Deflation and Bitcoin, the last word on this forum

[tytus]

Deflation has practical consequences. Who would invest on "real world" companies on GLBSE if You can expect more profits from the rising value of the BTC.

[Adrian-x]

Deflation has practical consequences. Who would invest on "real world" companies on GLBSE if You can expect more profits from the rising value of the BTC.

This is one of the many benefits of Bitcoin. You don't need to invest to maintain your wealth, you invest for profits. The result is businesses that fulfill society's needs will profit and those that don't fail. (People's needs aren't going away they just won't need as much c#@p.)

The net benefit is people planet and profit and now we have a self regulating system, and a production driven economy, the economic benefits of the throw away society start eroding.

A fixed money supply has far reaching environmental benefits too.

[tytus]

I have a business and I would like to borrow money to pay for a registration fee of the product. I can not borrow bitcoins because it is too expensive :-( deflation means that there is no lending of money, no new investments (no research) ... only consumption of old goods. Why is inflation wrong ? Inflation causes goods to have a more reliable value than money. People start producing and keeping goods instead of money, which as we know is only virtual (!).
I live in en ex-communist country and according to communism people don't need to be wealthy, people need work :-) 
Introducing constantly lowering inflation to bitcoins [by not reducing the mining revenues per block] would make the currency much more liquid. Instead investing in a ponzi scheme (keeping bitcoins) we could invest with bitcoins in hightech startups.

[rdponticelli]

I have a business and I would like to borrow money to pay for a registration fee of the product. I can not borrow bitcoins because it is too expensive :-( deflation means that there is no lending of money, no new investments (no research) ... only consumption of old goods. Why is inflation wrong ? Inflation causes goods to have a more reliable value than money. People start producing and keeping goods instead of money, which as we know is only virtual (!).
I live in en ex-communist country and according to communism people don't need to be wealthy, people need work :-) 
Introducing constantly lowering inflation to bitcoins [by not reducing the mining revenues per block] would make the currency much more liquid. Instead investing in a ponzi scheme (keeping bitcoins) we could invest with bitcoins in hightech startups.

You can borrow any inflating currency instead of bitcoins, if that makes you feel more comfortable (any fiat, devcoins, freicoins, which have demurrage instead of inflation, etc.) and you can buy bitcoins with them if and when you need them. Bitcoin is just one more player in a huge monetary ecosystem and its deflationary nature is one of its greatest contribution.

[tytus]

But this eliminates BTC from the investment business (crowd financing) and the other currencies don't have a valuation to facilitate serious investments. BTC would be perfect for crowd financing if not the deflation.

[rdponticelli]

But this eliminates BTC from the investment business (crowd financing) and the other currencies don't have a valuation to facilitate serious investments. BTC would be perfect for crowd financing if not the deflation.

I don't believe that deflation eliminates bitcoin's viability as an investment tool. There has been a long discussion in this thread, covering the matter. You can start on this post, if you haven't read it already, and follow some of the points made there and subsequently. It's really long, but equally worthwhile in my humble opinion.

I've make an example here on how deflation discourages investments in real capital.
I would like to know if there's any false premise in it.

Your example tries to hold prices stable while it imagines a change in the value of the currency. You can't do that. Whether or not the bakery is an efficient use of real capital is a currency-neutral question.

This is most clear when you say that with "deflation, you also have to cover the gains of money from deflation to get the loan." This is not true. That gain is given to you when you borrowed the money, you just need to give it back. When you borrow $50,000 of a deflating currency, you are also borrowing its deflation value which you may then spend or invest, so your return will be higher. When you borrow $50,000 of a non-deflating currency, you do not have that value to spend or invest, so your return will be less.

Whether the currency is inflationary or deflationary, you borrowed some amount of value. You can then obtain some rate of return on that value. If that rate of return is sufficient to cover the interest on the value you borrowed, you win and the loan works. If not, you lose. This is inflation/deflation neutral. With a deflationary currency, all other things being equal, you will borrow a bit less money because you will also be borrowing its deflation value, and you will consequently pay a bit less interest because all the money you pay as interest is a bit more valuable because it's expected to deflate.

