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Author Topic: The Bitcoin deflation annoyance  (Read 3574 times)
BitterTea
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October 25, 2011, 10:54:47 PM
 #21

I thought that but I took a look at block explorer and it was in fractional BTC even when looking at raw view (maybe their "raw view" isn't that raw).  So I wasn't sure but I think you may be right.  I do recall reading something about internally the system handling everything as satoshis.

Yeah, a value of 1 = 1 satoshi; a value of 100000000 = 1 BTC.
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October 26, 2011, 07:39:03 AM
 #22

Price stability is not a non-issue, it is a central goal of any monetary system.

The central goal of a monetary system is to provide a measure of value to facilitate trade. What's with this fetish for price stability? Stable against what? Ultimately, all prices are relative and floating against one another.

Here's a riddle for you: If corn halves in value relative to cotton, how much money do you print for price stability?

This is a total non-issue.
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October 26, 2011, 11:24:00 AM
 #23

(1) the prices of things will be constantly changing since the currency will keep deflating

That's true of the US Dollar as well, but instead of the money losing purchasing power it will gain purchasing power. The rate of change will be driven lower by speculators long term (if everyone knows Bitcoins will rise in price, speculators will buy them, rising the price in the present). Over time, you will see a gradual, relatively predictable price and its annoyance for repricing goods should not be overwhelming. How many times per day does Wal Mart change the price on a good in their store? It's no great burden.


(2) we will be dealing in decimal units. Quoting ridiculous prices like BC0.000013 or whatever will be very annoying and a lot of invoicing systems are not designed to handle cents values below 1/100

Have some foresight!  A name will be given to smaller units. Perhaps the .00000001 unit will be called the Satoshi (seems to be catching on). In such a case where BTC is extremely valuable, your coffee will simply be "5.30 satoshis".   Nomenclature is a non-issue, the market will easily figure out efficient naming schemes.


I think ultimately we will have to make a competing client that breaks the 21 million limit and uses a more practical value scale and rate of inflation.

Go for it. I won't be buying it.  


if a satoshi is the smallest unit, how can a coffee be 5.30 satoshis? if they are the smallest unit then they are not divisible....
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October 26, 2011, 11:57:25 AM
 #24

if a satoshi is the smallest unit, how can a coffee be 5.30 satoshis? if they are the smallest unit then they are not divisible....

Nice catch. That means precision will need to be increased before Bitcoin gains in value million-fold.
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October 26, 2011, 12:29:40 PM
 #25

if a satoshi is the smallest unit, how can a coffee be 5.30 satoshis? if they are the smallest unit then they are not divisible....

Nice catch. That means precision will need to be increased before Bitcoin gains in value million-fold.


Exactly and the bitcoin network can handle any level of precision.  It currently is set at 1E-8.

At 1 BTC = $1,000,000 USD, 1 satoshi = $0.01 (at current limit)
Given the need for single penny units isn't exactly necessary we likely could get to 1 BTC = $10 mil and thus 1 satoshi = $0.10 before the current divisibility becomes an issue.

1 BTC = $10 mil is a monetary supply of $210 trillion and is roughly 5x the current global monetary supply.

These are trivial non-issue.  Broader acceptance, reduced volatility, more advanced tools, user friendly client, idiot proof backup & security these are much harder problems and have real impact on the uptake of Bitcoin.
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October 26, 2011, 08:35:02 PM
 #26

I still think you're wrong about this. Imagine Alice, Bob, and Charlie make up the entire economy. Alice wants the widget that Bob is selling for 2 BTC, but has none. So she borrows from Charlie and pays Bob. Bob now has 2 BTC and Charlie as an IOU from Alice for 2 BTC. Would Bob trade his 2 BTC to Charlie for Alice's IOU? Are they of equal value? Only if Bob trusts that Alice will repay 2 BTC.
For the original loan to take place, the IOU would have to be worth 2 BTC. That may mean its face value is substantially more than 2 BTC. That may mean it's insured.

