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 Author Topic: Inflation and Deflation of Price and Money Supply  (Read 520524 times)
crabel
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 November 30, 2013, 05:42:09 AM

Interesting post, and subsequent discussion. I am trying to get a grasp on measuring the complexity of the bitcoin economy. Fortunately, the blockchian records every transaction. I do need help in accessing and parsing the blockchain into a file I can pull into Mathematica or Matlab.

Frustrated by there being a lack of formal aggregation of microeconomics into macro phenomena (Keynes and neo Keynesian does not count as rigorous in my book), I aggregated von Neumann and Morgenstern's game theory (micro model of individual action) into macroecon, by adding every individual's action together.  Keynesian tend to look at the individuals resulting from the aggregate instead of the aggregate being composed of the individuals (an Austrian perspective). Basically the Keynesian's have the logic backwards (along with their math) and the Austrians who have the logic in the right direction but reject math.  Go figure.

Because my approach is based on statistical measures, I am very concerned with distributional information, which is why the blockchain is so important.

In earlier derivations I derived a similar relationship that you posted very early regarding the velocity of money, but with a twist:
lambda*M=C*N*T

lambda-marginal utility of money (amount of action that a unit of money can achieve in exchange)
M-quantity of money
C-constant of proportionality
N-number of degrees of freedom of the system. These are the number of logically independent participants within the economy
T-temperature-the marginal utility of information, it is the measure of action of the individuals in the economy.

I looked a 10 blocks (269609 to 269618) and found that the received transactions are LogNormal. I go through some of the interpretations and consequences of that distribution in this post:
http://statisticaleconomics.org/2013/11/29/measuring_the_complexity_of_bitcoin/
Examining the distribution results in measures for the temperature and the number of degrees of freedom. Because we know the quantity of money, at least until fractional reserve takes hold in bitcoin (just wait it is coming) we can easily compute the marginal utility of bitcoin.

I need to push the model further and develop a better/more complete model that describes the functional relationships, but need larger chunks of the blockchain to do so. Any help would be appreciated.

If you are curious of some analysis of the dollar under this framework here is a post Theft at the Grandest Scale:
http://statisticaleconomics.org/2013/11/13/theft-at-the-grandest-scale/

This is why I use bitcoin, and moving away from fiat. Money that is created benefits those who get to use it first. I would rather the expansion of the money supply be used to fund a service that I benefit from (validating transactions and prevent double spending by paying the miners) than where my action goes to benefit some group of individuals who I never met and don't get anything in return.
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be4verch33se
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 December 02, 2013, 08:37:09 PM

I'd have to take exception with the following quote:

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.

I definitely don't want to get into a pissing match with you (like some people seem to be doing in this thread) but perhaps I'd need you to explain this a little better.

From what I can reason, when the bitcoin supply stops growing we will have a rampant effective supply deflation due to many factors:
- lost/damaged currency
- population growth
- saving/hoarding

Supply deflation also causes other problems which, in themselves, cause more effective supply deflation and price deflation. Ex:
- reduction in currency supply causes unemployment, which in turn causes more effective supply deflation
- reduction in currency supply causes "effective debt value" to increase which slows credit re-payment and tightens credit availability, which causes hoarding, which causes more effective supply deflation
- supply deflation encourages hoarding, over spending, which therefore causes more effective supply deflation
- loans with interest go into default since the interest required to repay the loans is never created. This causes an economic downturn and ultimately more deflation.

It is for these reasons, and many more, that deflation can quickly become an unstoppable beast, and is therefore a economy's worst nightmare. This is why virtually all central banks across the world try to keep the money supply at a growth rate of 1-3%, and go on T-Bill printing sprees whenever a hint of deflation is detected. And since most fiat currency is generated through credit, this is why a credit freeze is so detrimental to the world economy.

Because of population growth, lost currency, and people's desire to save, you can never have a "neutral" money supply. You will always have either inflation, or deflation, and due to deflation's exponential run-away nature it is considered the lesser of two evils to keep a well controlled, very low, supply inflation rate. Furthermore, a low level of inflation determines acceptable interest rates which aid in economic growth and wealth re-distribution.

There is also a human psychological element. Supply deflation, or even stagnation, requires continual lowering of prices and wages in the face of economic growth. People typically are more resistant to a reduction in wages and revenues, versus increases.

This is the biggest problem I see with bitcoin, and why I favor altcoins that solve this issue with proof-of-stake (like Peercoin).

