The general flaw of fiat money and how its associated with Bitcoins

[MaDDDog]

First of all I want to state out that I am not a Spectaculator who tries to make his profit by posting bad things about Bitcoins. Actually I am a big Bitcoin supporter right after I came in contact with them but still I have a few doubts about Bitcoins that I would like to discuss with people who got a clue.

The general problem of Fiat Money that causes most the economic problems is the hoarding of money. The conflict comes with the contradiction that  money is  personal property and general property at the same time. All people who participates in one market depend on the money circulation, if money is hold back by one participant this cuts down the income of all other members in the same market.

Let me illustrate this point:

One Market has 5 members. Every Member has a total capital of 100 BTC. Every Member runs a different business, one blacksmith, one grocery store... etc. Everybody spends all of his money for goods in one week (we assume that all participators get the same amount of the spend). So all participators got at the end of the week, all goods they need + 100BTC for their needs in the next week => working market.
So if the Blacksmith decides to build up a fortune and decides to spend 10 BTC less now every week, what will happen? All other market members will end up with  2,5 BTC less that they had last week what forces them to cut down their spendings for the next week. Now every week 10 BTC income are missing as long the Blacksmith holds on his 10 BTC ( 10 BTC in one week, 40 BTC in a month.. etc).

The market has now 2 options:

- Reaction with deflation, making all money more valuable => The Blacksmith succeeded to absorption the purchasing power of the other participators.

- Paying the blacksmith interest so that he spends his BTC => The Blacksmith succeeded and got now his 100 BTC + Interest leaving all other participators with less purchasing power.

There are no other options forcing the Blacksmith to spend his BTC because its his private property and since Money cannot rot like every other good does, so he can hold on, on his money as long as he wants to.

The solution:

All money is issued for a limited period by constant value and looses value over time after that period. Forcing you to spend it because now the money rots away if you dont spend it quick enough.

This was already worked out by Silvio Gesell an German merchant and  theoretical economist and founder of Freigeld(Free Money) and Freiwirtschaft(Free Trade). 

So how is that associated with the Bitcoin reality might you ask?

Pretty simple. Bitcoins got an even huger problem since they are based on deflation, so everbody who holds on, on his Bitcoins is guaranteed that they rise value, making you think twice spending them, which hurts the market really bad since all participators depend on the money circulation in order to achieve income. I already saw hundreds of  posts of people saying that they "hold on" on their coins. Meaning that they dont want to spend them and ultimately seeing BTC as an investment like stocks and not as a currency.

So everybody who truly believes in the succeed of BTC would be an Idiot if he spend them now, cause they are guaranteed in growing value over time, the only rational reason that keeps people spending their BTC is fear. Fear that they dont worth a penny tomorrow, so they spend them today. But the trust will be build up in short time and we will end up with an not working  market because  a big portion of the BTC coin volume wont be spend.

A solution for this problem might be looking like this:

1 BTC has to cross X Wallets in Y Time or Z % of that BTC will vanish.

This would force people to spend their BTC and handling them like a currency and not like an investment.


Discuss.


greetings MaDDDog

[1715176517]

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[1715176517]

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[hugolp]

The general problem of Fiat Money that causes most the economic problems is the hoarding of money.

Fail.

Stopped reading here.

This would force people to spend their BTC and handling them like a currency and not like an investment.

This would force people out of BTC since nobody would trust it.

[MaDDDog]

Please dont reply if you dont read the entire post and dont get the point. I could have said instead of hoarding of money,  accumulating money. But I choose hoarding(horten) cause its the word for holding money back that is used by Silvio Gesell and Bernd Senf (prof. in economy).

[hugolp]

Please dont reply if you dont read the entire post and dont get the point.

I have read the same point several times.

You are basically saying that the more the money circulates the more rich everybody is, which is obviously false. Its a common falacy. I dont want to come as aggressive, sorry if you got that impression, its just that one gets tired of hearing the same failed theories again and again.

[MaDDDog]

I dont say that the more money circulates the richer is everybody. I say that if money is backed up in value by goods and implanted in the money circulation that everybody gets poorer when people hold back money because this will destroy income.
Understand the difference between "holding back" and "printing new" money.
This thesis is proven by several economic professors.

[hugolp]

I dont say that the more money circulates the richer is everybody. I say that if money is backed up in value by goods and implanted in the money circulation that everybody gets poorer when people hold back money because this will destroy income.
Understand the difference between "holding back" and "printing new" money.

