Why bitcoin is doomed: I can't couterfeit them

[justusranvier]

Deflation is associated with depression because depressions always happen after an bubble created by the mass emission of unbacked credit, with all the resource misallocation this entails.

When all the bad debt eventually defaults the result is deflation while the effective monetary supply shrinks.

Blaming deflation for the pain experienced during depressions is a case of blaiming the symptom - it's like blaming the fact that you stopped drinking for causing your hangover instead of blaming the excessive drinking. There's nothing wrong with the natural deflation caused by increasing productivity in an economy with a fixed currency supply. The problem is speculative bubbles caused by excessive credit.

[Etlase2]

Deflation is associated with depression because depressions always happen after an bubble created by the mass emission of unbacked credit, with all the resource misallocation this entails.

What do you think would happen if, for example, Satoshi actually does control 1-2 million BTC and starts a banking empire? (I'm asking your opinion, not giving a leading question.)

[hazek]

I disagree. The same happens with stock split. If u had 100 shares after 10x split u would have 1000 of them. Moving decimal point in Bitcoin helps only to use amounts less than 1 satoshi, it doesn't increase Bitcoin's supply.

I don't understand. In your analogy you say I start with 100 shares, and then I have 1000 shares and yet you say this is not an increase in supply? What is this then?

It's similar to using "micro" and "nano". If every bitcoin was a coin with "1 BTC" printed on it, then we would have 21'000'000 such coins. If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins. Increase in supply would be if we added more coins to those 21 million ones.

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

[hazek]

I don't understand. In your analogy you say I start with 100 shares, and then I have 1000 shares and yet you say this is not an increase in supply? What is this then?

It is not an increase in the total value, but of course printing more money or lending out money doesn't increase the total value either. What bothers them is that this isn't any value that they can appropriate, because it's shared by all currency holders equally. In their view, printing more money and giving it to everyone is bad, but printing more money and giving it to banks to lend out is good, because lending is good. And giving it to governments to spend is good because government spending is good.

What they really want to do is punish saving, which they slander by calling it "hoarding". This is really the broken window fallacy writ large. Saving is actually producing. To "save money", you must earn it and do nothing else.

Nicely said. Btw I knew that already I'm just having fun pointing out the stupid stuff Come-from-Beyond writes by pretending I'm clueless 

[justusranvier]

What do you think would happen if, for example, Satoshi actually does control 1-2 million BTC and starts a banking empire?

I don't know what that means. What's he actually going to do with his bitcoins?

[Etlase2]

I don't know what that means. What's he actually going to do with his bitcoins?

Banks usually lend money.

[streblo]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

[makomk]

It is not an increase in the total value, but of course printing more money or lending out money doesn't increase the total value either. What bothers them is that this isn't any value that they can appropriate, because it's shared by all currency holders equally.

Okay, so you're saying that the thing that bothers them is that people who want to invest money in new businesses can't "appropriate" value from other currency holders who just sit on their money because any increase the size of the economy resulting from their investments is shared by all currency holders equally? Because that's what the blog post seems to be complaining about, and it does seem like it'd not work out terribly well.

[Come-from-Beyond]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

[JoelKatz]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

You're absolutely right, if the economy is already growing so fast that no investment is better than just leaving things the way they are, then investment will, and should be, discouraged. Not all investment is good. Bad investments steer resources from more productive uses to less productive uses.

[hazek]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

Are you sure you linked the right page? Because what you linked seems to indicate it's you who is wrong:

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25.

In this example the supply of shares doubled and the price of each share accordingly halved. This perfectly mirrors my post in your quote, does it not?

[JoelKatz]

Okay, so you're saying that the thing that bothers them is that people who want to invest money in new businesses can't "appropriate" value from other currency holders who just sit on their money

No, not at all. It's not the investors who appropriate the value, it's government and bankers who do that. Government prints more money. Bankers create money by loaning it out. (Of course, some bankers are also investors, but it's in their capacity as bankers that they appropriate the value.)

because any increase the size of the economy resulting from their investments is shared by all currency holders equally?

