Skeptical of the skeptics...

[kloinko1n]

Im skeptical of this shitty thread. I mean REALLY?

Ignoramus is my name 

[1713558184]

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[Giraffe.BC]

Speculators make markets MORE stable, not less. Or perhaps I should rephrase that - they make markets more rational, because when a speculator sees a price he deems "irrational" he can take a financial position in the other direction and profit if he's correct. This incentive encourages people to critically asses the market in question. A market in which speculation was difficult would be a market I'd be less confident in.

For commodities markets, sure.  For a fledgling currency?  Not so much.  There's a reason that early on, currencies have always had to be backed by something tangible:  it allows a consistent, stable value for the currency to exist right out of the gate, so people don't have to worry that they're going to be stuck with worthless paper if they accept it for their goods and services.  It's like training wheels on a bike -- you really need extra stability at first to build confidence. 

Protip: name-calling is unnecessary. I'm not going to call you a "nutter-butter" just because you believe economies should be centrally-planned.

If it helps, I meant nutter-butter in the nicest possible way. 

People have this impression that the dollar has been around for hundreds of years and has proven its trustworthiness. They do not realize that it has only been a mere 35 years since it was disconnected from gold. The USD, in its current form, is only 35 years old, and given the fact that the US Gov is in debt far beyond what it can repay without printing the money (especially if interest rates rise), and that other nations are growing increasingly skeptical about its place as the world reserve currency, you will see the dollar in a long-term decline over the coming two decades. This decline could turn into a collapse very quickly as the vast sums held in reserves are sold by nations who increasingly prefer to trade without US dollars.

What other currency is the rest of the world going to switch over to?  Euros?  Yuan?  Yen?  The USD is still far and away the safest place for other nations' currency reserves. 

I agree that our national debt is getting too large and we need to reduce our deficit to avoid getting ourselves into hot water down the road, but it's hardly the impending apocalypse you're trying to portray it as.  As for your 35 year argument, you're trying to create a more uncertain image for the USD than is realistic.  It's not like there was some fundamental shift in the 70's where people were marching down to the bank to get their gold every week and suddenly couldn't because of this massive paradigm shift.  The government simply realized that keeping large reserves of gold was unnecessary -- the training wheels could be taken off and the bike would keep rolling along just fine.  Which it has, and will continue to do.  Better, in fact, because now without the training wheels you can do maneuvers you couldn't do (like avoid a full blown economic depression).

[Giraffe.BC]

<snip] but the model of exponentially-increasing difficulty is just foolish.  A model where participants earn a share of transaction fees based on the number of actual transactions they help process would be far less wasteful of electricity and CPU cycles and could potentially encourage far broader adoption of the Bitcoin software[snip>

It is feared that this scheme you propose would lead to an exponentially fast increase in the number of bitcoins, with a sudden stop at 21 million. The current scheme is much less violent.

Only if you insist on having a 21 million upper limit.  I contend this is a bad idea, and one of the weaknesses of the Bitcoin model.

[evoorhees]

What other currency is the rest of the world going to switch over to?  Euros?  Yuan?  Yen?  The USD is still far and away the safest place for other nations' currency reserves.  

I agree that our national debt is getting too large and we need to reduce our deficit to avoid getting ourselves into hot water down the road, but it's hardly the impending apocalypse you're trying to portray it as.  As for your 35 year argument, you're trying to create a more uncertain image for the USD than is realistic.  It's not like there was some fundamental shift in the 70's where people were marching down to the bank to get their gold every week and suddenly couldn't because of this massive paradigm shift.  The government simply realized that keeping large reserves of gold was unnecessary -- the training wheels could be taken off and the bike would keep rolling along just fine.  Which it has, and will continue to do.  Better, in fact, because now without the training wheels you can do maneuvers you couldn't do (like avoid a full blown economic depression).

Well your response was civil, thank you =)

Regarding the 35 year argument, there WAS a fundamental shift in the 70's. That shift happened August 15, 1971 when the "gold window" was eliminated - the gold window allowed foreign nations to exchange dollars for gold at a fixed rate ($35/ounce). American citizens were not allowed to exchange in this way, but nations could. In other words, the US dollar was still on some semblance of a gold standard until that day.