Define people hold back money.

What people usually mean by this is that people dont spend and consume. But when people saves, they send the money to the bank, that loan it out through fractional reserve banking, thus promoting investment and (usually) creating growth. So by not consuming and saving more growth is created.

This thesis is proven by several economic professors.

This does not say much about the theory.

[dumb_mother]

also you make it sound as if anyone who wishes to save money for a rainy day is a terrible person.  it used to be (way back in that crazy time when people used to provide for themselves or rely on their family **shudder** how crazy, right?)  that saving was viewed as a necessity to make sure that you could make it through rough times.

a deflationary currency, outside of the grasp of politicians and bankers, is the greatest thing to happen since water.   why?  because it is a huge deterrent to a debt-fueled growth economy which we are currently suffering from across the world.  when you open up the faucets and let politicians spend as much money on whatever they want for years and years, facilitated by debt that a federal reserve banking system profligates, many bad things result.  eventually that faucet runs dry and an economic shitstorm ensues (think the world 3 years ago or europe currently and about to bleed back over to the us), everyone comes to rely on the government to provide basic necessities so that when that faucet runs dry times truly get bleak, and because of the profligate spending- currency debasement becomes the norm and inflation begins to spiral upwards leaving those few people who did manage to save screwed as well because they now find their savings worthless.  not to mention the people who live in poverty their entire life because they take on too much of a debt burden in their youth and never can quite rise up high enough to shed it.

saving is not bad!  saving is good!  when i was little i was told i could go and play AFTER i did my homework, why now is it that we should get all of our rewards without first saving up the work to pay for them.  if rather than encouraging everyone to spend every dime they had, and borrow more to spend more to encourage prosperity in the moment, everyone saved money for that rainy day that will always come, that rainy day wouldn't be nearly so rainy.

[vector76]

- Reaction with deflation, making all money more valuable => The Blacksmith succeeded to absorption the purchasing power of the other participators.

If the money is more valuable, the other participants have the same purchasing power even though they have less money.  The economy continues just as before, but with lower prices and less money.  No problem.

And you are also wrong about bitcoins being deflationary.

The average Keynesian is equally wrong but usually makes a much better argument.

[blogospheroid]

YOu could have searched for demurrage on the forums. There are many who have suggested demurrage as a part of the money design, but due to factors like bitcoin mixers and pseudo-anonymity, it's not possible to implement the same in the bitcoin protocol.
If you can imagine and code a way of implementing this, you can use the bitcoin code and create a new demurrage based digital currency.

btw. the blacksmith in your story starves to death as he cannot eat coins. The only one who can do what is described is a farmer. And try telling a farmer after this harvest that he should hold back and not spend his money. He'll give you a look like you've lost your head. What was the point in him creating all this surplus grain if he cannot sell it for things that he wants.

[srb123]

1 BTC has to cross X Wallets in Y Time or Z % of that BTC will vanish.

So I use a client that has been patched to send coins to another address in my wallet periodically. There is no way anyone but me can know all the addresses in my possession, they are anonymous.

The way I see it, yes deflationary currency's have failed in the past, but it was a different, slower world. Bitcoin is a great experiment in how such a system would work in a Global Market, with a huge diversity of participants trading in real time.

Yes, there is a chance that the lessons of the past may hold true, but the opportunity to help give Bitcoin a chance to succeed is way too good to pass up. (And we're having some laughs along the way.)

[vector76]

Which deflationary currency has failed?

[MaDDDog]

- Reaction with deflation, making all money more valuable => The Blacksmith succeeded to absorption the purchasing power of the other participators.

If the money is more valuable, the other participants have the same purchasing power even though they have less money.  The economy continues just as before, but with lower prices and less money.  No problem.

And you are also wrong about bitcoins being deflationary.

The average Keynesian is equally wrong but usually makes a much better argument.

Nope the economy doesnt continue as before. The Blacksmith has gained purchasing power while the volume of goods hasnt grown. This makes him able to get a bigger portion of goods then before while the rest of the community end up with less good.

