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Author Topic: The general flaw of fiat money and how its associated with Bitcoins  (Read 5138 times)
srb123
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June 20, 2011, 01:55:52 PM
 #21

Which deflationary currency has failed?

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

Either way, I don't see many of them around.
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MaDDDog
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June 20, 2011, 02:01:04 PM
 #22

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.

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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
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June 20, 2011, 02:03:18 PM
 #23

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
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June 20, 2011, 04:40:07 PM
 #24

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
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June 20, 2011, 10:22:54 PM
 #25

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.

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benjamindees
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June 21, 2011, 12:44:03 AM
 #26

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.  Huh
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.  Huh
4.  OMG Bitcoin doesn't grow it shrinks!
5.  We need to change Bitcoin so that it can keep up!!!!

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adaman
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June 21, 2011, 04:32:04 PM
 #27


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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
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June 21, 2011, 09:35:30 PM
 #28

MaDDDog, is a Mad Dog Troll  Shocked

Because he sees flaws in Bitcoins? Come on!  Roll Eyes
bitcola
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June 21, 2011, 09:37:51 PM
 #29


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.  Huh
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
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June 22, 2011, 03:48:51 AM
 #30

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
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June 22, 2011, 12:40:40 PM
 #31

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.

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vector76
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June 22, 2011, 07:14:18 PM
 #32

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
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June 22, 2011, 09:12:25 PM
 #33

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
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June 23, 2011, 10:46:43 AM
 #34


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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
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June 23, 2011, 10:49:37 AM
 #35

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
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June 23, 2011, 03:40:34 PM
 #36

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.
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