The effects of savings and debt on bitcoin based economy

[deisik]

But to get back to the sound-money system...  Certainly, *in aggregate*, this steady state would probably see a portion of money permanently saved away.  Whatever the size of this portion, it needs not be a concern.  Money is almost infinitely divisible.  Whatever is left circulating would just have to be priced appropriately to reflect the goods and services available in the economy.

The fact that money is infinitely divisible is irrelevant here. What matters is the change in the amount of money per change in the amount of goods produced and services rendered, which would lead to either depreciation of money or its appreciation. Ultimately, money serves to facilitate the exchange of goods, and a slightly depreciating money does this better than an appreciating money (or just time invariant money)...

[odolvlobo]

Ultimately, money serves to facilitate the exchange of goods, and a slightly depreciating money does this better than an appreciating money (or just time invariant money)...

Money serves to facilitate the exchange of value, and "better" is a matter of opinion. I prefer a constant value, and slightly appreciating or depreciating values are equivalently inconsequential.

[dblink]

I assume this because to my understanding bitcoin doesn't support money printing and this means people aren't forced to invest their money to avoid inflation.

According to your statement, the "people" you mentioned here meant fixed-investor ?. If it is, then the fixed investor are the hardest hit during inflation. According to me without the money flowing in the market there is not a single solution to avoid inflation crisis. Since you are an economist can you enlighten my knowledge regards to this.

[deisik]

Ultimately, money serves to facilitate the exchange of goods, and a slightly depreciating money does this better than an appreciating money (or just time invariant money)...

Money serves to facilitate the exchange of value, and "better" is a matter of opinion. I prefer a constant value, and slightly appreciating or depreciating values are equivalently inconsequential.

Money only represents value, i.e. the value of goods and services that can be bought with it. It doesn't have much value in itself (save for the transactional and exchange utilities). If money appreciates, that means that it represents more value, and vice versa. And no, slightly depreciating money (about a few percentages annually) facilitates the exchange of "values" better than non-depreciating money, since it disfavors hoarding which affects the exchange utility of money, thereby making it less efficient. Furthermore, slight depreciation favors producers since they are among the first after the bankers to get the money, thereby making them less affected by the negative effects of money depreciation, which contributes to production (depreciation adds up a little to their profits)...

If you happen to challenge this (which you evidently do), bring forward a viable argument in favor of your position. Just saying that you disagree obviously won't suffice

[EggShells]

...but in the long run it will only further unwind the deflationary spiral...

Could you elaborate on this one?   I'm not sure what you mean.

Since people are hording money, there is greater demand of it. In other words, the demand for money results from people's desire to hold money. Hoarding money inevitably causes money appreciation because there is less quantity of money per same amount of goods (initially). As I said, the decrease in the amount of money in circulation can be offset by an increase in money velocity (which actually happens in the short term), but money velocity increases only when people spend (or invest) money (in the long term). Therefore, greater demand for money (hoarding) ultimately leads to a decrease in the velocity of money, thereby further unwinding the deflationary spiral...

That's why it is called spiral

A spiral is a pattern that gets more and more intense, but the initial deflation going into a sound-money system (if that's what happens -- it would depend on how we did it) is self limiting.  People will start spending when they get older, and actually spend more since they know the savings they have left won't be eaten away by an inflationary system.

Another self limiting factor of this deflation is that the more money is saved away in aggregate, the more incentive to spend, since the lower the price levels would be.  Thus it is a naturally self-balancing system, just as healthy systems should be.

Again, the terror inspired by modern commentary about deflation only relates what I call "bad deflation," ie price and demand collapse after an asset bubble bust, which is precisely the kind of thing the modern system produces periodically (much more frequently in the developing world than, say, in the US -- but then it comes back to bite us as war and terrorism.)

Since the modern system moves more and more towards the production of luxuries for its beneficiaries, consumed at their whim, it's no wonder that spending and demand are fragile.  This is the result of inequality and instability reinforcing each other.

[EggShells]

But to get back to the sound-money system...  Certainly, *in aggregate*, this steady state would probably see a portion of money permanently saved away.  Whatever the size of this portion, it needs not be a concern.  Money is almost infinitely divisible.  Whatever is left circulating would just have to be priced appropriately to reflect the goods and services available in the economy.

