Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable?

[Adrian-x]

It is idiocy based on Keynes('s ideas) and it doesn't work.

I suspect Keynes would have rectified the problem he was creating was it not for his premature death; I scorn all his blind Keynesian followers alive today. 

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[Realpra]

https://en.wikipedia.org/wiki/Demand_for_money - The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits.



where M^d is the nominal amount of money demanded, P is the price level, R is the nominal interest rate, Y is real output, and L(.) is real money demand.

Okay so basically its fancy talk for the money printing required to keep prices stable in a growing economy.

Lets go one level deeper: Why are stable prices good? What is the facts and basis behind this premise?

Money "demand" assumes that stable prices is a good thing, but that seems very loaded/biased to me.

Say it IS a good thing, how do you LOWER prices again if the economy contracts?

If stable=good, why is it okay for each individual commodity to fluctuate in price and what is the point of average stable prices if each individual ware changes in price all the time?

Well there you go! There was some heated discussion a year or so ago on how deflation might somehow be prone to negative interest rates. CD rates nowadays are around 1%. Admittedly, that is with central bank theft of interest rates, but even when they were not manipulating as much, the best, safe interest rate in a typical 2-3% inflationary economy is going to be 2-3%. Riskier investments can lead to around a solid 5%, but they tank when the economy as a whole tanks (see everybody's IRAs, 401ks, etc. over the last few years). If deflation is 3%, 3% must be taken off of the interest rate. CDs can't pay you 1% if deflation is 3%, that would be a real 4% interest rate. Right now you're looking at -2% with inflation on a real return from a CD, how do we get from real -2% to real +4% just by using deflation? Magic? 6% better interest doesn't just come out of nowhere.

I know of very secure investments which pay 1-3.5% in REAL interest rates for something that "lasts forever". A bigger and more informed investor with the right "ins" may well know of something even better.

The fact that many interest rates today are negative in real terms should tell you that its fucked up in real terms.

[Roger_Murdock]

There is also, at least in my proposal, a large chunk of the new money that goes straight to trade, which is why I chose my words carefully and said "equitably" instead of "equally". Trade is where new value is realized and it should be rewarded in kind.

But isn't trade (like virtue) its own reward? Voluntary exchanges occur when both parties perceive themselves as benefiting from the exchange. That's why you can be reasonably confident that a voluntary exchange is in fact creating new value.  So, why do you need to artificially incentivize more trades via inflation?

Well there you go! There was some heated discussion a year or so ago on how deflation might somehow be prone to negative interest rates. CD rates nowadays are around 1%. Admittedly, that is with central bank theft of interest rates, but even when they were not manipulating as much, the best, safe interest rate in a typical 2-3% inflationary economy is going to be 2-3%. Riskier investments can lead to around a solid 5%, but they tank when the economy as a whole tanks (see everybody's IRAs, 401ks, etc. over the last few years). If deflation is 3%, 3% must be taken off of the interest rate. CDs can't pay you 1% if deflation is 3%, that would be a real 4% interest rate. Right now you're looking at -2% with inflation on a real return from a CD, how do we get from real -2% to real +4% just by using deflation? Magic? 6% better interest doesn't just come out of nowhere.

But aren't artificially-low interest rates one of the main objections to an inflationary currency?  If we switched to a sound currency like Bitcoin, of course interest rates would rise. But they'd rise to their correct level, i.e. the level that reflects the voluntary preferences of market participants.

[Roger_Murdock]

It's very simple logic. Value doesn't come from nowhere, so when you get value even though you just keep the money in the safe you must be getting it from someone who has created it. If this wasn't an ideological question for so many of you it would be much easier for you to see. Unfortunately it's like telling a communist that communism in reality undermines the welfare of the people. It is obvious if you don't desperately need to deny it for your ideology to make sense.

Here's a thought experiment I've used in the past that might be helpful.  Let's say you want to sell some widgets, i.e., buy some money with them.  You have two potential buyers.  A has 10 gold pieces he's willing to exchange for widgets.  B has 10 identical gold pieces, but B's gold comes with a catch.  If you don't spend (or lend or invest) B's gold pieces and instead just keep them in the safe, he gets to take 1 one of them back every year they're not spent.  Now you might be willing to trade with both A and B, but you'll probably be willing to give A more widgets in exchange for his gold.  That difference in the "price" (in widgets) of A's money vs. B's money is the price you pay for the additional usefulness of A's gold.  So it's NOT "free." It's a bargained-for benefit of A's gold that he gives up and you acquire when the exchange takes place. Putting your money in the safe (and earning a real return in a deflationary currency) is simply one of the things you can do with it.  So you MUST have paid for that value in the initial exchange.

[Etlase2]

Okay so basically its fancy talk for the money printing required to keep prices stable in a growing economy.

There is nothing in that equation about printing money. It compares the demand for money to the price level. It applies to stable, inflationary, and deflationary economies.

Lets go one level deeper: Why are stable prices good? What is the facts and basis behind this premise?

