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Author Topic: Is it true that btc is a "deflationary currency"?  (Read 2058 times)
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September 05, 2013, 08:04:05 PM
 #21

I would speak thusly: The 21 million coins were all created at the time of the genesis block, only they have not all been found yet. Taking into account loss of coins, it is deflatioary (in the money supply sense).

Interesting way of seeing things.  The dollar is also a deflationary currency, they just haven't disclosed the total number of dollars that will be printed by mankind.  Especially when taking into account all of the lost bills Smiley

Well, they have not disclosed the limit, but I don't think they have decided the limit. If you view the bitcoin system only as a facilitor of trade, it is obviously inflating now, but if you take speculation into account, the 21 million limit is the most important parameter. Every speculator know about the limit.
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September 05, 2013, 08:05:44 PM
 #22

Not an economist, but I think the confusion lies in 'is bitcoin inflationary (overall)' vs 'is bitcoin inflationary (currently)'.  Is that right?  As of now, bitcoins are being generated so maybe that's currently inflationary.  However, the overall limit is set, so overall it's not inflating.  Also, there's just a matter of perspective here.  Maybe we could say that it's not inflationary, that all bitcoins are already in existence, but they are just being released slowly.   I dunno.

With Bitcoin I think it is more accurate to say that the rate of inflation (expansion of the money supply) is predetermined and that the rate of inflation (expansion of the money supply) is gradually reduced over time until it is nonexistent.  This obviously means that prices have no influence on the supply of bitcoins.

On the other hand, Keynesians use the excuse of deflation (falling prices) to justify adding more money to their fiat money supply.  They would claim that the fact that a bitcoin can buy more today than it could a year ago would be cause for alarm and that they need to have the power to arbitrarily increase the money supply by whatever amount is necessary to keep prices from dropping. Of course, you and I wouldn't be issued any of this newly created, yet to be spent, money.  Just the bankers and politicians would.  How convenient.  They would claim that they are helping the economy and fighting off deflation (falling prices) while creating more money for themselves.

Yeah, theoretically I guess you could say that all 21M bitcoins have already been created.  They're just locked up and inaccessible and are gradually being distributed as rewards when new blocks are mined.  However, because they are unable to be spent, they still can't really be considered part of the current money supply.
I agree with this of course. See also my previous post.
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September 05, 2013, 08:39:44 PM
 #23

I would speak thusly: The 21 million coins were all created at the time of the genesis block, only they have not all been found yet. Taking into account loss of coins, it is deflatioary (in the money supply sense).

Interesting way of seeing things.  The dollar is also a deflationary currency, they just haven't disclosed the total number of dollars that will be printed by mankind.  Especially when taking into account all of the lost bills Smiley

Well, they have not disclosed the limit, but I don't think they have decided the limit. If you view the bitcoin system only as a facilitor of trade, it is obviously inflating now, but if you take speculation into account, the 21 million limit is the most important parameter. Every speculator know about the limit.

As a speculator, i'm much more interested in bitcoin's perceived value (what others are willing to pay me in fiat) than the hard limit set for some distant future.  Sure, the 21 mil. ceiling affects the price, but the link is far from a direct one.  I doubt the value of bitcoins would halve if the cap was 42 mil., especially if that ceiling was set to be reached 1,000 years from now.  Inversely, if the ceiling was 14 mil, the bitcoin price would not go up by 1/3.  Possible, but definitely not obvious.

Not sure where i'm going with this, other than i don't feel that 21 mil. ceiling is bitcoin's most important aspect.
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September 05, 2013, 08:55:32 PM
 #24


I would speak thusly: The 21 million coins were all created at the time of the genesis block, only they have not all been found yet. Taking into account loss of coins, it is deflatioary (in the money supply sense).

Interesting way of seeing things.  The dollar is also a deflationary currency, they just haven't disclosed the total number of dollars that will be printed by mankind.  Especially when taking into account all of the lost bills Smiley

Well, they have not disclosed the limit, but I don't think they have decided the limit. If you view the bitcoin system only as a facilitor of trade, it is obviously inflating now, but if you take speculation into account, the 21 million limit is the most important parameter. Every speculator know about the limit.

