A modest amount of inflation should be part of bitcoin

[jtimon]

While I roughly agree with the sentiment, it's worth noting that killing people won't be nearly as effective as disengaging from the fraudulent system and using our own solution.

Not saying kill .. just saying how wrong it is.

Deflation is "unfair" too.
-person Y starts a business paying their workers fro 40 hours a week.
-person Y make a building and will use their gains for housing himself and his family with this amount.
...
Deflation occurs and he has not gained enough to cover housing and food for him and his family. Maybe he can't even pay the loan ha asked for starting the business.

@CoinOperated

Do you think demurrage could prevent these bubbles?

http://bitcointalk.org/index.php?topic=6549.0

wrong again ...

Deflation as your referring to .. increases the value of money ... that's like investing wisely from the employee stand point ... duh ..
Employers can just alter the terms of contract of employment to make it fair for themselves .. after all that's all employment is .. a contract.

Your poor employee could have an inflation-resistant contract too, right?
Also wages are not the only costs for the businessman. He will not be able to sell their products at the price he expected. Not because his competitors have improved, but because of deflation. Nothing will save him from this, maybe contracting with their clients before asking for the loan...He could save the "risk premium" from the loan interest too, I just think it's not likely to happen.
I'm always referring to price inflation/deflation with a constant money supply. When not expected, both damage the measurement.
If would prefer to hear bitcoiners say "it is unavoidable" than "It is a good thing, it manipulates the labor market to benefit the employees" or "deflation is good, everybody gets richer". This sounds to me as good as printing money to stop poverty.

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[jtimon]

That makes no sense. Prices are falling due to deflation, so food and shelter is no problem.

Is no problem for money owners, it is a problem for debtors.

The interest rate on the loan is 0 or negative, since the creditor will be repaid in BTC with more purchasing power, and is easier to repay.

Without demurrage the interest rate on the loan will never go to zero or negative: the money owner would prefer to just hold it.

Also, person y probably has been saving money for a while (since deflation causes hoarding, right?) and has enough to get by.

What if the deflation appears after he starts the business?

Loan junkies .. why the hell do all you idiots want loans to begin with .. do you ENJOY being in DEBT in the first place ....
Learn what money is .. and use it ...
Learn what stocks/commodities/investments and such are ... (here's a hint .. there different) .. and use them ...

you'll notice that no one with an I.Q. over their shoe size here is bitching about this shit ... they use BTC as the currency it is vs the commodities they want it to be ...
when the USD or CDN goes UP/DOWN vs other currencies people don't bitch about .. OH FUCK DEFLATION ... .. they just pay the price at the counter and shut the fuck up .... it's money ... if you don't like the exchange back and forth ... QUIT EXCHANGING.

DOC DOC  > ... it's hurt when I do THIS ... doc: then quit fucking DOING THAT!!!

charging 5BTC for coffee

if the exchange on an item goes to 0.01BTC vs $5.00 ... then keep charging the original 5 BTC price .. ... the clients can exchange AT THE TIME of purchase if they want .. OR .. just work for the BTC currency to begin with ... just like EVERY OTHER CURRENCY as a standard ..
because guess what .... 5BTC = 5BTC .. dumb asses.


now please everyone .. shut up .. learn ... move on.

EDIT 1: your using BTC to begin with because you hate the Fiat shit going on .. so quit complain about it ... you have REAL MONEY now .. USE IT.

I don't want a loan, but some entrepreneurs need them to start their business.
I prefer bitcoin to fiat currency, but it doesn't make deflation good.
I can see you're a bad ass, but I need arguments that convince me instead of insults to learn and move on. It seems to me that you're very confident that you got nothing to learn from me in this issue. Want me to shut up? Please link me to a serious critique against Silvio Gesell from the austrian school. I'm looking for it, but the better argument I've found is "Keynes said he was a prophet", which seems to me as good argument as "If you don't like deflation quit exchanging".

[jtimon]

inflation does NOT exists with real money (see Gold/Silver/BTC) .. period ... it simply doesn't ..