All other things being equal, would you rather have an inflating currency or a deflating currency? Answer: A deflating one because you can hoard it and you can also sell to others the highly-desirable right to hoard it themselves. So you would be willing to accept a bit less of it in exchange for things. This means the borrower obtains currency that is more useful and pays back with currency that is more desirable. (Which perfectly cancels out the factors pushing in the other direction.)

The logic of loans is currency neutral. The borrower needs to consume a certain amount of value in a way that creates a surplus from deferring production until after consumption. He pays back that same amount of value plus some of the surplus which is split between the borrower and the lender.

And for the valuation of the other cryptocurrencies, just give them time. All of them, including bitcoin itself, are just a work in progress.

[Adrian-x]

I have a business and I would like to borrow money to pay for a registration fee of the product. I can not borrow bitcoins because it is too expensive :-( deflation means that there is no lending of money, no new investments (no research) ... only consumption of old goods. Why is inflation wrong ? Inflation causes goods to have a more reliable value than money. People start producing and keeping goods instead of money, which as we know is only virtual (!).
I live in en ex-communist country and according to communism people don't need to be wealthy, people need work :-)  
Introducing constantly lowering inflation to bitcoins [by not reducing the mining revenues per block] would make the currency much more liquid. Instead investing in a ponzi scheme (keeping bitcoins) we could invest with bitcoins in hightech startups.

Most of these concerns have been raised before.

I am a business man greedy I want to borrow $10 today before inflation and enjoy the asset and its profits.  And then after 20% money inflation pay back the $10, benefiting from $0.20 inflation and the profits having had the asset.  All the time telling the public everything is OK, I borrowed $10 and paid it back - the net 20% benefit is capitalism at work and is the result of my ingenuity and wasn't stolen from you.  

Inflating the money supply encourages businesses and individuals to invest now to protect their wealth.

I must invest in a profit producing asset / business (oil well, toy factory, toilet paper manufacturer)   today because my money will be worth less tomorrow. Or I must buy the biggest house I can afford today because the asset will be worth more after the money supply has inflated and I will have leveraged my investment and maximise my return.

By contrast:

Deflating the money supply encourages saving to preserve wealth, my money is worth more in the future and less today, I will buy a house as small as practical today as my money will buy a bigger house in the future. I will only consume what I need today as I can afford to consume more in the future.
I won't invest in the oil well now as the demand for oil is decreasing, and the asset will be worth more in the future and cost less to develop in the future.  

The environmental  and human benefit is, only products that fulfill human needs are produced profitably with a fixed money supply, and deflation only occurs when growth in the economy happens, which naturally refocuses the business cycle.

With inflation of the money supply, over consumption is encouraged because prises will be higher in the future,  (it artificially simulates entrepreneurs to create new businesses that are not based on the sound principles of supply and demand.)


With Deflation of the money supply consuming the bare necessity is encouraged because prises will be lower in the future.  (it encourages entrepreneurs to only invest in providing services and products that will fulfill a need that can generate a profit.)

the net benefit is People, Profit and the Planet. Credit on the other hand is regulated by the capitalist and the retune on investment is interest, driven by current economic circumstance, interest will tend to be high when there is growth and low when there is less growth.

So as a business wanting to borrow money you need to be realistic.

The keynesian economic model encourages a consumption driven economy and allows big corporations to benefit from loopholes in the system, where a fixed money supply is discouraged for fear of a deflationary spiral, although a fixed money supply is more like a law of nature or gravity and treats everyone the same.  
 
It looks to me like your gripe is you wanting to take advantage of a loophole in an inflating fiat money supply while seeking benefit or comparison to a fixed money supply.  
 

[tytus]

@rdponticelli

I don't see any convincing arguments in this post. Everything in the post is correct but it does not answer the basic question, "who will give loans" :-). Nobody will loan money in a highly deflating currency unless the business of the borrower is extremely profitable [dealing drugs]. Mots offers You will collect when trying to loan money at >30% interest are either scams or are extremely risky. In BTC You can expect much higher interest than 30% per year.

