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July 21, 2010, 12:10:01 PM
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I also agree that the correct view is that the free market should determine it. However, I am curious how you can see price deflation and monetary deflation as equivalent. Do you want to explain why this is, and how you arrived at this conclusion? Furthermore, I'm not clear on how you see monetary stability a bad thing, and you are implying that it is.

if you presume that price deflation is OK and monetary deflation is bad, presumably you'd also hold that monetary inflation is bad and price inflation is OK?

No, I wouldn't, because general price inflation without monetary inflation means that society as a whole is getting poorer and worse off. There might not be anything immoral with the situation on the face of it (unlike monetary inflation as practiced), but it is not desirable.

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July 21, 2010, 12:12:14 PM
 #22

... Monetary deflation and price deflation are not equivalent in any way, and they cannot be conflated (which is what scepticus is attempting to do).  One is a cause and the other is a potential effect.  They may be linked in a causal way but they cannot be substituted for one another.  All discussion which does this is nonsensical noise.

...

Thank you. He might not be making the conflation intentionally; after all, the discussion is conflated when we learn and study about economics in school. Many people are simply not aware that they are talking about two different things. I admit that I've tripped over this many times in the past, myself.

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July 21, 2010, 12:39:45 PM
 #23

all fixed quantity money schemes must be deflationary by definition under conditions of economic growth.

"The correct view is that the free market should determine the amount of money that is available."

price deflation and monetary deflation are equivalent when viewed from the point of view of the scales that weigh money against everything else, which is all that most people care about. The same applies to monetary inflation and price inflation.

That much should be obvious to anyone except an austrian or keynsian fanatic.

I also agree that the correct view is that the free market should determine it. However, I am curious how you can see price deflation and monetary deflation as equivalent. Do you want to explain why this is, and how you arrived at this conclusion? Furthermore, I'm not clear on how you see monetary stability a bad thing, and you are implying that it is.

The point is, the bitcoin user base isn't fixed - the number of coins need to grow with the user base. If it doesn't then you are increasing the value of the coins already held by existing users. Therefore, the more popular bitcoins become, the more valuable each coin will get.
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July 21, 2010, 12:44:01 PM
 #24

... Monetary deflation and price deflation are not equivalent in any way, and they cannot be conflated (which is what scepticus is attempting to do).  One is a cause and the other is a potential effect.  They may be linked in a causal way but they cannot be substituted for one another.  All discussion which does this is nonsensical noise.

...

Thank you. He might not be making the conflation intentionally; after all, the discussion is conflated when we learn and study about economics in school. Many people are simply not aware that they are talking about two different things. I admit that I've tripped over this many times in the past, myself.

You're very welcome.
It is an easy trap to fall into.  It's one of the most powerful lessons taught by the Austrians.  It's also completely orthogonal to the dominant economic policies and teachings. 

It's also completely wrong.
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July 21, 2010, 03:41:02 PM
 #25

all fixed quantity money schemes must be deflationary by definition under conditions of economic growth.

"The correct view is that the free market should determine the amount of money that is available."

price deflation and monetary deflation are equivalent when viewed from the point of view of the scales that weigh money against everything else, which is all that most people care about. The same applies to monetary inflation and price inflation.

That much should be obvious to anyone except an austrian or keynsian fanatic.

I also agree that the correct view is that the free market should determine it. However, I am curious how you can see price deflation and monetary deflation as equivalent. Do you want to explain why this is, and how you arrived at this conclusion? Furthermore, I'm not clear on how you see monetary stability a bad thing, and you are implying that it is.

The point is, the bitcoin user base isn't fixed - the number of coins need to grow with the user base. If it doesn't then you are increasing the value of the coins already held by existing users. Therefore, the more popular bitcoins become, the more valuable each coin will get.

You've given a value statement, but you haven't explained why the number of coins needs to grow with the user base; what's the reason behind it? What bad things will happen if things are not changed in the way that you suggest? How do you suggest implementing this? How do you decide how much every new user should get?

"Therefore, the more popular bitcoins become, the more valuable each coin will get."

Which is what simple supply & demand would dictate. Let me give my own value statement in the form of a question, in return: What would happen to the purchasing power of all existing gold users if we could somehow conjure up a 400oz bar of gold out of thin air and give it to every citizen who immigrated to North America?

I recommend you read these threads for further info:

http://bitcointalk.org/index.php?topic=376.0
http://bitcointalk.org/index.php?topic=382.0
http://bitcointalk.org/index.php?topic=57.0

And here is some further reading:

http://blog.mises.org/6828/the-principle-of-sound-money/
http://mises.org/Community/blogs/lilburne/archive/2009/06/19/224252.aspx

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July 21, 2010, 04:51:34 PM
 #26

If 10 people on an island have a gold coin each and only use these to trade with, what happens when an 11th person arrives on the island? Will the value of the gold coins increase, decrease or stay the same?