Maybe it doesn't exist anymore, but it did. For example, after the discovery of America, when ships full of gold came to Europe.
Even with a fixed money supply, we can have inflation if there's a negative growth. Have you heard about falling EROI or peak oil?

[tomcollins]

inflation does NOT exists with real money (see Gold/Silver/BTC) .. period ... it simply doesn't ..

Maybe it doesn't exist anymore, but it did. For example, after the discovery of America, when ships full of gold came to Europe.
Even with a fixed money supply, we can have inflation if there's a negative growth. Have you heard about falling EROI or peak oil?

Even now it does.  I think the supply of gold increases by 1-2% per year.

[BitterTea]

I think what matters more than whether monetary inflation or deflation is occurring is whether it is predictable. If so, businesses and investors can include it in their calculations to more accurately determine profitability. Otherwise, they will follow the false signals created by artificial pressure on the supply of money and malinvestments occur.

[tomcollins]

I think what matters more than whether monetary inflation or deflation is occurring is whether it is predictable. If so, businesses and investors can include it in their calculations to more accurately determine profitability. Otherwise, they will follow the false signals created by artificial pressure on the supply of money and malinvestments occur.

Predictability is great.  But counterfeiting is not cool.  Those who are last to get the counterfeited money will suffer at the expense of those who are the first to get it.

However, if it's open, like mining, where anyone can enter if there becomes too much of a gap between price and cost to extract, everything evens out.  If it's too easy to mine for what you get, then lots of people enter, more mining happens, the price goes down.  If it gets too hard to mine, then people stop mining, price goes up, people start mining more.

The problem is when one person can benefit at the expense of others.

[CoinOperated]

I think what matters more than whether monetary inflation or deflation is occurring is whether it is predictable. If so, businesses and investors can include it in their calculations to more accurately determine profitability. Otherwise, they will follow the false signals created by artificial pressure on the supply of money and malinvestments occur.

I am not an Austrian per se, but I like some of their ideas.  Malinvestment is very Austrian, and I think what everyone are nervous about on this thread and the "21M limit" thread is that we are currently seeing some false signals and malinvestment in bitcoin itself. People are devoting resources to something with little real economy to back it.  If people lose confidence in MtGox the whole thing could turn very quickly.

Some possible solutions:
Collectively decide to increase the mining rate (in a gradual controlled way)
Start a second chain (the whole Au/Ag thread)
Some kind of controlled inflation/deflation target or band (I don't really know what solution is proposed to implement this)

Any others?

[abyssobenthonic]

inflation does NOT exists with real money (see Gold/Silver/BTC) .. period ... it simply doesn't ..

Maybe it doesn't exist anymore, but it did. For example, after the discovery of America, when ships full of gold came to Europe.
Even with a fixed money supply, we can have inflation if there's a negative growth. Have you heard about falling EROI or peak oil?

Even now it does.  I think the supply of gold increases by 1-2% per year.

Though the extent to which that's the result of mining known reserves (which are theoretically already priced in) vs. discovering new reserves....

[Tsudico]

Deflation is "unfair" too.
-person Y starts a business paying their workers fro 40 hours a week.
-person Y make a building and will use their gains for housing himself and his family with this amount.
...
Deflation occurs and he has not gained enough to cover housing and food for him and his family. Maybe he can't even pay the loan ha asked for starting the business.

This is my first post, and I'd like to take a stab at this. There really isn't enough information to go on, but let me try by filling in additional information:

Person Y makes a carrot picking machine. The resources that go into the carrot picking machine cost 2ⓑ and the labor is also 2ⓑ. The machine is sold for 5ⓑ.

Deflation occurs...let's say 10% so it's a bit easier to do the numbers with. The carrot machine now has to cost 4.50ⓑ to keep in line with what Person Y's competitors are pricing it at.

If deflation is occurring, then it effects all prices, so the resources to make the machine have also deflated in price 10%, or instead of costing 2ⓑ, they cost 1.80ⓑ.

