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Author Topic: Deflation and Bitcoin, the last word on this forum  (Read 128460 times)
jtimon
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May 08, 2012, 10:32:27 AM
 #381

No matter the form, the scarcity itself will make BTC more possibly to become the target of mortgage, and then many loan based on BTC will be issued, these loans will require increased currency supply, it's the same effect as FRB
Let me repeat again:

So far, noone has explained to me how money can be more scarce or less scarce. From economic point of view, this concept makes no sense.

Mutual credit based monies like LETS are not scarce, as opposed to cash-monies. It can be created (and destroyed) when is needed (at transaction time).

The increase in the money supply through credit expansion is guided by the features of the substitute created, for example, transaction costs. It is not caused by "money being scarce".

If I want to buy you a good but I lack the money. But you trust me an accept my IOU, we're expanding the credit. In "credit" I'm including these: http://en.wikipedia.org/wiki/Bill_of_exchange
Are you saying that there cannot be substitutes for bitcoin because it is so easy to transfer and store?
Because there's already bitcoin substitutes. Accounts on markets like mtgox, Open Trasaction's "untraceable cash" backed by bitcoin or ripplepay credit lines denominated in btc.
Bitcoin transactions aren't instant. That could be their feature but I think is more than that. Ripple can enable trade in communities where there's no actual cash to trade with. I don't know, maybe mutual credit is not "real life" enough for you but it seems the best example for "circumventing money scarcity through credit" to me.
Did you hear about Wir money? How do you explain that it gets more used during deflationary/illiquid times?


2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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lonelyminer (Peter Šurda)
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May 08, 2012, 11:21:19 AM
 #382

Mutual credit based monies like LETS are not scarce, as opposed to cash-monies. It can be created (and destroyed) when is needed (at transaction time).
There are still rules or personal judgement involved that make them scarce (based on my understanding). Either there is a centrally set credit limit, or the seller of a good must evaluate whether he accepts the instrument or not. You're just saying that it's more elastic.

If I want to buy you a good but I lack the money. But you trust me an accept my IOU, we're expanding the credit. In "credit" I'm including these: http://en.wikipedia.org/wiki/Bill_of_exchange
You are mixing together two things. Whether the seller accepts the IOU, and whether the IOU becomes a generally accepted medium of exchange are two separate issues. The latter does not follow from the former. Also, you have the option of selling some of the other things you own, yet they are not a medium of exchange. Or you can take a loan from someone else. I think transaction costs generally favour the options I outlaid, in particular with strangers.

Are you saying that there cannot be substitutes for bitcoin because it is so easy to transfer and store?
I'm saying that it's less likely that such "Bitcoin IOUs" would become a generally accepted substitute for Bitcoin, because "it is so easy to transfer and store". It's still hypothetically possible.

Because there's already bitcoin substitutes. Accounts on markets like mtgox, Open Trasaction's "untraceable cash" backed by bitcoin or ripplepay credit lines denominated in btc.
These instruments are not generally accepted as a medium of exchange. I suspect that Mt. Gox codes are redeemed by the first recipient (since A giving B the code does not make it impossible for A to use it). Open Transactions, if I understand it correctly, makes it clear whether the instrument it issues is just another form of Bitcoin, or a debt instrument (I'm not even sure the latter is implemented at the moment).

Bitcoin transactions aren't instant. That could be their feature but I think is more than that.
Since Bitcoin is form-invariant, theoretically issues like this can be solved (e.g. green addresses or zipconf.com already exist).

Ripple can enable trade in communities where there's no actual cash to trade with. I don't know, maybe mutual credit is not "real life" enough for you but it seems the best example for "circumventing money scarcity through credit" to me.
I think that this leads to compartmentalisation of economies (autarky) and a decrease in the specialisation of labour, rather than these media to become more widespread. It's a voluntary regression to a less complex economy. Now, that's not necessarily bad, it might be what the people involved want. I just am not sure that this becomes a widespread occurrence. Whether I personally prefer such an economic system or not is immaterial.

Did you hear about Wir money? How do you explain that it gets more used during deflationary/illiquid times?
I heard about it and I find it a very interesting topic. What I think happens is that the "illiquid" times refer to a shrinking of the money supply through the contraction of credit and WIR provides a lower interest rate or better conditions than the banks that use the Swiss franc. This is interesting because it is a form of credit expansion that is ignored by almost all economic schools.
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May 08, 2012, 06:36:20 PM
 #383

Mutual credit based monies like LETS are not scarce, as opposed to cash-monies. It can be created (and destroyed) when is needed (at transaction time).
There are still rules or personal judgement involved that make them scarce (based on my understanding). Either there is a centrally set credit limit, or the seller of a good must evaluate whether he accepts the instrument or not. You're just saying that it's more elastic.

More often, there is an explicit or implicit peg to the national currency.  Ithica Hours are a fine example of this, since officially they are supposed to represent an hour of labor, but for all practical purposes that standard hour is $10.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
jtimon
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May 09, 2012, 04:23:08 PM
 #384

Mutual credit based monies like LETS are not scarce, as opposed to cash-monies. It can be created (and destroyed) when is needed (at transaction time).
There are still rules or personal judgement involved that make them scarce (based on my understanding). Either there is a centrally set credit limit, or the seller of a good must evaluate whether he accepts the instrument or not. You're just saying that it's more elastic.

More often, there is an explicit or implicit peg to the national currency.  Ithica Hours are a fine example of this, since officially they are supposed to represent an hour of labor, but for all practical purposes that standard hour is $10.

Although some LETS use national currencies as unit of account (other hours [of unskilled labor], I think ounces of silver have been tried...), Ithaca hours aren't based on LETS. It's a purely fiat community currency. For creation is donated to charities I think to encourage people to accept them. Anyway, they're not based on the so called "power of zero".
Yes, LETS systems tend to limit the maximum debt each participant can take and therefore the maximum "positive units" that can exist at the same time is not infinite. My point is that unlike gold this money is produced on demand.

If I want to buy you a good but I lack the money. But you trust me an accept my IOU, we're expanding the credit. In "credit" I'm including these: http://en.wikipedia.org/wiki/Bill_of_exchange
You are mixing together two things. Whether the seller accepts the IOU, and whether the IOU becomes a generally accepted medium of exchange are two separate issues. The latter does not follow from the former.

I'm not saying every credit becomes a generally accepted medium of exchange when it's used for trade. All I'm saying is that it becomes [a]A[/b] medium of exchange when is used for trade instead of money and therefore must influence the price of the generally accepted medium of exchange if there's one.

Are you saying that there cannot be substitutes for bitcoin because it is so easy to transfer and store?
I'm saying that it's less likely that such "Bitcoin IOUs" would become a generally accepted substitute for Bitcoin, because "it is so easy to transfer and store". It's still hypothetically possible.

Ok, then I agree.

