= Grand Unified Solution to Lost Coins, Hoarding, Deflation, Speculation =

[firefop]

The end result of deflation is always a destruction of an increase of prodution capacity and capitol to the point ware where  goods become so scarce plentiful that they stop falling in price and the deflation burns itself out diversification occurs.  The greater the deflation the more physical capitol is wasted or lost diversification of production occurs.

FTFY & L2MacroEconomics.

[1714020345]

1714020345

[bitrick]

bitrick:  Obviously loans that are only spent to consume are unsustainable and I never said otherwise.  The question to you is WHY THEY STILL EARN INTEREST when they create nothing? 

I explained that.  I don't agree with the current system that, for example, forces savers in Cypruss to fund loans to Greece for consumption that will eventually default. The current system is corrupt. Since you appear to disagree with the current system as well, what do you propose as an alternative?

Further more the whole basis of your argument that 'savings' represent a reduction in consumption and at the same time are 'invested' to create future productivity is trying to have it both ways.  

I didn't say that. You made that up.

No one can make a rational argument that simply stuffing money under a mattress has a positive effect on the economy or increases future wealth in any way ...

I never said that, but matress stuffing is surely better than malinvestment. Keynesians always avoid addressing the issue of malinvesment. They think every investment is positive and hand wave furiously about money multipliers and such. Malinvestment wastes resources, period. Mattress stuffing allows deployment of resources at a more appropriate time.

[justusranvier]

No one can make a rational argument that simply stuffing money under a mattress has a positive effect on the economy or increases future wealth in any way, it is instead a tax on productivity and this has been know for centuries.  Investment CAN be productive and every reasonable person can see how it generates real returns and increased wealth, but mattress stuffers can not claim those benefits as being caused by their actions.  BitCoins economy is pure mattress stuffing without a hint of productive investment (no before you ask buying an ASIC with BTCs is not a productive investment), and the nature of the coin guarantees it always will be hoarded, that is the flaw in deflationary economics.

Bullshit.

The mattress stuffer first had to get the cash before they could hoard it. If they can't just print it out of thin air it means they actually had to go out in the world and trade for it, by producing valuable products and services. In order to still have the cash, it means they didn't spend it, which means they have consumed less than they produced. This is where the economic benefits of saving come from. The savers are investing, by adding their productivity to the economy while simultaneously limiting their consumption.

The harmful effects of hoarding that you're thinking of are when banksters and politicians just type new balances into their own bank accounts and spend without ever having to contribute any value in return. You're trying to blame deflation for the harmful effects caused by inflation.

Mining bitcoins isn't the same as saving as described above, but unlike government money inflation it is voluntary, limited, and transparent. It will become increasingly insignificant over time anyway so it's not relevant to a long term analysis.

[Impaler]

Do you seriously believe that BTC mining has contributed 1 BILLION dollars of goods and services to the rest of the economy?  Maybe their are some miners who eat Ramen so they can afford their huge electric bills but that's not decreased consumption, that's exchanging one consumption for another.  No one can point to any deferred consumption involved in making or hoarding BTCs.  The entire LIFETIME CONSUMPTION of the few thousands of elite miners doesn't come to a Billion dollars.

Your assumption that the entire 'surplus' of deferred consumption goes into productive investments is baseless.  The economy dose not make or not make investments by looking at if their exists a surplus of goods that could be invested, that's how a centrally planned economy might work.  In a free-market economy a surplus is a sign to produce less, not more.

You have not addressed in the slightest the price signals that run counter to I've identified and are just repeating a self justifying manta that's been discredited for ages.  What business is going to be investing when the price they get for their goods is declining AND volume sold is going down?  Maybe capital goods are down in price as well, but that's both unlikely (because the deferred consumption was in consumer goods not capital goods) but it's irrelevant too.  It just means producers of capital goods will ALSO be contracting their production.  Both of these are the effects we would see from hoarding, deferred consumption and deflation.  And no costs of raw materials will not go down to balance it all, the biggest cost is labor and wages are STICKY.