At the beginning of 1971, a US dollar was essentially still "as good as gold," at least on an international level. After the gold window was closed, the US became pure fiat. This was even more influential because many other countries tied their currencies to the dollar, so it effectively thrust much of the world into fiat. You wouldn't call this a "fundamental shift?" I'm guessing you never learned this in school... I sure didn't. Not surprisingly, after the gold standard was completely destroyed the value of the dollar plummeted and within three years it took $195 to buy an ounce of gold instead of $35.

This was the equivalent of a default on debt obligations. If you were a foreign nation, and held dollars, this dealt you a crushing blow. Instead of your dollar pile representing a set weight of gold, it now represented... nothing. Or more accurately, it represented "faith" in the US Government. The US Gov defaulted only a few decades ago... also didn't learn that in school, right? =)

So perhaps you consider gold "training wheels," and you say a mature currency doesn't need them. Well, the dollar has lost 80% of its purchasing power in these few decades since. It will lose much more than that in the next decade or two.

Voltaire famously said, "paper money eventually returns to its intrinsic value - zero." I think you may find yourself understanding why that is the case over the next several years.

[Nescio]

Speculators make markets MORE stable, not less. Or perhaps I should rephrase that - they make markets more rational, because when a speculator sees a price he deems "irrational" he can take a financial position in the other direction and profit if he's correct. This incentive encourages people to critically asses the market in question. A market in which speculation was difficult would be a market I'd be less confident in.

Then you are naive because a speculator will aim to maximize profit, not 'be rational'. That means striving to control the market to the detriment of all others, eliminate competitors etc. 'People' like Goldman Sachs have been expertly subverting the market for quite a while now (starting with some deregulation in the Reagen era), it's anything but rational now. The result is that the economy and the government are taken financially hostage, if they don't cooperate with the robber barons they simply threaten to let the whole thing collapse.

Otherwise I agree with the rest of your points The US Dollar is dead and buried and quantitative easing is just the last round of wealth redistribution. There are some long term economic problems with the Bitcoin model that I have no answer for, but it's a helluva lot better than the untouchable vampires controlling the economy now.

BTW, the fundamental problem is uncontrolled greed in human nature IMHO, not decentralization.

[billyjoeallen]

Speculators make markets MORE stable, not less. Or perhaps I should rephrase that - they make markets more rational, because when a speculator sees a price he deems "irrational" he can take a financial position in the other direction and profit if he's correct. This incentive encourages people to critically asses the market in question. A market in which speculation was difficult would be a market I'd be less confident in.

Then you are naive because a speculator will aim to maximize profit, not 'be rational'. That means striving to control the market to the detriment of all others, eliminate competitors etc. 'People' like Goldman Sachs have been expertly subverting the market for quite a while now (starting with some deregulation in the Reagen era), it's anything but rational now. The result is that the economy and the government are taken financially hostage, if they don't cooperate with the robber barons they simply threaten to let the whole thing collapse.

Otherwise I agree with the rest of your points The US Dollar is dead and buried and quantitative easing is just the last round of wealth redistribution. There are some long term economic problems with the Bitcoin model that I have no answer for, but it's a helluva lot better than the untouchable vampires controlling the economy now.

BTW, the fundamental problem is uncontrolled greed in human nature IMHO, not decentralization.

You just can't argue with nitwits like this. It's competition between rival speculators that produces stability. Buying low and selling high keeps the price in the middle.

[Nescio]

You just can't argue with nitwits like this. It's competition between rival speculators that produces stability. Buying low and selling high keeps the price in the middle.

You mean like the 35% swing on tuesday/wednesday? Yeah, it's working fantastic Sherlock.

[billyjoeallen]

You just can't argue with nitwits like this. It's competition between rival speculators that produces stability. Buying low and selling high keeps the price in the middle.

You mean like the 35% swing on tuesday/wednesday? Yeah, it's working fantastic Sherlock.

There's no short-selling options (puts) to cover. Gotta have the tools to do the job, Watson.

[patvarilly]

Skepticism is a healthy attribute. And to be brutally honest, of course Bitcoin is likely to fail - all new things are likely to fail. We're all engaged in a wildly speculative and risky venture, here. Even conservative ventures usually fail, and this is anything but conservative.