Consider the same example where they don't have to trade in gold. Would the 11th person try to use an alternative money?

You either take the approach that you're going to have competing, fixed quantity monies, or you try to let a single currency flex with the user base. Sure, you can have competing currencies (indeed, should). However, if you can use a money which can be flexible to the user base, it makes life easier. I'd suggest reading Hayek's Denationalisation of Money.

I've read plenty of Austrian theory, thanks, and agree with much of it. Most of the ideas are better than what we have to put up with now, but we have a chance to make a better system than using simple commodity money.

Additionally, we are starting from a point of obscurity - hardly anyone has heard of or use Bitcoins. Do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? If you limit supply prematurely in 10 years, it would have just as terminal an affect as if you did it now.
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July 21, 2010, 06:21:17 PM
 #27

If 10 people on an island have a gold coin each and only use these to trade with, what happens when an 11th person arrives on the island? Will the value of the gold coins increase, decrease or stay the same?

Why are you asking the question? What does the answer tell us? I can't read your mind, so I don't know why you think that an expansionary supply is good and a fixed supply is bad.

Consider the same example where they don't have to trade in gold. Would the 11th person try to use an alternative money?

Surely he can exchange his labour in return for gold or whatever else he needs?


You either take the approach that you're going to have competing, fixed quantity monies, or you try to let a single currency flex with the user base. Sure, you can have competing currencies (indeed, should). However, if you can use a money which can be flexible to the user base, it makes life easier. I'd suggest reading Hayek's Denationalisation of Money.

I've read plenty of Austrian theory, thanks, and agree with much of it. Most of the ideas are better than what we have to put up with now, but we have a chance to make a better system than using simple commodity money.

You have yet to tell us why what you are proposing would be a better system, and what is wrong with the system as it is.

You've given a value statement, but you haven't explained why the number of coins needs to grow with the user base; what's the reason behind it? What bad things will happen if things are not changed in the way that you suggest? How do you suggest implementing this? How do you decide how much every new user should get?



Additionally, we are starting from a point of obscurity - hardly anyone has heard of or use Bitcoins. Do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? If you limit supply prematurely in 10 years, it would have just as terminal an affect as if you did it now.

I believe that if Bitcoins become popular and are being used 10 years from now, their quality of stability will add, rather than detract, to their attractiveness. There is no guarantee that this will happen, but, independent of all other factors, monetary stability is a plus.

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Traktion
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July 22, 2010, 12:22:17 AM
 #28

If 10 people on an island have a gold coin each and only use these to trade with, what happens when an 11th person arrives on the island? Will the value of the gold coins increase, decrease or stay the same?

Why are you asking the question? What does the answer tell us? I can't read your mind, so I don't know why you think that an expansionary supply is good and a fixed supply is bad.

It's a simple question - do you think the value of the gold coins increase, decrease or stay the same? Once you give the forum an answer, then we can take the next step together.

Consider the same example where they don't have to trade in gold. Would the 11th person try to use an alternative money?

Surely he can exchange his labour in return for gold or whatever else he needs?

How about if another 9 people joined the 11th man on the island, each without any gold. There are now 20 people, each in competition for 10 gold coins, which only the original 10 owned. What has happened to the value of the coins? There are two options and a bunch of shades of grey in between:

1. Demand for the gold coins doubles, meaning that the owners can exchange their coins for twice as much labour/stuff.
or
2. The new 10 guys will use something else instead of gold, such as silver, seashells or whatever.

In scenario 1, you have made the original 10 people very wealthy, simply because they were on the island first. In scenario 2, gold has been displaced as the only currency, with an alternative being used by the new islanders.

You may say 'and? what's your point?' The point is that you either end up with the early adopters gaining disproportionately, just for being in the right place at the right time. Alternatively, you end up with numerous currencies, which have to be exchanged to do business - it also becomes more confusing for the layman, to have lots of different monies, with different (and likely fluctuating) exchange rates.

Would it not simply be better to design a currency which ebbs and flows with the user base? This negates the need (although doesn't rule out) for lots of competing currencies. It also means that new comers to the island can at least mine their own (gold in this example) coins, to give them a more even starting point.

I don't know how many more ways I can explain the same thing, so I hope this outlines the options and outlines my point.

You either take the approach that you're going to have competing, fixed quantity monies, or you try to let a single currency flex with the user base. Sure, you can have competing currencies (indeed, should). However, if you can use a money which can be flexible to the user base, it makes life easier. I'd suggest reading Hayek's Denationalisation of Money.

I've read plenty of Austrian theory, thanks, and agree with much of it. Most of the ideas are better than what we have to put up with now, but we have a chance to make a better system than using simple commodity money.

You have yet to tell us why what you are proposing would be a better system, and what is wrong with the system as it is.