This is BASIC Adam Smith macroeconomics I'm talking here, supply and demand and price signals.  The 'paradox of thrift' and negative effects of deflation are not even Keynesian conclusions, they are the firm conclusion of EVERY the very earliest thinking in economics worthy of the term that date back to Dickensian England.

[coastermonger]

I just want to point out that Bitcoins hard limit and deflationary properties are precisely the reason why I love it, and why I convert fiat into BTC at all.  BTC is bound to be volatile in the early days as new populations gain awareness of it and new markets enter. 

If a plan was implemented that recycled, reintroduced, or created more coins somehow I would immediately divest.  OP your idea makes for an interesting experiment, but I think its one that should be started in an Alt currency, and not used for Bitcoin itself.
 

[drawingthesun]

If all those things are solved, mainstream economists would actually take Bitcoin seriously as an economic model

This is tiring, who cares about these "mainstream economists", most of them have observed the current system because there is no alternative and can't see that there maybe another way. I know people who studied economics, they knee jerk and shout bubble, its not fiat and not good! Many of us are tired of them; leave us to our experiment please.

If Bitcoin is going to be adopted by the mainstream, we have to take action to solve every single one of those issues listed above. They are going to be solved anyway, whether it's by us or by them. The world is eventually going to move to a digital currency whether it's ours or theirs, this is beyond question. But if they get to it first and create something that eliminates those issues, it's going to be centralized, not anonymous, not cryptographically secured and will involve banks. If it's going to be us, we have to solve those issues some way soon, and there's not a whole lot of viable solutions for each, let alone singular solutions that fix every one.

If your alternative is the better idea, create an alternative coin, the market will decide if yours is better or worse. This is the only fair way to introduce a new idea.

Since this is possibly going to upset the "How dare you blaspheme the Sacred Cow by suggesting we change the rules for Bitcoin!" crowd, I humbly add this following. I think we need to let go of this idea that the current rules of Bitcoin are somehow sacred and holy, not to ever be touched because doing so would revile the spirit of the Almighty Satoshi. There is nothing wrong with recognizing a set of flaws in a system and taking action to fix those flaws. They need to be fixed somehow, and the sooner we do it, the easier it will be. If you have a better solution to all of the above, I encourage you to post it.

No, people have bought into Bitcoin based on its rules that are set out in stone. Create a alternative currency to compete, then people can buy into that. The people in Bitcoin don't want this inflation and coin half age. They want to horde. If hording will kill Bitcoin then another coin will replace it.

[alexeft]

If all those things are solved, mainstream economists would actually take Bitcoin seriously as an economic model

This is tiring, who cares about these "mainstream economists", most of them have observed the current system because there is no alternative and can't see that there maybe another way. I know people who studied economics, they knee jerk and shout bubble, its not fiat and not good! Many of us are tired of them; leave us to our experiment please.

If Bitcoin is going to be adopted by the mainstream, we have to take action to solve every single one of those issues listed above. They are going to be solved anyway, whether it's by us or by them. The world is eventually going to move to a digital currency whether it's ours or theirs, this is beyond question. But if they get to it first and create something that eliminates those issues, it's going to be centralized, not anonymous, not cryptographically secured and will involve banks. If it's going to be us, we have to solve those issues some way soon, and there's not a whole lot of viable solutions for each, let alone singular solutions that fix every one.

If your alternative is the better idea, create an alternative coin, the market will decide if yours is better or worse. This is the only fair way to introduce a new idea.

Since this is possibly going to upset the "How dare you blaspheme the Sacred Cow by suggesting we change the rules for Bitcoin!" crowd, I humbly add this following. I think we need to let go of this idea that the current rules of Bitcoin are somehow sacred and holy, not to ever be touched because doing so would revile the spirit of the Almighty Satoshi. There is nothing wrong with recognizing a set of flaws in a system and taking action to fix those flaws. They need to be fixed somehow, and the sooner we do it, the easier it will be. If you have a better solution to all of the above, I encourage you to post it.

No, people have bought into Bitcoin based on its rules that are set out in stone. Create a alternative currency to compete, then people can buy into that. The people in Bitcoin don't want this inflation and coin half age. They want to horde. If hording will kill Bitcoin then another coin will replace it.

