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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 524122 times)
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February 09, 2018, 01:23:31 PM
 #981

Very interesting, and descriptive thought analysis on the inflation-deflation principles of money supply as related to Bitcoin; and cryptocurrency in general (or those that will be successful anyway).

I had been thinking of this a bit differently, with similar effects, but had not given as much thought to this theory yet.

In my mind when I heard about those being inherent in Bitcoin, and viewed illustrations like those around with the grocery cart much fuller, and then mostly empty... well that's about as far as I got with my thought process on this and believed I had substantially understood that.

However, I was thinking more in terms of Bitcoins deflationary effects not so much as what used to cost BTC20, now cost BTC10, or visa-versa for the inflationary part. I applied only the fact that over time everything costs us more, such as groceries per said illustrations, and our local currencies do not increase in value... we have to earn more to meet the rise in the costs of goods and services.

Therefore using fiat was inflationary and Bitcoin was offering deflationary effects where the opposite would occur due to the fact that it is not governed or controlled by one central authority (which can impose other changes in value to the monetary system) and that regardless of the highs and lows (which I did not think about too much) that in time hodling Bitcoin alone--the value would increase largely due to scarcity of the coin down the road.

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February 10, 2018, 02:42:28 PM
 #982

An excellent post that I'll sticky so people can learn from.
やほ
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February 11, 2018, 04:29:13 AM
 #983

What incentives do savers have to buy-in on a inflationary money supply?

Excellent job for a first post Flavio!  Wink

Call me stupid but, if the money in my wallet would inflate in value between the time I put it in and the time I spend it (widely shared view of BTC over the long term), that would be a pretty good incentive!

Note that I'm looking at the long term, say 2 to 5 years, so perhaps more of a savings wallet than one for the weekly groceries!



You actually misunderstood me a little bit. When I say inflationary money supply, I mean the opposite of bitcoin. Inflationary money supply causes your money to be worth less and less with time. The question I want to raise is. Is there no incentive for people to have money on an inflationary supply?

Given that price volatility increases cost of business then it's reasonable to say this cost can be measured. Inflation raises cost of business too. "When does inflation cost trumps volatility and vice-versa?" That's the question I really wanna raise.
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February 11, 2018, 06:30:44 PM
 #984

Good post/ Blockchain can have only deflation because the amount of bitcoin is limited.
And what do you tonk about it?
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February 12, 2018, 12:55:24 PM
 #985

How can a digital simulation of money become more illusory than it already is? Simulated money will always be an illusion, but because it is a simulation we do not have to accept the 'rules' coded into it as if they were the Ten Commandments. Instead, we can select the relevant sections of source code, hit the delete button, and start over.

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February 14, 2018, 01:37:33 PM
 #986

You must read "Money creation in the modern economy" http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf, a paper co-authored by three economists from the Bank of England. The paper explains how the majority of money in the modern economy is created by commercial banks making loans. This is because money is really just an IOU (I Owe You: An informal document that acknowledges a debt owed)

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February 15, 2018, 08:49:52 AM
 #987

Thanks!! สมัครufabet
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February 15, 2018, 05:42:24 PM
 #988

In accordance with the definition and theory of quantity, inflation occurs because of the increasing amount of money circulating in society without compensating for the increase in the quantity of goods. While deflation is a reverse event, where in the economy occurs the process of decreasing the price of goods continuously within a certain period.
Generally available three sectors that can cause inflation and deflation are:
1. import and export sector
2. savings and investment sectors
3. the state budget sector
From these three sectors, it can be concluded that the government and private sectors are the cause of inflation.
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February 16, 2018, 12:16:44 PM
 #989

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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February 16, 2018, 12:23:32 PM
 #990

The whole trading pictures depends from the supply and the demand. That creates the value of a given currency - such as bitcoin.
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February 18, 2018, 08:00:51 PM
 #991

While I despise them, I see the genius of the Federal Reserve system.

There's genius in stealing?  Roll Eyes
there aren't stealing...
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February 19, 2018, 01:44:23 AM
 #992

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...
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February 19, 2018, 08:41:24 AM
 #993

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.

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Komorhan
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February 21, 2018, 12:28:33 PM
 #994

it has been a very nice statement, the determination of the value of the bitcoin by buyers and sellers is a good thing, but those who are in the ladder cause the prices to go down extremely excessively and the small investors are panicking and damaging. I think it would be good for everyone to have a cure for it.

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profesormonero
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February 25, 2018, 10:23:47 AM
 #995

I'll read your post. I think is a really interesting topic. In a year or two I'll be able to reply 😊
nskendrovic
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February 26, 2018, 12:16:04 AM
 #996

These are always confusing, I remember being really confused about the hyperdeflation of germany before WW2, the money was losing value rapidly, while nowadays when we're talking about inflation we're talking about dollars being printed and the value slowly going down every year.

I always use Bitcoin now to understand, bitcoin is deflationary, after the limit is all mined the supply will decrease because of lost coins and dying people, meanwhile it's mooning in value.

Coinonomist
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February 28, 2018, 12:49:47 AM
 #997

Just a quick note to introduce myself to the topic:

Inflation - i.e. the price of goods goes up in money terms - is perceived (in the Academy) as a good thing because it encourages spending. Keynes' "animal spirits" are a description of the expectation that times will be good in the future, so I don't need to hoard money now.

If people and businesses spend, then businesses (and people) earn money by selling.

If you believe that the $$ in your pocket today will buy you more goods than in the future (because you expect some inflation) then you have an incentive to spend now. If you expect prices to go down, then you defer your spending.

We've seen this with bitcoin over the past couple of years. When a bitcoin can increase in value from $10 to $1,000 to $10,000, then why would you spend a bitcoin on a $10 pizza (or on anything else)?

It's all great to talk about "Statists" and inflation as a tool to reduce the value of government and business debt. But a world where prices go down (think Japan in the past 30 years) is a world where people and businesses prefer saving over spending to an unhealthy degree.

Not because saving is bad, particularly when saving builds value for people, but because if everyone decides to emphasise saving at the same time, we risk ending up in another Great Depression scenario.

This is the challenge for any token/coin. How do you create value that is exciting for hodlers? But not such a steep rise in value that no-one will ever spend the token/coin for its intended purpose?
Hehe0304
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February 28, 2018, 02:23:38 PM
 #998

Money supply is inversely proportional to the value of a commodity, cryptocurrency. More the supply is, less the price. The Bitcoin is a deflationary currency.
steel3000
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March 01, 2018, 03:42:10 AM
 #999

Notes and coins are physical representations of that abstraction regardless if they are made of gold or paper. 
The only reason gold was used as the material of choice is it had the desirable properties.
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March 04, 2018, 03:17:47 PM
 #1000

Definitions matter when describing the relationship between changes in the money stock, or total money supply, and inflation. For example, the first definition of inflation given by the American College Dictionary is any increase in the currency not redeemable in specie.
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