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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 523598 times)
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March 27, 2018, 08:10:09 AM
 #1041

The very supply isn’t related to its worth (so far as a vacuum is concerned), it’s just a quantity; a true value or price can’t be determined without considering a demand.

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March 28, 2018, 06:17:11 AM
 #1042

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer



Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.



Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.



What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading! Wink

Thank you very much for your useful information!!!
I will give some further information

 - Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions, opposites of the same coin, is delicate, and an economy can quickly swing from one condition to the other.

 - Inflation is caused when goods and services are in high demand, creating a drop in availability. Supplies can decrease for many reasons: A natural disaster can wipe out a food crop; a housing boom can exhaust building supplies, etc. Whatever the reason, consumers are willing to pay more for the items they want, causing manufacturers and service providers to charge more.

 - Deflation occurs when too many goods are available or when there is not enough money circulating to purchase those goods. For instance, if a particular type of car becomes highly popular, other manufacturers start to make a similar vehicle to compete. Soon, car companies have more of that vehicle style than they can sell, so they must drop the price to sell the cars. Companies that find themselves stuck with too much inventory must cut costs, which often leads to layoffs. Unemployed individuals do not have enough money available to purchase items; to coax them into buying, prices get lowered, which continues the trend.

When credit providers detect a decrease in prices, they often reduce the amount of credit they offer. This creates a credit crunch where consumers cannot access loans to purchase big-ticket items, leaving companies with overstocked inventory and causing further deflation. Deflation can lead to an economic recession or depression, and the central banks usually work to stop deflation as soon as it starts.
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March 28, 2018, 09:36:06 AM
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 #1043

Much has been said, a lot of it in your post already. However i would just like to address the notion of Keynes, which you brought up. You know it is interesting, I have heard the quote "we are all Keynesians now" referring to monetary policy. Regardless of who is the Fed chair, and since it is a largely an autonomous organization the following is irrelevant but nonetheless no legislature or member of the executive branch opposes the fact that at any given time contractionary or expansionary monetary policy should be implemented (ok Ron Paul, you got me). Back to my original line of thought. I feel a lot about Keynes is misunderstood. You may still oppose it of course, but the second part of the theory that is never talked about and it is precisely why we rely on monetary policy now and not as much fiscal, because politicians are to heavily obsessed with constituents short term feelings  to make tough decisions. It should work (in theory of course) as such, during times of economic recession we are worried about one half of the dual mandate of the federal reserve and that is unemployment, so we increase the money supply increasing demand. The money supply is increased by purchasing government bonds. Now there is more cash in the economy (most of this is technically digitized today) and less bonds. This however increases inflation but decreases unemployment. Now what we have been doing is quantitative easing, which has become a buzz word that I am sure you are familiar with. Also just to note I am not saying you do not understand this just people in general. QE is simply continuing to increase money supply via the purchasing of bonds when interest rates are already at zero. Now Keynes would also allow for fiscal policy ie. government spending which we just saw a lot of lol. You see the problem however comes in when one must implement the second half of Keynesian economics, which its critics do not ever talk about. If you do not like the model, that is fine just represent the theory in a fair way. The aforementioned second half consists of the contractionary part once the economy begins to recover. On the fiscal side it would go as follows. Now that the unemployment rate is down and gdp is up, we spend less and tax more. This is supposed to offset the deficit we incurred when the economy was in the proverbial shitter. We had raised large deficits when the economy was in recession by implementing large spending bills and large tax cuts. Also its usually conservatives who batter his theory and are they not pro tax cuts. Now you balance this out next by cutting spending and increasing taxes. The problem on the fiscal side is the politicians never want to cut spending and increase taxes when the time comes due. On the monetary side we just recently started the second half of Keynes. Now the fed is worried about inflation, not unemployment and gdp, so they decrease the money supply by selling bonds. Now that they have sold bonds, there is less money in the economy. Listen i have a huge problem in a democracy with the federal reserve having so much power that is not beholden to the people directly, but the theory behind the federal reserve is not dissimilar to that of appointed judgeships. They do not want to have to pander to ignorant voters. I have been involved in crypto for a while. Also it may be noted that im largely a libertarian on most issues. I think the drug war is the single most damaging contemporary policy to mankind. I am not im staunch opposition to central banks like most libertarians and remember i run in these circles and i know the arguments well, at the same time I would never patronize you or anyone else. I understand the criticisms, however in the echo chamber of crypto with its screams for decentralization, the other side of the argument becomes lost to group think. Portugal, Italy, Greece and Spain all lack one thing the ability to control their own money supply through a central bank. This can not be overlooked. The single most detrimental aspect to the individual notions in the Eurozone is the lake of monetary autonomy. Just food for though. I really enjoyed your post.