+1 from me 

[Nova!]

Not a good idea for currency. See Freicoin...demurrage currency ( http://en.m.wikipedia.org/wiki/Demurrage_(currency) )

Another bad but similar idea: How about a coin that knows who owns it? This way, coins can redistribute themselves from rich people to poor people each week...and currency ownership taxes can be paid automatically every hour!

Isn't that known as DevCoin?

[101111]

I can look at bitcoin as a new asset class and decide to put 1% of my savings into it, as part of a balanced portfolio (property, shares, normal cash savings, etc).

Now some joker wants to come in and essentially tax me? Hey you - %$#off.

[vacuum]

Ancient Egypt had two forms of money: one was gold and silver, and the other was grain.

Wheat would be grown by the people, then they'd deposit it in the store house and get a receipt for it. They would then take those receipts and use them as money in the market place to buy whatever they needed such as food, clothing, tools, etc. These receipts would depreciate in value because the grain had a shelf life due to spoilage, rats, and priests who would eat it in return for running the whole system. It's a direct analogy to the proposal in the OP. This type of money system wasn't inflationary, rather it was a flexible system that allowed anyone in society to create money themselves without fighting it out of the hands of rich people. It was a currency for the benefit of society.

On the other side of things, there was gold and silver. This wasn't traded in the marketplace, but rather used as a store of wealth and exchanged for things like land, homes, it was taken on journeys, and used entirely differently than the first type of money. Both of these systems coexisted and were used by people for different purposes.

If you were raising a family, you probably relied mostly on the wheat system because with each person born in the family, gold would be diluted. With the wheat system, there was a constant source of money that automatically adjusted itself based on the population. Decaying coins are slightly different in that they won't become more numerous, but they will have the effect of not concentrating money in the hands of the old, with the young being at a disadvantage. This is important for currency to do it's job. On the other hand, if you desire to store your wealth, something like gold is a lot more appropriate, and it doesn't restrict currency from flowing around in the economy.

Therefore, what we really need is a dual system. Those who want to store wealth for the long term can fight over the limited supply of the first type of money, and those who just want to buy stuff can use the other form. For example, lets say you get your paycheck. You put 75% of your paycheck in the decaying money because it's cheaper and easier to get and you're going to be spending it anyways. The other 25% of your check you put into the scarce money for long-term savings.

[herzmeister]

yup, I like Lietaer's idea of yin-yang money.

http://www.scribd.com/doc/34641415/The-Monetary-Blind-Spot

[vacuum]

yup, I like Lietaer's idea of yin-yang money.

http://www.scribd.com/doc/34641415/The-Monetary-Blind-Spot

Thank you, this is exactly what I was thinking of but I couldn't remember how to find it again.

Here's more:

Bernard A. Lietaer on Monetary blind spots and structural solutions
1 of 5 https://www.youtube.com/watch?v=OfMbYllbN6c
2 of 5 https://www.youtube.com/watch?v=AIRGPX7LuxI
3 of 5 https://www.youtube.com/watch?v=Q7uJIjSO-a4
4 of 5 https://www.youtube.com/watch?v=xQ-WvJiZ3DQ
5 of 5 https://www.youtube.com/watch?v=MFbvixl_Jv8

[Snowfire]

Re Freicoin or any other system with  Wörgl-style demurrage: Such an instrument might be adopted in a situation like Wörgl where nothing else is available. But the modern world is not like this; there are lots of alternatives, not only Bitcoin, but Litecoin, et al., which do not charge demurrage. Users will naturally choose to use the systems without such fees. It matters not how fair or unfair you believe this to be; it is a matter of psychology and individual self-interest. Selling a demurrage currency in a market flooded with non-demurrage currencies is going to be an uphill battle.

[darkmule]

I believe this is a solution looking for a problem.  While many mainstream economists point to volatility, the deflationary nature of the currency, and other aspects of Bitcoin as bad things, those are actually the unique qualities of Bitcoin that make it desirable to, well, the people who desire to use them.  Whether or not Bitcoin becomes "mainstream" is basically irrelevant to me so long as it remains useful for the things I use it for.

