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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 578891 times)
Ek334433
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January 22, 2018, 04:17:08 PM
 #941

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
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lhadygreen
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January 23, 2018, 07:52:19 AM
 #942

It's just like the law of supply and demand.
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January 23, 2018, 11:53:14 AM
 #943

It's just like the law of supply and demand.

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January 23, 2018, 02:37:38 PM
 #944

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 blog, and thought it may be reasonable to dedicate a post on the  matter.

It is a critical issue really, the rate of emission is quite fixed and would be difficult to change even with a really hard hard fork. Demand however can be actuated upon and manipulation is surely there.

Mr.Shady
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January 24, 2018, 06:57:30 AM
 #945

Excellent topic Sir. Now, I understand more about how fast the bitcoin changes time to time. As a business student graduate. It's also the same as inflation and deflation of prices in the market. I almost see that our world is near to be a cashless world although there are some countries that has already cashless transactions. More power bitcoin.  Cool
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January 24, 2018, 09:11:28 PM
 #946

Quote
Keynesian economics is a horrible system, but so far it works the best until we have another implemented
Keynesian economics is not science, it's just form of propaganda. You receive money from government to justify big government and call this economics, ecology etc.
So you mean the Keynesian economics is not exactly as what they said because they're under control of the goverment?
Well if your income are 100% depended on the government you wouldn't say anything to harm it. You don't bite the hand that feeds you. And that alone is enough to really be cautious about information coming from that source.

Also the only modern active alternative school is austrian and they are proven to predict things way better and they have a radically different approach(and the one that actually makes some logical sense).

These are unfair and incorrect views of the Keynesian economics.

Keynes pioneered the study of the economy as an aggregate. It also introduces the idea of disequilibrium and price stickiness, which are occurring themes if you conduct any serious macroeconomic analysis. He also introduced behavioral elements in his formal analysis e.g. money demand equation and term "Animal Spirit". He would have incorporated expectation but the mathematics at his time was not advanced enough to handle that.

The policy prescriptions from Keynes's theory are natural implications of his theory, which remains revolutionary even to this day. The great depression in the late 20s dealt a huge blow to the Austrian school as well as western capitalism in general. It beckoned a response outside the box and Keynes' demand management really was the answer until the 70s. You have to remember that even liberals in the west placed a lot of hope on Communism during the great depression, the vibe was certainly very different from now.

While it is unfortunate that Keynesian economic theories have been politicized to benefit the state power, it is also nature that for a long period of human history big states and institutions exist. The Austrian school was too ahead in its time and the technology was not there until more than a hundred years later. The free market is still an imperfect institution (as correctly realized by Keynes) that is not really free and transparent, central authority is needed to enforce property rights.

So contrary to what you have said, it is Keynesian economics that was radical to the traditional Austrian school. Hell, it is even radical in this day as the neo-liberalism (a politicized descendant of the Austrian School) took over the world from the 90s that led to the tremendous growth of wealth and income inequality.


Nah, that's not right. Keynes used to say in radio that people should buy more and not do any savings... becouse! He may be a great mind for this time but spend without without any concerns about future prices embased on government printing or debt is just creative accountability. I really would like to read your sources about Keynes being this true Keynes thoughts, could you plz share? Regardless of that, in true, learn macroeconomic is a process that shuld go through Keynes - his description of economic forces is truly remarcable and easy to understand.

Perhaps ppl should consider a little bit more of the government involment over the 29's. As Freedman says: when the government, by laws or incentives, creates a false price, the whole market act on falses premisses. For example: If a Government gives money to build roads, buildings and etcs, more students would seek to be engineers, becouse the market claim for them. By the time they get their degree if the roads/buildings policy stops there will be a lot for unemployed engenieers. They act on a false premisse and this 'bubble' of unemployment is more or less the same of 29's. Not saiyng that the free market does not have part on this. But plz consider the Govenrment more on this.
mebeforeyou2411
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January 25, 2018, 07:19:21 AM
 #947

Deflation is a decrease in general price levels of throughout an economy. If there is a higher supply of goods and services but there is not enough money supply to combat this, deflation can occur..
Disinflation, on the other hand, shows the rate of change of inflation over time. The inflation rate is declining over time, but it remains positive.


vuvuvu1
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January 25, 2018, 07:51:03 AM
 #948

deflation, it is opposite of inflation, whereby prices of goods and services fall and people can purchase more goods with the limited money. It is the decrease in the general price level, in the country’s economy.

