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Author Topic: Positive aspects of deflation...  (Read 6530 times)
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November 07, 2011, 08:40:11 AM
 #1

Just a few things I've mentioned when having to "defend" the deflationary aspect of Bitcoin to people who are new to the idea.

1) We live in a world that is rapidly running out of resources (such as oil now and later coal) due to consumption.

The idea of the necessity to have "ever expanding" economies must surely have a lot to do with this issue. A deflationary economy might well be of great benefit in helping the world to reduce the problems of over consumption.

2) We live in a world that is badly polluted by the very consumption our "growing economies" have so heavily promoted.

Slowing demand down (and especially the demand for "throw away" goods) surely is a good way to help the environment (and therefore all life living on planet Earth).

3) Goods these days are never made to last (I think most people even only just over 30yo would agree that many modern tools and devices are inferior compared to products that were being made by previous generations).

If your money was becoming more valuable by you not spending it then you are going to buy a replacement widget when you absolutely need it (and you would want that widget to last as long as possible so you are not losing even more by constant replacement).

Tie in the above with a bit about the greed of modern banks (which as a store for your savings in order to earn interest would be unnecessary with deflation) and you start to put forward a more convincing argument in favour of deflation for those that although perhaps schooled in Keynesian economics do understand the problems of the modern world (assuming they are not bankers).

Cheers,

Ian.

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November 07, 2011, 08:52:12 AM
 #2

"just think, if we have deflation, our tools will last longer!"

quite a stretch to blame money for consumerism, bro. perhaps we should go back to lords and fiefdoms?

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November 07, 2011, 09:23:07 AM
 #3

"just think, if we have deflation, our tools will last longer!"

quite a stretch to blame money for consumerism, bro. perhaps we should go back to lords and fiefdoms?

Sorry but I don't quite see how I "blamed money for consumerism" - consumerism is tied to inflation/deflation in that we see behavior such as "keeping up with the latest" vs. "keeping what I've got working" being fairly related to economic cycles but money itself causes neither.

I have no idea why my post would suggest anything to do with lords and fiefdoms either - care to explain?

Cheers,

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November 07, 2011, 09:33:20 AM
 #4

I certainly agree that economic growth is not good when it's at the expense of resource depletion and environmental damage.  I am absolutely in favor of economic incentives to produce durable, long-life goods, and discouraging the use of disposable products and wasting resources.

Limiting economic growth to achieve those goals has several problems:

While it encourages you to continue using an old product for as long as possible, when a replacement becomes necessary it doesn't provide a strong incentive to replace it with a high-quality one.  Because deflation increases the time-value of money, you have an economic incentive to spend as little as possible now even if it means buying a second replacement sooner.  Since your money will be worth more in the future, that second replacement will cost you less.

Not all economic activity has nonrenewable resource costs.  Paying for telephone service, food, sex, etc, does not directly deplete resources.  There may be secondary effects (oil for mechanized farming, coal to power the telephone company), but economy-wide deflation doesn't create an incentive to buy your food from a more efficient farm; it just encourages eating less.

It also discourages investments that conserve resources: rooftop solar that would have paid off in 10 years now becomes much less rewarding if spending that money now hurts more and buying coal-power for the next ten years becomes effectively cheaper to you.

Economic incentives that are targeted directly at the externalities are much more effective and have far fewer unintended consequences.  I don't mind slowing economic growth when it's driven by those incentives, but limiting economic growth to try to achieve those goals is backwards and often counterproductive.

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November 07, 2011, 10:02:44 AM
 #5

While I agree that deflation isn't always positive and think that most of your points are very relevant I do think that the idea of buying cheaper rather than better goods can be argued. Consider that the consumer has a choice of a cheaper product (for $20) and a better quality one (for $30) and that the quality one will outlast the cheaper one by a factor of two (say 2 years rather than 1).

Consider then the following:

Cheaper $20 - lasts 1 year
Quality $30 - lasts 2 years

lets just assume that the "price" of both of these goods remains the same (so getting more expensive in real terms each year due to perhaps increased scarcity of resources required for manufacturing) then we would see the following spending occur over 5 years

        Cheaper  Quality
Year 1    20.0    30.0
Year 2  +20.0   +0.0
Year 3  +20.0   +30.0
Year 4  +20.0   +0.0
Year 5  +20.0   +30.0

Total   100.0     90.0

In this example by buying the quality product we have actually saved money.

Whilst this is a contrived example I've generally found that quality products will last much more time than their proportional cost (YMMV) so I do think that deflation can assist in favoring the choice of quality over the cheapest price (as I think the real problem is that a lot of people just don't bother to consider how long something will last these days).

Cheers,

Ian.

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November 07, 2011, 10:51:52 AM
 #6

Prosperity comes from people growing useful things, making useful things, or providing useful services. Contrary to what bankers and politicians will tell you, prosperity doesn't come from increasing the money supply.

The higher the rate of inflation, the more of the prosperity goes to people who borrowed their capital, and are in debt. The higher the rate of deflation, the more of the prosperity goes to people who have saved, and are providing the capital for others.

In ideal circumstances, there is no inflation or deflation. Savers can obtain a small premium in return for temporarily foregoing use of their money, and borrowers can pay a small premium in return for using other people's capital for productive purposes.
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November 07, 2011, 11:12:27 AM
 #7

It all depends on the price/quality ratios.  When I can get a product that's twice as good for 50% more cost, I'll take it every time.  The trouble is it's often not nearly so clear-cut.

http://www.amazon.com/Ingersoll-Rand-2135TiMAX-2-Inch-Impact-Wrench/dp/B000WMN2GU
http://www.amazon.com/Campbell-Hausfeld-TL1302-2-Inch-Impact/dp/B000TA4BDI

I've used both.  The Ingersoll is a quality tool, clearly made to last a lifetime, and it's a real pleasure to use.  The C-H is disposable; it performs as promised, but I'd expect to replace it frequently since it's not nearly as well made and it's too cheap to bother fixing.

The environmental impact (materials and energy) that go into each are comparable.  The difference is in the extra manufacturing costs to produce the finer-quality, better-engineered product.  It's basically all labor.

