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Author Topic: Bitcoin currently at double the inflation of USD?  (Read 1934 times)
thoughtfan
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December 22, 2012, 10:13:41 AM
 #1

Just thought I'd run this by you see if my sums and my understanding is far off the mark.

First to be clear I'm using the word inflation here to mean the increase in money supply, not what can be purchased for it.

If the Fed are creating $85 billion USD/month in 2013 and though not accurate we use the M3 estimate of $15 trillion as the total from which the percentage is derived have I got my decimals in the right place to give us a monthly percentage increase of 0.57% inflation per month?

As for Bitcoin if there are around 11 million in existence and 25 per 10 mins gives us 110,000 per month this gets us to 1%?

So though it is far from the full picture, would it be fair to say despite all the criticism of Bernanke's QE that Bitcoin's inflation is currently approximately double that of the Fed?

If so and if Ben said he'd halve QE in four years time and again every four years thereafter then I guess in terms of money supply the primary difference between Bitcoin and USD is we can trust an algorithm more than we can trust a person or organisation?

What is interesting to me is that all this QE which feels like absolute madness to me, within a context and if its issuer could be trusted, mightn't necessarily be that bad a thing.  Of course these are big 'ifs'.

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December 22, 2012, 02:44:19 PM
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Just thought I'd run this by you see if my sums and my understanding is far off the mark.

First to be clear I'm using the word inflation here to mean the increase in money supply, not what can be purchased for it.

If the Fed are creating $85 billion USD/month in 2013 and though not accurate we use the M3 estimate of $15 trillion as the total from which the percentage is derived have I got my decimals in the right place to give us a monthly percentage increase of 0.57% inflation per month?

As for Bitcoin if there are around 11 million in existence and 25 per 10 mins gives us 110,000 per month this gets us to 1%?

So though it is far from the full picture, would it be fair to say despite all the criticism of Bernanke's QE that Bitcoin's inflation is currently approximately double that of the Fed?

If so and if Ben said he'd halve QE in four years time and again every four years thereafter then I guess in terms of money supply the primary difference between Bitcoin and USD is we can trust an algorithm more than we can trust a person or organisation?

What is interesting to me is that all this QE which feels like absolute madness to me, within a context and if its issuer could be trusted, mightn't necessarily be that bad a thing.  Of course these are big 'ifs'.

The rate of inflation of the USD as a result of the bond buying of 85 GUSD/month is not completely clear cut. There could be some multiplication due to fractional reserve banking, as the bond end up as reserves. Also, if the general level of trust should go down and lending would shrink, the M3 could go down.

But yes, the BTC money supply inflates. The important point is, howewer, that it is predetermined, so everbody can know, and the inflation is already calculated into the current price. The unknown parameter for bitcoin is the rate of adoption. Obviously, the money supply expansion does not follow the adoption rate. Theoretically, if adoption rate was known, another formula could be found that more closely follow adaption. It probably would not make a lot of difference. You have to start at zero, and we want it to be stable, so the current formula is as good as any. But again the important point is that the supply is predetermined and known.

About the Fed reducing the easing: I don't see how they can at this point.
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December 22, 2012, 05:32:59 PM
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You are also neglecting the deflationary pressure caused by debt destruction (defaults).  Ben would be hard pressed to outpace that, especially if we have another collapse in the short to medium term.

Additionally, the inflation is fundamentally different because the USDs get handed over to bankers for the sole reason that they are wealthy and in a position to lend (but they are refusing to because interest rates are too low for the risk).  With bitcoin, you only get the new BTC by helping to process transactions.

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December 22, 2012, 05:52:42 PM
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Suppose Benny was the most trustworthy human in the history of the world, still he could not instill remotely as much confidence that his 'decreasing QE' scheme would occur as the confidence that code and math can instill.

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December 22, 2012, 05:54:10 PM
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So though it is far from the full picture, would it be fair to say despite all the criticism of Bernanke's QE that Bitcoin's inflation is currently approximately double that of the Fed?

If so and if Ben said he'd halve QE in four years time and again every four years thereafter then I guess in terms of money supply the primary difference between Bitcoin and USD is we can trust an algorithm more than we can trust a person or organisation?

A fundamental difference: Fed distributes new money at will to whom they choose. I can tell you with certainty they didn't choose me. New bitcoins, on the other hand, are up for grabs - with definitive cost of production - for anyone willing to contribute computing power to securing the network.

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thoughtfan
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December 23, 2012, 12:43:38 AM
 #6

One of the things I love about this forum is that putting up something like the OP brings out so many different ways of looking at the same thing; so many new considerations to feed back into my own thoughts.

Thank you so much Smiley

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December 23, 2012, 07:29:01 AM
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Fed's inflation, done via debt, is something everyone living in US pays. Bitcoin's inflation, done via mining, is something only the dumb miners who dropped $10K's into their equipment, never top recoup it again, pay.
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December 27, 2012, 11:56:41 PM
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The rate of inflation of the USD as a result of the bond buying of 85 GUSD/month is not completely clear cut. There could be some multiplication due to fractional reserve banking, as the bond end up as reserves. Also, if the general level of trust should go down and lending would shrink, the M3 could go down.

Just FYI, the two terms I bolded are essentially synonyms.  They can't go up and down at the same time.

Also, just as a technical note, in modern (real-world) fractional reserve banking, the lending comes first, and the reserves are found later.  Adding reserves does not cause lending because the primary constraint on lending is the bank's assessment of the borrower's ability to repay.

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December 28, 2012, 12:06:43 AM
 #9

I wonder how the US birth rate compares with the bitcoin adoption rate.  After all, there's nothing wrong with printing more dollars if the community using them is also growing to soak them up.

If US babies were being born at the same rate new folks are picking up on the Bitcoin revolution, the news would be roaring about an overpopulation crisis.

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December 28, 2012, 11:51:28 AM
 #10

While the supply of bitcoin is inflating, according to the predetermined formula, demand for bitcoin is also on the rise.

Obviously the demand is rising faster than the inflation. That is why the price of bitcoin has been rising.

You could say that bitcoin currently has effective deflation in the sense that over time fewer bitcoins are available to potential buyers at any given price.

But all this has little meaning, as we know the development of the bitcoin money supply in advance. It should already be represented in today's price.

In other words, if everybody believed that a bitcoin will be worth $100 in 10 years, everybody should buy bitcoins now, until they are worth $100, give or take some interest.
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December 28, 2012, 01:46:21 PM
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You could say that bitcoin currently has effective deflation in the sense that over time fewer bitcoins are available to potential buyers at any given price.

The term is actually "disinflation" = falling rate of inflation.

Quote
But all this has little meaning, as we know the development of the bitcoin money supply in advance. It should already be represented in today's price.  In other words, if everybody believed that a bitcoin will be worth $100 in 10 years, everybody should buy bitcoins now, until they are worth $100, give or take some interest.

Maybe it is.  At 22% (not unreasonable given the level of risk) $13.40 compounded over 10 years is $101.97 Smiley
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December 28, 2012, 04:04:46 PM
 #12

. . . a monthly percentage increase of 0.57% inflation per month?

As for Bitcoin if there are around 11 million in existence and 25 per 10 mins gives us 110,000 per month this gets us to 1%? . . .
Interestingly, the inflation of the bitcoin supply will remain above 0.57% for approximately the next four years until the next time the block reward is reduced.

The month before the next block reward reduction the supply will increase by a bit less than 0.70%.

The month after the next block reward reduction the supply will increase by a bit less than 0.35% and the percentage it increases will continue to fall every month after that.

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