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Author Topic: Deflation and Bitcoin, the last word on this forum  (Read 135892 times)
cunicula
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June 28, 2011, 11:01:25 PM
 #101

Eureka!  Smiley

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.


If the price deflation is a product of economic growth, than it's logically impossible for there to be a recession caused by the same

Um, no. Review your logic.
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June 28, 2011, 11:03:22 PM
 #102

Eureka!  Smiley

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.


If the price deflation is a product of economic growth, than it's logically impossible for there to be a recession caused by the same

Um, no. Review your logic.

That took me two seconds.  Logic reviewed.  You should try learning some.

"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'
cunicula
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June 28, 2011, 11:29:48 PM
 #103

Eureka!  Smiley

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.


If the price deflation is a product of economic growth, than it's logically impossible for there to be a recession caused by the same

Um, no. Review your logic.

That took me two seconds.  Logic reviewed.  You should try learning some.

Suppose y is the real economic growth rate, t is the inflation rate, g is a variable that affects economic growth directly (but not inflation), and p is a variable that affects inflation directly (but not economic growth).

Consider the following mathematical relationship:
t =  ALPHA*y + p where  -1<ALPHA1<0 (interpretation economic growth causes deflation)
y =  BETA *t + g  where 1>BETA1>0 (interpretation inflation causes economic growth)

Now lets set solve for y and t as a function of g and p.

y = (g+p*BETA)/ (1-ALPHA*BETA)
t = (p+g*ALPHA)/(1-ALPHA*BETA)

Now note that an increase in g causes economic growth directly [and deflation through its influence on economic growth] (i.e. dt/dg<0 , dy/dg >0)
Note that an increase in p causes inflation directly [and economic growth through its influence on inflation] (i.e. dt/dp>0, dy/dp>0)

Not saying it actually happens this way, but logically impossible, apparently not.
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June 28, 2011, 11:54:54 PM
 #104

Eureka!  Smiley

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.


If the price deflation is a product of economic growth, than it's logically impossible for there to be a recession caused by the same

Um, no. Review your logic.

That took me two seconds.  Logic reviewed.  You should try learning some.

Suppose y is the real economic growth rate, t is the inflation rate, g is a variable that affects economic growth directly (but not inflation), and p is a variable that affects inflation directly (but not economic growth).

p would always affect g.  They are never independent in an economic venue.  Thus your little attempt at mathmatic bs is just that. 

Let me try this another way.  Assuming everything else remains the same, and that the monetary base is static; the price deflation is an effect of the overall economic growth.  Price deflation is the symptom while the economic growth is it's cause.  So long as the economic growth continues, the price deflation does as well, yes?  When the economic growth declines, so does the rate of price deflation, yes?  Thus, when the rate of price deflation stops or goes negative, it's a symptom that the economic growth has already gone into recession.  The symptom follows the cause.  The symptom cannot be the cause.

Granted, a real economy is complex, with many feedback effects; which means that this is an overly simple way of looking at the issue.  However, taken alone, the price deflation cannot logically be the cause of a recession in this scenario.  Even though the prior price deflation could contribute to the severity of a decline, it cannot cause it.

"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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June 29, 2011, 12:21:23 AM
Last edit: October 22, 2016, 05:43:26 AM by cunicula
 #105

I build a model with certain assumptions, then X is possible.
You build a model with other assumptions, then X is impossible.
If you want to say something is impossible/possible you need to specify under what assumptions.

If you would like to show appreciation for your economics lesson.


I pwn for the lulz, but I'm not sticking around to hand wave with you for free.
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June 29, 2011, 12:25:19 AM
 #106


If you would like to show appreciation for your economics lesson, my donation address is:



If you were my student, you would be held back.  The part that I find most amusing is that some teenager actually believes that he is giving me an economics lesson.

EDIT:  BTW, mine were not assumptions.

"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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June 29, 2011, 04:07:57 AM
 #107

Nobody with an IQ over 40 will take any currency that functions on a deflationary basis, notably a significant deflationary basis, seriously.
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June 29, 2011, 04:32:57 AM
 #108

Nobody with an IQ lower than 40 could feed themselves, much less make any rational choice about currencies.

"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'
cunicula
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June 29, 2011, 04:41:55 AM
 #109

Assuming everything else remains the same, and that the monetary base is static

EDIT:  BTW, mine were not assumptions.

