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Author Topic: A modest amount of inflation should be part of bitcoin  (Read 16339 times)
BitterTea
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April 26, 2011, 07:37:07 AM
 #61

No, because price deflation must generalized (in fact if it occurs just in one sector, it's not really price deflation) to impede commerce.
The money is not getting out of circulation (is not being hoarded) because computers are cheaper each year. The others sectors are not affected by this.

How does removing money from circulation hurt anyone? All the other money has more purchasing power, which means individuals can purchase more of the things they need and want. Sticky wages are merely a psychological obstacle, decreasing wages are good if prices are decreasing faster.

People don't really want money, they want the things they can buy with that money. If they can buy more or better things in exchange for less of their time, they will be happier (inasmuch things can make one happy).
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jtimon
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April 26, 2011, 09:15:18 AM
 #62

No, because price deflation must generalized (in fact if it occurs just in one sector, it's not really price deflation) to impede commerce.
The money is not getting out of circulation (is not being hoarded) because computers are cheaper each year. The others sectors are not affected by this.

How does removing money from circulation hurt anyone? All the other money has more purchasing power, which means individuals can purchase more of the things they need and want.

How can closing highways hurt transport? All the other highways would have more "transporting power", which means they can charge more fees for using them.
From my point of view, money is to commerce what roads are to transport. Maybe there's some better analogy.

If everybody hoard their money, there's no decrease in price: there's no price at all. People would have to barter in exchange of other things instead of money.

Sticky wages are merely a psychological obstacle, decreasing wages are good if prices are decreasing faster.

People don't really want money, they want the things they can buy with that money. If they can buy more or better things in exchange for less of their time, they will be happier (inasmuch things can make one happy).

Agreed.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
jtimon
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April 26, 2011, 09:29:20 AM
 #63

HELOOOO...

Bitcoin is divisible to 8 decimal places. EIGHT! Its a digital currency, you don't have to break it on a rock to divide it. Deflation is irrelevant.


bills of 0.000000000000001 dolars can be printed too. So I guess deflation is not a problem for national currencies neither.

You're right, it's not. Mostly because deflation isn't good for governments and central banks.

The point I'm trying to make is that a severe deflation is not good for trading. It doesn't matter how the money is created.
The fact that the governments and central banks can suppress deflation easily by creating inflation (which is not good neither) doesn't make deflation any better. It's a problem for national currencies too, it's just not the most common problem because governments are always willing to spend more and central banks are always willing to print more. Deflation could be good for an hypothetical government with no debts and money reserves, but it would be bad for the economy of its country.

That fact that bitcoin have 8 decimal places doesn't solves the problems of deflation. If so, central banks could just print bills with smaller denominations to avoid the problems of deflation. Instead they tend to replace deflation with inflation.
Join everyone else and just say there's no problem with deflation.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
marcus_of_augustus
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April 26, 2011, 09:51:00 AM
 #64

There is yet another reason, that is bitcoin specific, on why inflation would be bad idea. Interestingly, it is the same basis why inflation is bad for other currencies, but is a different mechanism for undermining confidence in the bitcoin system.

We already have good evidence that network difficulty, hence hash-power and security are correlated quite tightly with bitcoin exchange rate, i.e. the price basis other goods, service and currencies. As the value of bitcoin grows, so does the security of the network due to the strength of the computational power backing it, since miners have an economic incentive to compete harder for the bitcoins on offer. At this stage, it is something of a virtuous circle.

However if there were to be an inflation expectation different than that already planned for then the incentive system in place that is driving the increase in network strength would be undermined. It is not just the dilution of the currency unit that would be affecting economic confidence but the pricing dynamics of securing the bitcoin network, that appear to working just fine at present, would also be affected.

Simply put: inflation is a threat to network security.

EDIT: seeing things in this light, it is no longer a question for economists but it is now in the hands of IT (where, perhaps, it should have been all along)




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April 26, 2011, 09:56:28 AM
 #65

สุดยอดเลยพี่

โยวกัง (http://xn--12cm5fua1c7f.com) โยวกัง
ribuck
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April 26, 2011, 10:00:48 AM
 #66

How can closing highways hurt transport? All the other highways would have more "transporting power", which means they can charge more fees for using them ... Maybe there's some better analogy.
Yes there is a better analogy. Saving your bitcoins is like keeping your car in the garage. Losing your bitcoins is like scrapping your car.

From my point of view, money is to commerce what roads are to transport.
If your car is not on the highway, it doesn't harm anyone else. It just makes the highways more useful to others
jtimon
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April 26, 2011, 10:03:24 AM
 #67


There is yet another reason, that is bitcoin specific, on why inflation would be bad idea. Interestingly, it is the same basis why inflation is bad for other currencies, but is a different mechanism for undermining confidence in the bitcoin system.

We already have good evidence that network difficulty, hence hash-power and security are correlated quite tightly with bitcoin exchange rate, i.e. the price basis other goods, service and currencies. As the value of bitcoin grows, so does the security of the network due to the strength of the computational power backing it, since miners have an economic incentive to compete harder for the bitcoins on offer. At this stage, it is something of a virtuous circle.

