The effects of savings and debt on bitcoin based economy

[daibatzu]

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

[1715167086]

1715167086

[1715167086]

1715167086

[AtheistAKASaneBrain]

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 will keep releasing new coins into the economy until year 2140. Sure, after 2025 he curve starts getting pretty flat and there aren't many new coins generated, but by then the price of BTC will be way too high to talk in terms of BTC, mBTC will be the standard.
There is no problem in people saving, if there is demand, that just means the price goes higher, and given the exceptional divisibility of BTC, the economy will still be fluid. I remember hearing somewhere that in theory, the whole BTC economy could perfectly function under 1 BTC available only, it's that divisible.

[deisik]

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?

It could potentially be sustainable, for the factors which you didn't mention. What will the population growth be within these 100 years? How technologically advanced is this country? If you keep all other things the same, then no, such an economy is not sustainable in the long run. A closed society built on these conditions will most certainly end up in a civil war (or will switch to barter, if it was not well developed at the start)...

[Amph]

don't forget that there will always be fees around, so even if the total amount of utilizable bitcoin would be so slim that many people cannot use it, you can still use receive fee via mining activity

also those 10 saved, will be spent one day, it's not like they are lost forever...

anyway you can always run additional blockchain with other coins, in the worst case scenario, but you need to build everything from zero again

[odolvlobo]

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.

[daibatzu]

don't forget that there will always be fees around, so even if the total amount of utilizable bitcoin would be so slim that many people cannot use it, you can still use receive fee via mining activity

also those 10 saved, will be spent one day, it's not like they are lost forever...

anyway you can always run additional blockchain with other coin, in the worst case scenario, but you need to build everything from zero again

Good point that it will spent at some point. One of the examples I had in mind was people saving for their pensions to be paid out at age 65 or whatever and did not want to invest in the stock market or any other risky investment. This could of course end up being the entire working age population of a country assuming a low unemployment rate.

[daibatzu]

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?

It could potentially be sustainable, for the factors which you didn't mention. What will the population growth be within these 100 years? How technologically advanced is this country? If you keep all other things the same, then no, such an economy is not sustainable in the long run. A closed society built on these conditions will most certainly end up in a civil war (or will switch to barter, if it was not well developed at the start)...

deseik could you explain what effect technology and population would have seeing as people still need to buy stuff whether they have technology or not even if it is each other? Perhaps using the two scenarios below both with a non money printing currency like bitcoin. Because I'm thinking, the government might decide to use money printing to make up tax revenue shortfalls if people are hoarding money and  additionally the share of government expenditure related to GDP would have to rise to spread the wealth and prevent civil unrest.
1.) A scientifically advanced society, say Japan but with self sustaining resources and a fixed or slightly declining population for x number of years
2.) A nation like Chad with little technology and resources but a growing population for x number of years

Thanks

[deisik]

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?

It could potentially be sustainable, for the factors which you didn't mention. What will the population growth be within these 100 years? How technologically advanced is this country? If you keep all other things the same, then no, such an economy is not sustainable in the long run. A closed society built on these conditions will most certainly end up in a civil war (or will switch to barter, if it was not well developed at the start)...

deseik could you explain what effect technology and population would have seeing as people still need to buy stuff whether they have technology or not even if it is each other? Perhaps using the two scenarios below both with a non money printing currency like bitcoin. Because I'm thinking, the government might decide to use money printing to make up tax revenue shortfalls if people are hoarding money and  additionally the share of government expenditure related to GDP would have to rise to spread the wealth and prevent civil unrest.
1.) A scientifically advanced society, say Japan but with self sustaining resources and a fixed or slightly declining population for x number of years
2.) A nation like Chad with little technology and resources but a growing population for x number of years

Ultimately, it doesn't matter how many coins are in circulation, provided the money is divisible enough (therefore even 1 bitcoin could potentially suffice). What matters here is the quantity of goods (and volume of services) per capita produced by the economy (which is why GDP is important). When people begin saving (and don't spend later, as your question assumes), they buy less goods, so less goods will be produced later. Thereby the quantity of goods per capita diminishes, and the society impoverishes itself overall. If the population of such society diminishes (e.g. due to mortality rate exceeding birth rate) and diminishes faster than the number of coins in circulation, then the quantity of goods per capita remains either the same or actually increases, thereby somewhat offsetting saving (though that would most likely not hold true in reality, since less people will produce less goods). If the population increases, but the society is technologically advanced, then the diminishing number of coins can be offset (to a degree) by technological innovations, so that with less money people can buy more (since people could still buy more even if they didn't save)...