Stable prices do not favor creditors (deflationary does) nor debtors (inflationary does--to the extent inflation goes beyond the baked in rate). Stable prices do not favor those who hold wealth in real assets (inflationary does) nor money (deflationary does). Assuming stable prices are achieved, that means the the supply of money isn't being manipulated by central bank inflation or those who control vast amounts of wealth (see panic of 1907 and how handsomely JP Morgan profited off of others' misery--and odds are good he caused it). Stable prices do not encourage over-investment to recoup inflationary losses nor under-investment because holding currency is the safest bet. It reduces or eliminates menu costs and the money illusion.

Money "demand" assumes that stable prices is a good thing, but that seems very loaded/biased to me.

Money demand doesn't assume anything, it allows you to solve for one of the variables if you have the others or it allows you to predict what the change might be if one or more of those variables change. Just like the equation of exchange (MV = PQ).

Say it IS a good thing, how do you LOWER prices again if the economy contracts?

Ahh the meaningless "gotcha!" moment. How do I lower prices from when bitcoin was at its $32 high? The simple answer is: I don't. No currency is immune to a loss of faith or demand. But, when you're in the unique situation where everyone has a good idea of how much it costs to produce new currency, and the currency is obviously undervalued, it opens up the opportunity for arbitrage. People will buy it just like any other asset they believe is undervalued. There are ways of making it return to stability quicker such as destroying transaction fees, but all this does is punish the people who still use the currency even more.

If stable=good, why is it okay for each individual commodity to fluctuate in price and what is the point of average stable prices if each individual ware changes in price all the time?

Each individual ware does not change in price all the time. This is known as sticky prices, and it causes problems up and down the economy when the value of the currency does not remain stable. But it's OK for each individual commodity to fluctuate because that is simply supply and demand, the basis for all pricing. Stable, inflationary, or deflationary doesn't change that. If technology and productivity increases allow for a reduction in price (the common computer hardware example), everyone's purchasing power increases and is wealthier as a result.

I know of very secure investments which pay 1-3.5% in REAL interest rates for something that "lasts forever". A bigger and more informed investor with the right "ins" may well know of something even better.

"Hey, I knows a guy! He can hook you up real good" said the spider to the fly. Don't forget that high interest rates are bad for business and therefore bad for economic growth. Future productive opportunities for your money are diminished. Also, "1-3.5" real interest equates to "-2 to 0.5" nominal interest in a deflationary economy at 3%.

The fact that many interest rates today are negative in real terms should tell you that its fucked up in real terms.

It just tells you that a central bank is controlling the interest rate rather than the free market. "Force" more debt on people and businesses and hope it fixes the problem.

[Etlase2]

But isn't trade (like virtue) its own reward? Voluntary exchanges occur when both parties perceive themselves as benefiting from the exchange. That's why you can be reasonably confident that a voluntary exchange is in fact creating new value.  So, why do you need to artificially incentivize more trades via inflation?

Because assuming the supply is expanding because there is more demand for the currency (and not because of reduced cost of producing the currency due to hardware efficiency gains or whatnot), rewarding people for trading incentivizes them to trade in it, not just hoard it. As in, legitimate existing businesses will want to take the currency, and people will want to spend it. It means you don't have to be digital-currency-wealthy to benefit from using it when the market expands. It's also "free" money that gets its value from reducing the value of fiat rather than paying for it in excessive hardware and electricity costs. It changes the objective from "buy and hold until a good fiat exchange opportunity arises" to "buy and use".

But aren't artificially-low interest rates one of the main objections to an inflationary currency?  If we switched to a sound currency like Bitcoin, of course interest rates would rise. But they'd rise to their correct level, i.e. the level that reflects the voluntary preferences of market participants.

No... artificially low interest rates are due to the central bank issuing new money to banks at low interest rates. It has everything to do with a centrally planned economy and nothing whatsoever to do with the money supply being unbound. It is fake market vs. free market, not inflation vs. deflation. There is little that is sound about bitcoin, and I have no idea why you think interest rates would rise in a deflationary economy, except for the incredibly unsound idea that no one will want to lend at negative interest so long-term interest instruments will be excessively scarce. You say "of course" yet this thread is 12 pages of people arguing about how long-term interest bearing instruments may or may not be viable. Again, you can't just add 3% on to the real interest rate and expect businesses to just hum along as if nothing has changed.

And 3% is only the best-case scenario where a large portion of the world has adopted bitcoin. Prior to that, deflation periods will be much, much heavier as the only way to expand the market is to increase the amount of deflation. Businesses who take loans in BTC will be punished for doing so because they expand the market and the demand for money making it much harder to repay the loan. But taking loans in BTC is the best way to get businesses to want BTC in exchange so that they can pay those loans back! It is a catch-22.

[Roger_Murdock]

No... artificially low interest rates are due to the central bank issuing new money to banks at low interest rates. It has everything to do with a centrally planned economy and nothing whatsoever to do with the money supply being unbound. It is fake market vs. free market, not inflation vs. deflation.