Because there's already bitcoin substitutes. Accounts on markets like mtgox, Open Trasaction's "untraceable cash" backed by bitcoin or ripplepay credit lines denominated in btc.
These instruments are not generally accepted as a medium of exchange. I suspect that Mt. Gox codes are redeemed by the first recipient (since A giving B the code does not make it impossible for A to use it).

Not generally but they're accepted. Apart from the redeption codes, you can send funds from one account to another: instantly and for free.

Open Transactions, if I understand it correctly, makes it clear whether the instrument it issues is just another form of Bitcoin, or a debt instrument (I'm not even sure the latter is implemented at the moment).

Yes they have various debt instruments. What they call "untraceable cash" is any currency (for example bitcoin) issued and backed by a trusted minter. It's just easier to audit a bitcoin reserve than a gold one. But to me this untraceable cash just seems like "untraceable IOUs from a trusted issuer". Still, they can offer you more trustless warranties than mtgox.

Bitcoin transactions aren't instant. That could be their feature but I think is more than that.
Since Bitcoin is form-invariant, theoretically issues like this can be solved (e.g. green addresses or zipconf.com already exist).

I think that green addresses is a good approach to instant payments and I guess ZipConf is based on trust too but it has serious limitations. For now subtitutes are used when needed. If you need trust, what's the point of using cash in the first place?

Ripple can enable trade in communities where there's no actual cash to trade with. I don't know, maybe mutual credit is not "real life" enough for you but it seems the best example for "circumventing money scarcity through credit" to me.
I think that this leads to compartmentalisation of economies (autarky) and a decrease in the specialisation of labour, rather than these media to become more widespread. It's a voluntary regression to a less complex economy. Now, that's not necessarily bad, it might be what the people involved want. I just am not sure that this becomes a widespread occurrence. Whether I personally prefer such an economic system or not is immaterial.

It is desirable for many people trying to make their communities more sustainable.
But I think this mostly applies to LETS systems:  Ripple doesn't have any scale limitation, it could be used worldwide.

Did you hear about Wir money? How do you explain that it gets more used during deflationary/illiquid times?
I heard about it and I find it a very interesting topic. What I think happens is that the "illiquid" times refer to a shrinking of the money supply through the contraction of credit and WIR provides a lower interest rate or better conditions than the banks that use the Swiss franc. This is interesting because it is a form of credit expansion that is ignored by almost all economic schools.

I guess almost all economic schools presume some nationalization or standaritation of money. And I think the point Joel is making is that with a free monetary market deflation shouldn't be dangerous since it would affect only one currency and the "illiquidity" would not need to be reproduced in the others. If so, I agree with him. But I'm still against the gold standard (of course, I think the dollar standard has demonstrated to be worse).
I think this is one thing that Gesell got wrong: "the money needs to be standard so that trade can be cheaper". Maybe was true in their times but that's what lead him to propose his freigeld as a national currency.
Maybe he was also wrong when he said "the economy needs stable prices". Maybe the demurrage can take care of the "crisis by prosperity" on its own even with a fixed supply. If so, another excuse less for the nationalization of money.
But by no means he was Keynesian. The system we have today it's in his own words:
Quote
The reform which we are here examining can be effective only as long as the interest which the employer receives, and can therefore afford to pay the savings-banks or capitalists, is sufficient to induce the majority of savers to put their money into circulation again. But does not Flürscheim claim that interest, if it once begins to fall, and if economic crises can be averted, must soon fall to zero ?

 A reform of this kind would be short-lived and would bring the possibility of the greatest fraud ever practised upon mankind. After such an attempt at reform the people, as in the past, would believe that their salvation lay in the gold standard and would clamour for its re-introduction.
http://www.community-exchange.org/docs/Gesell/en/neo/part3/13.htm

So his prediction was accurate: zero interest but no lenders (real savers). Paper-money without separating the function of store of value is a receipe for disaster.
Sorry for quoting Gesell all the time, but he introduced me to the monetary field and influenced me greatly.
And sorry for the long post too.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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May 09, 2012, 06:15:46 PM
 #385

Mutual credit based monies like LETS are not scarce, as opposed to cash-monies. It can be created (and destroyed) when is needed (at transaction time).
There are still rules or personal judgement involved that make them scarce (based on my understanding). Either there is a centrally set credit limit, or the seller of a good must evaluate whether he accepts the instrument or not. You're just saying that it's more elastic.

More often, there is an explicit or implicit peg to the national currency.  Ithica Hours are a fine example of this, since officially they are supposed to represent an hour of labor, but for all practical purposes that standard hour is $10.

Although some LETS use national currencies as unit of account (other hours [of unskilled labor], I think ounces of silver have been tried...), Ithaca hours aren't based on LETS. It's a purely fiat community currency. For creation is donated to charities I think to encourage people to accept them. Anyway, they're not based on the so called "power of zero".
Yes, LETS systems tend to limit the maximum debt each participant can take and therefore the maximum "positive units" that can exist at the same time is not infinite. My point is that unlike gold this money is produced on demand.

Yes, to be literal, Ithica Hours are not a LETS.  A true LETS is a mutual credit system.  But that's part of the problem that bitcoin is trying to solve; credit systems require that parties in transactions be identifiable after the fact.  The entire CC & Paypal industries are, functionally, based upon this same system.  You cannot participate in a LETS system unless the 'system' knows who you are and how to find you.

I've made the argument in the past that Bitcoin is, in many respects, more like a LETS designed for the Internet, wherein the local exchange zone is the whole of the Internet; than it is like actual cash.  The blockchain takes teh function of the community ledger & distributes it, the total number of bitcoins in circulation represents the functional maximum credit expansion of the entire community.  Likewise, the blockchain & network know who you are, to the extent that is necessary for the function of the system; which by design happens to be very little.  It would be trivial to expand bitcoin into credit systems, but that would just require greater levels of self-identifcation.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
jtimon
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May 09, 2012, 07:33:12 PM
 #386

Yes, to be literal, Ithica Hours are not a LETS.  A true LETS is a mutual credit system.  But that's part of the problem that bitcoin is trying to solve; credit systems require that parties in transactions be identifiable after the fact.  The entire CC & Paypal industries are, functionally, based upon this same system.  You cannot participate in a LETS system unless the 'system' knows who you are and how to find you.

I see Ripple more as the LETS for the internet than bitcoin. Like LETS it's based on trust but the seller or "the community as a whole" doesn't have to trust the payer. Ripple is like LETS on a web of trust. One could say that LETS is a concrete structure in all the possible Ripple network topologies. Ripple is the most flexible mutual credit system.

I've made the argument in the past that Bitcoin is, in many respects, more like a LETS designed for the Internet, wherein the local exchange zone is the whole of the Internet; than it is like actual cash.  The blockchain takes teh function of the community ledger & distributes it, the total number of bitcoins in circulation represents the functional maximum credit expansion of the entire community.  Likewise, the blockchain & network know who you are, to the extent that is necessary for the function of the system; which by design happens to be very little.  It would be trivial to expand bitcoin into credit systems, but that would just require greater levels of self-identifcation.