The fact that money is infinitely divisible is irrelevant here. What matters is the change in the amount of money per change in the amount of goods produced and services rendered, which would lead to either depreciation of money or its appreciation. Ultimately, money serves to facilitate the exchange of goods, and a slightly depreciating money does this better than an appreciating money (or just time invariant money)...

What you describe is a self-reinforcing pattern of deflation, which is by no means certain to happen (as I argued earlier.)

Money serves many more functions than that.  For example as a record of how much contribution each person has made, and thus how much reward is due.  In this capacity it serves a moral function.

In fact, the very discussion of the nature of money is politically and ideologically tainted from the get-go.  Best to stick to how the system works, and its implications, in practice.

[deisik]

...but in the long run it will only further unwind the deflationary spiral...

Could you elaborate on this one?   I'm not sure what you mean.

Since people are hording money, there is greater demand of it. In other words, the demand for money results from people's desire to hold money. Hoarding money inevitably causes money appreciation because there is less quantity of money per same amount of goods (initially). As I said, the decrease in the amount of money in circulation can be offset by an increase in money velocity (which actually happens in the short term), but money velocity increases only when people spend (or invest) money (in the long term). Therefore, greater demand for money (hoarding) ultimately leads to a decrease in the velocity of money, thereby further unwinding the deflationary spiral...

That's why it is called spiral

A spiral is a pattern that gets more and more intense, but the initial deflation going into a sound-money system (if that's what happens -- it would depend on how we did it) is self limiting.  People will start spending when they get older, and actually spend more since they know the savings they have left won't be eaten away by an inflationary system.

Another self limiting factor of this deflation is that the more money is saved away in aggregate, the more incentive to spend, since the lower the price levels would be.  Thus it is a naturally self-balancing system, just as healthy systems should be.

This has been discussed a million times already. First, you say that people start spending when they get older. That's okay, but again you somehow forget that when the elders start spending, the youths may start saving (just as their ancestors in their time). And you can't prove it logically that they will be saving less. Second, you say that people spend more under deflation since they know that their savings won't be eaten away by inflation. This is just plain wrong and against all logic since in the latter case people obviously have more incentive to spend than in the former (since money is constantly losing its purchasing power, and it gets spent immediately). That has been proven by practice a million times again...

But what you said is ultimately irrelevant since it is not the collapse in consumers' demand (which is always short termed per se). You completely left out from consideration the producers' side, as if the total output were not affected by the appreciating money

[daibatzu]

...but in the long run it will only further unwind the deflationary spiral...

Could you elaborate on this one?   I'm not sure what you mean.

Since people are hording money, there is greater demand of it. In other words, the demand for money results from people's desire to hold money. Hoarding money inevitably causes money appreciation because there is less quantity of money per same amount of goods (initially). As I said, the decrease in the amount of money in circulation can be offset by an increase in money velocity (which actually happens in the short term), but money velocity increases only when people spend (or invest) money (in the long term). Therefore, greater demand for money (hoarding) ultimately leads to a decrease in the velocity of money, thereby further unwinding the deflationary spiral...

That's why it is called spiral

A spiral is a pattern that gets more and more intense, but the initial deflation going into a sound-money system (if that's what happens -- it would depend on how we did it) is self limiting.  People will start spending when they get older, and actually spend more since they know the savings they have left won't be eaten away by an inflationary system.

Another self limiting factor of this deflation is that the more money is saved away in aggregate, the more incentive to spend, since the lower the price levels would be.  Thus it is a naturally self-balancing system, just as healthy systems should be.

Again, the terror inspired by modern commentary about deflation only relates what I call "bad deflation," ie price and demand collapse after an asset bubble bust, which is precisely the kind of thing the modern system produces periodically (much more frequently in the developing world than, say, in the US -- but then it comes back to bite us as war and terrorism.)

Since the modern system moves more and more towards the production of luxuries for its beneficiaries, consumed at their whim, it's no wonder that spending and demand are fragile.  This is the result of inequality and instability reinforcing each other.