However if there were to be an inflation expectation different than that already planned for then the incentive system in place that is driving the increase in network strength would be undermined. It is not just the dilution of the currency unit that would be affecting economic confidence but the pricing dynamics of securing the bitcoin network, that appear to working just fine at present, would also be affected.


That's true. Even if we replace inflation with demurrage in everything you said.
If the price of the hypothetical freicoin were equal to the price of the bitcoin (and the supply the same) the security of the freicoin network would be smaller than the security of the bitcoin network because miners would have more incentive to mine bitcoins that haven't demurrage.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
jtimon
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April 26, 2011, 10:09:52 AM
 #68

How can closing highways hurt transport? All the other highways would have more "transporting power", which means they can charge more fees for using them ... Maybe there's some better analogy.
Yes there is a better analogy. Saving your bitcoins is like keeping your car in the garage. Losing your bitcoins is like scrapping your car.

Can you elaborate a bit more on why your analogy is better?

From my point of view, money is to commerce what roads are to transport.
If your car is not on the highway, it doesn't harm anyone else. It just makes the highways more useful to others

If your money is not in the market, you harm commerce. There's less medium of exchange out there to trade.
People willing to trade without money will have to use conventional barter or IOUs, which are not as good as money for trade.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
jtimon
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April 26, 2011, 10:59:09 AM
 #69

To make clear that I'm not for inflation. I started this thread that explains how the money supply of the freicoin would look like.
There's a math problem and a bounty of 2 + 5 + 5 = 12 btc

http://bitcointalk.org/index.php?topic=6549


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ribuck
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April 26, 2011, 11:05:48 AM
 #70

Can you elaborate a bit more on why your analogy is better?
The Bitcoin system is the conduit for transactions, just as the highway is the conduit for vehicles. If you don't use the Bitcoin system (because you are saving your coins), you don't damage the system itself, just as you don't damage the highway by not driving on it.

"The economy" is not a tangible entity, it's just a statistical aggregation. However, "your economy" is real to you. If other people are not spending their bitcoins, your bitcoins are worth more and your economy is booming.
jtimon
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April 26, 2011, 11:19:12 AM
 #71

Can you elaborate a bit more on why your analogy is better?
The Bitcoin system is the conduit for transactions, just as the highway is the conduit for vehicles. If you don't use the Bitcoin system (because you are saving your coins), you don't damage the system itself, just as you don't damage the highway by not driving on it.

I disagree. Imagine that no bitcoin owner sells their bitcoins for anything (I know, you have to imagine it).
No new bitcoin based business would be created, because there's no bitcoin transactions. If no one is willing to sell their bitcoins and people just collect them, bitcoin wouldn't serve as a medium of exchange.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
ribuck
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April 26, 2011, 11:29:47 AM
 #72

... Imagine that no bitcoin owner sells their bitcoins for anything ...

But I am always free to sell my bitcoins. If others are not selling their coins, I can get more for the coins that I sell.

You and others who share your preferences are free to start up freicoin and use it instead of Bitcoin. Competing currencies are not a bad thing.
jtimon
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April 26, 2011, 11:58:32 AM
 #73

... Imagine that no bitcoin owner sells their bitcoins for anything ...

But I am always free to sell my bitcoins. If others are not selling their coins, I can get more for the coins that I sell.

Yes, you could sell your bitcoins for more, but that's not the point. You missed the part "imagine NOBODY wants to sell them". I'm just trying to explain you how money hoarding can hurt commerce like closing highways can hurt transportation. Of course, the owners of the highways have no reason to close them neither.

We agree in that deflation promotes hoarding, right?

You and others who share your preferences are free to start up freicoin and use it instead of Bitcoin. Competing currencies are not a bad thing.

Yes, I know. I prefer bitcoin and ripple to succeed for now.
Plus I don't know the bitcoin code well enough to make a fork, and I don't have the time to read it right now.
Moreover, what's the point in starting it if nobody (from the subset of the world population that understands why bitcoin can have value) agrees with me in that demurrage could be a good thing?

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ribuck
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April 26, 2011, 12:30:17 PM
 #74

We agree in that deflation promotes hoarding, right?

No!

Every transaction needs a buyer and a seller.

With price inflation, the buyer wants to get rid of the inflating money before it loses value, but the seller doesn't want to receive value-losing money either.

With price deflation, the buyer is happy to have money that increases in value, but the seller wants the money too.

Prosperity doesn't come from the money supply. It comes from people making stuff and doing stuff that is useful to other people. Perhaps in a theoretical "perfect" world, prices would vary only as productivity changes, but I can't think how you could bootstrap a new currency into such a world.
BitterTea
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April 26, 2011, 01:17:12 PM
 #75

Jtimon, I feel you're so close to understanding why deflation isn't a preoblem.