I also see problems with a mining incentive relying entirely on transaction fees. Transaction fees will be completely controlled by "purchasing power" of sorts. The entities capable of providing the lowest transactions fees will invariably be the largest (in terms of infrastructure). This will naturally create transaction titans, and likely a monopoly by cartel, which is the worst thing that can happen for the bitcoin network.

Thankfully proof-of-stake solves both of these problems, so I think virtual currency has a future, but I don't believe that future is secured in BTC.

Thoughts?
kjj
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 December 03, 2013, 04:20:08 AM

I'd have to take exception with the following quote:

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.

I definitely don't want to get into a pissing match with you (like some people seem to be doing in this thread) but perhaps I'd need you to explain this a little better.

From what I can reason, when the bitcoin supply stops growing we will have a rampant effective supply deflation due to many factors:
- lost/damaged currency
- population growth
- saving/hoarding

Supply deflation also causes other problems which, in themselves, cause more effective supply deflation and price deflation. Ex:
- reduction in currency supply causes unemployment, which in turn causes more effective supply deflation
- reduction in currency supply causes "effective debt value" to increase which slows credit re-payment and tightens credit availability, which causes hoarding, which causes more effective supply deflation
- supply deflation encourages hoarding, over spending, which therefore causes more effective supply deflation
- loans with interest go into default since the interest required to repay the loans is never created. This causes an economic downturn and ultimately more deflation.

It is for these reasons, and many more, that deflation can quickly become an unstoppable beast, and is therefore a economy's worst nightmare. This is why virtually all central banks across the world try to keep the money supply at a growth rate of 1-3%, and go on T-Bill printing sprees whenever a hint of deflation is detected. And since most fiat currency is generated through credit, this is why a credit freeze is so detrimental to the world economy.

Because of population growth, lost currency, and people's desire to save, you can never have a "neutral" money supply. You will always have either inflation, or deflation, and due to deflation's exponential run-away nature it is considered the lesser of two evils to keep a well controlled, very low, supply inflation rate. Furthermore, a low level of inflation determines acceptable interest rates which aid in economic growth and wealth re-distribution.

There is also a human psychological element. Supply deflation, or even stagnation, requires continual lowering of prices and wages in the face of economic growth. People typically are more resistant to a reduction in wages and revenues, versus increases.

This is the biggest problem I see with bitcoin, and why I favor altcoins that solve this issue with proof-of-stake (like Peercoin).

I also see problems with a mining incentive relying entirely on transaction fees. Transaction fees will be completely controlled by "purchasing power" of sorts. The entities capable of providing the lowest transactions fees will invariably be the largest (in terms of infrastructure). This will naturally create transaction titans, and likely a monopoly by cartel, which is the worst thing that can happen for the bitcoin network.

Thankfully proof-of-stake solves both of these problems, so I think virtual currency has a future, but I don't believe that future is secured in BTC.

Thoughts?

Everything you said has been said around here plenty of times.  It is kinda the core of Keynesianism, and I promise you that the our problem is not lack of familiarity with his work*.

The problem you run into is that you are asserting your conclusion.  You are stating a bunch of things as if they were established facts, when they are not.

The great depression is generally cited as the evidence to back up your position, but the people that make those claims take a peculiar view of history.  They tend to skip over the decades of malinvestment and manipulation that caused the great depression, and pretend that the deflation fairy sprinkled some deflation around, causing the whole mess.  A few economists will give the problems from ~1865 to ~1929 a token mention, or call them the instigating factor, but then forget all about them and carry on finding the conclusion they wanted to begin with.**

In much the same way, the analyses of that period tend to either ignore or gloss over the insanity pushed by the central banks and the governments.

Modern economic theory is that all problems are caused by a lack of meddling.  If the people that know better than you can't or don't meddle in the markets, we have a crash.  And when we have a crash anyway, the problem is always that they didn't meddle enough.

So, with that in mind, I'd like you to think very carefully about your position.  Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history?  One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?

P.S.  "Proof" of "Stake" systems don't solve the money supply problem (assuming that there is indeed a money supply problem to begin with).  If the devs all got lobotomies and switched bitcoin to POS, and all of the bitcoin users got hooked on crack and followed along with that change, the limit would still cap out a bit short of 21 million.

And by "his work", I don't just mean his work, but the work of the branch of economics voodoo that bears his name.

** At the cost of a few hundred million dead, much of the world has learned, finally, not to give a bunch of power to people just because they say they want it.  Now we ask them to come up with good excuses first.  "Proving" that giving them power is scientifically necessary is a good way to stay in the club and get your bills paid.

