Altcoin - the alternative cryptocurrency?

[miscreanity]

This is a fallacy! How money supply becomes inadequate? Money is a measure not fuel for economic growth. By increasing money supply as economy grows you are in fact rewarding a group of participating parties with extra money they do not deserve. You are creating bubbles! Bubbles are much more disruptive than slower growth.

Anything can act as money. Money is simply an abstract concept that is applied to a representative item in order to make trade between differing products possible.

I cannot give someone oranges for his chicken eggs if he doesn't want oranges. A universally or at least widely-accepted medium must be used. Otherwise, a direct barter system is necessary.

As mentioned, anything would work to represent value; even ceramic cups. For simplicity, let's use dollars as they're familiar. When there are 10 dollars in an economy that has a hundred items for immediate trade, there are insufficient dollars to facilitate trade. Even if there were 100 dollars, that may not be enough because some items might be valued more highly than others. At least 100 dollars would be necessary to represent each item of value; more depending on negotiated value of the items.

Thus, there would be an increased demand for the medium of exchange, in our case dollars. If that demand is not met, the items will not be traded. This is one of the arguments used against gold as a currency, which does have some validity. Consider a situation where you might look to buy a pair of sandals. The sandals are $40 and you have a $50 bill. Should there be a shortage of currency, the business might not be able to provide you with the $10 in change you would expect after purchasing the $40 sandals with your $50. Would you be willing to take a $10 loss?

The store management might instead raise the price to $50. Eventually, that would displace values of other goods throughout the economy. Granted, it would be a slight displacement, but done with many items and by many participants, the aggregate changes add up and cause large-scale disruption. Then demand for the adopted currency increases.

It is a matter of convenience that drives the demand for a common currency. If it cannot be supplied sufficiently, trade will be put off until negotiated prices restabilize or alternatives are implemented, thus causing an overall slowdown in the interim. This has nothing to do with the economy itself, as that still retains its objective productive capacity. Instead, the economy's ability to function smoothly is hindered by lack of a fungible exchange method.

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[superpc]

This is a fallacy! How money supply becomes inadequate? Money is a measure not fuel for economic growth. By increasing money supply as economy grows you are in fact rewarding a group of participating parties with extra money they do not deserve. You are creating bubbles! Bubbles are much more disruptive than slower growth.

Anything can act as money. Money is simply an abstract concept that is applied to a representative item in order to make trade between differing products possible.

I cannot give someone oranges for his chicken eggs if he doesn't want oranges. A universally or at least widely-accepted medium must be used. Otherwise, a direct barter system is necessary.

As mentioned, anything would work to represent value; even ceramic cups. For simplicity, let's use dollars as they're familiar. When there are 10 dollars in an economy that has a hundred items for immediate trade, there are insufficient dollars to facilitate trade. Even if there were 100 dollars, that may not be enough because some items might be valued more highly than others. At least 100 dollars would be necessary to represent each item of value; more depending on negotiated value of the items.

Thus, there would be an increased demand for the medium of exchange, in our case dollars. If that demand is not met, the items will not be traded. This is one of the arguments used against gold as a currency, which does have some validity. Consider a situation where you might look to buy a pair of sandals. The sandals are $40 and you have a $50 bill. Should there be a shortage of currency, the business might not be able to provide you with the $10 in change you would expect after purchasing the $40 sandals with your $50. Would you be willing to take a $10 loss?

The store management might instead raise the price to $50. Eventually, that would displace values of other goods throughout the economy. Granted, it would be a slight displacement, but done with many items and by many participants, the aggregate changes add up and cause large-scale disruption. Then demand for the adopted currency increases.

It is a matter of convenience that drives the demand for a common currency. If it cannot be supplied sufficiently, trade will be put off until negotiated prices restabilize or alternatives are implemented, thus causing an overall slowdown in the interim. This has nothing to do with the economy itself, as that still retains its objective productive capacity. Instead, the economy's ability to function smoothly is hindered by lack of a fungible exchange method.

That's a good way of representing it.  BitCoin is just a newer currency that makes some changes that are better to all but basically anything could be used as currency.

[becoin]

When there are 10 dollars in an economy that has a hundred items for immediate trade, there are insufficient dollars to facilitate trade.

There are sufficient dollars (if this trade is so important to the economy). Each item will be traded at $0.10 and the sky will not fall!

[miscreanity]

There are sufficient dollars (if this trade is so important to the economy). Each item will be traded at $0.10 and the sky will not fall!

