The current Bitcoin economic model doesn't work

[NewLibertyStandard]

Noone knows the identities of who the coins belong to, but they do know that they belong to "some entity".  The first transaction in each block says "Ok everyone, listen up:  Someone from address asd;lkfjads;lfkjasd;lfjkasd;fj owns 50 new bitcoins, even though it didn't come from anyone else."  This doesn't reveal the persons identity, but it DOES reveal when they were created.  Looking back to see when the bitcoins were released to the public, and when the first coin was generated, we can see if the developers left coin generation on for a long time to develop a monopoly.

That's the choice of the developer, nothing wrong with it. I was around pretty early and from what I could tell, the network really had been public the whole time. In fact I think I was the first person, or at least one of the very first people, to start pushing for real financial transactions. You're welcome everybody!

[1714156125]

1714156125

[Quantumplation]

Well, a single person can have multiple addresses, so you don't neccesarily know if two transactions go to the same person, as different addresses could be either the same person or different people.

[asdf]

Satoshi stated in his FAQ that "When Bitcoins start having real exchange value, the competition for coin creation will drive the price of electricity needed for generating a coin close to the value of the coin." Now the only problem is that this "real exchange value" itself would be determined by electricity, computer deterioration, and time expenditures needed to generate those BTCs. We have a loop.

I think you have it backwards my friend. The value of bitcoins will be determined primarily by demand. As demand increases the value will rise and the profitability of generating will adjust accordingly. So, as the number of generators increases, so does the difficulty, thus the profitability levels off at about the cost of electricity/hardware to do the generation.

What you're forgetting is that the cost of generation (In electricity) changes. It depends on the difficulty. The profitability of generation will adjust according to demand/value.

Satoshi has really thought this one through.

[Dennis]

Re: computers...the point there is that by the logic of the "deflationary spiral," people should put off their purchases of computers and cellphones, since they can get so much more for the money next year (or the same thing for a lot less money). Yet these are some of the most dynamic sectors of the economy, despite a deflation rate approaching 50% per year.

It's true that we had deflation during the Great Depression. What people overlook is that we also had deflation during the Roaring Twenties. What's more, "Between 1870 and 1896, prices fell consistently amid rapid economic growth—with plenty of booms and busts along the way." Source: http://www.slate.com/id/2258810

Deflation caused by lessening demand, due to everyone being too in debt to buy as much, can be pretty horrible, since it makes it that debt even harder to pay off. But deflation that's just due to the money supply not keeping up with economic growth doesn't appear to be a problem.

[sturle]

Re: computers...the point there is that by the logic of the "deflationary spiral," people should put off their purchases of computers and cellphones, since they can get so much more for the money next year (or the same thing for a lot less money). Yet these are some of the most dynamic sectors of the economy, despite a deflation rate approaching 50% per year.

It doesn't work like that for computers.  Last years computers can run last years software, but if you can be more productive with this years software, you need a better computer.  Most people land on a reasonable compromise, and buy the cheapest computer capable of what they need for a couple of years ahead.  This goes for any piece of technology -- cars, planes, factory equipment, whatever.  It makes more sense to buy today and be more productive, than to wait for everyone else to drive you out of competition.

Deflation caused by lessening demand, due to everyone being too in debt to buy as much, can be pretty horrible, since it makes it that debt even harder to pay off. But deflation that's just due to the money supply not keeping up with economic growth doesn't appear to be a problem.

In a normal economy deflation is countered by printing more money.  Inflation is needed for an economy to work.  Economy is driven by the trading of goods, and money makes it effective.  If there is deflation, it makes more sense to keep the money and not trade it for goods.  If goods keep their worth at best, while money keeps getting worth more and more, then no one will be willing to trade their money for goods and the economy collapses.  In my country it was government policy during the 1930ies to have deflation until the money was worth the same as before the crash, and this made the depression last for ten years more than it would if they had just devaluated and started the inflation again.  A lot of rich people would be poorer, but the economy would have recovered faster because of more incentive to spend and invest.  (Hyperinflation is not good either, because money needs to be trusted to not lose their value to fast.)

