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Author Topic: Economic of Deflationary Spiral  (Read 11284 times)
fsargent
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April 22, 2011, 09:15:34 PM
 #1

From what I've read about bitcoin, there is a fixed cap on the amount of money that can exist in the system, like various types of Austrian economists have desired.

Without being able to increase the supply of bitcoins, the economy will stagnate as the currency causes deflation. As deflation occurs, people horde currency, leading to lack of commerce.
This means that eventually when the coins have been mined you'll have an oligopoly of a few holders of a large amount of bitcoin, and then people participating in the real economy outside of it.

I am not hating on bitcoin because I don't understand it, I just don't think it has the flexibility to sustain itself in the long run, and so runs into the greater fool theory. Don't want to step on any toes, just my two cents.
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April 22, 2011, 09:18:06 PM
 #2

From what I've read about bitcoin, there is a fixed cap on the amount of money that can exist in the system, like various types of Austrian economists have desired.

Without being able to increase the supply of bitcoins, the economy will stagnate as the currency causes deflation. As deflation occurs, people horde currency, leading to lack of commerce.
This means that eventually when the coins have been mined you'll have an oligopoly of a few holders of a large amount of bitcoin, and then people participating in the real economy outside of it.

I am not hating on bitcoin because I don't understand it, I just don't think it has the flexibility to sustain itself in the long run, and so runs into the greater fool theory. Don't want to step on any toes, just my two cents.

limited supply hasn't stopped gold and friends from being a great store of value over time.

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tomcollins
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April 22, 2011, 09:22:55 PM
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From what I've read about bitcoin, there is a fixed cap on the amount of money that can exist in the system, like various types of Austrian economists have desired.

Without being able to increase the supply of bitcoins, the economy will stagnate as the currency causes deflation. As deflation occurs, people horde currency, leading to lack of commerce.
This means that eventually when the coins have been mined you'll have an oligopoly of a few holders of a large amount of bitcoin, and then people participating in the real economy outside of it.

I am not hating on bitcoin because I don't understand it, I just don't think it has the flexibility to sustain itself in the long run, and so runs into the greater fool theory. Don't want to step on any toes, just my two cents.

Oh noes, the economy will stagnate because everyone will get stuff for cheap!
kiba
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April 22, 2011, 09:23:26 PM
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From what I've read about bitcoin, there is a fixed cap on the amount of money that can exist in the system, like various types of Austrian economists have desired.

Without being able to increase the supply of bitcoins, the economy will stagnate as the currency causes deflation. As deflation occurs, people horde currency, leading to lack of commerce.
This means that eventually when the coins have been mined you'll have an oligopoly of a few holders of a large amount of bitcoin, and then people participating in the real economy outside of it.

I am not hating on bitcoin because I don't understand it, I just don't think it has the flexibility to sustain itself in the long run, and so runs into the greater fool theory. Don't want to step on any toes, just my two cents.

So why is the economy expanding in a deflationary spiral?

fsargent
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April 22, 2011, 09:24:03 PM
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Gold is mined, that's where the currency comes from. Once the gold ran out, thats when things got nasty. That's why countries invaded eachother under mercantileism.
See: http://en.wikipedia.org/wiki/Dutch_disease
Not an exact comparison, to be fair. But the point is the same where you're mining a currency rather than providing goods or services. Once that currency mine runs out, then the effects that I'm discussing, like hording, will come into effect.
kiba
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April 22, 2011, 09:25:03 PM
 #6

Gold is mined, that's where the currency comes from. Once the gold ran out, thats when things got nasty. That's why countries invaded eachother under mercantileism.
See: http://en.wikipedia.org/wiki/Dutch_disease
Not an exact comparison, to be fair. But the point is the same where you're mining a currency rather than providing goods or services. Once that currency mine runs out, then the effects that I'm discussing, like hording, will come into effect.

People are already hoarding. We just like to call them: saving.

fsargent
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April 22, 2011, 09:30:16 PM
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So why is the economy expanding in a deflationary spiral?