That was a hypothetical for use as an example. Don't focus on the term used, since anything can act as the currency.

I could've said:

"When there are 10 skyhooks in an economy that has a hundred items for immediate trade, there are insufficient skyhooks to facilitate trade."

The point is that skyhooks are being used by the trading participants to make trade easier. Without enough skyhooks, something else must be used, or trading must be done in-kind (barter).

We can go with currency exchange for further clarification. Let's say that I have 10,000 USD and you have 15,000 BRL. The value representation is approximately equal with 1 US dollar equivalent to about 1.5 Brazilian Reals. If I want 7,500 of your BRL, but you want gold instead of dollars, I will have to use 5,000 USD to buy the appropriate amount of gold. If I can only get 2,000 USD worth of gold, I won't be able to give you enough gold for 7,500 BRL. You would only be willing to exchange for the 3,000 BRL worth of gold that I now have.

The trade is limited by the amount of common currency, in the last case, gold. Obviously there is more gold than that in the world, but again, the situation was hypothetical - an example. Try not to get caught up in the details.

[evoorhees]

If one currency has been widely adopted, then the money supply must follow the increase in total amount of traded goods/services in the whole economy, so a constant increase in money supply is required to maintain price stability

But what if this currency has not been widely adopted (like bitcoin) or maybe never will be? Then I think defaltion nature tends to keep it's economy scale limited, not the other way around (economy scale getting bigger and the currency get more valuable)

As far as my understanding goes, that's accurate. If the economy and currency are growing at the same pace, prices remain stable and everyone goes about with business as usual.

Inflation should not be desired for the mere purpose of keeping prices flat. Prices are important things, they signal where investment ought to occur. Holding any price flat, whether general goods or money, etc. is not only unnecessary but is likely to cause market distortions. All prices ought to float freely against each other... causing the supply of money to increase in order to flatten prices is merely another fallacy of central planning and ought to be avoided.

The fact remains that if two bitcoin-type currencies exist, and Bitcoin proper has zero inflation and the Altcoin has X inflation, then over time the former will retain value in advance of the latter. This will cause the former to be preferred, unless the latter possesses some benefit which overcompensates for this issue. I don't see Altcoin having any substantial benefit over Bitcoin, but I do see it having many negatives.

Those who want perpetual monetary inflation "as long as it's predictable" can go right ahead  

[evoorhees]

If a money supply remains constant while the economy grows, eventually the money supply becomes inadequate to facilitate trade throughout the entire economy. Consequences vary, but all are disruptive.

False. So long as there are enough divisible units to cover the small transactions, it matters not how much money is in a system. Bitcoin is infinitely divisible, and a world in which a car costs one trillionth of a bitcoin is no different functionally than a world in which it costs 1,000 bitcoin. Prices adjust to the money supply, and there is no reason to tamper with it or inflate it merely to hold prices constant.

[becoin]

Try not to get caught up in the details.

I'm not, you are. You are missing the bigger picture. To make a trade happen easier is just the same as giving the buyer easy money. That should never ever happen or you intentionally create bubbles in the economy.

[miscreanity]

Inflation should not be desired for the mere purpose of keeping prices flat. Prices are important things, they signal where investment ought to occur. Holding any price flat, whether general goods or money, etc. is not only necessary but is likely to cause market distortions. All prices ought to float freely against each other... controlling the supply of money to increase in order to flatten prices is merely another fallacy of central planning and ought to be avoided.

The fact remains that if two bitcoin-type currencies exist, and Bitcoin proper has zero inflation and the Altcoin has X inflation, then over time the former will retain value in advance of the latter. This will cause the former to be preferred, unless the latter possesses some benefit which overcompensates for this issue. I don't see Altcoin having any substantial benefit over Bitcoin, but I do see it having many negatives.

Those who want perpetual monetary inflation "as long as it's predictable" can go right ahead  

I entirely agree that inflation shouldn't be used simply to keep prices steady and that things should float freely. However, it is still desirable to maintain price stability in order for an economy to function efficiently. Wild fluctuations will cause difficulty in price discovery, thus increasing problems in projecting the viability of business productivity. Basically, it becomes almost impossible to calculate a reliable ROI. This leads to an abandonment of such a manic currency in favor of more flexible alternatives.

The significance of unlimited expansion is not forced inflation or a set rate as central banks today aspire to. Instead, currency demand elasticity is kept stable by the perpetually available expansion; inflation is the result in this case, not the cause. As noted with mining, if it isn't profitable and all miners cease their activity in favor of transaction processing fees, there won't be any inflation at all until mining becomes profitable again (representative of growth and hence demand).