Ahhh, good point. That was sort of in the back of my mind as I wrote that. It's not that new money can be printed into existence. It's that it's printed and loaned into existence at an interest rate determined by a central authority. So if we got rid of the central bank, and the government instead simply printed new money into existence to fully or partially fund itself, what effect, if any, would that have on prevailing interest rates? More thoughts later. Thanks!

[Realpra]

Lets go one level deeper: Why are stable prices good? What is the facts and basis behind this premise?

Stable prices do not favor creditors (deflationary does) nor debtors (inflationary does--to the extent inflation goes beyond the baked in rate). Stable prices do not favor those who hold wealth in real assets (inflationary does) nor money (deflationary does).

But creditors are not spending real wealth because they are not buying anything while debtors in general ARE consuming something of value. It would make sense just fine that they are punished unless they are very careful not to waste stuff we all need.

(See my island example.)

This particular part of your counter is an appeal to the emotion of fairness. You are not substantiating it by also explaining why creditors and debtors should be treated equally. (feel free to do so though)

Assuming stable prices are achieved, that means the the supply of money isn't being manipulated by central bank inflation or those who control vast amounts of wealth (see panic of 1907 and how handsomely JP Morgan profited off of others' misery--and odds are good he caused it).

Now I spend a good deal of time reading about the 1907 situation and two things strike me:
1. The economy was in recession for other reasons already when there was a crisis of faith in NYC banks.
2. The whole ordeal sounds like a massive card house/gambling business that SHOULD have been allowed to fail.

It was saved by JP Morgan at A LOSS to him. Likely he did it anyway because the house of cards falling would have cost him MORE.
Now when used as an analogy for a very basic premise (stable = good) it is unfortunate that you have the facts somewhat backward.

The mess was saved due partly also to deregulation pushed by JP, basically a lowering of the bar for the gamblers. I personally speculate the mess came apart in the great depression.

Now both credit holding manipulators actually lost money in your analogy here (the other being a botched copper cornering attempt starting the ordeal) so I don't see it as supporting your case for stable average prices in ANY way.

Stable prices do not encourage over-investment to recoup inflationary losses nor under-investment because holding currency is the safest bet.

This is a new premise to back the other one. Here you are making the premise that stable average prices lead to a perfect level of general investment.
A premise based on the first premise almost.

It reduces or eliminates menu costs

Now that's the first good argument I have heard.

However there is a problem. We both agree that changes to individual ware prices are necessary and unavoidable. This means that there will always be SOME menu costs.

The question then becomes, how great are they?
In a digital age I would say very small. Additionally super markets and in fact ALL salesmen will often change prices beyond need to confuse or attract customers into paying or buying more - this means the cost to doing so can not be all that great.

Another counter is that if menu costs were a serious detriment to anything people would display prices in a third medium - like dollar prices today paid with BTC.

and the money illusion.

The money illusion would arguably be made STRONGER if everything always cost the same. I guess what you mean is that the cost of falling under the money illusion would be smaller.

Under inflation you would be paying too little and under deflation too much if you went by "the usual price".

Again sales people will try to make you pay more in so many ways, this is a bargaining problem that the free market solves nicely through cutthroat competition.

If market competition reduce prices to their correct level there is also no illusion cost so I don't see it supporting your premise.

Say it IS a good thing, how do you LOWER prices again if the economy contracts?

Ahh the meaningless "gotcha!" moment. How do I lower prices from when bitcoin was at its $32 high? The simple answer is: I don't. No currency is immune to a loss of faith or demand.

So your answer is "I don't"? How is BTC crashing from $32 to $2 due to a localized bubble stable?

So you didn't answer my question because bubble collapses are not going to ensure stable prices.

The only sustainable way to lower prices I see is to remove currency from circulation which will require theft, taxes or selling real assets (which central banks don't have enough of to manipulate prices down again).

Could it be that monetary inflationists only care about stable prices when it allows them to GET money and value aaaand... not so much when they theoretically should go out and spend it to lower prices?
That's not ad hominem btw that's occams razor - simplest explanation: "I want free stuff" - like ALL human beings.

[Etlase2]

But creditors are not spending real wealth because they are not buying anything while debtors in general ARE consuming something of value. It would make sense just fine that they are punished unless they are very careful not to waste stuff we all need.

Do you not absorb anything? Are you just going to keep going round and round?

DEBTORS does not equal CONSUMERS. Get it out of your head that this has anything to do with credit cards. This is about economic growth. Not only new growth, but also existing value brought over from fiat.

This particular part of your counter is an appeal to the emotion of fairness. You are not substantiating it by also explaining why creditors and debtors should be treated equally. (feel free to do so though)

If you never try to make up a type of fallacious argument again, the world will be a better place. I also did not say that they should be treated equally, I said ONE IS NOT FAVORED OVER THE OTHER. See the difference? I explained further in the post why deflation is not good for debtors--it will cause them to go bankrupt. This will stunt economic growth as even viable industries will fail. I'm sorry if I don't spell out each and every argument within one sentence. Inflation isn't good for creditors because, presumably in a non-debt based currency/society, most people will be creditors via interest earned on savings. Inflation/central banking steals a good portion of that.

