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Author Topic: What happens with an ideal currency?  (Read 1039 times)
Anth0n
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February 11, 2013, 03:09:48 PM
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Suppose commodity X is easily divisible, fungible, and scarce, making it a suitable candidate for a medium of exchange in a free economy. Because it is a suitable candidate, people begin saving quantities of X to use at a later date, since they know that X will maintain its value. This desire to save means an increased demand for X, making it the good most likely to be used in barter, i.e. it becomes a currency.

Producers should respond to the increased value of X by increasing production, based on simple law of supply and demand. So ultimately, my question is how will the production of new X influence economic development in this imaginary economy?
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Merralea
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February 11, 2013, 07:24:30 PM
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Suppose commodity X is easily divisible, fungible, and scarce, making it a suitable candidate for a medium of exchange in a free economy. Because it is a suitable candidate, people begin saving quantities of X to use at a later date, since they know that X will maintain its value. This desire to save means an increased demand for X, making it the good most likely to be used in barter, i.e. it becomes a currency.

Producers should respond to the increased value of X by increasing production, based on simple law of supply and demand. So ultimately, my question is how will the production of new X influence economic development in this imaginary economy?
So...
>Increased demand for X and it's impact on price/quanity

Increased value, increased quantity, yes, until a new equilibrium is reached. The increase in quantity is an effect; it doesn't cause anything else or create a feedback loop. As I'm talking about a currency, the increase in value would be observed as price deflation (a 50c potato is now 45c, etc).
How this would affect economic development at large depends on who is asked. A Keynesian would say that prices are downwardly sticky, so there would be a significant period of time where prices were above the market-clearing price and surpluses (more goods produced than consumed) would result. Coupled with this, individuals and firms are disincentivized to invest as, if prices are falling quickly enough, it would both be difficult to make an accounting profit and more profitable to simply hold the money. (Rereading that the self-contradiction seems far too painfully obvious for such a school of foolishness to have persisted for so long, so if that is inaccurate please correct me).
An Austrian would say that, while prices take time to adjust, there would be no significant period of  surplus as prices would be bid down and a new equilibrium would be reached. The effect of anticipated price decreases on investment would be a bidding down of the costs of factors of production that would not affect the amount of investment in real terms (though it may in accounting terms).
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February 11, 2013, 11:03:26 PM
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You missed the part where he wasn't talking about Bitcoin and asked what happens when producers produce more X in response to higher demand, Merralea.

To answer the actual question, Anth0n, the result would likely be price stability over the long-term. Assuming X requires a fairly constant cost to produce and is not consumable and does not decay. Production of new currency will happen when there are more goods and services available to buy with that new currency, because an increase in demand for the same amount currency will mean that the currency is worth more than it costs to produce.

It is pretty much the basis for the idea of Decrits, linked in my sig.

Anth0n
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February 12, 2013, 07:04:51 AM
 #4

You missed the part where he wasn't talking about Bitcoin and asked what happens when producers produce more X in response to higher demand, Merralea.

To answer the actual question, Anth0n, the result would likely be price stability over the long-term. Assuming X requires a fairly constant cost to produce and is not consumable and does not decay. Production of new currency will happen when there are more goods and services available to buy with that new currency, because an increase in demand for the same amount currency will mean that the currency is worth more than it costs to produce.

It is pretty much the basis for the idea of Decrits, linked in my sig.

Doesn't this mean that price stability is not achieved with Bitcoin, since the amount of Bitcoin supplied is the same regardless of the number of goods and services available in Bitcoin?
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February 12, 2013, 08:35:59 AM
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Yes. Were you under the impression that bitcoin wants anything to do with a stable price? This is the basis for all of the deflation talk.

Anth0n
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February 12, 2013, 04:09:00 PM
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Yes. Were you under the impression that bitcoin wants anything to do with a stable price? This is the basis for all of the deflation talk.

I was under the impression that all of the deflation talk is based on the idea that even with a static supply of coins and no increased demand, improvements in the capital structure would still cause prices to trend downward. Not technically deflation in terms of the money supply, but deflation as "falling prices" (terrible definition). Without price stability it seems to me like the Bitcoin economy would still undergo boom and bust cycles like the standard economy. Not necessarily as severe, but still problematic.
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February 12, 2013, 05:10:55 PM
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Yes. Were you under the impression that bitcoin wants anything to do with a stable price? This is the basis for all of the deflation talk.