Bitcoin is awesome but not because it is credit. Precisely because it is cash. It's the main advantage of bitcoin over ripple. Bitcoin is no one else's liability. In ripple everything is credit/debt. The value can be represented like arrows from one person to another. Bitcoin is more scalar(instead of vectorial): the relationship is between the currency holder and the rest of the currency users as a whole. But cash is alway more liquid than credit. Bitcoin is more like the gold of the internet. And the only problem I have with bitcoin is the same I have with gold. Well, I have more problems with gold than with bitcoin and bitcoin has more qualities than being pure cash that make it awesome, just wanted to point to the shared "deflation problem".
Anyway, I strongly support Bitcoin and I like to see it taking the lead of the "free monetary market" front of the monetary reformists.
In the end, many of us expect a new monetary ecosystem debunking the current system rather any solution alone.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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May 09, 2012, 08:32:40 PM
 #387

Yes, to be literal, Ithica Hours are not a LETS.  A true LETS is a mutual credit system.  But that's part of the problem that bitcoin is trying to solve; credit systems require that parties in transactions be identifiable after the fact.  The entire CC & Paypal industries are, functionally, based upon this same system.  You cannot participate in a LETS system unless the 'system' knows who you are and how to find you.

I see Ripple more as the LETS for the internet than bitcoin. Like LETS it's based on trust but the seller or "the community as a whole" doesn't have to trust the payer. Ripple is like LETS on a web of trust. One could say that LETS is a concrete structure in all the possible Ripple network topologies. Ripple is the most flexible mutual credit system.


Perhaps, but I question your analysis of the trust model that Ripple uses.  I'd say that Ripple is more akin to a web-of-cosigners'-trust model than a mutual credit system like LETS.  That's not to say that Ripple can't be succesful in it's own way, but all that it's really doing is replacing the credit card companies' consumer credit rating system with a peer-to-peer model of credit rating.  Ripple could trade in silver, bitcoin, hours of labor or shells; but Ripple isn't (itself) a currency or even a transfer system.

Quote
I've made the argument in the past that Bitcoin is, in many respects, more like a LETS designed for the Internet, wherein the local exchange zone is the whole of the Internet; than it is like actual cash.  The blockchain takes teh function of the community ledger & distributes it, the total number of bitcoins in circulation represents the functional maximum credit expansion of the entire community.  Likewise, the blockchain & network know who you are, to the extent that is necessary for the function of the system; which by design happens to be very little.  It would be trivial to expand bitcoin into credit systems, but that would just require greater levels of self-identifcation.

Bitcoin is awesome but not because it is credit. Precisely because it is cash. It's the main advantage of bitcoin over ripple. Bitcoin is no one else's liability. In ripple everything is credit/debt. The value can be represented like arrows from one person to another. Bitcoin is more scalar(instead of vectorial): the relationship is between the currency holder and the rest of the currency users as a whole. But cash is alway more liquid than credit. Bitcoin is more like the gold of the internet. And the only problem I have with bitcoin is the same I have with gold. Well, I have more problems with gold than with bitcoin and bitcoin has more qualities than being pure cash that make it awesome, just wanted to point to the shared "deflation problem".


Okay, but we are contesting the 'problem' part of your observation.  It's not under question that, if bitcoin is ever truly succesful, that deflation is going to occur.  We contest that it's necessrily a problem.  The rasing value of bitcoin might be bad for some, but it will be good for others.  Who complains about the falling cost of milk but the dairy farmer?  Apple doesn't want to sell last year's Idevice for less this year, they have to because their industry is in a constant state of deflation.  Who does falling consumer prices harm?  Not the consumer, certainly.  And if deflation is too rapid for bitcoin, what happens?  At worst new vendors are reluctant to enter into the bitcoin economy, the growth slows, and the deflation rate tempers.  It's a self-regulating system just like gold was internationally before 1913.  Self-regulating systems are not perfect.  They are, by definition, always reactionary.  This leaves open the possibility that bad things can happen in the short term.  The past 100 years should be proof enough that deliberate oversight, even by the best experts in the field, isn't better.  That distinction is the essence of the conflict between Keynes & Hayek, as well as their successors.  Bitcoin is a grand experiment in Austrian theory, for there is no room in the protocol for intervention on any level.

Quote
Anyway, I strongly support Bitcoin and I like to see it taking the lead of the "free monetary market" front of the monetary reformists.
In the end, many of us expect a new monetary ecosystem debunking the current system rather any solution alone.


The irony of that statement is if Bitcoin is successful, the theories of your academic predecessors are disproven.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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May 10, 2012, 12:03:43 AM
 #388

Perhaps, but I question your analysis of the trust model that Ripple uses.  I'd say that Ripple is more akin to a web-of-cosigners'-trust model than a mutual credit system like LETS.  That's not to say that Ripple can't be succesful in it's own way, but all that it's really doing is replacing the credit card companies' consumer credit rating system with a peer-to-peer model of credit rating.  Ripple could trade in silver, bitcoin, hours of labor or shells; but Ripple isn't (itself) a currency or even a transfer system.

Ripple is not a currency but neither a rating system: it is precisely a transfer system. Every user acts with its neighbors/friends like a LETS acts with the members. It would be more accurate to say that every ripple user issues his own currency. The transfers of credit occur transitively between nodes in the trust network exactly the same way your credit goes from your bank in your country to other bank in another country (who trusts your bank, not you) when you make an international transfer.
But the whole point is it can be used for trade in the total absence of cash. What can perform the function of medium of exchange it is a monetary system in my opinion.

It's not under question that, if bitcoin is ever truly succesful, that deflation is going to occur.  We contest that it's necessrily a problem.
...
It's a self-regulating system just like gold was internationally before 1913. 

I claim that if bitcoin is in a free monetary market the design flaw it has (shared with gold) would be camouflaged or even completely equilibrated.
But if bitcoin becomes the one and only currency of the world, we will have periodic global deflation that will cause many merchants to not have any stock, a lot of entrepreneurs not to invest and many savers not to lend. Because prosperity will cause real capital yields to drop but the unperishable money will demand his rent tribute from borrowers and merchants. Well, merchants don't pay, they pass it to the consumer. But we will need products not consumed and demands not satisfied periodically. Destroy some factories so that the ones that stay become as profitable as capital-money demands for his monopolized services.
What lonelyminer tries to say, I think, is that the cycles were consequence of fractional reserve, that may have been necessary with gold but not with bitcoin because there's no practical need.

Self-regulating systems are not perfect. They are, by definition, always reactionary.

Can I see that definition?
What do you mean exactly by reactionary here?


  This leaves open the possibility that bad things can happen in the short term.  The past 100 years should be proof enough that deliberate oversight, even by the best experts in the field, isn't better. That distinction is the essence of the conflict between Keynes & Hayek, as well as their successors.

I thought that Hayek had problems with deflation and hoarding too.

