How economy grow with a deflationary currency?

[bitcool]

Bitcoin money base is still growing at the moment, but the deflationary expectation is starting to settle in.

With a deflationary currency, people have the tendency to hoard, it is harder for businesses to make money in this kind of deflationary environment.

If I am not mistaken, since the inception of Bitcoin economy, in this system, very few business has been more profitable than hoarders.

So, if it's not good for trading, it's destined to be a tool for speculation?

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[🏰 TradeFortress 🏰]

And I still get coding jobs. Go figure.

Why would anyone buy an apple for $1 if tomorrow it would be $0.99? Because you want an apple now.

Why would anyone buy oil if it was going to be cheaper tomorrow? Because you need to drive today.

[JoelKatz]

With a deflationary currency, people have the tendency to hoard, it is harder for businesses to make money in this kind of deflationary environment.

This is a myth. Do inflationary currencies could cause people to hoard commodities? Does a gas station refuse to sell me gas today because he hopes to sell it to me for more tomorrow?

Say I'm considering buying a car and you're considering selling a car. Regardless of the properties of the currency, inflating or deflating, stable or risky, since they affect you and I equally, I should consider the car worth more units of that currency than you do. So we would trade some amount of currency for the car. The properties of the currency might affect the amount of currency we exchange for the car -- it must be less than the car is worth to me and more than it's worth to you -- but it can't close the gap that incentivizes us to perform the transaction.

How do you hoard currency? Well, first you have to get the currency, which means you have to produce something of value and trade it for the currency. And then, well, you do nothing. So hoarding is production and mutually beneficial trade and that's it. It's not a bad thing at all.

[Stephen Gornick]

With a deflationary currency, people have the tendency to hoard,

Even though the currency is still inflating at a little over 10% per year for the next year or so, there are people convinced that the future demand over these next years will cause the exchange rate to rise.  So they are holding their coins ("hoarding", as you describe it), and the exchange rate is rising.

it is harder for businesses to make money in this kind of deflationary environment.

If these people weren't investing in bitcoins they would be putting their wealth in something else.  But for now, they're taking this money they would have invested elsewhere and have put it in bitcoin and are not spending it on consumption.   They wouldn't have spent that money anyways .. .they are speculators and investors, and they invest with some of their income and wealth and use some for consumption as well.

If I am not mistaken, since the inception of Bitcoin economy, in this system, very few business has been more profitable than hoarders.

Agreeing with you 100% on that.  Yet nearly every day there's some type of Bitcoin-based venture launched.

So, if it's not good for trading, it's destined to be a tool for speculation?

Nope, because there still are reasons bitcoins are useful for spending.  What is the easiest way to send money to your favorite online gambling service today?   Bitcoin.   Bitcoin is the largest online payments system that works without participation of the banks, and thus gaming services use it without concern about funds being frozen.  How is BitcoinStore able to undercut Amazon and NewEgg?  Because they use the lowest cost payment network (fees about a penny or less) with no chargeback risk -- from customers anywhere in the world.  And on and on.  There will be people using bitcoins for the benefits of bitcoin.    Merchants will adopt bitcoin because there are bitcoins to be spent.  It matters not that some value of bitcoins will not be used in spending.  If you are concerned about that you are looking at the wrong side of the equation.  Or at least one there is no control over.  Bitcoin is not an academic study or theoretical concept.  It exists today.  If there will be huge amounts of value transferred into it, there will huge amounts of value transferred into it.  That's the way free markets work.

[hazek]

Bitcoin money base is still growing at the moment, but the deflationary expectation is starting to settle in.

With a deflationary currency, people have the tendency to save, it is harder for businesses to make money in this kind of deflationary environment.

If I am not mistaken, since the inception of Bitcoin economy, in this system, very few business has been more profitable than savers.

So, if it's not good for trading, it's destined to be a tool for saving?

FYP

And no, being good tool for saving doesn't preclude it from being a good tool for trading. Actually it's quite the opposite, only a good tool for saving can possibly drive healthy trading.

[inge]

Are we talking about an economy based only on bitcoins with no possibility of substitution?

First. Hoarding itself is not such a bad thing if prices and wages immediately drop as money supply decrease. The problem arises when prices and wages are not dynamic enough to clear to market changes. In this case a drop in money supply will lead to a drop in consumption.

Second. Money deflation is caused primarily by a decrees of velocity of money and/or the amount of money supply pro capite. If bitcoins are going to be used for purchasing goods or service in the real economy than the velocity of the money supply side can support a grow in the economy.

Regards, Inge

[CIYAM]

Something else to consider:

If you bought a bunch of BTC when they were relatively *cheap* (let's say at the 5 USD dollar level they were at for quite a while last year) and you now want to use a VPS service (which you can pay for in BTC for the current USD price through various providers) then you'll find that your VPS is now 5x cheaper for you than if you had just stuck to paying USD and it keeps getting cheaper every month (at the moment) so even if you say bought 100 BTC worth at 5 USD that may well be enough to cover your VPS usage for the next 10+ years!

[JoelKatz]

If you bought a bunch of BTC when they were relatively *cheap* (let's say at the 5 USD dollar level they were at for quite a while last year) and you now want to use a VPS service (which you can pay for in BTC for the current USD price through various providers) then you'll find that your VPS is now 5x cheaper for you than if you had just stuck to paying USD and it keeps getting cheaper every month (at the moment) so even if you say bought 100 BTC worth at 5 USD that may well be enough to cover your VPS usage for the next 10+ years!