You might want to edit your posts above this as well, it would make your argument more coherent.

I'd love to know what you call these non-assumptions of yours.

These things would come in real handy when writing economics papers.
 
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June 29, 2011, 09:34:52 AM
 #110

If the price deflation is a product of economic growth, then it's logically impossible for there to be a recession caused by the same.

This is exactly what I think is to be proven.

And if a recession were to occur for other reasons, thatn price deflation could not proceed uninterupted.  This, of course, is all relative to the economic activity represented by the movement of bitcoin, and that is such an insignificant amount overall that the US economy (or any other) could easily return to a reccession while the bitcoin economy is still in massive growth.  But for clarity, let me restate the issue.  If the bitcoin economy is growing, then it can't be in recession.  If the monetary base is maintained (it's not, bitcoin is still inflationary) it's impossible for price deflation to occur as a direct result of growth while such an economy is in recession.  A recession is, by definition, the opposite of growth.


I'm talking about bitcoin after all 21 are issued (or any other currency with a stable monetary base).
Growth is the opposite of a recession. But growth (with a fixed monetary base) causes deflation and deflation can cause recession.
It wouldn't happen all at the same time: first growth, then deflation, then recession.  

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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June 29, 2011, 11:20:51 AM
 #111


I'm talking about bitcoin after all 21 are issued (or any other currency with a stable monetary base).
Growth is the opposite of a recession. But growth (with a fixed monetary base) causes deflation and deflation can cause recession.
It wouldn't happen all at the same time: first growth, then deflation, then recession.  


You can't have infinite growth in a finite world. The only reason we get "boom and bust" cycles in RL is because of our instable currencies, there is no real growth on a global scale (except monetary growth).

Bitcoin is a non-deflationary, non-inflationary currency, therefore it can't face the problems of inflation/deflation itself.
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June 29, 2011, 01:03:04 PM
 #112


You can't have infinite growth in a finite world.

Agreed.


The only reason we get "boom and bust" cycles in RL is because of our instable currencies, there is no real growth on a global scale (except monetary growth).

This statement is even more brave than "deflation caused by growth is harmless".
You mean nowadays or it has been always like that?


Bitcoin is a non-deflationary, non-inflationary currency, therefore it can't face the problems of inflation/deflation itself.

That's what some people don't like about bitcoin and why many people think central banks are a good thing.

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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June 29, 2011, 03:03:04 PM
 #113

That's what some people don't like about bitcoin and why many people think central banks are a good thing.

Yeah, many people think that the gold standard worsened the Great Depression because the Fed was limited by what it could do.

(please don't flame me)
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June 29, 2011, 04:03:42 PM
 #114

That's what some people don't like about bitcoin and why many people think central banks are a good thing.

Yeah, many people think that the gold standard worsened the Great Depression because the Fed was limited by what it could do.

(please don't flame me)

Perhaps you are referring to "Golden Fetters: The Gold Standard and the Great Depression" by Barry Eichengreen.
Book learning isn't tolerated around here. So you are right to expect to get flamed.

Enter the ignorant hordes....
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June 29, 2011, 04:09:08 PM
 #115

That's what some people don't like about bitcoin and why many people think central banks are a good thing.

Yeah, many people think that the gold standard worsened the Great Depression because the Fed was limited by what it could do.

(please don't flame me)

Perhaps you are referring to "Golden Fetters: The Gold Standard and the Great Depression" by Barry Eichengreen.
Book learning isn't tolerated around here. So you are right to expect to get flamed.

Enter the ignorant hordes....


Just because someone once published a book on the topic, doesn't make them right.

"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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June 30, 2011, 02:01:28 AM
 #116

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.
If the price deflation is a product of economic growth, than it's logically impossible for there to be a recession caused by the same

This is intuitively correct. I'd like to see a counter-example in human English. If the economy is healthy, production and consumption high, then I understand that commodity prices will necessarily drop, except for scarce resources. As I understand it, the only reason we have inflation along with economic growth is because we increase the money supply in line with the growth rate (and apparently we double the money supply with declining growth). If the money supply remained fixed, then economic growth would see a deflated currency as more products and services are buying relatively fewer monies.