I agree with you on most of what you say: Bitcoin is a technical marvel, and it's shown by example how to set up a distributed currency system.  I would love to see the day when I can send money internationally instantly and without an intermediary / enormous fees.  I'm learning everything I can about the technical aspects of Bitcoin and am hoping to contribute back to the community in due time to bring its vision to fruition.

But I think what will ultimately happen is that the original Bitcoin will fail and a successor to it with saner economics will take over it.  At the risk of igniting the wrath of others on this forum (as I've seen happen elsewhere, even in this post to a partial extent), the fact that Bitcoin is deflationary will, I think, ultimately be its undoing:

* I don't see how, in the long run, a large number of people will spontaneously show the altruism necessary to get past the hoarding mentality of "why should I buy this today when I can buy twice of it tomorrow".  If everybody hoards their Bitcoins, merchants have no customers.  This is essentially a tragedy of the commons: everyone knows this will be a tragedy, and everyone hopes that there will be a vibrant Bitcoin economy, but the incentives at the individual level are set up so that you participate in that economy as little as possible while hoping that others won't do what you do.  We all know from experience that in these situations, it's the commons that yields, not the individuals.  Bitcoin attracts lots of "free market" people that loudly point out the importance of the word "free", but you can't spell "free market" without the word "market".

* I don't see how any kind of lending will work well (operative keyword: well) in the Bitcoin world.  Put yourself in the mentality of 100 years into the future when everyone earns BTCs and can buy anything with BTCs.  Now, if I lend you money, I will reasonably ask you to pay me back more than what I gave you; otherwise, I might as well have kept my money and not run the risk that you'd default on the loan.  But with every passing month, it becomes harder and harder for you to pay back the loan, as your salary drops and drops every day.  Now imagine something wonderful happens: I don't know, the Internet gets invented and millions of new jobs get created, so the economy expands, and so your paycheck goes *way* down.  Your debt hasn't, and you're screwed, even though things were supposed to have gotten better, not worse.  In an inflationary system, banks get screwed if the inflation rate goes way up (and they marshall the resources to fight this possibility hard), but banks are much better at coping with large economic shocks than are individuals with relatively tiny savings.

In a spirit diametrically opposite to what Bitcoin is supposedly setting out to do, I can't think of a better way of transferring enormous amounts of power to a small clique of bankers than deflationary lending.  All these people have to do is lend out money, charge interest, and never do anything with that money.  So either people aren't going to borrow money (good luck buying a house with your savings before you're 50 if you're in the bottom 98% income bracket), or we get enormous concentrations of power in lenders.  Neither of these prospects is appealing, and if the community's answer to these problems is to pretend that they don't exist, then by and large, the outside world's reaction to Bitcoins will be to pretend that they don't exist.

* By the way, try convincing anyone that its fine for their *nominal* paycheck to go down and down as they work more and more.  I think human psychology will trump the rational explanation that the amount of stuff you can buy with your ever-decreasing paycheck remains constant or increases.  Look at how many gimmicks companies today will go through to avoid cutting salaries during a recession, it's utterly demoralizing.

What I think might actually take off is a Bitcoin-like currency with a baked-in small, fixed rate of inflation, say 2% or so.  This gets rid of the hoarding problem: you're better off investing your money in something productive than sitting on it indefinitely.  It gets rid of the initial distribution problem by inflating away the "hard-earned" savings of the early adopters that stop contributing to the community after a few months of "back-breaking" mining, without undermining the savings of those who invested in furthering the Bitcoin ecosystem (my understanding is that some early adopters hold double-digit percentages of the whole Bitcoin economy, which puts it on par with Zimbabwe's wealth distribution).  It lays down the foundational for a sustainable banking system, where there's actually an incentive to lend money that would otherwise sit idle.  There's no central banker pulling the levers to control the inflation rate or to benefit from its control, if that's the bug that keeps you awake at night (see OP's last few replies), so it's not central-planning [off-topic, just thought I'd mention that there's a wide spectrum of economic possibilities from deflation to authoritarian central planning, and it's a stretch to claim that guiding macroeconomic policy with a single, blunt lever is equal to authoritarian central planning].

The way I imagine this playing out is that Bitcoin eventually forks into separate currencies, and the mildly inflationary variants are the ones that actually gather mass momentum, leaving the deflationary variants in the dust (with their hoarders' fortunes not having lost a cent of nominal value, but becoming ultimately worthless).  Mild inflation, not subject to political influence, is a fair and equitable way of incentivizing economic activity and investment.