Some of these issues are issues which, with government-backed currency, led to the abandonment of the gold standard.  However, Bitcoin doesn't have this problem.  Nobody is obligated to participate in Bitcoin who does not want to, and those who do are fine with these "problems."  If people prefer fiat currency, they'll use that.  I would imagine the vast majority of Bitcoin users use some combination of fiat currency and Bitcoin and routinely convert between the two as convenient.

If there is anything "revolutionary" about Bitcoin, from a political perspective, it is not that it will obliterate fiat currency or instantly do away with the Fed, or whatever various factions of Bitcoin supporters want it to do immediately.  However, by competing against fiat currency and having its own set of characteristics that make it desirable, it creates pressure against states to abuse their powers over fiat currency too much.  After all, there is now an alternative.

I also don't see the currency being outlawed successfully.  To the extent this is all computer code, it is protected speech under the human rights laws of most so-called "civilized" countries.  While I can see attempts to outlaw it, they will be as successful as the attempts to outlaw cryptography have been.  I.e. some states will try to do it and meet with little to no success, while challenges to the laws on constitutional grounds will win.

Just as actually banning cryptography would render a nation's businesses completely vulnerable to having their trade secrets stolen, once Bitcoin is seen as useful by businesses, and it eventually will be, attempts to outlaw it will not only face organized opposition from the people, but from the corporations who, by and large, own much of the government.  This is one area where we'll basically be on the same side, and even an oppressive government can't win against that kind of coalition.

[Anon136]

its a great idea on paper and a terrible idea in practice because it will always get murdered by a deflationary currency. This is very much a form of market failure where it is in the interest of the collective to have a stable currency but never in the interest of the individual to adopt it.

plus once speculators begin to understand deflationary currency they will price in a lot of the nastyness. Speculators are just still so new to this give them a chance to learn.

[ZephramC]

If there is anything "revolutionary" about Bitcoin, from a political perspective, it is not that it will obliterate fiat currency or instantly do away with the Fed, or whatever various factions of Bitcoin supporters want it to do immediately.  However, by competing against fiat currency and having its own set of characteristics that make it desirable, it creates pressure against states to abuse their powers over fiat currency too much.  After all, there is now an alternative.

I also don't see the currency being outlawed successfully.  To the extent this is all computer code, it is protected speech under the human rights laws of most so-called "civilized" countries.  While I can see attempts to outlaw it, they will be as successful as the attempts to outlaw cryptography have been.  I.e. some states will try to do it and meet with little to no success, while challenges to the laws on constitutional grounds will win.

Just as actually banning cryptography would render a nation's businesses completely vulnerable to having their trade secrets stolen, once Bitcoin is seen as useful by businesses, and it eventually will be, attempts to outlaw it will not only face organized opposition from the people, but from the corporations who, by and large, own much of the government.  This is one area where we'll basically be on the same side, and even an oppressive government can't win against that kind of coalition.

+1

[firefop]

Do you seriously believe that BTC mining has contributed 1 BILLION dollars of goods and services to the rest of the economy?  Maybe their are some miners who eat Ramen so they can afford their huge electric bills but that's not decreased consumption, that's exchanging one consumption for another.  No one can point to any deferred consumption involved in making or hoarding BTCs.  The entire LIFETIME CONSUMPTION of the few thousands of elite miners doesn't come to a Billion dollars.

Your assumption that the entire 'surplus' of deferred consumption goes into productive investments is baseless.  The economy dose not make or not make investments by looking at if their exists a surplus of goods that could be invested, that's how a centrally planned economy might work.  In a free-market economy a surplus is a sign to produce less, not more.

You have not addressed in the slightest the price signals that run counter to I've identified and are just repeating a self justifying manta that's been discredited for ages.  What business is going to be investing when the price they get for their goods is declining AND volume sold is going down?  Maybe capital goods are down in price as well, but that's both unlikely (because the deferred consumption was in consumer goods not capital goods) but it's irrelevant too.  It just means producers of capital goods will ALSO be contracting their production.  Both of these are the effects we would see from hoarding, deferred consumption and deflation.  And no costs of raw materials will not go down to balance it all, the biggest cost is labor and wages are STICKY.