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June 30, 2011, 10:51:22 AM
 #117

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.
If the price deflation is a product of economic growth, than it's logically impossible for there to be a recession caused by the same

This is intuitively correct. I'd like to see a counter-example in human English. If the economy is healthy, production and consumption high, then I understand that commodity prices will necessarily drop, except for scarce resources. As I understand it, the only reason we have inflation along with economic growth is because we increase the money supply in line with the growth rate (and apparently we double the money supply with declining growth). If the money supply remained fixed, then economic growth would see a deflated currency as more products and services are buying relatively fewer monies.

A (growth) implies B (deflation).
Therefore, you say, B cannot cause -A (recession).

When I'm happy I drink. Therefore, I cannot get sad by drinking.

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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June 30, 2011, 07:49:59 PM
 #118


There are two schools of thought on deflation and inflation.
Keynesian economics, which favors government intervention and money supply inflation. This not surprisingly is the most popular school of thought with world governments (if someone told you to just print money and spend it you'd like them too).

This school not only supports inflation, but believes it to be essential to growth.

Then there is the Austrian school, which is is for a free market, against government intervention, and generally think inflation is bad and deflation is good. Again unsurprisingly these people are not popular in government circles around the world.



I don't know if this has already been shared, for those interested, there are two pretty cool "Hayek vs Keynes" rap videos on this subject. Smiley

http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

I personally like the second one better.

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July 01, 2011, 06:30:34 AM
 #119


I don't know if this has already been shared, for those interested, there are two pretty cool "Hayek vs Keynes" rap videos on this subject. Smiley

http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

I personally like the second one better.

They are in another thread. They're very cool.

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July 06, 2011, 04:36:20 AM
 #120

In my opinion, the point Andrew Vorobyov brought in, cannot be overemphasized: Without inflation, people don't invest. Bitcoin isn't really the electronic version of cash money. It rather is a kind of electronic gold (as the term 'mining' for the money creation process suggests). Indeed it could be a very good means of exchange, but as a replacement for a 'currency', it lacks an inflation mechanism.

I know, by now you probably are about to reply with the usual 'but inflation is bad' / 'you are wrong here' / 'just don't use bitcoin' / 'you misunderstood bitcoin' / 'go away, evil Keynesian thug' phrases -- or just ignore me. But don't get me wrong: I am quite enthusiastic about the idea behind bitcoin, the decentralized architecture and so. But right now, bitcoin merely makes a good gold substitute: people are eager to speculate with it, hoard it, but spending it for real goods and services seems to be a miniscule application of the system despite the obvious benefits. So why is that?

If bitcoin is ever to replace real currency, it needs to implement an inflation mechanism beyond the one currently implemented to reward the creation of new blocks: It has to be one that distributes new coins more equally around the peers than with the current algorithm which just prefers users with mining rigs. Maybe a combination of CPU/GPU/FPU power and another sparse resource like IPv4 addresses. As a side effect, the acceptance of the new currency can be further enhanced.

Without an inflation mechanism, bitcoin is doomed to stay in the bubble state, waiting to burst and see $/€-Exchange rates that will only stabilize at rates where idealists like me are still willing to trade real goods for it. Only exchange for goods can stabilize the exchange rates. And goods will only be produced, if investments in their production is more profitable than hoarding. A bitcoin v0.4, or maybe rename it to bitfiat or so, could initially be coupled to bitcoin v0.3 somehow to inherit the trust it earned and -- just like the national currencies -- liberate itself from its hoarding roots and develop its exchange value to the fullest.

I'm well aware that I'm posting in a forum that is dominated by miners and speculators and so I really can understand the reluctance to depart from the deflation model that is so accessible to the common sense. Maybe it's inevitable in this early stage to just focus on the creation of trust. But for the sake of bitcoin's full potential, I hope the community finds a way to let it evolve before the burst without losing trust in bitcoin because of the patch. Smooth inflation by algorithm is really better than by a bursting bubble which would leave bitcoin to live a niche existence among other projects.

One scenario I can imagine is: There will be a bunch of forks soon, which resemble state currencies and rely on bitcoin as 'gold'. They can be exchanged for one another with different rates depending on the 'fiscal politics' of the respective group (which will be connected to strategies to get p2p emoney into the production process). Divide and rule...

Anyhow, trying to ban questions that address social sciences from the forum, I think, is a tactics with limited range.
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