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Imahara
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 December 03, 2013, 02:09:33 PM

My post on http://zeroprofits.blogspot.com/:

Bitcoin high price and hoarding is normal, no constant deflation is expected.

Several arguments against the success of Bitcoin are doing the round:

1. Bitcoin is a bubble, the present \$1000+ price level bears no relation to the small bitcoin economy.

2. People are hoarding bitcoin and not using it. How can that possibly be a successful currency?

3. Bitcoin has a deflation problem. The general price level would have to keep falling to accommodate the growing bitcoin economy, given the fixed supply of bitcoin. (And somehow predictable deflation is assumed to be a bad thing.)

All these arguments are FALSE, and below I will show why. I will do this in terms that many economy students are familiar with; the Quantity theory of money:

M · V = P · Q

or the Money supply times the Velocity of money equals the Price level times the Quantity of goods.

People could use this relationship to 'prove' that when the money supply M is fixed and the economy Q grows, the price level P must drop to accommodate it, which means deflation.

But then you are falsely assuming V, the velocity of money, to be constant.

When you expect a sizable drop in price level P, you would postpone spending. You know your bitcoins will be worth more tomorrow, so there is a free profit to be had. This drop in spending now would mean there is less bitcoin chasing after goods today, and more bitcoin spending tomorrow. People are hoarding bitcoin. Price levels will adjust, going down today, and you can expect the price level to be higher tomorrow. (Saying that the price level in bitcoin goes down, is the same as saying the value of a bitcoin goes up.)

This hoarding will continue until the expected change in price level does not provide a free lunch anymore. In a bitcoin economy with a fixed money supply it can't be the Price level adjusting to the growing economy. It is the amount of bitcoin used in spending, or the Velocity of money. The bitcoin value should be expected to climb rapidly and stabilize.

So what the Quantity theory of money shows us is:

1. The price of a bitcoin should be expected to move now, to a level fitting the size of the future bitcoin economy. Assuming bitcoin adoption, the high price is rational given the low market capitalization compared to that needed in a reasonably sized future bitcoin economy.

2. Bitcoin hoarding is normal. The velocity of bitcoin will be higher tomorrow than it is today. Bitcoin hoarding is a logical consequence of the expected growth in the bitcoin economy in combination with the limited supply of bitcoin. It is rational and here to stay for the foreseeable future.

3. There will be no constant deflation. The price level, or the value of a bitcoin, will reach a stable level that fits the future size of the bitcoin economy. It is the velocity of money, or the number of bitcoin actually used in spending that will adjust to the growing economy, not the price level.
be4verch33se
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 December 03, 2013, 08:58:34 PM

So, with that in mind, I'd like you to think very carefully about your position.  Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history?  One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?

P.S.  "Proof" of "Stake" systems don't solve the money supply problem (assuming that there is indeed a money supply problem to begin with).  If the devs all got lobotomies and switched bitcoin to POS, and all of the bitcoin users got hooked on crack and followed along with that change, the limit would still cap out a bit short of 21 million.

First, thanks for your response. I appreciate being able to have a rational discussion about this. I am extremely excited about virtual currency and would like to discuss my concerns without being having to combat blind fanboi-ism.

I think it's difficult to find an instance of a deflationary episode after 1929, because so much is done (since then) to stop them. It's definitely difficult to find any instance of rampant deflation or inflation that wasn't or couldn't be contributed to an external factor. After all, something always has to start the ball rolling.

But we do see them start, and then governments go on money printing sprees to correct them before they get out of hand. You only have to go back to 2007-2009 during the housing bubble burst in the United States to see this. Yes, the most recent US recession was caused by greedy lending and trading schemes that created a price bubble, but the result of this bubble bursting was an influx of personal and corporate debt defaults that caused some banks to close, and virtually all banks to freeze credit. Since the United States money supply is largely generated by debt, this created a deflation in the money supply which is what caused all the problems you can still see signs of today including unemployment, entire industries failing, skyrocketing government debt (to correct the issue), etc.

Of course above we're talking about a potential for rampant deflation. One could argue that a small amount of deflation can be just as benign as a small amount of inflation. Of this, I'm not so sure. My hunch would be that hyper-deflation has a more inheritant run-away effect than hyper-inflation. If you like analogies I would hypothesize hyper-inflation is caused by a continual effort from a government to print too much money, or over-value goods and services and thus participate in pushing a hypothetical boulder up a hill. While hyper-deflation would be pushing a boulder down a hill. It doesn't take a whole lot to get it started, and once it's started it's hard to stop. But again, this is just an educated guess. I am not certain, and don't think anyone can be.