Bitcoin is a grand experiment in Austrian theory, for there is no room in the protocol for intervention on any level.

And I will happy to see it survive the dollar, I really believe it will do it.
But I don't expect nor desire it to become the single currency. Bitcoin is the pandora of non-backed cash. It won't come alone.

Quote
Anyway, I strongly support Bitcoin and I like to see it taking the lead of the "free monetary market" front of the monetary reformists.
In the end, many of us expect a new monetary ecosystem debunking the current system rather any solution alone.

The irony of that statement is if Bitcoin is successful, the theories of your academic predecessors are disproven.

I'm not an academic. I just study monetary theory for fun.
If bitcoin is "successful" and still causes periodic crisis the way Gesell described for gold, his theory will stand. The base of his theory is that there's a "hidden" rent implicit in money for being non-perishable. I'm not sure how one can disprove that.
Other influences... Riegel and some austrians also advocate for monetary market freedom, so yes, I guess that if btc becomes the one, their theories will be disproven.
I really like austrian economic theory but you can't say that the school is so united in the monetary realm. Some of them believe in intrinsic value (that should have died with Marx's theory on the subject) and can't even see that bitcoin is as good as gold (well, better).
Some think that fractional reserve is a problem, while others don't. There must be even austrians that just want a sound national fiat.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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May 10, 2012, 12:46:26 AM
 #389


It's not under question that, if bitcoin is ever truly succesful, that deflation is going to occur.  We contest that it's necessrily a problem.
...
It's a self-regulating system just like gold was internationally before 1913. 

I claim that if bitcoin is in a free monetary market the design flaw it has (shared with gold) would be camouflaged or even completely equilibrated.


Semantics, but okay.

Quote
But if bitcoin becomes the one and only currency of the world,


I can't see such a condition ever happening, for no other reason than of people with concerns like your own.

Quote

Self-regulating systems are not perfect. They are, by definition, always reactionary.

Can I see that definition?
What do you mean exactly by reactionary here?

Meaning that all self-regulating systems are responding to market stimuli (in an automatic fashion), but by definition, that stimuli has already occurred.  Perhaps in the very recent past, but in the past.  Thus the system reacts but cannot predict.  The jsutification of moving to managed monetary ssytems 100 years ago was the idea that an expert should (theoretically) bea ble to  foresee stresses building in the monetary ssytem and move to prevent or temper them.  Experience tells us what Hayak alread knew, that there simply isn't enough data avaliable to any one player to consistantly make such predictions, ans false positives are at least as bad as false negatives.  Hayak called it "a fatal conceit".

Quote

  This leaves open the possibility that bad things can happen in the short term.  The past 100 years should be proof enough that deliberate oversight, even by the best experts in the field, isn't better. That distinction is the essence of the conflict between Keynes & Hayek, as well as their successors.

I thought that Hayek had problems with deflation and hoarding too.

Yes, but by who's definition?  Hayak defined inflation and deflation as the expansion & contraction of the monetary supply, not the increase or decrease in market prices. Under a gold standard, the monetary supply couldn't change much from the base gold volume outside of a temporary gold rush, since credit expansion was naturally limited in scope.  Thus, all fiat currency inflation or deflation was the direct result of controller error and/or political intervention.  Likewise, I'd wager that 'hoarding' means something entirely different to you than it did to Hayak.

Quote

Bitcoin is a grand experiment in Austrian theory, for there is no room in the protocol for intervention on any level.

And I will happy to see it survive the dollar, I really believe it will do it.
But I don't expect nor desire it to become the single currency. Bitcoin is the pandora of non-backed cash. It won't come alone.



Conceeded.

Quote
Quote
Anyway, I strongly support Bitcoin and I like to see it taking the lead of the "free monetary market" front of the monetary reformists.
In the end, many of us expect a new monetary ecosystem debunking the current system rather any solution alone.

The irony of that statement is if Bitcoin is successful, the theories of your academic predecessors are disproven.

I'm not an academic. I just study monetary theory for fun.
If bitcoin is "successful" and still causes periodic crisis the way Gesell described for gold, his theory will stand. The base of his theory is that there's a "hidden" rent implicit in money for being non-perishable. I'm not sure how one can disprove that.


Well, there are many ways to look at the transaction costs, and that one is just as valid.  It's truely impossible to seperate the effects, though.

Quote
Other influences... Riegel and some austrians also advocate for monetary market freedom, so yes, I guess that if btc becomes the one, their theories will be disproven.
I really like austrian economic theory but you can't say that the school is so united in the monetary realm. Some of them believe in intrinsic value (that should have died with Marx's theory on the subject) and can't even see that bitcoin is as good as gold (well, better).
Some think that fractional reserve is a problem, while others don't. There must be even austrians that just want a sound national fiat.


There are, indeed.  These differences come down do disagreements in degree, not perspectives.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
lonelyminer (Peter Šurda)
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May 10, 2012, 08:32:26 AM
 #390

What a delightful and professional debate. Wish there were more like it. Don't have time to reply now, but will later.
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May 10, 2012, 10:33:16 AM
 #391

Thank you for the explanation about self-regulating systems. They correct imbalances but they can't prevent them. The self-regulation acts a posteriori. And a planned monetary policy is doomed to failed by the fact that is impossible to predict the outcome of a complex system like the economy. That's a strong point in favor of denationalization of money.
Gesell also wanted to print or let the demurrage destroy money a posteriori to maintain price stability, but in the abscence of hoarding (money that is not spent nor lent by my definition) and with an increased velocity of money, smaller changes will affect more effectively and quickly. The minters could not blame the sentiments of the markets for unstable prices and they would have to take full responsibility.
His solution still requires bureaucrats taking decisions and I'm not very comfortable with that.
My main point here was that a gold standard is also an inferior solution over a truly free monetary market.
I take the winning side on this one which I think is the libertarian side. And probably today's global monetary system will be remembered as a historic argument against the planned monetary policy.

It's probable that I've misunderstood Hayek because I haven't read him deeply, just some articles by him and about him, an interview, a couple of raps...
My claim comes from this sentence from him:
Quote
It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.
http://butnowyouknow.net/those-who-fail-to-learn-from-history/hayeks-1932-letter-on-the-great-depression/

That makes me think that effectively he thought that deflation was bad for investment. He just didn't like the government spending solution. Also I read somewhere that he said that "capital intensive industries suffer more and first", which perfectly fits with the free-money theory on interest.

In any case, what we want to know is the fundamental nature of economic cycles. Is it a systemic problem derived from the monetary system? If so, what parts of it are ultimately responsible?
I think the different austrian positions on this issue reveal different fundamental understandings of the very nature of money.
Just like hearing Nielsio talking about bitcoin reveals he has a Marxian theorist of value demon deep inside, despite his best libertarian intentions.
The value of money comes from the fact that is useful in the market as a medium of exchange, not because it is redeemable by certain commodity.
This is a huge monetary division among austrians from my point of view, but we don't need to spend much time on it. Most bitcoiners will be with me when I say "the intrinsic value believers are wrong". The rest may discuss about the metaphysics of "digital commodities".

