Hyperdeflation, own half the world by headstart - don't you care at all?

[Cinnamon Cayenne]

I was also, at first, quite worried about such things.

Certainly, if the currency deflates at a high enough velocity, it stops circulating, and becomes worthless as a mode of exchange.

But I have been convinced to let things run their course now - to see what happens.

Perhaps these may help assuage your fears:

• I doubt Bitcoin will ever be the mode of exchange for all goods, everywhere. It seems to me more likely that it will simply become another economy, alongside the various parochial fiat economies.
• Should the Bitcoin economy dominate regardless of the above, only an early adopter who has held their coins entirely through the currency's meteoric rise has the capability of becoming a plutocrat. Wouldn't that be strange, for someone to see their coins worth $100? And then $1000? And still not sell? And even then, if that person were to wait until they hold 1% of the money in the world... they could never spend it all at once. It would be like a man who finds a mountain made of a single flawless diamond, and proceeds to try to sell it, and in doing so sends the price of diamonds down in flames. Such riches are difficult to actually use.
• But putting such theoretical plutocrats aside, here is the argument that convinced me to not be so concerned about the Bitcoin's deflationary properties: on this Earth, there has never been a deflationary currency. There has never been a currency whose supply increases predictably and significantly more slowly than the supply of the goods it represents. We do not actually know how such a currency will behave in the wild, and while we may speculate, we are speculating. Bitcoin is, in some ways, still an experiment.

[1714935968]

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[1714935968]

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[wogaut]

<snip>

• But putting such theoretical plutocrats aside, here is the argument that convinced me to not be so concerned about the Bitcoin's deflationary properties: on this Earth, there has never been a deflationary currency. There has never been a currency whose supply increases predictably and significantly more slowly than the supply of the goods it represents. We do not actually know how such a currency will behave in the wild, and while we may speculate, we are speculating. Bitcoin is, in some ways, still an experiment.

Gold?
Well, if you talk about extremely long periods of time, decades, generations, ...., then you can't really have a net-deflationary currency forever; it's like the energy or mass preservation law in physics. But for sure, whenever a currency is fully tied (not partial reserve or other monetary instruments) to the value of a scarce commodity (such as gold) then you will get a deflationary currency. And we already know how that works: Value of the currency rises (other goods drop) to the point where the economy cannot sustain it any longer, then a depression follows as correction, and then it starts again. In the process, more and more assets are transferred to the money power.
I already mentioned an example of a failed forced re-introduction of the gold-standard by Winston Churchill, and the result was massive deflation and a depression that followed.
I understand there are always other factors at work, and Austrian Economists will ignore most of the evidence that's there and tell you "human nature cannot be predicted". 
But the statement "we do not actually know how such a currency will behave" is simply untrue; we have a really good idea how it behaves, that's why the money power would love to have it.

[nedbert9]

@ DandT... Trillions is the smart money. ..... NO MOM I CAN'T TAKE OUT THE TRASH.

lulz


Ok, what is one of the reasons that people are freaking out about over the US economy?  Individual savings.  Saving is required for sustainability.  At least for the individual.  Of course, you can argue that a capitalist economy works better when everyone spends their entire income.  An example of short sighted, unsustainable capitalism.  Then again 10% of US households have the privilege of "earning" so much cash that they can both comfortably survive and save regularly and substantially.

Approx. 75% of US households make $75,000 or less.  A mildly deflationary currency system would be a boon to making the little that this class of society can put aside for savings really count in the future.

That 75% of US households will still need to immediately spend the majority of their income.  They will have no choice, but spend in order to survive and raise their families.  
There is no serious argument that $75,000, at the high end, is an excessive amount of money for a household with 2 adults, ~2 children.  

The economy will not fail when the 75% are still obligated to prop up the economy in order to have a modest lifestyle.

Deflationary (mildly) currency = doom = an argument that exists in a vacuum outside of reality.

[nedbert9]

<snip>

• But putting such theoretical plutocrats aside, here is the argument that convinced me to not be so concerned about the Bitcoin's deflationary properties: on this Earth, there has never been a deflationary currency. There has never been a currency whose supply increases predictably and significantly more slowly than the supply of the goods it represents. We do not actually know how such a currency will behave in the wild, and while we may speculate, we are speculating. Bitcoin is, in some ways, still an experiment.