Look at GLBSE. I did not study the assets there very deeply but (1) there were many scam warnings issued by the operator and (2) most none scam assets are related to bitcoin mining, which is denominated in BTC but is also a very high risk investment [buying GPU / FPGA may not return enough profits when ASICs arrive ... and ASIC can also be made obsolete with new ASICs].

There is a reason why we don't use gold as currency. It is too valuable. Economies that switched to an inflating currency grew much more and other economies had to follow. Are there loans in gold ?

You can still buy gold and BTC will be similar to other commodities but it will fail in competing with other currencies if it stays deflationary. And because it has only a virtual value it may just collapse similar to a ponzi scheme. It will collapse if another inflationary virtual currency obtains some popularity and will become exchangeable with BTC.

Right now there is LTC. It is exchangeable at a daily volume of few (5) BTC :-) but after moving all current GPUs to LTC it may become more popular for miners. All that miner have to do then is to convince businesses to switch to LTC. We can watch this and see if it is possible for an alternative currency to survive. LTC is of course a stupid example because it is also deflationary (block halving), thus gives benefits to early adopters [ponzi again :-)]. But if it is possible to create a new currency then currencies will evolve into more useful ones. Gold is not useful as a currency.

I take the argument that I should read the whole thread [but will I find in 26 pages a group of people that wants to create an inflationary BTC fork buy disabling the block halving? :-) ...]. And I am also not an economist so the discussion about benefits of inflationary and deflationary currencies are way above my skills. But I have a practical problem with a stock exchange denominated in BTC.

I am also afraid that sooner or later there will be an inflationary BTC fork. It will create chaos for both versions of BTC so it would be much better to change the rules before the eminent block halving.

I think we should start a new thread and check hoe many BTC owners would be willing to start a fork that has an algorithm with disabled block halving. The person who starts the thread should be skilled enough to present convincing arguments for this attempt (preferable a native English speaker with economic skills, who I am not). We can see if there will be any response :-) ... I am aware that this can cause a revolution and revolutions create chaos and destruction initially :-) Maybe there was already a thread like this ?

[tytus]

It looks to me like your gripe is you wanting to take advantage of a loophole in an inflating fiat money supply while seeking benefit or comparison to a fixed money supply. 

This I did not understand :-) but I agree with Your point of view. There is however an additional aspect ! Competition between economic systems. What's wrong with a system where You own nothing ... all wealth is public [communism] ... it does not sound bad but it is not competitive :-)

Same with currencies. What competitive economy has a deflationary currency ? [Japan?]. Why don't we use gold as currency ... this is not competitive. The benefits of BTC for human and nature are ok, but what if it has to compete with another more popular currency. The current value of $100M will just evaporate.

BTW: nature is extremely competitive :-)

[Etlase2]

Tytus: there is no point in creating a bitcoin fork where the mining reward doesn't halve. First of all, even if it doesn't halve, you can still expect a very price-level deflationary currency as the rate of inflation of the money supply will continually dwindle compared to the whole. Secondly, creating a fork means that everyone who has coins on bitcoin1 has coins on bitcoin2. This just isn't a good idea for a number of reasons--like spending currency on one side will be a totally valid transaction on the other side, at least in the beginning. Chaos, yes. Another reason is the difficulty will be copied, and it's unlikely a significant portion of miners will switch to the fork, so no one will be able to produce any blocks for a very long time.

You bring up many valid concerns that will almost always fall on deaf ears around here, especially in this thread. The latest and greatest argument is that inflation causes overconsumption and deflation is good for the planet, yada yada yada. Problem is, as you point out, fiat isn't going anywhere so bitcoin doesn't help the planet because people will just invest and overconsume with fiat. And maybe bitcoin can be a fun toy or a way to send money anonymously or over long distances.

If you are interested in an idea for an unbound currency, see my signature.