Bitcoins are deflationary, you should learn more about BTC.

also you make it sound as if anyone who wishes to save money for a rainy day is a terrible person.  it used to be (way back in that crazy time when people used to provide for themselves or rely on their family **shudder** how crazy, right?)  that saving was viewed as a necessity to make sure that you could make it through rough times.

a deflationary currency, outside of the grasp of politicians and bankers, is the greatest thing to happen since water.   why?  because it is a huge deterrent to a debt-fueled growth economy which we are currently suffering from across the world.  when you open up the faucets and let politicians spend as much money on whatever they want for years and years, facilitated by debt that a federal reserve banking system profligates, many bad things result.  eventually that faucet runs dry and an economic shitstorm ensues (think the world 3 years ago or europe currently and about to bleed back over to the us), everyone comes to rely on the government to provide basic necessities so that when that faucet runs dry times truly get bleak, and because of the profligate spending- currency debasement becomes the norm and inflation begins to spiral upwards leaving those few people who did manage to save screwed as well because they now find their savings worthless.  not to mention the people who live in poverty their entire life because they take on too much of a debt burden in their youth and never can quite rise up high enough to shed it.

saving is not bad!  saving is good!  when i was little i was told i could go and play AFTER i did my homework, why now is it that we should get all of our rewards without first saving up the work to pay for them.  if rather than encouraging everyone to spend every dime they had, and borrow more to spend more to encourage prosperity in the moment, everyone saved money for that rainy day that will always come, that rainy day wouldn't be nearly so rainy.

You make the same mistake, that many people do when they discuss economics. They mix a bunch of metaphors with a subjective impression of recent history into some kind of context and think that is a valuable argument. Its not. A true economic argument can only be formed by causality chains.

YOu could have searched for demurrage on the forums. There are many who have suggested demurrage as a part of the money design, but due to factors like bitcoin mixers and pseudo-anonymity, it's not possible to implement the same in the bitcoin protocol.
If you can imagine and code a way of implementing this, you can use the bitcoin code and create a new demurrage based digital currency.

btw. the blacksmith in your story starves to death as he cannot eat coins. The only one who can do what is described is a farmer. And try telling a farmer after this harvest that he should hold back and not spend his money. He'll give you a look like you've lost your head. What was the point in him creating all this surplus grain if he cannot sell it for things that he wants.

Well I didnt knew that but it still stays true even if you  ignore this problem  for 100 more years like it has already been done.

The Blacksmith doesnt starve to death since he only holds 10 BTC of his 100 BTC total capital. Also you need to consider that the other participants dont know that the Blacksmith will hold back 10 BTC this week so they spend all their coins as normal.

1 BTC has to cross X Wallets in Y Time or Z % of that BTC will vanish.

So I use a client that has been patched to send coins to another address in my wallet periodically. There is no way anyone but me can know all the addresses in my possession, they are anonymous.

The way I see it, yes deflationary currency's have failed in the past, but it was a different, slower world. Bitcoin is a great experiment in how such a system would work in a Global Market, with a huge diversity of participants trading in real time.

Yes, there is a chance that the lessons of the past may hold true, but the opportunity to help give Bitcoin a chance to succeed is way too good to pass up. (And we're having some laughs along the way.)

Since I am an economics student and not a coder geek I have to admit that I dont know how to make this practicably in code. But I am pretty sure that it can be done by some coder mastermind.

New market same people.

Which deflationary currency has failed?

Gold has failed as currency. (AS CURRENCY! I DONT SAY THAT GOLD FAILED IN GENERAL!)


 

[hugolp]

The Blacksmith doesnt starve to death since he only holds 10 BTC of his 100 BTC total capital. Also you need to consider that the other participants dont know that the Blacksmith will hold back 10 BTC this week so they spend all their coins as normal.

This is false. The Balcksmiths started loaning the money in fractional reserve system with the knowledge of their clients. Previous to fractional reserve the blacksmith were not paying interest buy charging a fee. Suddenly the blacksmith starts paying interest instead of paying a fee, and people dont even question why he is paying interest now and where does he get the money? It makes no sense.

Gold has failed as currency. (AS CURRENCY! I DONT SAY THAT GOLD FAILED IN GENERAL!)

Gold has not failed as a currency. Gold was removed slowly from the monetary field by politicians and bankers because it didnt allow them to inflate the currency as they wanted. But gold as currency has not failed.

[MaDDDog]

The Blacksmith doesnt starve to death since he only holds 10 BTC of his 100 BTC total capital. Also you need to consider that the other participants dont know that the Blacksmith will hold back 10 BTC this week so they spend all their coins as normal.