Is the Ingersoll worth 10x more?  Is it worth 20x more with the time-value considered?  Is it worth 30x once you start adding deflation?  Deflation's encouraging us to buy the disposable one.

If you price in the externalities (environmental damage from metals mining, carbon remediation costs for the power generation) into the materials (eg, make the metal more expensive), it will drive up the cost of each by, say, $25.  That's negligible for the Ingersoll, but suddenly the C-H becomes a lot less appealing at twice the cost.  That creates a market incentive to allocate those resources efficiently instead of just telling us to buy less stuff.

http://www.amazon.com/HP-Deskjet-Printer-C8970A-B1H/dp/B000CO9ZMI
http://www.amazon.com/HP-CP3525N-Color-LaserJet-Printer/dp/B001FWG8DU

Pretty similar performance:  around 30PPM, color, networked...  Is the latter worth 6x more?  Even its toner cartridges are worth several times the purchase price of the cheap one!  The operating costs are much lower, and the latter will last 20 years in a home office while the former will get tossed out every couple years.  The overall price/quality tradeoff is OK: pay 6x for something that lasts 10x longer and saves you money on refills in the future.  Once you add deflation in, you start having a really big incentive to buy the one that only costs 1/6th.

I wish it was just a 50% premium to get the good stuff, but cheap disposable goods have flooded the market because they're dramatically cheaper.  Making people reluctant to spend their money will encourage that trend.

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November 07, 2011, 11:47:45 AM
 #8

I wish it was just a 50% premium to get the good stuff, but cheap disposable goods have flooded the market because they're dramatically cheaper.  Making people reluctant to spend their money will encourage that trend.
I think the main reason why cheap disposable goods could flood the market is because they are produced in very large quantities - often exceeding the "real" demand for a product of that type.
People often buy things they do not really need just because they think they make a bargain.

In a deflationary economy people would probably think twice before buying, thus making mass production of goods less cost-effective.

Also I'm under the impression, that with production costs increasingly having to take into account secondary costs (like recycling the product after its lifespan, the environmental impact of the resources and the production process, future supply of limited resources,...), the real cost for a product would shift the balance even more towards longer lasting products of higher quality. This has nothing to do with inflation/deflation but with cost transparency.

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November 07, 2011, 12:15:41 PM
 #9

I agree with the market flooding effect.  I partly agree about deflation helping by discouraging unnecessary consumption: that's certainly true, but it equally discourages investing in high quality goods.  If the apparent cost of both doubles, what's improved?  It decreases resource consumption, but it also increases the cost of non-constrained resources; this dilutes the incentive to use the limited resources efficiently.

Ideally you only want to increase the cost of the limited resources; your last paragraph hits it square on the head.

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November 07, 2011, 10:20:54 PM
 #10

1) We live in a world that is rapidly running out of resources (such as oil now and later coal) due to consumption.

No we aren't and even if we where resources are never depleted. They get substituted long before that...

There is very little reason to assume deflation would have any effect on the savings/spending ratio. Not a little inflation either, the problem is not in the pocket of the average Joe but because it makes entrepreneurs think there are more savings available then there are.

The savings/spending ratio is determined by time-preferences and the real interest rate which there is no reason I can see to assume would be higher with a slowly diminishing money supply then with a steady one. But interest rates would not be artificially lowered by government credit expansion so there would be no artificial cheap consumer credits to get. Saving might be somewhat higher with a market interest rate which would mean there is more capital to use to make capital goods and new technologies and the production capability of the society would grow at a faster rate. This does however also make consumer goods cheaper.
So chances are we would land pretty much right we are today anyway but without the destructive miss-allocation of inflation created business cycles, some of the capital that get miss-allocated and destroyed during booms would go to investments. But some of it also probably to consumption.

People just hoarding the currency does absolutely nothing to anything except the price of the currency if the degree of hoarding changes but that doesn't really do anything either since it is a transparent and universal price change the market can easily account for.

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November 07, 2011, 10:44:33 PM
 #11

So chances are we would land pretty much right we are today anyway but without the destructive miss-allocation of inflation created business cycles,

110% agreed. But you don't need deflation to fix this, you need stability. Deflation WILL lead to hoarding if there is no counterpoint that says "if you hoard, I'm going to inflate the supply." Thus the idea for the cryptocurrency linked in my sig.

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November 08, 2011, 08:28:57 AM
 #12

110% agreed. But you don't need deflation to fix this, you need stability. Deflation WILL lead to hoarding if there is no counterpoint that says "if you hoard, I'm going to inflate the supply." Thus the idea for the cryptocurrency linked in my sig.

You can't create price stability, it is just a nonsensical idea to try and fix the price of money.
Increasing price of money will not lead to hoarding, there will be savings options where the risk weighted return is higher for almost everyone then just holding cash in any developed market that isn't in chock.

If someone is destroying money very fast there may be a problem but I don't think BitCoin are going to get lost of that rate and if they where it should rather indicate some other significant problems in the currency that will probably make it unusable as money in the near future.

Of-course there is Gresham's law as long as people are forced to use artificially overpriced government currencies they will spend those and hold onto there bitcoin. But you can't really fix that by trying to price fix another currency...

I read some about your proposal I am not sure how you plan it is going to work. People will mine it when it is not profitable based on future expectations or just for fun like they do BitCoin and just messing around with the release rate really does nothing in the long run. The money will disperse eventually. The only way to do anything different that really matters in the long run is having a currency board that manipulates the supply and that will never work...

The analogy to gold is wrong also as gold mining adds very little new gold and the mining output is very slow to react to price changes and relative to the gold supply the changes in mining output are very small. Gold production is actually a lot more like BitCoin. The high concentration easy to extract resources where excavated long ago and did created massive concentrations of gold (they where later stolen and concentrated elsewhere but anyway). What we are left with now is resources that are difficult and expensive to extract and the supply is rising steadily at about 2% per year where some of it is allocated to industrial use.

I think BitCoin would be a little better if was designed to stabilize at something like a 1% per year growth of the money stock but it should not make a difference really unless so much is lost that you get divisibility issues or it hinders transaction times that no new blocks are created at all.







