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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 509474 times)
GrandmaJean
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September 02, 2014, 03:26:47 AM
 #321

Can anybody explain to me why, in an environment in which BTC is expected to appreciate further, anybody would use their BTC to spend?
....

Because as a living being you CAN NOT stop consuming (and spending).
You could delay some consumption, but you can not stop from consuming goods completely.

For example:
You have only BTCs and need to buy food to eat. You could delay consumption for a day, maybe three, but then you will be hungry and the desire to eat will probably be stronger than the desire to profit from a future increase in value of your BTC. Or maybe not and you will die starving. You will probably just use the minimum quantity of BTC you could spend to buy ramen and delay buying Champagne and caviar for the future.

This is an extreme situation, but there is a large number of people with different (often very different) time preferences, so there always be at least a small flow of Bitcoin to be exchange for goods and services or fiat.
If I acquire Bitcoin just to pay for my new tablet, because I can only use Bitcoin if I'm in Ghana and want to pay a shop in the US, my time horizon is very short. If I buy Bitcoins because I want protect my savings from inflation in Argentina, my time horizon is much longer.
This situation would be very unlikely to happen in the real world. I would say that most people that have the ability to acquire bitcoin also have fiat based assets they can spend.

Even in your situation, people will delay consuming for as long as they can because they think the value of bitcoin will increase. This will ultimately lead to lower economic activity because people will delay purchases for as long as they can hold off.

The reason that the level of bitcoin economic activity is where it is now is because some people do not think the price will always rise, but rather there is some chance it may not.
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painlord2k
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September 02, 2014, 03:00:37 PM
 #322

This situation would be very unlikely to happen in the real world. I would say that most people that have the ability to acquire bitcoin also have fiat based assets they can spend.

Even in your situation, people will delay consuming for as long as they can because they think the value of bitcoin will increase. This will ultimately lead to lower economic activity because people will delay purchases for as long as they can hold off.

The reason that the level of bitcoin economic activity is where it is now is because some people do not think the price will always rise, but rather there is some chance it may not.

But, as the value of Bitcoin increase and the value of fiat decrease (based on relative inflation rates and adoption rates), if you have a balance in Bitcoin and a balance in fiat, the share of your wealth denominated in Bitcoin will increase compared in the share of your wealth denominated in fiat.
At some time, the share of your wealth denominated in fiat will become irrelevant compared to the share denominated in bitcoin.

The question about economic activity is a trope of keynesians, pseudo and post.
The problem with an inflating currency is to push for too much economic activity (investing and consuming). Economic activity is too much compared to the ability of the system to support it. People engage in too much consumption, not enough savings, too much investing and not enough savings. I wrote about "NOT ENOUGH SAVINGS"?
Until the effect of increasing the money supply last, people do not realize their investments are a failure. But as the effect wore off, the investments done because of inflation must be liquidated at a loss (for the investors or someone one else like the taxpayers). Then the government push for another round of inflation (lowering interest rates). And another, and another. Until interest rates go to zero. They they can not do anything, because the currency become, essentially worthless. In the mean time they have favored debtors and consumers at the expenses of lenders and savers.

People saving, AKA people producing and selling good and services without consuming, stop working as hard as before, because the value of their savings lose value and they can not same more of a certain amount.

People saving 50% of their income can not save more than 5 years of their income in currency in inflation is 10% every year (increase of money supply), because at the end they lose exactly as much value as they add (they are working for nothing, essentially). So they decide to spend more in consumption now because they know they will not be able to consume it later. But this take away real savings - like briks, mortars, wood, drugs, etc. - from people looking for loans to start productive enterprises. And given less stuff is produced and more is consumed, prices start to go up.





yoni
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September 04, 2014, 02:32:39 AM
 #323

I think is true and agree with you about 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.

a country will develop if analyze and improve the market share of Bitcoin.

Regards, Wink
Biochemical
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September 06, 2014, 06:52:07 PM
 #324

The whole trading pictures depends from the supply and the demand. That creates the value of a given currency - such as bitcoin.
boumalo
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September 07, 2014, 09:39:54 AM
 #325

The whole trading pictures depends from the supply and the demand. That creates the value of a given currency - such as bitcoin.