This is false. The Balcksmiths started loaning the money in fractional reserve system with the knowledge of their clients. Previous to fractional reserve the blacksmith were not paying interest buy charging a fee. Suddenly the blacksmith starts paying interest instead of paying a fee, and people dont even question why he is paying interest now and where does he get the money? It makes no sense.

Gold has failed as currency. (AS CURRENCY! I DONT SAY THAT GOLD FAILED IN GENERAL!)

Gold has not failed as a currency. Gold was removed slowly from the monetary field by politicians and bankers because it didnt allow them to inflate the currency as they wanted. But gold as currency has not failed.

true, what you say makes no sense.

Gold has failed as a currency, it wasnt removed by politicians and bankers. The Kings in in medieval times already started to reduce the Gold % of a coin since Gold was way to rare to satisfy the market with enough pure gold coins. Many wars in in medieval times started for the reason of acquiring more Gold for the Market.

[hugolp]

Gold has failed as a currency, it wasnt removed by politicians and bankers.

Oh come on. You are now pissing on us.

The Kings in in medieval times already started to reduce the Gold % of a coin since Gold was way to rare to satisfy the market with enough pure gold coins. Many wars in in medieval times started for the reason of acquiring more Gold for the Market.

Yes, the kings tried and sometimes got away with devaluating the purity of the coins. So what?

[da2ce7]

MaDDDog, is a Mad Dog Troll 

[vector76]

Purchasing power of the blacksmith is only greater if he spends his savings.  If he doesn't spend his savings, everything works the same but with slightly different price levels.  If he spends his savings he can buy stuff.  Duh.

[MaDDDog]

Gold has failed as a currency, it wasnt removed by politicians and bankers.

Oh come on. You are now pissing on us.

The Kings in in medieval times already started to reduce the Gold % of a coin since Gold was way to rare to satisfy the market with enough pure gold coins. Many wars in in medieval times started for the reason of acquiring more Gold for the Market.

Yes, the kings tried and sometimes got away with devaluating the purity of the coins. So what?

politicians and bankers removed gold as backing for paper money and created so the fiat money. Gold wasnt a currency at that point anymore.


Yes kings devulated the purity in coins to make own profit but it turned out that it was very healthy for the economy since there wasnt enough pure gold coins in circulation to keep the market running.

[hugolp]

politicians and bankers removed gold as backing for paper money and created so the fiat money. Gold wasnt a currency at that point anymore.

Are you trolling me? You first said that politicians and bankers did not removed gold as money and now you say the did.

Yes kings devulated the purity in coins to make own profit but it turned out that it was very healthy for the economy since there wasnt enough pure gold coins in circulation to keep the market running.

This does not make sense from an economic point of view. The nominal value of money is arbitrary.

[da2ce7]

Trolling how-to for bitcoin forum:

1.  Show why hoarding is bad for debt based fiat currencies.
2.  Show that both debt based fiat currencies, gold and bitcoin are money.
3.  
4.  Hoarding must be bad for all types of money!
6.  We need to change bitcoin so people don't hoard it!!!!

[srb123]

Which deflationary currency has failed?

Failed probably the wrong word. Maybe "decided against".

Either way, I don't see many of them around.

[MaDDDog]

politicians and bankers removed gold as backing for paper money and created so the fiat money. Gold wasnt a currency at that point anymore.

Are you trolling me? You first said that politicians and bankers did not removed gold as money and now you say the did.

Yes kings devulated the purity in coins to make own profit but it turned out that it was very healthy for the economy since there wasnt enough pure gold coins in circulation to keep the market running.

This does not make sense from an economic point of view. The nominal value of money is arbitrary.

Gold was not currency at that point anymore, it was just used to back of the value of paper currencies. Like it was discussed to do for BTC.
So tell me, when the value of BTC is backed by Gold, what is the currency then:  Gold or BTC?

Even if it doesnt make sense to you now, it happened and history proved it true.

I dont try to troll in any way

[BubbleBoy]

The blacksmith can hoard a sizable portion of the monetary base only if:
1. He is in a good market position; competition will quickly move to erode his advantage and he will spend profits to become more competitive, thus this situation is temporary
2. He has a monopoly from the town sheriff, a "patent" on blacksmithing, "intelectual property" on the design of horse shoes, owns the only iron mine etc.

Everybody that works hard and it's good as what they do should at least for a while have the right to be in situation 1. So the source of the apparent trouble is most likely no 2.  - a natural or artificial monopoly. There's no way to fix social injustice through monetary means. Even if you start the printing press, the owner of all iron or all land will still be extract inflationary money of everybody else, and use them to buy very stable assets in return.