I understand the logic of people spending as they get older but could a case be made for transferring accumulated wealth to the next generation also or is this typically in the form of assets (housing, artwork, gold, diamonds e.t.c)?

[Aayush]

Hello all. I have been thinking a lot about alternative economic systems and have two hypothetical questions.
Say there is a country of 4 million people and the average earnings every year for each person is 25,000 units of bitcoin. And in this country, the people here save 10 percent of their income (for religious reasons or whatever). And when I say save, I mean they do not want to invest it in the stock market or a company or anything else. They just want to set it aside, like keeping gold coins under your mattress. I assume this because to my understanding bitcoin doesn't support money printing and this means people aren't forced to invest their money to avoid inflation. Come to think of it, deflation is a great incentive to save money. Now, this would mean every year 2500 bitcoins per person is no longer circulating within the economy. Just laying dormant. In 10 years it would be 25,000 per person. In 100 years 250,000. My question is, is this sustainable for an economy? What gives?
Secondly, what effect would an interest free economic system like the muslims supposedly use have on an economy based on bitcoin? To my understanding muslim banking is a bit like kickstarter where people pool funds to create a business (could be occulus rift or lego or whatever) and if the business succeeds they get a share according to what percentage they invested in the company. If it fails then everybody loses. This reduces debt loads because you are not stuck with interest payments and there is really no such thing as borrowing in the traditional sense. Room for fraud obviously but it seems there is a lot of fraud in our current system as well. And with a system like the internet, past reputation can probably be easier to gauge. Is this sustainable also? What are the pros and cons?

Please note I am by no means an economics specialist, just worried about the way most economies around the world seem to be unsustainable and imploding and thinking of solutions. Thanks

One flaw I find in your assumptions, is that you cannot take bitcoins as a unit, since bitcoins are limited you cannot earn 25,000 units and save 2,500 units endlessly, however what can be done is that the value remains the same, that is to say the purchasing power. Like 2500$ btc worth eac month and saving 250$ eac month.
This will have the same deflationary effect putting an equal value of bitcoins each month out of circulation.
This is entirely sustainable as bitcoins can be divided infinetly, so the units remaining of btc won't matter, so the saving's do not affect that in any actual manner.People do keep assets and those 25,000 units per person u say will just be an asset.

With bitcoins I do beleive a interest world is set to exist thanks to it's deflationary nature.
Te kickstarter type concept would be hard to bring forth on a larger scale as it contains many inefficiencies, people do not like to loose money and be arbitrary about gains the interest model guarantees a much safer  and reliable path.
Whatever currency we may use, the expected amount will always exceed the actual amount, thanks to interest.

[daibatzu]

I assume this because to my understanding bitcoin doesn't support money printing and this means people aren't forced to invest their money to avoid inflation.

According to your statement, the "people" you mentioned here meant fixed-investor ?. If it is, then the fixed investor are the hardest hit during inflation. According to me without the money flowing in the market there is not a single solution to avoid inflation crisis. Since you are an economist can you enlighten my knowledge regards to this.

Actually I'm not an economist at all. With regard to monetary hoarding leading to inflation you might have a point. When people save money there is a lack of capital in the economy. This conceivably causes interest rates to rise providing an incentive for the owners of capital to lend money which creates inflation as the money supply is increased and also has to match the returns on  higher interest rates. Just my guess though, not an expert

[daibatzu]

One flaw I find in your assumptions, is that you cannot take bitcoins as a unit, since bitcoins are limited you cannot earn 25,000 units and save 2,500 units endlessly, however what can be done is that the value remains the same, that is to say the purchasing power. Like 2500$ btc worth eac month and saving 250$ eac month.
This will have the same deflationary effect putting an equal value of bitcoins each month out of circulation.
This is entirely sustainable as bitcoins can be divided infinetly, so the units remaining of btc won't matter, so the saving's do not affect that in any actual manner.People do keep assets and those 25,000 units per person u say will just be an asset.

With bitcoins I do beleive a interest world is set to exist thanks to it's deflationary nature.
Te kickstarter type concept would be hard to bring forth on a larger scale as it contains many inefficiencies, people do not like to loose money and be arbitrary about gains the interest model guarantees a much safer  and reliable path.
Whatever currency we may use, the expected amount will always exceed the actual amount, thanks to interest.