Quote
The IOU is not fungible because its value depends upon the probability that the debtor will repay their debt.
The IOU might have a different risk/reward profile than bitcoins. But the risk/reward profile of currency is very hard to adjust. Meanwhile, those who craft IOUs can carefully tune their risk/reward profiles by choosing the face value, interest rate, and using partial or complete insurance. So it's quite likely that at least some people will prefer the IOU. And if you don't, you just have to sell it to someone who does. If, for example, the IOU's interest rate scales with inflation, it can actually have *less* risk than holding currency.

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October 26, 2011, 08:39:29 PM
 #27

Yes, you can say that the 5,000 IOU adds additional 5,000 bitcoins into the economy, but this IOU should be considered less valuable than actual 5,000 bitcoins because there's counterparty risk attached to it, i.e. the borrower might default in case he fails to earn 5,000 actual bitcoins to repay the loan.
Who said the face value of the loan was 5,000 bitcoins? I said the loan was *worth* 5,000 bitcoins (because a disinterested party paid 5,000 bitcoins for it in an open market). The value of a loan includes the risk.

Quote
Another issue that springs to mind: how could there be interest on loans if the money supply is fixed ...
The money supply is not fixed. Think about dollars for a minute. Bitcoins are like dollars but the Federal reserve can't print any more of them. So what? What percentage of US dollars are in the form of physical currency?

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October 26, 2011, 08:46:10 PM
 #28

Your definition of money supply and the standard accepted definition of money supply are not the same thing.

Debt isn't part of money supply.  Debt is part of the larger economy but not the money suppy.
Debt isn't fungible, easily divisible, or have low friction.

The bitcoin monetary supply is fixed.
The US monetary supply is expanding.

Neither of those definitions require printed money.  The federal reserve doesn't print any money.  They expand or contract money supply via open market policies.

Just because something has an equivelent value in BTC doesn't mean it is part of the BTC money supply.

You have 500 BTC, I have one ounce of gold.  Using your debt analogy if I sell you the gold coin the BTC money supply has doubled because their is 500 BTC and 500BTC (equivelent) of gold.  In reality there isn't.  The money supply is still 500 BTC. 

I hate to quote wikipedia but:
Quote
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).
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October 26, 2011, 09:36:53 PM
 #29

While it is certainly true you can increase the supply of bitcoins by loaning them, even this is subject to the limitations of requiring a fractional reserve. Even the most reputable loaner will require a reserve to honor ongoing redemptions. Let's say, for the sake of argument the reserve is 10% and that 50% of the total supply is net loaned then perhaps we can expand the total supply by 500%. So, now, instead of 21 million coins we effectively have 100 million floating around. Once again the limit is fixed.

By loaning bitcoins we can expand the BC supply, not increase it indefinitely.

Posters arguing that price stability is not an important monetary objective need to go back to "skool" and take Econ 101.

Internally the bitcoin source code uses coins and cents as the fundamental units and formats and parses strings that way. Any change of denomination would require changes to the core logic of the current client.

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October 26, 2011, 09:56:22 PM
 #30

Posters arguing that price stability is not an important monetary objective need to go back to "skool" and take Econ 101.

You can't enforce stability merely by a generation function, hence it's not relevant to the topic. If you have an idea about how to stabilize exchange value without compromising freedom from central authority, I'd like to hear it. At this point, I consider it impossible, since exchange value is external to the currency. In the same manner, you can't stabilize the value of corn relative to acetone without taking external measures either.

Internally the bitcoin source code uses coins and cents as the fundamental units and formats and parses strings that way. Any change of denomination would require changes to the core logic of the current client.

Cents? Correct me if I'm wrong but Bitcoin keeps it as a signed 64-bit Integer (1 BTC is 10^8 units). Increasing the precision is only possible with a change in protocol, but it can be seamless if done in a long interval, say two years. After that, clients older than two years wouldn't be able to connect to the network. No practical problems there. This is not "core logic" either.
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October 26, 2011, 10:01:54 PM
 #31

You can't enforce stability merely by a generation function, hence it's not relevant to the topic. If you have an idea about how to stabilize exchange value without compromising freedom from central authority, I'd like to hear it. At this point, I consider it impossible, since exchange value is external to the currency. In the same manner, you can't stabilize the value of corn relative to acetone without taking external measures either.