So the question is, what do you want the blacksmith to own: papers and bits (money) or everything else ? Fudging with the money supply will not achieve social justice.

I say run the printing press just at the right rate to keep the rich man's stash stable. He'll accumulate allot of money, and we will be able to afford to buy things without being crowded out in the market. When he thinks about spending them and crashes the market therefore his own wealth, we'll move to some other fiat currency.

[Gr.Green]

if I have two wallets and keep transferring money back and forth it will never rot by your formula.

that kind of money must self destruct without exceptions. it should keep its value until it destroys itself after a period of time. just like a tomato that you forget to eat becomes rotten and has to be thrown away.

with BTC, the network can claim the money back after it has expired. this way you don't need to limit the BTC supply by 21 million. if each 50 BTC generated had 1 year or so to circulate from the point of minting, then everyone will be forced to keep the money moving. this would also solve the problem of forgotten wallets and coins lost in hardware and software failures.

[Richard Andreassen]

Many wars in in medieval times started for the reason of acquiring more Gold for the Market.

Yeah, before Adam Smith wrote the Wealth of Nations and showed everyone what a dumb idea mercantilism was.

[benjamindees]

Trolling how-to for bitcoin forum:

1.  Show why hoarding is bad for debt based fiat currencies.
2.  Show that both debt based fiat currencies, gold and bitcoin are money.
3.  
4.  Hoarding must be bad for all types of money!
6.  We need to change bitcoin so people don't hoard it!!!!

This is just one tack that a Bitcoin troll can take.  Here's an alternate method:

1.  Human population grows exponentially.
2.  Labor theory of value.
3. 
4.  OMG Bitcoin doesn't grow it shrinks!
5.  We need to change Bitcoin so that it can keep up!!!!

[adaman]

Gold has failed as a currency, it wasnt removed by politicians and bankers. The Kings in in medieval times already started to reduce the Gold % of a coin since Gold was way to rare to satisfy the market with enough pure gold coins. Many wars in in medieval times started for the reason of acquiring more Gold for the Market.

You are right. There where times in history whene gold was realy rare. But bitcoins are not gold. If bitcoins become rare, and they will as more people starting to get/use them, then the value of bitcoins will increase and you got your deflation. I agree untill this point. Unlike gold bitcoins can be devided again and again and again. So if bitcoins become rare maybe in future people will be payed in µBTC or even nano BTC. And if this is still an to huge amount you can start deviding also an single Satoshi. This is limitless in theory. It is still not implemented yet but i am sure it will if there is an need to get smaller amounts of bitcoins. In contrast to gold or any physical currency this are just numbers. It does not matter how small they are to represent an value. So i see no danger in hoarding bitcoins.

[bitcola]

MaDDDog, is a Mad Dog Troll 

Because he sees flaws in Bitcoins? Come on! 

[bitcola]

This is just one tack that a Bitcoin troll can take.  Here's an alternate method:

1.  Human population grows exponentially.
2.  Labor theory of value.
3. 
4.  OMG Bitcoin doesn't grow it shrinks!
5.  We need to change Bitcoin so that it can keep up!!!!

I could equally say this:

The typical pro-BTC troll says:

1. Bitcoins are just like companies, there's nothing wrong with early adopters making a lot out of it.
2. Bitcoins are just like companies, there's nothing wrong with early adopters making a lot out of it.
3. Bitcoins are just like companies, there's nothing wrong with early adopters making a lot out of it.
4. Bitcoins are just like companies, there's nothing wrong with early adopters making a lot out of it.
5. You're a troll! <other insults and abuse hurled>.

[flaxindo]

The general problem of Fiat Money that causes most the economic problems is the hoarding of money...

Since Fiat money is inflationary (on purpose, to give criminals the ability to fund things they couldn't through direct taxation), hoarding fiat money means you have less today than you did yesterday.

Fiat currency = rotting meat

There is no incentive to "save" rotting meat...

[makomk]

Purchasing power of the blacksmith is only greater if he spends his savings.  If he doesn't spend his savings, everything works the same but with slightly different price levels.  If he spends his savings he can buy stuff.  Duh.

Not that simple. The problem is that if he saves in the short term he can increase his overall spending power significantly in the longer term, so he has no incentive to spend money now rather than later.