[kiba]

In a normal economy deflation is countered by printing more money.  Inflation is needed for an economy to work.  Economy is driven by the trading of goods, and money makes it effective.  If there is deflation, it makes more sense to keep the money and not trade it for goods.  If goods keep their worth at best, while money keeps getting worth more and more, then no one will be willing to trade their money for goods and the economy collapses.  In my country it was government policy during the 1930ies to have deflation until the money was worth the same as before the crash, and this made the depression last for ten years more than it would if they had just devaluated and started the inflation again.  A lot of rich people would be poorer, but the economy would have recovered faster because of more incentive to spend and invest.  (Hyperinflation is not good either, because money needs to be trusted to not lose their value to fast.)

This is poor economic reasoning.

The necessity of monetary inflation does not follow toward economic exchange and the effectiveness of money. In other words, this is a non-sequitar.

His reasoning also ignored the fact that people need foods, water, and the like. All of which will exceed the desire to horde.

It is worth noting that money, by themselves are not an end. For any of the money to have any use at all, they must be spent and invested, or otherwise saved for some future catastrophe, spending needs, and others.

All the saving rate does is forecast the time-preferences of the consumers, thus economies will follow consumption pattern that are longer term and make possible capital intensive projects.

I say his reasoning is a bunch of gibberish easily disproved.

[MoonShadow]

This is poor economic reasoning.

I've seen a lot more of that since joining this forum.  Considering the main topic, I was expecting a higher level of economic education from the average active member than I've actually seen.

[kiba]

This is poor economic reasoning.

I've seen a lot more of that since joining this forum.  Considering the main topic, I was expecting a higher level of economic education from the average active member than I've actually seen.

It add nothing of substance to the topic...

[asdf]

This is poor economic reasoning.

I've seen a lot more of that since joining this forum.  Considering the main topic, I was expecting a higher level of economic education from the average active member than I've actually seen.

It add nothing of substance to the topic...

It add nothing of substance to the topic...
add nothing of substance to the topic...
nothing of substance
nothing
.

[sturle]

In a normal economy deflation is countered by printing more money.  Inflation is needed for an economy to work.  Economy is driven by the trading of goods, and money makes it effective.  If there is deflation, it makes more sense to keep the money and not trade it for goods.  If goods keep their worth at best, while money keeps getting worth more and more, then no one will be willing to trade their money for goods and the economy collapses.  In my country it was government policy during the 1930ies to have deflation until the money was worth the same as before the crash, and this made the depression last for ten years more than it would if they had just devaluated and started the inflation again.  A lot of rich people would be poorer, but the economy would have recovered faster because of more incentive to spend and invest.  (Hyperinflation is not good either, because money needs to be trusted to not lose their value to fast.)

This is poor economic reasoning.

... by Nobel price winning economists. There is a short summary in the Wikipedia article about the gold standard http://en.wikipedia.org/wiki/Gold_standard#Suspension_of_the_gold_standard.  Read the paragraph titled "Prolongation of the Great Depression".

Some inflation is good. Deflation is bad. Every nation in the world governs by this principle.

The necessity of monetary inflation does not follow toward economic exchange and the effectiveness of money. In other words, this is a non-sequitar.

His reasoning also ignored the fact that people need foods, water, and the like. All of which will exceed the desire to horde.

Economic exchange today is about a lot more than food. If money keeps increasing in value as long as you hold onto it, you would want to spend as little as possible on other stuff than necessities.  You wouldn't even put it in a bank, because banks can go bankrupt.  And they will in this scenario, because very few will borrow money if their loan keeps getting higher and higher in money value every year. It also discourages investment. The number of possible investments which gives you more in return than you get by keeping the money gets lower, and this limits economic growth.

It is worth noting that money, by themselves are not an end. For any of the money to have any use at all, they must be spent and invested, or otherwise saved for some future catastrophe, spending needs, and others.

Yes!  And it makes no sense to spend more money than absolutely necessary if the coin which buys you one bread today can buy three breads tomorrow. The other way around makes a lot more sense, since that is an initiative to keep the money flowing in exchange for goods, which keep the economy growing.  Within limits, of course, since lack of trust in money induced by hyperinflation is just as bad.

I say his reasoning is a bunch of gibberish easily disproved.

Then disprove it.  It would certainly earn you a Nobel price.

[caveden]

... by Nobel price winning economists.