[tytus]

Tytus: there is no point in creating a bitcoin fork where the mining reward doesn't halve. First of all, even if it doesn't halve, you can still expect a very price-level deflationary currency as the rate of inflation of the money supply will continually dwindle compared to the whole. Secondly, creating a fork means that everyone who has coins on bitcoin1 has coins on bitcoin2. This just isn't a good idea for a number of reasons--like spending currency on one side will be a totally valid transaction on the other side, at least in the beginning. Chaos, yes. Another reason is the difficulty will be copied, and it's unlikely a significant portion of miners will switch to the fork, so no one will be able to produce any blocks for a very long time.

=> A revolution of ASIC owners :-) they have enough power to solve some blocks at the beginning :-)
Maybe the threat of a revolution is sufficient to convince others to make BTC more 'advanced' :-)
I am aware that users of this forum posses bitcoins and the idea of inflation does not taste well :-) but this is also not a problem. I value the BTC community because it is probably much "smarter" than other communities and arguments are discussed on a intellectual and not emotional level :-).

If you are interested in an idea for an unbound currency, see my signature.

cool (!) ... I go there

[Adrian-x]

The latest and greatest argument is that inflation causes overconsumption and deflation is good for the planet, yada yada yada. Problem is, as you point out, fiat isn't going anywhere...

To be honest, I used to believe the money supply has to inflate with the economy as it grew so everyone could participate economically, and it would prevent capital from centralising by forcing it into circulation.  I have come to understand this is a man made solution problem and is the fundamental assumption underlying the increasing poverty and environmental problem in our economy today. (call it "yada yada" but my observation is fact based so I would like to understand the counter argument) 

I came to my conclusion after wrestling with the real argument of a deflationary spiral that will naturally occur in the Bitcoin ecosystem.  I now see this as a needed correction that will take place over the next 10 - 30 years, and Bitcoin will provide a solution if it is as robust as people think and something better doesn't come along.

Bitcoin is attractive to me because it keeps in balance the fundamental natural law of the  Cantillon Effect*, it is unavoidable when the money supply is increased, it causes the widening disparity between the rich and poor, and turns old and adolescent people into a liability instead of an asset, and it forces the productive people to work more.
 
*When the money supply is increased it affects relative inflation. That is the disproportionate rise in prices among different goods in an economy over time, that will benefit those who are first to receive the money and diminish the wealth of those in the economy who have to experience price inflation before earning the new money.

[Etlase2]

To be honest, I used to believe the money supply has to inflate with the economy as it grew so everyone could participate economically, and it would prevent capital from centralising by forcing it into circulation.  I have come to understand this is a man made solution problem and is the fundamental assumption underlying the increasing poverty and environmental problem in our economy today. (call it "yada yada" but my observation is fact based so I would like to understand the counter argument) 

I wholeheartedly agree that the current incarnation of fiat is the cause of many of the world's economic ills. I do not agree that the reason behind this is an increase in the money supply.

Bitcoin is attractive to me because it keeps in balance the fundamental natural law of the  Cantillon Effect*, it is unavoidable when the money supply is increased, it causes the widening disparity between the rich and poor, and turns old and adolescent people into a liability instead of an asset, and it forces the productive people to work more.
 
*When the money supply is increased it affects relative inflation. That is the disproportionate rise in prices among different goods in an economy over time, that will benefit those who are first to receive the money and diminish the wealth of those in the economy who have to experience price inflation before earning the new money.

These are effects that are essentially and intentionally programmed in via central banking. I agree that it is a problem with how the money is distributed rather than the fact that there is more money. Deflation, especially bitcoin's version of deflation, does not even try to solve this problem. Blame it on the fall-guy of inflation and pretend that deflation is the answer rather than attacking the core of the problem: distribution of new money. Since in bitcoin there really won't be any new money very soon, the distribution of "new money" comes in the form of appreciating currency. Who does this universally benefit? Those with lots of currency.

The same scenario that exists today with banks and the same scenario that causes the business cycle and depressions would be just as common under bitcoin were it the world's currency. Power is heavily concentrated just as it was under gold. I see no particularly meaningful outcomes that are different from the gold standard or fiat. Bitcoin will allow the powers that be to manipulate the currency to unjustly benefit themselves at the cost of everyone else. Except that people will quickly get sick of that shit and use another cryptocurrency or switch back to fiat since now they have a choice in the matter.