This is very unlikely to happen though.

First, if people don't expect this to happen, then there's a good chance it might not happen. That means you're taking a risk by holding.

If it's a nearly sure thing, then people will expect it to happen, and then they'll bid the price up sooner. If everyone expected gasoline to be $50/gallon in a year, few people would sell it at $4/gallon today. They'd just wait until the price rose pretty close to that $50 right now.

[herzmeister]

First. Hoarding itself is not such a bad thing if prices and wages immediately drop as money supply decrease. The problem arises when prices and wages are not dynamic enough to clear to market changes. In this case a drop in money supply will lead to a drop in consumption.

This.

In a legacy economic system like today's, things like wages, rents, insurance fees, etc just don't adapt and drop fast enough.

[Anth0n]

Bitcoin is not technically deflationary, since the supply will not contract in the long run. The supply will just remain constant.

But in terms of supply and demand, usually when demand for a good or service increases, production increases to match the new demand. So what worries me about Bitcoin economics is that once the 21 million supply is hit, new demand cannot be accommodated for, so even though the supply of Bitcoin is not deflationary, keeping a constant supply with additional demand has the equivalent effect of no new demand and decreasing supply. This doesn't mean that everyone saves and no one spends, but it does mean that the balance of saving/spending will be tilted in favor of more saving and less spending, meaning it is not economically optimal.

In the real economy today, rampant increases in the supply of money facilitate more spending and less saving, also not economically optimal.

So in my mind the one economic problem with Bitcoin is that production is fixed regardless of demand.

[justusranvier]

This doesn't mean that everyone saves and no one spends, but it does mean that the balance of saving/spending will be tilted in favor of more saving and less spending, meaning it is not economically optimal.

Who gets to define "optimal"?

[hazek]

but it does mean that the balance of saving/spending will be tilted in favor of more saving and less spending, meaning it is not economically optimal.

Bullshit on a stick. Prove it. Prove that it is not "economically optimal".




p.s.: After you fail, this comic book might give you an idea why you failed: http://www.youtube.com/watch?v=bFxvy9XyUtg

[Anth0n]

This doesn't mean that everyone saves and no one spends, but it does mean that the balance of saving/spending will be tilted in favor of more saving and less spending, meaning it is not economically optimal.

Who gets to define "optimal"?

Optimal is when supply meets demand. If demand keeps increasing when supply is constant, prices will never be stable. It seems to me like Satoshi just made a guess on what the Bitcoin adoption curve would be: percentage-wise, adoption will be faster earlier on, justifying the current constant increase in Bitcoin supply. But once the supply maxes out, enough people will ideally be already using Bitcoin so that demand cannot increase enough to justify more production.

[CIYAM]

This is very unlikely to happen though.

It's exactly what I did.

(actually even better - my VPS is effectively less than free - but will not disclose how I managed that)

[Anth0n]

but it does mean that the balance of saving/spending will be tilted in favor of more saving and less spending, meaning it is not economically optimal.

Bullshit on a stick. Prove it. Prove that it is not "economically optimal".




p.s.: After you fail, this comic book might give you an idea why you failed: http://www.youtube.com/watch?v=bFxvy9XyUtg

Why the hostility? I've already read that comic by the way.

I'm perfectly familiar with the requirement for savings to facilitate production. Savings in Bitcoin will be higher than they otherwise would be if production matched increased demand. Just as in the world of dollars, spending is higher than it otherwise would be if the supply of dollars wasn't expanded so much.

But if you're educated in the matter, please inform me what the ideal economic circumstance is.

I am also entertained by your request for proof, followed by usage of a comic book to prove your own point.

[justusranvier]

But if you're educated in the matter, please inform me what the ideal economic circumstance is.

The ideal economic circumstance is the one that all participants freely choose; the circumstance that exists when coercion is removed.

[hazek]

But if you're educated in the matter, please inform me what the ideal economic circumstance is.

The ideal economic circumstance is the one that all participants freely choose; the circumstance that exists when coercion is removed.

Precisely this, and regardless of the outcome. Everything else is enslavement and I do not agree to any of it.

[johnyj]

Bitcoin money base is still growing at the moment, but the deflationary expectation is starting to settle in.

With a deflationary currency, people have the tendency to hoard, it is harder for businesses to make money in this kind of deflationary environment.

If I am not mistaken, since the inception of Bitcoin economy, in this system, very few business has been more profitable than hoarders.

So, if it's not good for trading, it's destined to be a tool for speculation?

Why must economy grow?

In a fiat money debt driven society, you have to grow the economy continuously, otherwise society as a whole could not pay back the interest and the credit system will collapse

But in a debt free society, it is not mandatory to grow the economy continuously, you can select, as long as everyone have enough saving, grow is voluntary for anyone, everyone can be very rich while there are almost no grow for the society

[bitcool]

Why must economy grow?

hmmm, let me guess... because no-growth is boring?  

Life is short and I don't want to get bored?

Invent a time machine, go back to 1990, find 100 people, give them the choice of having a Japanese economy or having a Chinese economy, I wonder how many would prefer two lost decades?

[bitcool]

This made me going back to look up the difference between saving and hoarding:
 
   http://www.wisegeek.com/what-is-the-difference-between-saving-and-hoarding-money.htm

Saving: Accumulating money for the purpose of spending it on something planned.

Hoarding: Accumulating for the sake of having more money.

Well, it turns out I am a hoarder, and at least I admit it.