The other main source of monetary disagreement in the school as I see it are:

1) Whether or not deflation can be a problem (for some can be even "good" in general terms).
2) The effect of fractional reserve banking (and credit/debt in general) in monetary cycles.

In the second point I think lonelyminer's position is close to Huerta de Soto's (correct me when you have time), which I would simplify to something like "gold is cyclic because of fractional reserve lending". But forbidding it is repressive. Luckily bitcoin removes the need for backed paper currencies and fractional reserve altogether.
Is that approximately your position?

Since you don't agree that deflation is a problem, I have a few questions.
Are financial cycles good?
Do financial cycles have a "destructive" part? How does it work? How does deflation relates to financial cycles?
What's the ultimate cause of these cycles?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
lonelyminer (Peter Šurda)
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May 10, 2012, 12:30:02 PM
 #392

Until I have time for a more thorough reaction I'll reply partially.

Just like hearing Nielsio talking about bitcoin reveals he has a Marxian theorist of value demon deep inside, despite his best libertarian intentions.
The value of money comes from the fact that is useful in the market as a medium of exchange, not because it is redeemable by certain commodity.
This is a huge monetary division among austrians from my point of view, but we don't need to spend much time on it. Most bitcoiners will be with me when I say "the intrinsic value believers are wrong". The rest may discuss about the metaphysics of "digital commodities".
For the record, I do not know any professional Austrian economists that believes in the "intrinsic value" concept. I emailed with about a dozen of them. While some do claim that a prospective money must be a highly desirable commodity before it is a medium of exchange, this is not the same as saying that it must have "intrinsic value". Nielsio, Kramer or Smiling Dave, to name a few Austrian Bitcoin detractors, are not professional economists. They're enthusiasts. The professionals are mostly merely uninterested in understanding Bitcoin (apart from some exceptions, like Selgin or Matonis).

If you look hard, you can find plenty of evidence that Austrians can understand why Bitcoin is useful. The founder of the Austrian School, Carl Menger, wrote in 1871 that the cost of the banking system influences the evaluation of a potential trade opportunity. His successor, Ludwig von Mises, wrote in 1912 that the idea that money is valued because of its commodity use-value is fallacious.

1) Whether or not deflation can be a problem (for some can be even "good" in general terms).
I think that all Austrians agree that a fall in the price level is not a problem, and that a change in the decrease in the quantity of money can be a problem.

2) The effect of fractional reserve banking (and credit/debt in general) in monetary cycles.
The issue is not credit/debt, but increases of money supply through credit/debt. And yes, you're right, the freebanking branch claims that credit expansion/contraction do not necessarily create business cycles.

In the second point I think lonelyminer's position is close to Huerta de Soto's (correct me when you have time), which I would simplify to something like "gold is cyclic because of fractional reserve lending". But forbidding it is repressive. Luckily bitcoin removes the need for backed paper currencies and fractional reserve altogether.
Is that approximately your position?
A nice way of putting it. Many of the Austrian FRB opponents (including de Soto) claim that FRB is a violation of property rights. I think their argument is incomplete, and Bitcoin shows that empirical factors can influence whether FRB comes to being or not.

Since you don't agree that deflation is a problem, I have a few questions.
Are financial cycles good?
Austrian school cannot answer if things are "good" or "bad". Besides, why would anyone think that business cycles are good?

Do financial cycles have a "destructive" part?
I would say that the Austrian position is that the destructive part is the boom, whereas the bust is an attempt to fix the destruction.

How does it work?
It works by misleading investors into believing there are more resources available than there really are. Just like any manipulation of price, it creates an imbalance between supply and demand and obscures it.

How does deflation relates to financial cycles?
After the expansion of credit causes malinvestment, this malinvestment needs to be liquidated and this leads to a contraction of credit. This is accompanied by a fall in prices. But the fall in prices in this case is a symptom, not a cause, of problems.

What's the ultimate cause of these cycles?
I could hardly put it more eloquently than these guys: http://www.youtube.com/watch?v=d0nERTFo-Sk
Quote from: rapper Hayek
The boom gets started with an expansion of credit.
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May 10, 2012, 01:07:51 PM
 #393

The other main source of monetary disagreement in the school as I see it are:

1) Whether or not deflation can be a problem (for some can be even "good" in general terms).
2) The effect of fractional reserve banking (and credit/debt in general) in monetary cycles.

In the second point I think lonelyminer's position is close to Huerta de Soto's (correct me when you have time), which I would simplify to something like "gold is cyclic because of fractional reserve lending". But forbidding it is repressive. Luckily bitcoin removes the need for backed paper currencies and fractional reserve altogether.
Is that approximately your position?


Close enough for government work, yes.

Quote

Since you don't agree that deflation is a problem, I have a few questions.
Are financial cycles good?


I don't think that defining it that way works.  The question then becomes, "good for whom?"  Financial cycles simply exist.  They always have in moderately free economies.  There have been entire tomes written on the how & why, but largely I consider that an irrelevant question, insofar as knowing how & why cycles exist doesn't really contribute to any ability to avoid them.  Fortunes have been made by men with some undefinable quality that gives them an edge over predictions, Warren Buffet not remotely being the first in a long list, so for those rare investors cycles would most certainly be 'good'.  For most people cycles are generally 'not good' and suppressing them in their best interests, but since we can agree that history has shown that those who accept positions of such authority tend not to have such a gift, we are all better off with reactionary natural systems than managed ones.  Honestly, if I had the ability to predict markets, I wouldn't accept the position of Federal Reserve Chairman either.  I'd be spending my time and money beating the market.  Would you?

Quote
Do financial cycles have a "destructive" part? How does it work? How does deflation relates to financial cycles?


"Destructive" yes, but necessary also.  Like fire clears away the brush so that the might oak might grow.  The deflationary phase is simply the result of the expansionary phase's overreach, and must occur.  It's harsh medicine, but the illness is worse.

Quote
What's the ultimate cause of these cycles?


Again, I consider that an irrelevant question; but I tend to agree with Austrian theory in the sense that the cycle is an aggregate result of investment successes leading to overinvestment, overinvestment leading to exuberance, exuberance leading to mal-investment, mal-investment leading to investing failures, investing failures leading to panic, panic leading to liquidation, liquidation leading to under-investment, under investment leading to new investment successes for the next generation, and so on infinium.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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May 10, 2012, 03:05:07 PM
 #394

Thank you for the clarifications and references, I'll look into them.
I also want to clarify what I mean by "good". It's like you could measure prosperity as a whole. I know it's just an abstract concept outside of nature. But paying the costs of rising people to let them die hungry in the streets later doesn't seem like a very economic deal for society, despite some guy gets more powerful because its property gets more valuable for being more scarce.
But not prosperity necessarily in an egalitarian way, probably more pragmatic than other thing. I'm not comfortable with terms that imply moral connotations but I think you can now understand what I mean when I say that business cycles are "bad".