Yeah, like that one who believes in the broken window fallacy: http://www.youtube.com/watch?v=QG4jhlPLVVs

The Nobel prize has already lost any respect it might had long before giving the peace prize to the guy who just raised the budget of the strongest armed forces on earth.

There is a short summary in the Wikipedia article about the gold standard http://en.wikipedia.org/wiki/Gold_standard#Suspension_of_the_gold_standard.  Read the paragraph titled "Prolongation of the Great Depression".

What prolonged the depression was all government interventions and attempts to recover the economy.
You want to see how can a strong crisis be quickly "solved"? Just read about the 1920 crisis: http://www.washingtontimes.com/news/2010/mar/18/a-tale-of-two-great-depressions/

Some inflation is good. Deflation is bad. Every nation in the world governs by this principle.

And that's why the world will suffer a major economic crisis in less than one generation time.
There is nothing bad about deflation. It rewards savers (and savings is good since it makes capital accumulation easier) and also make it easier for the poorer to consume stuff that otherwise they wouldn't manage to.

Economic exchange today is about a lot more than food. If money keeps increasing in value as long as you hold onto it, you would want to spend as little as possible on other stuff than necessities.  You wouldn't even put it in a bank, because banks can go bankrupt.  And they will in this scenario, because very few will borrow money if their loan keeps getting higher and higher in money value every year. It also discourages investment. The number of possible investments which gives you more in return than you get by keeping the money gets lower, and this limits economic growth.

First: savers should be rewarded. They make everybody else's life better.
Second: for such a strong price deflation to occur, not only a frozen monetary base is needed, but a strong increase in productivity is necessary as well. Your scenario is self-contradictory. If prices going down causes such bad consequences, how could the prices keep going down in the first place? Productivity would drop and the price of goods would raise since they would become more scarce.
The thing is that prices going down do not cause economic problems. On the contrary, they represent a previous increase in productivity. Prices going down are the result of economic growth.
By the way, the technology industry is a living example of that. Their productivity increases even faster than the central bank printers work. Electronic goods' prices are always falling, and that's not negative at all. That doesn't stop people from wanting to consume them by the way (assuming people would just keep money in their pockets and never use it's quite silly, come on... money is not and end in itself).

Yes!  And it makes no sense to spend more money than absolutely necessary if the coin which buys you one bread today can buy three breads tomorrow.

If that happens it means your baker triplicated his productivity in one-day time. Give him a medal or something.

The other way around makes a lot more sense, since that is an initiative to keep the money flowing in exchange for goods, which keep the economy growing. 

No, no! That's the source of all your mistakes! It's not money flow that allows the economy to grow, it's not consumption that increases productivity.

Memorize it: It's not consumption that allow economic growth. It's saving.

Repeat it to yourself several times.... 

Seriously, a raise in consumption is the end consequence of economic growth, not its cause.
First, somebody has to save. Then, this savings can finance capital accumulation. More capital, more productivity. More productivity, more goods and services. More goods and services, more consumption is possible.
Consumption is in the end of the chain. Savings is on the beginning.

Then disprove it.  It would certainly earn you a Nobel price.

It already has been disproved since the 20s.

[db]

Nobel price winning economists.

The economics prize is almost as bad as the peace prize. Despite the name it is not actually a Nobel prize but was instituted by the Swedish central bank in 1968.

Some inflation is good. Deflation is bad.

It's not that simple. Unexpected, monetary deflation (and inflation) is bad. That is if there is an unexpected change in the amount of money units that contracts, loans and wages denominated in the currency does not take into account then things get skewed for no good reason.

But that is not the kind of deflation we talk about here. Growth deflation  arising from economic growth is as predicatable as that growth and a good thing because it does not artificially push down the level of investment from the optimal as an inflating money supply does.

Every nation in the world governs by this principle.

Every country in the world has trade tariffs too. That's certainly not because they are good.

It also discourages investment. The number of possible investments which gives you more in return than you get by keeping the money gets lower, and this limits economic growth.

But hoarding growth deflating money is investment so it's actually the exact opposite. It encourages investment and increases economic growth.

[sturle]

... by Nobel price winning economists.

Yeah, like that one who believes in the broken window fallacy: http://www.youtube.com/watch?v=QG4jhlPLVVs

Some people even believe in gods or wear a cowboy hat.  Some are even clueless about the Nobel prices.  This do not mean they are incompetent or wrong about everything else.