If the economy slows and/or contracts, the existing Altcoins would gradually become worth less. As the economy grows, demand for a common currency increases, so the supply must become available - it must inflate. This keeps the Altcoin value relatively stable and range-bound (elastic). It balances out Bitcoin's nature.

Being a deflationary currency, Bitcoin will become worth more as the economy grows, leading to accumulation - it then becomes a Giffen good. This increase in hoarding reduces currency available for the economy to function, which is a major factor in the bust that occurs after a boom unless there is a means of translating the value difference between the store of value acting as a foundation, and the product or service desired. That's where Altcoin fits.

The big difference from current centrally-managed currencies and the Alt/Bitcoin duality is that the former have no effective restraint and are managed using crude methods while the latter are self-correcting, being managed internally by the system itself. It's kind of like the Holy Grail of monetary theory.

False. So long as there are enough divisible units to cover the small transactions, it matters not how much money is in a system. Bitcoin is infinitely divisible, and a world in which a car costs one trillionth of a bitcoin is no different functionally than a world in which it costs 1,000 bitcoin. Prices adjust to the money supply, and there is no reason to tamper with it or inflate it merely to hold prices constant.

Agreed on all counts, in theory. In practice, that can prove less than functional; consider this: is Bitcoin really infinitely divisible? If it would require a change to the code to increase the precision past 8 digits or some other external translation, the answer becomes less clear. Even as the system stands, what would it take to enact such a change? Would that change the fact that Bitcoin is deflationary by nature, having a set limit of ~21mm units? Again, the Giffen good aspect comes into play with a deflationary asset, as does Gresham's law.

Rather than trying to shoehorn Bitcoin into a role of both the means of exchange and store of value, it can much more easily act as the latter due to its deflationary nature. Altcoin then allows for flexibility in the opposite direction without having to add patches to an elegant system. The more things are changed, the greater the potential for failure. KISS. The exchanges already perform the vital function of acting as bridges between disparate currencies and would afford the same between Altcoin and Bitcoin.

If Altcoin's inflation halted due to unprofitability of mining in a stagnant or contracting economy, the eventual rise in Bitcoin's value will equalize the overall system and allow the economy to continue growing. Altcoin would continue growing to match the economy's pace while Bitcoin maintains its steady value appreciation. It doesn't matter what Altcoin's value is because the economy's growth carries it - it does matter what Bitcoin's is because the economy would rest on it. The same principles apply to the US dollar (Altcoin) and gold (Bitcoin).

Of course, this all assumes widespread adoption of both Altcoin and Bitcoin.

[stryker]

If a money supply remains constant while the economy grows, eventually the money supply becomes inadequate to facilitate trade throughout the entire economy. Consequences vary, but all are disruptive.

This is a fallacy! How money supply becomes inadequate? Money is a measure not fuel for economic growth. By increasing money supply as economy grows you are in fact rewarding a group of participating parties with extra money they do not deserve. You are creating bubbles! Bubbles are much more disruptive than slower growth.

but not increasing the money supply raises the value of the existing money as with bit coin.... remember with altcoin more money is being added but its up for grabs to anyone who mines?!?!

and decentralised currency needs miners.... plus adding just a little more forever more may encourage people to spend a little and not just hoard.... lets face it hoarding is only done as a means to get rich quick? or at least maybe fairly fast

[miscreanity]

Try not to get caught up in the details.

I'm not, you are. You are missing the bigger picture. To make a trade happen easier is just the same as giving the buyer easy money. That should never ever happen or you intentionally create bubbles in the economy.

No need for accusation. I have to differ with you on the suggestion that making trade easier is the same as providing "easy money". While I do agree with you that what we call easy money results in bubbles, it's outside of the actual currency demand from an economy. I also think the excessive availability of it is made possible primarily because of the human control element.

It might be good to elaborate on what I consider "easy money" and how it results in problems. In my view, it's a supply of currency above and beyond that which is demanded by the overall economy (consisting of individuals, businesses and the market systems utilized by them to engage in transactions). Because central banks of today use crude methods to determine demand for money, the granularity is often too large to be effective without introducing major price/value distortions.

Each time an intervention occurs, it distorts demand. If the distortions aren't allowed to recede, further interventions that supply "easy money" will exacerbate the problem until it is no longer possible to compensate and the money supply is so far removed from real demand that bubbles form (demand that responds to the increases in money supply as opposed to real assets and productivity).