A certain percentage of inflation is good, but beyond that, is worse for every economy. Moreover, deflation is the worst condition for an economy.
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January 25, 2018, 11:23:56 AM
 #949

Let's consider the following scenario: The world is 2100, everyone is using bitcoin as a global money and all prices will be expressed in bitcoins. It seems obvious that in a scenario like this there will be just a few things that will be priced in bitcoin and have a value of 1 BTC. Most of the goods and services that will be sold then will use maybe satoshi as the currency that they will be priced in. And there could even be the need to go even lower, and price things in milisathosi's.

But being a digital money, there could be a protocol upgrade to support more than 8 decimals, so that you could buy a cup of coffee or something. If such an upgrade occurs, isn't it akin to an increase in the money supply by a factor of ten (in the case of one more decimal)? And continuing our train of thought, in another 50 years when the economy will be even more productive, you will need another decimal for small transactions. And so you can basically inflate the money supply ad infinitum, based on the "needs of commerce".

So, to sum up, being able to divide the bitcoin in ever smaller denominations, isn't this a way to inflate the money supply?
RealLetoAtreides
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January 25, 2018, 11:57:37 AM
 #950

A certain percentage of inflation is good, but beyond that, is worse for every economy. Moreover, deflation is the worst condition for an economy.

Good for whom? For those who receive the newly printed money first. Because they will be able to get out and buy things at the older prices, that were present before the money increase. And this drives up prices for everyone else. And the worst off will be those who are the last on the receiving ladder.

And now lets identify who are those who receive the money first: Banks and Governments. Who are those who receive the money last? Those on fixed income, employees mostly and those who save. It's called the Cantillon effect. It's a grand scheme of redistribution from the poor and low income earners to the rich and those connected to the money faucet.
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January 27, 2018, 01:01:27 PM
 #951

If bitcoin is perceived as a means of exchanging goods and services, then the drop in purchasing power is called inflation, the growth of purchasing power is deflation.

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January 27, 2018, 02:52:59 PM
 #952

From the history of mankind, the carrier of money will always change. The earliest is the exchange of barter. Afterwards, shells, gems, gold, coins, banknotes and electronic money are the trend of the future. Security and stability are the basic characteristics of money. What is the terminator of the currency? Quantum calculation?
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January 27, 2018, 08:50:19 PM
 #953

Excellent publication! Even though several years have passed, this information helps anyone to understand the constant exchange of securities figures within the market.
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January 28, 2018, 11:49:55 AM
 #954

Two main impacts of bitcoin related to inflation that I see:
1.  It's pretty clear that nobody is using Bitcoin for payments, and at the present time, it's transactions are too expensive to make it good for most payments.  That said, there's a very real chance that Bitcoin (or Ethereum or some other cryptocurrency) can replace gold as a store of value and inflation hedge and some chance that it also replaces the USD as the world's reserve currency.  If those happen, price of Bitcoin goes way, way up from current levels.  If not, it likely drops to near zero.

2.  If bitcoin (and other cryptos) go up enough in value, they're going to create real-world inflation.  All of the new crypto millionaires and billionaires will want to start spending their money.  Their new spending will drive prices of money items higher, making it increasingly difficult for those who didn't hold crypto to afford those items.  That could result in an inflationary spiral...and could cement the widespread perception of crypto as an inflation hedge.
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January 28, 2018, 12:48:39 PM
 #955

What will be the end point of "currency"? I suspect we will come full circle, round to barter once again ... enabled by Satoshi's amazing creation.


I don't think that barter is a situation that we should strive for. It only allows for a limited economic activity, because everyone has to know the barter rates of every good with every other good.