1) Whether or not deflation can be a problem (for some can be even "good" in general terms).
I think that all Austrians agree that a fall in the price level is not a problem, and that a change in the decrease in the quantity of money can be a problem.

In my words this would be "Not price deflation but monetary deflation can cause problems."
Why? What's so different?

2) The effect of fractional reserve banking (and credit/debt in general) in monetary cycles.
The issue is not credit/debt, but increases of money supply through credit/debt. And yes, you're right, the freebanking branch claims that credit expansion/contraction do not necessarily create business cycles.

What they think it does? They are part of nature like MoonShadow claims, right?

How does it work?
It works by misleading investors into believing there are more resources available than there really are. Just like any manipulation of price, it creates an imbalance between supply and demand and obscures it.

What force increasingly mislead investors?
Oh, you say it later, the expansion of credit.

How does deflation relates to financial cycles?
After the expansion of credit causes malinvestment, this malinvestment needs to be liquidated and this leads to a contraction of credit. This is accompanied by a fall in prices. But the fall in prices in this case is a symptom, not a cause, of problems.

But does the deflation take an active part on the credit contraction? Doesn't it have any side effects?
Merchants are just right watching their inventory depraciate?
Doesn't the production of real capital decrease under monetary deflation?

What's the ultimate cause of these cycles?
Quote from: rapper Hayek
The boom gets started with an expansion of credit.


So how that expansion of credit starts under a gold standard?
Are you with the freebanking branch or with the FRB opponents?

The other main source of monetary disagreement in the school as I see it are:

1) Whether or not deflation can be a problem (for some can be even "good" in general terms).
2) The effect of fractional reserve banking (and credit/debt in general) in monetary cycles.

In the second point I think lonelyminer's position is close to Huerta de Soto's (correct me when you have time), which I would simplify to something like "gold is cyclic because of fractional reserve lending". But forbidding it is repressive. Luckily bitcoin removes the need for backed paper currencies and fractional reserve altogether.
Is that approximately your position?

Close enough for government work, yes.

Not sure what you mean here.

Quote
Do financial cycles have a "destructive" part? How does it work? How does deflation relates to financial cycles?


"Destructive" yes, but necessary also.  Like fire clears away the brush so that the might oak might grow.  The deflationary phase is simply the result of the expansionary phase's overreach, and must occur.  It's harsh medicine, but the illness is worse.

Quote
What's the ultimate cause of these cycles?


Again, I consider that an irrelevant question; but I tend to agree with Austrian theory in the sense that the cycle is an aggregate result of investment successes leading to overinvestment, overinvestment leading to exuberance, exuberance leading to mal-investment, mal-investment leading to investing failures, investing failures leading to panic, panic leading to liquidation, liquidation leading to under-investment, under investment leading to new investment successes for the next generation, and so on infinium.

So deflation is the necessary solution to a problem that has no avoidable cause, it's just nature, fair enough. We agree that the managed solution just make things worse. For me it is because the solution does not attack at the root of the problem and for you no action should be taken at all, but the result is the same: no, Keynes, that's not "good".
Since my position is that the root of the cause is inherent in the monetary system (for example gold), let's discuss how propsperity works under a gold standard.
When some enterprise it's very profitable, many actor invest on it to compete for the profits, which drop by that very competition as the demand is satisfied. Real capital works in the same way. For example, if a town has very few houses in relation to its population, the rents will be high, and there will be an incentive to build more and get the rent that the houses will yield. As long as the yield of the capital in proportion with its cost of production is over the rate of interest (discounting price inflation and after paying for the risks), more houses will be built. But with more houses the offer increases and the rents drop. So do the yields. And at some point is not profitable to build more houses and the savings must be invested in other sectors.
But what happens with concrete sectors also applies for the economy as a whole: the more profitable investments are made first and in the end the less ones are left. With gold and perfect competition, after much prosperity the yields of real capital have droped so much that...

a) Tend to zero, meaning that the cost of production of capitals equal their total yield instead of being lower.
That's what I think would be natural but doesn't happen because of the non-perishability of gold.

b) When their yields reach the minimum limit set by the basic interest or liquidity premium, the market needs to reset. Some of the capital gets destroyed so that real capitals are profitable enough again. If the market doesn't do it on its own a war is needed.

c) When their yields reach the minimum limit set by the basic interest or liquidity premium, the credit starts to expand, expanding the monetary supply and causing malinvestments. After the bust the malinvestments get destroyed and also some of the good investments by the price turbulences. Lenders are ready again to invest in the now profitable pieces.

d) New innovations always appear and the rate of interest never approach those low values naturally. The human race is meant for exponential growth. We've just rejected the cornucopia by government all this time. Gold has been always perfect as money.

e) Your own, how that prosperity trend ends?

Clarifications:

1) Nominal interest rate = Real interest rate + inflation premium = basic interest + risk premium + inflation premium
So, yes, I'm counting on risks.

2) Why the basic interest is always greater than zero?
Because being the money non perishable it is always better to hold the cash and enjoy that protection against uncertainty that it offers (liquidity premium) than to lend it at zero interest, even when there's zero risk in the loan.
That externality that money holders enjoy for free (or can trade for the rent that basic interest is) must be paid somewhere else. Is it only pay by the consumers through the investors through the borrowers to the lenders or is it also paid somewhere else?

Another question. The "deflation speculators". People that make gains just by holding money in deflationary times.
How they benefit society by signaling that cash to clear debts will be even more desperately needed tomorrow than today?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
lonelyminer (Peter Šurda)
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May 10, 2012, 04:11:39 PM
 #395

I also want to clarify what I mean by "good". It's like you could measure prosperity as a whole. I know it's just an abstract concept outside of nature. But paying the costs of rising people to let them die hungry in the streets later doesn't seem like a very economic deal for society, despite some guy gets more powerful because its property gets more valuable for being more scarce.
But not prosperity necessarily in an egalitarian way, probably more pragmatic than other thing. I'm not comfortable with terms that imply moral connotations but I think you can now understand what I mean when I say that business cycles are "bad".
Let's then say that the question is if business cycles are a pareto-improvement over their absence? Then the answer is no. Changes in the quantity of money (regardless of whether this is an increase or decrease) merely redistribute wealth, they do not present a pareto-improvement.

In my words this would be "Not price deflation but monetary deflation can cause problems."
Why? What's so different?
Changes in the quantity of money are merely a redistributive measure. Since money is injected through particular funnels, from which it goes to other parts of the economy, this leads to a shift of wealth in the opposite direction. In some cases, such as credit expansion through the banking system, this leads to cycles. If the production costs of money are close to the market price, and there are no legal restrictions on the competition of production of money, the redistributive effect is minimised. This works much better with gold than with fiat (if we disregard FRB). With Bitcoin, I would argue it works even better, you can very easily see how the production costs trail the market price and how marginal producers fall out. It's genius.