So, I guess I'm a Keynesian (I didn't know this). And as a Keynesian, the deflationary nature of bitcoin is worrying. Whether or not this will be an issue, I guess time will tell.

As for POS. What I like about POS is that blocks are generated for saving the currency (as in not spending it). The rate of generation can be controlled at whatever value you like, say 1%. This acts as a built-in Treasury Bill generation to the currency constantly inflating it at a maximum of 1% per year. This pre-defined POS generation rate would also define the prime lending rate, and give the currency room to generate interest for private loans. The community could also agree to raise or lower the POS rate based on economic indicators that would require it. Currently, all implementations of POS try to offset the POS block generation by requiring mandatory transactions fees that become 'destroyed' by the network. But in principle, without these mandatory destroyed transaction fees, POS could guarantee the continual slow growth of a virtual money supply.

deisik
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 December 03, 2013, 09:13:39 PM

Modern economic theory is that all problems are caused by a lack of meddling.  If the people that know better than you can't or don't meddle in the markets, we have a crash.  And when we have a crash anyway, the problem is always that they didn't meddle enough.bills paid.[/size]

Isn't this exactly what Keynesianism is all about? I always thought that theories based on Keynesian economics advocate government monetary and fiscal programs aimed at increasing employment and stimulating business activity, that is, active meddling into economic problems by the state... Or did I get something wrong from your post?

deisik
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 December 03, 2013, 09:20:50 PM

So, with that in mind, I'd like you to think very carefully about your position. Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history? One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?[/size]

One of the most recent examples is Japan. I don't think we can speak in this case about the kind of "meddling" which Austrians say can forebode or provoke negative effects on the economy. There was a large price bubble in stocks and real estate there in the 1980s, which topped in 1989 and popped in the early 1990s. They say that for almost ten years after 1990, Japan had been caught in a deflationary spiral. It brought about high levels of bankruptcy and low consumer demand, which, in turn, put further downward pressure on prices. The Bank of Japan was slow to react and embarked on a quantitative easing only in 2001...

kjj
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 December 04, 2013, 12:27:17 AM

So, with that in mind, I'd like you to think very carefully about your position.  Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history?  One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?

P.S.  "Proof" of "Stake" systems don't solve the money supply problem (assuming that there is indeed a money supply problem to begin with).  If the devs all got lobotomies and switched bitcoin to POS, and all of the bitcoin users got hooked on crack and followed along with that change, the limit would still cap out a bit short of 21 million.

First, thanks for your response. I appreciate being able to have a rational discussion about this. I am extremely excited about virtual currency and would like to discuss my concerns without being having to combat blind fanboi-ism.

I think it's difficult to find an instance of a deflationary episode after 1929, because so much is done (since then) to stop them. It's definitely difficult to find any instance of rampant deflation or inflation that wasn't or couldn't be contributed to an external factor. After all, something always has to start the ball rolling.

But we do see them start, and then governments go on money printing sprees to correct them before they get out of hand. You only have to go back to 2007-2009 during the housing bubble burst in the United States to see this. Yes, the most recent US recession was caused by greedy lending and trading schemes that created a price bubble, but the result of this bubble bursting was an influx of personal and corporate debt defaults that caused some banks to close, and virtually all banks to freeze credit. Since the United States money supply is largely generated by debt, this created a deflation in the money supply which is what caused all the problems you can still see signs of today including unemployment, entire industries failing, skyrocketing government debt (to correct the issue), etc.

I think your view of the recent bubble/burst is overly simplistic.  I hope you don't take it the wrong way when I say that you appear to have swallowed the populist line about greedy bankers hook, line and sinker.  That episode was far too complicated to blame on one party (unless that party is government*).  Basically everyone in the country was an active participant in that fiasco.

It would take a while to sort that whole mess out and identify all of the groups participating, and what they did wrong.  The short version is that "greedy lending" takes two: a lender and a borrower.

The credit freeze was an overreaction, but a temporary one.  No one knew if they were solvent, and no one knew how creditworthy any potential borrowers were.  The rules had been on vacation for a long time, and it took a while to adjust when they got back.  Lending is once again constrained by the credit demand of creditworthy borrowers, which is a much smaller market than the credit demand of everyone with a pulse.

The most important part missing from your description is the malinvestment.  During the bubble, the markets were sending the wrong signals to the wrong places.  Millions of new houses were built.  Everyone and their cat got a real estate license.  Home improvement stores sprang from every corner, and the manufacturers of the goods sold in such stores expanded capacity.  We ended up with a glut of things that we don't need, and a shortage of things that we do need.  We've also made the, erm,  "bold" decision to do everything in our power to prevent those malinvestments from clearing.

