Inflation and Deflation of Price and Money Supply

[deisik]

One key aspect worth noting is that, up until the advent of virtual currencies, one large edge of inflationary over deflationary policies is the fundamental limit to how small your currency can be functionally made for transfer.

The indefinite divisibility of bitcoin completely bypasses this incentivizing increasing monetary velocity as a result.

Bitcoin is not and never will be infinitely* divisible. Amount 0.00000001 BTC is currently the smallest unit. Value is currently expressed by 8byte (64bit) number of this units. This means there is space for 18 446 744 073 709 551 616 units. Considering maximum 21M coins, smallest unit would be ~1.14E-12 BTC. Effectively this means space for adding additional 3 decimal places up to 1E-11 BTC without change of data field.

We can estimate gross domestic product of planet Earth to be less than 1E14 USD (about 0.83E14 in 2012). If all the world economy was converted to bitcoins then 1 Satoshi would be worth 4.762 cents in current USD. This is too much for micropayments. Above mentioned "smallest unit" would be worth thousand times less. I consider this to be adequate (for the planetary phase of human evolution) :-].

* - not infinitely divisible. But division up to the number of atoms in the observed universe would be no problem. Still long shot to infinity.

And to correctly write down this number would require even more atoms (let alone making a transaction or handling it in some way, lol)...

You can write this number (its lower and higher estimate) quite easily. But you can not write all numbers from 1 to this number (without exhausting matter and energy in the universe).

I specifically mentioned 'correctly' which, I guess, is something different from the number's lower and higher estimates. The number of atoms in the universe is about 10^80 (if I'm not mistaken), so that to completely (read exactly) write down an arbitrary number with such division you would need about 10^80 digits, right?

[ZephramC]

One key aspect worth noting is that, up until the advent of virtual currencies, one large edge of inflationary over deflationary policies is the fundamental limit to how small your currency can be functionally made for transfer.

The indefinite divisibility of bitcoin completely bypasses this incentivizing increasing monetary velocity as a result.

Bitcoin is not and never will be infinitely* divisible. Amount 0.00000001 BTC is currently the smallest unit. Value is currently expressed by 8byte (64bit) number of this units. This means there is space for 18 446 744 073 709 551 616 units. Considering maximum 21M coins, smallest unit would be ~1.14E-12 BTC. Effectively this means space for adding additional 3 decimal places up to 1E-11 BTC without change of data field.

We can estimate gross domestic product of planet Earth to be less than 1E14 USD (about 0.83E14 in 2012). If all the world economy was converted to bitcoins then 1 Satoshi would be worth 4.762 cents in current USD. This is too much for micropayments. Above mentioned "smallest unit" would be worth thousand times less. I consider this to be adequate (for the planetary phase of human evolution) :-].

* - not infinitely divisible. But division up to the number of atoms in the observed universe would be no problem. Still long shot to infinity.

And to correctly write down this number would require even more atoms (let alone making a transaction or handling it in some way, lol)...

You can write this number (its lower and higher estimate) quite easily. But you can not write all numbers from 1 to this number (without exhausting matter and energy in the universe).

I specifically mentioned 'correctly' which, I guess, is something different from the number's lower and higher estimates. The number of atoms in the universe is about 10^80 (if I'm not mistaken), so that to completely (read exactly) write down an arbitrary number with such division you would need about 10^80 digits, right?

It depends on the base  . I can write number 1234 using only 4 digits in base 10. I do not need 1234 digits.  to completely (read exactly) write down an arbitrary number with such division you would need about... 80 digits. Right?
However there is a problem that the number of atoms changes constantly. (eg. by creation [meaning anti-anihilation] or by [products of] nuclear reactions).
My original argument was meant that even if Bitcoin were divisible to 10^100 parts it would be quite possible to use it with current computers by using 333-bit integral representation of the value counted in some "Quarkhoshis".

[deisik]

And to correctly write down this number would require even more atoms (let alone making a transaction or handling it in some way, lol)...

You can write this number (its lower and higher estimate) quite easily. But you can not write all numbers from 1 to this number (without exhausting matter and energy in the universe).

I specifically mentioned 'correctly' which, I guess, is something different from the number's lower and higher estimates. The number of atoms in the universe is about 10^80 (if I'm not mistaken), so that to completely (read exactly) write down an arbitrary number with such division you would need about 10^80 digits, right?

It depends on the base  . I can write number 1234 using only 4 digits in base 10. I do not need 1234 digits.  to completely (read exactly) write down an arbitrary number with such division you would need about... 80 digits. Right?