We only need currencies as a trusted medium that can be easily converted from work to, say, pizzas

I think money serves a bunch of needs and that they won't disappear soon, even though the medium they inhabit may change. You don't need money just so you can compare the value of goods between themselves, a task you will find very hard to do in a barter economy.  But also you need money to protect for future uncertainty. If somehow we all knew the future perfectly, then we won't need money anymore, because we could set up our income and expenses so that they match perfectly and we won't be in a need to have cash.

Other than that, money serve a role as a store of value (or at lease, it should serve this role. But fiat currencies failed at this role spectacularly), to move value created through time, not just through space.

When everyone on the planet is continuously online (2040 would be my guess, maybe earlier) fiat currencies, banks, and the rest of the current financial ecosystem will be superfluous.

I also think that fiat currencies will become superfluous, but I don't think the same thing can be said about the financial system. Yes, it will have to change, to use sound money and be responsible, but it does offer a function that is asked from the market, so I don't think it will disappear. Just my 2 cents
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January 28, 2018, 07:57:13 PM
 #956

Far from inflation being the problem, the money supply has shrunk and we are in a deflationary bind. The money supply needs to be pumped back up to generate jobs and productivity; and in the system we have today, that is done by issuing bonds, or debt.
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January 29, 2018, 10:09:30 AM
 #957

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.

Money supply is the quantity of money generating inside a country.

How does inflation and deflation relate to money supply?

As the discussion goes in the Law of Supply and demand. "The higher the demand, the lower the supply and vise versa" therefore if money supply goes up, its demand goes down. If the demand for money will go down, higher prices will be implemented. If the price of goods becomes higher, it is called inflation. But if the opposite happened, deflation will be the result.
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January 30, 2018, 02:51:47 PM
 #958

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.



Read more: What is the difference between inflation and deflation? | Investopedia https://www.investopedia.com/ask/answers/111414/what-difference-between-inflation-and-deflation.asp#ixzz55g8TlgCw
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As the law of demand and supply goes, money supply has the same effect. Money supply is the quantity or number of money produced and circulating inside a country. As the supply of money increases, the demand for money decreases which make prices of goods rise up resulting to inflation. But when the supply of money decreases, the demand for money increases making the price of goods decrease resulting to deflation.
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January 30, 2018, 03:06:43 PM
 #959

If you go back one hundred years before the start of the Federal Reserve then the entry for inflation definition was an expansion of the money supply.     With QE this is clearly apparent
Far from inflation being the problem, the money supply has shrunk and we are in a deflationary bind. The money supply needs to be pumped back up to generate jobs and productivity; and in the system we have today, that is done by issuing bonds, or debt.

Overall we have increased the production of money far above a normal rate.    Most new cash was used to buy government bonds which only distributes the cash gradually within the economy.
Only when government repays the debt will we see the return to a normal scenario and a nessecery higher interest rate on the Dollar, Euro or Yen.

Japan has been operating QE for 17 years so it is unlikely they will ever repay the debt or unwind QE programs.    In effect the bonds have defaulted but are being continually rebought by government itself to prevent that scenario.    Some clarity might appear if you look at Greece who are unable to rebuy their own bonds hence have neared a default scenario, this is the same for every country far past 100% GDP debt, Japan is 260% or so

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February 01, 2018, 12:51:34 PM
 #960

Generally it can be said that inflation is a measure of a general increase of the price level in an economy, as represented typically by an inclusive price index, such as the Consumer Price Index in a nation. The term indicates many individual prices rising together rather than one or two isolated prices, such as the price of gas in an otherwise calm price environment. The inflation rate is typically expressed as an annual growth rate in prices (again, as measured by an index) even if measured over a shorter period of time. For example, if a radi o report states that "consumer prices rose at an inflation rate of six percent last quarter," that would typically mean than the Consumer Price Index for All Urban Consumers (the most quoted index) rose over the last three months at an annualized rate of around four percent, and the press would generally refer to the current inflation rate as around four percent. The term deflation refers to a general decline  in prices or the price level as measured by an inclusive price index and, again, is not a reference to isolated price declines, like natural gas declining in price, in an otherwise stable price environment. 
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