This is BASIC Adam Smith macroeconomics I'm talking here, supply and demand and price signals.  The 'paradox of thrift' and negative effects of deflation are not even Keynesian conclusions, they are the firm conclusion of EVERY the very earliest thinking in economics worthy of the term that date back to Dickensian England.

You can call it anything you like...

But it doesn't affect the correctness of what I've said. Nobody producing a product when faced with 'the price they get for their goods is declining AND volume sold is going down' the company either diversifies what they produce (either through innovation of opening another line of business) or they do what you're suggesting... which is scaling back production which eventually results in their going out of business.

The reaction you're assuming is the expected response to a general economic slump (aka decrease of demand due to lack of funds) not the response you'd expect during deflation. During deflation you have currency that's owned growing in value and this actually encourages people to spend some portion of it that they wouldn't have before. It creates it's own added economic stimulus in this way. Persons are able to at the same time save more value and also spend more value because what they already have is increasing in value.

All that said - the idea that deflation is going to somehow make the 'price they get for their goods decline' is silly - that price isn't going to change just because the currency is worth more. Now someone may lower the price to stay competative, but if the currency is worth more... that's a neutral move on the part of the company not a loss.

What you really should consider is this bad idea that deflation is going to encourage hoarding. It doesn't and it won't. If someone suddenly made everything cost half the current price... how would a typical consumer act? They'd buy more/nicer stuff with some portion of their income and probably end up saving (or paying down debt) with the other portion. Both of those are good for any economy.

[Impaler]

You can call it anything you like...

But it doesn't affect the correctness of what I've said. Nobody producing a product when faced with 'the price they get for their goods is declining AND volume sold is going down' the company either diversifies what they produce (either through innovation of opening another line of business) or they do what you're suggesting... which is scaling back production which eventually results in their going out of business.

Wow that completely takes the cake for self contradiction and stupidity.  

First off a business can not 'diversity' its way around deflation, because deflation is a broad spectrum change in money valuation that is affecting ALL entities in the economy and all sectors of the economy.  Further more if everyone tries to diversify at the same time its just a musical-chairs everyone is now just encroaching on everyone else, and because businesses have core competency in their original area of business but not their new business the diversification is going to lower total productivity and yes lead to reduced profits and many of them going out of business which is NOT what we expect in a growing economy.

The reaction you're assuming is the expected response to a general economic slump (aka decrease of demand due to lack of funds) not the response you'd expect during deflation. During deflation you have currency that's owned growing in value and this actually encourages people to spend some portion of it that they wouldn't have before. It creates it's own added economic stimulus in this way. Persons are able to at the same time save more value and also spend more value because what they already have is increasing in value.

The response to a general economic slump IS what we expect to see from deflation because deflation will CAUSE and be caused BY general economic slumps.  This is just as we expect inflation to cause a general economic heating up and a general heart up in the economy will cause inflation.  This is the very basis of economic cycle theory and its a very simple explanation, the equivalent of Boyles gas laws for economics.

A business can not get a wash on selling its product at a lower costs for 'more valuable money' because businesses have lots of FIXED COSTS that are on CONTRACT (not least of which is labor, energy, building lease).  Those fixed costs remain in fixed nominal currency units meaning they explode in real costs and eat away all the profit margin that may have existed even if marginal costs to make each widget are at parity with new marginal sale prices of widgets.  So the business is destroyed by deflation and if you had 1 sentila of knowledge about real business you would know this.

All that said - the idea that deflation is going to somehow make the 'price they get for their goods decline' is silly - that price isn't going to change just because the currency is worth more. Now someone may lower the price to stay competative, but if the currency is worth more... that's a neutral move on the part of the company not a loss.

Now you speak as if your don't know the meaning of the world deflation, it IS the increase in purchasing power of money so YES prices decline, if their wasn't a decline in prices then their would be by definition no deflation.  And yes business (all of them) WILL change their prices to stay competitive, (they will either do that or go our of business), that is how free-market competition works, this is well understood and is what happens when the ratio between supply and demand changes.  Under deflation the price point is dropping because their is either more stuff or less money.