Because the US economy suffered a 'value' shock not a capital shock. We didn't lose a bunch of houses, they just aren't worth as much as we thought they were. Of course, specific people lost their houses, but the economy as a whole didn't lose them.
Everything happened 'on the books' but not in the world. So while everyone has a harder time affording this that or the other, people are still able to produce more good and services, leading to expanding value within the corporate sector. The TARP reform as well as the federal reserve ""printing money"" has increase liquidity to prevent a 'value' shock. Unfortunately, they didn't put that money in the hands of people, but instead in the hands of banks, which gave it to corporations, which are bloody flush with cash right now. The only problem is that the corporations are still figuring out how to generate 'value' from the cash that they have. Hire an extra person? Buy more equipment? Develop a new department? They're not sure. It's still emerging.

Economies can grow or shrink despite inflation or deflation. Think Stag-flation. One's the 'real' economy, the other is currency value.



fsargent
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April 22, 2011, 09:32:30 PM
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People are already hoarding. We just like to call them: saving.

Difference between hording and saving is that savers are saving for a purchase, while horders are hording because they believe their money will be worth more next year than the current one.

BTW, saving in investments is not hording, because someone is using your money to grow it. Saving your money in cash, that's hording.
kiba
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April 22, 2011, 09:36:12 PM
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Difference between hording and saving is that savers are saving for a purchase, while horders are hording because they believe their money will be worth more next year than the current one.

BTW, saving in investments is not hording, because someone is using your money to grow it. Saving your money in cash, that's hording.
Fundamentally, all saving/hoarding are limited by humans' time preference and all the goal of investment and saving is toward purchases of something...

There is no difference.

jed
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April 22, 2011, 09:41:22 PM
 #10

I never understand this deflationary argument people give. I think it only applies to national currencies not something like bitcoin. Let me see if I have your argument straight:
1) bitcoin is deflationary so bitcoins will exchange for more and more dollars as time goes on.
2) This means that bitcoins are worthless

huh? which is it? are they going to be worth a lot or worth a little?

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kiba
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April 22, 2011, 09:44:39 PM
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I never understand this deflationary argument people give. I think it only applies to national currencies not something like bitcoin. Let me see if I have your argument straight:
1) bitcoin is deflationary so bitcoin's will exchange for more and more dollars as time goes on.
2) This means that bitcoins are worthless

huh? which is it? are they going to be worth a lot or worth a little?

It seems to me that they confused monetary goal as the end goal of human beings.

But humans do not want money. They want power, love, sex, gratification, understanding, and so on. Money helps achieve these things.

fsargent
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April 22, 2011, 09:47:13 PM
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People are already hoarding. We just like to call them: saving.

Difference between hording and saving is that savers are saving for a purchase, while horders are hording because they believe their money will be worth more next year than the current one.

BTW, saving in investments is not hording, because someone is using your money to grow it. Saving your money in cash, that's hording.

Basically as long as one does not take money from the bank deposit thus allowing bunks to multiply it by at least 10 due to miracle of fractional reserve banking it is saving. (Saving the banks, probably)

But as soon as one takes money from the bank and put it under the mattress in form of cash or gold or bitcoin, it is hoarding, is it not? And this is now classified as an act of "internal terrorism", no less...

Who said that brainwashing is not working?


That's quite far from what I said.
The banks generate their money because they loan it to people.
If I have $10, give it to the bank, and after one period they give me $11.
That bank gave "Steve" a loan of $10, and demanded $12 and the end of the term.
Steve took that $10 and made/sold muffins, earning him $15. He repays the loan, netting him $3.

That's an economy.

Hording/Deflation:
I have $10, for which I can buy 5 muffins.
I wait a year. I have $10, I can buy 6 muffins. I think, fuck! I should just keep on saving my money till I can get ALL the muffins!
Muffin maker gets no money. I get no muffins. No exchange occurs. Economy stops beyond subsistence.

Nominal Inflation:
I have $10, I can buy 5 muffins.
I wait a year. I have $10, I can buy 4 muffins. I think, fuck! I should have bought those fucking muffins! I'm going to get those muffins right now.
Muffin maker gets $10, I get muffins. Happiness. Exchange occurs, Muffin maker is able to take his investment and expand his muffin making. Due to his ability to scale his production, muffins get cheaper. Economy grows, people are incentivized towards helping and producing for others.
jed
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April 22, 2011, 09:49:10 PM
 #13

But you will die if you don't eat anything for a year? Maybe this will cause people to only buy things which are important rather than what they do now which is buy an ton of crap.

