A modest amount of inflation should be part of bitcoin

[Ian Maxwell]

But surely the reason inflating the dollar is unfair is because people are forced to hold dollars as it happens? It's not unfair to, like, Estonians. Or moon men.

Since no one is forced to hold bitcoins, who is inflation unfair to?

[jtimon]

another posts related to this:

http://bitcointalk.org/index.php?topic=2792.0

http://bitcointalk.org/index.php?topic=6317.0

http://bitcointalk.org/index.php?topic=3816.0

I started this last one that, in fact, doesn't propose to eliminate deflation but its pernicious effects.

[phelix]

Bitcoins or any other cryptocurrency with inflation would never work. Why? Because the next day someone would start a new block chain without inflation and everyone would switch. How could you ever prevent that?

From an economics perspective of passing arround bitcoins as fast as possible it would sure be better to have a some inflation that would benefit everybody in equal parts. But it does not seem possible.

[jtimon]

Some people said in my thread that a demurrage cryptocurrency won't work for the same reason: people would switch to a clone without it. People would prefer to hold bitcoins. That's true. But people would definitely prefer to pay with...let's say...freicoins or timecoins (don't google them, they don't exist).
Bitcoin it's better to store value than timecoin and freicoin. But if they have any value, they will be preferred to pay. The payee can trade them for bitcoins as soon as he receives them or can trade them for other goods and services that accept them.
The payee prefers to be paid in bitcoins, but mostly prefers to be paid. If the payer does not have he can accept freicoins or lose the sell.

[MoonShadow]

Some people said in my thread that a demurrage cryptocurrency won't work for the same reason: people would switch to a clone without it. People would prefer to hold bitcoins. That's true. But people would definitely prefer to pay with...let's say...freicoins or timecoins (don't google them, they don't exist).
Bitcoin it's better to store value than timecoin and freicoin. But if they have any value, they will be preferred to pay. The payee can trade them for bitcoins as soon as he receives them or can trade them for other goods and services that accept them.
The payee prefers to be paid in bitcoins, but mostly prefers to be paid. If the payer does not have he can accept freicoins or lose the sell.

This is actually true, in the sense that bad money chases good money out of the market.  This is one reason you don't see silver dimes anymore, even though they still exist.  The difference is that, without some form of outside force compelling the consumer to deal in the bad money, why would they ever buy it in the first place?

[jtimon]

This is actually true, in the sense that bad money chases good money out of the market.  This is one reason you don't see silver dimes anymore, even though they still exist. The difference is that, without some form of outside force compelling the consumer to deal in the bad money, why would they ever buy it in the first place?

I guess at first it would be just faith and then it would be backed by the economy behind it, that is, by the goods and services offered in exchange of it. Just like bitcoin.
Some people ask themselves the same question about bitcoin. Why would anybody buy them in the first place if there's the risk that that market does not develop?

[BitterTea]

Personally, I'd have liked it if BTC that aren't used for much too long begin fading away and get slowly collected by miners, after 10 years or so. That way, the amount of BTC is exactly determined and they don't just get less and less with nobody knowing how many are left. Plus we'd have some remaining mining in the future that has a solid and fairly predictable income.

But it may be too late for that fix now. I actually never understood why it shouldn't be done -- nobody accidentally keeps coins around unmoved that long.

So you would steal from those who saved and give that savings to miners? That sounds an awful lot like the the USD economy, except anybody can be a miner (just not a big one).

[MoonShadow]

This is actually true, in the sense that bad money chases good money out of the market.  This is one reason you don't see silver dimes anymore, even though they still exist. The difference is that, without some form of outside force compelling the consumer to deal in the bad money, why would they ever buy it in the first place?

Some people ask themselves the same question about bitcoin. Why would anybody buy them in the first place if there's the risk that that market does not develop?

Because speculators can look at the system, and in particular the ultimate cap on the monetary base, and speculate that those bitcoins that they can gather and keep would be worth much more in the future.  If it were permanently inflationary, those same speculators would be able to assume that even if such a support economy were to develop, those same coins would eventually be worth less in the long term.