As a speculator, i'm much more interested in bitcoin's perceived value (what others are willing to pay me in fiat) than the hard limit set for some distant future.  Sure, the 21 mil. ceiling affects the price, but the link is far from a direct one.  I doubt the value of bitcoins would halve if the cap was 42 mil., especially if that ceiling was set to be reached 1,000 years from now.  Inversely, if the ceiling was 14 mil, the bitcoin price would not go up by 1/3.  Possible, but definitely not obvious.

Not sure where i'm going with this, other than i don't feel that 21 mil. ceiling is bitcoin's most important aspect.

Only the fact that the limit is there.
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September 05, 2013, 09:05:45 PM
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I would speak thusly: The 21 million coins were all created at the time of the genesis block, only they have not all been found yet. Taking into account loss of coins, it is deflatioary (in the money supply sense).

Interesting way of seeing things.  The dollar is also a deflationary currency, they just haven't disclosed the total number of dollars that will be printed by mankind.  Especially when taking into account all of the lost bills Smiley

Well, they have not disclosed the limit, but I don't think they have decided the limit. If you view the bitcoin system only as a facilitor of trade, it is obviously inflating now, but if you take speculation into account, the 21 million limit is the most important parameter. Every speculator know about the limit.

As a speculator, i'm much more interested in bitcoin's perceived value (what others are willing to pay me in fiat) than the hard limit set for some distant future.  Sure, the 21 mil. ceiling affects the price, but the link is far from a direct one.  I doubt the value of bitcoins would halve if the cap was 42 mil., especially if that ceiling was set to be reached 1,000 years from now.  Inversely, if the ceiling was 14 mil, the bitcoin price would not go up by 1/3.  Possible, but definitely not obvious.

Not sure where i'm going with this, other than i don't feel that 21 mil. ceiling is bitcoin's most important aspect.

Only the fact that the limit is there.

How much would you discount your coins if bitcoin's current inflation rate would continue indefinitely?  50%?  99%? 
Would have never gotten into bitcoin if there was no ceiling? 
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September 05, 2013, 09:37:11 PM
 #26

Bitcoin will have monetary inflation until Bitcoins stop being generated (currently 3600 BTC per day). As long as public interest continues to increase as it has in the past however prices of goods denominated in Bitcoin will continue to deflate.
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September 05, 2013, 10:02:08 PM
 #27


I would speak thusly: The 21 million coins were all created at the time of the genesis block, only they have not all been found yet. Taking into account loss of coins, it is deflatioary (in the money supply sense).

Interesting way of seeing things.  The dollar is also a deflationary currency, they just haven't disclosed the total number of dollars that will be printed by mankind.  Especially when taking into account all of the lost bills Smiley

Well, they have not disclosed the limit, but I don't think they have decided the limit. If you view the bitcoin system only as a facilitor of trade, it is obviously inflating now, but if you take speculation into account, the 21 million limit is the most important parameter. Every speculator know about the limit.

As a speculator, i'm much more interested in bitcoin's perceived value (what others are willing to pay me in fiat) than the hard limit set for some distant future.  Sure, the 21 mil. ceiling affects the price, but the link is far from a direct one.  I doubt the value of bitcoins would halve if the cap was 42 mil., especially if that ceiling was set to be reached 1,000 years from now.  Inversely, if the ceiling was 14 mil, the bitcoin price would not go up by 1/3.  Possible, but definitely not obvious.

Not sure where i'm going with this, other than i don't feel that 21 mil. ceiling is bitcoin's most important aspect.

Only the fact that the limit is there.

How much would you discount your coins if bitcoin's current inflation rate would continue indefinitely?  50%?  99%?  
Would have never gotten into bitcoin if there was no ceiling?  

I depends. Another predefined inflation curve, possibly never ending, would also work as sound money. Since speculators could take this into account, there would be no real difference from what we have. But also since there is no difference, the hard limit is good PR and easy to understand, so I prefer the current scheme. An elastic supply of some kind, feedback from a price basket, or anything else, would be phrone to corruption and would end badly, maybe the coin would not enter the critical mass at all.

About the actual discount, I have no idea. I have in fact no idea what is the right price of bitcoin now, and I have not tried to speculate on price levels and dates. The market price for bitcoin (or anything else) does not have to be perfect or correct in any way, the important point about any market is that it is free.