A change in the the price level on the other hand is are not accompanied by such redistributive effect. You could argue that a rise benefits savers and a fall benefits borrowers, but this only works if one of them mispredicts the future price development. If they have reasonably accurate predictions about future price, that will be reflected on the interest rate. So it could be said that sudden and unexpected changes in purchasing power could be a problem. But when do such things occur? Normally, they happen when this is a consequence a change of the money supply, for example, credit contraction. If people expect a fall in the prices, or if the fall is stable and predictable, then there is no "problem".

The issue is not credit/debt, but increases of money supply through credit/debt. And yes, you're right, the freebanking branch claims that credit expansion/contraction do not necessarily create business cycles.
What they think it does? They are part of nature like MoonShadow claims, right?
They argue that in a free banking system with a commodity monetary base, credit expansion/contraction satisfies changes in the demand for money and therefore does not cause cycles. I find their argument unpersuasive.

What force increasingly mislead investors?
Oh, you say it later, the expansion of credit.
It's a manipulation of the interest rate, which is a type of a price. If there is a price that lies out of the equilibrium, you're going to have a mismatch of demand and supply. Since interest rate is intertemporal, it is maybe easier to obscure.

But does the deflation take an active part on the credit contraction? Doesn't it have any side effects?
DeSoto goes into much detail about how the prices change during a credit contraction. Sadly I don't remember all of it. But basically, the stuff that is produced will be considered too expensive, and people will only be willing to buy it at a lower price. This causes a fall in the market prices. Assuming the contraction is not countered by printing more money (or regulations), eventually the price will equilibrate and the bad investments will be liquidated.

Merchants are just right watching their inventory depraciate?
I suppose you could say that, but only until the equilibrium is reestablished. It does not go on forever.

Doesn't the production of real capital decrease under monetary deflation?
Not necessarily. The point here is the interest rate, not the fall in prices. The interest rate must correspond to the time preference of people and their willingness to forego consumption. During the boom, the price signals that people are foregoing consumption, so more producer goods are produced. During the bust, these need to be either sold at a loss, or dismantled and in the worst case scenario, scrapped. As you hopefully see, the problem is a disequilibrium, not a falling price.

So how that expansion of credit starts under a gold standard?
The video is a bit inaccurate, because the business cycle does not require fiat money.The elastic supply only exacerbates it. Under the gold standard, the cycle is started when commercial banks loan "from nothing". They can do this at a lower interest rate than the time preference of the savers. Other banks join, because otherwise they would lose. This is however somewhat mitigate by the risk of bank runs (as there is no lender of last resort).

Are you with the freebanking branch or with the FRB opponents?
I think that FRB causes the cycles, but I don't think that's illegal. While I think the freebanking branch has many interesting and new insights, in general I don't agree with their conclusions. For example, I disagree that expansion/contraction of credit satisfies "demand for money", but I agree with Selgin that in a mature economy the "outside money" (in case of gold) would not circulate. He does not explain why, but obviously it's due to transaction costs. He thinks this is the same with Bitcoin, but I argue that it works the opposite way, since substitutes are less likely to have lower transaction costs. So, in a Bitcoin economy, it is the "inside money" that would not circulate. On the other hand, the gold standard proponents do not get it right either, because they think that the solution is that people use gold coins rather than substitutes. Which obviously is not a likely occurrence as gold coins have comparably higher transaction costs than gold-substitutes, in particular electronic ones.

So I suppose I'm somewhere in the middle. I think they are both a bit right and a bit wrong.
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May 10, 2012, 07:01:12 PM
 #396

Thank you for the clarifications and references, I'll look into them.
I also want to clarify what I mean by "good". It's like you could measure prosperity as a whole. I know it's just an abstract concept outside of nature. But paying the costs of rising people to let them die hungry in the streets later doesn't seem like a very economic deal for society, despite some guy gets more powerful because its property gets more valuable for being more scarce.


"let them die hungry" is a bit of hyperbole, don't you think?  Such things are very rare in the worst of conditions, including the Great Depression.  Libertarians tend to get this image of being social darwinists, but it's simply not so.  I've never known a lib that would give to help someone truly in need, and I've never known a lib that wasn't better prepared than the average Joe for hard times, either.  Never.

Personally, I get a monthly quota of public transit tickets, even though I don't often use them myself.  I get them pre-tax, due to IRS deduction rules; but I do pay for them.  I give away at least half of what I get to people I meet on the street, generally more in the winter than the summer; because a three hour bus ride to nowhere in particular is a fine place to take a warm nap without much risk of getting hassled.  I give them to local shelters and my church for similar reasons.

Quote
But not prosperity necessarily in an egalitarian way, probably more pragmatic than other thing. I'm not comfortable with terms that imply moral connotations but I think you can now understand what I mean when I say that business cycles are "bad".

While the business cycle may be "bad" for a great many, they are also unavoidable.  They existed to some degree under the gold standard and were the greatest of arguments for central bank planning & control of the fiat monetary system; and they have existed since.  Rarely have they been more mild than under an unmanaged "free banking" gold standard.


1) Whether or not deflation can be a problem (for some can be even "good" in general terms).
I think that all Austrians agree that a fall in the price level is not a problem, and that a change in the decrease in the quantity of money can be a problem.

In my words this would be "Not price deflation but monetary deflation can cause problems."
Why? What's so different?

[/quote]

Price deflation can be caused by a great many things beyond changes in the monetary base, most of which are still beyond the control of central bank magement even if the data existed to matter.  It's like cpmparing Apples to the entire fruit market.  Austrians focus on changes in the monetary base because it's actually possible to draw conclustions and make predictions based on focusing on one variable at a time.

Quote
How does it work?
It works by misleading investors into believing there are more resources available than there really are. Just like any manipulation of price, it creates an imbalance between supply and demand and obscures it.

What force increasingly mislead investors?
Oh, you say it later, the expansion of credit.

Specificly, the expansion of credit puts upward presssure on prices, particularly commodities prices used as inputs for industry.  But prices are themselves signals to other producers concerning what commodities are in demand, leading to investements in the production of those commodites even though there may not be an actual increase in demand.  For example, There has been an attitude of 'boom' construction in China the past decade or so.  In the beginning, it was driven by an honest need, and then the government opened up credit because they perceived the need in order to support construction.  Later on the needs were satistfied, but construction companies are in the business of building, so they have an incentive to continue building on the cheap credit provided by the Chinese government.  An attitude of "build it and they will come" develops, and the construction forces up the price of steel & copper.  This tells metals producers in other nations that China needs materials, when they would not if the interest rate wasn't still 'cheap'.  Ultimately this leads to steel manufacturers building new facilities and copper mining companies opening up new viens.  This floods the market of materials, but eventually the Chinese government notices that there is much credit debt & a lot of mostly empty new buildings, and (belatedly) tightens credit.  This causes a complete halt to marginal new construction projects, and the new steel & copper production that was just coming online turns out to be excessive, and the market rates for those products crashes as it becomes apparent that such investments were not needed to start with, thus 'mal-investments'.  This is literally what has just happened in China.  Something that many Austrian economists, bloggers & commentators have been warning against for 5 or 6 years.