What I've described goes beyond simply making trade easier and crosses into the limitations of human perception on grand scales. Trade only gets so easy - the excess doesn't help. Because Alt/Bitcoin manage themselves internally, these distortions are virtually impossible. When distortions begin to occur, the system self-corrects. I'm sure there will eventually be certain specific situations where complications could arise, but for now they are two sides of an extremely sublime system (the combination of cryptography, triple-entry accounting and distributed networking/processing).

It's somewhat similar to a parent (as a central bank) attempting to control a teenager's habits (which is impossible, as the parent cannot watch the teenager 24/7) and the teenager (as the currency) learning to take care of himself (he is always around himself and his decisions affect him directly so he would know immediately, or very quickly, when action needs to be taken).

Oh - I keep wanting to squish your user icon

[miscreanity]

but not increasing the money supply raises the value of the existing money as with bit coin.... remember with altcoin more money is being added but its up for grabs to anyone who mines?!?!

and decentralised currency needs miners.... plus adding just a little more forever more may encourage people to spend a little and not just hoard.... lets face it hoarding is only done as a means to get rich quick? or at least maybe fairly fast

Decentralized currencies don't necessarily need miners; it's a very ingenious way to spur usage, though. In the Bitcoin system, no miners means no inflation. It's a naturally self-correcting mechanism that prevents runaway devaluation.

Hoarding can be a get-rich-quick method during rapid growth or high volatility, but normally it takes a very long time for hoarding to pay off.

[evoorhees]

Good discussion Miscreanity!

I entirely agree that inflation shouldn't be used simply to keep prices steady and that things should float freely. However, it is still desirable to maintain price stability in order for an economy to function efficiently.

These two sentences contradict each other. On one hand you say inflation shouldn't be used to keep prices steady. On the other hand you're saying it's desireble to keep prices steady by continually inflating the currency. Your first sentence is correct, second is false.

Wild fluctuations will cause difficulty in price discovery, thus increasing problems in projecting the viability of business productivity.

Agreed, but Bitcoin will not cause wild fluctuations in the long term, will it? It's decreasing rate of inflation is steady and predictable, and there will be no drastic increase nor decrease in money supply, thus price discovery should also occur on a relatively smooth curve. Both Bitcoin and Altcoin would be perfectly predictable and smooth - neither having an advantage in this regard.

If the economy slows and/or contracts, the existing Altcoins would gradually become worth less. As the economy grows, demand for a common currency increases, so the supply must become available - it must inflate. This keeps the Altcoin value relatively stable and range-bound (elastic). It balances out Bitcoin's nature.

Now this is a very problematic statement =) Your claim is that Altcoin will tend to -match- the rate of economic growth, and thus would keep prices stable. But how can you predict the rate of economic growth? You cannot. If the economy grows faster than you're expecting, Altcoin will resemble Bitcoin in that prices for money will rise. The supposed ills which you see in Bitcoin's slower rate of inflation would be similar in Altocoin's faster rate of inflation. Similarly, if the economy grows slower than you expect, the price for both monies will fall, but Altcoin's price will fall faster.

In other words, any argument that Altcoin is superior because it maintains steady inflation rests on the assumption that the economy maintains a steady growth of precisely that amount as well. If not, then Altcoin is susceptible to the same issues of price changes as Bitcoin, just leveraged differently.

Being a deflationary currency, Bitcoin will become worth more as the economy grows, leading to accumulation - it then becomes a Giffen good. This increase in hoarding reduces currency available for the economy to function, which is a major factor in the bust that occurs after a boom unless there is a means of translating the value difference between the store of value acting as a foundation, and the product or service desired. That's where Altcoin fits.

Change the word "hoarding" to the word "saving" and you'll see why your statement is silly. An increase in savings rates is not a major factor in an economic bust. People save to the extent that future consumption is worth more than what they could consume in the present. When people save, market prices must fall only until those goods become attractive again, and subsequently people will spend. The "deflationary spiral" is a myth... savings is a self-correcting process. One need only look at the electronics market to see this in action. We all know the computer will cost half the price next year, yet how many of us are reading this on 20 year old computers? We buy electronics all the time, knowing full well that prices will fall.

----

tl;dr - "deflation" is not a problem. It's a boogeyman. Prices always tend to correct and re-allocate behavior toward efficiency. It's okay for prices of goods to fall, and prices of money to rise.