1. He is in a good market position; competition will quickly move to erode his advantage and he will spend profits to become more competitive, thus this situation is temporary

You're assuming perfect competition of a kind that doesn't exist. In particular, setting up a competitor has high initial costs in terms of equipment and land, which acts as a barrier to entry. What makes it worse is that anyone with the money to fund this also has the option to just sit on it and watch their spending power grow in the same way as the original blacksmith, so it's only worth it if their expected return is greater than the amount of money they'd get for just doing nothing.

[vector76]

Purchasing power of the blacksmith is only greater if he spends his savings.  If he doesn't spend his savings, everything works the same but with slightly different price levels.  If he spends his savings he can buy stuff.  Duh.

Not that simple. The problem is that if he saves in the short term he can increase his overall spending power significantly in the longer term, so he has no incentive to spend money now rather than later.

How exactly?  If money is slightly more valuable, everything will have lower price levels, including the blacksmith's services.  His income will consist of fewer, more valuable units just like everyone else.

[hessenpepper]

I've been thinking about the coexistence of Bitcoins with current money, USD in my case.  Suppose that paychecks, taxes, loans are all still using USD.  What effect does Bitcoins have on US monetary policy.

Scenario 1 - Bitcoin is just used to facilitate transferring USD.
    Person A converts dollars to Bitcoins and sends them to person B.
    Person B takes the Bitcoins and converts them to dollars.
    Assuming there is no transaction costs the velocity of USD does not change and there is no effect on monetary policy.
Scenario 2 - Bitcoins replace USD transactions.
    Person A has Bitcoins from mining or some previous transaction and sends them to person B.
    Person B receives the Bitcoins and saves them for later transactions.
    Think about what has happened.  A transaction that had previously been done with USD is now done with Bitcoins.  This reduces the velocity of USD, similar to the effect of a population decrease.  As the use of Bitcoins increases, the Fed has to slow the rate of adding money to the economy.

What if people save money with Bitcoins instead of USD.  USD is taken out of the bank and used to purchase Bitcoins.  Again, that increases the money supply and the Fed has to pull back.

What if countries decide that Bitcoins are more profitable than US Treasury Notes?  Suppose China starts buying Bitcoins.  Interest rates would go up right?

Why will people use Bitcoins?
    Drugs - Silk Road.
    Porn - so the wife does not see it on the credit card bill.  Porn industry was very early to sell on the internet and adopt Blu-Ray.
    Internet shopping - Buying stuff from shady sites that you don't want to give your credit card to.  See porn above ... or Sony.
    Buying software from around the world.  Independent software developers can accept Bitcoins.  Would not have worry about working with credit card companies or exchange rates.

[MaDDDog]

Gold has failed as a currency, it wasnt removed by politicians and bankers. The Kings in in medieval times already started to reduce the Gold % of a coin since Gold was way to rare to satisfy the market with enough pure gold coins. Many wars in in medieval times started for the reason of acquiring more Gold for the Market.

You are right. There where times in history whene gold was realy rare. But bitcoins are not gold. If bitcoins become rare, and they will as more people starting to get/use them, then the value of bitcoins will increase and you got your deflation. I agree untill this point. Unlike gold bitcoins can be devided again and again and again. So if bitcoins become rare maybe in future people will be payed in µBTC or even nano BTC. And if this is still an to huge amount you can start deviding also an single Satoshi. This is limitless in theory. It is still not implemented yet but i am sure it will if there is an need to get smaller amounts of bitcoins. In contrast to gold or any physical currency this are just numbers. It does not matter how small they are to represent an value. So i see no danger in hoarding bitcoins.

Well thats pretty much my point. Why should a smart market participator buy goods now for his BTC if he knows for sure that he could purchase the same goods( or even better goods, as we all know goods improve over time through new technologies, cars are a great example for that) for just a thousandth part of the price in the future?  It doesnt make sense, and thats why our early adopters hoard BTC instead of spending them. In the "normal" economy hoarded money lies on bank accounts so it back flows into the economy through credits. But there are no banks in BTC economy yet, and they are not needed. You can just put your BTC on an usb and just watch them grow in value while utterly cutting them out of the economy causing even more deflation.
Or if you want to fasten that up you can to speculate with your BTC, acquiring more BTC through exchange gambling. (I wont go further on the role of the exchange market since this would just over complicate the problem without any benefit for the true purpose of this discussion)

And thats exactly whats happening. 
There is a total of 6,638,500 BTC at the moment. If we assume that over 1,2 Million BTC are hoarded on wallets ( and this is a pretty realistic if you consider that only one big account on mt.gox had already 500k BTC) then already 1/6 of the total BTC amount is cut out of the money circulation. If this 1,2 Mil BTC would be spend and coins would change their owner once per week, that would generate an income of 72.000.000$ in a month. ( 1.200.000 BTC * 15$ exchange rate * 4 weeks).