So again I ask, how would an openly inflationary version of Bitcoin actually bootstrap?  Not like Bitcoin has, this is certain.  Such a currency would have almost zero chance of overcoming the first value rule.  Bitcoin's first value was a potential future value to speculators, but an inflationary bitcoin would never had that first value.

[MoonShadow]

Personally, I'd have liked it if BTC that aren't used for much too long begin fading away and get slowly collected by miners, after 10 years or so. That way, the amount of BTC is exactly determined and they don't just get less and less with nobody knowing how many are left. Plus we'd have some remaining mining in the future that has a solid and fairly predictable income.

But it may be too late for that fix now. I actually never understood why it shouldn't be done -- nobody accidentally keeps coins around unmoved that long.

This is actually likely to happen in the long term, if the public/private keypair system Bitcoin uses is to ever show signs that it might be cracked.  Bitcoin can move to another, more secure, version of the same thing without skipping a beat; and users would be pretty much forced to go back and claim all of their old transactions in order to move them to the new system in situ.  However, lost coins would be obvious shortly after such a changeover were complete, and easily recovered by the first person willing to write the crack program using the new exploit.  It'd be like treasure hunters racing to claim a Spanish Gallion, first to get the address cracked and moved to his own new address wins.

It might be decades before anything like this occurs, however.

[jtimon]

This is actually true, in the sense that bad money chases good money out of the market.  This is one reason you don't see silver dimes anymore, even though they still exist. The difference is that, without some form of outside force compelling the consumer to deal in the bad money, why would they ever buy it in the first place?

Some people ask themselves the same question about bitcoin. Why would anybody buy them in the first place if there's the risk that that market does not develop?

Because speculators can look at the system, and in particular the ultimate cap on the monetary base, and speculate that those bitcoins that they can gather and keep would be worth much more in the future.  If it were permanently inflationary, those same speculators would be able to assume that even if such a support economy were to develop, those same coins would eventually be worth less in the long term.

So again I ask, how would an openly inflationary version of Bitcoin actually bootstrap?  Not like Bitcoin has, this is certain.  Such a currency would have almost zero chance of overcoming the first value rule.  Bitcoin's first value was a potential future value to speculators, but an inflationary bitcoin would never had that first value.

In fact bitcoin still is an "inflationary" currency. Some speculators invest in bitcoins waiting for the creation of bitcoins too slow down but others just wait for the demand to explode. If bitcoin is increasing in value is because the demand is increasing not because the total supply is banishing. Nevertheless you're right in that it would attract less speculators and it would be harder for the currency to acquire value at first. Anyway, it would be easy for a speculator to calculate the damage of demurrage in its investments.
Unlike in timecoin, in freicoin, the total supply of money (once issued) will be constant, just like in bitcoin.
Demurrage will also has an advantage for their users. When all the supply is generated, the miners will live not only from the fees, but also from the money collected through demurrage, thus making the fees lower. The users will be charged less for trading and (in exchange) will be charged for hoarding.

[jtimon]

Personally, I'd have liked it if BTC that aren't used for much too long begin fading away and get slowly collected by miners, after 10 years or so. That way, the amount of BTC is exactly determined and they don't just get less and less with nobody knowing how many are left. Plus we'd have some remaining mining in the future that has a solid and fairly predictable income.

But it may be too late for that fix now. I actually never understood why it shouldn't be done -- nobody accidentally keeps coins around unmoved that long.

So you would steal from those who saved and give that savings to miners? That sounds an awful lot like the the USD economy, except anybody can be a miner (just not a big one).

Actually, I don't see anything bad in what he says. If everybody knows that after 10000 blocks a public address expires, people would just create another address and move them. Only the lost coins would stay in the same address.
But I don't see anything bad in some bitcoins getting lost neither.
What's the point of having "the amount of BTC is exactly determined"?
To have the full 21 millions and not some unknown amount between 21,000,000 and 20,990,000?
When you lose a bitcoin, all the others become more valuable, but we got the micro bitcoins and nanobitcoins.
We don't really need those lost bitcoins. Satoshi could have decided 50 billions or 10 millions and bitcoin would be the same. Only the price per bitcoin would be different.