Additionally, in an economy where deflation is occurring the employer has a couple choices when it comes to how the employees are paid. If paying employees hourly, then most likely instead of employees getting pay raises they would get a decreasing pay scale normally and a flatter pay scale if a great worker. Another possibility is that employees are paid per machine, and so when the deflation occurs the employer adjusts the amount per machine down directly.

Either way reduces the amount for labor to 1.80ⓑ instead of the previous amount. This is an additional cost reduction of 0.20ⓑ.

Adding up the costs now gives a total amount of: 3.60ⓑ with a profit of 0.90ⓑ which matches the deflation.

What is the end result of the deflation? All goods and service costs are reduced 10% so Person Y is still able to pay for their home and family.

This hypothesis assumes that deflation immediately and everywhere, which doesn't accurately reflect reality, but I don't think a double digit deflation would reflect reality either. It is important to understand that every Person Y is someone else's Person X, so while short term losses could happen for a Person Y, they are likely to be offset rather quickly.

As far as a home loan would be concerned, I think in a deflationary society the "loan" would just require the principal to be repaid instead of the current requirement of interest that exceeds the inflation of the money supply. The person taking out the loan would strive to pay off the loan as quickly as possible, so that they can hold on to more of their money's value. The person who loaned the money would be fine to wait until the full payment schedule is completed, so that they would have the added value the deflation added to the purchasing power of the money.

That I think may be the hardest thing for me to wrap my head around. While it's easy to see that something that cost 1ⓑ now costs 0.90ⓑ means that the item now is 90% of it's cost, what happened to a person's purchasing power? If a 1ⓑ purchase in the past now only takes 0.90ⓑ, the value of a bitcoin has increased. If my math is correct, the increase is 11%. This means that a person actually gains additional value from deflation for their existing funds.

[CoinOperated]

Nice thoughtful post, Tsudico. As Vladimir points out there won't be any home loan because the lender can just hold onto BTC at zero risk.  There always has to be some interest to account for repayment risk and profit.  Say the interest is 5%, then with 10% deflation that makes an effective 15% interest rate - expensive for the borrower and all the more reason to pay off the loan quickly.

That is the conventional wisdom on deflation.  It makes borrowing very expensive, and discourages lending as well.  Another risk for the borrower: What if deflation accelerates half way through the loan?  Then you are faced with a rising effective interest rate and ever-appreciating principal to repay.  In an inflationary environment generally borrowers benefit from some inflation, or worst case it is neutral.  Lenders bear most of the inflationary risk. This additional risk for the borrower in deflation is another reason not to borrow, or to pay it off very quickly.

While you may correctly conclude "don't borrow" in fact there are short term "effective debts" incurred all the time in any economy.  You get billed at the end of the month, paid at the end of the month, things take time to ship, to store in inventory, to get consumed.  Inventories need to be sold quickly or you could lose money.  You can come up with hundreds of examples.

Things to ponder.

[MoonShadow]

Nice thoughtful post, Tsudico. As Vladimir points out there won't be any home loan because the lender can just hold onto BTC at zero risk. 

This will hold true only so long as the value of the bitcoin is increasing at a rate faster than the ROI of the potential home loans.  This will not continue forever.  In fact, it's almost certain to level off to a much more stable relative value by 2020.  That or crash into oblivion.

[Tsudico]

That is the conventional wisdom on deflation.  It makes borrowing very expensive, and discourages lending as well.  Another risk for the borrower: What if deflation accelerates half way through the loan?  Then you are faced with a rising effective interest rate and ever-appreciating principal to repay.  In an inflationary environment generally borrowers benefit from some inflation, or worst case it is neutral.  Lenders bear most of the inflationary risk. This additional risk for the borrower in deflation is another reason not to borrow, or to pay it off very quickly.

All this depends on the amount of inflation or deflation of a currency. Inflation isn't sustainable, it requires more and more money in order to pay for the same things. This may partially be offset by technology or production improvements, but the end result is that you need to use more money to purchase the same goods. That requires you to work more or harder to gain that money. It also makes people more inclined to spend the money they have since the quicker they spend it, the more purchasing power that money has.