I meant decimal notation indeed. And no, it would require 10^80 digits. As I got it, when people say that Bitcoin is divisible, they usually mean a number of decimal places (the number of digits following the decimal point). So the number of decimal places in this context should be considered as equal to the number of atoms in the universe, i.e. 10^80 decimal places

Otherwise, it is not even figuratively close to infinity, just some trivial 80 digits after the point, lol...

[WynX]

Interesting, so I agree the divisibility of the currency itself is not a problem. Even the bit-wise convenient satoshi*10^-3 is more than enough.
Do you think the need for massive deflation for bitcoin when successful adoption of the coin *occurs*, is being hampered by the current distribution of the money supply? Simply put, everybody on bitcointalk (owning some coins) now are the future miljonairs? The rich in bitcoin now, are going to buy their own countries?




Does it really seem feasible to expect such a sudden shift of wealth?

[zipmaster]

Interesting, so I agree the divisibility of the currency itself is not a problem. Even the bit-wise convenient satoshi*10^-3 is more than enough.
Do you think the need for massive deflation for bitcoin when successful adoption of the coin *occurs*, is being hampered by the current distribution of the money supply? Simply put, everybody on bitcointalk (owning some coins) now are the future miljonairs? The rich in bitcoin now, are going to buy their own countries?




Does it really seem feasible to expect such a sudden shift of wealth?

No, with deflation I would think the shift in wealth to be minimal. The utility curve of money for individuals flattens out for larger wealths. As an example, the difference in net wealth of 100 million vs. 10 billion has the potential to change the actual quality of life by an amount which is much less than the difference between 10k vs. 100k. As a result, as currency deflates, the ultra rich find themselves holding excess wealth whose utility is of small effective value.

In a deflationary economy, wouldn't the ultra rich be induced to spend more since their wealth is less useful" to their own quality of life over time?

[Ix]

As a result, as currency deflates, the ultra rich find themselves holding excess wealth whose utility is of small effective value.

How can you think that when there is evidence all around us of what "ultra rich" do? They control media and therefore public opinion, they control government and therefore public policy. When quality of life is no longer an issue, it becomes about power. There is no magic spell that makes this work differently in bitcoin. If ultra rich are induced to spend more, what do they spend it on?

[WynX]

They would spend it on whatever they'd like ....to get more power potentially...
But I suggest that the superwealthy of today (in fiat) are not the same people that hold most of the BTC. Is the change of one group to the other not hampering BTC adoption (especially since you mention the wealthy control many things like public opinion)?

[ZephramC]

As a result, as currency deflates, the ultra rich find themselves holding excess wealth whose utility is of small effective value.

How can you think that when there is evidence all around us of what "ultra rich" do? They control media and therefore public opinion, they control government and therefore public policy. When quality of life is no longer an issue, it becomes about power. There is no magic spell that makes this work differently in bitcoin. If ultra rich are induced to spend more, what do they spend it on?

Ultra rich in fiat have enormous power because of incentives and power structure set by politicians. In a system where government have the power to invade liberty, regulate, set values and redistribute money to such extend as today there is great potential for corruption.
Ultra rich in bitcoin will have great power too. They will set very strong incentives. For example they can desire space travel or building private islands with self-sufficient communities realizing their social utopias. They can have most exotic whims, even perverse ones and they will offer so good price that people will compete almost to death to fulfill those whims. But in Bitcoin world it would be enormously more difficult to ultimately force people to trade with ultra-rich. The freedom is in the choice to refuse offer 500 Milions USD for your old house, to refuse even 5 Bilions and to refuse to sell it at all. On the other hand you can not refuse to participate in bailouting TBTF bank if the government decides it is right (and compulsory) thing to do.
So the ultra rich will probably spend on luxury, encouraging its development and consequently bringing the new luxury to the masses. Cars, traveling to foreign countries, personal cinema (television), using plane, mobile phones ... all of that started as a luxury for the very rich. Without them there would be insufficient incentive to develop these areas and insufficient rewards for the smart ones doing so. You can say that ultra-rich will provide new and enormous opportunities for the exceptional ones (individuals, corporations) best able to fulfill their wishes and ideas. Of course, one of very deep needs buried in people is "I want others to hold the same values as me! I want to influence them and "make them see"!" We shall see how big this quest for power will become.

[Ix]

Ultra rich in fiat have enormous power because of incentives and power structure set by politicians.

Corruption does not spontaneously generate. You have put the cart before the horse; it is the ultra rich that have created that power with their wealth.

Ultra rich in bitcoin will have great power too. They will set very strong incentives. For example they can desire space travel or building private islands with self-sufficient communities realizing their social utopias. They can have most exotic whims, even perverse ones and they will offer so good price that people will compete almost to death to fulfill those whims.