So the real question is what the supply and demand depend of...

Erdogan
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September 07, 2014, 11:09:32 AM
 #326

The whole trading pictures depends from the supply and the demand. That creates the value of a given currency - such as bitcoin.

So the real question is what the supply and demand depend of...

Demand comes from the urge to hold, supply from the want to hold less.


logictense
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September 20, 2014, 03:17:58 PM
 #327

The whole trading pictures depends from the supply and the demand. That creates the value of a given currency - such as bitcoin.

So the real question is what the supply and demand depend of...

Demand comes from the urge to hold, supply from the want to hold less.


Brilliant. However "money" is a term that is subdivided upon bonds and exactly money. Total wealth in economy equals the total amount of bonds plus quantity of money in circulation which equals to the quantity of bonds supplied plus quantity of money supplied. The total amount of bonds and money that people want to hold must equal to the total amount of wealth in ecosystem because people can't purchase more assets than their available resources allow. Thus demand is defined the aggregated amount of bonds and money people hold in the period of time, moreover all goods, property and bonds that can ever be supplied must equal the amount of the bonds and money that can ever be demanded. Thereby both supply and demand are equally equating to the equilibrium interest rate of any kind of money/asset. Supposing that cryptocurrency substitutes bonds the demand for cryptocurrency and an interest rate should be negatively related by using the opportunity costs, the amount of interest (expected return) sacrificed by not holding the alternative coin. If an interest rate on a certain coin rises, an opportunity cost of holding money rises and thus money is less desirable and the quantity of money demanded must fall. However permanent growing an interest rate on a coin due to the reducing of available money supply can possibly heavily rise an opportunity cost of holding another coins/assets.

Erdogan
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September 20, 2014, 04:19:29 PM
 #328

The whole trading pictures depends from the supply and the demand. That creates the value of a given currency - such as bitcoin.

So the real question is what the supply and demand depend of...

Demand comes from the urge to hold, supply from the want to hold less.


Brilliant. However "money" is a term that is subdivided upon bonds and exactly money. Total wealth in economy equals the total amount of bonds plus quantity of money in circulation which equals to the quantity of bonds supplied plus quantity of money supplied. The total amount of bonds and money that people want to hold must equal to the total amount of wealth in ecosystem because people can't purchase more assets than their available resources allow. Thus demand is defined the aggregated amount of bonds and money people hold in the period of time, moreover all goods, property and bonds that can ever be supplied must equal the amount of the bonds and money that can ever be demanded. Thereby both supply and demand are equally equating to the equilibrium interest rate of any kind of money/asset. Supposing that cryptocurrency substitutes bonds the demand for cryptocurrency and an interest rate should be negatively related by using the opportunity costs, the amount of interest (expected return) sacrificed but not holding the alternative coin. If an interest rate on a certain coin rises, an opportunity cost of holding money rises and thus money is less desirable and the quantity of money demanded must fall. However permanent growing an interest rate on a coin due to the reducing of available money supply can possibly heavily rise an opportunity cost of holding another coins/assets.

Debt muddles the picture a bit. The most important things to not about debt is that it expands the total amount of money (which might reduce the urge to hold and therefore the value of the currency unit), that debt is transient, and that you have to pay interest for the loan.

Interest is the value of consuming now, compared to consuming later. Said another way, the compensation you want to have in exchange for going to the back of the consumption queue.

The appreciation of bitcoin is not interest.

boumalo
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September 22, 2014, 07:43:50 PM
 #329

The whole trading pictures depends from the supply and the demand. That creates the value of a given currency - such as bitcoin.

So the real question is what the supply and demand depend of...

Demand comes from the urge to hold, supply from the want to hold less.