Thanks Aayush. I think I have a lot of difficulty wrapping my head around how exactly a bitcoin unit is divided. Seems really confusing to me. Isn't that the same as increasing the money supply by stealth?
The problem I see with interest is exponential growth (http://www.nlcpr.com/compoundinterest.php) and the fact that it causes inflation because of the hidden costs of borrowing in the production supply chain. Is interest a way of balancing the deflation tendencies of bitcoin/the gold standard?

[Aayush]

Thanks Aayush. I think I have a lot of difficulty wrapping my head around how exactly a bitcoin unit is divided. Seems really confusing to me. Isn't that the same as increasing the money supply by stealth?
The problem I see with interest is exponential growth (http://www.nlcpr.com/compoundinterest.php) and the fact that it causes inflation because of the hidden costs of borrowing in the production supply chain. Is interest a way of balancing the deflation tendencies of bitcoin/the gold standard?

The smallest bitcoin unit currently is a satoshi 10^-8
If it comes to a situation when all bitcoin except one is locked away a single bitcoin can be split even further than a satoshi.
That does not however change the value of that one btc in any way.
It's like u have a $ but if value of $ begins to increase you start using cents for your daily transactions and if value increases more u need a smaller unit than a cent say 1/10th of a cent. In this process however the value of btc remains the same.
So no it is not increasing money supply in any way we are just splitting the same $ value in smaller parts.

Yes the interest problem always is existent, and it does give the illusion of an increased money supply leading to inflation. Bitcoin is a naturally deflationary currency and depending on the market conditions it will counter the inflation surge, in a way that the overall currency shall still remain deflationary.IMO

[manselr]

One flaw I find in your assumptions, is that you cannot take bitcoins as a unit, since bitcoins are limited you cannot earn 25,000 units and save 2,500 units endlessly, however what can be done is that the value remains the same, that is to say the purchasing power. Like 2500$ btc worth eac month and saving 250$ eac month.
This will have the same deflationary effect putting an equal value of bitcoins each month out of circulation.
This is entirely sustainable as bitcoins can be divided infinetly, so the units remaining of btc won't matter, so the saving's do not affect that in any actual manner.People do keep assets and those 25,000 units per person u say will just be an asset.

With bitcoins I do beleive a interest world is set to exist thanks to it's deflationary nature.
Te kickstarter type concept would be hard to bring forth on a larger scale as it contains many inefficiencies, people do not like to loose money and be arbitrary about gains the interest model guarantees a much safer  and reliable path.
Whatever currency we may use, the expected amount will always exceed the actual amount, thanks to interest.

Thanks Aayush. I think I have a lot of difficulty wrapping my head around how exactly a bitcoin unit is divided. Seems really confusing to me. Isn't that the same as increasing the money supply by stealth?
The problem I see with interest is exponential growth (http://www.nlcpr.com/compoundinterest.php) and the fact that it causes inflation because of the hidden costs of borrowing in the production supply chain. Is interest a way of balancing the deflation tendencies of bitcoin/the gold standard?

No it isn't. 1 BTC = 1 BTC, no matter how much you divide it. This is pretty simple logic. This is the same principle:

https://www.youtube.com/watch?v=YtLEWVu815o

Kids don't seem to get it even if it's obvious. In the Bitcoin context, adults seem to have problems too, because it's not as obvious as something physical, but it's basically the same. Bitcoin will be scarce, no matter how much you divide it.

[EggShells]

This has been discussed a million times already. First, you say that people start spending when they get older. That's okay, but again you somehow forget that when the elders start spending, the youths may start saving (just as their ancestors in their time). And you can't prove it logically that they will be saving less. Second, you say that people spend more under deflation since they know that their savings won't be eaten away by inflation. This is just plain wrong and against all logic since in the latter case people obviously have more incentive to spend than in the former (since money is constantly losing its purchasing power, and it gets spent immediately). That has been proven by practice a million times again...