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jed
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April 22, 2011, 09:51:10 PM
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Actually the problem is no different than it is now. I can either buy a muffin today or invest that money and buy more muffin in a year.

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kiba
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April 22, 2011, 09:54:14 PM
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That's an economy.

Hording/Deflation:
I have $10, for which I can buy 5 muffins.
I wait a year. I have $10, I can buy 6 muffins. I think, fuck! I should just keep on saving my money till I can get ALL the muffins!
Muffin maker gets no money. I get no muffins. No exchange occurs. Economy stops beyond subsistence.


What a bunch of bollocks. A muffin man is going to have his muffin...right now.

We are creatures that prefer something now rather than some later. For as time passes without consumption of goods and services lead to no gratification. At some point we must consume to satisfy our wants and needs.

Patience are for the virtuous and those with unlimited time. We are not immortal, or even if we were, we do not have patience. The time to the death of the universe is still ticking. At some point we must satisfy our needs and want...we will run out of time.

You want to go without a year of eating muffins? But to a muffin lover...that's insane!

fsargent
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April 22, 2011, 09:57:03 PM
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Actually the problem is no different than it is now. I can either buy a muffin today or invest that money and buy more muffin in a year.
Yeah, invest it.
Hording involves keeping the money in cash, effectively removing it from the system.

Additionally, having people not satisfy their every minuscule needs and desires and going back to subsistence living isn't exactly a great way to live.
fsargent
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April 22, 2011, 09:58:44 PM
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That's an economy.

Hording/Deflation:
I have $10, for which I can buy 5 muffins.
I wait a year. I have $10, I can buy 6 muffins. I think, fuck! I should just keep on saving my money till I can get ALL the muffins!
Muffin maker gets no money. I get no muffins. No exchange occurs. Economy stops beyond subsistence.


What a bunch of bollocks. A muffin man is going to have his muffin...right now.

We are creatures that prefer something now rather than some later. For as time passes without consumption of goods and services lead to no gratification. At some point we must consume to satisfy our wants and needs.

Patience are for the virtuous and those with unlimited time. We are not immortal, or even if we were, we do not have patience. The time to the death of the universe is still ticking. At some point we must satisfy our needs and want...we will run out of time.

You want to go without a year of eating muffins? But to a muffin lover...that's insane!

Jeez OK How about if I make this a Playstation3 then.

If you think that 'Money' is going to have more value tomorrow than it is today, then you'll want to keep money rather than trading it for things. When that happens on a large scale, people lose jobs, factories close down, etc.
fsargent
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April 22, 2011, 10:00:57 PM
 #18

BTW! Noisebridge is very happy to welcome anyone through its doors! This IRC conversation is a bad representation of noisebridge as a whole, especially considering we have plenty of trolls on IRC (oh internet!).

Please come check out Noisebridge if you're ever in San Francisco. https://www.noisebridge.net/wiki/Noisebridge

We're a really nice group of people, and we'd love to discuss Bitcoin or any other things you find interesting. I can't guarantee that everyone will enjoy the subject, or agree with its viability, but it's a wonderful place to find like minds.
jav
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April 22, 2011, 10:02:07 PM
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If I have $10, give it to the bank, and after one period they give me $11.
That bank gave "Steve" a loan of $10, and demanded $12 and the end of the term.
Steve took that $10 and made/sold muffins, earning him $15. He repays the loan, netting him $3.

But from whose pocket did those $2 in interest come from? If everyone of us wants to be Steve, someone has to lose out, right?

So what's the standard economist answer to that? Increase money supply and grow economy, I guess. But isn't it time we think about a system that doesn't require an endlessly growing economy?

<fsargent> Bitcoins also have no method of redistribution, the entire economy will divert to one holder

Can you elaborate on this? What's the method of redistribution for dollars?

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kiba
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April 22, 2011, 10:04:05 PM
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Jeez OK How about if I make this a Playstation3 then.

If you think that 'Money' is going to have more value tomorrow than it is today, then you'll want to keep money rather than trading it for things. When that happens on a large scale, people lose jobs, factories close down, etc.

The bitcoin economy is a contradiction of your crappy theory.

Domains get rented, hosting services get paid for, and people buy goods and services.Bitcoins got pledged for new projects and people paid for ads.

Also, I paid for my writers.

Ultimately, more goods and services keep an economy in deflationary growth.

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