Defaltionary Spiral -- Is there a way to make this workout? (hoarding bitcoins)

[johnyj]

I am ignorant on all the ins and outs of this.  I am posting this to try to learn what the possible economic outcome is of bitcoin.  I am prompted by this comment from the 'Hoarding Bitcoins' 'study' that hit slashdot and everywhere else.  

Comment:

"So what you're saying is that there is a limited resource which we cannot make more of that people are hording? And the more people horde it, the higher the deflation? And people watch their value rise in USD as this happens? And you're surprised?

What motive is there to spend your BTC? Isn't this how deflationary spirals [wikipedia.org] occur? Wasn't this an effect of The Great Depression and lead to FDR implementing a pump-priming strategy [wikipedia.org]?

Could someone explain how they would escape that spiral? I'm not an economist so I don't know if there are other routes of which I'm unaware."

What are the economists thoughts on this?  Could small businesses such as satoshidice and webhosting for bitcoins spark an actual economy?  Or is this just a long term pump and dump?



EDIT:  I was made aware below that the article being commented on was funded by institutions that have something to lose if bitcoin goes primetime.  Does anyone have information about this?

If BTC is the only currency, it will go into deflation spiral, but since there are other fiat currencies, it will just get hoarded without causing too much problem

If some very popular product (like Iphone) only sell to BTC owners and reject payment in USD, that will cause a mass adoption of BTC

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[firefop]

If BTC is the only currency, it will go into deflation spiral, but since there are other fiat currencies, it will just get hoarded without causing too much problem

If some very popular product (like Iphone) only sell to BTC owners and reject payment in USD, that will cause a mass adoption of BTC

This sort of scenario isn't in bitcoins best interest right now... simply because the network won't support the volume needed for that level of transactions. After ASIC release - a the expected development steps to up the transactions per second we should be in the ballpark of being able to handle visa's transaction volume. Then will be the time to push for mainstream adoption by some super-entity...

But there's no reason it has to be a super-entity. I could very well (and imho more likely) be the miners that push/force mainstream adoption. For example: I'm in the process of building some cottages in Northern California (expecting construction to finish summer 2013) that will give large discounts for paying rent in btc. I'm shooting for 15% discount for bitcoin payments. I think I can do that in this location.

Maybe someone else will offer discounts for their fast-food franchises, chain of nail salons and other small business with multiple locations. That alone could push mainstream adoption quite quickly. Imagine the word of mouth advertising, your existing customers would tell everyone "you can get huge discount by paying in bitcoins" and those businesses would grow.

Then (of course) you'd have other business owners asking you "How can you offer such a deep discount?" and you'd get to explain it to them... then we'd see some real growth as it filters out into daily markets as a result.

[Etlase2]

After ASIC release - a the expected development steps to up the transactions per second we should be in the ballpark of being able to handle visa's transaction volume. Then will be the time to push for mainstream adoption by some super-entity...

ASICs will have no bearing whatsoever on transaction volume scalability. All they do is crunch SHA2 hashes. Transactions are ECDSA verifications.

[johnyj]

That's a good point, if BTC's price can rise continuously, then it is very reasonable that everything paid by BTC will get at least 15% discount

[Wekkel]

Now think about it this way.  You live in a small town that uses bitcoin after the 21M cap has been reached.  The town's population is growing, but chasing the same 21M bitcoins.  Now the $100 in your savings account is worth $105.  You no longer invest in the risky bank because you don't need to fight inflation.  The only people investing in the bank expect a decent return on top of inflation.  Now it is more difficult to purchase a new car, house, or start a new business.  This causes the amount of debt per person plummet.  People are no longer working to pay off their mortgages or car payments.  Salesman, bankers, & corrupt government officials aren't making a killing while the rest of us suffer.

A sligtly different approach:

Now think about it this way.  You live in a small town that uses bitcoin after the 21M cap has been reached.  The town's population is growing, but chasing the same 21M bitcoins.  Now the $100 in your savings account is worth $105, as is the $100 held by any other town man.  You and other town people will only invest in the risky bank insofar the investments are sound and have a reasonable perspective on a decent profit (e.g., that there will be demand for it).  Now it is less difficult to purchase a new car or house due to lower prices, but lending money (e.g., to start a new business) will be more difficult (higher interest rate).  This causes the amount of debt per person plummet.  People are no longer working to pay off their mortgages or car payments and are no longer bitten due to stealth theft by inflation. The benefits of increases in productivity and inventions are spread out over the entire community because of increased purchasing power of everyone's bitcoins.