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October 26, 2011, 10:57:24 PM
 #32

I hate to quote wikipedia but:
Quote
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).
This is a reasonable definition of money supply. The fact that the block chain can never contain more than 21 million bitcoins puts no limit whatsoever on how many can be in circulation (just as a bearer bond can circulate the same way dollar bills do) or in demand deposits. The reason you don't see equivalents in circulation with dollars is because of a combination of legal restrictions and the lack of any need for them.

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October 26, 2011, 11:13:24 PM
 #33

I hate to quote wikipedia but:
Quote
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).
This is a reasonable definition of money supply. The fact that the block chain can never contain more than 21 million bitcoins puts no limit whatsoever on how many can be in circulation (just as a bearer bond can circulate the same way dollar bills do) or in demand deposits. The reason you don't see equivalents in circulation with dollars is because of a combination of legal restrictions and the lack of any need for them.

It may be "reasonable" but it isn't used.  A bearer bond isn't part of US money supply.

For example no commonly accepted definition of US money supply includes mortgages which you would include for bitcoin economy.  Similarly the US money supply would be many magnitudes larger if you considered all mortgages, students loans, credit card balances, corporate bonds, derivatives, stocks, options, credit default swap, US national debt, etc to be part of the money supply.   It may be part of the economic activity but it isn't the money supply.

The same applies for global money supply and bitcoin money supply.

Debt isn't used to conduct trade.  Sure debt trades hands but it is the item being sold not the medium for trade.


People buy debt.  
People sell debt.  
However the other side of that trade normally involves money.

People buy potatoes
People sell potatoes
However the other side of that trade normally involves money.

Unless your definition of the bitcoin money supply includes potatoes it shouldn't include debt either.

Nobody for example goes to Grocery stores and pays for groceries with some debt they own.  The money supply is what facilitates trade not what is purchased.

Grocery <-> Currency
Debts <-> Currency
Videogames <-> Currency
...
Houses <-> Currency


The reason we track & measure the money supply is it is the intermediary that facilitates trade.  No matter what someone wants (from debt to videogames) they can acquire it via money and likewise when someone wants to sell something they can sell it for money.

If you trade debt for something other than money that is barter.  It doesn't make the debt part of the money supply.  Likewise if I trade you $1600 in potatoes for an ounce of gold are those potatoes part of the gold supply now.  Did the gold supply grow by $1600?  Of course not and likewise if you barter some debt you own for some other asset it doesn't increase the money supply.  I mean if you include debt in the money supply to not be arbitrary anything bartered for gold should be part of gold supply.

Lastly one trait of money is fungibility.  Each dollar is worth exactly the same as every other dollar.  Each unit of debt isn't worth the same (even if it has the same face value and interest).  Some will default, some will payoff early, some will payoff in full.  When you get paid in dollars (or bitcoins) it doesn't matter which dollar you get paid with however if you get paid in debt it does matter which debt you get paid with.  

While you can barter with debt it isn't money and thus isn't part of the money supply (any money supply).
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October 27, 2011, 01:38:21 AM
 #34

While you can barter with debt it isn't money and thus isn't part of the money supply (any money supply).
If that were true, then no fiat currency would be part of the money supply, inlcuding dollar bills. Fiat currency notes are debt -- most of the money supply for most of the world's nations are notes that represent sovereign debt. See, for example, 12 USC 411. http://www.law.cornell.edu/uscode/12/411.html

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October 27, 2011, 02:14:08 AM
 #35

While you can barter with debt it isn't money and thus isn't part of the money supply (any money supply).
If that were true, then no fiat currency would be part of the money supply, inlcuding dollar bills. Fiat currency notes are debt -- most of the money supply for most of the world's nations are notes that represent sovereign debt. See, for example, 12 USC 411. http://www.law.cornell.edu/uscode/12/411.html

We will have to agree to disagree.

The money supply in many countries is based on debt but the actual money supply (as in the count) doesn't include debt.

Banks use fractional reserve banking to increase or decrease the money supply and central banks influence that action via monetary policy.

Still the ACTUAL MONEY SUPPLY = MONEY not debt.

As an example, the federal reserve defines the US money supply as:
Quote

M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts).
M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.

Currently the M2 is ~10 trillion.  Obviously debt is not a component of the money supply given US mortgages and national debt are ~7T and ~14T respectively and collectively the US has roughly ~30T in debt of all forms.