Many of the things said about inflation could also be said about deflation although the effects are reversed. Deflation requires less and less money to pay for the same things. A deflationary currency promotes saving by increasing the value of the currency over time in relation to purchased goods. This could lead to hording of the currency which defeats the purpose of a currency in the first place.

In regard to the OP:

A modest inflation of say 1% ?  would preserve the award mechanism to promote productivity for individuals/small groups, without "punishing" those who aren't doing so well.

Even a 1% inflation would cause the currency to double in 70 years. Instead of 21 million there would be 42 million. Another 21 million would be generated in 35 years, then 17.5 years and so on and so on. If any form of inflation had to exist, I personally would prefer a flat amount rather than a percentage.

The one point I don't usually see mentioned is that it is the rate of inflation or deflation that matters the most. The closer either is to zero the better the currency will be able to be used as a stable medium for exchange. Until bitcoin reaches the point where it is more profitable to process transactions than to mine for bitcoins, I don't think we'll be able to determine whether inflation should continue to be included in bitcoin. If the deflation of a bitcoin is extreme enough to warrant additional measures, I think it should be decided at that time. I personally prefer keeping inflation out of the equation until proof exists that justifies it.

[CoinOperated]

In regard to the OP:

A modest inflation of say 1% ?  would preserve the award mechanism to promote productivity for individuals/small groups, without "punishing" those who aren't doing so well.

Even a 1% inflation would cause the currency to double in 70 years. Instead of 21 million there would be 42 million. Another 21 million would be generated in 35 years, then 17.5 years and so on and so on. If any form of inflation had to exist, I personally would prefer a flat amount rather than a percentage.

The one point I don't usually see mentioned is that it is the rate of inflation or deflation that matters the most. The closer either is to zero the better the currency will be able to be used as a stable medium for exchange. Until bitcoin reaches the point where it is more profitable to process transactions than to mine for bitcoins, I don't think we'll be able to determine whether inflation should continue to be included in bitcoin. If the deflation of a bitcoin is extreme enough to warrant additional measures, I think it should be decided at that time. I personally prefer keeping inflation out of the equation until proof exists that justifies it.

I didn't fixate on the 1% inflation.  I took the OP as a general question of should we have a price stability target and how to accomplish that.  Both are big questions, the second part is really vexing. My intuition says a better target is very mild deflation, say maybe 1-3% per year.  I am on the same page of you that a stable medium of exchange would encourage commerce.  But I have taken some flak on that point from some who think it is heresy to talk about adjusting the money supply. I don't know how else to accomplish it.  I do know that current system has proven extremely volatile.

[MoonShadow]

  I do know that current system has proven extremely volatile.

Only for the moment.  Stability comes with market maturity.

[CoinOperated]

  I do know that current system has proven extremely volatile.

Only for the moment.  Stability comes with market maturity.

Sure, agreed. But it is a small market, compared to the USD/EUR/JPY liquidity out there, the BTC price would have to rise 100s or 1000s of times for the market cap to get big enough to give it enough scale to have even a slim chance at maturity.

[MoonShadow]

  I do know that current system has proven extremely volatile.

Only for the moment.  Stability comes with market maturity.

Sure, agreed. But it is a small market, compared to the USD/EUR/JPY liquidity out there, the BTC price would have to rise 100s or 1000s of times for the market cap to get big enough to give it enough scale to have even a slim chance at maturity.

That's the ideal outcome.

[amincd]

While I agree that given a constant money supply prices will tend to fall with economic growth and technological innovation, clearly there has not been sufficient economic growth in the real bitcoin economy to account for the large increase in the price of BTC/USD in the last four weeks.  This price instability I believe is a threat to widespread adoption of bitcoin, as measured by the rapid changing of these prices in the first and second derivative.  