The Nobel prize has already lost any respect it might had long before giving the peace prize to the guy who just raised the budget of the strongest armed forces on earth.

The economists in question did not receive the peace price.  If you believe that, you are wrong.  The prices are not related by anything but their name.  The two prices are even given in different countries.

There is a short summary in the Wikipedia article about the gold standard http://en.wikipedia.org/wiki/Gold_standard#Suspension_of_the_gold_standard.  Read the paragraph titled "Prolongation of the Great Depression".

What prolonged the depression was all government interventions and attempts to recover the economy.
You want to see how can a strong crisis be quickly "solved"? Just read about the 1920 crisis: http://www.washingtontimes.com/news/2010/mar/18/a-tale-of-two-great-depressions/

The article fails to mention that the correction in 1920, when millions (yes, millons) of soldiers returned home from a ruined Europe to a transition from war to peace time economy was completely different from the depression in the thirties in both cause and effect.   And I can't see anything in the article that supports deflation in the long term.  This is not about crisis resolution, but about keeping an economy going in the long term.  This is a highly political and very unscientific article.

Some inflation is good. Deflation is bad. Every nation in the world governs by this principle.

And that's why the world will suffer a major economic crisis in less than one generation time.
There is nothing bad about deflation. It rewards savers (and savings is good since it makes capital accumulation easier) and also make it easier for the poorer to consume stuff that otherwise they wouldn't manage to.

Which planet do you live on?  Those statements must be based on some political theory.  It is certainly not sane economics.  Capital accumulation slows economic growth.  I'll give you a real world example.  My country has about four times the amount of fortune in an international fund as The USA has debt per inhabitant.  It is from oil revenue which is saved in good times to keep the national GDP in check, and spent in worse times.  We expect it all to be gone in 50 years because of an aging population and empty oil wells, but for now we are rich.  When the crisis came in 2008, this country spent a lot of money from the fund to keep people at work and the economy going, and avoided recession.  This spending from the fund increased GDP, just as putting money away keeps GDP from growing too much for us to stay competitive with the rest of the world.

Deflation is very bad for the poor.  When you owe money to someone else, and the money you owe them keep getting more and more worth while you get paid less because of increasing money worth, you don't have any chance of paying back at the end.  With interest you know how much you can borrow, providing the interest keeps at approximately the same level and your income does the same or increases.  With deflation your income will go in the opposite direction, and if deflation increases you pay double.  At least interest levels and inflation tend to cancel each other out in the long term.

Economic exchange today is about a lot more than food. If money keeps increasing in value as long as you hold onto it, you would want to spend as little as possible on other stuff than necessities.  You wouldn't even put it in a bank, because banks can go bankrupt.  And they will in this scenario, because very few will borrow money if their loan keeps getting higher and higher in money value every year. It also discourages investment. The number of possible investments which gives you more in return than you get by keeping the money gets lower, and this limits economic growth.

First: savers should be rewarded. They make everybody else's life better.
Second: for such a strong price deflation to occur, not only a frozen monetary base is needed, but a strong increase in productivity is necessary as well. Your scenario is self-contradictory. If prices going down causes such bad consequences, how could the prices keep going down in the first place? Productivity would drop and the price of goods would raise since they would become more scarce.
The thing is that prices going down do not cause economic problems. On the contrary, they represent a previous increase in productivity. Prices going down are the result of economic growth.
[/quote]
Try to explain this to the Japanese.  Japan has been troubled by deflation for two decades.  Try to explain that this is good for the economy.  I doubt you'll find anyone who agree with you.  Only ten countries in the world have lower GDP growth than Japan.

By the way, the technology industry is a living example of that. Their productivity increases even faster than the central bank printers work. Electronic goods' prices are always falling, and that's not negative at all. That doesn't stop people from wanting to consume them by the way (assuming people would just keep money in their pockets and never use it's quite silly, come on... money is not and end in itself).

As I have noted earlier -- electronic goods are an exception because they increase productivity by themselves.  Modern electronics lead to a productivity increase high enough to pay for the quickly decreasing value of the goods.  There are many other examples, which all have the same property.

Yes!  And it makes no sense to spend more money than absolutely necessary if the coin which buys you one bread today can buy three breads tomorrow.