M0, M1, M2, M3 are the measures of money supply and include ... money. 

The whole purpose of counting money supply is because the supply of money (not debt) affects prices.  People buy and sell things with money not fractional mortgage notes or partial credit card bonds.  Thus the amount of mortgages changing isn't going to directly affect the change in prices (inflation).  The change in the supply of money (actual money both physical and electronic) relative to the change in productivity is what results in inflationary or deflationary pressures.
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October 27, 2011, 03:10:08 AM
 #36

While you can barter with debt it isn't money and thus isn't part of the money supply (any money supply).
If that were true, then no fiat currency would be part of the money supply, inlcuding dollar bills. Fiat currency notes are debt -- most of the money supply for most of the world's nations are notes that represent sovereign debt. See, for example, 12 USC 411. http://www.law.cornell.edu/uscode/12/411.html
In the US, FRNs are not debt, but they are backed by debt (on the FED's balance sheet)...that's an important distinction.  A large part, but not all, of that debt backing is US Treasury debt (in particular, the FED has added large amounts of MBS debt in recent years to its balance sheet).  However, when you deposit dollar bills into a bank checking account, that is debt (a debt the bank owes you).  And since the bank only maintains a fractional reserve backing of that debt and a checking account balance is for the most part as good as a physical note (especially due to FDIC insurance), that debt does effectively expand the money supply (of course there are different measures of money supply..."money supply" itself isn't a very specific concept).

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October 27, 2011, 03:40:11 AM
 #37

(1) the prices of things will be constantly changing since the currency will keep deflating
Just set your prices relative to something else you find desirable (or perhaps your input costs) and let software do the updating for you.

Quite Right!

May I suggest the USD is a rather stable unit of account. It is widely used and people are familiar and comfortable with it. This problem is largely solved.

I don't know why one would wish to use Bitcoin to solve a problem that is already solved, and for which Bitcoin is manifestly unsuitable, when there are so many unsolved problems for which Bitcoin is ideal.

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October 27, 2011, 04:43:20 AM
 #38

(1) the prices of things will be constantly changing since the currency will keep deflating
Just set your prices relative to something else you find desirable (or perhaps your input costs) and let software do the updating for you.
Quite Right!

May I suggest the USD is a rather stable unit of account. It is widely used and people are familiar and comfortable with it. This problem is largely solved.

I don't know why one would wish to use Bitcoin to solve a problem that is already solved, and for which Bitcoin is manifestly unsuitable, when there are so many unsolved problems for which Bitcoin is ideal.
I'd rather based it on actual costs of other goods to remain independent of any other currency.  For curiosity, back in July I started tracking the prices of 9 staple items at my local grocery store.  The prices were 2% higher at the last check about a week or so ago.  That's a 2% rise in ~3 months!

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October 27, 2011, 04:54:17 AM
 #39

Banks use fractional reserve banking to increase or decrease the money supply and central banks influence that action via monetary policy.

Still the ACTUAL MONEY SUPPLY = MONEY not debt.
Fractional reserve banking is debt. My $100 checking account balance is the bank's debt. If a checking account balance is part of the money supply, then debt can be part of the money supply.

Your dollar bill is debt. It is an obligation of the United States. If a dollar bill is part of the money supply, then debt can be part of the money supply.

Whether or not debt actually *will* be part of the money supply depends on a lot of factors. The primary one is whether or not it makes economic sense for it to be. In a hypothetical economy with a currency shortage, there will be a demand for currency, and debt will meet that demand.

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October 27, 2011, 05:17:27 AM
 #40

I'd rather based it on actual costs of other goods to remain independent of any other currency.  For curiosity, back in July I started tracking the prices of 9 staple items at my local grocery store.  The prices were 2% higher at the last check about a week or so ago.  That's a 2% rise in ~3 months!

Again, most people will probably find it convenient to use the USD together with a measure of inflation when calculating costs (assuming US based). Finding an accurate figure to approximate the inflation in the basket of goods you typically buy is tricky, but doing the calculations yourself would give you an exactitude that is probably not worth the candle. (your figure of 8% p.a. for staple goods sounds about right to me)

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