I know many of these things have been said before, but I think it's important to keep them in the day-to-day discussion.  The community hasn't come to a consensus that deflation economics is great (I get the sense there's a collective delusion that it has), and to me, that's the point that seems most likely to end Bitcoins as it exists today.  My optimism, which I share with the OP, is that the underlying technology is marvelous and the fundamental idea of Bitcoin is sound, so I expect those portions of the experiment to outlive Bitcoin itself.

[wumpus]

I don't think "deflation is great". I do think it is the only way a new, distributed currency can work. If you don't put limits on the rate in which they can be produced you'll get that crazy inflation that you have in game currencies.

To be able to withstand being able to print money in arbitrary amounts, a currency already needs a lot of trust. Only the USD can pull this off I think

For a distributed currency without central "trusted" entity, a maximum amount is the only reassurance that the amount won't grow sky-high and devalue into nothingness.

[hashman]

I agree with you on most of what you say: Bitcoin is a technical marvel, and it's shown by example how to set up a distributed currency system.  I would love to see the day when I can send money internationally instantly and without an intermediary / enormous fees.  I'm learning everything I can about the technical aspects of Bitcoin and am hoping to contribute back to the community in due time to bring its vision to fruition.

But I think what will ultimately happen is that the original Bitcoin will fail and a successor to it with saner economics will take over it.  At the risk of igniting the wrath of others on this forum (as I've seen happen elsewhere, even in this post to a partial extent), the fact that Bitcoin is deflationary will, I think, ultimately be its undoing:

The number of bitcoins increases with time.  This is called monetary inflation.  Right now it is close to 40% annual inflation.  What is deflationary again?  Perhaps you are referring the the increase in price for a bitcoin as valued in USD.  This is due to rising demand and not monetary inflation.      

* I don't see how, in the long run, a large number of people will spontaneously show the altruism necessary to get past the hoarding mentality of "why should I buy this today when I can buy twice of it tomorrow".  If everybody hoards their Bitcoins, merchants have no customers. 

Actually, we should have spent them three weeks ago because today we can only buy half of what we could then.  However your argument does have merit, in alternative currency communities it is often discussed using a currency that loses value at a specific date, to encourage spending.  Such a currency may have merit but it is not this one.  This one is more modeled after gold.  

Why do you assume my salary drops every day?  It seems you are assuming that demand for bitcoins will rise with no limit.  That isn't possible.  Currencies fluctuate and financial institutions have various means of dealing with that, variable rate loans and options, etc.  One could easily envisage variable rate loan payments tied to other commodities, in the short term such as the USD.  If you really thought the demand was going to outstrip inflation you could offer people loans with negative interest rates.  Stranger things have happened.        

    

[patvarilly]

I don't think "deflation is great". I do think it is the only way a new, distributed currency can work. If you don't put limits on the rate in which they can be produced you'll get that crazy inflation that you have in game currencies.

One simple alternative, proposed here http://forum.bitcoin.org/index.php?topic=18460.0, is to change the per-block subsidy rule so that instead of paying out 50 BTC per block + fees, it pays out (2% of the total money supply)/(number of blocks produced per year) (equal to about 125 BTC nowadays).  That minimally dilutes the value of everyone's BTCs and assigns it proportionally to whoever is securing the blockchain today, which seems at least as good a setup for incentivizing block hashing as the one there is today.  It's only a slight change in the Bitcoin rules (with large consequences of course), and I don't see why the distributed currency wouldn't work if that change were made.  I'm not suggesting this is the best way of implementing algorithmic inflation, but am merely pointing out that doing this isn't impossible.

[wumpus]

One simple alternative, proposed here http://forum.bitcoin.org/index.php?topic=18460.0, is to change the per-block subsidy rule so that instead of paying out 50 BTC per block + fees, it pays out (2% of the total money supply)/(number of blocks produced per year) (equal to about 125 BTC nowadays).

I agree with you that a predefined, fixed % of inflation could have worked too. At least in the long run.

However, to get initial adopters the current approach was a really good idea. Instead of a fixed 2% per year, the inflation (production of new coins) is high in the beginning and goes down over time. I'm not sure why it goes down to 0%, though, but I think it's too late to change that.