Gold?
Well, if you talk about extremely long periods of time, decades, generations, ...., then you can't really have a net-deflationary currency forever; it's like the energy or mass preservation law in physics. But for sure, whenever a currency is fully tied (not partial reserve or other monetary instruments) to the value of a scarce commodity (such as gold) then you will get a deflationary currency. And we already know how that works: Value of the currency rises (other goods drop) to the point where the economy cannot sustain it any longer, then a depression follows as correction, and then it starts again. In the process, more and more assets are transferred to the money power.
I already mentioned an example of a failed forced re-introduction of the gold-standard by Winston Churchill, and the result was massive deflation and a depression that followed.
I understand there are always other factors at work, and Austrian Economists will ignore most of the evidence that's there and tell you "human nature cannot be predicted".  
But the statement "we do not actually know how such a currency will behave" is simply untrue; we have a really good idea how it behaves, that's why the money power would love to have it.

Good points that should be seriously considered.

Let's think about "money power" from another angle.  Any free market economy is biased towards "money power."  The 75% are obligated to spend almost all that they earn.  The 25%, 15% more realistically, have the luxury of resources, thus time, in making calculated decisions in attempt to better their position in the economy.

If this weren't true Warren Buffet wouldn't be warning us of a dangerous rise in 'dynastic wealth.'

A deflationary (mild) currency would benefit both the have's and have-not's.  Though, the bias towards "money power" would be magnified, thus causing increased potential for instability over time.  So, there we have the problem.  An increasing bias towards "money power," over time that exists in any free market, but is magnified in a deflationary economy.

This should make the thoughtful person wonder whether the root cause of instability in an economy should be attributed to currency properties or the bias towards "money power."

How to reliably solve a problem of this magnitude?  I have no clue.  I know the problem will not be solved until we have an accurate understanding of the actual problem.  Intellectual inertia of the status quo will not likely be leading us to this state of enlightenment. 

[/list]

[Cinnamon Cayenne]

And we already know how that works: Value of the currency rises (other goods drop) to the point where the economy cannot sustain it any longer, then a depression follows as correction, and then it starts again. In the process, more and more assets are transferred to the money power.

A scenario which closely resembles the bubbles we see in modern currencies.

I am uncertain. There is a part of me which imagines that the current system also provides advantages to the money power, via access to the mechanism by which money is created. And these advantages are removed in a system where anyone can become a transaction signatory, given a landlord who pays utilities.

The other side of the coin, however, is that, if Bitcoin is truly an "experiment", then people ought to be willing to learn from it. If your proposed scenario is truly how things go, then I should hope that, once the story starts to play out in our economy, people will be wise enough to notice, and will react by creating another blockchain that has more Keynesian properties - leveling out to, say, a one percent expansion per year, rather than zero.

[wogaut]

I am uncertain. There is a part of me which imagines that the current system also provides advantages to the money power, via access to the mechanism by which money is created. And these advantages are removed in a system where anyone can become a transaction signatory, given a landlord who pays utilities.

The other side of the coin, however, is that, if Bitcoin is truly an "experiment", then people ought to be willing to learn from it. If your proposed scenario is truly how things go, then I should hope that, once the story starts to play out in our economy, people will be wise enough to notice, and will react by creating another blockchain that has more Keynesian properties - leveling out to, say, a one percent expansion per year, rather than zero.

Absolutely. That's why we need to continue to have these discussions and not just treat Satoshi's white-paper as the Bitcoin bible; he proposed an experiment that will provide insights which could be used to improve our monetary system.

We will probably see more block chains with modified characteristics in the future.

[evoorhees]

Bitcoin is never deflationary. Bitcoin is inflationary, with the rate of inflation falling toward zero over time.

[DeathAndTaxes]

Bitcoin is never deflationary. Bitcoin is inflationary, with the rate of inflation falling toward zero over time.

If/when the rate of coin destruction exceeds the rate of coin creation then the money supply will shrink = monetary deflation.

[MoonShadow]

Bitcoin is never deflationary. Bitcoin is inflationary, with the rate of inflation falling toward zero over time.

If/when the rate of coin destruction exceeds the rate of coin creation then the money supply will shrink = monetary deflation.