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November 08, 2011, 09:15:04 AM
 #13

You can't create price stability, it is just a nonsensical idea to try and fix the price of money.

You can't fix the price. 100% agreed there.

However you CAN create stability.  Specifically, you can reduce factors that cause instability.

Bitcoin's design has inherent economic properties that create speculation cycles.  Etlase2's proposal (EnCoin) tries to improve these problems one way; my proposal (RevCoin or whatever) uses a different mechanism; Red's (GEM) is broadly similar; plenty of other systems with varying levels of practicality have been suggested.

Perfect stability isn't possible, but we can do a lot better than what we have now.

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November 08, 2011, 10:24:40 AM
 #14

Bitcoin's design has inherent economic properties that create speculation cycles.

Every small currency will be subject to speculation. And speculation is a really good thing too. What we need is just more speculation in the form of a futures market so merchants can hedge against price changes between different currencies and goods they are doing business in.

Quote
Etlase2's proposal (EnCoin) tries to improve these problems one way; my proposal (RevCoin or whatever) uses a different mechanism; Red's (GEM) is broadly similar; plenty of other systems with varying levels of practicality have been suggested.

I don't see any solutions. EnCoins just seems to peg it to the electricity price which is really very volatile at least here in the colder part of the world. Most families here actually pay a premium on electricity to hedge against price changes. Fixed term price electricity contracts are still the most popular even though they end up paying more then having a floating price in the long run...

Really it is neither necessary or possible to stabilise the price of money. Stabilizing the supply yes, but BitCoin supply is already stable. I am sure it is possible to do improvements when it comes to things like transaction handling and security but not much you can do that matters to the supply. Maybe you can improve on the initial distribution but as long as you do it in a way that gets people to start using it then it in the long run that is quite irrelevant.

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November 08, 2011, 10:41:39 AM
 #15

Every small currency will be subject to speculation. And speculation is a really good thing too. What we need is just more speculation in the form of a futures market so merchants can hedge against price changes between different currencies and goods they are doing business in.

I don't mind speculation when it's pricing in the future.  I do mind uninformed, wild-eyed speculation.

Futures are great to mitigate price risk, but how much do you see of businesses planning a quarter in advance to make a large purchase in BTC?  I don't think that's a very large part of the current economy.  In fact, I don't think it exists at all.  Shorts are much more useful for those who just want to hedge day-to-day currency risk.

In any case, none of that helps the guy who just wants to store some money in his wallet without being whipped around by volatility.

Quote
I don't see any solutions. EnCoins just seems to peg it to the electricity price which is really very volatile at least here in the colder part of the world.

Really it is neither necessary or possible to stabilise the price of money. Stabilizing the supply yes, but BitCoin supply is already stable.

Does your electricity price move 10x in under 6 months?

In any case, I'm not arguing for pegging the price (which can't work).  I'm saying we should look at ways to mitigate destabilizing factors - like deflation - which make the market fluctuate by 10x in such a short time period.

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November 08, 2011, 11:23:54 AM
 #16

I don't see any solutions. EnCoins just seems to peg it to the electricity price which is really very volatile at least here in the colder part of the world.

It is electricity + processing cycles + time. I don't know how things will eventually work out, but the second two factors may be worth a larger percentage of the value to people than the first. The price is far from fixed, it is rather an oscillation that would hopefully never go too far one way or the other. I'm still working on more ideas to keep the oscillations smaller and to be able to account for unexpected future variables such as the CPU->GPU thing that bitcoin suffered, as well as large changes in the price of electricity.

Quote
Really it is neither necessary or possible to stabilise the price of money. Stabilizing the supply yes, but BitCoin supply is already stable. I am sure it is possible to do improvements when it comes to things like transaction handling and security but not much you can do that matters to the supply. Maybe you can improve on the initial distribution but as long as you do it in a way that gets people to start using it then it in the long run that is quite irrelevant.

It isn't possible? If there was a commodity that worked very efficiently as a currency and was always difficult to acquire but not limited, would that not create a stable value to the currency? And the fact that no government can dilute the supply when they feel like it? The bitcoin supply is most definitely not stable or we would not have seen a deflationary spiral in the first few years of its existence. And deflationary spirals are wont to happen again and again as the prisoner's dilemma takes hold--this doesn't require a bad distribution or early adopters--so what the end result will likely be is that merchants will have to stop taking BTC as payment and switch back to a traditional currency during spirals. Currency fail. Surprise, surprise but if there aren't businesses popping up all over the place to keep the volatility away from merchants by just converting it to something else. Gogo payment processor, fail currency.

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November 08, 2011, 01:03:36 PM
 #17

economic growth in rich countries is mainly driven by productivity gains, not by growth in resource consumption.


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November 09, 2011, 12:57:37 PM
 #18

In any case, I'm not arguing for pegging the price (which can't work).  I'm saying we should look at ways to mitigate destabilizing factors - like deflation - which make the market fluctuate by 10x in such a short time period.

From my knowledge the BitCoin supply has not decreased yet. So by definition there has never been any deflation.

The only reason the BitCoin price so unstable is because there is very little actual commerce going on with BitCoins.

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November 09, 2011, 01:01:30 PM
 #19

When I say "deflation" here, I'm talking in the sense that "Bitcoin is a deflationary currency": that the money supply is limited and therefore prone to value growth, not that the money supply decreases.

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November 09, 2011, 01:36:18 PM
 #20

When I say "deflation" here, I'm talking in the sense that "Bitcoin is a deflationary currency": that the money supply is limited and therefore prone to value growth, not that the money supply decreases.

A fixed supply currency does not have any value growth. It is everything else's value that decreases. The money could never outperform investments in production gains on average. All it does is to preserve your productive output for the future which is very important that a money can do and if you saved the productive value of a chair from when they took 2 times the input to make it makes perfect sense you can buy 2 chairs for that not that they are easier to make.


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November 09, 2011, 01:46:01 PM
 #21

It isn't possible? If there was a commodity that worked very efficiently as a currency and was always difficult to acquire but not limited, would that not create a stable value to the currency?