[daibatzu]

thanks deseik I get it now. Just one more niggle. What do you think about pensions though since most societies seem to have it. It would seem the US and Japan liberalized pensions (401k, privatizing Japan Post) to put the money saved by the elderly to what seemed to be more productive uses. Should pensions simply be set aside (not monetized) and paid by companies/governments when due (the company or government might not exist however) or should they be abolished altogether?

[daibatzu]

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.

[deisik]

thanks deseik I get it now. Just one more niggle. What do you think about pensions though since most societies seem to have it. It would seem the US and Japan liberalized pensions (401k, privatizing Japan Post) to put the money saved by the elderly to what seemed to be more productive uses. Should pensions simply be set aside (not monetized) and paid by companies/governments when due (the company or government might not exist however) or should they be abolished altogether?

As far as I'm acquainted with the question, the money which is allegedly saved by the elderly for their pensions was actually spent on paying pensions to their ancestors, so today's elders can only be paid from the money earned by their descendants, i.e. today's workers...

So the answer ultimately depends on a few things, e.g. the ratio of the number of workers and pensioners, the productivity of today's workforce, the average lifespan after retiring, etc

[deisik]

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.

But don't forget that instead of buying a phone, watch, etc, you buy an i-phone and then you can either save the free money (which you didn't spend on all these things) or spend it on something else. You guess, most people prefer spending to saving, thereby ending up buying even more technology (in terms of functionality) than they could allow earlier... 

[daibatzu]

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.

But don't forget that instead of buying a phone, watch, etc, you buy an i-phone and then you can either save the free money (which you didn't spend on all these things) or spend it on something else. You guess, most people prefer spending to saving, thereby ending up buying even more technology (in terms of functionality) than they could allow earlier... 

Well thought out. Thanks for the explanation

[johnyj]

Hello all. I have been thinking a lot about alternative economic systems and have two hypothetical questions.

OP's question is quite interesting

People tends to believe that the currency's value is relatively stable (They use it as a standard unit to measure value, they don't like the value of the unit itself fluctuate, a currency with floating value will make average people's decision making very difficult, they would prefer the value of the currency to be a constant)

Following this thought, you will see that the "deflation spiral" is true: When people are hoarding coins more and more, less and less coins will be used on trading. To merchants, less coins means less sale, thus they will scale down the production, laying off workers, and workers get less income, less spending, and even less coins in circulation, a negative feedback loop until almost every spending are cut to minimum

So the solution is that people must get rid of the idea that currency's value is constant. If merchants understand that currency's value is floating depends on supply and demand, they would cut the product price, and cut the income for his employees when currency becomes scarce. Theoretically, if currency supply reduced by half, then everything's price inclusive salary would be cut by half, to make the whole economy work as usual. But I'm afraid that this approach will result in the resistance from workers, they don't understand that currency's value is constantly changing. Another problem is that all the merchant must do this at the same time to make it work, and typically they are limited by the lowest wage regulations

If everyone accept this, then just like Forex market, this trend will not continue forever, because everyone are facing the same decision making difficulty like a currency trader: Sooner or later, majority of whales who holding the currency will consider current product price is too low, they will spend their money to buy, then the trend will turn and the price of everything will rise up again. After a while the market will reach a new equilibrium around a new price level

In fact that is market based currency valuation, should be the most efficient way for economy. Today's system is trying to fix the value of currency, then the value fluctuation is absorbed by FED changing money supply constantly. During normal time, FED does nothing, there is no big difference, but overtime, their influence on market accumulated, and eventually will cause a large volatility, and then they will gain a lot from its operation, they just printed 5x money for themselves because people did not want USD's value to rise a lot when the market said it should

Another possibility is: When merchants are running out of currencies, they would issue their own currencies/certificates to carry out the trade (backed by each merchant). With multiple transaction medium running parallel, the effect of each currency is less predictable

[daibatzu]

You are right. The idea of currency stability is a very hard one to get rid of. I think humans are probably wired for this. Possibly why cheating or back stabbing is frowned upon. It reminds us of instability.
There is another idea I've seen floating around which involves backing a currency with energy. You can get the gist of it here. http://p2pfoundation.net/Energy-Backed_Currencies.
Basically the idea is we can use bitcoins as currency for normal trade. However to prevent hoarding and the deflationary spiral which could possibly result from it, excessive savings (perhaps greater than 10 percent of money supply or whatever is deemed safe) can be stored as energy credits. Since energy is used by producers and by consumers alike it is always valuable and is constantly bought and sold. This way I could buy a memory card for the price 1 kilowatt of power or something. Since the price of energy will not always be constant (can increase or decrease), there is no incentive to hoard savings.