What you really should consider is this bad idea that deflation is going to encourage hoarding. It doesn't and it won't. If someone suddenly made everything cost half the current price... how would a typical consumer act? They'd buy more/nicer stuff with some portion of their income and probably end up saving (or paying down debt) with the other portion. Both of those are good for any economy.

You just can't avoid contradicting yourself, first you say it 'wont cause hoarding' and later admit people will 'save and pay down debt' with some of their new surplus.  If that particular person was not doing those things before then this is a decrease in the percentage of their income that was spent.  And that means monetary velocity is going down, it will take longer for each unit of currency to make a circle through the economy so it now has less opportunity to bid on goods and services and this allows prices to fall further, this reduction in velocity can more then counter the increased value of money such that the net value of money moving through the economy goes down and when the that goes down it means the economy is contracting not just nominally but in real terms.

Some people might spend the more valuable money but because we know people will be losing jobs left and right in the economic downturn their will be a broad mood of fear and a desire to save in order to protect oneself in the event of that job loss hitting you, so a huge jump in savings is what ALWAYS occurs during an economic slump.  This creates a spiral of more businesses closing, slower monetary velocity, more deflation, the classic deflationary spiral that has been observed for CENTURIES (note also that unwinding of debt adds more fuel by contracting money supply through the banking system).  

In your mythological reality some kind of never before seen upward deflation spiral would need to be happening in which velocity increases because people spend more (nominally) then they were previously and businesses expand despite being killed by fixed overhead costs.  All of this is a fantasy in direct contradiction to the logical responses that businesses and individuals would actually have to deflation and in complete contradiction to all observed economic contractions.

[kjj]

A business can not get a wash on selling its product at a lower costs for 'more valuable money' because businesses have lots of FIXED COSTS that are on CONTRACT (not least of which is labor, energy, building lease).  Those fixed costs remain in fixed nominal currency units meaning they explode in real costs and eat away all the profit margin that may have existed even if marginal costs to make each widget are at parity with new marginal sale prices of widgets.  So the business is destroyed by deflation and if you had 1 sentila of knowledge about real business you would know this.

What new bullshit is this?

By this logic, inflation (the reality we all live in now) would lead to the destruction of every supplier of the business, the businesses on the other sides of those contracts.  After all, contract prices are fixed and absolute until the end of time and can nether be renegotiated  as needed nor written to compensate for changes in the value of money.

And yet, here we all are.  Derp?

[Thanak]

Do you seriously believe that BTC mining has contributed 1 BILLION dollars of goods and services to the rest of the economy?  Maybe their are some miners who eat Ramen so they can afford their huge electric bills but that's not decreased consumption, that's exchanging one consumption for another.  No one can point to any deferred consumption involved in making or hoarding BTCs.  The entire LIFETIME CONSUMPTION of the few thousands of elite miners doesn't come to a Billion dollars.

This is not a closed system, bitcoin is exchanged for other currency.  The bitcoin cap wouldn't be 1 billon with just the miner, you also have people that bought those coin for cash and the value of what they did to get that cash in the first place.


No matter the type of currency prices are set with many different input. You cannot end speculation, you can just switch it to different place. People will take into account the anticipated change in the value of the currency to make their investment choise.

Lets say I have 100k$ to invest I can do plenty of thing :

- Buy a state bond and get fixed rate
- Buy real estate (leveraged or not)
- Buy stock
- Buy gold
- Buy a shotgun, a shitload of canned good and a bucker in my backyard
- Buy currency
...

The return on each of these will be influenced by the ancipated rate of inflation/deflation and will be taken into account when I make my choice.


Also another thing is you assume is that people should not be rewarded for Hording/Saving/DelayingConsuption. I think this is where you are wrong. Time preference is taken into account in the valuation of any invesment. For most people stuff now is more valuable than stuff later. You delay consomption because :

-You want to make sure you can still consume later when your personnal ability to produce will not be as high
-You get a reveward for delaying consumption (interest, wich in a free market get ajusted to take into account the inflation/deflation rate)