This is wishing for the "magic spell" that I mentioned, that giving (relatively random) people immense amounts of power will somehow change the landscape of society for the better. It might, but if history is any indication, it probably won't. And in all likelihood, Wall Street will probably reward those with a golden parachute in return for also having a significant amount of control over bitcoin. In which case it's mostly the same people again.

But in Bitcoin world it would be enormously more difficult to ultimately force people to trade with ultra-rich. The freedom is in the choice to refuse offer 500 Milions USD for your old house, to refuse even 5 Bilions and to refuse to sell it at all. On the other hand you can not refuse to participate in bailouting TBTF bank if the government decides it is right (and compulsory) thing to do.

While this is a valid point in its own right, it is an externality irrelevant to the landscape within bitcoin. It is an argument that applies to any cryptocurrency.

[zipmaster]

As a result, as currency deflates, the ultra rich find themselves holding excess wealth whose utility is of small effective value.

How can you think that when there is evidence all around us of what "ultra rich" do? They control media and therefore public opinion, they control government and therefore public policy. When quality of life is no longer an issue, it becomes about power. There is no magic spell that makes this work differently in bitcoin. If ultra rich are induced to spend more, what do they spend it on?

I agree with you LX. The one difference here though is that the ultra rich cannot hoard by taking advantage of special federal reserve-type handouts. They start with an immense amount of wealth that, through deflation, grows in value over time. This implies that anything they spend will ultimately be more useful to the worker over time than to them. Unless they can manipulate the price of bitcoin en-masse to buy it back at a lower price, the worker will be getting paid with something that guarantees greater value over time.

Deflation pushes the ultra-rich utility curve to flatten out and, as a result, they should spend more. What will the spend more on? Obtaining power is a very good guess. The big difference is that this will most likely be political power as opposed to financial power since there won't be any currency to manipulate.

I guess the main point I'm trying to hone in on is the following:
A) How much power is effectively a result of the manipulation of a currency's value?
B) How much can bitcoin be actively manipulated by the bitcoin ultra rich in a hypothetical bitcoin economy?

[Ix]

Deflation pushes the ultra-rich utility curve to flatten out and,

I'm not sure how you are supporting this claim. What evidence suggests this?

The big difference is that this will most likely be political power as opposed to financial power since there won't be any currency to manipulate.

So you say, but this is not a so dissimilar scenario to the hard gold standard employed by the US leading up to 1913, and then JP Morgan met with some senators to draft the federal reserve act and laid the groundwork for the modern banking dynasties.

A) How much power is effectively a result of the manipulation of a currency's value?
B) How much can bitcoin be actively manipulated by the bitcoin ultra rich in a hypothetical bitcoin economy?

These are very difficult questions to answer. Those who can/could do those things with bitcoin, or have with fiat money in the past, are not exactly forthcoming about it.

[crazyheart]

Interesting, so I agree the divisibility of the currency itself is not a problem. Even the bit-wise convenient satoshi*10^-3 is more than enough.
Do you think the need for massive deflation for bitcoin when successful adoption of the coin *occurs*, is being hampered by the current distribution of the money supply? Simply put, everybody on bitcointalk (owning some coins) now are the future miljonairs? The rich in bitcoin now, are going to buy their own countries?

http://i57.tinypic.com/1570kgi.png


Does it really seem feasible to expect such a sudden shift of wealth?

No, with deflation I would think the shift in wealth to be minimal. The utility curve of money for individuals flattens out for larger wealths. As an example, the difference in net wealth of 100 million vs. 10 billion has the potential to change the actual quality of life by an amount which is much less than the difference between 10k vs. 100k. As a result, as currency deflates, the ultra rich find themselves holding excess wealth whose utility is of small effective value.

In a deflationary economy, wouldn't the ultra rich be induced to spend more since their wealth is less useful" to their own quality of life over time?

So distribution should be fair at the beginning

[deisik]

Does it really seem feasible to expect such a sudden shift of wealth?

This is simply not possible for very simple and rather obvious reasons. The main of which is that wealth doesn't mean money (though it can be described or calculated in money terms, since it's one of money functions). Wealth is what you can (or cannot, for that matter, lol) buy with the help of money, not the money itself (bitcoin or not bitcoin)...

[deisik]

Even if you had a trillion dollars in cache cash piled in some warehouse, you still wouldn't be able to buy a country since nobody would sell you power. Real power can only be taken, often by force. Money can only help you here in an indirect way (bribery, mercenaries, etc)...

[ZephramC]

Does it really seem feasible to expect such a sudden shift of wealth?

This is simply not possible for very simple and rather obvious reasons. The main of which is that wealth doesn't mean money (though it can be described or calculated in money terms, it's one of money functions). Wealth is what you can (or cannot, for that matter) buy with the help of money, not the money itself (bitcoin or not bitcoin)...