If that happens it means your baker triplicated his productivity in one-day time. Give him a medal or something.

No.  This will make the baker able to buy more breads.  Quite the opposite, in fact.  The flour he paid a coin for yesterday is now only worth 1/3 coin, and he will lose money because he can't sell the breads for that much.

The other way around makes a lot more sense, since that is an initiative to keep the money flowing in exchange for goods, which keep the economy growing. 

No, no! That's the source of all your mistakes! It's not money flow that allows the economy to grow, it's not consumption that increases productivity.

Memorize it: It's not consumption that allow economic growth. It's saving.

Repeat it to yourself several times.... 

It is wrong as a general rule, which I have proven by counter examples.

Seriously, a raise in consumption is the end consequence of economic growth, not its cause.
First, somebody has to save. Then, this savings can finance capital accumulation. More capital, more productivity. More productivity, more goods and services. More goods and services, more consumption is possible.
Consumption is in the end of the chain. Savings is on the beginning.

1. Save capital.
2. ?
3. Profit!

Capital will not increase productivity anywhere unless it is invested (which is the same as spent, just with different expectations).  I can collect tons of gold in my basement.  This will not lead to increased productivity anywhere.  I can give it to poor people, who spend it.  This leads to increased demand, and inflation, which lead to increased productivity because it is needed to fill the demand.

Then disprove it.  It would certainly earn you a Nobel price.

It already has been disproved since the 20s.

No it hasn't.

[kiba]

Try to explain this to the Japanese.  Japan has been troubled by deflation for two decades.  Try to explain that this is good for the economy.  I doubt you'll find anyone who agree with you.  Only ten countries in the world have lower GDP growth than Japan.

Dude, you couldn't do worse by using the Japanese as an example. They tried interventionists measure, didn't work. The Japanese stuff their money under the bed.

Even if they were to spend it, there would be massive inflation. It's bad for the Japanese all around.

There are good deflation and bad deflation, just as there are good inflation and bad inflation. Though generally, most inflation that happen today are just bad.

[caveden]

... by Nobel price winning economists.

Yeah, like that one who believes in the broken window fallacy: http://www.youtube.com/watch?v=QG4jhlPLVVs

Some people even believe in gods or wear a cowboy hat.  Some are even clueless about the Nobel prices.  This do not mean they are incompetent or wrong about everything else.

You may say that if a mathematician believes in gods that doesn't make him incompetent in Math, but if a so called "economist" believes in one of the oldest fallacies concerning economics, that's a different scenario, don't you think?

The article fails to mention that the correction in 1920, when millions (yes, millons) of soldiers returned home from a ruined Europe to a transition from war to peace time economy was completely different from the depression in the thirties in both cause and effect.

Err... lots of people coming back, with no jobs or money, wounded and all... shouldn't that make everything even worse?

And by the way, the cause of the 1920 crisis was exactly the monetary expansion done by the Fed during WW1.

Which planet do you live on?  Those statements must be based on some political theory.  It is certainly not sane economics.  Capital accumulation slows economic growth. 

What? Wow ... wait... so... buying more machines, training more people, that slows economic growth??

I don't know what you think capital means, but capital = means of production. Machinery, plants, tools, even immaterial things like knowledge, all these are capital. The more you have it, the more productive you are. Economic growth = increase in productivity.

Accumulating capital is the only way to sound economic growth. There's no "monetary magic" that, just by the printing of some paper, will create real capital from thin air and make a society richer. It seems you believe in this keynesian illusion.

I'll give you a real world example.  My country has about four times the amount of fortune in an international fund as The USA has debt per inhabitant.  It is from oil revenue which is saved in good times to keep the national GDP in check, and spent in worse times.  We expect it all to be gone in 50 years because of an aging population and empty oil wells, but for now we are rich.  When the crisis came in 2008, this country spent a lot of money from the fund to keep people at work and the economy going, and avoided recession.  This spending from the fund increased GDP, just as putting money away keeps GDP from growing too much for us to stay competitive with the rest of the world.