[FreeMoney]

Should we just accept this and horde and dump as we please, accepting that Bitcoin will likely not make it?

Yes, Bitcoin's value will be the result of speculation.   Your hoarding helps someone else (someone who is hoping to sell at a higher price).   Your dumping helps someone else (someone who is hoping to buy at a lower price).   Also, your buying and selling helps liquidity, thus shrinks the spreads between the buy and sell.

And, if that merchant needs/wants bitcoins then instead of being worth less because of the ~1% to get rid of them they will be worth ~1% more since they get to avoid the fees involved in acquiring them.

[benjamindees]

This research was supported by the Citi Foundation.

http://www.citigroup.com/citi/foundation/invest/index.htm

Citigroup is, of course, the third largest bank in the US.  The focus of the Citi Foundation seems to be on educating the "unbanked" and steering them towards "appropriate" financial products within the traditional banking system.

[FreeMoney]

That's a good point, if BTC's price can rise continuously, then it is very reasonable that everything paid by BTC will get at least 15% discount

If everything is cheaper in bitcoins everyone will buy bitcoins before spending driving the price to even more maddening heights!

edit: And don't tell me it will be canceled by the merchants unloading them because why would merchants lose 15% just to turn around and get fiat!?

[firefop]

That's a good point, if BTC's price can rise continuously, then it is very reasonable that everything paid by BTC will get at least 15% discount

If everything is cheaper in bitcoins everyone will buy bitcoins before spending driving the price to even more maddening heights!

edit: And don't tell me it will be canceled by the merchants unloading them because why would merchants lose 15% just to turn around and get fiat!?

Not entirely canceled by merchants cashing out... what I'd expect to see is they routinely cash out enough to cover costs and save the remaining bitcoins. Eventually, they'll be able to buy from their suppliers in btc and they'll stop changing it to fiat in general. . .

[nevafuse]

Now the $100 in your savings account is worth $105.

Don't forget the guy with $10,000,000 is now worth $10,500,000.

Now it is more difficult to purchase a new car, house, or start a new business.

It's more difficult for the poor and middle classes. It is easier for the wealthy.

This causes the amount of debt per person plummet.  People are no longer working to pay off their mortgages or car payments.  Salesman, bankers, & corrupt government officials aren't making a killing while the rest of us suffer.

I'm not sure where salesmen come in, but bankers and politicians won't make a killing off of any currency they can't control--inflationary, deflationary or otherwise. It is an advantage to any decentralized currency, not an advantage of deflation. Inflationary and deflationary transfers of wealth may be different mechanisms, but the end result is the same: a select group benefit at the cost of everyone else.

Currency control = inflation.  The new money is unfairly allocated.  Even if a central authority tried to keep the inflation rate at 0%, it would still have to inflate the supply to offset the growing population.  Who decides who gets this new money?  Why is it fair to give it to the government to give the banks?  The only solution to this problem is a currency that doesn't inflate.  Stuffing your mattress is a 401k the average person can use & understand.

[Etlase2]

Why is it fair to give it to the government to give the banks?

Why is it fair to give it to the rich? Is there really any difference? (Besides the obvious that you and your bitcoin buddies stand to make millions.)

The only solution to this problem is a currency that doesn't inflate.

No, it isn't. You didn't even offer a solution, you offered the exact same problem with a shiny new box.

[Richy_T]

Why is it fair to give it to the government to give the banks?

Why is it fair to give it to the rich? Is there really any difference? (Besides the obvious that you and your bitcoin buddies stand to make millions.)

The only solution to this problem is a currency that doesn't inflate.

No, it isn't. You didn't even offer a solution, you offered the exact same problem with a shiny new box.

No one is giving it to anyone. It is the mechanics of the thing.

The government could easily print up a couple of billion and distribute it evenly or give it directly to the poor (not that I would approve of either) instead they reward people for, uh, well, is there any good reason for giving it to the banks?

At least with deflation, those who benefit most tend to be those who have actually earned their money.