[BitterTea]

@jtimon - I agree with both of your posts. I think recycling "lost" coins just makes extra busy work for savers.

One thing regarding inflation/deflation (this isn't necessarily directed at you). There are two very different things that go by the same name.

The first is monetary inflation/deflation, which is when the money supply increases or decreases. Generally we only experience monetary inflation, but in the case of Bitcoin, once the generation subsidy drops to 0, we will experience very slow monetary deflation in the form of lost private keys. Changes in the quantity of money will cause a change in the price of products, which is the second type - price inflation/deflation. Currently, the money supply of Bitcoin is inflating (at a rate of about 7200 BTC/day). If the Bitcoin economy were larger, this would cause an increase in prices (denominated in Bitcoin), just as we see today with prices in USD (which is highly inflationary).

However, there are other causes of price inflation/deflation. In the case of Bitcoin, prices appear to deflating, even though the monetary supply is inflating. The cause of this is the exchange rate of BTC/USD. Because few can pay their business costs in Bitcoins, it is easier to price in dollars and then convert to BTC on the fly. As Bitcoin gains popularity and/or the dollar inflates, those goods will be prices in fewer Bitcoin, but only because Bitcoin is more valuable as compared to the dollar. Once businesses can pay for their costs in Bitcoin, this "deflation" will disappear and prices will become more stable.

[jtimon]

Thank you for pointing out that monetary inflation is not the same that price inflation. I didn't know the correct way to mean one or another.
I think this price deflation may not disappear. It is true that we can't measure the current price deflation of bitcoins just by looking at its USD dollar price, because USD have an increasing price inflation. The point I wanted to make is that you can have price deflation even with monetary inflation. That's what is happening now with bitcoins: the falling dollar is not the only cause of the rise of the bitcoin.
We could even have price inflation with a constant monetary base if less goods are traded every year (negative growth). Let me think about something that could cause a global negative economic growth...oh, yes, a falling EROI, for example. When people say that bitcoin has a built in deflation they mean that when the bitcoin monetary base is completely issued and thus constant, there will be price deflation if the economy keeps growing.
Price deflation can encourage hoarding and make trade harder (because the medium of exchange gets out of the market), but what you want to fight is hoarding and not the deflation itself. Demurrage can prevent hoarding even in a deflationary context.

Demurrage has another economical advantage. It would make more enterprises profitable. To calculate the profit, you must first discount the interest cost. If you suppress the liquidity premium with demurrage (not the risk premium), the financing costs will decrease. In capitalism, all kinds of capital tend to be as profitable as lending money. If, for example, renting houses becomes more profitable, investors will construct more houses until the profit becomes the equivalent. If there are "too many" houses, the price of houses will drop until they become as profitable as money. Money is the only true capital.
For more on this (sorry if I repeat this links too much):

http://en.wikipedia.org/wiki/Freigeld

http://finanzcrash.com/english/aberrations.html

[Mashuri]

Thank you for pointing out that monetary inflation is not the same that price inflation. I didn't know the correct way to mean one or another.
I think this price deflation may not disappear. It is true that we can't measure the current price deflation of bitcoins just by looking at its USD dollar price, because USD have an increasing price inflation. The point I wanted to make is that you can have price deflation even with monetary inflation. That's what is happening now with bitcoins: the falling dollar is not the only cause of the rise of the bitcoin.
We could even have price inflation with a constant monetary base if less goods are traded every year (negative growth). Let me think about something that could cause a global negative economic growth...oh, yes, a falling EROI, for example. When people say that bitcoin has a built in deflation they mean that when the bitcoin monetary base is completely issued and thus constant, there will be price deflation if the economy keeps growing.
Price deflation can encourage hoarding and make trade harder (because the medium of exchange gets out of the market), but what you want to fight is hoarding and not the deflation itself. Demurrage can prevent hoarding even in a deflationary context.