You've given a value statement, but you haven't explained why the number of coins needs to grow with the user base; what's the reason behind it? What bad things will happen if things are not changed in the way that you suggest? How do you suggest implementing this? How do you decide how much every new user should get?

I'd like a system where I have to deal with as few currencies as possible. I'd like to be able to see the price of something this year and know it will be roughly (external factors, like oil/energy, famine excluded) the same price in several years from now. This would help me plan and prepare for the future. It also helps businesses do the same.

What will happen if things aren't done this way? You may end up with a bubble (ponzi style) or you may just end up with many currencies. Neither is ideal, for the reasons I outline above.

How do I plan on implementing this? Coin minting rates could adjust to the number of active nodes in the swarm - the bigger the swarm, the more coins could be minted. There may be more nuanced ways of doing this, but I'm most concerned with the theory; getting the theory wrong may doom the technology needlessly (it's great tech, IMO). If everyone agrees on a theory, then more thought can be pushed into the implementation of it.

How do you decide how much every new user should get? If each node can mint new coins at the same rate as the founder users, then the number of coins should grow as the user base does. Early adopters would still have an advantage, as they will have had more time to accumulate coins, but it gives new entrants a better chance - it has more balance. It is very much like how the current Bitcoin base is growing, but with a more dynamic approach and with no hard limit.

Additionally, we are starting from a point of obscurity - hardly anyone has heard of or use Bitcoins. Do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? If you limit supply prematurely in 10 years, it would have just as terminal an affect as if you did it now.

I believe that if Bitcoins become popular and are being used 10 years from now, their quality of stability will add, rather than detract, to their attractiveness. There is no guarantee that this will happen, but, independent of all other factors, monetary stability is a plus.

I'll repeat this question, as it's important: do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? I will assume you will say no (please let us know), but this will contradict your position - if you are going to fix the supply, it will have a similar (although less extreme) effect whether you do it now or in the future.

The point is, we all want monetary stability. By not increasing the supply with the user base, this will not be achieved though - that's my whole point.
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July 22, 2010, 01:09:54 AM
 #29

If 10 people on an island have a gold coin each and only use these to trade with, what happens when an 11th person arrives on the island? Will the value of the gold coins increase, decrease or stay the same?

Why are you asking the question? What does the answer tell us? I can't read your mind, so I don't know why you think that an expansionary supply is good and a fixed supply is bad.

It's a simple question - do you think the value of the gold coins increase, decrease or stay the same? Once you give the forum an answer, then we can take the next step together.

Consider the same example where they don't have to trade in gold. Would the 11th person try to use an alternative money?

Surely he can exchange his labour in return for gold or whatever else he needs?

How about if another 9 people joined the 11th man on the island, each without any gold. There are now 20 people, each in competition for 10 gold coins, which only the original 10 owned. What has happened to the value of the coins? There are two options and a bunch of shades of grey in between:

1. Demand for the gold coins doubles, meaning that the owners can exchange their coins for twice as much labour/stuff.
or
2. The new 10 guys will use something else instead of gold, such as silver, seashells or whatever.

In scenario 1, you have made the original 10 people very wealthy, simply because they were on the island first. In scenario 2, gold has been displaced as the only currency, with an alternative being used by the new islanders.

You may say 'and? what's your point?' The point is that you either end up with the early adopters gaining disproportionately, just for being in the right place at the right time. Alternatively, you end up with numerous currencies, which have to be exchanged to do business - it also becomes more confusing for the layman, to have lots of different monies, with different (and likely fluctuating) exchange rates.

Would it not simply be better to design a currency which ebbs and flows with the user base? This negates the need (although doesn't rule out) for lots of competing currencies. It also means that new comers to the island can at least mine their own (gold in this example) coins, to give them a more even starting point.

I don't know how many more ways I can explain the same thing, so I hope this outlines the options and outlines my point.

You either take the approach that you're going to have competing, fixed quantity monies, or you try to let a single currency flex with the user base. Sure, you can have competing currencies (indeed, should). However, if you can use a money which can be flexible to the user base, it makes life easier. I'd suggest reading Hayek's Denationalisation of Money.

I've read plenty of Austrian theory, thanks, and agree with much of it. Most of the ideas are better than what we have to put up with now, but we have a chance to make a better system than using simple commodity money.

You have yet to tell us why what you are proposing would be a better system, and what is wrong with the system as it is.

You've given a value statement, but you haven't explained why the number of coins needs to grow with the user base; what's the reason behind it? What bad things will happen if things are not changed in the way that you suggest? How do you suggest implementing this? How do you decide how much every new user should get?

I'd like a system where I have to deal with as few currencies as possible. I'd like to be able to see the price of something this year and know it will be roughly (external factors, like oil/energy, famine excluded) the same price in several years from now. This would help me plan and prepare for the future. It also helps businesses do the same.