Brilliant. However "money" is a term that is subdivided upon bonds and exactly money. Total wealth in economy equals the total amount of bonds plus quantity of money in circulation which equals to the quantity of bonds supplied plus quantity of money supplied. The total amount of bonds and money that people want to hold must equal to the total amount of wealth in ecosystem because people can't purchase more assets than their available resources allow. Thus demand is defined the aggregated amount of bonds and money people hold in the period of time, moreover all goods, property and bonds that can ever be supplied must equal the amount of the bonds and money that can ever be demanded. Thereby both supply and demand are equally equating to the equilibrium interest rate of any kind of money/asset. Supposing that cryptocurrency substitutes bonds the demand for cryptocurrency and an interest rate should be negatively related by using the opportunity costs, the amount of interest (expected return) sacrificed but not holding the alternative coin. If an interest rate on a certain coin rises, an opportunity cost of holding money rises and thus money is less desirable and the quantity of money demanded must fall. However permanent growing an interest rate on a coin due to the reducing of available money supply can possibly heavily rise an opportunity cost of holding another coins/assets.

Debt muddles the picture a bit. The most important things to not about debt is that it expands the total amount of money (which might reduce the urge to hold and therefore the value of the currency unit), that debt is transient, and that you have to pay interest for the loan.

Interest is the value of consuming now, compared to consuming later. Said another way, the compensation you want to have in exchange for going to the back of the consumption queue.

The appreciation of bitcoin is not interest.


At the moment the FED wants a bit better now with jeopardising the future, it prefers something horrible in a few years that having pain now because when it starts accepting the pain it will get ugly so they try to keep the illusion alive; more drug not to suffer the withdraw symptoms of not getting the drug but it will end in an overdose or even bigger withdraw with physical disabilities for life

cutesakura
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October 04, 2014, 03:53:14 AM
 #330

I think the same for each country, inflation will occur when the exchange rate of the country against another country is too large, so that the country of the currency market will be less used, and in the event of deflation, the price of the country's currency value decreases the difference, so the market will be more trust in the currency of the country ...
hopefully inflation does not happen too long in a country ....  Grin
BYONDIIx
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October 15, 2014, 01:47:28 AM
 #331

Thank God for economics.
indiangrad
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October 19, 2014, 07:14:17 AM
 #332

To the economists - Can we sustain in a deflationary economy?
So when I lend money, what kind of interest should I get since I know after some time any it is gonna depreciate? Would that give rise to a scenario where I'm asked to pay interest for giving loans?
TonyT
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October 19, 2014, 10:17:48 AM
 #333

To the economists - Can we sustain in a deflationary economy?
So when I lend money, what kind of interest should I get since I know after some time any it is gonna depreciate? Would that give rise to a scenario where I'm asked to pay interest for giving loans?

Already, in Europe, the EU member country central banks have to give interest every time they loan money to the central EU bank, so your last sentence is already true in Europe with central banks.

TonyT
boumalo
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October 19, 2014, 12:53:18 PM
 #334

To the economists - Can we sustain in a deflationary economy?
So when I lend money, what kind of interest should I get since I know after some time any it is gonna depreciate? Would that give rise to a scenario where I'm asked to pay interest for giving loans?

Prices going down is a good thing that the market brings to people; governments like inflation because it allows them not to face all the consequences of their actions

painlord2k
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October 19, 2014, 03:06:52 PM
 #335

To the economists - Can we sustain in a deflationary economy?
So when I lend money, what kind of interest should I get since I know after some time any it is gonna depreciate? Would that give rise to a scenario where I'm asked to pay interest for giving loans?

Yes, we can.
If it is a strong deflation (caused by a correction of a previous inflation) it will last a short time, because the increase in purchasing power will "force" people to spend their money in some extent reducing the deflation in the same way.
People, also, can not stop consuming completely. So, there is a limit how fast a currency can deflate.