I do believe however, that as the volatility calms down well after the max level of adoption, the value of the sum of bitcoins will be the sum of the value that the users want to have ready for a rainy day and for their life savings. The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.
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September 05, 2013, 10:46:11 PM
 #28

 hard limit is good PR


That is what it is all about. The limit is an illusion.

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September 06, 2013, 12:41:03 PM
 #29

In terms of monetary supply ( the amount of coins in existence ) Bitcoin is inflationary as new coins are being created and will continue to be made for quite a few years. When block reward drops to zero, in terms of monetary supply, Bitcoin will become neutral.

In terms of monetary value Bitcoin is very deflationary. Rate of adoption has outpaced monetary inflation causing Bitcoin to deflate substantially.

This is correct, but the last sentence only partially: in terms of monetary value Bitcoin was built to be deflationary, and its long-term trend has been deflationary. Nevertheless, as everybody has seen on April, 10th, it is extremely volatile and can lose 50% of its value in a very short time. As I asked many times: what was that? The USD deflating? Cheesy

Anyhow, I'm not nitpicking: its just that I see people repeating like a mantra "Bitcoin is a deflationary currency" when its not totally true (in fact as GoldenWings91 said actually is in an inflationary phase in terms of monetary supply). My impression is that when many people say "Bitcoin is a deflationary currency", they really mean "its a commodity-like asset very prone to bubbles" (or to "boom and bust cycles"), which is a different thing Wink

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September 06, 2013, 01:45:22 PM
 #30

...
How much would you discount your coins if bitcoin's current inflation rate would continue indefinitely?  50%?  99%?  
Would have never gotten into bitcoin if there was no ceiling?  

I depends. Another predefined inflation curve, possibly never ending, would also work as sound money. Since speculators could take this into account, there would be no real difference from what we have. But also since there is no difference, the hard limit is good PR and easy to understand, so I prefer the current scheme. An elastic supply of some kind, feedback from a price basket, or anything else, would be phrone to corruption and would end badly, maybe the coin would not enter the critical mass at all.

Predefined inflation curve is fundamentally different from hard limit.  Predefined inflation would avoid several difficulties, miners having to transition from inflation-driven to tx-fee rewards & lowered investment incentives of non-inflationary money amongst them.

Quote
About the actual discount, I have no idea. I have in fact no idea what is the right price of bitcoin now, and I have not tried to speculate on price levels and dates. The market price for bitcoin (or anything else) does not have to be perfect or correct in any way, the important point about any market is that it is free.

This is not really the answer i was looking for.  I haven't asked you to arrive at the correct price, merely how much *you* would devalue your bitcoins if the limit was doubled.  The exact answer is probably not necessary, as long as we agree that it is not *exactly* 1/2.

Quote
I do believe however, that as the volatility calms down well after the max level of adoption, the value of the sum of bitcoins will be the sum of the value that the users want to have ready for a rainy day and for their life savings.

I'm not sure what you mean by "max level of adoption."  If everyone who wants bitcoins has bitcoins, then there is no one to buy bitcoins, by definition.  If you mean something else, please explain.  
My questions might seem like hairsplitting pedantry, but we're dealing with something unconventional here, and what appears to be obvious & commonsensical often needs to be redefined.

Quote
The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.

If i'm understanding you correctly, this "real value" is measured by demand, which remains in constant flux?
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September 06, 2013, 02:34:03 PM
 #31

A true Keynesian would recognize that any deflationary currency would be anathema to a system built on debt. It pretty much makes long-term debt unsustainable, as it has the effect of increasing the effective interest rate continuously.

Deflationary currencies are meant to be hoarded.

Hoarding reduces the amount of available currency for circulation.
The per-unit value of the currency increases due to scarcity.
The increasing value encourages hoarding.

It is a circular feedback loop driving values. It rewards savers and punishes borrowers.

Our entire world economic system is built on borrowing and debt. 99% of the world's financial institutions would no longer be needed without debt.
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September 06, 2013, 03:07:21 PM
 #32

Thank you for your comments.

...
How much would you discount your coins if bitcoin's current inflation rate would continue indefinitely?  50%?  99%?  
Would have never gotten into bitcoin if there was no ceiling?  