[tytus]

@Adrian-x

Bitcoin is attractive to me because it keeps in balance the fundamental natural law of the  Cantillon Effect*, it is unavoidable when the money supply is increased, it causes the widening disparity between the rich and poor, and turns old and adolescent people into a liability instead of an asset, and it forces the productive people to work more.

What You say is that inflation puts more competitive strain on the society
- more competitive (rich) become even more competitive (rich)
- less competitive (adolescent people) become poor
- productive people must work more ...

Fighting these effects is not a goal for BTC, is it? The primary task for BTC is to survive.

[Adrian-x]

It looks to me like your gripe is you wanting to take advantage of a loophole in an inflating fiat money supply while seeking benefit or comparison to a fixed money supply. 

This I did not understand :-) but I agree with Your point of view. There is however an additional aspect ! Competition between economic systems. What's wrong with a system where You own nothing ... all wealth is public [communism] ... it does not sound bad but it is not competitive :-)

Same with currencies. What competitive economy has a deflationary currency ? [Japan?]. Whey don't we use gold as currncy ... this is not competitive. The benefits of BTC for human and nature are ok, but what if it has to compete with another more popular currency. The current value of $100M will just evaporate.

BTW: nature is extremely competitive :-)

To your initial point raised, we don't need more stuff, products, services and kick-starter funded game consoles, we need creative solutions to world poverty and environmental collapse, and here are the opportunities for the future entrepreneurs profiting by fulfilling these needs first then developing the market. All I was trying to point out that hypothetically your described business venture is not appropriate for an economy about to experience deflation.

To your other points raised I agree competition is good we don't have enough of it at the moment. In Adam Smith's Wealth of Nations where you have a free market with true competition, everything evolves into a state of equilibrium, this is the capitalist principle I subscribe to. Marks on the other hand felt you could get there more simply through a managed economy "Communism" - he was wrong.  While he saw merit in Adam Smith on fundamental principle of the free market, he could not reconcile ownership of privet property and saw it as an evil, concluding it should be managed by the state. (this is not possible - you need as much direct feedback to cause and effect as you can get, only possible without central control. - that how you learn not to burn your hand on a stove.)
 
Bitcoin is just an idea, amazingly it is worth $100,000,000 it can't do anything until each Bitcoin is worth about $1,300 each by 2012 standards and that won't happen until it is more evenly distributed and an economy evolves to support it. The idea may fizzle out or be destroyed, but right now it is an idea equal to the wheel or printing press, or internet. It needs scrutiny and more believers and many boom bust cycle to distribute it and if it holds it may catch on.

Regarding competitive currency systems, any fiat system managed by a central authority is removed from the principle of cause and effect.  When you lower interest rates you are telling entrepreneurs previously unsustainable business opportunities are now viable, or creating artificial demand for new homes forcing up the price further confusing entrepreneurs to respond by providing for the artificial demand, this is an inefficient by-product leading to less competitive advantage.     


A managed Fiat money system is not better than Bitcoin and will eventually collapse you don't have to do much just wait I give it another 16 years tops.

[Adrian-x]

Since in bitcoin there really won't be any new money very soon, the distribution of "new money" comes in the form of appreciating currency. Who does this universally benefit? Those with lots of currency.

This is my biggest problem with Bitcoin, but it doesn't make it a bad idea, and it just means the centralised money base is radically redistributed in relation to the status quo , I hate fact that there is the Bitcoin Rich , my solution - Start mining! If this idea takes off just having 1 Bitcoin can make you wealthy.

The same scenario that exists today with banks and the same scenario that causes the business cycle and depressions would be just as common under bitcoin were it the world's currency. Power is heavily concentrated just as it was under gold. I see no particularly meaningful outcomes that are different from the gold standard or fiat. Bitcoin will allow the powers that be to manipulate the currency to unjustly benefit themselves at the cost of everyone else. Except that people will quickly get sick of that shit and use another cryptocurrency or switch back to fiat since now they have a choice in the matter.