[patvarilly]

The number of bitcoins increases with time.  This is called monetary inflation.  Right now it is close to 40% annual inflation.  What is deflationary again?  Perhaps you are referring the the increase in price for a bitcoin as valued in USD.  This is due to rising demand and not monetary inflation.      

No, no, I should have been clearer.  I mean to imagine how bitcoin will work when/if it goes mainstream, long after the initial inflationary push is gone.  Imagine that everyone now uses Bitcoins for everything on a daily basis.  That's where all these problems of hoarding / inefficient lending / salary deflation would become very serious.

Actually, we should have spent them three weeks ago because today we can only buy half of what we could then.  However your argument does have merit, in alternative currency communities it is often discussed using a currency that loses value at a specific date, to encourage spending.  Such a currency may have merit but it is not this one.  This one is more modeled after gold.  

Same thing here, I'm trying to see what the long-term structural problem is.  Right now, as you said, the currency is very inflationary, very volatile, and almost no one depends on its properties for buying food and paying the rent.  I agree that Bitcoin is modeled after gold.  My point is that that's what will eventually kill the current incarnation of Bitcoin.

Why do you assume my salary drops every day?  It seems you are assuming that demand for bitcoins will rise with no limit.  That isn't possible.  Currencies fluctuate and financial institutions have various means of dealing with that, variable rate loans and options, etc.  One could easily envisage variable rate loan payments tied to other commodities, in the short term such as the USD.  If you really thought the demand was going to outstrip inflation you could offer people loans with negative interest rates.  Stranger things have happened.

Again, think longterm.  Say all the initial bitcoins have been handed out, and all that is happening is trading.  Let's say, for purposes of example, that everyone earns a salary in this bitcoin economy.  If each person keeps doing what they do every day, just population growth will increase the amount of economic activity.  Since there are no new bitcoins, the total salary distributed must stay the same, so the per-person salary goes down.  We can't all have constant salaries and there being more of us each day.  In normal times, to population growth you'd have to add additional economic activity (those investments had better do something), which only worsens the problem.  Demand for bitcoins doesn't have to grow without limit: it simply has to grow past the moment when no new bitcoins are generated.

As for the negative-interest loan, you could offer that, and for the whole community, it would be beneficial that you did, but as an individual, you'd be a fool for taking a risk to with a lower reward than taking no risk at all.  Perhaps there are a few altruistic souls out there (think 10,000 BTC pizza), but we can't rely on banker altruism for the well-functioning of an economy.

[patvarilly]

One simple alternative, proposed here http://forum.bitcoin.org/index.php?topic=18460.0, is to change the per-block subsidy rule so that instead of paying out 50 BTC per block + fees, it pays out (2% of the total money supply)/(number of blocks produced per year) (equal to about 125 BTC nowadays).

I agree with you that a predefined, fixed % of inflation could have worked too. At least in the long run.

However, to get initial adopters the current approach was a really good idea. Instead of a fixed 2% per year, the inflation (production of new coins) is high in the beginning and goes down over time. I'm not sure why it goes down to 0%, though, but I think it's too late to change that.

I agree that the initial adoption problem is one of the stumbling blocks.  I've been trying to think of a way that you could set up a transition from the original Bitcoin chain to a new one without necessarily starting out from scratch.  One idea would be for clients to monitor the old and new chains in parallel.  If you decide to switch to the new chain, you would send your Bitcoins to a non-existent address (say, the hash160 of XOR'ing your public key with the string "BERNANKE" repeated a few times).  That would destroy your old Bitcoins, since there's no way of either recovering a private key whose public key will hash to that, or creating a private key on your own that hashes to that.  Then the miners in the new chain would see this nonsense transaction in the old blockchain and add a coinbase transaction in the new chain that deposits those same Bitcoins into the same address on the new blockchain.  The new, parallel chain, relying on pretty much the same technology as Bitcoins, could be incorporated into things like exchanges and payment services nearly painlessly.  However, presumably, the new chain would also have things like a reasonable lending framework, and might attract a bigger following of people than the original chain (it's not a banana republic), so that market forces would make the new chain more valuable.

What do you think?