Maybe this is the sticking point... it will never be that nobody wants to trade their money in a deflationary/hoarding environment. Why? As the number of hoarders approaches the number of participants in the economy, the purchasing power of the remaining money "in" the economy approaches infinite. At some point, well before infinite purchasing power, some individuals are going to take advantage of low prices and make purchases. This will raise prices slightly.

You see, there is no spiral, it's a negative feedback loop - self correcting, not subject to wild swings as is the centrally controlled fiat money.
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April 26, 2011, 01:21:44 PM
 #76



It seems to me everything boils down to trust. 
This might be obvious to some but since the currency is virtual the trust/belief  is the most important aspect, especially when it is introduced.

I would have no problem trusting a currency with fixed say 0.5% increase in money supply each year, which in reality would lead to deflation anyway due to advance in technology/productivity etc.
But In order to have as many people as possible put their trust in bitcoin,  I now think it might be best let it converge to a fixed amount.

Maybe there will not be a new Ipad every year, but as an environmentalist I got no problem with that.





jtimon
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April 26, 2011, 02:41:47 PM
 #77

Jtimon, I feel you're so close to understanding why deflation isn't a preoblem.

I think our views are not that different.
The two things in which we don't agree are these:

-Deflation incentives hoarding.
-Hoarding "hurts" commerce.

It would be more reasonable that you say:

Deflation incentives hoarding, but hoarding does not hurts commerce and there's no problem with it at all.

Maybe this is the sticking point... it will never be that nobody wants to trade their money in a deflationary/hoarding environment. Why? As the number of hoarders approaches the number of participants in the economy, the purchasing power of the remaining money "in" the economy approaches infinite. At some point, well before infinite purchasing power, some individuals are going to take advantage of low prices and make purchases. This will raise prices slightly.

You see, there is no spiral, it's a negative feedback loop - self correcting, not subject to wild swings as is the centrally controlled fiat money.

Agreed. My example, obviously won't happen. Just because of what you said.
I didn't talk about any spiral.
It is not subject to wild swings but it's subject to swings.

Since you don't like the highway analogy, I'll try it with an example.
BitterTea produces, for example, tea; Ribuck produces carrots and I produce fish.
There's only 3 gold coins in the island.
If one of us has the 3 coins in some certain time and hoard them, there's no possibility of exchange between the others but by barter or issuing IOUs.





2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
jtimon
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April 26, 2011, 02:49:27 PM
 #78

We agree in that deflation promotes hoarding, right?

No!

Every transaction needs a buyer and a seller.

With price inflation, the buyer wants to get rid of the inflating money before it loses value, but the seller doesn't want to receive value-losing money either.

With price deflation, the buyer is happy to have money that increases in value, but the seller wants the money too.

With price deflation, the money owner has a privilege that will take advantage of.
While money increases in value over time, most goods, like carrots, decrease their value over time.

Prosperity doesn't come from the money supply. It comes from people making stuff and doing stuff that is useful to other people.

I agree. Prosperity doesn't come from money supply. If so, we should all thank a lot Bernanke for what he is doing.

Perhaps in a theoretical "perfect" world, prices would vary only as productivity changes, but I can't think how you could bootstrap a new currency into such a world.

The fact that you can't think of a new currency with stable prices is not incompatible with the fact that it would be desirable.


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jtimon
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April 26, 2011, 02:56:00 PM
 #79



It seems to me everything boils down to trust. 
This might be obvious to some but since the currency is virtual the trust/belief  is the most important aspect, especially when it is introduced.

I would have no problem trusting a currency with fixed say 0.5% increase in money supply each year, which in reality would lead to deflation anyway due to advance in technology/productivity etc.
But In order to have as many people as possible put their trust in bitcoin,  I now think it might be best let it converge to a fixed amount.

Maybe there will not be a new Ipad every year, but as an environmentalist I got no problem with that.


After the coming (¿coming?) energy crisis there won't be a new Ipad every year regardless of the monetary system.
Personally I don't think that is going to be a new Ipad every year even if the peak energy doesn't come after a century from now.
Apple's strategy in rewards with free software is not very smart IMO. The appstore will kill apple. Maybe I'm wrong. Anyway this is offtopic.

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jtimon
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April 26, 2011, 03:05:45 PM
 #80

Quote
Since you don't like the highway analogy, I'll try it with an example.
BitterTea produces, for example, tea; Ribuck produces carrots and I produce fish.
There's only 3 gold coins in the island.
If one of us has the 3 coins in some certain time and hoard them, there's no possibility of exchange between the others but by barter or issuing IOUs.

now let's imagine that there are 21 million coins and 2.1 billion of bitcoin users. What are the odds that they ALL will decide to hoard their average 0.01 BTC and will not part with it even if it suddenly worth twice as much as day before. Care to do the math?


Ok. Again, I'm not saying that hoarding could ever stop commerce, just slow it down. Because not everybody is going to hoard the money.
There's 21 million bitcoins out there.
There's a 3% annual deflation.
Nobody will start a business that doesn't give him more profit than the 3% that he is getting for just hoarding his money.
What is better for society?
Someone living from doing nothing or someone investing the money in some enterprise at a risk?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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