I depends. Another predefined inflation curve, possibly never ending, would also work as sound money. Since speculators could take this into account, there would be no real difference from what we have. But also since there is no difference, the hard limit is good PR and easy to understand, so I prefer the current scheme. An elastic supply of some kind, feedback from a price basket, or anything else, would be phrone to corruption and would end badly, maybe the coin would not enter the critical mass at all.

Predefined inflation curve is fundamentally different from hard limit.  Predefined inflation would avoid several difficulties, miners having to transition from inflation-driven to tx-fee rewards & lowered investment incentives of non-inflationary money amongst them.

I don't see the point in continuing the current rate, which would probably mean that we would have increasing prices forever. A rate of for instance 1-2 % would account somewhat for increase in population plus increase in productivity. Anyway, as long as the rate is predefined, it would be sound money. A high inflation rate of 13 % only means that all contracts regarding the future would have to have a formula attached to it. For instance, the rent for an apartment is 3.5 *1.13/12** months_from_now btc per month. I just don't see the advantage.

Quote

Quote
About the actual discount, I have no idea. I have in fact no idea what is the right price of bitcoin now, and I have not tried to speculate on price levels and dates. The market price for bitcoin (or anything else) does not have to be perfect or correct in any way, the important point about any market is that it is free.

This is not really the answer i was looking for.  I haven't asked you to arrive at the correct price, merely how much *you* would devalue your bitcoins if the limit was doubled.  The exact answer is probably not necessary, as long as we agree that it is not *exactly* 1/2.
With 42 millon, the value in the end would be half per bitcoin, all other things unchanged (which they never are, so about half is good).
Quote
Quote
I do believe however, that as the volatility calms down well after the max level of adoption, the value of the sum of bitcoins will be the sum of the value that the users want to have ready for a rainy day and for their life savings.

I'm not sure what you mean by "max level of adoption."  
We don't know the level, may be 0.1% of everybody, 10 % of everbody or 100% of everybody. I mean whatever is the number of people who wants to use bitcoin. It will probably never be completely stable. "Natural" level is may be a better word.
Quote


If everyone who wants bitcoins has bitcoins, then there is no one to buy bitcoins, by definition.  If you mean something else, please explain.  
I suppose the individual's values change more or less continuously, as you eat up your food supply and consume the contents of your petrol tank, and people will refill their bitcoin purse with fresh bitcoins earned on work. Individuals will revalue all the time, but we can still imagine a relatively stable demand for the total.
Quote

My questions might seem like hairsplitting pedantry, but we're dealing with something unconventional here, and what appears to be obvious & commonsensical often needs to be redefined.

Quote
The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.

If i'm understanding you correctly, this "real value" is measured by demand, which remains in constant flux?

With real value I mean just a way to measure it, as in the value of a house, the value of a month's work, the value of a month of food supply etc. Since we want to asess a value of the money supply, it does not make sense to measure it in money.
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September 06, 2013, 04:09:32 PM
 #33

Thank you for your comments.

...
Predefined inflation curve is fundamentally different from hard limit.  Predefined inflation would avoid several difficulties, miners having to transition from inflation-driven to tx-fee rewards & lowered investment incentives of non-inflationary money amongst them.

I don't see the point in continuing the current rate, which would probably mean that we would have increasing prices forever. A rate of for instance 1-2 % would account somewhat for increase in population plus increase in productivity. Anyway, as long as the rate is predefined, it would be sound money. A high inflation rate of 13 % only means that all contracts regarding the future would have to have a formula attached to it. For instance, the rent for an apartment is 3.5 *1.13/12** months_from_now btc per month. I just don't see the advantage.

Oh, i agree there's no reason to keep inflation high & 1 or 2% may be enough.  It's the set limit i have trouble with.

Quote
Quote
Quote
The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.

If i'm understanding you correctly, this "real value" is measured by demand, which remains in constant flux?

With real value I mean just a way to measure it, as in the value of a house, the value of a month's work, the value of a month of food supply etc. Since we want to asess a value of the money supply, it does not make sense to measure it in money.

I think this is where i lose you:  The value of money is traditionally measured in other money.
The value of a house is denominated in money (dollars, rubles, pounds, yen etc.).
The value of each of these currencies is denominated in other currencies (rubles/dollar etc.).  It is also possible to denominate money's worth in fractions of a house (or commodity bundle, or market basket, whatever).