2. The whole ordeal sounds like a massive card house/gambling business that SHOULD have been allowed to fail.

Sure sounds like the current situation on Wall Street today.

It was saved by JP Morgan at A LOSS to him. Likely he did it anyway because the house of cards falling would have cost him MORE.

Where do you see this as a loss? Morgan purchased massive equity in banks and trusts and organized the deflated stock market buy up. Remember when Citigroup shares were $550 a piece and then suddenly $10 a piece a few years ago? These are the times when Morgan propped up the economy. If you're referring to the "$21 million loss" referenced in the wiki article, that is a reference to his existing stock holdings. Did you not read far enough to see this tidbit?

"The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion)."

Now when used as an analogy for a very basic premise (stable = good) it is unfortunate that you have the facts somewhat backward.

It's unfortunate that you claim I have my facts backward when you don't get it.

The mess was saved due partly also to deregulation pushed by JP, basically a lowering of the bar for the gamblers. I personally speculate the mess came apart in the great depression.

<insert lulwut pear> I have no idea what the hell you're talking about.

Now both credit holding manipulators actually lost money in your analogy here (the other being a botched copper cornering attempt starting the ordeal) so I don't see it as supporting your case for stable average prices in ANY way.

I hope you don't play chess. The whole crisis would have never happened if the supply of money was not illiquid. But it was, and people in New York buying food from the fall harvest caused drops in liquidity every year.

This is a new premise to back the other one. Here you are making the premise that stable average prices lead to a perfect level of general investment.
A premise based on the first premise almost.

It is similar, yes. The interest rate will change in a free market to adjust to the need for money, and no other factors need come into play.

Another counter is that if menu costs were a serious detriment to anything people would display prices in a third medium - like dollar prices today paid with BTC.

LOL because BTC is stable.

If market competition reduce prices to their correct level there is also no illusion cost so I don't see it supporting your premise.

"You can lead a horse to water but you can't make it drink."

So your answer is "I don't"? How is BTC crashing from $32 to $2 due to a localized bubble stable?

That's BTC's problem.

So you didn't answer my question because bubble collapses are not going to ensure stable prices.

Make a currency ripe for bubbles and bubbles are what you get. In the Decrits proposal, the more people that mine the more money is created, so any upward pressure on the price will be quickly deflated. Since everybody knows this, it is in the best interests of people holding currency to sell while it is above its cost to produce, further reducing the possibility of a bubble.

The only sustainable way to lower prices I see is to remove currency from circulation which will require theft, taxes or selling real assets (which central banks don't have enough of to manipulate prices down again).

Or you could actually read what I said about arbitration.

Could it be that monetary inflationists only care about stable prices when it allows them to GET money and value aaaand... not so much when they theoretically should go out and spend it to lower prices?
That's not ad hominem btw that's occams razor - simplest explanation: "I want free stuff" - like ALL human beings.

No, it's not an ad hominem, it would be a strawman. Gotta work on that. Ad hominem - attacking the person in lieu of the argument; strawman - attacking an argument that the person did not make in lieu of the actual argument. Anyone who doesn't spend/receive money in an expanding Decrits economy suffers some opportunity cost--they won't receive any of the new money given to transaction activity.

[Etlase2]

Ahhh, good point. That was sort of in the back of my mind as I wrote that. It's not that new money can be printed into existence. It's that it's printed and loaned into existence at an interest rate determined by a central authority. So if we got rid of the central bank, and the government instead simply printed new money into existence to fully or partially fund itself, what effect, if any, would that have on prevailing interest rates? More thoughts later. Thanks!

It depends on the government's policy towards spending into existence more than they bring in in taxes. If they spend more than the increase in demand for new money due to growth, then real interest rates will fall. If they keep extra spending at around the rate of new growth, then interest rates should be mostly determined by the free market. But the goddamn genius part of governments spending new currency into existence is that THEY DON'T HAVE TO PAY INTEREST ON IT. Thus there is no incentive to create more than necessary as they don't need to worry about reducing the effective debt. Well, other than political corruption. But at least in a "democracy" we have some (little) choice in electing people to government, politicians who cause inflation or direct new money to poor causes can be voted out. We have no such choice in electing central bank chairmen.

Imagine how much lower the tax burden could be if, in the US at least, we didn't owe an entire year's worth of GDP in debt! The British empire did this for 700+ years with tally sticks. But then the Rothschilds got ahold of England. It makes so much more sense than the current system you have to wonder how fricken stupid or greedy people were to get us to where we are today.

[Realpra]

If you're referring to the "$21 million loss" referenced in the wiki article, that is a reference to his existing stock holdings. Did you not read far enough to see this tidbit?

"The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion)."

Yeah that's the one. Being on the board of directors is not the same as ownership it only means some influence.
http://en.wikipedia.org/wiki/Board_of_directors

Bank officers could likely have been elected into those boards by stockholders to get better bank deals - but JP could own 0 shares.

The mess was saved due partly also to deregulation pushed by JP, basically a lowering of the bar for the gamblers. I personally speculate the mess came apart in the great depression.

