Sniff ... do you smell smoke?

[HappyFunnyFoo]

What this data shows is that from pre-recession inflationary peak to the present day, U.S. currency has devalued in total 5% over the course of about four years.  That's about 1.25% inflation per year, average.  If you kept your dollars in an online savings account over this period of time, your interest rate would've averaged about 2%.  Kept them in the market and reinvested dividends?  Anywhere from 5% to 40% gain per year, depending on your timing competence.

Current inflation levels aren't problematic - deflation could be around the corner at any time and is a much bigger threat at current inflation levels of 1.25%.  Some goods have increased in price 50-100%, such as frozen vegetables, over this period in time, for reasons not directly tied to currency valuation.

Want to see bitcoin traded for goods instead of hoarded?  The currency needs to be fundamentally inflationary in nature.  Where are all of the merchants flooding in to embrace bitcoin?  People aren't likely to readily spend bitcoins due to their constant tendency to increase in value and their exceptionally high volatility.  It's a hoarder's world.  Bitcoin is more like a precious commodity exponentially increasing in scarcity over time, and the fact that people even consider it remotely comparable to government-backed currencies is incomprehensibly ludicrous.  After all, like gold, bitcoin is mined, not printed. 

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[MoonShadow]

What this data shows is that from pre-recession inflationary peak to the present day, U.S. currency has devalued in total 5% over the course of about four years.  That's about 1.25% inflation per year, average.  If you kept your dollars in an online savings account over this period of time, your interest rate would've averaged about 2%.  Kept them in the market and reinvested dividends?  Anywhere from 5% to 40% gain per year, depending on your timing competence.

While this is all true, the problem is this kind of analysis is (at best) concurrent or (more likely) delayed.  Said another way, these metrics look at recent history (and perhaps the trends) in order to make a future prediction.  That is, after all, the point of all this; to make an educated guess as to what comes next.  The problem with that is there are other metrics that should more indicitive of the future than (in particular) the consumer price index over the past several years.  The metrics of the monetary base, for example (M1, M2 & M-prime) have more than doubled over that same time frame.  Has the demand for liquidity and/or the practical size of the US economy doubled during that time?  No and No.  So the simple logic of the law of supply and demand (as applied to monetary demand) says that, eventually, we are going to see some rather severe inflation, assuming that the federal reserve does not (or cannot) withdraw that liquidity from the banking system at the next inflection point.  There is no historical evidence that the academics who work at the federal reserve even have a reliable theory that could inform them of such an inflection point.  And that should worry you more than the small, and dropping, risks of a deflationary event.

[Stephen Gornick]

Want to see bitcoin traded for goods instead of hoarded?  The currency needs to be fundamentally inflationary in nature. \

Economists and others stuck on this deflationary spiral never consider transaction costs in their arguments.  

Why not?

When I spend a $100 on something and pay using a payment card, the person I'm making the purchase from gets $97.  So the price of the good is raised 3% more than it needs to be.   When I spend using bitcoin, that transaction cost -- even when exchanging to and from fiat on both ends is a fraction of that level.  

So with USD you have a currency that inflates at 1.5% per year but has transaction costs of 3% for each time the funds are turned over.  With Bitcoin you have a currency that will (eventually) inflate at a much lower level but whose transaction costs are just 1% or less, for example, with each turn of the money.

So at the market, the customer is asked to choose:

Option A.) For about $103 USD using your payment card you get $100 worth of goods.    

Option B.) Optionally, you can pay using bitcoins, first convert $101 of your USDs to get $100 worth of Bitcoins and then with that you are able to purchase $100 worth of goods.

Which option will the consumer choose?

And thus, even with an expected increase in the value of bitcoin, using Bitcoins will continue to be the choice made when making payments.

-----

Faced with competition at the point of sale, an argument would be that the payment card transaction will drop to a more competitive level.  A 2% or so difference is enough of an incentive to switch for many consumers.  1% ... not so much.

What might happen though is normal payment flow will move over to bitcoin to take advantage of the discount, but the payments occurring from fraud can't (or at least if it does those losses won't be borne by the banks or the issuer) and as a result that 3% truly might be the actual floor that payment cards can still function at profitably.

Incidentally, Bitcoin's currency inflation rate just dropped below 30% per annum and slowing each and every day.  When the block reward drops in half around December, its currency inflation rate will drop from about 25% to just 12.5% per annum.  So Bitcoin still is at a rapid inflationary level yet hoarding also is happening at the same time.

[Explodicle]

Want to see bitcoin traded for goods instead of hoarded?  The currency needs to be fundamentally inflationary in nature.  Where are all of the merchants flooding in to embrace bitcoin?

List of actual merchants flooding in to accept Bitcoin:
https://en.bitcoin.it/wiki/Trade

The only active inflationary "cryptocurrency" I'm aware of:
http://solidcoin.info/
(Warning: it's managed by one anonymous guy who keeps changing the rules)

The only inflationary coin proposal that I think could actually work:
http://encoin.bitcoinforums.net/
(Still in early planning stage)

I couldn't find a list of potential merchants that WOULD have flooded in to accept something because it decreases in value. Inflation encourages HOLDERS to want to move the currency - it discourages merchant acceptance.