What will happen if things aren't done this way? You may end up with a bubble (ponzi style) or you may just end up with many currencies. Neither is ideal, for the reasons I outline above.

How do I plan on implementing this? Coin minting rates could adjust to the number of active nodes in the swarm - the bigger the swarm, the more coins could be minted. There may be more nuanced ways of doing this, but I'm most concerned with the theory; getting the theory wrong may doom the technology needlessly (it's great tech, IMO). If everyone agrees on a theory, then more thought can be pushed into the implementation of it.

How do you decide how much every new user should get? If each node can mint new coins at the same rate as the founder users, then the number of coins should grow as the user base does. Early adopters would still have an advantage, as they will have had more time to accumulate coins, but it gives new entrants a better chance - it has more balance. It is very much like how the current Bitcoin base is growing, but with a more dynamic approach and with no hard limit.

Additionally, we are starting from a point of obscurity - hardly anyone has heard of or use Bitcoins. Do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? If you limit supply prematurely in 10 years, it would have just as terminal an affect as if you did it now.

I believe that if Bitcoins become popular and are being used 10 years from now, their quality of stability will add, rather than detract, to their attractiveness. There is no guarantee that this will happen, but, independent of all other factors, monetary stability is a plus.

I'll repeat this question, as it's important: do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? I will assume you will say no (please let us know), but this will contradict your position - if you are going to fix the supply, it will have a similar (although less extreme) effect whether you do it now or in the future.

The point is, we all want monetary stability. By not increasing the supply with the user base, this will not be achieved though - that's my whole point.

Something along these lines has been suggested by several different people so far.  I am fairly certain it is extremely foreign to Satoshi's vision for bitcoins.  Also a breaking update to the client.

Are none of the people who have suggested this change coders?  Because it shouldn't be too difficult to modify the code for bitcoins and create freedomcoins or whatever you want to call it.

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July 22, 2010, 01:15:18 AM
 #30

The point is, the bitcoin user base isn't fixed - the number of coins need to grow with the user base. If it doesn't then you are increasing the value of the coins already held by existing users. Therefore, the more popular bitcoins become, the more valuable each coin will get.

I do have a question on this issue:  If increasing the user base should also correspondingly increase the monetary supply, how to you propose that the new coins are allocated for new users?  What is the criteria for a "new user" and how does that apply to "old users"?  Should a corresponding reduction in the monetary supply happen when somebody leaves the system?  How should those coins be removed to keep inflation or deflation from happening?

I can understand that the purpose of increasing the monetary supply is to stabilize the economy so prices stay mostly fixed (more or less) over time provided new participants in the system have roughly the same initial stack of currency.

On a practical level, however, the distribution of the initial set of "coins" in any new currency is always going to be fraught with problems and some people will feel cheated and others given a little bit too generously.  Any allocation system for the initial set of coins has its problems.  So why do you think Bitcoins is necessarily more evil than other systems?  Other than simply handing each new participant to Bitcoins with a certain amount of coins in the beginning, I can't think of another system that at least tries to equally distribute the coins more "fairly".

Giving each new user a fixed number of coins doesn't really solve many problems and in fact creates a whole bunch of new ones in its place.  I need not go into details because I hope most intelligent people can figure out the flaws of a network-based approach that presumes to give each new user some money equally... and it is something many on-line games already have to grapple with all of the time.

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July 22, 2010, 03:03:41 AM
 #31

If 10 people on an island have a gold coin each and only use these to trade with, what happens when an 11th person arrives on the island? Will the value of the gold coins increase, decrease or stay the same?

Why are you asking the question? What does the answer tell us? I can't read your mind, so I don't know why you think that an expansionary supply is good and a fixed supply is bad.

It's a simple question - do you think the value of the gold coins increase, decrease or stay the same? Once you give the forum an answer, then we can take the next step together.

I'm not really interested in beating around the bush. I'm still waiting for you to tell me why your proposed solution is better than the current system in place, and how it will avoid pitfalls such as distortions through inflation.


Consider the same example where they don't have to trade in gold. Would the 11th person try to use an alternative money?

Surely he can exchange his labour in return for gold or whatever else he needs?

How about if another 9 people joined the 11th man on the island, each without any gold. There are now 20 people, each in competition for 10 gold coins, which only the original 10 owned. What has happened to the value of the coins? There are two options and a bunch of shades of grey in between:

1. Demand for the gold coins doubles, meaning that the owners can exchange their coins for twice as much labour/stuff.
or
2. The new 10 guys will use something else instead of gold, such as silver, seashells or whatever.

In scenario 1, you have made the original 10 people very wealthy, simply because they were on the island first. In scenario 2, gold has been displaced as the only currency, with an alternative being used by the new islanders.

You may say 'and? what's your point?' The point is that you either end up with the early adopters gaining disproportionately, just for being in the right place at the right time. Alternatively, you end up with numerous currencies, which have to be exchanged to do business - it also becomes more confusing for the layman, to have lots of different monies, with different (and likely fluctuating) exchange rates.