Well about as stable as the price of gold in LCT-TVs have been over the last 10 years....

There will be no spirals just because the money supply is fixed. The money would need to outperform every investment option on the market for there to be any incentives to hoard. It only happens under exceptional circumstances where all investments become extremely risky.
All commodities goes up and down in price, the same things that cause speculation in any commodity causes speculation in money. Small primitive markets with very poor information are very susceptible to these things to happen.

Ohh, wait BitCoins are a small primitive market with almost no information where all investments are extremely risky...

The problem is the regression theorem of money. You can circumvent that launching something hasn't already been figured out what is actually worth by previous non-monetary uses of it will be extremely unstable by just changing the algorithm.

What you would have to do is give a promise of redemption in something else until the currency has a good circulation if you want to overcome the problem of initial price volatility.

If the benefits of anonymity and lack of central authority in virtual payments is large enough to overcome this problem Bitcoin will stabilize ... if not it will fail.


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November 09, 2011, 03:16:28 PM
 #22

We're talking about currency that tends to grow in value - the price for a typical product will be lower next year than it is now.  Call that whatever you want, but we're trying to discuss the relative merits of such a thing.  You're just sidetracking into silly semantics arguments.

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November 09, 2011, 03:49:51 PM
 #23

We're talking about currency that tends to grow in value - the price for a typical product will be lower next year than it is now.  Call that whatever you want, but we're trying to discuss the relative merits of such a thing.  You're just sidetracking into silly semantics arguments.

What silly semantics? I pointed out once that deflation is inaccurate terminology. Everything else I have written is argumentation against that there should be any problems with the kind of currency you describe.

To summarise:
1. consumer goods will not become cheaper relative to money faster then they do towards accumulating productive capital. Any current hoarding taking place would not be because the supply of Bitcoin is limited but because there is a lack of low-risk savings opportunities.
2. the price curve of BitCoin this far has nothing to do with this but can be explained by Mises regression theorem as well as normal speculation vulnerability that applies to all commodities and especially in markets with low trust, volume and information.

On another note Gresham's Law is not applicable here either since it is only between two government currencies. But it still teaches us that while overvaluated fiat will not make people hoard crypt-currencies it will make it impossible for crypto-currencies to gain any foothold of significance in the white market before the fiat system collapses...

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November 09, 2011, 07:28:59 PM
 #24

Well about as stable as the price of gold in LCT-TVs have been over the last 10 years....

I don't follow the analogy.

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There will be no spirals just because the money supply is fixed. The money would need to outperform every investment option on the market for there to be any incentives to hoard. It only happens under exceptional circumstances where all investments become extremely risky.

How many "exceptional circumstances" can we come up with? Investments are going to create growth, growth is going to create further demand for the money...

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All commodities goes up and down in price, the same things that cause speculation in any commodity causes speculation in money. Small primitive markets with very poor information are very susceptible to these things to happen.

Commodities go up and down in price because of real world factors beyond speculation. Currency speculation is only based on what currency will outperform another. I wonder how a fixed supply of money will perform compared to an unfixed supply? Bitcoin only has very poor information by design.

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The problem is the regression theorem of money. You can circumvent that launching something hasn't already been figured out what is actually worth by previous non-monetary uses of it will be extremely unstable by just changing the algorithm.

Could you please restate the second sentence? It is making my brain hurt.

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What you would have to do is give a promise of redemption in something else until the currency has a good circulation if you want to overcome the problem of initial price volatility.

No, you have to do that if you want to overcome the initial problem of price ridiculousness. If the difficulty of creating money is easily quantifiable (electricity cost + time/processing cycles) and is only created when there is demand for it, then your demand will always oscillate around supply. It doesn't need to be pegged to an exact value, the value will become "sticky" over time, but the volatility will not be all that big in the mean time. Just because bitcoin did an absolutely terrible job of it does not mean that it couldn't happen much more smoothly.

1. consumer goods will not become cheaper relative to money faster then they do towards accumulating productive capital.

And by what authority do you have to make this claim? Historical inaccuracy?

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2. the price curve of BitCoin this far has nothing to do with this but can be explained by Mises regression theorem as well as normal speculation vulnerability that applies to all commodities and especially in markets with low trust, volume and information.

Herein lies the problem: a bitcoin as a commodity is effectively a digital trash token that used to be insanely easy to create and is now insanely difficult to create because more people are creating it. Makes it awfully hard for people to come up with a time value of money of a commodity that has no idea what its price is. A stable cost to produce would heavily alleviate that as well as fix the intentional pyramid of wealth transfer.

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On another note Gresham's Law is not applicable here either since it is only between two government currencies. But it still teaches us that while overvaluated fiat will not make people hoard crypt-currencies it will make it impossible for crypto-currencies to gain any foothold of significance in the white market before the fiat system collapses...

Are you suggesting that bitcoins are not in any way overvalued? That their value is not determined in almost the exact same way? Bitcoins won't gain any foothold because merchants will run back to fiat any time deflation starts making the risk of accepting bitcoins too great. It will effectively compromise its own utility by being a fixed quantity since fiat will always exist right alongside it. Bitcoin will be the hoarding currency, fiat will be the spending currency. A currency that has a stable cost to produce and unfixed quantity, however, would be resistant to both inflation and deflation, and would appeal to both spending and saving.

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November 11, 2011, 01:57:37 PM
 #25

How many "exceptional circumstances" can we come up with? Investments are going to create growth, growth is going to create further demand for the money...

Usually the exceptional circumstances are government intervention. War, monetary manipulation, trade manipulation and shortages created by legislation. But there are a number of other things too like technological revolutions, natural disasters and a very small economy could be vulnerable to problems caused by poor self-regulation creating an unsafe environment for contracts.

The commodity money will maintain purchasing power, but that is all it does. It doesn't generate any profit or income. Value of money = total goods and services. But what this doesn't show is anything of what is going on the right side where more of capital created gets allocated to individuals with very low time-preferences then people with high time-preferences that spend most on consumption.

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Commodities go up and down in price because of real world factors beyond speculation. Currency speculation is only based on what currency will outperform another. I wonder how a fixed supply of money will perform compared to an unfixed supply? Bitcoin only has very poor information by design.