The difference between Bitcoin and gold is (technically) you can't plunder and steel Bitcoin by force. Other than that I like the idea of gold too, but I was born too late to benefit from that party, and the fact that it is obsolete, (it is easy to steel and expensive to send), so I don't see history reputing its self. And I love the fact we can restart the criptocurancy party again. Now I know the rules, this one fact will keep the Bitcoin rich in check. The Bitcoin rich could be the new feudal kings in a new system, ( I hope to see some amazing patriotism) .

[Adrian-x]

What You say is that inflation puts more competitive strain on the society

(Yes)
For eg. the old cannot save for retirement and are a cost on society.

- more competitive (rich) become even more competitive (rich)

(No)
With inflation the closer you are to new money the easier it is to increase wealth.
Generating money is not 100% a by-product of competitiveness; it's partially a result of lobbying government and affecting public policy.

- less competitive (adolescent people) become poor

with inflation "adolescent people" being kids but still true of young adults entering the workforce, they're at a disadvantage, some will break through but the majority won't be able to afford a house in there lifetime unless it is given to them.  - the back bone labour of the economy will (less the effects of technological advantages) lose there wealth to inflation.

- productive people must work more ...

The employed today have to work harder and longer hours than ever before the average household needs 2 incomes to support a family today - in 1975 you needed just 1 with more leisure time and could afford a house .
The free time predicted as a result of the technical advances of the 50' provided by dishwashers, washing machines, electric ovens' fridges, and vacuum cleaners, were suppose to free up our time. But the opposite has happened, I and typically the average person work to support the system - the elderly, day care, the inflated housing cost and may other effects of inflation.  

Fighting these effects is not a goal for BTC, is it? The primary task for BTC is to survive.

Totally agree, these benefits are buy products of the system, but Bitcoin doesn't won't need to survive if it has no benefits.  

[MoonShadow]

The difference between Bitcoin and gold is (technically) you can't plunder and steal Bitcoin by force.

That's not technically true.  If a thug knows who has access to the wallet.dat, all that is required is a little uninterrupted time with an Alabama lie detector.  The trick is that, since they are not a physical object, they need not exist in any particular place (i.e. a safe) that can be compromised.

[tytus]

@Adrian-x

A deflating bitcoin will not solve any of the problems You are talking about. An inflating bitcoin can solve my problem of providing liquidity for start-up companies.

The reason why now You need 2 incomes to support a US family is lack of inflation ... decades of relative overvaluation of $ compared to other currencies and now You have competition from low-cost-labor countries that purposely kept the value of their currency low. Such a competition can eliminate the value collected in BTC very fast.

[MoonShadow]

@Adrian-x

A deflating bitcoin will not solve any of the problems You are talking about. An inflating bitcoin can solve my problem of providing liquidity for start-up companies.

The reason why now You need 2 incomes to support a US family is lack of inflation ... decades of relative overvaluation of $ compared to other currencies and now You have competition from low-cost-labor countries that purposely kept the value of their currency low. Such a competition can eliminate the value collected in BTC very fast.

Wow, I'm continually amazed at the economic ignorance of some forum members.  While it's a bit of a distortion to blame all of the economic woes of our modern world on inflationary monetary policies, inflation in general solves only one problem.  That one problem is the access to liquidity of those who have the the legal authority to create new funds and the people and industries that are most closely connected to that entity.  In the modern case of the US; those entities include the Federal Reserve & member banks, the federal government, & any major corporation or lobbying group with close ties to said government.  That does not, ever, include middle class American households. 

And any economic advantage that inflation may hold for a particular nation's trade policy is 1) always a temporary effect that lasts only as long as it takes for the international community to adjust to the changes in relative value and 2) only applies if no one else is also debasing their currency at the same time, which is clearly not the case in our modern world.

Also, bear in mind that nations don't actually trade, people do.  So any advantage in trade imbalances due to one-sided inflationary policies benefit a corporation on one side of that international trade, not even a government and never a population.