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March 29, 2018, 05:03:49 AM
 #1044

Yes you could estimate future cash flows of you had contracts or sales data.

For example I worked for a bakery that made 20K per month.  Then I decided to model my business after theirs but in a different past of town that didn't have a good bakery.  I could estimate that within a few years my business could possibly genstate similar income

Or if I snuck behind their backs and offered the same baguette to a distributor for 20% less and stole their contract

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March 30, 2018, 11:15:19 PM
 #1045

I feel a lot about Keynes is misunderstood. You may still oppose it of course, but the second part of the theory that is never talked about and it is precisely why we rely on monetary policy now and not as much fiscal, because politicians are to heavily obsessed with constituents short term feelings  to make tough decisions. It should work (in theory of course) as such, during times of economic recession we are worried about one half of the dual mandate of the federal reserve and that is unemployment, so we increase the money supply increasing demand. The money supply is increased by purchasing government bonds. Now there is more cash in the economy (most of this is technically digitized today) and less bonds. This however increases inflation but decreases unemployment. Now what we have been doing is quantitative easing, which has become a buzz word that I am sure you are familiar with. Also just to note I am not saying you do not understand this just people in general. QE is simply continuing to increase money supply via the purchasing of bonds when interest rates are already at zero. Now Keynes would also allow for fiscal policy ie. government spending which we just saw a lot of lol. You see the problem however comes in when one must implement the second half of Keynesian economics, which its critics do not ever talk about. If you do not like the model, that is fine just represent the theory in a fair way. The aforementioned second half consists of the contractionary part once the economy begins to recover. On the fiscal side it would go as follows. Now that the unemployment rate is down and gdp is up, we spend less and tax more. This is supposed to offset the deficit we incurred when the economy was in the proverbial shitter. We had raised large deficits when the economy was in recession by implementing large spending bills and large tax cuts. Also its usually conservatives who batter his theory and are they not pro tax cuts. Now you balance this out next by cutting spending and increasing taxes. The problem on the fiscal side is the politicians never want to cut spending and increase taxes when the time comes due. On the monetary side we just recently started the second half of Keynes. Now the fed is worried about inflation, not unemployment and gdp, so they decrease the money supply by selling bonds. Now that they have sold bonds, there is less money in the economy. Listen i have a huge problem in a democracy with the federal reserve having so much power that is not beholden to the people directly, but the theory behind the federal reserve is not dissimilar to that of appointed judgeships. They do not want to have to pander to ignorant voters. I have been involved in crypto for a while. Also it may be noted that im largely a libertarian on most issues. I think the drug war is the single most damaging contemporary policy to mankind. I am not im staunch opposition to central banks like most libertarians and remember i run in these circles and i know the arguments well, at the same time I would never patronize you or anyone else. I understand the criticisms, however in the echo chamber of crypto with its screams for decentralization, the other side of the argument becomes lost to group think. Portugal, Italy, Greece and Spain all lack one thing the ability to control their own money supply through a central bank. This can not be overlooked. The single most detrimental aspect to the individual notions in the Eurozone is the lake of monetary autonomy. Just food for though. I really enjoyed your post.


Unfortunately, the FED has mishandled the control of monetary policy more times than they've gotten it right. Greenspan failed to raise rates quickly enough for example. The Board of Governors are also subject to political pressures even though they're "independent". Much the same way Supreme Court Justices are. It's a function of humanity really. Those with power want to influence others to act in their own best interests, not necessarily the interest of the masses.

This makes for an interesting consideration. While BTC is a capped supply, I'd love to see some economists consider the viability of a crypto that was governed by an algorithm which adjusted supply based on actual and target values of a given set of variables (unemployment, real wage growth, CPI or some other inflation measure, etc.). This is overly simplified as it doesn't address how supply is decreased (how does the protocol burn tokens since it's not by buying treasuries). Perhaps it increases/decreases all wallet balances proportionally. It also doesn't consider interest rates or the rate curve. But it would be fascinating to see a study of automating monetary policy on the blockchain, which would remove human emotions like greed and fear or conflicts of interest.
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March 31, 2018, 04:50:52 AM
 #1046

Your post is a well-written and well-thought of analysis based on Keynesian economics.  But I'm sure there is more to it than just money supply inflation/deflation or demand-pull inflation.  It would be interesting for you to talk about the price of bitcoin in terms of random walk theory for example and or behavioral finance.  I would say that the pricing is based more on herd mentality than any other factors.
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March 31, 2018, 08:41:22 AM
 #1047

But your argument reflects the “keynesian” definition. It seems to me we’d better avoid that. The thing is that our modern meaning of inflation deals with an effect, but not a cause, which you didn’t grasp in your posts. That is why they have such a strong dislike for this term.