Currency demand depends on the amount of trade. But if a commodity currency grows enough and gets used by many different industries in many different locations this should stabilize and the price start to grow very steadily and speculation will stop.

I suppose you could attach you decentralized currency to a centralized statistical agency and force people that use it to specify what it is sent and received for ... doesn't really make anything any better though. The problem is not in BitCoin itself but with the rest of the market. Because we don't have BitCoin stock exchanges that force disclosure of certain information from large bitcoin trading companies to be listed there and the like...

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Could you please restate the second sentence? It is making my brain hurt.

Sorry

You can not circumvent that launching a currency that doesn't already have an established market price will be extremely unstable by just changing the algorithm. Doing it by decree would be a good way to stop all commerce dead in it's tracks. Some people are willing to take the risk with bitcoin because there are many benefits to the alternatives but it is a long way before the market will start pricing these things in a way that correlates any good with people value scales...

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No, you have to do that if you want to overcome the initial problem of price ridiculousness. If the difficulty of creating money is easily quantifiable (electricity cost + time/processing cycles) and is only created when there is demand for it, then your demand will always oscillate around supply. It doesn't need to be pegged to an exact value, the value will become "sticky" over time, but the volatility will not be all that big in the mean time. Just because bitcoin did an absolutely terrible job of it does not mean that it couldn't happen much more smoothly.

People will still be producing it at what would be a loss in the creators mind. Some find ways to lower or externalise production costs, other produce at a loss because they think the price will go up later. Production cost is not that relevant. Also how would you measure demand anyway? Adjusting the supply by the circulation rate or something seems like a recipe for disaster. When everyone is trading down the currency the response from the algorithm would be to increase the supply...
If you are just using the market prices relying on a fixed production price it might create shorter and sharper speculation cycles but it will not get rid of them.

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1. consumer goods will not become cheaper relative to money faster then they do towards accumulating productive capital.

And by what authority do you have to make this claim? Historical inaccuracy?

It is impossible I already explained why earlier in this post. There are stuff going inside the stock of goods of services that isn't going on inside the stock of money. If A = B + C and B increases at a faster rate then C you are better of in B then in A. It isn't more difficult then that really. Essentially the model would be (money stock = capital + consumer goods and services)

History has nothing to do with it. There is no point proving this empirically and there is very little economic data from commodity money economies and even less from economies where regular people have been allowed to save and invest under the same conditions as the political class.


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Herein lies the problem: a bitcoin as a commodity is effectively a digital trash token that used to be insanely easy to create and is now insanely difficult to create because more people are creating it. Makes it awfully hard for people to come up with a time value of money of a commodity that has no idea what its price is. A stable cost to produce would heavily alleviate that as well as fix the intentional pyramid of wealth transfer.

Might be possible to improve the launch a little. But in the long run this is irrelevant and Bitcoin is already past the worst of it I think. It is no pyramid really. Everyone is making a profit since Bitcoin are actually usable and valuable.

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Are you suggesting that bitcoins are not in any way overvalued? That their value is not determined in almost the exact same way? Bitcoins won't gain any foothold because merchants will run back to fiat any time deflation starts making the risk of accepting bitcoins too great. It will effectively compromise its own utility by being a fixed quantity since fiat will always exist right alongside it. Bitcoin will be the hoarding currency, fiat will be the spending currency. A currency that has a stable cost to produce and unfixed quantity, however, would be resistant to both inflation and deflation, and would appeal to both spending and saving.

Yes, but this is the key part of what you wrote "since fiat will always exist right alongside it".
If you create free money that is more inflationary then fiat no one will accept it.
If you create one that is less inflationary no one will spend it.
You can't really get around that. Instead we should simply focus on the black and grey sectors and other merchants that aren't forced to do any business in fiat. Because they would much rather take payments in a currency that is not inflationary and refuse fiat...

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November 11, 2011, 04:16:31 PM
 #26

Usually the exceptional circumstances are government intervention. War, monetary manipulation, trade manipulation and shortages created by legislation. But there are a number of other things too like technological revolutions, natural disasters and a very small economy could be vulnerable to problems caused by poor self-regulation creating an unsafe environment for contracts.

The commodity money will maintain purchasing power, but that is all it does. It doesn't generate any profit or income. Value of money = total goods and services. But what this doesn't show is anything of what is going on the right side where more of capital created gets allocated to individuals with very low time-preferences then people with high time-preferences that spend most on consumption.

Yes, value of money = total goods and services. However, in a totally fixed supply like bitcoin's, the value is pushed up the chain like no other. Those with a low time-preference earn for doing nothing productive. Who can generally afford to have a low time-preference? The wealthy. As the total goods and services expand but the supply of money doesn't, this is giving value to those with money. This value doesn't just magically appear from no where, it is taken from those with a high time-preference. Yes, Bitcoin may create wealth by lowering barriers to trade, however, this will be insignificant compared to the amount of value that is moved up the chain. "Monetary manipulation" doesn't have to have anything to do with what the government does (other than a lack of regulation, as will be rampant with bitcoin) as the recent mortgage crisis shows.

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Currency demand depends on the amount of trade. But if a commodity currency grows enough and gets used by many different industries in many different locations this should stabilize and the price start to grow very steadily and speculation will stop.

You are making gross assumptions that do not fit the historical divide of how those with wealth use it. Yes, the price of BTC would stabilize if it became more popular. This does not mean those with wealth will not attempt to manipulate the currency, and this does not mean that this won't cause more deflation than there should be. No matter what, deflation is a vehicle that gains more value for those with currency than those without. They will use this to gain even more. Human greed is at the source of every recession. Lack of productivity should not be encouraged by gaining real wealth. It is stupid.

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People will still be producing it at what would be a loss in the creators mind. Some find ways to lower or externalise production costs, other produce at a loss because they think the price will go up later. Production cost is not that relevant. Also how would you measure demand anyway? Adjusting the supply by the circulation rate or something seems like a recipe for disaster. When everyone is trading down the currency the response from the algorithm would be to increase the supply...
If you are just using the market prices relying on a fixed production price it might create shorter and sharper speculation cycles but it will not get rid of them.