<insert lulwut pear> I have no idea what the hell you're talking about.

Yeah I can tell:

The steel union controlled 60% of the steel industry, but to avoid a major collapse of TC&I and further panic the steel union had to acquire TC&I.

This went straight against Theodore Roosevelt's anti-monopoly regulation spree so JP had him convinced an exception was necessary - hence dereg.

The whole ordeal was still a house of cards as I see it so maybe THAT was what came apart during the great depression. Just speculation that last part though.



I'm putting you back on ignore etlase, you are annoying me, being overly obtuse and talking down to me for no reason.

[Roger_Murdock]

But isn't trade (like virtue) its own reward? Voluntary exchanges occur when both parties perceive themselves as benefiting from the exchange. That's why you can be reasonably confident that a voluntary exchange is in fact creating new value.  So, why do you need to artificially incentivize more trades via inflation?

Because assuming the supply is expanding because there is more demand for the currency (and not because of reduced cost of producing the currency due to hardware efficiency gains or whatnot), rewarding people for trading incentivizes them to trade in it, not just hoard it. As in, legitimate existing businesses will want to take the currency, and people will want to spend it. It means you don't have to be digital-currency-wealthy to benefit from using it when the market expands. It's also "free" money that gets its value from reducing the value of fiat rather than paying for it in excessive hardware and electricity costs. It changes the objective from "buy and hold until a good fiat exchange opportunity arises" to "buy and use".

Sorry, but that doesn't seem to answer my question. Obviously, "rewarding people for trading incentivizes them to trade in it." But again, why isn't mutually beneficial trade its own reward?  Why do you NEED to add an extra incentive to encourage more trades? And won't the extra trades that occur as a result of your incentive be trades that would not otherwise have been considered mutually beneficial? (And doesn't that tell you that those trades were not in fact wealth-creating?) I would think you'd need to argue that "hoarding" creates some kind of negative externality.

It seems to me that the deflationary nature of Bitcoin IS encouraging people to save it, but I see that as a good thing.  Again, the larger fiat economy is still encouraging too much consumption and too much debt.  Bitcoin is thus helping to offset some of those destructive tendencies.  As I've argued before, Bitcoin is currently operating more as a gold-like store of value.  But unlike gold, Bitcoin has everything it needs to be a successful medium of exchange.  It's just that success as a (direct) medium of exchange is much more reliant on network effects and will thus take longer to achieve.  But I'd note that it's already succeeding as a medium of exchange for certain niche markets (e.g., Silk Road) where its advantages over fiat make it particularly compelling.  

[Etlase2]

Sorry, but that doesn't seem to answer my question. Obviously, "rewarding people for trading incentivizes them to trade in it." But again, why isn't mutually beneficial trade its own reward?  Why do you NEED to add an extra incentive to encourage more trades?

The value of an expanding currency has to go somewhere. In bitcoin, very little of it goes to miners as there is competition to spend more and more money to get a larger piece of the same pie and make the ROI as low as possible. This money that bitcoin mining wastes helps only the electric company, ATI (or ASIC manufs), and people previously holding bitcoin. So only two types of people using the network benefit: 1) miners (barely), 2) existing holders of currency. Under the decrits system, it is: 1) miners (who only mildly compete with each other, spending 5x the money on video cards will not bring 5x the return, it keeps the "hardware tax" low), 2) existing holders of currency (who also receive half of the "free" money based on their holdings), 3) people who trade. This opens up a whole new dimension of who benefits from using the currency while at the same time reducing the amount of hardware/electricity waste. There is no reason that people who do nothing productive in expanding the economy should see all the benefit of expanding the economy. Have you heard of Wall Street? Because that's exactly what they do.

The "meta" of rewarding trade with new currency (and unbounded mining) also counteracts Wall Street-like symptoms. If capital accumulation becomes the goal of the financial market rather than productivity and economic growth, the unbounded supply, a currency that "the people" can create, will devalue the power of that capital accumulation. It will stop greedy people in megacorp banks from causing the business cycle. Because of price stickiness it's very hard to see the effects of a recession, but in gasoline it was obvious in 2008. It dropped dramatically in half in price because the US dollar experienced a big slow in the velocity of money which caused deflation, even though it was not all that evident in most prices. It was certainly evident in unemployment, though. A fun and informative video: http://www.youtube.com/watch?v=qOP2V_np2c0 (note that this video is intentionally from a Marxist perspective on capitalism--I'm not promoting marxism, only stating the obvious that capitalism has no countermeasure for when it gets out of hand, and that this is a problem of the system of money, not so much capitalism itself)

You can call this devaluation theft, but it is the natural order of things when the greed of a few massively outweighs the benefit to society. Play too many games with the financial market, and people just create their own currency on the side anyway, effectively diminishing the power of the existing, forced currency. This happened in hundreds of communities during the great depression. What if the currency could have this property baked in?

And won't the extra trades that occur as a result of your incentive be trades that would not otherwise have been considered mutually beneficial? (And doesn't that tell you that those trades were not in fact wealth-creating?)