Even if you had a trillion dollars in cache cash in your warehouse, you wouldn't be able to buy a country since nobody would sell you power. Real power can only be taken...

This is also the reason why even the richest people on Earth (or some Megacorporation) cannot simply "buy a house, food and clean water for everyone on Earth". Either price of houses, food and water will increase tremendously or we will run out of houses soon or we will damage economy in the long run by such malinvestment.

[deisik]

Does it really seem feasible to expect such a sudden shift of wealth?

This is simply not possible for very simple and rather obvious reasons. The main of which is that wealth doesn't mean money (though it can be described or calculated in money terms, it's one of money functions). Wealth is what you can (or cannot, for that matter) buy with the help of money, not the money itself (bitcoin or not bitcoin)...

Even if you had a trillion dollars in cache cash in your warehouse, you wouldn't be able to buy a country since nobody would sell you power. Real power can only be taken...

This is also the reason why even the richest people on Earth (or some Megacorporation) cannot simply "buy a house, food and clean water for everyone on Earth". Either price of houses, food and water will increase tremendously or we will run out of houses soon or we will damage economy in the long run by such malinvestment.

Actually, they could provide a house, food and clean water for everyone on Earth. They could build houses and they could grow food instead of just buying them (or pay somebody who would do), but this wouldn't be effective employment of available resources (in plain words: no profits gained). So, why should they in the first place?

[WynX]

This is simply not possible for very simple and rather obvious reasons. The main of which is that wealth doesn't mean money (though it can be described or calculated in money terms, since it's one of money functions). Wealth is what you can (or cannot, for that matter, lol) buy with the help of money, not the money itself (bitcoin or not bitcoin)...

Ok, you're right, it's not wealth, it's just money.

Even if you had a trillion dollars in cache cash piled in some warehouse, you still wouldn't be able to buy a country since nobody would sell you power. Real power can only be taken, often by force. Money can only help you here in an indirect way (bribery, mercenaries, etc)...

Are you saying that the fiat or bitcoin rich have or will have no means to effectively use their (financial) power? I agree that buying a country might not be plausible, however there must be quite some ways to obtain wealth.
When we're assuming we're moving from a full-fiat economy to a mixed economy including bitcoin (or other crypto for that matter), would you say that the fiat-rich will have no means to influence crytpo-currency adoption and can only maintain the same level of richness by shifting part of their financial portfolio to crypto?

[deisik]

This is simply not possible for very simple and rather obvious reasons. The main of which is that wealth doesn't mean money (though it can be described or calculated in money terms, since it's one of money functions). Wealth is what you can (or cannot, for that matter, lol) buy with the help of money, not the money itself (bitcoin or not bitcoin)...

Ok, you're right, it's not wealth, it's just money.

Even if you had a trillion dollars in cache cash piled in some warehouse, you still wouldn't be able to buy a country since nobody would sell you power. Real power can only be taken, often by force. Money can only help you here in an indirect way (bribery, mercenaries, etc)...

Are you saying that the fiat or bitcoin rich have or will have no means to effectively use their (financial) power? I agree that buying a country might not be plausible, however there must be quite some ways to obtain wealth.
When we're assuming we're moving from a full-fiat economy to a mixed economy including bitcoin (or other crypto for that matter), would you say that the fiat-rich will have no means to influence crytpo-currency adoption and can only maintain the same level of richness by shifting part of their financial portfolio to crypto?

To buy something worthy you need someone who would sell you something worthy. Why should they in the first place?

At first you admit that wealth is not money, then you again turn to fiat-rich as if they were not wealthy in real terms but were just sitting on heaps of cash. If their real wealth is not confiscated or expropriated during the process of crytpo-currency adoption, they shouldn't care. Say, you have a house, and its price can be denominated both in dollars and bitcoins (or any other currency for that matter). Does this playing with figures change its real value?

[ThomasMuller]

What will the creation of other coins do to Bitcoin, Litecoin, etc? My theory is that if we can make our money whenever we want is an action that has no value.

As we speak there are several Alt coins out there.

I mean this is too easy and creates enough deflation that will get to a no value point.

[WynX]

If their real wealth is not confiscated or expropriated during the process of crytpo-currency adoption, they shouldn't care. Say, you have a house, and its price can be denominated both in dollars and bitcoins (or any other currency for that matter). Does this playing with figures change its real value?

For real estate value is more constant (thats why mortgages exist), however I indeed think the ultra-rich are sitting on heaps of money....well not literally but think of investments, shares, etc. I also think that the market cap that bitcoin represents is partly (mostly?) taken from the market cap of fiat. So yes, in a way, their wealth is expropriated from them because of devaluation.