Status quo bias. You are willing to accept that bitcoin works, but not that another way could. In my design, there is no "loss in the creator's mind." It is all determined by the demand for new currency which is based on whether or not people produce new currency based on the market price. In my design, there is no algorithm that determines to increase the supply. People determine whether or not to increase the supply. And the supply is occasionally restricted (by the currency award, nothing more) to foster competition; what this competition does is help level off the cost to produce against factors that are unknowable to an algorithm. Price of electricity goes down or electrical consumption of GPUs go down--foster competition on a restricted supply to see who is willing to set the bar for what is profitable.

People can't hoard and expect that the value of their currency will increase by virtue of them restricting the supply. The supply will expand in response. The supply will expand in response to more goods and services being available in the economy. The value of each unit of currency will remain stable, or oscillate around a stable point. All of this requires separating the money supply from the security of the network. It can't be done with the gross simplicity of bitcoin's coin distribution scheme. That's why I had to propose a redesign for everything.

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History has nothing to do with it. There is no point proving this empirically and there is very little economic data from commodity money economies and even less from economies where regular people have been allowed to save and invest under the same conditions as the political class.

So you don't consider gold a commodity money? "Political class" is irrelevant, it is the "wealthy class" that controls politicians. The poor are never going to be able to invest under the same conditions--they don't have the capital! Bitcoin is a more ridiculous version of commodity money than gold because its supply is absolutely fixed. If it were to ever gain wide acceptance (which it won't because of early adopters), the wealthy class will again control the currency, and again they will do whatever is most beneficial to themselves. This *will* result in another deflationary spiral (and I mean spiral in the sense that deflation is happening far faster than it should), and they will be happy to fix it by spending a lot less currency for the same goods and services as before. And they get all of that value before the money gets back to circulation; it is almost the exact same measure by which banks and the wealthy gain from cheap lending from the central banks in an inflationary currency. The gap between the rich and the poor grows and eventually a recession will be the result. The poor will have had their wages deflated as a result of this restriction in the supply, and once prices rise again, realize that all of a sudden they no longer had the purchasing power they once had. Where did that value go? To the wealthy. A limited commodity currency does not solve anything.

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Might be possible to improve the launch a little. But in the long run this is irrelevant and Bitcoin is already past the worst of it I think. It is no pyramid really. Everyone is making a profit since Bitcoin are actually usable and valuable.

Wait wait, so how many people made a profit that bought in from anywhere between $4->$30->$4? Somebody bought in. Do you think it was the early adopters buying in? Everyone is not making a profit. The later adopters are not making a profit. This is a zero sum game where wealth is transferred up the chain. It doesn't matter if there were early adopters, there will always be those who are wealthier, and the wealthy have proved on many different occasions that they, time and time again, will do whatever they can to increase that wealth. It was goldsmiths, after all, that created fractional reserve. Bitcoin is no solution, it is just the beginning of the same old bullshit.

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You can't really get around that. Instead we should simply focus on the black and grey sectors and other merchants that aren't forced to do any business in fiat. Because they would much rather take payments in a currency that is not inflationary and refuse fiat...

So you would just give up on a better currency then because you think it's impossible? What makes you think merchants would want to take currency when it was $30 but could be worth $4? When/if it hits $30 again and they have to charge 0.25 BTC for their widget, what guarantee do they have that that BTC won't essentially become worthless again? How can they be sure that the wealthy are not merely manipulating the supply?

Merchants and consumers would both love a currency with a stable value. The rich, not so much, but they might eventually be forced to use it because no one else wants their bullshit, manipulative currency. *I* say we come up with something that forces the rich to stop abusing us, and use money on the 99%'s terms. Bitcoin is the SOS with a new group of people in control. All it will ever amount to is a payment processor with fees every step of the way that make it no better than paypal or CCs. *I* want something that is actually a store of value. *I* want to actually change how the system of money works. Bitcoin has no hope of doing that. Stop thinking that it is impossible, focus your energy on what you could do to make it possible, if that's actually what you want, anyway. If you are a bitcoin elite, you might certainly not.

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November 15, 2011, 12:06:34 AM
 #27

Yes, value of money = total goods and services. However, in a totally fixed supply like bitcoin's, the value is pushed up the chain like no other. Those with a low time-preference earn for doing nothing productive. Who can generally afford to have a low time-preference? The wealthy. As the total goods and services expand but the supply of money doesn't, this is giving value to those with money. This value doesn't just magically appear from no where, it is taken from those with a high time-preference. Yes, Bitcoin may create wealth by lowering barriers to trade, however, this will be insignificant compared to the amount of value that is moved up the chain. "Monetary manipulation" doesn't have to have anything to do with what the government does (other than a lack of regulation, as will be rampant with bitcoin) as the recent mortgage crisis shows.

There is no wealth transfer caused by money. Everyone will be relatively exactly where they where before when the price of money changes. If I have 1 BTC and you have 99 the and one BTC can buy a goat I have 1% of the wealth in terms of goat purchasing power and you have 99%. If the price of BTC doubles it means I can buy 2 goats and you 198. 2/200 is still 1%. So my bargaining position in the market is not affected at all.

There is a transfer counted in market prices from low to high time-preferences but it is not because money changes in value it is because people with low time-preferences receive interest from the entrepreneurs that borrow there money. The entrepreneur gets the money to pay those interest rates from the consumers.

However in terms of value everyone is still better of, and most likely in terms of market prices this will not really concentrate wealth either. Since higher interest rates drives up consumer prices as well the motivation to save increases double and should keep interest rates fairly low as long as investing in safe. But if it is not there are other problems that have very little to do with the currency as long as it was freely adopted...

Also one does not "afford" to have high or low time-preferences. Generally it is the other way around too, people from very poor backgrounds tend to have extremely low time-preference and trust fund babies extremely high. It is true that the rich one might still save more in absolute terms because the marginal utility on there money is lower but in the long run the poor people will save a larger portion and it will balance wealth. Anyone with any job can save up a fortune in a lifetime in any western country even with our taxes. All my grandparents did. So the only healthy people that will remain poor for there entire life are those with very high timepreferences...