Both of you are literally correct.  Bitcoin is designed to be inflationary during the early 'bootstrapping' years, and trend toward stability, but the permanent loss of bitcoins cannot be accounted for, so in the long run bitcoin is slightly deflationary.  However, economicly these things are a matter of degree; and bitcoin isn't going to be nearly as deflationary as every fiat currency on earth has been inflationary.  We are talking about deflation rates that would be barely discernable over a normal lifetime. (that is, unless you're the guy who's dumb ass rich dad died without putting the passphrase to his wallet into his will)  The growth of the bitcoin economy, and the business cycle that will occur once the economy is a stable size, are variables that would dominate the deflationary nature of bitcoin by orders of magnitude.  And, sorry to say for all the 'deflationary spiral' daydream believers on this forum, those are two aspects of any economy that is beyond the scope of the currency unit itself.  There is literally nothing we could hope to do to manage either condition, whether you might consider them problems or not.

[MoonShadow]

I am uncertain. There is a part of me which imagines that the current system also provides advantages to the money power, via access to the mechanism by which money is created. And these advantages are removed in a system where anyone can become a transaction signatory, given a landlord who pays utilities.

The other side of the coin, however, is that, if Bitcoin is truly an "experiment", then people ought to be willing to learn from it. If your proposed scenario is truly how things go, then I should hope that, once the story starts to play out in our economy, people will be wise enough to notice, and will react by creating another blockchain that has more Keynesian properties - leveling out to, say, a one percent expansion per year, rather than zero.

Absolutely. That's why we need to continue to have these discussions and not just treat Satoshi's white-paper as the Bitcoin bible; he proposed an experiment that will provide insights which could be used to improve our monetary system.

We will probably see more block chains with modified characteristics in the future.

Probably.

By the way, we've been having this kind of discussion repeatedly for two years.  Many people have tried to spin off new blockchains that incorporate various tweeks to the protocol to compete directly with bitcoin based upon whatever perceived flaw they though existed.  Only one of those blockchains remains remotely within the realm of viablitity, and that's Namecoin, which technically isn't a currency so much as it's a domain name registration & transfer ledger.

[Cinnamon Cayenne]

Perhaps I have been misled.

I was under the impression that "inflation" and "deflation" referred not to an increase or decrease in the size of the monetary supply, but rather to an increase or decrease in the ratio of money to goods.

That is, if the economy and the money supply are both growing, it isn't "inflation" - that for it to be "inflation" requires money to be created faster than the valuable things upon which the money might be spent.

[MoonShadow]

<snip>

• But putting such theoretical plutocrats aside, here is the argument that convinced me to not be so concerned about the Bitcoin's deflationary properties: on this Earth, there has never been a deflationary currency. There has never been a currency whose supply increases predictably and significantly more slowly than the supply of the goods it represents. We do not actually know how such a currency will behave in the wild, and while we may speculate, we are speculating. Bitcoin is, in some ways, still an experiment.

Gold?
Well, if you talk about extremely long periods of time, decades, generations, ...., then you can't really have a net-deflationary currency forever; it's like the energy or mass preservation law in physics. But for sure, whenever a currency is fully tied (not partial reserve or other monetary instruments) to the value of a scarce commodity (such as gold) then you will get a deflationary currency. And we already know how that works: Value of the currency rises (other goods drop) to the point where the economy cannot sustain it any longer, then a depression follows as correction, and then it starts again. In the process, more and more assets are transferred to the money power.
I already mentioned an example of a failed forced re-introduction of the gold-standard by Winston Churchill, and the result was massive deflation and a depression that followed.
I understand there are always other factors at work, and Austrian Economists will ignore most of the evidence that's there and tell you "human nature cannot be predicted". 
But the statement "we do not actually know how such a currency will behave" is simply untrue; we have a really good idea how it behaves, that's why the money power would love to have it.

Here's a little hint for you to consider your error in logic.

If the money power would love to have a gold standard, we would have a gold standard.  [/list]

[wogaut]

Here's a little hint for you to consider your error in logic.

If the money power would love to have a gold standard, we would have a gold standard. 

And you support Ron Paul, because he actually supports a return to the gold standard (which he indeed does, being heavily invested in gold himself)?

I really don't see your logic...

[MoonShadow]

Perhaps I have been misled.

I was under the impression that "inflation" and "deflation" referred not to an increase or decrease in the size of the monetary supply, but rather to an increase or decrease in the ratio of money to goods.