In my opinion, it looks like the deflation was caused by the mess, rather than the other way around.

Of course above we're talking about a potential for rampant deflation. One could argue that a small amount of deflation can be just as benign as a small amount of inflation. Of this, I'm not so sure. My hunch would be that hyper-deflation has a more inheritant run-away effect than hyper-inflation. If you like analogies I would hypothesize hyper-inflation is caused by a continual effort from a government to print too much money, or over-value goods and services and thus participate in pushing a hypothetical boulder up a hill. While hyper-deflation would be pushing a boulder down a hill. It doesn't take a whole lot to get it started, and once it's started it's hard to stop. But again, this is just an educated guess. I am not certain, and don't think anyone can be.

Hyper-deflation would probably be horrible.  But I can't imagine any realistic way that it could ever happen.

So, I guess I'm a Keynesian (I didn't know this). And as a Keynesian, the deflationary nature of bitcoin is worrying. Whether or not this will be an issue, I guess time will tell.

As for POS. What I like about POS is that blocks are generated for saving the currency (as in not spending it). The rate of generation can be controlled at whatever value you like, say 1%. This acts as a built-in Treasury Bill generation to the currency constantly inflating it at a maximum of 1% per year. This pre-defined POS generation rate would also define the prime lending rate, and give the currency room to generate interest for private loans. The community could also agree to raise or lower the POS rate based on economic indicators that would require it. Currently, all implementations of POS try to offset the POS block generation by requiring mandatory transactions fees that become 'destroyed' by the network. But in principle, without these mandatory destroyed transaction fees, POS could guarantee the continual slow growth of a virtual money supply.

The properties you describe don't seem to have anything to do with "stake", assuming that such a thing has meaning.  Bitcoin's subsidy decreases to zero because we want it to, not because proof-of-work requires it to.

* Government gets special mention for shielding pretty much everyone from individual risk.  Since no one had their own skin in the game, they all had incentives to be stupid.  In a free market, those that take bad risks end up losing their capital and they have to sit out the next round.

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kjj
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 December 04, 2013, 04:07:05 AM

Modern economic theory is that all problems are caused by a lack of meddling.  If the people that know better than you can't or don't meddle in the markets, we have a crash.  And when we have a crash anyway, the problem is always that they didn't meddle enough.[/size]

Isn't this exactly what Keynesianism is all about? I always thought that theories based on Keynesian economics advocate government monetary and fiscal programs aimed at increasing employment and stimulating business activity, that is, active meddling into economic problems by the state... Or did I get something wrong from your post?

Yes.  Modern economic theory is Keynesian.  It can get confusing sometimes, because the textbooks just say "Economics", and not "Keynesian Economics".  A shame really, because Keynes himself isn't so bad compared to those that formed the school around his name.

Governments love Keynesianism, because governments love to meddle, and Kenyesianism says that meddling is good.

So, with that in mind, I'd like you to think very carefully about your position. Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history? One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?

One of the most recent examples is Japan. I don't think we can speak in this case about the kind of "meddling" which Austrians say can forebode or provoke negative effects on the economy. There was a large price bubble in stocks and real estate there in the 1980s, which topped in 1989 and popped in the early 1990s. They say that for almost ten years after 1990, Japan had been caught in a deflationary spiral. It brought about high levels of bankruptcy and low consumer demand, which, in turn, put further downward pressure on prices. The Bank of Japan was slow to react and embarked on a quantitative easing only in 2001...

Japan is an odd culture, and the Japanese people have a gigantic demographic problem that has been building since the war.

Again, I'm skeptical of claims that deflation is causing harm in Japan.  It seem more likely to me that deflation, assuming there really is any, is a symptom.

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 December 04, 2013, 04:35:55 AM

It seem more likely to me that deflation, assuming there really is any, is a symptom.

Assuming the sky is blue, no shit. Inflation and deflation aren't spontaneous, they are results of changes in the money supply and/or the velocity of money. Money supply increases due to Keynesian economics employed by governments is not equal to some bad word known as "inflation", it is a cause of inflation--a cause that has very intended side effects which we all know and love [/sarcasm]. Conflating Keynesian economics with money supply increases is mostly a red herring, as there is nothing that says there can't be a decentralized currency employing some method of money supply increases which would, no doubt, act magnificently different from government/bank manipulation of the money supply.

It is therefore not an honest line of argument to compare bitcoin to government money. An inflationary, decentralized cryptocurrency can be just as Austrian as bitcoin, and then all of your pro-deflation arguments based on a lack of meddling hold little water. Deflation does not equal Austrian and inflation does not equal Keynesian--these are gross oversimplifications.