That always happens. If I grow the economy, all stakeholders benefit equally. That's not the issue. It's about whether you can penalize people who refuse to consume on the misguided theory that consumption produces value.

Because that's what the blog post seems to be complaining about, and it does seem like it'd not work out terribly well.

That's not a problem even if you agree with it. So long as you don't have a coercively-enforced monetary policy, people can always grow the currency by circulating debt instruments.

[streblo]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

You're absolutely right, if the economy is already growing so fast that no investment is better than just leaving things the way they are, then investment will, and should be, discouraged. Not all investment is good. Bad investments steer resources from more productive uses to less productive uses.

I agree that this negative-feedback is good and works well during an expanding economy. Essentially, a bubble is prevented.

Instead, suppose the economy is contracting for whatever reason, perhaps a natural disaster or a lack of good ideas. Due to the economy contracting, the demand for goods is lowered and, hence, prices go down. When prices go down, the rate of deflation increases, thus exacerbating the situation. Is this not the case?

[hazek]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

You're absolutely right, if the economy is already growing so fast that no investment is better than just leaving things the way they are, then investment will, and should be, discouraged. Not all investment is good. Bad investments steer resources from more productive uses to less productive uses.

I agree that this negative-feedback is good and works well during an expanding economy. Essentially, a bubble is prevented.

Instead, suppose the economy is contracting for whatever reason, perhaps a natural disaster or a lack of good ideas. Due to the economy contracting, the demand for goods is lowered and, hence, prices go down. When prices go down, the rate of deflation increases, thus exacerbating the situation. Is this not the case?

But that's a good thing. If the economy is contracting for whatever reason, perhaps a natural disaster, then you want people to save more in order to more comfortably weather the storm. In such a case you want the non essential jobs to be lost and more essential jobs gained.

For example, right now the FED is trying to reinflate a bubble when even though it would be a crushing blow to the economy what we really need is to stop inflating and start restructuring the unproductive sectors that are wasting misallocated resources and free those up for the productive part of the economy. A lot of jobs would be lost, a lot of wealth would get destroyed through debt liquidation but hey at least we'd get to the bottom and to a sound foundation for renewed growth again.

[streblo]

But that's a good thing. If the economy is contracting for whatever reason, perhaps a natural disaster, then you want people to save more in order to more comfortably weather the storm. In such a case you want the non essential jobs to be lost and more essential jobs gained.

I would think you would want people investing (as opposed to saving/sitting-on-money) to rebuild back to the equilibrium established previous to the economic contraction.

For example, right now the FED is trying to reinflate a bubble when even though it would be a crushing blow to the economy what we really need is to stop inflating and start restructuring the unproductive sectors that are wasting misallocated resources and free those up for the productive part of the economy. A lot of jobs would be lost, a lot of wealth would get destroyed through debt liquidation but hey at least we'd get to the bottom and to a sound foundation for renewed growth again.

Isn't that what was tried at the beginning the great depression, which lead to its longevity? The countries which bounce back fastest were the ones which dropped the gold standard the soonest.

Thank you hazek and joel for your helpful, informative replies. I want to believe a an economy can be run on a fixed amount of money, but I'm having trouble getting past this. Cheers

[hazek]

Hey that's ok. You've learned a theory of how the economy works and you're having a hard time letting go, it happens. Maybe it will be easier for you to believe what we're telling you is actually how reality works once Bitcoin turns out to be the best thing yet for an economy a few decades from now.  

[julz]

I want to believe a an economy can be run on a fixed amount of money, but I'm having trouble getting past this.

I find it a little strange that this subject comes up as a point against Bitcoin, as it is surely only an issue in the rather unlikely scenario that an *entire economy* is running on Bitcoin.
Surely most people see Bitcoin as something that will somehow slot in amongst other currencies rather than something that will take over the world?