As I told Realpra, the answer to this is simple in that the odds of getting free money are not outweighed by the transaction fee. Such as if the transaction fee is 0.01 and the award is 100x the tx fee or 1 coin, then the odds being awarded that coin are 1 in 101 (but really half that as either the sender or receiver may be rewarded, so it's 1 in 101 only if you're trying to game the system and send to yourself). I haven't come up with the exact solution of how to do that, but it will likely have to do with hash comparisons or hamming distances or the like. It's essentially just based on "refunding" tx fees with new money.

I would think you'd need to argue that "hoarding" creates some kind of negative externality.

It does and I have. https://bitcointalk.org/index.php?topic=110708.0. Keynes said "saving causes recession because of lack of growth" hayek says, "you stupid son, saving causes an increase in non-consumption growth because banks use the money to loan." Since nobody needs to put money in bitcoin banks, and indeed it would be silly as there is no way you are getting a return on savings in a deflationary economy, nobody will "save" in the sense that it is used for non-consumption growth. So rather the ONLY kind of bitcoin growth will be when people holding bitcoin fall to the pressures of consumption at reduced prices. That's right, bitcoin can only grow via consumption (or lololol via speculation). If you have a better idea of how the economy works than Hayek's excessively intuitive logic, I'm all ears. But know that I will call you out on any begging the question fallacies.

It seems to me that the deflationary nature of Bitcoin IS encouraging people to save it, but I see that as a good thing.  Again, the larger fiat economy is still encouraging too much consumption and too much debt.

According to Hayek, there is a clear distinction we can make between saving and hoarding, and bitcoin is hoarding. Too much debt in fiat is the nature of a debt-based currency, one which Decrits would not be. "Overconsumption", if we could ever find a way of actually defining that, is probably more of a problem of government policy than the currency itself. Either way, you can't use what happens in fiat as an argument against an unbound free market currency. I can just as easily argue that bitcoin will forever be entrenched in a business cycle of slow recession with periodic economic booms as the deflationary pressure causes a rash of consumption. The money shouldn't be what encourages or discourages anything, it should be as neutral as possible. That's why price stability is important. If people want to consume and your free market currency penalizes consumption, then they will not use your currency.

Bitcoin is thus helping to offset some of those destructive tendencies.

So you say. But I could just as easily argue that bitcoin will always be irrelevant because few, in the grand scheme of things, will use it. Bitcoin doesn't offset anything if people still universally use fiat.

It's just that success as a (direct) medium of exchange is much more reliant on network effects and will thus take longer to achieve.

And it will probably never achieve the network effect because people will get wise to the fact that they're buying into a pyramid. Rant about whether or not it's a pyramid scheme all you want, the fact of it all is that 50% of all the currency to ever be distributed will have been distributed in the next few months, and this may be stunting growth much more than you realize. *I* could sleep soundly at night, in the future, after having released Decrits knowing that there won't be hundreds of videos on Youtube calling it a pyramid or ponzi scheme.

But I'd note that it's already succeeding as a medium of exchange for certain niche markets (e.g., Silk Road) where its advantages over fiat make it particularly compelling.  

A black market being the only real source of growth in an economy is not exactly a ringing endorsement of that economy. It just means the benefits for the black market outweigh the downsides.

[Roger_Murdock]

It does and I have. https://bitcointalk.org/index.php?topic=110708.0. Keynes said "saving causes recession because of lack of growth" hayek says, "you stupid son, saving causes an increase in non-consumption growth because banks use the money to loan." Since nobody needs to put money in bitcoin banks, and indeed it would be silly as there is no way you are getting a return on savings in a deflationary economy, nobody will "save" in the sense that it is used for non-consumption growth. So rather the ONLY kind of bitcoin growth will be when people holding bitcoin fall to the pressures of consumption at reduced prices. That's right, bitcoin can only grow via consumption (or lololol via speculation). If you have a better idea of how the economy works than Hayek's excessively intuitive logic, I'm all ears. But know that I will call you out on any begging the question fallacies.

I guess I come back to my argument that it's impossible to save without lending, which I don't think you've addressed.  By deferring consumption to which you're entitled, you effectively lend those resources to the rest of the economy. Thus, in my view, deflation represents the market-determined interest rate on this extremely low risk loan. Attempting to get rid of this reward for savings seems like it can only introduce distortions into the market.  As far as whether we'll see Bitcoin "banks," I imagine we will eventually.  While you don't need a Bitcoin "bank" for safe storage of your money, "banks" could still act as a middleman between lenders and borrowers. But again, I don't expect many businesses to borrow in Bitcoin for the foreseeable future.  Why would you when the price of borrowing purchasing power in the form of fiat is being kept artificially cheap?

The money shouldn't be what encourages or discourages anything, it should be as neutral as possible. That's why price stability is important. If people want to consume and your free market currency penalizes consumption, then they will not use your currency.

I tend to think that consumption should be "penalized." When you consume in the present, there's an opportunity cost.  Those resources are no longer available to be put toward enabling even greater consumption in the future.  I think deflation is just communicating that underlying reality. "Stable prices" mask it. And just so I understand your position, you expect people to voluntarily abandon Bitcoin in favor of an alternative currency that's designed to maintain "stable prices"? In that case,  I guess it's an empirical question, and we'll see what happens.

