Self-regulating spirals

[epii]

I was thinking about the issue of lost coins last night.  I read in the FAQ the idea that lost coins aren't lost value, as the value of a lost coin will be redistributed to all other coins in the economy.  However, it also states that there is no way of distinguishing a lost coin from a coin in savings.  It follows that whatever impact the coin's "loss" had on the economy (apart from its owner) took effect as soon as it exited active circulation, not when it was lost.  It follows from that that savings have the power to increase the value of all the coins in circulation, which would motivate more savings, and... of course, what I'm describing is the deflationary spiral which has already been talked to death here.

But assuming the simplest economic model of bitcoin possible, let's follow this thought experiment through.

So everybody wants to save their bitcoins instead of spending them, because the value is increasing, and as more people start saving, that increase appears to accelerate.  However, savings as a fraction of the total bitcoin money supply will follow an S-curve; the deflation will start to decelerate as the majority of the money supply winds up in savings.

At this point, bitcoin owners will realize that they are sitting on piles of gold, but that deflation has become so slow that their savings cannot reasonably gain any more value (in this simple model).  Furthermore, if some other saver were to get the notion to start spending, the increased circulation would cut into the value of your savings.  Clearly it is imperative to be the first one to start spending, and thus maximize your buying power before everybody else jumps on the spending bandwagon!  This would start an inflationary "spiral" (though not hyperinflation, obviously, because there is an upper limit on the amount of currency in circulation).

I imagine these forces would not swing back and forth between such extremes, but would rather balance each other out somewhere around the middle.  Once new bitcoins are no longer being produced, I foresee that fairly constant ratios of coins will remain in circulation and in savings.  The inflation/deflation rate should tend to zero, excluding the very important effects of population growth, economic growth, etc.

Do others agree with this assessment?

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[hugolp]

Yes.

Also, you are only considering consumption in your model. But savings are usually used for investment through the financial system, so an increase in savings is not less money in the economy, its just less money being used for final consumption and more money being used for capital building. The transmission from savings to investment is not 100% but with a competitive financial system it does not create problems.

[Stephen Gornick]

So everybody wants to save their bitcoins instead of spending them, because the value is increasing

When I buy gas, I use the gas station where I pay cash and pay about $0.10 or so less per gallon that at a gas station where I can buy using credit.

The merchant that accepts credit loses between 1.5% and 3% of the sale amount to payment network charges.

If given the option of paying for my purchase using bitcoins at a price that is 2% less than the visa/mc/paypal price, ... I'm going to pay with bitcoins.  That 2% is recognized immediately.   Generally, I will restock my wallet for with more bitcoins, based on my bitcoin spending needs.

[epii]

But savings are usually used for investment through the financial system, so an increase in savings is not less money in the economy, its just less money being used for final consumption and more money being used for capital building. The transmission from savings to investment is not 100% but with a competitive financial system it does not create problems.

Ah, okay, that makes sense, but when I was talking about savings, I was talking about the case in which a person's wallet is just sitting on their computer, unused.  As the challenges of bitcoin banking have already been expounded here, I imagine the infrastructure of the bitcoin economy would have to undergo quite an overhaul before investment could become a common vehicle for saving.

[marcus_of_augustus]

And then you have to factor in alternative, competing crypto-currencies that can be created ad infinitum ... it is really difficult to see this deflationary, depression-bound bitcoin economy threat that gets trotted out.

[Grinder]

In theory there can be many currencies, but in practice it will most likely be a case of winner takes it all, because using several different currencies requires a lot of overhead. People will end up using the one everybody else uses as long as there aren't any really siginficant advantages from changing.

This is also why bitcoins are almost only used by libertarians so far. For everybody else who don't care about the politics it's just more risk and more work than using normal credit cards or Paypal.

[marcus_of_augustus]

In theory there can be many currencies, but in practice it will most likely be a case of winner takes it all,

Well this statement has no basis in reality, either theoretical or observed behaviour.

Multi-currency regimes in free banking states that have flourished previously in Hong Kong, Panama and Scotland had a multitude of currencies issued from competing private banks. There is no 'winner takes all' because big users/holders of currency wish to spread their risk and rightly so.

[Grinder]

I don't know about the others, but in Hong Kong they all issue Hong Kong dollars, which is pegged to USD. They are not allowed to issue HKD if they don't have the equivalent amount in USD in deposit. Also all the notes are printed by the same government owned company. That doesn't leave much to compete about.

[Nefario]

In terms of money entering and leaving an economy its only a major thing if everyone tries to spend all their savings at the same time, that is use their savings to consume. This would result in a price spike. The same would be said if everyone stopped spending at the same time, prices drop very quickly.

[marcus_of_augustus]

I don't know about the others, but in Hong Kong they all issue Hong Kong dollars, which is pegged to USD. They are not allowed to issue HKD if they don't have the equivalent amount in USD in deposit. Also all the notes are printed by the same government owned company. That doesn't leave much to compete about.

That is today, read up on the history of it ... they have become part of the globalist bankster takeover like so many other countries.

[Sepp]

I imagine these forces would not swing back and forth between such extremes, but would rather balance each other out somewhere around the middle.  Once new bitcoins are no longer being produced, I foresee that fairly constant ratios of coins will remain in circulation and in savings.  The inflation/deflation rate should tend to zero, excluding the very important effects of population growth, economic growth, etc.

Do others agree with this assessment?

You are probably right about the extremes balancing each other out somewhere in the middle, especially as the bitcoin ecology grows.

The last assumption however, that inflation/deflation rate should tend to zero is not a given.

The overall inflation/deflation rate depends entirely on how much request for bitcoin there is to do its main business, which is to be used as a payment medium.

Large changes in user base will inflate/deflate the currency.

Double the user base, and you will roughly double the value of each coin = deflation.

Cut the user base in half (because - let's say - users leave for a different bitcoin implementation) and the value of each coin will roughly be half = inflation.