Demurrage has another economical advantage. It would make more enterprises profitable. To calculate the profit, you must first discount the interest cost. If you suppress the liquidity premium with demurrage (not the risk premium), the financing costs will decrease. In capitalism, all kinds of capital tend to be as profitable as lending money. If, for example, renting houses becomes more profitable, investors will construct more houses until the profit becomes the equivalent. If there are "too many" houses, the price of houses will drop until they become as profitable as money. Money is the only true capital.
For more on this (sorry if I repeat this links too much):

http://en.wikipedia.org/wiki/Freigeld

http://finanzcrash.com/english/aberrations.html

Don't fear deflation.  Price deflation also happens as productivity increases through technological advances, for example.  Consumer electronics and computers have been in a constant state of double-digit price deflation for decades DESPITE severe USD inflation (you can often buy twice the computer for the same amount of USD every 1-2 years or so).  If "hoarding" were such a problem then the electronics industry would have gone bust a long time ago as everyone just sat and waited for things to stabilize.  All deflation does is decrease people's time preference and increase savings which, in a free banking market, lowers interest rates so longer term capital investments can be carried out.  The only type of deflation to fear is a "sudden-stop", uncontrolled deflation, like the popping of an inflationary credit bubble (2008 anyone?)

[abyssobenthonic]

Thank you for pointing out that monetary inflation is not the same that price inflation. I didn't know the correct way to mean one or another.

debasement is probably the better word

There is an English word that used to mean "debasement," whose meaning somehow changed, during a generally unpleasant period in history, to mean "increase in consumer prices," and has since come to mean "increase in consumer prices as measured, through a process whose opacity makes chocolate look transparent, by a nonpartisan agency whose objectivity is above any conceivable question, so of course we won't waste our time questioning it." The word begins with "i" and ends with "n." Because of its interesting political history, I prefer to avoid it.

(possibly of interest: during roughly the time of that generally unpleasant period of history (roughly 1914 to 1989), at least in most of the Anglosphere, "liberalism" dramatically shifted its meaning to the point that those who held to the old meaning had to essentially redefine themselves (as "libertarians"))

[bitjet]

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.

[jtimon]

Don't fear deflation.  Price deflation also happens as productivity increases through technological advances, for example.  Consumer electronics and computers have been in a constant state of double-digit price deflation for decades DESPITE severe USD inflation (you can often buy twice the computer for the same amount of USD every 1-2 years or so).  If "hoarding" were such a problem then the electronics industry would have gone bust a long time ago as everyone just sat and waited for things to stabilize.  All deflation does is decrease people's time preference and increase savings which, in a free banking market, lowers interest rates so longer term capital investments can be carried out.  The only type of deflation to fear is a "sudden-stop", uncontrolled deflation, like the popping of an inflationary credit bubble (2008 anyone?)

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.

[jtimon]

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.

[jtimon]

Thank you for pointing out that monetary inflation is not the same that price inflation. I didn't know the correct way to mean one or another.

debasement is probably the better word

There is an English word that used to mean "debasement," whose meaning somehow changed, during a generally unpleasant period in history, to mean "increase in consumer prices," and has since come to mean "increase in consumer prices as measured, through a process whose opacity makes chocolate look transparent, by a nonpartisan agency whose objectivity is above any conceivable question, so of course we won't waste our time questioning it." The word begins with "i" and ends with "n." Because of its interesting political history, I prefer to avoid it.

(possibly of interest: during roughly the time of that generally unpleasant period of history (roughly 1914 to 1989), at least in most of the Anglosphere, "liberalism" dramatically shifted its meaning to the point that those who held to the old meaning had to essentially redefine themselves (as "libertarians"))

You prefer to use "monetary debasement" over "price inflation". Fair enough.
It's the same for me.

[BitterTea]

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.