*I* could sleep soundly at night, in the future, after having released Decrits knowing that there won't be hundreds of videos on Youtube calling it a pyramid or ponzi scheme.

Yeah, I think it's safe to say that there will NOT be hundreds of videos on YouTube talking about Decrits. (Ok, that was a little obnoxious, but c'mon, you teed that one up for me.)

A black market being the only real source of growth in an economy is not exactly a ringing endorsement of that economy. It just means the benefits for the black market outweigh the downsides.

The black market is the free market. It's also a BIG market.  Personally, I think handling $2 million a month in sales for a single website is pretty good for an experimental currency that's less than 4 years old. Again, I'm not trying to be too much of a jerk here, but let me know when Decrits hits a similar milestone.

[Etlase2]

I guess I come back to my argument that it's impossible to save without lending, which I don't think you've addressed.  By deferring consumption to which you're entitled, you effectively lend those resources to the rest of the economy. Thus, in my view, deflation represents the market-determined interest rate on this extremely low risk loan. Attempting to get rid of this reward for savings seems like it can only introduce distortions into the market.

As I mentioned in the tomato soup thread, the problem with this is the market doesn't know it's getting this "loan". In the mean time, debtors go bankrupt, creditors go bankrupt because debtors go bankrupt, people lose their jobs because no one can afford the products/services of their company any more, THEN the market adjusts to lower prices. This "deferred consumption" doesn't happen in a vacuum and it is only beneficial to the one(s) causing the problem. Everyone else suffers (except other hoarders). And then they suffer again when the hoarder calls in to collect and causes inflation and reduces the value of everyone else's savings.

But again, I don't expect many businesses to borrow in Bitcoin for the foreseeable future.  Why would you when the price of borrowing purchasing power in the form of fiat is being kept artificially cheap?

Why would businesses use bitcoin if they can't run a business with it? What incentive to businessmen have at all to use a volatile, unforgiving currency?

I tend to think that consumption should be "penalized."

Whatever you say, Karl.

When you consume in the present, there's an opportunity cost.  Those resources are no longer available to be put toward enabling even greater consumption in the future.

But yet you argue that deferring consumption merely lends resources to the rest of the economy. That is a net zero, broseph. Your argument has been busted by your own admission. Hayek, on the other hand, says that saving in banks promotes non-consumption growth, exactly what you hope will happen by playing with deflation. If everyone's purchasing power is temporarily increased, you may get some non-consumption growth, but you will also get plenty of consumption. And it's also just a temporary illusion that ignores what happens when there is unexpected deflation. (bankruptcies, job loss, etc. ad nauseum)

I think deflation is just communicating that underlying reality. "Stable prices" mask it. And just so I understand your position, you expect people to voluntarily abandon Bitcoin in favor of an alternative currency that's designed to maintain "stable prices"? In that case,  I guess it's an empirical question, and we'll see what happens.

Deflation is communicating the reality you think you've argued and you think is best but is really just the latest in a string of bitcoinomics rationalizations. Stable prices allow for an economy to actually figure that out for itself. If you ask my opinion, I think the reality of a stable price currency like Decrits would actually make the price of luxury consumption items be much higher. Without the wealth and productivity of the people being dragged up the economy as in fiat or bitcoin, wealth will be more evenly spread throughout the economy, and thus luxury goods must cost more in relation to things like food (supply and demand, of course). But this cost comes at reducing inconsequential things like poverty and hunger. I think I can live with that.

And oh I think people invested in bitcoin will hold on to it for as long as possible. But when something better comes along that actually supports a working economy, the viability of bitcoin will be greatly diminished. If new people aren't rushing to speculate on bitcoin (and it's bad for business), bitcoin's price will not increase. When bitcoin starts stalling, some people are going to rush to cash out. Then all that value goes up in a puff of smoke and the pyramid collapses.

Yeah, I think it's safe to say that there will NOT be hundreds of videos on YouTube talking about Decrits. (Ok, that was a little obnoxious, but c'mon, you teed that one up for me.)

God forbid bitcoin sees a little actual competition other than "i changed 4 lines of code join mah pyramid!!!11" It is folly to assume that the free market will universally choose bitcoin when even you think it sucks for business. Unless you want to fall back to the AbelsFire feudalism argument where "herp a derp nobody needs loans in an economy!!!11"

It's amusing how you didn't respond to my comment about how side currencies popped up all over the place during the great depression. The great thing about a free market is it gets to decide what's best, not what you think is best.

The black market is the free market. It's also a BIG market.  Personally, I think handling $2 million a month in sales for a single website is pretty good for an experimental currency that's less than 4 years old. Again, I'm not trying to be too much of a jerk here, but let me know when Decrits hits a similar milestone.

I'm glad you're impressed. But that does not counter the fact that it is flourishing because of the nature of a cryptocurrency and nothing specific to bitcoin. It's actually sad how even in that economy the volatility of bitcoin means that people have to waste money hedging bitcoin against USD. I don't know what Silk Road charges for the service, but it isn't free and it is another transaction cost that bitcoin imposes due to its poor design.