Part of the reason Bitcoin is deflationary is because it's much simpler that way. The only way a bunch of computer geeks are going to embrace a more complicated solution is if:
A. Bitcoin crashes and burns horribly
B. A better alternative is demonstrated

[Boussac]

Want to see bitcoin traded for goods instead of hoarded?  The currency needs to be fundamentally inflationary in nature.  Where are all of the merchants flooding in to embrace bitcoin?

Part of the reason Bitcoin is deflationary is because it's much simpler that way. The only way a bunch of computer geeks are going to embrace a more complicated solution is if:
A. Bitcoin crashes and burns horribly
B. A better alternative is demonstrated

Be patient: most merchants have not even heard of bitcoin yet. Bit-pay and us  (perhaps other evangelists) are only starting to speak up at trade shows. We are meeting big merchants and the idea of bitcoin is gradually gaining attention within these organizations.
Adopting a new transaction acquisition mechanism is not something a big merchant will engage in without due diligence: we are in the middle of it.

As far as alternatives are concerned, bitcoin IS an alternative to elastic money as we know it (dollars, euros, etc). I fail to see what an elastic cryptocurrency would bring to the table. As soon as you deal with a non zero demurrage rate or money supply growth rate, the question is who sets the non-zero value of the rate. With bitcoin, the rate is set to zero, period. Much easier to build a wide consensus on that.

[Stephen Gornick]

this is going to be one one of the greatest economical collapses of all times. Just sit and watch.

Well, if it (inflationary-led collapse) is happening now, it isn't being broadcast by BPP -- they haven't been updating their chart.
 - http://bpp.mit.edu/usa/

If it is happening now, it isn't being shown in data from the BLS.

If it is happening now, you would see it occurring in the prices for commodities, and in food and energy prices paid as a consumer.
 - http://finviz.com/futures_charts.ashx?t=SOFTS&p=w1

Doug Short says it isn't happening (but includes in grey the data from ShadowStats which says high inflation is happening):



 - http://www.advisorperspectives.com/dshort/updates/Inflation-Since-1872.php

And the conclusion here is that as long as you don't buy food, fuel or pay rent, you won't see any inflation:
 - http://www.zerohedge.com/contributed/2012-10-12/inflation

Wait ... what?

[MoonShadow]

Whether or not inflation is high depends upon how you define it.  If you believe that increases in general prices are inflation, then we have had about 40% inflation over the past four years looking at foodstuff, and about 100% inflation over the same time period looking at energy.  If, on the other hand, you define inflation as the increase of the base money supply (over and beyond the growth of the economy at large) then M1 is through the roof but M2 is not.  It very much depends upon what you consider to be of greater importance, the actual production of currency or the creation of debt.  Bear in mind that under any modern fiat currency system, debt underlies the economic usefulness of the currency base, thus the total amount of money should rationally include the total amount of debt in the private sectors (government debts are often self-cancelling, but not always) Thus the most accurate metric that we have for determining the currency base across time is probably M3, which has been declining since 2007; primarily due to the popping of the housing industry and the fact that a huge number of Americans had over-leveraged themselves with home-equity loans and refinacing.  As those bad real estate deals liquidate, debt is destroyed and what was once believed to be valid currency ceases to exist.  This is deflationary overall, and this can be expected to continue until the real estate actually bottoms out.  However, once it does bottom out, the effects of the past several years of QE, bailouts and increases in public indebtedness are going to start to show up in the real economy.  To put it simply, we have not seen anything yet.

Having said that, I don't believe that a hyperinflationary event in in the cards so long as the Federal Reserve system exists.  The reason is that such an event is always a political event, not a fiscal or economic event.  If it comes to the point that TPTB in government want to increase the currency base for their own perceptions of gain, the Fed will comply right up until the point that they perceive a threat to their own existance, and then they will refuse to comply.  Since they are a creation of the five major regional banks, and not so much a creation of the government, their contiued existance is dependent upon those banks and the FRN.  If they permit a hyperinflationary event, their con game is over, and they don't want that.  But if Congress were to decide to revoke the Fed's charter (something that I'm in favor of for philosphocial reaons, despite knowing what could happen next), the Congress itself could trigger such a hyperinflationary event.  So could another world war or civil war, but under no concivable condition would the Federal Reserve participate in it's own destruction.

[🏰 TradeFortress 🏰]

The US economy is going to collapse real soon.

[MoonShadow]

The US economy is going to collapse real soon.

This is such a meaningless statement.  It's not really possible for an economy to 'collapse', since it's not any kind of structure, not even figuratively.  The economy can slow down, and it can even do so at a catastrophic rate for certain classes or groups of economic actors, but in any practial manner it cannot really be said that the long term wealth of the US (infrastructure, arable land mass, educated labor base, etc.) is destroyed under such an event.  From a personal perspective, personal wealth is destroyed, but most of that is actually transfered to new ownership or simply underutilized, and not actually destroyed.

So when you say the statement above, it would be nice if you would state what the conditions that define "collapse" in your view, so that the rest of us can evaluate whether or not we agree that those conditions apply to the rest of us.  For example, "collapse" for you might be that you lose your job and there is no work within your field of expertise and/or within your accustomed salary range.  That would certainly be bad for you and your family, but might not have any direct effect upon myself.