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 December 04, 2013, 06:03:20 AM

Yes.  Modern economic theory is Keynesian.  It can get confusing sometimes, because the textbooks just say "Economics", and not "Keynesian Economics".  A shame really, because Keynes himself isn't so bad compared to those that formed the school around his name.

Governments love Keynesianism, because governments love to meddle, and Kenyesianism says that meddling is good.

As far as I remember, a modern economic theory based on Keynesian is called Neo-Keynesian economics. And Monetarism (in its present state often referred to as Neo-Monetarism) is also a modern economic theory. In fact, I don't remember the textbooks I happened to read calling the Keynesian economic theory as just "Economics"...

Yes, governments may love Keynesianism, but to say that they they love only Keynesianism would be a bit far-fetched (mildly speaking). They employ Monetarism principles just as easily, especially in questions of money supply and central banking

deisik
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 December 04, 2013, 06:08:26 AM

So, with that in mind, I'd like you to think very carefully about your position. Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history? One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?

One of the most recent examples is Japan. I don't think we can speak in this case about the kind of "meddling" which Austrians say can forebode or provoke negative effects on the economy. There was a large price bubble in stocks and real estate there in the 1980s, which topped in 1989 and popped in the early 1990s. They say that for almost ten years after 1990, Japan had been caught in a deflationary spiral. It brought about high levels of bankruptcy and low consumer demand, which, in turn, put further downward pressure on prices. The Bank of Japan was slow to react and embarked on a quantitative easing only in 2001...

Japan is an odd culture, and the Japanese people have a gigantic demographic problem that has been building since the war.

You asked whether we know of any deflationary episode which didn't follow closely a period of state meddling. I gave you such an example. Now you say that Japan is an odd culture and all that. What is your point really?

deisik
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 December 04, 2013, 06:42:36 AM

Again, I'm skeptical of claims that deflation is causing harm in Japan.  It seem more likely to me that deflation, assuming there really is any, is a symptom.

Yes, it did and is still a problem there. 2001 was the second worst year in post-war Japan with more than 19,000 companies going bankrupt whose liabilities were 10 million yen or more (an increase of 1.9 percent from the previous year and the largest number since 1984), the real situation being even worse as small business bankruptcies were not accounted for at all. In 2002 Masaura Hayami, then a Bank of Japan governor, said he expected that the Japanese economy would remain in a severe state as prices continued to fall and preventing the economy from falling into a deflationary spiral would pose a significant challenge...

If deflation didn't cause harm and was not at the root of Japan's problems, then what was the cause and why then the government and Bank of Japan took to an expansionary monetary policy in the first place? As with anything, you can always claim deflation is only a symptom and there are some underlying causes hidden somewhere beneath, but does it actually makes things better or render them more clear?

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 December 04, 2013, 12:59:28 PM

It seem more likely to me that deflation, assuming there really is any, is a symptom.

Assuming the sky is blue, no shit. Inflation and deflation aren't spontaneous, they are results of changes in the money supply and/or the velocity of money. Money supply increases due to Keynesian economics employed by governments is not equal to some bad word known as "inflation", it is a cause of inflation--a cause that has very intended side effects which we all know and love [/sarcasm]. Conflating Keynesian economics with money supply increases is mostly a red herring, as there is nothing that says there can't be a decentralized currency employing some method of money supply increases which would, no doubt, act magnificently different from government/bank manipulation of the money supply.

It is therefore not an honest line of argument to compare bitcoin to government money. An inflationary, decentralized cryptocurrency can be just as Austrian as bitcoin, and then all of your pro-deflation arguments based on a lack of meddling hold little water. Deflation does not equal Austrian and inflation does not equal Keynesian--these are gross oversimplifications.

The current discussion is in the context of bitcoin's limited supply being bad.  When the subsidy stops, bitcoin supply growth will turn very slightly negative.  The current, and often repeated, claim is that when inflation stops and turns negative, we go into a death spiral, and bitcoin will fail for that reason.  I see no real reason to come to that conclusion, and I'm refuting those claims.  I have no particular desire to get into a discussion about whether inflation is the money printing itself, or the money that is printed.  But don't let me stop you...

For example of what I'm arguing against:

Again, I'm skeptical of claims that deflation is causing harm in Japan.  It seem more likely to me that deflation, assuming there really is any, is a symptom.