The other main source of monetary disagreement in the school as I see it are:

1) Whether or not deflation can be a problem (for some can be even "good" in general terms).
2) The effect of fractional reserve banking (and credit/debt in general) in monetary cycles.

In the second point I think lonelyminer's position is close to Huerta de Soto's (correct me when you have time), which I would simplify to something like "gold is cyclic because of fractional reserve lending". But forbidding it is repressive. Luckily bitcoin removes the need for backed paper currencies and fractional reserve altogether.
Is that approximately your position?

Close enough for government work, yes.

Not sure what you mean here.

[/quote]

"gold is cyclic because of fractional reserve lending". But forbidding it is repressive. Luckily bitcoin removes the need for backed paper currencies and fractional reserve altogether."

The above statements are, IMHO, generally accurate.

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Do financial cycles have a "destructive" part? How does it work? How does deflation relates to financial cycles?


"Destructive" yes, but necessary also.  Like fire clears away the brush so that the might oak might grow.  The deflationary phase is simply the result of the expansionary phase's overreach, and must occur.  It's harsh medicine, but the illness is worse.

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What's the ultimate cause of these cycles?


Again, I consider that an irrelevant question; but I tend to agree with Austrian theory in the sense that the cycle is an aggregate result of investment successes leading to overinvestment, overinvestment leading to exuberance, exuberance leading to mal-investment, mal-investment leading to investing failures, investing failures leading to panic, panic leading to liquidation, liquidation leading to under-investment, under investment leading to new investment successes for the next generation, and so on infinium.

So deflation is the necessary solution to a problem that has no avoidable cause, it's just nature, fair enough.


Yes, it's harsh medicine.

[/quote]
We agree that the managed solution just make things worse. For me it is because the solution does not attack at the root of the problem and for you no action should be taken at all, but the result is the same: no, Keynes, that's not "good".
Since my position is that the root of the cause is inherent in the monetary system (for example gold), let's discuss how propsperity works under a gold standard.
When some enterprise it's very profitable, many actor invest on it to compete for the profits, which drop by that very competition as the demand is satisfied. Real capital works in the same way. For example, if a town has very few houses in relation to its population, the rents will be high, and there will be an incentive to build more and get the rent that the houses will yield. As long as the yield of the capital in proportion with its cost of production is over the rate of interest (discounting price inflation and after paying for the risks), more houses will be built. But with more houses the offer increases and the rents drop. So do the yields. And at some point is not profitable to build more houses and the savings must be invested in other sectors.

[/quote]

Doing great so far.

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But what happens with concrete sectors also applies for the economy as a whole: the more profitable investments are made first and in the end the less ones are left. With gold and perfect competition, after much prosperity the yields of real capital have droped so much that...

Just an interjection, this kind of observation isn't unique to a gold standard.  It's the natural state of a free market if left alone.

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a) Tend to zero, meaning that the cost of production of capitals equal their total yield instead of being lower.
That's what I think would be natural but doesn't happen because of the non-perishability of gold.


If I understand the question, then your wrong about the cause.  It's not the non-perishability of the refernce captial unit that matters.  The down cycle occurs because investment trends have 'inertia' in the minds of investors, who tend to continue investing in the same areas that have done well for them in the recent past.  It's the tallented ones that can see the inflection points that change investment conditions and not continue past thezero future margin point, the rest tend to lose money until they have learned new habits.

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b) When their yields reach the minimum limit set by the basic interest or liquidity premium, the market needs to reset. Some of the capital gets destroyed so that real capitals are profitable enough again. If the market doesn't do it on its own a war is needed.


Hmm, "war is econoimcs by other means".  So perhaps.

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c) When their yields reach the minimum limit set by the basic interest or liquidity premium, the credit starts to expand, expanding the monetary supply and causing malinvestments. After the bust the malinvestments get destroyed and also some of the good investments by the price turbulences. Lenders are ready again to invest in the now profitable pieces.

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Not quite.  The credit yield donesn't reset on it's own, there must first be new investments that come availble that qualify.

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d) New innovations always appear and the rate of interest never approach those low values naturally. The human race is meant for exponential growth. We've just rejected the cornucopia by government all this time. Gold has been always perfect as money.



Gold is not perfect money, and neither is Bitcoin.  They are both the best examples of the best
kinds of money that humanity has yet devised.  In part, because they don't need intervention.

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e) Your own, how that prosperity trend ends?

I can't know that, no one can.  That's the root point.

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Clarifications:

1) Nominal interest rate = Real interest rate + inflation premium = basic interest + risk premium + inflation premium
So, yes, I'm counting on risks.

2) Why the basic interest is always greater than zero?
Because being the money non perishable it is always better to hold the cash and enjoy that protection against uncertainty that it offers (liquidity premium) than to lend it at zero interest, even when there's zero risk in the loan.
That externality that money holders enjoy for free (or can trade for the rent that basic interest is) must be paid somewhere else. Is it only pay by the consumers through the investors through the borrowers to the lenders or is it also paid somewhere else?


It's paid n many ways.  To many to mention.  It's paid for in taxes, in consumer prices, whatever.  It's alwasys paid, though.

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Another question. The "deflation speculators". People that make gains just by holding money in deflationary times.
How they benefit society by signaling that cash to clear debts will be even more desperately needed tomorrow than today?


In the same way that speculators signal that more oil is going to be needed in the future than today, by risking their own captial to do so.  Increases in the price of gas in the near term will reduce the price of gas when (if) such future events occur.  If they don't, the speculators get hurt and teh price of gas is reduced below thir risked amount.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
lonelyminer (Peter Šurda)
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May 14, 2012, 08:32:13 AM
 #397

One more thing to add:

It is desirable for many people trying to make their communities more sustainable.
Be careful what you wish for. A reduction of complexity of the economy means that less people can survive. Maybe you're extremely lucky and the level won't "equilibrate" through famine and war, but I wouldn't count on it.
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May 16, 2012, 03:41:00 PM
 #398


I can't believe this thread is still alive. 
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May 17, 2012, 09:30:39 AM
 #399

I think the 4 year period halving policy is a really bad idea and it will bring instability, but still not a deal breaker for the whole concept. At least for several years, over which we get to try a lot of stuff.

Having a constant rate of creation is by all means deflationary as the percentage of coins created over the mass of coins would be ever-decreasing and the loss of coins wouldn't be a concern.

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May 17, 2012, 05:14:52 PM
 #400


I can't believe this thread is still alive. 

Why? What's wrong with it?

IMHO this thread has some of the best posts I've seen in the whole forum. Ok, it has a lot of noise too, but you can easily skip them...
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