Anyway - my take is that even if an entire economy were running on bitcoin, the divisibility could *in effect* allow expansion and contraction of money supply as necessary, simply through price adjustments.  The counter to this argument is that prices, and particularly wages can be 'sticky'.
(The unions will need to do a bit of rethinking - and base their negotiations on some metric of maintaining spending-power per week for example. Well I guess they already do, but they'll have to be transparent and rigorous in their calculations to overcome people's psychological distaste for a 'smaller' paypacket)

In a computerised age where recalculating & repricing is relatively trivial, (along with adjustments to people's expectations of 'my wage must go up' etc)  - it should surely be the case that such a highly divisible system would be the fairest  way of keeping the effective money-supply in sync with economic activity, all through the mechanisms of supply & demand without intervention required.

[Dabs]

By year 2013 there will be about 11 million bitcoins, about half of the maximum, which will be reached by year 2100+.
By year 2020 there will be about 18 million bitcoins, almost close to 90% of all possible bitcoins.

There will be another 80 to 120 years after that of very slow growth or increase in the amount of bitcoins.

The value of the bitcoins is another matter. Right now it is about $10 per bitcoin.

Also, we have about 8 billion people on this planet. Not everyone is going to use bitcoins for the same reason not everyone has every other government denominated currency except what they use regularly in their home country. The biggest ones would be the US Dollar and the Euro.

We can estimate the population of an imaginary country that uses bitcoin at maybe a maximum of 1 billion people, and probably not even that. Maybe it's closer to 10 million individuals, within the next few years. Right now, the numbers are probably close to 100,000 people, as in people, not addresses, maybe even less.

On average, everyone of those 100,000 people would have about 100 bitcoins each, on average. Some people will have more, some people will have less.

I don't know what the value of the bitcoin will be against the dollar or whatever currency by next year, but I do know it will be higher than it is today.

Bitcoin is not doomed, but it will not completely replace other currencies, for the same reason not everyone trades on the biggest ones. Depends on where you live.

[streblo]

Hey that's ok. You've learned a theory of how the economy works and you're having a hard time letting go, it happens. Maybe it will be easier for you to believe what we're telling you is actually how reality works once Bitcoin turns out to be the best thing yet for an economy a few decades from now.  

For all intents and purposes, the deflationary problem with gold and bitcoin is the same. And divisibility isn't really a factor, unless you consider it to add to price stickiness.  My questions are more general than being specific to just Bitcoin. Also, I think a few decades from now Bitcoin (if it still exists) will have so many hardforks it won't be recognizable.

I want to believe a an economy can be run on a fixed amount of money, but I'm having trouble getting past this.

I find it a little strange that this subject comes up as a point against Bitcoin, as it is surely only an issue in the rather unlikely scenario that an *entire economy* is running on Bitcoin.
Surely most people see Bitcoin as something that will somehow slot in amongst other currencies rather than something that will take over the world?

Yes, I agree. So it is somewhat a hypothetical exercise. This deflation thing always comes up and has always bothered me. For the next decade, bitcoin supply is highly inflationary, with a decade of moderate bitcoin supply inflation after that, so, once again, discussing this money supply is irrelevant to the present (insofar as future expectations can't affect the present).

[grondilu]

Just red this piece of crap.  What a troll.


« And yet, these very same designers of BitCoin are part of the segment of society that creates new utility value. Engineers dream up things that never existed before and bring them into the world. There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. »

Duh...yeah...  with prices!   Jeez.

Wealth is created, prices fall.  So we know wealth has been created and we can even measure it with falling prices.  That's what money is about: measuring the value of things.   In a world with X apples, the price of an apple is twice the price as in a world with 2*X apples.   And in a world where there is more wealth, things look cheaper.  Because people are richer, because there is more wealth.  What's so hard to get, seriously?