Yes, it did and is still a problem there. 2001 was the second worst year in post-war Japan with more than 19,000 companies going bankrupt whose liabilities were 10 million yen or more (an increase of 1.9 percent from the previous year and the largest number since 1984), the real situation being even worse as small business bankruptcies were not accounted for at all. In 2002 Masaura Hayami, then a Bank of Japan governor, said he expected that the Japanese economy would remain in a severe state as prices continued to fall and preventing the economy from falling into a deflationary spiral would pose a significant challenge...

If deflation didn't cause harm and was not at the root of Japan's problems, then what was the cause and why then the government and Bank of Japan took to an expansionary monetary policy in the first place? As with anything, you can always claim deflation is only a symptom and there are some underlying causes hidden somewhere beneath, but does it actually makes things better or render them more clear?

This is circular.  The Bank of Japan asserts that deflation is bad and must be stopped, so they print money.  Their statements and actions do not constitute an argument in favor of their claim.  They had a lost decade between 1990 and 2001, then they started intervention.  Now they've had a second lost decade, and are looking at a third.  The claim is, of course, that they didn't meddle enough the first time.

Modern economic theory is that all problems are caused by a lack of meddling.  If the people that know better than you can't or don't meddle in the markets, we have a crash.  And when we have a crash anyway, the problem is always that they didn't meddle enough.

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Etlase2
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 December 04, 2013, 02:08:24 PM

When the subsidy stops, bitcoin supply growth will turn very slightly negative.  The current, and often repeated, claim is that when inflation stops and turns negative, we go into a death spiral, and bitcoin will fail for that reason.

Here we go again with the duplicitous meanings of inflation and deflation. "We are in disagreement about whether or not Japan experienced deflation because obviously deflation means a reduction in the money supply, and this won't happen with bitcoin until 2140..." Of course, nowhere in the world does deflation mean that except for on bitcointalk.org.

Do you have anything better?

Quote
I see no real reason to come to that conclusion, and I'm refuting those claims.  I have no particular desire to get into a discussion about whether inflation is the money printing itself, or the money that is printed.  But don't let me stop you...

No, you just presume for the sake of whatever sake. To conflate, obscure, and whatever else rather than actually talk about economics. Because if you were to do that, bitcoin looks pretty stupid.

deisik
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 December 04, 2013, 02:35:33 PM

This is circular.  The Bank of Japan asserts that deflation is bad and must be stopped, so they print money.  Their statements and actions do not constitute an argument in favor of their claim.  They had a lost decade between 1990 and 2001, then they started intervention.  Now they've had a second lost decade, and are looking at a third.  The claim is, of course, that they didn't meddle enough the first time.

If you wouldn't make it so... well, then it wouldn't. I didn't actually get what you meant by saying that their statements and actions did not constitute an argument in favor of their claim... What should they actually do? Please expand more on this. I think it is fair now to ask for a thorough explanation from you. Just shaking your head wouldn't do ..

kjj
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 December 04, 2013, 10:36:50 PM

This is circular.  The Bank of Japan asserts that deflation is bad and must be stopped, so they print money.  Their statements and actions do not constitute an argument in favor of their claim.  They had a lost decade between 1990 and 2001, then they started intervention.  Now they've had a second lost decade, and are looking at a third.  The claim is, of course, that they didn't meddle enough the first time.

If you wouldn't make it so... well, then it wouldn't. I didn't actually get what you meant by saying that their statements and actions did not constitute an argument in favor of their claim... What should they actually do? Please expand more on this. I think it is fair now to ask for a thorough explanation from you. Just shaking your head wouldn't do ..

If I call you a criminal and then wrestle you to the ground for a citizen's arrest, a third party wouldn't take my words (the accusation) or actions (wrestling) as proof that you are actually a criminal.

In the same way, just because a central banker says that deflation is bad, and then prints money to fight it, you shouldn't take him at his word.  He may sincerely believe that deflation is bad, and he may be willing and able to act on his belief, but none of that suggests that his belief is correct.

I don't know the solution for Japan.  I've never claimed to.  But, I have a pretty good idea of what doesn't work.

If a doctor told you that you were sick because your humors were out of balance, and that draining some blood would cure you, and it instead made you sicker, would you believe him when he tells you that you didn't drain enough?  How about if every patient he treated died?  Doctors of the pre-scientific era at least had the advantage that some of their patients got better despite their efforts.

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deisik
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 December 05, 2013, 05:54:38 AM

If I call you a criminal and then wrestle you to the ground for a citizen's arrest, a third party wouldn't take my words (the accusation) or actions (wrestling) as proof that you are actually a criminal.