Here's my problem:

If 1 BTC bought one house, and *another* house is built -- where does the extra BTC come from to buy that house?  

I'll strip this down to something manageable & hopefully a bit more clear:  Assume there are only 100 BTC in our model, and 100 houses to buy with them.  One BTC is valued at one house.  Some new people are born, and slap some mud & grass together, building a new house.  Now there are 101 houses, but only 100 BTC to buy them with.  Has the value of 1 BTC grown by ~1%?

In the alternative:  A big tornado comes to our 100-house model, destroying half of the houses.  Now there are only 50.  How much is one bitcoin worth now?

You can see (well, i can) that the value of bitcoin is closely linked to the health of economy, or (in the case of valuing it in other currencies) the health of other economies.  It could be argued that the fiat is far more stable, due to the very fact that it is manipulated.
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September 06, 2013, 04:19:39 PM
 #34

Thank you for your comments.

...
Predefined inflation curve is fundamentally different from hard limit.  Predefined inflation would avoid several difficulties, miners having to transition from inflation-driven to tx-fee rewards & lowered investment incentives of non-inflationary money amongst them.

I don't see the point in continuing the current rate, which would probably mean that we would have increasing prices forever. A rate of for instance 1-2 % would account somewhat for increase in population plus increase in productivity. Anyway, as long as the rate is predefined, it would be sound money. A high inflation rate of 13 % only means that all contracts regarding the future would have to have a formula attached to it. For instance, the rent for an apartment is 3.5 *1.13/12** months_from_now btc per month. I just don't see the advantage.

Oh, i agree there's no reason to keep inflation high & 1 or 2% may be enough.  It's the set limit i have trouble with.

Quote
Quote
Quote
The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.

If i'm understanding you correctly, this "real value" is measured by demand, which remains in constant flux?

With real value I mean just a way to measure it, as in the value of a house, the value of a month's work, the value of a month of food supply etc. Since we want to asess a value of the money supply, it does not make sense to measure it in money.

I think this is where i lose you:  The value of money is traditionally measured in other money.
The value of a house is denominated in money (dollars, rubles, pounds, yen etc.).
The value of each of these currencies is denominated in other currencies (rubles/dollar etc.).  It is also possible to denominate money's worth in fractions of a house (or commodity bundle, or market basket, whatever).

Here's my problem:

If 1 BTC bought one house, and *another* house is built -- where does the extra BTC come from to buy that house?  

I'll strip this down to something manageable & hopefully a bit more clear:  Assume there are only 100 BTC in our model, and 100 houses to buy with them.  One BTC is valued at one house.  Some new people are born, and slap some mud & grass together, building a new house.  Now there are 101 houses, but only 100 BTC to buy them with.  Has the value of 1 BTC grown by ~1%?

In the alternative:  A big tornado comes to our 100-house model, destroying half of the houses.  Now there are only 50.  How much is one bitcoin worth now?

You can see (well, i can) that the value of bitcoin is closely linked to the health of economy, or (in the case of valuing it in other currencies) the health of other economies.  It could be argued that the fiat is far more stable, due to the very fact that it is manipulated.

I am confident that an Austrian school adherent would argue effectively that the size of a monetary base has no effect on real values. Certainly there would be differences in ledgers, but only as measured in nominal terms. A dollar does not represent a loaf of bread, but rather a potential claim upon an amount of bread that is unknown until the dollar is exchanged.

I see no reason to assume that the velocity of money would be different if the value of a dollar was equal to 1 loaf of bread or 100.
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September 06, 2013, 04:28:57 PM
 #35

Thank you for your comments.

...
Predefined inflation curve is fundamentally different from hard limit.  Predefined inflation would avoid several difficulties, miners having to transition from inflation-driven to tx-fee rewards & lowered investment incentives of non-inflationary money amongst them.

I don't see the point in continuing the current rate, which would probably mean that we would have increasing prices forever. A rate of for instance 1-2 % would account somewhat for increase in population plus increase in productivity. Anyway, as long as the rate is predefined, it would be sound money. A high inflation rate of 13 % only means that all contracts regarding the future would have to have a formula attached to it. For instance, the rent for an apartment is 3.5 *1.13/12** months_from_now btc per month. I just don't see the advantage.