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You are making gross assumptions that do not fit the historical divide of how those with wealth use it. Yes, the price of BTC would stabilize if it became more popular. This does not mean those with wealth will not attempt to manipulate the currency, and this does not mean that this won't cause more deflation than there should be. No matter what, deflation is a vehicle that gains more value for those with currency than those without. They will use this to gain even more. Human greed is at the source of every recession. Lack of productivity should not be encouraged by gaining real wealth. It is stupid.

The incentives to increase productivity are only higher with a "deflationary" currency. Consumption does not create any wealth and the incentives to save are higher or equal as I just tried to explained.

How would they manipulate the currency to create deflation? It makes no sense. The only thing early adopters of BTC can create is inflationary pressure when they finally decide to cash out.

Greed does not cause recessions, inflation does.


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Status quo bias. You are willing to accept that bitcoin works, but not that another way could. In my design, there is no "loss in the creator's mind." It is all determined by the demand for new currency which is based on whether or not people produce new currency based on the market price. In my design, there is no algorithm that determines to increase the supply. People determine whether or not to increase the supply. And the supply is occasionally restricted (by the currency award, nothing more) to foster competition; what this competition does is help level off the cost to produce against factors that are unknowable to an algorithm. Price of electricity goes down or electrical consumption of GPUs go down--foster competition on a restricted supply to see who is willing to set the bar for what is profitable.

As I said people will just externalise there production cost and produce it anyway. Or they will produce it because they are speculating. I don't see how a fixed production cost will make anything different then bitcoin.


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People can't hoard and expect that the value of their currency will increase by virtue of them restricting the supply. The supply will expand in response. The supply will expand in response to more goods and services being available in the economy. The value of each unit of currency will remain stable, or oscillate around a stable point. All of this requires separating the money supply from the security of the network. It can't be done with the gross simplicity of bitcoin's coin distribution scheme. That's why I had to propose a redesign for everything.

And it is still impossible for hoarding to be the most profitable option in a sound market. Even if you control so much of the money supply you could actually create a price increase in money that is higher then gain from savings for a short period all it will do is turn people away from the currency. It is a very risky move so there we are again it is impossible to get higher risk adjusted profit from it then from savings. That doesn't mean that no one will do it since peoples preference to risk are different, but it is extremely unlikely that someone will A. control enough currency and B. be that reckless...


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So you don't consider gold a commodity money? "Political class" is irrelevant, it is the "wealthy class" that controls politicians. The poor are never going to be able to invest under the same conditions--they don't have the capital! Bitcoin is a more ridiculous version of commodity money than gold because its supply is absolutely fixed. If it were to ever gain wide acceptance (which it won't because of early adopters), the wealthy class will again control the currency, and again they will do whatever is most beneficial to themselves. This *will* result in another deflationary spiral (and I mean spiral in the sense that deflation is happening far faster than it should), and they will be happy to fix it by spending a lot less currency for the same goods and services as before. And they get all of that value before the money gets back to circulation; it is almost the exact same measure by which banks and the wealthy gain from cheap lending from the central banks in an inflationary currency. The gap between the rich and the poor grows and eventually a recession will be the result. The poor will have had their wages deflated as a result of this restriction in the supply, and once prices rise again, realize that all of a sudden they no longer had the purchasing power they once had. Where did that value go? To the wealthy. A limited commodity currency does not solve anything.

I won't get into to which degree politicians take bribes but it is still the politicians holding all the power and implementing the policies like fiat currencies, other bank regulation and taxes that put small investors at a disadvantage.

I don't know what the distribution of bitcoin looks like but I don't think it is that bad and there are still plenty of bitcoin to be produced. Even with a lot of concentration it is still very difficult to manipulate a commodity money effectively, but there are other reasons why this would make a commodity unattractive as money too so it can be a problem. Bitcoin would however need to be very very concentrated when it is all done for this to be any problem of note and I don't think it will be because a free-market disperses wealth, it is politics that concentrate it and there won't be any of that in the bitcoin economy.

The rest of that are just fallacies I have already addressed.

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Wait wait, so how many people made a profit that bought in from anywhere between $4->$30->$4? Somebody bought in. Do you think it was the early adopters buying in? Everyone is not making a profit. The later adopters are not making a profit. This is a zero sum game where wealth is transferred up the chain. It doesn't matter if there were early adopters, there will always be those who are wealthier, and the wealthy have proved on many different occasions that they, time and time again, will do whatever they can to increase that wealth. It was goldsmiths, after all, that created fractional reserve. Bitcoin is no solution, it is just the beginning of the same old bullshit.

Value is subjective and from there own point of view everyone made a profit. Except those people who made errors and didn't get what they expected but they only have themselves to blame.

The wealth going up the chain you speak of is no different then the transference between you and Apple if you and buy an iPad you really want. It gives you satisfaction for your high timepreferences and interest to Apples shareholders. The next poor guy that comes around could just as easily choose to buy Apples shares as that iPad, so it doesn't transfer anything from poor to rich just between people with different timepreference.
You will booth end up with more value, just as the people who bought Bitcoin later at a higher price ended up with a higher value because they needed it to do some transaction or just thought it was fun enough to mess with.

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So you would just give up on a better currency then because you think it's impossible? What makes you think merchants would want to take currency when it was $30 but could be worth $4? When/if it hits $30 again and they have to charge 0.25 BTC for their widget, what guarantee do they have that that BTC won't essentially become worthless again? How can they be sure that the wealthy are not merely manipulating the supply?

Merchants and consumers would both love a currency with a stable value. The rich, not so much, but they might eventually be forced to use it because no one else wants their bullshit, manipulative currency. *I* say we come up with something that forces the rich to stop abusing us, and use money on the 99%'s terms. Bitcoin is the SOS with a new group of people in control. All it will ever amount to is a payment processor with fees every step of the way that make it no better than paypal or CCs. *I* want something that is actually a store of value. *I* want to actually change how the system of money works. Bitcoin has no hope of doing that. Stop thinking that it is impossible, focus your energy on what you could do to make it possible, if that's actually what you want, anyway. If you are a bitcoin elite, you might certainly not.

