Thank you all for the replies.
I'll do my best to respond.Dogisland said:
"By monetary controls would you be looking to change the bitcoin supply rate to keep the currency at a constant price ? e.g. $10"
Yes for expansionary policy, but within a set range. But also by control over fees to both control velocity and contract the supply of the currency (by destroying it).
I'm assuming the following:
1. The demand for the currency will increase if the project that uses it is successful.
2. The project is all about long term contracts, let's use 1 year as an example. For buying and selling items today, bitcoin is great. But let's say you want a hosting provider to accept x amount of bitcoins each month for 1 year, what will be their response? I predict it will be resistance if they believe the value of the coins will increase (deflation) over the next year. They will be on the loosing side. Now think of a 30 year mortgage, bitcoins would not be used for the same reason.
3. If the 51st state joined the USA, there would be a need to create more dollars simply to balance the increased demand for the currency. Just as a growing animal needs more blood because of an increase in mass just to keep the same flow, pressure, and other attributes. Think of a growing company that can outgrow its cashflow, it's a similar situation. Bitcoin can not adjust for this.
So my situation is that a global digital currency is needed, but it needs monetary controls. They don't need to be perfect, but they need to be able to exercise a psychological effect to deter speculators, just as a centrally managed currency can. It would not be centrally managed though, but rather a p2p voting scheme would decide as a consensus. Note I'm not 100% sure I trust the masses to make correct monetary policy, but for this project it would be businesses, so I'm not as concerned.
"Would it not be a simple case of matching buyers and sellers ?"
That's a fallback position we're probably going to take, but if a contract were traded between currencies, then an exchanger would take a cut. This greatly reduces the velocity of the contract, as it can't be exchanged much else the fees kill it's value. We need to be able to cross borders easily. Joel said:
"Predictable deflation is not a problem because it's already built into the present price."
Disagree, because there is no accurate mechanism today to predict the future value of a bitcoin. For example, if the DEA took down a major money transport network (not laundering) tomorrow, the demand for bitcoins could spike. The market would know this I feel, therefore nobody in their right mind would accept a long term contract that had bitcoins as the currency. That's the essence of the problem I see with bitcoin, it's for short term transactions only because of a lack of confidence in the future stability of the currency.
" Every "people will want to hold onto bitcoins rather than spend them" argument is perfectly counterbalanced by a "people will want to induce others to part with bitcoins" arguments. "
Disagree, because recent history disproves this. Bitcoins have suffered much deflation. Perhaps the mt gox attack popped a bubble even.
"The fundamental flaw in the deflation argument is that it assumes bitcoins are worth X today"
They clearly are I think it's about $13 per bitcoin.
"and then they have some extra value from the expected deflation that will make people want to hold them."
They do, which is why Satoshi is sitting on a lot of them. He knows the demand will only rise and the supply will be much more constant. As the delta between them increases, the value of his coins is guaranteed to increase. Hence a hold strategy.
"If that were true, then they would have to be worth more than they are worth, which is a contradiction."
This does not factor in risk, nor the inability to predict bitcoin values. Satoshi has a greater ability to predict than many others, hence he's more of an investor than a speculator, but prediction with bitcoin is speculation at best at the moment because of it's nature and the fact that it's in its infancy.
" 10 bitcoins today includes the right to have 10 bitcoins next year, plus the additional right to spend them before that if that's more valuable. So 10 bitcoins today cannot possibly have a lower present value than 10 bitcoins next year."
I dont agree that a present value analysis is reasonably possible, so I must reject that part of your argument.
I am very thankful for your reply. Realnowhereman said:
"There is no predictable deflation "built in" to bitcoin."
Disagree. The future supply is fixed per the algorithm. IF demand increases, the result is deflation. It has already occurred. I consider this fact.
"The supply of bitcoins is only (to a reasonable approximation) going to increase; never decrease."
I feel that's not relevant because only the delta between supply and demand is the issue, and it can be unhealthy. The Yen had a deflation problem recently, and it was horrible for Japan's economy because it's export based. The supply of real estate could be used in your example also because it's fixed, yet I also don't feel your argument is relevant in the case of real estate.