[tacotime]

If the money supply is constant, then deflation is unavoidable and will hinder the economy growth

If someone told you that economic growth depends on money supply they are plain ignorant!

You're right, economic growth does not depend on the money supply, but I believe the point being made was that it can be adversely affected or slowed by it. Deflation to anything less than a purely cash-based economy would have to make up the difference in economic activity with delayed payment or barter. Even reduction in available credit can act as a drag when the system has grown into such flexibility.

If a money supply remains constant while the economy grows, eventually the money supply becomes inadequate to facilitate trade throughout the entire economy. Consequences vary, but all are disruptive.

Deflation is more a problem for banks to deal with than for people or for a centralized system...  The big problem with deflation is for wages and for contracts involving loans/debt, but the easy fix is to just put terms into the contract with reference to inflation/deflation.

e.g. you have a loan for 1000$ at 3% annual for five years.  However, make the 3% annual adjusted for central/foreign currency or commodity inflation or deflation, so that it's 3% above whatever the currency has modified to.  If it this year saw a 5% deflation (increase in value of currency +5% or -5% inflation), make the amount owed negative 2%.  If there is 5% deflation, there should be a clause in worker contracts that specifies their wages will go down too.  This is what banks should have been doing in the first place... NOT the Federal Reserve who has been consistent in messing everything up for the past while by never contracting the US money supply.

The only nice thing about a linear supply of money compared to a deflationary supply is that early adopters will not destroy it by getting way more than anyone else...  Eventually there will be no reason to mine anymore with a deflationary curve, which is one of the long term dangers of BTC (a supply not capable of contraction).  But that hasn't deterred gold as an investment.

A better curve for difficulty may be one that is non-formulaic and ties supply to weighted global currency values and supplies, reflecting the amount of wealth presently available.  In the event of recession the output could be contracted by higher difficulties, while in economically favourable times it could be expanded with lower difficulties.  Just an idea.  You could go through economic papers and then probably hard code something that accesses currency values/supplies on the web and calculates the difficulty based upon those.  This would be a real advancement in the online currency world, instead of digital equivalents of gold or of inflation-ridden USD.

[miscreanity]

Good discussion Miscreanity!

Likewise! I've seen, and agreed with, a lot of your comments in other threads. You brought up some good points and the opportunity to cross-examine conclusions is always welcome.

... However, it is still desirable to maintain price stability in order for an economy to function efficiently.

These two sentences contradict each other. On one hand you say inflation shouldn't be used to keep prices steady. On the other hand you're saying it's desireble to keep prices steady by continually inflating the currency. Your first sentence is correct, second is false.

Nothing about inflation in that sentence, only price stability.

Agreed, but Bitcoin will not cause wild fluctuations in the long term, will it? It's decreasing rate of inflation is steady and predictable, and there will be no drastic increase nor decrease in money supply, thus price discovery should also occur on a relatively smooth curve. Both Bitcoin and Altcoin would be perfectly predictable and smooth - neither having an advantage in this regard.

I don't imagine Bitcoin would cause fluctuations in the long-term; wider adoption should see the exchange rates settle and fluctuations become the rarity instead of the norm. The comparison I usually use is to gold, where Bitcoin is the digital version of it. That will last as long as the economy's demand for Bitcoins doesn't outpace the currency's inflation rate - that's when convenience starts to trump value.

Altcoin is different, though. It isn't as predictable because there's no set expansion. If the inflation rate were arbitrarily targeted at 2%, sure you could figure out how many Altcoins there would be in the year 2238. With no specified rate, it'll simply expand to accommodate the participating economy's demand. It could top out at ~10mm units for a year or blaze up to ~100mm within the same time.

As with Bitcoin, the initial growth phase could be turbulent. Bitcoin can be inflated by being dividing units, but it requires increasing effort to do so each time based on the number of participating nodes in the network. It's a similar problem to accumulating >50% of the processing power, though perhaps not quite as difficult. An updated fork would have to propagate sufficiently. Exchanges could accommodate further division, but that's basically patching at a higher level to make things work, introducing external failure potential.

Inflating Altcoin's supply would simply involve more mining. That would take place based on the profitability of generating additional blocks, essentially what the situation in Bitcoin will be until it hits ~21mm units. With no expansion limits, Altcoin can continue to grow with the economy, but during a contraction it can't reduce the number of Altcoins that already exist. It's the opposite problem from Bitcoin's - progressive loss of value instead of progressive gain.