In the same way, just because a central banker says that deflation is bad, and then prints money to fight it, you shouldn't take him at his word.  He may sincerely believe that deflation is bad, and he may be willing and able to act on his belief, but none of that suggests that his belief is correct.

I don't know the solution for Japan.  I've never claimed to.  But, I have a pretty good idea of what doesn't work.

If a doctor told you that you were sick because your humors were out of balance, and that draining some blood would cure you, and it instead made you sicker, would you believe him when he tells you that you didn't drain enough?  How about if every patient he treated died?  Doctors of the pre-scientific era at least had the advantage that some of their patients got better despite their efforts.

So you didn't say a word to actually substantiate your judgment beyond just claiming that I'm wrong. Surely, this is not what I expected to hear, and if you really thought that such an answer would make me think of your opinion as something reasonable or well-founded, then you chose the wrong person to debate with. That said, I suggest we leave the matter where it is now...

kjj
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 December 05, 2013, 06:56:10 AM

So you didn't say a word to actually substantiate your judgment beyond just claiming that I'm wrong. Surely, this is not what I expected to hear, and if you really thought that such an answer would make me think of your opinion as something reasonable or well-founded, then you chose the wrong person to debate with. That said, I suggest we leave the matter where it is now...

Heh.  I never said you were wrong.  I said that your argument is circular.  Being circular, it does not support your conclusion.

Again, I'm skeptical of claims that deflation is causing harm in Japan.

Yes, it did and is still a problem there.

This is the issue under current discussion.  "Deflation is causing harm in Japan."

In support of your claim, you say:

2001 was the second worst year in post-war Japan with more than 19,000 companies going bankrupt whose liabilities were 10 million yen or more (an increase of 1.9 percent from the previous year and the largest number since 1984), the real situation being even worse as small business bankruptcies were not accounted for at all.

In 2002 Masaura Hayami, then a Bank of Japan governor, said he expected that the Japanese economy would remain in a severe state as prices continued to fall and preventing the economy from falling into a deflationary spiral would pose a significant challenge...

Paraphrase: "some guy says that deflation is bad"

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bitinlet
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 December 06, 2013, 05:19:47 AM

So, with that in mind, I'd like you to think very carefully about your position.  Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history?  One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?

P.S.  "Proof" of "Stake" systems don't solve the money supply problem (assuming that there is indeed a money supply problem to begin with).  If the devs all got lobotomies and switched bitcoin to POS, and all of the bitcoin users got hooked on crack and followed along with that change, the limit would still cap out a bit short of 21 million.

First, thanks for your response. I appreciate being able to have a rational discussion about this. I am extremely excited about virtual currency and would like to discuss my concerns without being having to combat blind fanboi-ism.

I think it's difficult to find an instance of a deflationary episode after 1929, because so much is done (since then) to stop them. It's definitely difficult to find any instance of rampant deflation or inflation that wasn't or couldn't be contributed to an external factor. After all, something always has to start the ball rolling.

But we do see them start, and then governments go on money printing sprees to correct them before they get out of hand. You only have to go back to 2007-2009 during the housing bubble burst in the United States to see this. Yes, the most recent US recession was caused by greedy lending and trading schemes that created a price bubble, but the result of this bubble bursting was an influx of personal and corporate debt defaults that caused some banks to close, and virtually all banks to freeze credit. Since the United States money supply is largely generated by debt, this created a deflation in the money supply which is what caused all the problems you can still see signs of today including unemployment, entire industries failing, skyrocketing government debt (to correct the issue), etc.

The most recent US recession was caused by Monetary Policy. The Fed kept interest rates low for too long post-9/11 (and the 01 recession). This price ceiling (or better put, interest rate ceiling) built a bubble in housing via excess demand. How? Well, as we all know the fed funds rate leads mortgage rates. With rates artificially low and kept low for too long, excess demand built, pushing house prices higher. Speculators jumped in, demand grew more, prices pushed higher. Further gov't jumped in, tried to push homeownership even higher, demand increased more. Meanwhile, at the height of the housing bubble 50% of all mortgage originations were ARMS. Then around 2004/2005 the Fed decided to start increasing rates. Well, when you increase rates and a bunch of people had ARMS, guess what happened. Some couldn't afford their mortgage. Those in the know started to recognize it. Speculators bailed. Demand retrenched. It got nasty because now a lot of the risky mortgages were packaged into MBS/ABS. It caused contagion. Add in CDS/CDOs... and you get an all out disaster.

Who caused the recession? A lot of people. Who was most to blame?

THE FED.

Why? Because of: Keynesianism.
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