But what you said is ultimately irrelevant since it is not the collapse in consumers' demand (which is always short termed per se). You completely left out from consideration the producers' side, as if the total output were not affected by the appreciating money

First off, I am not sure what you are trying to argue by citing output from the producer side.  Can you elaborate?  Specifically, you seem to say that there will be some kind of progressive price, demand or output squeeze, as in a spiral.  I don't argue that a general lowering of these levels, compared to the present system, might well happen under sound money.  I do beg to differ when we talk about some kind of spiral.

If a spiral would ensue, then the Italian Renaissance and 18th century Scottish free-banking era (both enjoying the rare examples of sound money and state-free credit during modern history) would have squeezed prices pretty hard.  Not to mention, the thousand year plus of gold and silver would have squeezed prices to almost zero.  Instead, the Scottish GDP rose from half to equal to that of England during its free-banking period, and the progress and prosperity during the Renaissance goes without saying.

The youth saving vs. elderly spending thing is a non-issue, as we are only talking about the steady-state.  It doesn't matter which one is higher, as long as some steady state obtains.  The key point is that the entire system would be self-correcting and steady-state-seeking, as opposed to self-reinforcing and chaos-seeking as in modern finance and money.

Ultimately, though, all we have are theories at this point.  The reason is that the sound money system has never been sufficiently experienced and studied since the birth of modern economics, as compared to features of the modern system.  We do know that the problems of deflation, as we know them, only apply to the modern system (as you said, experienced a "million times.")  Typically, this form of economic pain occurs when the system tries desperately to regain monetary confidence, say, by holding on to a peg to a stronger money, either precious metals or a hard currency, after confidence is already busted.   Examples are Britain's attempt to stick to the gold standard at the pre-war gold price in the 1920s, or the attempt by many a developing country to maintain their hard currency pegs by raising interest rates and cutting fiscal deficits after a financial bust, either under pressure from the IMF or of their own accord.  It is all par for the course for a basically deceptive system.

[JarvisTechnology]

The number of bitcoins has no effect on the viability or sustainability of Bitcoin. There are 21 million bitcoins. There could be 21 quadrillion or just 21. It is an arbitrary number. It doesn't make a difference.

However, as pointed out by Amph, the bitcoins are not gone forever. They will be spent eventually. Otherwise, what is the point of saving them? The question is moot.

The difference between an interest-bearing loan and buying a share of a company is just the structure of the investment, primarily in the assignment of risk. In the end, the results are the same for the investor: they give some money to someone and they get it back later with a bonus.

In this era where money must also allow people to compare the value of dissimilar goods and services, and then hold that value into the future....
And as compare to bitcoin which is haven't yet popular it's economy cannot run a healthy course, at least as far as the dynamics of money in the economy are concerned. 

[Possum577]

Are we assuming that this community earns exclusively in bitcoin as well? Because if people are earning in fiat than the deflation of BTC or inflation of fiat (to BTC) would result in fewer and fewer BTC being acquired for the same amount of fiat, which would minimize some of the supply constraints you're hypothesizing. It's a good question, I hope all of us are the right side of it!

[Erdogan]

There is no such thing as a deflationary spiral, because there is a balance between money value and consumption.

Since money have no intrinsic value, nothing real is held back from the economy by saving, neither consumption nor investments. What is consumed and invested, is what is produced, no more, no less. A saver defers consumption on his part, products can then be consumed by others. The price signals incur it.

With a lot of saving, money value will increase. Or the price of money, as expressed in some other goods, is increasing.  Increasing money value incurs the savers to save less and spend more. All savings will eventually be spent, there is no point in saving if not to be able to spend later.

The interest rate is the price you pay to consume or invest earlier than otherwise, it is the price of the time factor, it is different from the price of money itself. If lots of money are saved (high money value), the interest will be low, because the savers want to invest or supply money on the loan market. When a project with favorable risk and profit shows up, money will be available for loaning with a low rate. If everybody wants to loan and invest, interest will go up until equilibrium is found.

Trying to regulate the level of investment by force, through taxation and public works, is the fallacy. It only disturbs the balances and creates turbulence.

[Miracal]

Also is it always true that we will buy more with more technology? Consider the iphone. I no longer need a phone, watch, game machine, compass, walkman, camera and many other devices. It seems technology is clumping up different devices and selling them for the price of one these days.

