway. We already have too much crap polluting our environment.

Well, it's not entirely correct that Bitcoin is infinitely divisible. In order to use smaller units than satoshis directly in the Bitcoin protocol, it requires an incompatible change. The Bitcoin protocol internally calculates in satoshis as integers. Other than that, it's right. Even when we use nanotechnology (see http://www.rfreitas.com/Nano/TangibleNanomoney.htm (http://www.rfreitas.com/Nano/TangibleNanomoney.htm)), gold cannot be transacted in units smaller than an atom. Bitcoin can be modified for any arbitrarily low smallest unit.

Amen, brother.  Now go forth and preach the word!

If I remember right, Detlev Schlichter argues that FRB could eventually find an equilibrium (if there are no bailouts etc). Many Austrians disagree that "no bailout" is a sufficient condition. For example, the businessmen might invest even if they know that it will go bust, as long as they believe they can sell it before the tide turns.

But if the majority of people understood the consequences, I think that could counteract it, so I tend to agree with you. The reason why expansion of credit leads to cycles is because the users are confused (deliberately tricked even). If they adapt their behaviour, the cycle would be mitigated. Theoretically, if the money supply is still elastic, there could be a misallocation of resources, but there would be no cyclical economic behaviour.

I don't quite agree.  I think that there would still be a cycle that statistics could identify, but that it's period and amplitude would be significantly attenuated under such a condition as to be inmaterial for the majority of people.  This is generally how it was for Joe Average for the first 100 or so years of the United States (generally) under a gold standard, it was those who earned an income (directly or indirectly) from investment capital and banking that such cycles affected to any dramatic degree.  Perhaps the Interent could one day lead to such a rise of distributed wisdom, but until such event the cycle will continue.

There is a major problem with the "deflation is doom" arguments that should be pointed out. From the consumption side it's very clear of course, people do buy things even in a deflationary situation which is evident even with goods that are not required for staying alive. Computers, smartphones, tablets etc. These are in a much sharper deflationary spiral than Bitcoin is likely to ever be and still those industries are doing fine.

With loans and investments this is usually not that simple but in fact it actually is. One just has to start thinking about WHY would deflation happen in the first place. One reason is population growth, or user growth. This is the main reason why the value of bitcoins has grown until now but let's assume we have 21 million coins and everyone is using Bitcoin. Then it's growing with the real population growth rate which is a small yearly percentage and it's going to actually turn to negative in a few decades (most population growth prediction models indicate this) which will actually cause a small inflationary pressure.

Regardless that will be a small factor. What we're left with is economic growth. Now, how does economic growth happen? With loans and investments. How will we manage to even get into a situation where nobody loans or invests because we have deflation, when there is no way for a deflationary situation to happen unless we first have economic growth?! The answer is, we can't. This is actually a paradox, deflation can't happen without economic growth (assuming the user base is fairly stable) which generally doesn't happen without loans and investments.

The answer in length is that in an economy with a fixed money supply debt and new loans will become increasingly expensive with increased economic growth. This will of course reduce loan-taking which will calm down the economic growth which will reduce deflation which will again decrease the price of loans and so on. In reality there will be an equilibrium of course so it doesn't actually go up and down all the time.

The point of this exercise was to show that it's not set in stone that the value of bitcoins just rise all the time. We simply might not have economic growth and then it will certainly not deflate. Which will keep money fairly cheap. If we start experiencing degrowth, money will get increasingly cheap making loan based investments much safer.

The likely result of this is that in a Bitcoin economy lot less unsound investments are made because you don't have inflation keeping those investments alive by keeping the debt cheap. Thus we will have a much healthier economy in a large number of ways. People will consume less because there are incentives to wait. People will save more money because saving is actually a sound possibility. People will take on less debt especially during deflation because debt is more expensive and more risky.

It won't end in a deflationary spiral. It won't kill the economy since people will still continue to buy whatever they need. Investments continue to be made, less if the economy is growing a lot, more if it's not growing. As evoorhees said, production, not consumption, is the driving force of this type of economy. Investments will also be more sound because the possibility of deflation will make loans much riskier than they are now. This will lead to a more stable economy with less ups and downs which is generally a good thing.

As a final note I'd like to add that this whole issue of investments becoming more difficult during deflation and economic growth applies really well only to loan based investments. Investments based on savings is still smart even if the economy is growing a bit. It has to be growing and thus Bitcoin deflating at a very high rate for a good savings based investment to become unprofitable. At that point the growth will stall at the latest and deflation will start decreasing.

So it's actually possible for the economy to grow and keep deflating even if loan based investments are difficult, if there is still a good market for high profit investments, which can then be funded from savings. In any case all types of loans and investments become increasingly profitable if economic growth stalls or starts degrowing.

Deflation while the economy is growing really can't be that bad, the whole notion is ridiculous. And what other ways are there for Bitcoin to deflate? The money supply is fixed, the supply is not going to deflate with the exception of lost coins. User base will eventually be fairly stable, right now the situation is complex because the supply is still in its high inflation phase but user base has grown sharply. The value of bitcoins rising and prices going down in a growing Bitcoin economy has not been a bad thing though, in fact we have seen Bitcoin merchants get more activity during user growth simply because people are trying out payments in this new economy.

I haven't really seen any good arguments yet for a sustained deflation problem that applies to Bitcoin. Keep them coming though. Bitcoin is a good experiment for an economy with a fixed money supply by the way. We'll find out if it works or not.

FRB is also a fairly interesting topic. Bitcoin banks can use FRB to an extent of course but only within their own accounts. The reserve requirements would naturally have to be a hell of a lot bigger than now because the "hard currency" would move in and out of the bank much more than it does in regular fiat banks.

This is because Bitcoin users can have individual hard currency accounts (Bitcoin wallets on their computers), while in fiat-land hard currency (money issued from central banks) only moves when a transfer is made from a bank to another bank. All transactions within the same bank, which are common in the traditional economy (but would be much less common in a Bitcoin economy simply because using banks and depositing to them is not "mandatory" in the same way) are simply the bank moving the debt based money around their own database, while not touching the hard currency at all.

So in a Bitcoin economy I would expect there to actually be some banks with no FRB, or 100% reserves and banks with a variety of different reserve requirements. The lower the reserve requirement the more risks are involved regarding bank runs.

The day to day transfers of hard currency (actual bitcoins) would likely be so high that even the biggest risk takers would have significantly higher reserves than the most sound banks in our mainstream economy. People could choose however, from banks that give you a high interest rate (because they use lower reserves and are able to loan out more) and banks that use a 100% reserve or close. The risks involved with those high interest deposits would be much higher of course.

You are right, the correct statement would be:
 bitcoin divisibility can be increased indefinitely by way of a new client version release to handle transactions using further decimals. Or ?