My point was that nobody is going to want to spend a currency with stable value while they have an inflationary one in there pocket. So no free currency of any kind will be able to out-compete fiat in the white market. (If the free currency is more inflationary then the fiat it still won't be circulated because no one will accept it them.)

It only works if booth buyer and seller have the option to refuse any method of payment and don't have any expenses in fiat like taxes that forces them to circulate it even if they could technically refuse it in payment. That is why it will never work outside back and grey markets.

99% of bitcoin is held by 1% of users or what are you trying to say? Do you have anything that supports that is even remotely the case?

The way the rich profit from the currency system today is by printing more money and make sure they are as close the new money in the chain as possible so they can use it before the increase in the money stock is noticed by the market and prices go up.

For them to manipulate a fixed supply currency would be just as difficult as it is for a majority shareholder to manipulate the stock price of his company. They really only have the power to dump the price and loose all they have. Manipulating it so they make a profit just by trading (and not distorting the flow of information relating to the company in other ways) is extremely difficult and that is even when controlling a majority of the supply. I doubt very much a single entity will end up controlling even close to the majority of the supply of bitcoin...


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November 15, 2011, 01:50:59 AM
 #28

There is no wealth transfer caused by money. Everyone will be relatively exactly where they where before when the price of money changes. If I have 1 BTC and you have 99 the and one BTC can buy a goat I have 1% of the wealth in terms of goat purchasing power and you have 99%. If the price of BTC doubles it means I can buy 2 goats and you 198. 2/200 is still 1%. So my bargaining position in the market is not affected at all.

You have not followed any logic as to why the price of BTC doubles. If I need a goat and the price is cut in half because of deflation due to hoarding, the goat herder certainly isn't happy about taking half as much BTC. And if I need a goat, I may have to spend my 1 BTC on a goat before deflation, now I have nothing when the price halves. If the rich man needed a goat, he still has 98 BTC, and now can buy a hell of a lot more goats while my wage deflates along with the rest of prices.

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There is a transfer counted in market prices from low to high time-preferences but it is not because money changes in value it is because people with low time-preferences receive interest from the entrepreneurs that borrow there money. The entrepreneur gets the money to pay those interest rates from the consumers.

And how is paying interest any different than the deflation of the currency. That is my point. The wealthy get wealthier for adding little of value to society.

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However in terms of value everyone is still better of, and most likely in terms of market prices this will not really concentrate wealth either. Since higher interest rates drives up consumer prices as well the motivation to save increases double and should keep interest rates fairly low as long as investing in safe. But if it is not there are other problems that have very little to do with the currency as long as it was freely adopted...

No, everyone is not better off. The goat herder is not better off as people wait to buy goats that may keep going down in price. Investing will not be very safe in a currency where a ROI is expected just from holding on to the currency. The wealthy can bide their time and wait for the spiral, then buying up immensely cheap goods and services (thus gaining real wealth, not currency wealth), while then the prices will rise again as velocity increases. The wealthy gained all kinds of value by spending a minimal amount of money.

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Also one does not "afford" to have high or low time-preferences. Generally it is the other way around too, people from very poor backgrounds tend to have extremely low time-preference and trust fund babies extremely high. It is true that the rich one might still save more in absolute terms because the marginal utility on there money is lower but in the long run the poor people will save a larger portion and it will balance wealth. Anyone with any job can save up a fortune in a lifetime in any western country even with our taxes. All my grandparents did. So the only healthy people that will remain poor for there entire life are those with very high timepreferences...

When you get back to reality, let me know. Your grandparents don't count for a very good sample size.

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The incentives to increase productivity are only higher with a "deflationary" currency. Consumption does not create any wealth and the incentives to save are higher or equal as I just tried to explained.

Incentives to increase efficiency are higher with a deflationary currency. But this does not fix the fundamental issues with a fixed supply. You can only get so efficient in a certain time frame, there is nothing stopping deflation from happening faster than this time frame.

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How would they manipulate the currency to create deflation? It makes no sense. The only thing early adopters of BTC can create is inflationary pressure when they finally decide to cash out.

Greed does not cause recessions, inflation does.

"It makes no sense." Well if you are unwilling to learn history to actually back up your arguments, I can't help you. And I can't argue against willing ignorance.

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As I said people will just externalise there production cost and produce it anyway. Or they will produce it because they are speculating. I don't see how a fixed production cost will make anything different then bitcoin.

You don't get it. Whatever. I'm sure they will just "externalise there[sic] production cost" to make it for free.

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And it is still impossible for hoarding to be the most profitable option in a sound market. Even if you control so much of the money supply you could actually create a price increase in money that is higher then gain from savings for a short period all it will do is turn people away from the currency. It is a very risky move so there we are again it is impossible to get higher risk adjusted profit from it then from savings. That doesn't mean that no one will do it since peoples preference to risk are different, but it is extremely unlikely that someone will A. control enough currency and B. be that reckless...

Yes, we should just rely on faith.

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I don't know what the distribution of bitcoin looks like but I don't think it is that bad and there are still plenty of bitcoin to be produced. Even with a lot of concentration it is still very difficult to manipulate a commodity money effectively, but there are other reasons why this would make a commodity unattractive as money too so it can be a problem. Bitcoin would however need to be very very concentrated when it is all done for this to be any problem of note and I don't think it will be because a free-market disperses wealth, it is politics that concentrate it and there won't be any of that in the bitcoin economy.

Fractional reserve exists because people demand currency. Banks are more than happy to create this currency for you, at interest. Fractional reserve will exist in bitcoin, and all it takes is greedy people who want more interest investing in banks with a 10% reserve or less to start the same chain of problems.

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The rest of that are just fallacies I have already addressed.

You have no leg to stand on in calling anything I've said a fallacy. None of your arguments come from any economic basis, only your opinion.

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Value is subjective and from there own point of view everyone made a profit. Except those people who made errors and didn't get what they expected but they only have themselves to blame.

:rofl: ok, you win. Bitcoin wiki 101 A+ grade.

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