That is, if the economy and the money supply are both growing, it isn't "inflation" - that for it to be "inflation" requires money to be created faster than the valuable things upon which the money might be spent.

That's a common error, perpetuated by poor news reporting by people who, themselves, don't understand economics.

True deflation or inflation are in increase or decrease of the overall supply of the monetary unit in circulation relative to the overall size of the economy that employs that unit.  It comes down to the law of supply & demand, if the economy doubles in size; and therefore there are twice as much in goods and services, while the monetary base remains exactly the same, then we can assume the relative trade value of that monetary trade unit to double.  Said another way, the value of the dollar goes up, so the prices of those same goods go down.

The same is also true in reverse, if an economy halves it's economic productivity while the currency base remains the same, prices double because the value of the currency has halved.  This would be a 100% inflationary event, which would be catastrophic.

However, while a doubling of an economy would be equally disruptive, it's hard to argue that it would be catastrophic in nature, because an economy can only double if the economy can manage a doubling, otherwise other economic forces will delay that same growth.  Resulting in a slower (but never negative) growth rate.  This is what the bitcoin economy experienced last year, for the economy grew in size so fast as to outpace the growth in the monetary base. 

[MoonShadow]

Here's a little hint for you to consider your error in logic.

If the money power would love to have a gold standard, we would have a gold standard. 

And you support Ron Paul, because he actually supports a return to the gold standard (which he indeed does, being heavily invested in gold himself)?

I really don't see your logic...

I support Ron Paul because he's an honest man, whether or not there is a return to a gold standard is inmaterial for me.  Actually, if we ever were to return to a gold standard in the US, Bitcoin is screwed.

[Haplo]

There are two ways in which "deflation" could occur.

One is that people start dumping their fiat for BTC at an obnoxious rate, leading to rapid currency appreciation. If the money that jumped into BTC decides to randomly jump out, this could cause major disruptions to the BTC economy, as inflation rates might jump up and down and even be forced below zero for periods of time. If the fluctuations are at least somewhat predictable, intelligent business owners could deal with it adequately.

The other is that the rate of currency destruction exceeds that of currency creation. Eventually (100+ years, probably) this would lead to a loss of fungibility of BTC, and the smallest unit of coin would end up buying more than the smallest items you would want to buy. As long as the rate of currency deflation is slow enough, and as long as people don't suddenly lose huge chunks of coins (ie maybe 10% of the coinbase disappears overnight), this will have virtually zero effect on the BTC economy. Interest rates will remain low to reflect the appreciation of the currency, and that is all.

Compare to USD, where the rate of inflation is 8% and the usual interest rate is under 5%. If you have USD in a savings account, you're losing money. With BTC, you still make < 5% interest, but since the currency is increasing in value you're actually making more than what the interest rate reflects.

<snip>

• But putting such theoretical plutocrats aside, here is the argument that convinced me to not be so concerned about the Bitcoin's deflationary properties: on this Earth, there has never been a deflationary currency. There has never been a currency whose supply increases predictably and significantly more slowly than the supply of the goods it represents. We do not actually know how such a currency will behave in the wild, and while we may speculate, we are speculating. Bitcoin is, in some ways, still an experiment.

Gold?
Well, if you talk about extremely long periods of time, decades, generations, ...., then you can't really have a net-deflationary currency forever; it's like the energy or mass preservation law in physics. But for sure, whenever a currency is fully tied (not partial reserve or other monetary instruments) to the value of a scarce commodity (such as gold) then you will get a deflationary currency. And we already know how that works: Value of the currency rises (other goods drop) to the point where the economy cannot sustain it any longer, then a depression follows as correction, and then it starts again. In the process, more and more assets are transferred to the money power.
I already mentioned an example of a failed forced re-introduction of the gold-standard by Winston Churchill, and the result was massive deflation and a depression that followed.
I understand there are always other factors at work, and Austrian Economists will ignore most of the evidence that's there and tell you "human nature cannot be predicted".  
But the statement "we do not actually know how such a currency will behave" is simply untrue; we have a really good idea how it behaves, that's why the money power would love to have it.