That's where the balance in competing money supplies comes in - Gresham's law means that oversupply of Altcoins will force Bitcoins to be hoarded/saved until Altcoins have dropped in far enough in value to be supported by Bitcoin's rise in value. The corollary is the decline in USD to a point where gold would be preferable for trade. Obviously, the control of dollar supply is too primitive to secure ongoing viability, but the principle remains the same.

Now this is a very problematic statement =) Your claim is that Altcoin will tend to -match- the rate of economic growth, and thus would keep prices stable. But how can you predict the rate of economic growth? You cannot. If the economy grows faster than you're expecting, Altcoin will resemble Bitcoin in that prices for money will rise. The supposed ills which you see in Bitcoin's slower rate of inflation would be similar in Altocoin's faster rate of inflation. Similarly, if the economy grows slower than you expect, the price for both monies will fall, but Altcoin's price will fall faster.

In other words, any argument that Altcoin is superior because it maintains steady inflation rests on the assumption that the economy maintains a steady growth of precisely that amount as well. If not, then Altcoin is susceptible to the same issues of price changes as Bitcoin, just leveraged differently.

Heh exactly. It's a bit tricky, but the pattern of growth would be about the same as Bitcoin's is now. The two are complementary, but we'll get to that in a moment.

There's no need to predict economic growth - the inflationary expansion occurs in response to it. If the money supply in Altcoins lags the economic growth, you can bet it'll be very worthwhile to mine, so there will be processors working overtime to generate as many as possible while the mining's good.

Imagine if Bitcoins were still worth USD$30 per BTC today. How many people would be mining their asses off? That'd happen until either the price dropped as demand fell off, or USD rates on everything increased 30-fold. Because of that, at this point in Bitcoin's growth phase, I entirely agree that they both would share the same inflation problem and that Altcoin's relative price would fall faster than Bitcoin's during a contraction. Once Bitcoin hits its ceiling, Gresham's law becomes apparent.

We can compare the X-coin relative price valuations as helium-filled balloons, one in the air, the other underwater. Altcoin is in the air - as it inflates, it rises; as it deflates, it drops to the ground. Bitcoin is underwater - as it inflates, it rises; as it deflates it still rises. At zero altitude, the two meet.

It isn't about superiority - the two variants work in a complementary fashion. Price stability is as important as having a solid value base. Bitcoin provides the base, but if an economy is expanding and Bitcoin has hit its limit (it doesn't subdivide units automatically to my knowledge), prices denominated in BTC will start to drop suddenly and rapidly. That means that Bitcoin will be gaining value in relation to the broader economy and would be looked at as an investment (again, similar to gold). This hoarding/saving takes BTC out of circulation, leading to further relative value increase in BTCs until a threshold is reached.

With a functioning implementation of Altcoin, prices remain stable because Altcoin's relative value keeps pace with economic growth. Bitcoin's value is still likely to rise rapidly, but not in direct relation to products and services. It rises in Altcoin value as well (e.g. 10 ATC per BTC to 20 ATC per BTC), but businesses pricing goods and services in ATC wouldn't care. The ATC price remains stable even if BTCs buy more ATC and goods now than before. That's the price stability, and Bitcoin's steady valuation acts as a base upon which all other valuation is finally derived.

If you've ever gone SCUBA diving and been unable to see the surface or the seafloor, you know how important a steady reference point is. Bitcoin is the reference point. Above all, it provides a starting point, the origin coordinate of (0,0) from which all other points on the value map can be plotted.

For an excellent visualization of Altcoin's potential progress, Artefact2's Eligius charts shows the pattern very nicely. The blue "Current block estimate" line is the path Altcoin would take and the green "Unpaid reward" line that climbs a stairstep pattern represents economic growth. I imagine the steady slope wouldn't be quite as steady, and would be attributable to speculators who keep mining under the expectation that growth will continue (speculators actually stabilize prices).

Change the word "hoarding" to the word "saving" and you'll see why your statement is silly. An increase in savings rates is not a major factor in an economic bust. People save to the extent that future consumption is worth more than what they could consume in the present. When people save, market prices must fall only until those goods become attractive again, and subsequently people will spend. The "deflationary spiral" is a myth... savings is a self-correcting process. One need only look at the electronics market to see this in action. We all know the computer will cost half the price next year, yet how many of us are reading this on 20 year old computers? We buy electronics all the time, knowing full well that prices will fall.