The problem is, this brings us back to the smart grid with all the problems of government control and interference it entails. Not to mention what happens to your "savings" when the US military bombs your country in the name of freedom (microgrids might be a solution to the Americans  though)

Ignore this. Idea completely taken down here: http://www.garynorth.com/public/10797.cfm

[EggShells]

The deflationary spiral due to sound money is a major scare that the elites set up to get the population to accept their monetary inflation.

There would be a natural barrier to the infinite hoarding that is so feared: the more you have saved, and the less time you have left on this earth, the more incentive to spend.  Eventually, everyone will spend.

The rate of spending and investment wouldn't be nearly as high as under modern money, but perhaps it'd be as nature intended and thus sustainable.  When there are no good investments, you don't invest.  When merchants don't offer good enough quality and price, you don't buy.  There is no forced lending and artificially encouraged spending, and no financial bubbles and pain from their bust.

Some losses to investment are always inevitable, but people wouldn't panic and make busts worse, because they would have a safe place for the part of their savings they want to be risk-free.  Also, when investments weren't artificially propped up by the authorities, they would be naturally safer anyway.

Under this system, individuals, not central authorities, make decisions about spending and lending.  It would be the market economy at work, in the capital markets as well as in goods and services.

Granted, if we had sound money right now, we would be in for a painful deflationary shock.  This is only because the economy is addicted to monetary inflation and doesn't know how to function without fattening up all the (major and minor) beneficiaries of the system and depending on their spending on luxuries.  This argument may be relevant in the short run, but has no part in the long-term design of the system.

Humanity survived millennia under gold and silver.  With better technology, we would be more than fine.

[deisik]

The deflationary spiral due to sound money is a major scare that the elites set up to get the population to accept their monetary inflation.

There would be a natural barrier to the infinite hoarding that is so feared: the more you have saved, and the less time you have left on this earth, the more incentive to spend.  Eventually, everyone will spend.

This doesn't hold on the scale of the whole economy. since spending now and spending tomorrow (or in a few years) is quite different in its effects. An aggregate hoarding would amount to extracting some portion of money from circulation for an indefinitely long period of time. Besides, that wouldn't be a problem in a fiat world where banks would effectively compensate for the void. On the contrary, in the "sound money" system the decreased amount of money in circulation could only be offset in the short run by the increased money velocity, but in the long run it will only further unwind the deflationary spiral...

The rate of spending and investment wouldn't be nearly as high as under modern money, but perhaps it'd be as nature intended and thus sustainable.

The nature intended us to copulate at twelve and die at twenty, to be "sustainable"

[EggShells]

The deflationary spiral due to sound money is a major scare that the elites set up to get the population to accept their monetary inflation.

There would be a natural barrier to the infinite hoarding that is so feared: the more you have saved, and the less time you have left on this earth, the more incentive to spend.  Eventually, everyone will spend.

This doesn't hold on the scale of the whole economy. since spending now and spending tomorrow (or in a few years) is quite different in its effects. An aggregate hoarding would amount to extracting some portion of money from circulation for an indefinitely long period of time. Besides, that wouldn't be a problem in a fiat world where banks would effectively compensate for the void. On the contrary, in the "sound money" system the decreased amount of money in circulation could only be offset in the short run by the increased money velocity,...

I totally agree that what you describe is technically true, but these are transient issues while we go from an inflationary to a sound-money system.  In the long run (steady-state,) the sound money economy would get back to balance between spending and saving, as the incentives to spend grows ever greater as each saver grows older and richer.

A major part of the modern fear of deflation comes from the very problem of the modern system: since most spending and investment is propped up directly or indirectly by the state, when this system goes out of whack for some reason (say, just after a financial crisis,) beliefs about a prolonged and truly serious deflationary spiral become very justified (since there was no real reason for the spending and lending in the first place, and the authorities' hand has just been weakened.)

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.

When people's savings are safe, they would feel free both to spend and invest, at a level that is appropriate to the risks and rewards of reality.  This is what I mean by what is intended by nature.

...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.

[ThEmporium]

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

You are calculating something even after 100 Years, What if an again future new satoshi invent some other way which nourish the bitcoin in digital platinum way. Weill, your statement about Islamic Banking, I would suggest that is the best banking I have ever seen in my life, compared to the current interest loan or bebt banking systems.

[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