[wumpus]

I agree that the initial adoption problem is one of the stumbling blocks.  I've been trying to think of a way that you could set up a transition from the original Bitcoin chain to a new one without necessarily starting out from scratch. 

You wouldn't even need to change the chain for that. If everyone agrees to lift the 21 million limit and change the number of coins generated, at some point in the future, the client could be changed to make that change starting from a certain block #.

It will be a very hard sell, of course, and it's arguably a problem that will only occur in the far future as the 21 million limit won't be reached for a long time.

[marcus_of_augustus]

Again, think longterm.  Say all the initial bitcoins have been handed out, and all that is happening is trading.  Let's say, for purposes of example, that everyone earns a salary in this bitcoin economy.  If each person keeps doing what they do every day, just population growth will increase the amount of economic activity.  Since there are no new bitcoins, the total salary distributed must stay the same, so the per-person salary goes down.  We can't all have constant salaries and there being more of us each day.  In normal times, to population growth you'd have to add additional economic activity (those investments had better do something), which only worsens the problem.  Demand for bitcoins doesn't have to grow without limit: it simply has to grow past the moment when no new bitcoins are generated.

You severely confused, probably from being conditioned to an inflationary-monopoly monetary environment. You need to first disentangle monetary economics from the wider economy.

How can a currency be hoarded into a deflationary spiral and become worthless at the same time? Think slowly, and clearly it is impossible, either it is hoarded and gets more valuable or it is dis-hoarded and gets less valuable, it cannot be both.

Currencies that hold their value in a free market of competing currencies will not engender widespread economic deflation by their nature. It is a plain falsehood meant only to support the current state-bankster oligopoly monopolised fiat regimes, stop spreading it. In a monopolistic monetary system a deflationary currency will cause the problems you speak of.

People should be able to save in the money they earn and not get ripped off by inflationistas in the mere act of saving. However, if bitcoin were ever to get co-opted, controlled and monopolised as money by the state then it would be time to get skeptical, deeply skeptical.

[Trader Steve]

For the record, I believe in having a limited supply of bitcoin. If bitcoin was ever changed to be an inflationary money, myself and many others would simply stop using it. We'd probably fork the block chain and refuse to download the latest release. I would venture to predict that the new, inflationary, version would die a quick death.

Just my 2 bitcents.

Trader Steve
http://www.GoldStarBullion.com

[Astrohacker]

Skepticism is a healthy attribute. And to be brutally honest, of course Bitcoin is likely to fail - all new things are likely to fail. We're all engaged in a wildly speculative and risky venture, here. Even conservative ventures usually fail, and this is anything but conservative.

I agree with you on most of what you say: Bitcoin is a technical marvel, and it's shown by example how to set up a distributed currency system.  I would love to see the day when I can send money internationally instantly and without an intermediary / enormous fees.  I'm learning everything I can about the technical aspects of Bitcoin and am hoping to contribute back to the community in due time to bring its vision to fruition.

But I think what will ultimately happen is that the original Bitcoin will fail and a successor to it with saner economics will take over it.  At the risk of igniting the wrath of others on this forum (as I've seen happen elsewhere, even in this post to a partial extent), the fact that Bitcoin is deflationary will, I think, ultimately be its undoing:

* I don't see how, in the long run, a large number of people will spontaneously show the altruism necessary to get past the hoarding mentality of "why should I buy this today when I can buy twice of it tomorrow".  If everybody hoards their Bitcoins, merchants have no customers.  This is essentially a tragedy of the commons: everyone knows this will be a tragedy, and everyone hopes that there will be a vibrant Bitcoin economy, but the incentives at the individual level are set up so that you participate in that economy as little as possible while hoping that others won't do what you do.  We all know from experience that in these situations, it's the commons that yields, not the individuals.  Bitcoin attracts lots of "free market" people that loudly point out the importance of the word "free", but you can't spell "free market" without the word "market".

Hoarding bitcoins is not a problem. There are plenty of units to go around even if everyone hoards. Hoarding merely increases the value of bitcoins.