----

tl;dr - "deflation" is not a problem. It's a boogeyman. Prices always tend to correct and re-allocate behavior toward efficiency. It's okay for prices of goods to fall, and prices of money to rise.

You're right - deflation isn't a problem. Currently, mismanagement of our mediums of exchange (Euro, USD, Yen, etc.) in relation to outstanding debt is. And hoarding/saving or whatever you want to call it isn't a bad thing either - it's a defensive reaction.

The difficulty comes from having such a dissociation between the real economy and the illusion of prosperity such that large segments of the illusory economy default during the crunch. Lots of pain and social unrest; nobody wanting to admit they were duped or wrong. The monetary system itself isn't at fault, it's the human control element.

Hoarding/saving doesn't cause the correction, it just accelerates it to completion. Not silly at all - it helps clear up the waste by cutting off access. Even the worst company can continue to function with funding; shut that off and the company fails faster than any other method. Savings: instant deflation!

Electronics are manufactured and their value comes from the way they're used (no electricity, no internet or software == doorstop). Something like that has immediate utility, but certainly isn't a store of value or we'd all be "saving" computers for our retirement. Gold simply exists and for very specific reasons serves almost no other purpose than as money, particularly in the store of value aspect. It also functions as a metric of value, that all-important reference point. Electronics cannot do so reliably. Nor can cars, houses, food, dollars or Euros.

The appropriate asset class needs to be used in the right context. No matter how valid a comparison it might be, imagine how absurd it would be to say that you wanted to pay for a Mercedes with 150 Radeon 5850 cards. Will that still be a legitimate comparison in 5 years?

Speaking of - I have an extra 6-pin power cable and an open PCIe slot - got an extra card?

[johnyj]

Each time an intervention occurs, it distorts demand. If the distortions aren't allowed to recede, further interventions that supply "easy money" will exacerbate the problem until it is no longer possible to compensate and the money supply is so far removed from real demand that bubbles form (demand that responds to the increases in money supply as opposed to real assets and productivity).

What I've described goes beyond simply making trade easier and crosses into the limitations of human perception on grand scales. Trade only gets so easy - the excess doesn't help. Because Alt/Bitcoin manage themselves internally, these distortions are virtually impossible. When distortions begin to occur, the system self-corrects. I'm sure there will eventually be certain specific situations where complications could arise, but for now they are two sides of an extremely sublime system

Although quite off-topic, it's a pleasure to read your post and get inspiration to think more

This "easy money" concept, I'm still confusing. What is exactly "easy"?

A cook in kitchen cooking hard to make 20$/hour
A fund manager sitting in his office to make 400$/hour
A banker get 400000000$ loan from FED with 0 interest
An early bitcoin miner mined 25000 BTC

Which is easier?

How could you decide the money supply is excess?

And, why economy can't expand at 10% or even 200% per year, what is the factor that limit it? It's decided by number of people? Technology? Human nature?

[miscreanity]

Although quite off-topic, it's a pleasure to read your post and get inspiration to think more

This "easy money" concept, I'm still confusing. What is exactly "easy"?

A cook in kitchen cooking hard to make 20$/hour
A fund manager sitting in his office to make 400$/hour
A banker get 400000000$ loan from FED with 0 interest
An early bitcoin miner mined 25000 BTC

Which is easier?

How could you decide the money supply is excess?

And, why economy can't expand at 10% or even 200% per year, what is the factor that limit it? It's decided by number of people? Technology? Human nature?

Easy money is most closely represented by the 3rd item you listed. It's almost impossible to lose with a 0% rate, as you can use it for even highly conservative investments that might return 2% and be nearly guaranteed profit. Gov't takes all the risk and banks keep all the profit.

It's almost impossible to determine when there's excess in a modern economy of sufficient size. There are so many variables and changes take a long time to propagate through an economy. By the time the metrics used to observe an economy and decide how to manage it finally produce recognizable results, there are major distortions. That makes any actions taken more likely to cause harm and further disruption than correct any imbalances in the first place.

In order to truly be able to centrally manage an economy, massive amounts of data must be collected, increasing complexity and potential for errors. The task becomes herculean while allowing the system to manage itself would result in the distortions and imbalances resolving themselves over time.

There are many factors that influence growth rates. Yes, the human aspect among others. Raw resource availability, energy production, global competition, population growth, infrastructure development, etc...