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March 31, 2018, 12:00:19 PM
 #1048

But your argument reflects the “keynesian” definition. It seems to me we’d better avoid that. The thing is that our modern meaning of inflation deals with an effect, but not a cause, which you didn’t grasp in your posts. That is why they have such a strong dislike for this term.

i dont think so
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April 02, 2018, 09:44:45 PM
 #1049

I've been sitting out because reading dinofelis attempt to repeat himself to victory is extremely boring.  But ZephramC is asking a question based on flawed assumptions, and I feel it is worth addressing.  His scenario only makes sense under the extremely literal view espoused by (among others) dinofelis.  ZephramC, if you are less committed to this view than dinofelis is, I hope that this adds to your understanding:

In my view, once the peanuts start being used as money, they behave in a very debt-like manner.*  Before money, barter is the exchange of wealth for wealth.  Once money shows up, the same barter transaction is virtualized in time and space.  One party gives wealth in exchange for a token that they expect to be able to redeem for wealth later.  When they actually get around to redeeming it, the barter is completed.
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April 05, 2018, 02:44:02 PM
 #1050

wow love you,thanks

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April 08, 2018, 01:01:09 PM
 #1051

I am inclined to think I can employ my own brain for deriving the meaning of this word from the context. I suppose I’m quite capable of it. Here people do not accept this owing to something some monetarist once expressed that was wrongly attributed to an austrian.

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April 10, 2018, 08:41:52 PM
 #1052

The appropriate term would not be inflation / deflation, economically speaking that is a much more complex term than what is stated in this post. Here the law of the market is easily verifiable. Offer / Demand, which is what is currently affecting the price of Bitcoin and will certainly continue to affect the price in a positive way when it increasingly approaches the maximum number of Bitcoins issued.
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April 11, 2018, 05:25:11 AM
 #1053

Yet, this hateful money system with all its faults has been immensely prosperous. We all know that for the last several centuries it has been used worldwide.

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April 11, 2018, 05:54:45 PM
 #1054

wow love you,thanks
The terminologies are defines in a right way but this is something very common in the business world and in the market. The answer tho the question is that the prices of thr Bitcoin is determined by the speculation as well as by the market forces. These are the two basic determinants. Besides exchange rates have their own criteria for the expected return they sit for.

   

 
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April 12, 2018, 07:42:30 AM
 #1055

In fact, eventually the bank is merely to comply with its mean reserve requirement. It just must own the 900$ when somebody else pays the check, if it isn’t at the same bank.

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April 12, 2018, 10:10:10 AM
 #1056

This could be good for blockchain to become more legit, but we know governments are also very good at messing things up sometimes...
https://coincodex.com/article/1514/22-european-countries-form-blockchain-partnership/
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April 12, 2018, 04:30:51 PM
 #1057


It's a percentage. It could be calculated and plotted in discrete yearly steps, but this chart shows the instantaneous (i.e., continuous) rate of inflation. "Annualized" just means that the rates are expressed at each point on the curve as though that rate of inflation were constant for a whole year and the money supply at the end of that year were compared to that at the beginning of the year. Inflation is usually expressed as an annualized rate. When you hear that the Federal Reserve is targeting an inflation rate of 2%, that's an annualized rate.
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April 13, 2018, 09:30:22 AM
 #1058

You’re quite right, but as far as economics is concerned we are always to be accurate and shrewd in our presumptions and choices, for rather obvious reasons, I should say.

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April 13, 2018, 12:19:02 PM
 #1059

I read the first message and was amazed. Price bitcoin from 10 to 20 bucks. Only then I saw the date of publication. Give me back my 2013 year... cry

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April 14, 2018, 10:56:50 AM
 #1060

The price of a bitcoin is determined by supply and demand. When demand for bitcoins increases, the price increases, and when demand falls, the price falls. There is only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate, which means that demand must follow this level of inflation to keep the price stable. Because Bitcoin is still a relatively small market compared to what it could be, it doesn't take significant amounts of money to move the market price up or down, and thus the price of a bitcoin is still very volatile.
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