The general problem of Fiat Money that causes most the economic problems is the hoarding of money...

Since Fiat money is inflationary (on purpose, to give criminals the ability to fund things they couldn't through direct taxation), hoarding fiat money means you have less today than you did yesterday.

Fiat currency = rotting meat

There is no incentive to "save" rotting meat...

Inflation and Interest emerged after hoarding was "invented". Interest is the "release" price for hoarded money, so that people have a reason to put their money on a bank account instead of putting it under their pillow. Thats also the reason why banks exist, they "redistribute" the money at the cost of interest and debt.
If the Inflation % < then the interest % that you get for your money, your getting richer. But dont forget that every Interest Dollar you get somebody else needed to spend his lifetime to work for.

In the deflationary BTC economy hoarded money will generate you profit from the fact that goods cost less BTC in the future. Making them more valuable.

Purchasing power of the blacksmith is only greater if he spends his savings.  If he doesn't spend his savings, everything works the same but with slightly different price levels.  If he spends his savings he can buy stuff.  Duh.

Not that simple. The problem is that if he saves in the short term he can increase his overall spending power significantly in the longer term, so he has no incentive to spend money now rather than later.

How exactly?  If money is slightly more valuable, everything will have lower price levels, including the blacksmith's services.  His income will consist of fewer, more valuable units just like everyone else.

You forgot that the blacksmith saved 10BTC before the deflation happened. Giving his saved BTC more purchasing power than they had, making him able to get a bigger piece of the rare goods.

[MaDDDog]

I've been thinking about the coexistence of Bitcoins with current money, USD in my case.  Suppose that paychecks, taxes, loans are all still using USD.  What effect does Bitcoins have on US monetary policy.

Scenario 1 - Bitcoin is just used to facilitate transferring USD.
    Person A converts dollars to Bitcoins and sends them to person B.
    Person B takes the Bitcoins and converts them to dollars.
    Assuming there is no transaction costs the velocity of USD does not change and there is no effect on monetary policy.
Scenario 2 - Bitcoins replace USD transactions.
    Person A has Bitcoins from mining or some previous transaction and sends them to person B.
    Person B receives the Bitcoins and saves them for later transactions.
    Think about what has happened.  A transaction that had previously been done with USD is now done with Bitcoins.  This reduces the velocity of USD, similar to the effect of a population decrease.  As the use of Bitcoins increases, the Fed has to slow the rate of adding money to the economy.

What if people save money with Bitcoins instead of USD.  USD is taken out of the bank and used to purchase Bitcoins.  Again, that increases the money supply and the Fed has to pull back.

What if countries decide that Bitcoins are more profitable than US Treasury Notes?  Suppose China starts buying Bitcoins.  Interest rates would go up right?

Why will people use Bitcoins?
    Drugs - Silk Road.
    Porn - so the wife does not see it on the credit card bill.  Porn industry was very early to sell on the internet and adopt Blu-Ray.
    Internet shopping - Buying stuff from shady sites that you don't want to give your credit card to.  See porn above ... or Sony.
    Buying software from around the world.  Independent software developers can accept Bitcoins.  Would not have worry about working with credit card companies or exchange rates.

Thats also  pretty interesting, but I think we should discuss that in another topic, so we not mix things up.

[vector76]

You forgot that the blacksmith saved 10BTC before the deflation happened. Giving his saved BTC more purchasing power than they had, making him able to get a bigger piece of the rare goods.

Wrong.  You can't take the price level and multiply by the quantity to determine what the saver would get if he liquidated his position.  The people who own millions of bitcoins can't liquidate and realize $15 for all of them.  Only the first sales would fetch $15, and the more they sell, the lower the price.

If someone bought a lot of bitcoins, enough to drive the price up to $100, then almost all of his purchases would have occurred at a price below $100.  If he takes the market price of $100 and multiplies by his holdings, he will show a fake profit.  This is what you are calling "increased purchasing power".  But he cannot liquidate them at that price.