So the extra islanders exchange their labour in return for goods, and prices drop; again, what is the issue here? Are you proposing we just grab what belongs to the current islanders and give it to the newcomers? There's nothing wrong with the newcomers satisfying their demand by performing labour in exchange for other goods of value.

Would it not simply be better to design a currency which ebbs and flows with the user base? This negates the need (although doesn't rule out) for lots of competing currencies. It also means that new comers to the island can at least mine their own (gold in this example) coins, to give them a more even starting point.

I don't know how many more ways I can explain the same thing, so I hope this outlines the options and outlines my point.

You need to explain it in more than just "It's my hunch that this would be better. It would be better, no?". Couldn't you back it up with a bit more than "I think this is better because it feels better"? How do you propose actually implementing such a system, and how does it lead to a more efficient market and more total wealth?

You either take the approach that you're going to have competing, fixed quantity monies, or you try to let a single currency flex with the user base. Sure, you can have competing currencies (indeed, should). However, if you can use a money which can be flexible to the user base, it makes life easier. I'd suggest reading Hayek's Denationalisation of Money.

I've read plenty of Austrian theory, thanks, and agree with much of it. Most of the ideas are better than what we have to put up with now, but we have a chance to make a better system than using simple commodity money.

You have yet to tell us why what you are proposing would be a better system, and what is wrong with the system as it is.

You've given a value statement, but you haven't explained why the number of coins needs to grow with the user base; what's the reason behind it? What bad things will happen if things are not changed in the way that you suggest? How do you suggest implementing this? How do you decide how much every new user should get?

I'd like a system where I have to deal with as few currencies as possible. I'd like to be able to see the price of something this year and know it will be roughly (external factors, like oil/energy, famine excluded) the same price in several years from now. This would help me plan and prepare for the future. It also helps businesses do the same.

What will happen if things aren't done this way? You may end up with a bubble (ponzi style) or you may just end up with many currencies. Neither is ideal, for the reasons I outline above.

How do I plan on implementing this? Coin minting rates could adjust to the number of active nodes in the swarm - the bigger the swarm, the more coins could be minted. There may be more nuanced ways of doing this, but I'm most concerned with the theory; getting the theory wrong may doom the technology needlessly (it's great tech, IMO). If everyone agrees on a theory, then more thought can be pushed into the implementation of it.

How do you decide how much every new user should get? If each node can mint new coins at the same rate as the founder users, then the number of coins should grow as the user base does. Early adopters would still have an advantage, as they will have had more time to accumulate coins, but it gives new entrants a better chance - it has more balance. It is very much like how the current Bitcoin base is growing, but with a more dynamic approach and with no hard limit.

Why not implement both systems and let the customer decide? You say you don't like competing currencies, but competition is the only way that the weak ideas get weeded out and the strong ideas survive. Competition is how the customer is better served! There's no need for a monopoly or a winner-take-all, not even for Bitcoin Wink

Additionally, we are starting from a point of obscurity - hardly anyone has heard of or use Bitcoins. Do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? If you limit supply prematurely in 10 years, it would have just as terminal an affect as if you did it now.

I believe that if Bitcoins become popular and are being used 10 years from now, their quality of stability will add, rather than detract, to their attractiveness. There is no guarantee that this will happen, but, independent of all other factors, monetary stability is a plus.

I'll repeat this question, as it's important: do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? I will assume you will say no (please let us know), but this will contradict your position - if you are going to fix the supply, it will have a similar (although less extreme) effect whether you do it now or in the future.

The point is, we all want monetary stability. By not increasing the supply with the user base, this will not be achieved though - that's my whole point.

I made the point earlier on that the coins must be distributed in some fashion. If we were to fix the supply now, who would have the rest of the coins? Maybe we should have fixed it at 0 coins? Obviously, when you start from a base of 0, you do need to have some inflation to bring the system into existence. This type of inflation is based on resources expended to create the system and there is not necessarily much profit in doing so, since it takes real resources to be done. We can argue the different ways we can create the system, and I don't mind doing so; I don't claim that the current way is perfect, though I do think it's a heck of a lot better than monopolizing the means of creation.

The current way gives plenty of time for new users to help create the currency, thus encouraging adoption. It helps prevent scenarios such as the first 100 forum members grab 100 of the coins, thus other users don't see any point in buying coins since there isn't much of a market for them, and they can't generate them themselves. The whole point of coin generation is to get around this chicken & egg problem and function as a demand generator, to help grow the network. This is why we don't fix the supply now, but we fix it once the demand to trade for Bitcoins far exceeds the demand to generate them, because a whole ecosystem has grown up around the currency.