On the other side, if the deflation is cause by technological progress reducing the costs of things, as it is natural to happen, the deflation will be a mild 2-3% per year.
You will be able to lend your money at 7-10-15% per year, depending on the quantity of saving people have around.
Higher the saving, faster they lower the interest rate the takers will be able and willing to pay.
Because there will be a limited number of business able to pay back >20% interest rate, more able to pay back 15% interest rate, many more able to pay back 10% interest rate and so on.
Higher the return you will be able to obtain from a loan, earlier you will be able to obtain it.
More business willing to pay 15% exist, more people will be willing to save to obtain that return.
If the business are able to just pay 10% less people will be willing to save as much as before
It is just a market dynamics.
indiangrad
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October 19, 2014, 05:26:48 PM
 #336

But I believe the ideal case scenario for an optimum economy is mild inflation. The following Khan academy video explains my point:
https://www.khanacademy.org/economics-finance-domain/core-finance/inflation-tutorial/inflation-scenarios-tutorial/v/moderate-inflation-in-a-good-economy

To the economists - Can we sustain in a deflationary economy?
So when I lend money, what kind of interest should I get since I know after some time any it is gonna depreciate? Would that give rise to a scenario where I'm asked to pay interest for giving loans?

Yes, we can.
If it is a strong deflation (caused by a correction of a previous inflation) it will last a short time, because the increase in purchasing power will "force" people to spend their money in some extent reducing the deflation in the same way.
People, also, can not stop consuming completely. So, there is a limit how fast a currency can deflate.

On the other side, if the deflation is cause by technological progress reducing the costs of things, as it is natural to happen, the deflation will be a mild 2-3% per year.
You will be able to lend your money at 7-10-15% per year, depending on the quantity of saving people have around.
Higher the saving, faster they lower the interest rate the takers will be able and willing to pay.
Because there will be a limited number of business able to pay back >20% interest rate, more able to pay back 15% interest rate, many more able to pay back 10% interest rate and so on.
Higher the return you will be able to obtain from a loan, earlier you will be able to obtain it.
More business willing to pay 15% exist, more people will be willing to save to obtain that return.
If the business are able to just pay 10% less people will be willing to save as much as before
It is just a market dynamics.
painlord2k
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October 19, 2014, 05:57:08 PM
 #337

Khan Academy video is a thesys non a demonstration.
Mild inflation transfer wealth from creditors to debtors and from owner of money to owners of assets (land, shares, gold)
Mild deflation transfer wealth from debtors to creditors and from owners of assets to owners of money.

I would like no transfer at all and zero inflation or deflation.

The difference is deflation is self correcting, because people dislike to not consume, where inflation is not self correcting, because people like to consume.
Even mild inflation penalize savers and reduce the quantity of savings available in a system.
Less savings are there less resilient is the system to black swans.
If there are no savings or debts start to pile up, even white swans with a small spot are enough to collapse the economy.

Erdogan
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October 20, 2014, 08:54:25 AM
 #338

Khan Academy video is a thesys non a demonstration.
Mild inflation transfer wealth from creditors to debtors and from owner of money to owners of assets (land, shares, gold)
Mild deflation transfer wealth from debtors to creditors and from owners of assets to owners of money.

I would like no transfer at all and zero inflation or deflation.

The difference is deflation is self correcting, because people dislike to not consume, where inflation is not self correcting, because people like to consume.
Even mild inflation penalize savers and reduce the quantity of savings available in a system.
Less savings are there less resilient is the system to black swans.
If there are no savings or debts start to pile up, even white swans with a small spot are enough to collapse the economy.



Another fundamental difference: Deflation transfers value from debtors to creditors and from owners of assets to owners of money, and these transfers apply to the wide economy. Inflation transfers value to the money creators, then the banks, then the privileged corporations, then everybody else. Inflation is continuous, enforcing and widening the wealth inequality.

Deflation corrects misallocations of capital, inflation destroys the capital structure.


atlosas
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October 20, 2014, 08:59:20 AM
 #339

Deflation is worse than inflation. Look at Japan. Deflation decreases money velocity, people tend to hoard instead of spending and spending is crucial to the growth of GDP.
Erdogan
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October 20, 2014, 10:17:37 AM
 #340

Deflation is worse than inflation. Look at Japan. Deflation decreases money velocity, people tend to hoard instead of spending and spending is crucial to the growth of GDP.

That is just spinning on the current central bank meme. It is wrong.


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