[johnyj]

Easy money is most closely represented by the 3rd item you listed. It's almost impossible to lose with a 0% rate, as you can use it for even highly conservative investments that might return 2% and be nearly guaranteed profit. Gov't takes all the risk and banks keep all the profit.

It's almost impossible to determine when there's excess in a modern economy of sufficient size. There are so many variables and changes take a long time to propagate through an economy. By the time the metrics used to observe an economy and decide how to manage it finally produce recognizable results, there are major distortions. That makes any actions taken more likely to cause harm and further disruption than correct any imbalances in the first place.

In order to truly be able to centrally manage an economy, massive amounts of data must be collected, increasing complexity and potential for errors. The task becomes herculean while allowing the system to manage itself would result in the distortions and imbalances resolving themselves over time.

There are many factors that influence growth rates. Yes, the human aspect among others. Raw resource availability, energy production, global competition, population growth, infrastructure development, etc...

From a macro level, it is difficult to see the truth because of many variabls and delays. Let's just look at a simple example:

A sell a horse to B at 10$
B sell back to A at 20$
A sell back to B at 40$
.
.
.
A sell the horse back to B at 1280$
.


During this procedure, since A and B are both making money, they will get good incentive to continue this activity. And the bank is willing to provide extra loan to facilitate the transactions because A&B's income are increasing steadily

We all know this is a bubble, but as long as banks are providing money to support the trading, this game could continue and the required money supply will increase exponentially

So, could we define that profit from rising in good's value are easy money and bank should not provide money to support such kind of trading?

But then how could you differentiate rising value caused by speculation or just by increase in demand? Isn't speculation itself some kind of demand?

[miscreanity]

So, could we define that profit from rising in good's value are easy money and bank should not provide money to support such kind of trading?

But then how could you differentiate rising value caused by speculation or just by increase in demand? Isn't speculation itself some kind of demand?

The example you provided doesn't just occur without serious distortions elsewhere in the system (internal, external or a combination). But yes, without tracking every transaction and the rationale, it becomes increasingly difficult to manage the money supply.

In the current system, banks provide credit and came to treat debt as money, but they do not increase the monetary base. Ironically, if the banks did print their own money, the ongoing financial crisis probably wouldn't be as pronounced although other issues would arise.

I would agree that speculation on expanding economic development can be categorized as demand. The question is whether we're talking about a hypothetical system such as one predominantly based on Alt/Bitcoin or the current system.

In the current system, speculation builds on itself because there are no consequences for being wrong if the speculator is a major player or otherwise in a position to be bailed out. In a Bitcoin-based system, there is no way to manipulate the monetary base, so a speculator who is wrong will have to take his losses.

[TiagoTiago]

Inflation sucks, a bottle of Coke is 4 times more expensive than it was just a couple years ago but salaries haven't increased anything near that

[johnyj]

In the current system, banks provide credit and came to treat debt as money, but they do not increase the monetary base. Ironically, if the banks did print their own money, the ongoing financial crisis probably wouldn't be as pronounced although other issues would arise.

I would agree that speculation on expanding economic development can be categorized as demand. The question is whether we're talking about a hypothetical system such as one predominantly based on Alt/Bitcoin or the current system.

In the current system, speculation builds on itself because there are no consequences for being wrong if the speculator is a major player or otherwise in a position to be bailed out. In a Bitcoin-based system, there is no way to manipulate the monetary base, so a speculator who is wrong will have to take his losses.

I think this post better move to economics subcategory 

In my understanding, only commercial banks treat debt as money, the central bank has to produce money to facilitate the trading

In old time, it was gold production, and today printing paper money/digital money with the amount matching the GDP growth. Like gold belongs to gold miner, the printed money also belongs to central bank. Although the central bank create money supply to buy the government bond, but without having the ownership of those printed money, they can not do this through an accountable way

Of course they do not need these money for private usage, but they are issentially like a bitcoin miner who provide the market with liquidity. They are more flexible than a bitcoin miner since the amount of money they can provide at any time (to keep price stable)  will not be limited by difficulty/electricity/hashing power etc... So their effort is moved from creating money and more focused on watching the money flow in the whole society

Anyway, the FED just feels like "the biggest end customer" in today's financial system. If he spend, everyone start to make money, if he  save, everyone feel the pain. If he spend too fast(easing), that will cause inflation; if he spend too slow(tightening), there will be deflation and recession; it's really an art to be a FED chairman

In the bitcoin world, same thing happens, but we all know this "biggest end customer" only have limited amount of bitcoin (he is not very rich), so we might not want to do big business with him