Oh, i agree there's no reason to keep inflation high & 1 or 2% may be enough.  It's the set limit i have trouble with.

Quote
Quote
Quote
The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.

If i'm understanding you correctly, this "real value" is measured by demand, which remains in constant flux?

With real value I mean just a way to measure it, as in the value of a house, the value of a month's work, the value of a month of food supply etc. Since we want to asess a value of the money supply, it does not make sense to measure it in money.

I think this is where i lose you:  The value of money is traditionally measured in other money.
The value of a house is denominated in money (dollars, rubles, pounds, yen etc.).
The value of each of these currencies is denominated in other currencies (rubles/dollar etc.).  It is also possible to denominate money's worth in fractions of a house (or commodity bundle, or market basket, whatever).

Here's my problem:

If 1 BTC bought one house, and *another* house is built -- where does the extra BTC come from to buy that house?  

I'll strip this down to something manageable & hopefully a bit more clear:  Assume there are only 100 BTC in our model, and 100 houses to buy with them.  One BTC is valued at one house.  Some new people are born, and slap some mud & grass together, building a new house.  Now there are 101 houses, but only 100 BTC to buy them with.  Has the value of 1 BTC grown by ~1%?

In the alternative:  A big tornado comes to our 100-house model, destroying half of the houses.  Now there are only 50.  How much is one bitcoin worth now?

You can see (well, i can) that the value of bitcoin is closely linked to the health of economy, or (in the case of valuing it in other currencies) the health of other economies.  It could be argued that the fiat is far more stable, due to the very fact that it is manipulated.

I am confident that an Austrian school adherent would argue effectively that the size of a monetary base has no effect on real values. Certainly there would be differences in ledgers, but only as measured in nominal terms. A dollar does not represent a loaf of bread, but rather a potential claim upon an amount of bread that is unknown until the dollar is exchanged.

I see no reason to assume that the velocity of money would be different if the value of a dollar was equal to 1 loaf of bread or 100.

Not a Kenyans vs Austrians argument -- simply pointing out that the value of money is determined by many factors, underlying economy and people's faith among those.  Bitcoin is not a magical exception.  It's a trivial point, but worth making to all the folks chanting "Black Swan."
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September 06, 2013, 04:40:08 PM
 #36

Thank you for your comments.

...
Predefined inflation curve is fundamentally different from hard limit.  Predefined inflation would avoid several difficulties, miners having to transition from inflation-driven to tx-fee rewards & lowered investment incentives of non-inflationary money amongst them.

I don't see the point in continuing the current rate, which would probably mean that we would have increasing prices forever. A rate of for instance 1-2 % would account somewhat for increase in population plus increase in productivity. Anyway, as long as the rate is predefined, it would be sound money. A high inflation rate of 13 % only means that all contracts regarding the future would have to have a formula attached to it. For instance, the rent for an apartment is 3.5 *1.13/12** months_from_now btc per month. I just don't see the advantage.

Oh, i agree there's no reason to keep inflation high & 1 or 2% may be enough.  It's the set limit i have trouble with.

Quote
Quote
Quote
The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.

If i'm understanding you correctly, this "real value" is measured by demand, which remains in constant flux?

With real value I mean just a way to measure it, as in the value of a house, the value of a month's work, the value of a month of food supply etc. Since we want to asess a value of the money supply, it does not make sense to measure it in money.

I think this is where i lose you:  The value of money is traditionally measured in other money.
The value of a house is denominated in money (dollars, rubles, pounds, yen etc.).
The value of each of these currencies is denominated in other currencies (rubles/dollar etc.).  It is also possible to denominate money's worth in fractions of a house (or commodity bundle, or market basket, whatever).
It is common and useful for some purposes, but since the pound has kept its value relative to the USD for the last 50 years, it does not mean that pound has had a stable value.
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Here's my problem:

If 1 BTC bought one house, and *another* house is built -- where does the extra BTC come from to buy that house?  
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The value of the money supply is not the value of the value of goods. So if you supply one more house and the demand for houses is the same, the price of each house will go down. The demand for money might go up or down as a consequence of this. It looks stupid if you have only one kind of good on the market of course.