Austrian economics doesn't say "human nature cannot be predicted", it only makes that assumption to simplify the effects of various economic events. Also, Churchill's failure with trying to return to the gold standard occurred for one reason and one reason only (I had to look this up, thanks a lot):

"The error they defended was in restoring the Pound to its pre-war gold content of 123.27 grains of fine gold, its old exchange rate of $4.87. In 1920, the Pound had fallen to as low as $3.40 in gold-based Dollars. Though it had since gained and was still gaining, the pre-war gold content and Dollar exchange rates were far too high. That was because, for these rates, British prices were far too high. Because of this high British prices anyone possessed of gold or Dollars could do better by exchanging them for the money of one of Britain's competitors and buying there. And Englishmen likewise could do better by exchanging pounds for Dollars, gold or other currencies at the favourable Churchillian rate and buying abroad. In 1925, the price advantage in doing so was about 10%. Exports, as always, were essential for Britain. So, other things equal, British coal, textiles and other manufactured tools could only become competitive at the new exchange rates if their prices were to come down by approximately 10%. A very uncomfortable process."

Full Article

If the US government put a price fix on gasoline at say, $0.50, nobody would be able to sell gasoline in the US because it would cost more to procure than what they could sell it for. If that happened it would be a disaster. Do the same thing to your currency, and you get the same result.

Since BTC is immune to this sort of manipulation, that sort of economic disaster basically cannot happen to BTC. Governments today can even control the price of gold and silver through fraudulent futures contracts and by stealing bullion from other countries (*cough*Libya*cough*). Again, they have very little ability to steal BTC, although if BTC were traded on major stock exchanges they could try to push the value down by naked shorting futures in the same way that they do with gold and silver. If you take a quick peek at the price of gold, you can see how well that's working out for them.[/list]

[wogaut]

Haplo, thank you for your lengthy response. Where do you get the 8%  number for US inflation? The average over the last 3 decades is about 3.3% per annum, which numbers are you using?

MoonShadow, I don't think bitcoin is screwed if the dollar returns to a gold standard,  these are not mutually exclusive. Comparing the graph for gold value to bitcoin I don't see the correlation, and I don't think these two will be excluding each other even if they would both be deflationary. They are 'controlled' by different mechanisms for starters.

[evoorhees]

Bitcoin is never deflationary. Bitcoin is inflationary, with the rate of inflation falling toward zero over time.

If/when the rate of coin destruction exceeds the rate of coin creation then the money supply will shrink = monetary deflation.

Okay fine, correct in that case if people lose coins But the algorithm and structure of Bitcoin itself is never deflationary.

[Haplo]

Haplo, thank you for your lengthy response. Where do you get the 8%  number for US inflation? The average over the last 3 decades is about 3.3% per annum, which numbers are you using?

MoonShadow, I don't think bitcoin is screwed if the dollar returns to a gold standard,  these are not mutually exclusive. Comparing the graph for gold value to bitcoin I don't see the correlation, and I don't think these two will be excluding each other even if they would both be deflationary. They are 'controlled' by different mechanisms for starters.

http://www.shadowstats.com

Government issued inflation numbers say exactly what the government wants them to say, even if it means excluding energy, mortgage payments and anything else important they feel like excluding from CPI numbers. Inflation can't actually be derived from CPI anyway, since it depends on how much money is issued by the Fed, the Treasury, and inflationary reserve banks.

That said, I overstated a bit, it's more like ~6%, although it varies. That's still more than you'll make in any US based savings account.

[wogaut]

http://www.shadowstats.com
Government issued inflation numbers say exactly what the government wants them to say, even if it means excluding energy, mortgage payments and anything else important they feel like excluding from CPI numbers. Inflation can't actually be derived from CPI anyway, since it depends on how much money is issued by the Fed, the Treasury, and inflationary reserve banks.

That said, I overstated a bit, it's more like ~6%, although it varies. That's still more than you'll make in any US based savings account.

While I do agree that the CPI doesn't fully reflect reality as the standard basket of goods which it is based on keeps changing.

But with 6% we are looking at a doubling of prices on average within 12 years, or halving of value.
That simply hasn't happened. I remember well enough what my purchasing power and of the company I work with was in 2000 and how it changed given income and my standard of living. I guess there are some areas in the US where that happened, but I don't see it.
SGS recently calculated even 10.5%(!), nobody could believe that we are dealing with stats that have longterm validity here. There value is just as skewed as the CPI, just in the other direction.