I highlighted an important word from your paragraph.
You're talking about Norway, right? The funds of the Norway state are real savings. The Norwegian society produces more than it consumes, the state confiscates it but, instead of doing like most states in the world and burning it immediately, it saves.
That's exactly what I've said before, when I stated that savings is in the beginning of the economic growth chain.
First, you have savings. The more savings available, the easier it is to invest them in the creation of new capital. More capital, more production. More production, more consuming becomes possible and voilà, you have, at the end of the process, a raise in consumption. It was only possible due to the savings in the beginning, otherwise, if everybody consumes exactly what they produce, where will the new capital come from?

Memorize it:
Savings -> Investments -> Capital accumulation -> Increase productivity -> Increase in consumption.

So, when the Norwegian state forces its citizens to save or consume, it is provoking artificial changes in temporal preferences, but, at least, it's not completely illusionary - the savings were real.
But when a state prints money in order to artificially push down the interest rates, all he's doing is manipulating prices. No real savings are created. In this fake prices scenario, people will consume and invest more (since the interest rate is artificially low), and will not be interested in savings... the real savings will eventually dry out, and many long term investments that were started will have to be abandoned because there's not enough resources to complete it.

That's what will happen to the word economy in the near future. And will be strong!

Ah, and regarding spending increasing the GDP... of course, GDP is a measure of spending! That's what it measures, it doesn't measure savings!

Try to explain this to the Japanese.  Japan has been troubled by deflation for two decades.  Try to explain that this is good for the economy.  I doubt you'll find anyone who agree with you.  Only ten countries in the world have lower GDP growth than Japan.

As already noted by someone, Japan suffers from intense government interference. The "too big to fail" idea has made the government drain all the resources of its people to sustain big, wealth destroyer companies.

As I have noted earlier -- electronic goods are an exception because they increase productivity by themselves.  Modern electronics lead to a productivity increase high enough to pay for the quickly decreasing value of the goods.  There are many other examples, which all have the same property.

Well, I was thinking about electronic consume goods, not electronic capital. You claim that under deflation people don't ever spend. So why do people buy HD TVs? Why not wait forever until they get cheaper/better?

And you noted an important thing also: increase in productivity. Just a frozen monetary base won't cause price deflation. Frozen monetary base + economic growth = price deflation. And if the economy is growing, that means new capital is available. As you noted by yourself, these more productive capital compensates the deflation.

1. Save capital.
2. ?
3. Profit!

You don't save capital (if it's "saved", it's not being used as capital at least), you save resources.
And resources saved can be invested to create new capital. With new capital, then, Profit!

Capital will not increase productivity anywhere unless it is invested (which is the same as spent, just with different expectations).  I can collect tons of gold in my basement.  This will not lead to increased productivity anywhere. 

You're confusing capital with resources. Of course capital increases productivity. And first you invest, then you have capital. Tons of gold in your basement is savings, not capital.

I can give it to poor people, who spend it.  This leads to increased demand, and inflation, which lead to increased productivity because it is needed to fill the demand.

Here it's clear you're influenced by keynesianism...

So, people go and spend more. And then, magically, from nowhere, productivity increases! Machines fall from the sky, people wake up more skilled, electronic chips spontaneously mutate into faster circuits, just because you distributed money to the spending-poor!

Sorry for the irony, but, seriously now, how do you think productivity increases? Aren't you missing some important steps in this reasoning?

(And sorry all for the huge post...)

[MoonShadow]

Some people even believe in gods or wear a cowboy hat.

Wherever you received your economic education from, you should return and demand your money back.

[kiba]

I think the only way to resolve it is that the bitcoin economy will disprove sturle.

[grondilu]

I haven't read all this thread but I'd like to say that keyneysianism makes me sick.   I've seen the part where Krugman promoted a "broken window" concept and I felt like vomiting.

[FreeMoney]

The "Nobel Prize" argument is absurd. Would reality change if the Nobel committee had decided differently? Or in that case would we actually get to analyze arguments instead of credentials?

And it is totally backwards as an indicator even. You can't get a Nobel until a bunch of people already heard you and agreed, so who cares now? It just a recognition of popularity after the fact.

And they aren't even trying to make it a good indicator anymore. They gave the peace prize to the commander of the largest military in the world. If it was funny it would be a joke.

[ShadowOfHarbringer]

Keynesian economy already failed miserably many times (see the latest world crisis caused by nothing else than INTERVENTIONISM), and it will fail again.

I would sooner say that fiat currency model is unsustainable.