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I'll strip this down to something manageable & hopefully a bit more clear:  Assume there are only 100 BTC in our model, and 100 houses to buy with them.  One BTC is valued at one house.  Some new people are born, and slap some mud & grass together, building a new house.  Now there are 101 houses, but only 100 BTC to buy them with.  Has the value of 1 BTC grown by ~1%?

It is not the amount of goods available. There must be other assumptions in the model at start, that the demand for money is the equivalent of one house per person, and there are 100 persons.

One new person, one new house, still a demand for money equivalent to one house per person, means that house prices will go down, which is the same as the value of bitcoin goes up, but spread over one more person means a new stable value of 1 house per .99 btc (or thereabout).
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In the alternative:  A big tornado comes to our 100-house model, destroying half of the houses. Now there are only 50.  How much is one bitcoin worth now?

You can see (well, i can) that the value of bitcoin is closely linked to the health of economy, or (in the case of valuing it in other currencies) the health of other economies.  It could be argued that the fiat is far more stable, due to the very fact that it is manipulated.


House prices will go up, but however far up they go there will not be 1 house per person any more. You really have to add some other goods and work to make a model. I could try, if I care enough, but not in this post. The point is that the sum of the value people want to have in money, the most liquid form, will be the sum of the value of the money.

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September 06, 2013, 04:46:04 PM
 #37

Thank you for your comments.

...
Predefined inflation curve is fundamentally different from hard limit.  Predefined inflation would avoid several difficulties, miners having to transition from inflation-driven to tx-fee rewards & lowered investment incentives of non-inflationary money amongst them.

I don't see the point in continuing the current rate, which would probably mean that we would have increasing prices forever. A rate of for instance 1-2 % would account somewhat for increase in population plus increase in productivity. Anyway, as long as the rate is predefined, it would be sound money. A high inflation rate of 13 % only means that all contracts regarding the future would have to have a formula attached to it. For instance, the rent for an apartment is 3.5 *1.13/12** months_from_now btc per month. I just don't see the advantage.

Oh, i agree there's no reason to keep inflation high & 1 or 2% may be enough.  It's the set limit i have trouble with.

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The future value is not related to the value of capital and durable goods, not related to the extent of trade, absolutely totally unrelated to the unmeasurable velocity of money, but as I said the reservation demand expressed in real value terms.

If i'm understanding you correctly, this "real value" is measured by demand, which remains in constant flux?

With real value I mean just a way to measure it, as in the value of a house, the value of a month's work, the value of a month of food supply etc. Since we want to asess a value of the money supply, it does not make sense to measure it in money.

I think this is where i lose you:  The value of money is traditionally measured in other money.
The value of a house is denominated in money (dollars, rubles, pounds, yen etc.).
The value of each of these currencies is denominated in other currencies (rubles/dollar etc.).  It is also possible to denominate money's worth in fractions of a house (or commodity bundle, or market basket, whatever).

Here's my problem:

If 1 BTC bought one house, and *another* house is built -- where does the extra BTC come from to buy that house?  

I'll strip this down to something manageable & hopefully a bit more clear:  Assume there are only 100 BTC in our model, and 100 houses to buy with them.  One BTC is valued at one house.  Some new people are born, and slap some mud & grass together, building a new house.  Now there are 101 houses, but only 100 BTC to buy them with.  Has the value of 1 BTC grown by ~1%?

In the alternative:  A big tornado comes to our 100-house model, destroying half of the houses.  Now there are only 50.  How much is one bitcoin worth now?

You can see (well, i can) that the value of bitcoin is closely linked to the health of economy, or (in the case of valuing it in other currencies) the health of other economies.  It could be argued that the fiat is far more stable, due to the very fact that it is manipulated.

I am confident that an Austrian school adherent would argue effectively that the size of a monetary base has no effect on real values. Certainly there would be differences in ledgers, but only as measured in nominal terms. A dollar does not represent a loaf of bread, but rather a potential claim upon an amount of bread that is unknown until the dollar is exchanged.

I see no reason to assume that the velocity of money would be different if the value of a dollar was equal to 1 loaf of bread or 100.

The rule that I try to argue for here, is only relevant for sound money. The austrians care only to talk about an economy with sound money. If the money supply including debt can be changed due to seasonal changes in demand, weather, and the whims of a central planner, no rules can be made.
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