Hi, I will repost this here as the previous thread has been closed by the admin for unkown reasons / probably a lot of "deflation" posts which was not intended.
I believe 2 things are imperative

1) controlled growth of the supply as suggested by "Suggester"
2) Making credit available and facilitating savings through an interest free credit/savings exchange. This will prevent "hoarding". Instead of "hoarding" the BC could be lent out to others without interest. The lender will be compensated by credit points, which allows him to get a bigger credit from future savers.


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Bitcoins had quite a frenzy about them recently, being mentioned in mass media and their value increasing. However, they will die out even without governments etc. Intervening or clamping them down. Let me explain:

Bitcoins are not money. They are a (perfect) medium of exchange. Their properties are similar to gold: scarce (finite amount), divisible, stable, low volume / easy transport, secure. So they only fulfil two properties of money: exchange and storage of value. But they lack CREDIT.

Fiat however, is born out of credit (each dollar/euro/... cash or deposit is mirrored by an equal amount of debt). The next is zero. Money is debt. The debt money (fiat) arises from property rights: somebody needs cash so he will pledge his property against a loan. The bank demands interest for giving up her property right on the money (a compensation for not being able to use the money, NOT because of the credit risk). Fiat systems thus have inherent interest in debt contracts. This interest has not yet been created, in order to have the interest paid back, new money must be perpetually created. Obviously, over the course of many years, the fiat system leads to an unequal distribution of net worth, as people owning property earn interest and people needing money pay interest.
The advantage, however, of the fiat system is Credit: only Credit enables economic trade, investment etc. Everybody who started their own business or wanted to buy a house knows that.

But credit comes into place with property rights – the only conundrum is the interest which is inherent to it. If we could remove the interest, we could go towards more equilibrium and a more stable and sustainable economy.

Without credit, we would live in a mere barter society. That’s what the bitcoin world is at the moment – a bartering club.

Unless bit coins allow CREDIT, they will just be a scarce barter medium and will end in an awful way:
Due to their scarcity (and the relatively huge amount of fiat in circulation), a bubble is already building: many people buy bitcoins without the intention of even use them for barter. Easy to see, as mtgox a “exchange” is the biggest bitcoin accepting site. They are now valued at ten dollar, with about 8 million in circulation. I would not be surprised if they go to 100 dollars due to their scarcity and similar properties to gold. They are a highly deflationary medium.

Eventually, the bubble will burst however, as people suddenly find themselves on the selling side and convert their bitcoins into physical goods or fiat. (the velocity of money rises, everybody wants to get rid of them, prices of goods relatively rise, the currency plummets). This would lead to a sad end to a nice experiment. Just like with Tulipmania, Dot Com Bubble etc. People would lose a lot of fiat and staying away from alternative currencies for a long time.

So what can be done to avoid it?

1)   Bitcoins should not be completely scarce. A finite amount of bitcoins makes them highly deflationary. Similar to gold, a controlled mining should be allowed even after the intended stop, so their availability grows with usage

2)   Credit needs to be allowed and facilitated: As we don’t want to have another fiat experiment, bitcoins would be ideal to try true interest free credit:  please take a look at the following interest free credit/banking model which could be easily setup for Bitcoins
http://jak.aventus.nu/download/Uppsatser/MARK_BURTON_DISSERTATION_2.pdf
http://www.feasta.org/documents/review2/carrie2.htm

Thoughts / critique / discussion welcome!
Guy

Sorry, I'm new. Just found out there is an economics forum.
Maybe an admin could kindly move the thread.

Thanks

would be happy to discuss this. I just opened a thread about the economics point on Bitcoins
http://forum.bitcoin.org/index.php?topic=11582.0

Hi, The problems is not amount, but growth. If you don't allow growth AT all after some point, the currency is deflationary, meaning people start to hoard the money, because they know that there will be more goods available tomorrow but the same amount of money.
Money get worth more - what we are seeing now with bitcoins.

Ideally, the amount should be fully flexible and based on economic activity: if Bitcoins take over the world, the amount should be allowed to grow in order to make the VALUE of the currency STABLE versus the ECONOMIC ACTIVITY / GOODS AVAILABLE it constitutes.
This is now very easy to measure with bitcoins due to the computing power in the network.

Also, if the activity slows (which is highly unlikely but possible), the amount of money should be REDUCED. They could withdraw from every client the tiniest fraction on a predetermined and announced date. Basically the currency/money should always be flexible with the economy, which moves in cycles.

Fiat currently is inflationary: they print MORE than the economy grows. Thus it LOSES value. They are doing exactly the wrong thing, but they need to do it, because interest needs to be paid. If you have an interest free monetery system, you can REDUCE the amount of moeny without creating a crisis.

Bitcoins had quite a frenzy about them recently, being mentioned in mass media and their value increasing. However, they will die out even without governments etc. Intervening or clamping them down. Let me explain:

Bitcoins are not money. They are a (perfect) medium of exchange. Their properties are similar to gold: scarce (finite amount), divisible, stable, low volume / easy transport, secure. So they only fulfil two properties of money: exchange and storage of value. But they lack CREDIT.

Fiat however, is born out of credit (each dollar/euro/... cash or deposit is mirrored by an equal amount of debt). The next is zero. Money is debt. The debt money (fiat) arises from property rights: somebody needs cash so he will pledge his property against a loan. The bank demands interest for giving up her property right on the money (a compensation for not being able to use the money, NOT because of the credit risk). Fiat systems thus have inherent interest in debt contracts. This interest has not yet been created, in order to have the interest paid back, new money must be perpetually created. Obviously, over the course of many years, the fiat system leads to an unequal distribution of net worth, as people owning property earn interest and people needing money pay interest.
The advantage, however, of the fiat system is Credit: only Credit enables economic trade, investment etc. Everybody who started their own business or wanted to buy a house knows that.

But credit comes into place with property rights – the only conundrum is the interest which is inherent to it. If we could remove the interest, we could go towards more equilibrium and a more stable and sustainable economy.

Without credit, we would live in a mere barter society. That’s what the bitcoin world is at the moment – a bartering club.

Unless bit coins allow CREDIT, they will just be a scarce barter medium and will end in an awful way:
Due to their scarcity (and the relatively huge amount of fiat in circulation), a bubble is already building: many people buy bitcoins without the intention of even use them for barter. Easy to see, as mtgox a “exchange” is the biggest bitcoin accepting site. They are now valued at ten dollar, with about 8 million in circulation. I would not be surprised if they go to 100 dollars due to their scarcity and similar properties to gold. They are a highly deflationary medium.

Eventually, the bubble will burst however, as people suddenly find themselves on the selling side and convert their bitcoins into physical goods or fiat. (the velocity of money rises, everybody wants to get rid of them, prices of goods relatively rise, the currency plummets). This would lead to a sad end to a nice experiment. Just like with Tulipmania, Dot Com Bubble etc. People would lose a lot of fiat and staying away from alternative currencies for a long time.

So what can be done to avoid it?

1)   Bitcoins should not be completely scarce. A finite amount of bitcoins makes them highly deflationary. Similar to gold, a controlled mining should be allowed even after the intended stop, so their availability grows with usage

2)   Credit needs to be allowed and facilitated: As we don’t want to have another fiat experiment, bitcoins would be ideal to try true interest free credit:  please take a look at the following interest free credit/banking model which could be easily setup for Bitcoins
http://jak.aventus.nu/download/Uppsatser/MARK_BURTON_DISSERTATION_2.pdf
http://www.feasta.org/documents/review2/carrie2.htm

Thoughts / critique / discussion welcome!
Guy