Eventually, though, once the market reaches critical mass -- and Bitcoin is far from there right now, but is doing better than any other similar idea that I've seen -- once it reaches a point where market supply and demand is self-sustaining, then there is much less of a need to seed the network in this fashion, as it is now able to stand on its own. Once the initial supply is large enough that Bitcoin is able to perform all of the functions of money adequately, then there is no further need to expand it beyond that point, other than perhaps a precision increase for future proofing.

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July 22, 2010, 10:14:04 AM
 #32

I'm not going to get chance to reply properly until this evening, but just want to say a few quick things.

I'm very much pro-currency competition - I'm a huge fan of Hayek's Denationalisation of Money. If Bitcoins stay as they are, I fear they will lose out to other currencies, which will do a better job as 'money'. If you read the aforementioned, you will see that Hayek thinks that the best monies may track a basket of goods - to keep the price roughly constant. That could best target of all, but without formulating a way to measure and maintain this, keeping a rough handle on supply vs demand for a currency is the next ideal. In short, I'm all for competition, but avoiding obvious limitations would help prevent a new currency quickly becoming obsolete... if we want to see Bitcoins thrive, rather than one of its successors, then we would be wise to consider this.

As I've said before, there is nothing wrong with Bitcoins becoming a digital commodity, but I don't believe this will be the best, most stable money. There is much scope for competition to prove this too. I think we all agree that we want stable money though, right?

P.S. I am a software engineer, with a passion for economics. If I had more free time, I would consider developing some friendly competition. I have few too many plates spinning as it is though!
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July 22, 2010, 03:12:47 PM
 #33

I'm not going to get chance to reply properly until this evening, but just want to say a few quick things.

I'm very much pro-currency competition - I'm a huge fan of Hayek's Denationalisation of Money. If Bitcoins stay as they are, I fear they will lose out to other currencies, which will do a better job as 'money'. If you read the aforementioned, you will see that Hayek thinks that the best monies may track a basket of goods - to keep the price roughly constant. That could best target of all, but without formulating a way to measure and maintain this, keeping a rough handle on supply vs demand for a currency is the next ideal. In short, I'm all for competition, but avoiding obvious limitations would help prevent a new currency quickly becoming obsolete... if we want to see Bitcoins thrive, rather than one of its successors, then we would be wise to consider this.

I think we just need to be clearer on the differences between price deflation and monetary deflation. The first is a good thing, the second is not. Many of the issues that you raise are actually issues that occur under the second, not the first.

I certainly don't mind if someone implements a commodity currency that tracks a basket of goods; indeed, I believe a more resilient digital economy will come about if people use more than one currency. The trouble lies in exchanging said currency for the basket of goods, which is the advantage of something like Bitcoin.

As I've said before, there is nothing wrong with Bitcoins becoming a digital commodity, but I don't believe this will be the best, most stable money. There is much scope for competition to prove this too. I think we all agree that we want stable money though, right?

P.S. I am a software engineer, with a passion for economics. If I had more free time, I would consider developing some friendly competition. I have few too many plates spinning as it is though!

Haha, I know the feeling. I hope I don't seem like I'm trying to come down hard on you, because I'm not, but I want to be sure that we're actually arguing over the same thing so that I can properly respond to you. Not only in my opinion, but substantiated by many bodies of works, the most stable money is one that avoids both monetary deflation and monetary inflation. This is achieved both by having currency competition (so that good money can be chosen over bad) and by having sound money whose supply remains stable, in order to not redistribute the pie. When both factors are in place, it will be difficult to have a huge inflationary credit run up that then leads to a huge deflationary bust. You need exogenous forces such as legal tender to really make that happen.

If you were to say that Bitcoin's slight monetary deflation is a slight problem, I'd agree with you. Until we find a better solution, though, I think we can deal with it by ensuring robust replication and backup solutions.

Price deflation, however, is not a problem. We need to be very clear on the differences between the two before we can continue the debate, because I feel you're linking the two when they shouldn't be linked.

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July 23, 2010, 09:32:44 AM
 #34

It's the monetary deflation I am concerned about here, not fluctuations (or deflation) in price indexes.

One way to demonstrate this is using the Quantity Theory Of Money. It has it's limitations, but over the long run, it has been proved correct time and time again. Specifically, T in the below:

M VT = P T

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

"T is an index of the real value of aggregate transactions." - If the number of Bitcoin user base (essentially, the size of the Bitcoin economy) grows, this value will increase. If everything else remains the same, it means that P ("the price level.") will likely decrease. Considering that the Bitcoin user base could expand massively, this is a concern.

While there aren't many articles on this, likely because there hasn't been a situation where it occurs, I found this: http://www.economics.utoronto.ca/munro5/QUANTHR2.htm (although it is using a modified formula):

Quote
ii) on the demand side: for M and V: population growth will initially increase the demand for money (and will thus increase k), and thus reduce any inflationary impact from any increase in M*. But population growth may also or subsequently change the structure and distribution of that population; and increased urbanization, and consequent changes in markets and financial structures, may lead to a reduced k -- or, to say the same thing, an increased V, an increased velocity of money circulation.