Yes, I somehow agree. There are technology devices that create a particular commodity. Then they compete with their rivals trying to give more value for money. They increase prices adding services which people might not really need but market it in a way which makes people believe they do. 

[daibatzu]

One flaw I find in your assumptions, is that you cannot take bitcoins as a unit, since bitcoins are limited you cannot earn 25,000 units and save 2,500 units endlessly, however what can be done is that the value remains the same, that is to say the purchasing power. Like 2500$ btc worth eac month and saving 250$ eac month.
This will have the same deflationary effect putting an equal value of bitcoins each month out of circulation.
This is entirely sustainable as bitcoins can be divided infinetly, so the units remaining of btc won't matter, so the saving's do not affect that in any actual manner.People do keep assets and those 25,000 units per person u say will just be an asset.

With bitcoins I do beleive a interest world is set to exist thanks to it's deflationary nature.
Te kickstarter type concept would be hard to bring forth on a larger scale as it contains many inefficiencies, people do not like to loose money and be arbitrary about gains the interest model guarantees a much safer  and reliable path.
Whatever currency we may use, the expected amount will always exceed the actual amount, thanks to interest.

Thanks Aayush. I think I have a lot of difficulty wrapping my head around how exactly a bitcoin unit is divided. Seems really confusing to me. Isn't that the same as increasing the money supply by stealth?
The problem I see with interest is exponential growth (http://www.nlcpr.com/compoundinterest.php) and the fact that it causes inflation because of the hidden costs of borrowing in the production supply chain. Is interest a way of balancing the deflation tendencies of bitcoin/the gold standard?

No it isn't. 1 BTC = 1 BTC, no matter how much you divide it. This is pretty simple logic. This is the same principle:

https://www.youtube.com/watch?v=YtLEWVu815o

Kids don't seem to get it even if it's obvious. In the Bitcoin context, adults seem to have problems too, because it's not as obvious as something physical, but it's basically the same. Bitcoin will be scarce, no matter how much you divide it.

I see. Makes sense now. Most people think in terms of dollars and cents at the most.

[n2004al]

Hello all. I have been thinking a lot about alternative economic systems and have two hypothetical questions.
Say there is a country of 4 million people and the average earnings every year for each person is 25,000 units of bitcoin. And in this country, the people here save 10 percent of their income (for religious reasons or whatever). And when I say save, I mean they do not want to invest it in the stock market or a company or anything else. They just want to set it aside, like keeping gold coins under your mattress. I assume this because to my understanding bitcoin doesn't support money printing and this means people aren't forced to invest their money to avoid inflation. Come to think of it, deflation is a great incentive to save money. Now, this would mean every year 2500 bitcoins per person is no longer circulating within the economy. Just laying dormant. In 10 years it would be 25,000 per person. In 100 years 250,000. My question is, is this sustainable for an economy? What gives?
Secondly, what effect would an interest free economic system like the muslims supposedly use have on an economy based on bitcoin? To my understanding muslim banking is a bit like kickstarter where people pool funds to create a business (could be occulus rift or lego or whatever) and if the business succeeds they get a share according to what percentage they invested in the company. If it fails then everybody loses. This reduces debt loads because you are not stuck with interest payments and there is really no such thing as borrowing in the traditional sense. Room for fraud obviously but it seems there is a lot of fraud in our current system as well. And with a system like the internet, past reputation can probably be easier to gauge. Is this sustainable also? What are the pros and cons?

Please note I am by no means an economics specialist, just worried about the way most economies around the world seem to be unsustainable and imploding and thinking of solutions. Thanks

Bitcoin is a great invention and with this, everyone which known and like it, agree. So an economy based on it as a currency is (must be) theoretically almost perfect. Mainly because, according to me but even for to, to many others, this economy will not suffer from inflation. But I write "almost" perfect. Because it will be a deflationary economy. Your post explain a similar case. You wrote: "deflation is a great incentive to save money". That's correct. Buy it will be such for overall economy of this country? You can find exhaustive answer to this question here: https://en.wikipedia.org/wiki/Deflation

As for me the "word" almost expressed above shows my thoughts about this economic model.