I was under the impression that all of the deflation talk is based on the idea that even with a static supply of coins and no increased demand, improvements in the capital structure would still cause prices to trend downward. Not technically deflation in terms of the money supply, but deflation as "falling prices" (terrible definition). Without price stability it seems to me like the Bitcoin economy would still undergo boom and bust cycles like the standard economy. Not necessarily as severe, but still problematic.

The cycles, bubbles and busts should depend on the time-scales you look at and on the sanity of the political context. This is because ideally, markets are able to learn from past mistakes.

In a stupid environment, meaning little reserves in capable hands and unstable rules and regulations, the weird cycles get amplified and bubbles are a serious risk. That's how things go in reality. The rules change the markets before they can use their memory of earlier bubbles to prevent the next! If the environment were a little more sane and stable over time, with for example Keynes' ideas as they were meant (not as an excuse for endless debt and inflation) it shouldn't be that bad.

IMO, an old, well setup market with a weaker government would fare even better. Austrian economists like to speculate just how good it turns out, but those need such large scales of size and time that nobody ever managed to test it. Political madness thinks up some new insanity long before such a market can find equilibrium.

A global market of roughly stable size might not be as vulnerable to instabilities as the local markets of the past. Maybe it will prevent the boom-bust cycles as traders get used to the problem. In this case, the current irregular growth is the reason for the instabilities and goes away as things settle down.
marcus_of_augustus
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February 12, 2013, 05:23:07 PM
 #8

Yes. Were you under the impression that bitcoin wants anything to do with a stable price? This is the basis for all of the deflation talk.

All of the "deflation talk" assumes that bitcoin is the only currency in circulation for whatever economy it is that you are referring to that is affected by this mythical deflation malady.

Anth0n
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February 12, 2013, 08:06:21 PM
 #9

You missed the part where he wasn't talking about Bitcoin and asked what happens when producers produce more X in response to higher demand, Merralea.

To answer the actual question, Anth0n, the result would likely be price stability over the long-term. Assuming X requires a fairly constant cost to produce and is not consumable and does not decay. Production of new currency will happen when there are more goods and services available to buy with that new currency, because an increase in demand for the same amount currency will mean that the currency is worth more than it costs to produce.

It is pretty much the basis for the idea of Decrits, linked in my sig.

Here is another interesting question based on your idea. If production of new currency happens when there are more goods and services available to buy with that new currency, then shouldn't consumption of that currency happen when there are fewer goods and services available? This is supposing the currency is something like a food item but still maintains properties of good money.

Does this mean there are different economic effects for non-consumable commodities than there are for consumable ones? I am going to hypothesize myself that money created in the market has to have a low demand for people to consume relative to demand for exchange, because if people value consumption of a commodity highly, then they will simply consume that commodity and save little or none of it.
benjamindees
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February 12, 2013, 11:26:28 PM
 #10

A currency is not the same as a commodity.  Don't start drawing those stupid lines.

Civil Liberty Through Complex Mathematics
Etlase2
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February 13, 2013, 12:19:56 AM
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Does this mean there are different economic effects for non-consumable commodities than there are for consumable ones?

Of course. There are a lot of people that think a currency that mimics a consumable is a better way for a currency to operate. See: demurrage, freicoin. I think it's a bad idea because it will fall on its ass in the face of any competition (people won't want it), and the only evidence it works is that a tiny town in europe used it during the great depression to prosper. But there were hundreds of other "side" currencies during the depression without demurrage that had significantly positive impacts on the areas that used them.

Merralea
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February 13, 2013, 01:05:26 AM
 #12

A currency is not the same as a commodity.  Don't start drawing those stupid lines.

Currency is a commodity almost by definition. "Stupid lines" apply.

The increase in quantity of the currency would only be an effect of the increased demand; it wouldn't cause anything else to any significant degree.
johnyj
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February 13, 2013, 04:31:13 AM
 #13

MV=PY

An ideal currency from economy theory point of view, it only works as a medium of exchange (not store of value for long term), have stable value, and the amount of currency always corresponding to the amount of goods and services exchanged each year, so that all the transaction need can be satisfied

But such a simplified model only exist in school, in reality there are lot of other factors affect the equation, to achieve these goal, currency issurer must continously study macro economy statistics and adjust the money supply level. Even those statistics do not really show the whole picture, so they have to use inflation to push the real interest rate below 0 to make sure people spend their money

Anyway I think some money are still being hoarded due to psychological/historical reasons, even people know that currency are losing value slowly


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