* Where credit is part of M in this case, I presume, so it will grow with demand. Bolding is mine.

As large population fluctuations, under the remit of a single, national currency are relatively rare. Famine gives us some examples, but there are arguments for prices increasing due to a decimated work force. IMO, it's probably a combination of both, but the amount of money per capita must be a consideration. As the volume of transactions in the Bitcoin economy may grow rapidly (due to the growing user base), we will have an even more extreme case on our hands.

If all prices are decreasing, just because money is becoming scarce, this isn't good deflation. This isn't because of technological advances, efficiencies and such, it is just because there is less money per capita over time.

EDIT: P.S. No worries with the arguing - as long as it remains cool and calm, it will help us arrive at the right answer, hopefully! Smiley

[One last thing: tracking a basket of commodities need not mean backing - the supply of money could just be adjusted to attempt to maintain the overall price level. While this is focusing on price inflation/deflation, it would attempt to keep the overall price level stable - to keep the currency as neutral as possible. Ultimately, it may be a better way of trying to do the same thing as above, albeit more complex. Tracking CPI/RPI is something different, as items in these indexes are changed (manipulated?) frequently.

The problem with tracking the prices of anything as that it is susceptible to changes in liquidity preferences (ie. propensity to hoard). Maybe a well 'managed' currency, in a world of competing denationalised currencies, would do well as the best (most stable) money. In our Bitcoin economy we probably should only concern ourselves with the broad strokes (ie. Quantity of Money, per capita), but future competition may go further (and attempt to create something more stable).]
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July 23, 2010, 10:43:05 AM
 #35

Quote
One last thing: tracking a basket of commodities need not mean backing - the supply of money could just be adjusted to attempt to maintain the overall price level. While this is focusing on price inflation/deflation, it would attempt to keep the overall price level stable - to keep the currency as neutral as possible.

Who's money are you going to destroy? Wouldn't the way to get the money to destroy be to sell the basket of goods?

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July 23, 2010, 11:28:22 AM
 #36

Quote
One last thing: tracking a basket of commodities need not mean backing - the supply of money could just be adjusted to attempt to maintain the overall price level. While this is focusing on price inflation/deflation, it would attempt to keep the overall price level stable - to keep the currency as neutral as possible.

Who's money are you going to destroy? Wouldn't the way to get the money to destroy be to sell the basket of goods?

At the risk of going OT (should probably have its own thread, if it warrants consideration), natural wastage (lost coins) will place the currency in a natural state of mild deflation, if everything else is equal (ie. the size of the Bitcoin economy - the number of Bitcoin users - remained the same etc). You could destroy money through part of the transaction fee being paid into the void (ie. a portion of the fee is just destroyed, rather than being given to the processing node).

Whether these techniques would be agile enough, I don't know. In a predominantly credit based economy, interest rates are more important in the short term. The Bitcoin economy would likely be quite different though. Of course there is nothing to stop a currency being backed by commodities, and it may be more stable too. I'm just throwing some ideas out there about a commodity basket really.

If it's worth debating, we can create a thread on it.
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August 04, 2010, 01:30:46 PM
 #37

First lets establish some facts and look at things a different way.   

1) There are (CURRENTLY) only 23,000,000 bit coins.  Most are held in a virtual account and used to purchase processing power to keep the system going for the next 100 years.  Identical to a VERY RICH MAN paying out his living expenses slowly with gold from his vault.   

 Think of these 23,000,000 as shares in a company we call "the economy" which generates profit in terms of real goods and services.  If the company is successful it "pays dividends" each "owner" gets more goods and services. 

2) Each of us owns a percent of the total coins that we traded real value to get. 
3) Monetary inflation (increasing the coin count beyond 23,000,000) steals ownership from those who have coins and GIVES IT to someone else.  Everyone still owns a percent of a whole.  SO WHO IS THIS SOMEONE and WHY THEM?

4) Monetary deflation (lost coins) results in the "purchasing power or percent ownership" of those coins being redistributed to all other owners.  Thus lost coins is good for all coin holders but the individual who lost the coins.  VALUE is not destroyed by coins being lost because there are still just as many goods and services in the economy.

5) If you "must" increase the money supply then it should be done according to a "stock split" where each user is given 2 for 1 or  1.05 for 1 ever year.  Net result is that everyones "percent ownership" stays the same and you achieve "price stability".   But the economic effect would be the same as price deflation under a fixed money supply.  There is a natural mental flaw that most people (and monkeys) suffer from where the perception of 4 pennies as being better than 1 nickel seems to make sense, combined with the physiological impact of taking a nominal pay cut even though it entitles you to more goods and services than before.