The price is increasing because the expected long run equilibrium price of BTCs is increasing. Price instability does pose a threat to widespread adoption if bitcoin, but rapid price appreciation also helps adoption of bitcoins by generating interest in them, which leads to larger numbers of people coming to hold them.

think a much more likely cause is not the natural evolution of prices in the face of growth and constant money supply, but rather a drastic increase in external demand wishing to hold the currency because of the novelty of something easily purchased electronically that cannot be easily increased in quantity.  The recent publicity has also contributed. The very attribute making BTC desirable will also be its undoing unless a self-regulating peer-to-peer method of naturally regulating the money supply can be found.

Speculators purchasing BTC on expectations of higher prices in the future does not hurt bitcoin adoption, it helps it. Speculation and rapid price rises are inevitable for any currency seeing rapid adoption rates.

[jtimon]

A deflationary currency promotes saving by increasing the value of the currency over time in relation to purchased goods. This could lead to hording of the currency which defeats the purpose of a currency in the first place.

Demurrage would discourage hoarding and encourage lending. If demurrage rate = deflation rate + liquidity premium (or the utility for the money owner of having cash to "protect" him from uncertainty), interest rates would be zero + risk premium (this depends on the investment and collateral). Calculate such a demurrage rate may be impossible.
This wouldn't solve the problem solve the accountability problems of inflation/deflation, but as someone said, that's not a real problem if inflation/deflation is predictable. With a stable monetary base, to predict deflation would be as hard as to predict growth (I'm not saying that's easy).
The point I want to make is that increasing the money supply is not the only way to discourage hoarding. With demurrage, people could still save by lending/investing and hoarding goods they will consume in the future (like Crusoe saving fish to have time to make a net). Fridges would be full and people would prefer not to owe money to their tender.

[CoinOperated]

While I agree that given a constant money supply prices will tend to fall with economic growth and technological innovation, clearly there has not been sufficient economic growth in the real bitcoin economy to account for the large increase in the price of BTC/USD in the last four weeks.  This price instability I believe is a threat to widespread adoption of bitcoin, as measured by the rapid changing of these prices in the first and second derivative.  

The price is increasing because the expected long run equilibrium price of BTCs is increasing. Price instability does pose a threat to widespread adoption if bitcoin, but rapid price appreciation also helps adoption of bitcoins by generating interest in them, which leads to larger numbers of people coming to hold them.

think a much more likely cause is not the natural evolution of prices in the face of growth and constant money supply, but rather a drastic increase in external demand wishing to hold the currency because of the novelty of something easily purchased electronically that cannot be easily increased in quantity.  The recent publicity has also contributed. The very attribute making BTC desirable will also be its undoing unless a self-regulating peer-to-peer method of naturally regulating the money supply can be found.

Speculators purchasing BTC on expectations of higher prices in the future does not hurt bitcoin adoption, it helps it. Speculation and rapid price rises are inevitable for any currency seeing rapid adoption rates.

This is the paradox.  The rising price is gathering attention to bitcoin.  This is good. I've argued in several posts that due to any random shock to the system, prices my fall (even if temporary). While things could work out well if prices rise steadily for a long time, and that at some point a real merchant economy emerges as the BTC total quantity tails off.  That is the ideal scenario.  But I also can see that any bump in the road could cause a drop in prices, followed by a move away from BTC.  At that point merchants may decide this was just a fad and the whole project will fizzle out.  It will be very difficult to restart.

I hope for the first outcome, but prefer to plan for the second since I've not encountered many smooth roads in life.  That is why I argue for considering ways to modify the system to encourage merchant participation soon.  I'm not the only one, I see many people exploring and considering different ideas along these lines, stemming from the same concern.

[marcus_of_augustus]

It was never going to be a smooth ride.

For it to be steadily rising price or stable you would have to somehow match the increase in supply, currently fixed at BTC 7200 per day, with an unpredictable amount of demand for new BTC.

Currently inflation is at the 7,200/6.086e06 per day, i.e. 43.8% annualised rate. Wrap your head around that, monetary issuance is expanding at 43.8% annualised and the value is still rising ...