[VogueBlackheart]

By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.

In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.

Even if newly-created money is distributed in proportion to current money holdings, wealth is transferred to those who spend it first (unless all prices rise in proportion to and at the instant of the money supply increase). Nit-picking perhaps, but it's important to isolate the addition of money itself from the rise in prices as this money starts moving through the economy.

[Roger_Murdock]

But yet you argue that deferring consumption merely lends resources to the rest of the economy. That is a net zero, broseph. Your argument has been busted by your own admission. Hayek, on the other hand, says that saving in banks promotes non-consumption growth, exactly what you hope will happen by playing with deflation. If everyone's purchasing power is temporarily increased, you may get some non-consumption growth, but you will also get plenty of consumption. And it's also just a temporary illusion that ignores what happens when there is unexpected deflation. (bankruptcies, job loss, etc. ad nauseum)

How is a loan a net zero? Some of the people who "take you up on the loan" (by immediately spending their money) will do so for the purposes of present consumption.  But (as you seem to acknowledge) others will do so for the purposes of investment.  Even if the former group dominates, that's not a net zero.  Those consumers had the same opportunity that you did to defer their consumption.  The fact that they chose not to indicates that they placed a higher subjective value on present consumption.  So both parties gain.  And the saver should be compensated.

[Etlase2]

Because saving money in a bank moves the currency through the economy via loans. Almost universally non-consumption growth.

Hoarding money leads to the same effective value being used throughout the economy, for consumption or non-consumption, depending on who is using it, but by acting via deflation instead of a lowering in the interest rate due to there being more money available.

Where is there any net gain here? How does more value magically appear in the economy just because you hoard?

I clearly illustrated in this response to you in the tomato soup thread about how by hoarding, one can earn a much better return than by saving in a fixed supply currency, but at a cost to everyone else. Any time someone defers consumption by hoarding, they are incurring a future inflation (or less deflation than there otherwise would have been). Both when you hoard and when you spend causes economic upset at the benefit to the hoarder and the detriment to the rest of the economy. Saving would incur no penalties in either situation. But it also won't make nearly as much value ("out of thin air").

[Roger_Murdock]

Because saving money in a bank moves the currency through the economy via loans. Almost universally non-consumption growth.

Hoarding money leads to the same effective value being used throughout the economy, for consumption or non-consumption, depending on who is using it, but by acting via deflation instead of a lowering in the interest rate due to there being more money available.

Where is there any net gain here? How does more value magically appear in the economy just because you hoard?

I clearly illustrated in this response to you in the tomato soup thread about how by hoarding, one can earn a much better return than by saving in a fixed supply currency, but at a cost to everyone else. Any time someone defers consumption by hoarding, they are incurring a future inflation (or less deflation than there otherwise would have been). Both when you hoard and when you spend causes economic upset at the benefit to the hoarder and the detriment to the rest of the economy. Saving would incur no penalties in either situation. But it also won't make nearly as much value ("out of thin air").

Bank loans are almost universally for non-consumption growth? Really? So home mortgages and car loans are a trivial fraction of bank loans? And even if the real resources loaned by "hoarding" did go primarily to consumption, why is that a problem? Consumers and investors both have the opportunity to bid on your loan by spending their own money on consumption and investment, respectively. The balance that results will thus reflect the subjective preferences of market participants. And yes savings results in a future inflation. By saving, you've loaned purchasing power. When you eventually spend your money, society pays you back by giving up some of their purchasing power. And to the extent that non-consumption growth has occurred, the economy will be larger than it was previously. So the subsequent inflation caused by your spending will be smaller than the initial deflation caused by your saving.

[Etlase2]

The POINT Roger, as I have been arguing, is that it does not make a difference. Society is not gaining anything from you hoarding than they would not have otherwise gained from you saving. On the contrary, hoarding will lead to a mix of non-consumption and consumption growth, whereas saving will primarily go to non-consumption growth. Non-consumption growth is about time preference--your deferred consumption acts to create the possibility of more, future consumption growth. Consuming may expand the economy here and now (debatable, in reality it likely just delays non-consumption growth which is what leads to a permanently bigger economy), whereas non-consumption expands it amortized over time in the future.

So the subsequent inflation caused by your spending will be smaller than the initial deflation caused by your saving.

This I proved to be incorrect using a simple example with the equation of exchange. "Saving" in a bank causes neither deflation nor inflation because the money is still in circulation. "Hoarding" in a digital wallet causes deflation and then inflation. If the ratio your amount of money to the total supply of money does not change, there is no possible way that it can not have this effect. And you, the hoarder, benefit far more handsomely off of hoarding than you would off of saving even though the net gain over saving to the economy is zero. The net gain to your wealth is substantially greater than zero. The only possibility to explain this is that it comes at a cost from everyone else. There is no miraculous new value created via hoarding that will be created above and beyond saving. Instead, it is just a transfer of wealth created via economic upset.