* I don't see how any kind of lending will work well (operative keyword: well) in the Bitcoin world.  Put yourself in the mentality of 100 years into the future when everyone earns BTCs and can buy anything with BTCs.  Now, if I lend you money, I will reasonably ask you to pay me back more than what I gave you; otherwise, I might as well have kept my money and not run the risk that you'd default on the loan.  But with every passing month, it becomes harder and harder for you to pay back the loan, as your salary drops and drops every day.  Now imagine something wonderful happens: I don't know, the Internet gets invented and millions of new jobs get created, so the economy expands, and so your paycheck goes *way* down.  Your debt hasn't, and you're screwed, even though things were supposed to have gotten better, not worse.  In an inflationary system, banks get screwed if the inflation rate goes way up (and they marshall the resources to fight this possibility hard), but banks are much better at coping with large economic shocks than are individuals with relatively tiny savings.

Lending will be less common in the bitcoin economy, but this isn't a problem. The fact that lending is so common with fiat currency systems is because banks create most of the money out of thin air and give it to themselves, and thus if you need money you have to get it from a bank. So lending is artificially high with fiat currencies because the central banks and their banking cartels have a monopoly on the money. Lending will be back to normal levels with bitcoin.

In a spirit diametrically opposite to what Bitcoin is supposedly setting out to do, I can't think of a better way of transferring enormous amounts of power to a small clique of bankers than deflationary lending.  All these people have to do is lend out money, charge interest, and never do anything with that money.  So either people aren't going to borrow money (good luck buying a house with your savings before you're 50 if you're in the bottom 98% income bracket), or we get enormous concentrations of power in lenders.  Neither of these prospects is appealing, and if the community's answer to these problems is to pretend that they don't exist, then by and large, the outside world's reaction to Bitcoins will be to pretend that they don't exist.

* By the way, try convincing anyone that its fine for their *nominal* paycheck to go down and down as they work more and more.  I think human psychology will trump the rational explanation that the amount of stuff you can buy with your ever-decreasing paycheck remains constant or increases.  Look at how many gimmicks companies today will go through to avoid cutting salaries during a recession, it's utterly demoralizing.

People will accept lower paychecks just like they accept rising prices today.

What I think might actually take off is a Bitcoin-like currency with a baked-in small, fixed rate of inflation, say 2% or so.  This gets rid of the hoarding problem: you're better off investing your money in something productive than sitting on it indefinitely.  It gets rid of the initial distribution problem by inflating away the "hard-earned" savings of the early adopters that stop contributing to the community after a few months of "back-breaking" mining, without undermining the savings of those who invested in furthering the Bitcoin ecosystem (my understanding is that some early adopters hold double-digit percentages of the whole Bitcoin economy, which puts it on par with Zimbabwe's wealth distribution).  It lays down the foundational for a sustainable banking system, where there's actually an incentive to lend money that would otherwise sit idle.  There's no central banker pulling the levers to control the inflation rate or to benefit from its control, if that's the bug that keeps you awake at night (see OP's last few replies), so it's not central-planning [off-topic, just thought I'd mention that there's a wide spectrum of economic possibilities from deflation to authoritarian central planning, and it's a stretch to claim that guiding macroeconomic policy with a single, blunt lever is equal to authoritarian central planning].

No one will want to put their money in an a currency that is just like bitcoin except its value drops with time.

The way I imagine this playing out is that Bitcoin eventually forks into separate currencies, and the mildly inflationary variants are the ones that actually gather mass momentum, leaving the deflationary variants in the dust (with their hoarders' fortunes not having lost a cent of nominal value, but becoming ultimately worthless).  Mild inflation, not subject to political influence, is a fair and equitable way of incentivizing economic activity and investment.

I know many of these things have been said before, but I think it's important to keep them in the day-to-day discussion.  The community hasn't come to a consensus that deflation economics is great (I get the sense there's a collective delusion that it has), and to me, that's the point that seems most likely to end Bitcoins as it exists today.  My optimism, which I share with the OP, is that the underlying technology is marvelous and the fundamental idea of Bitcoin is sound, so I expect those portions of the experiment to outlive Bitcoin itself.

[Nescio]

You just can't argue with nitwits like this. It's competition between rival speculators that produces stability. Buying low and selling high keeps the price in the middle.

You mean like the 35% swing on tuesday/wednesday? Yeah, it's working fantastic Sherlock.

There's no short-selling options (puts) to cover. Gotta have the tools to do the job, Watson.

Oh wait, so you actually concede it's not working right now? Impeccable logic.