"Therefore any price deflation that happens because bitcoins increase in value because of increased demand is dependent entirely on the success or not of bitcoins. Therefore bitcoin deflation is not predictable, therefore the current price does not include that deflation."
Agreed, mostly. My fundamental assumption is that demand for bitcoins will grow, because bitcoin will succeed. But it will never in its current form be usable for long term transactions because of the inability to exercise monetary policy. Having the currency rise in value over time is not healthy for a currency, it's healthy for speculators. Let me cite the link at the bottom of this message to address this perspective.
"Which means that the current price reflects the market's prediction of future price."
Agreed, but it's highly speculative. I consider it a fact that any businessman that looks at bitcoins will refuse to sign a long term contract that uses the currency, unless he's convinced he'll be on the winning side. Thus the situation now requires a sucker in order for the transaction to succeed. This isn't healthy for a currency. For short term transactions, I don't see a problem with bitcoin. For my use case, this is the fatal flaw. Joel Katz then said:
"The issue is what happens in the future if all bitcoins have been generated and bitcoins are a well-established means of payment. In that case, deflation will be predictable."
I agree, but I claim deflation has already occurred because of the delta between demand and supply. All coins dont need to be created, only a delta needs to happen, and it could be both a positive and negative delta.
"Of course, there will never be perfect prediction. But the fact that most people will generally agree on at least what is likely to happen and that such predictions will not change radically over short periods of time ensure a stable price. (And the premise of the question is that we all know bitcoins, if they survive that long, will ultimately be deflationary. If that premise is false, there's no problem. If the premise is true, the market will be efficient to the extent it's true, so still no problem.)"
Good point, but a competing digital currency for those that want stability could arise, if there is a demand for it. Bizzy
then commented, and I agree 100%.Joel then commented:
" I agreee. That's not the case right now. The question is about a future time when that is the case, when bitcoins are stable, when all (or most) of the coins are mined, and so on. Right now, in two years bitcoins might be worth nothing or $5,000 each."
Deflation has happened already. It was fueled ultimately by an increase in demand for bitcoins and a limited supply. I bet more towards the $5000 each statement. Johnyj commented:
"Monetary policy control only works with a currency which is decreasing in value"
Disagree. If demand for the currency were to drop then government could remove some from the market. Take a company doing a stock buy back for example, same approach. It's ideal when the company has the funds and the price as dropped. That's in essence the exercise of monetary policy over the stock value by a contractionary policy (contract the supply).
"But if people are hoarding the currency, then most of the added money supply will become their saving, and the monetary policy could have very little effect. "
Disagree. If the hoarders know they will be punished, they will be less likely to hoard. As they see new currency being added, their confidence in the success of their hold stragegy will drop. Monetary control serves as an important psychology tool because people know it exists and can be exercised if necessary. With bitcoin, this is not the case, we all know it can't be exercised. Which is in effect one of the main reasons for its success, but for long term contracts this is a serious problem. SUMMARY
Let's take the Swiss for example. The structure of their economy is such that they must have a stable currency, after all banking is their biggest sector. Inflation is very very low for Swiss Francs. It's an example of stability.
Therefore, if I were to issue a 30 year bond today, I'd want to be paid in Francs. The reason why is that I bet the US govt will inflate their way our financial problems. Yet the swiss couldn't get away with it.
For my use case, the 'economy' will be like Switzerland where stability is mandated, else there are winners and losers more so than satisfied parties whom have completed long term contracts. There is a great reduction in stress when you have confidence in the long term prospects of the currency.
So I'm researching to try to understand if monetary controls could be added to a p2p design like bitcoin, and I think they can. The controls would be variables in the protocol that enabled expansionary and contractionary policy. Note that I don't believe the stability of the swiss franc would be achieved, and the policy controls would not be god like, as they would involve voting by the community, but the community would be motivated for stability by the nature of the use case.
I'd love to keep this thread going. Let me cite this alternative deflation position which I fully agree with:https://en.bitcoin.it/wiki/Deflationary_spiral#Alternative_ViewpointThank you all
for your time. Please point out any holes in my statements, as this is very useful for me.