The #1 question that monetary inflationists must answer is by what moral ground can any individual or group choose to reallocate shares of wealth?   If you create new coins "from nothing" who gets the goods that are purchased with those new coins? 

Monetary deflation is only a problem in a banking system where new money is created from credit and the math requires an increasing number of loans to pay interest or else someone must default.   It is perfectly stable when money is not debt and its existence does not depend upon paying someone interest.



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August 05, 2010, 12:29:21 AM
 #38

Monetary deflation is only a problem in a banking system where new money is created from credit and the math requires an increasing number of loans to pay interest or else someone must default.   It is perfectly stable when money is not debt and its existence does not depend upon paying someone interest.

In order to fall far enough to break your neck, you need something to propel you up that high in the first place. Fractional reserve + legal tender + money inflation is a good way of doing that, but credit based on real savings in a free market would find it much harder to do so. The people so scared of monetary deflation forget that a great inflationary expansion must occur before there can be a deflation!

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August 05, 2010, 12:41:54 AM
 #39

Nice summary. Worth discussing but I'm still not buying it.

As an aside, I think there are a lot of mixed metaphors and final paragraph doesn't follow in anyway from the previous paragraphs.

1) There are (CURRENTLY) only 23,000,000 bit coins.  Most are held in a virtual account and used to purchase processing power to keep the system going for the next 100 years.  Identical to a VERY RICH MAN paying out his living expenses slowly with gold from his vault.   
Note: I think it is 21,000,000. But agreed, there is a virtual account which the blocks are being debited from.

However for your metaphor, who is this very rich man? Why is he the ONLY one with money when we start the system? Why does this guy get to decide what the price for OUR services are? That doesn't seem very market based to me?

My metaphor twist is important because I want to show that the way blocks are trickled out is really a sociological trick.

If you believe in a fixed currency, the trickle out system should really bother you. It is by definition and design "monetary inflation". Obviously, the first person who received 50 BTC had all the value. That made him the second very rich man. However, according to your rules, if the second block was generated by someone else, 1/2 of the second rich mans values was taken away and given to a third now rich man.

By your very own terms, who is this very rich man, that he can choose to reallocate shares of wealth arbitrarily?

The only rational way to answer this question is to say, he's the very rich man! He gets to make the rules of his game. If you don't like the rules of his game you don't have to play with him. Therefore, by common agreement among all who choose to play the very rich mans game, there exists at least one moral reason for an individual or group to reassign other people's wealth. So you have given a first affirmative answer to your #1 question. I'll suppose you are asserting that there exist no OTHER moral reason.

Now, let's look at a different but more consistent metaphor that could have been used to boot the system, if you were a real austrian purest.

Suppose the rich man said, I'm dying. You 21 closest friends of mine get all my BTC. Take care of it and trade it with the world. He then gave each person 1,000,000 BTC.

Now you have the same logical stable state as you will have in "100 years" in your given example. It just gets here sooner. But the benefit is, you don't have to compromise on your most important value. Now there exists no group or individual who can reassign other people's wealth. Ideologically it is a perfect system.


I think you can give me a dozen reasons why my pure system will fail. I'll give only one to advance the argument.

1) Why on earth outside of the initial 21 now very rich men, would anyone else choose to use the system? Who are those 21 guys to make all the rules for all time? Why do they get to be the initial rich people and not me? What did they contribute that I am not contributing?

This inductive logic holds for any fixed commodity fiat money system.

I would guess there are roughly 21,000,000 motown records which were pressed in 1966. Why not use them as your fixed commodity? They are already "fairly distributed" among the initial population.

Or perhaps you could use the roughly 21,000,000 Playboy magazines that were printed in 1957. Those are "fairly distributed" as well. Well if you decide men should be most of the initial rich people.

In that case we could all decide that if you happen to have a 1966 motown record or a 1957 Playboy, you get a starting bitcoin.

After that every bit of your logic still holds. They don't even have to all be redeemed at once. You could redeem them for bitcoins as you stumbled across them (like finding gold!)


This is where the sociological trick comes in. Everyone here who is normally an austrian but tolerates the trickle in system does so for one reason. They want to be one of the initial rich people. To get something for nothing is very motivating.


So the #1 question I have for you is, as the chances of being awarded blocks goes down. Why on earth is anyone going to want to play the silly game invented by you people who happened to stumble upon easy BTC first?

After all, Knightmb has 10% of all the exiting BTC. He probably bought and generated them for less than $1,000 at the time. If I decide to trade some commodity worth $10,000 I would likely end up with less than half of his stash.

He put in $1,000 and I put in $10,000 a couple of months later. He is more than twice as rich as me. If someone tries to trade $100,000 worth of commodities for BTC a few months after me, is he going to be half as rich as me and a quarter as rich as knightmb?

That seems like a poor game for him to play.
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August 05, 2010, 01:12:11 AM
 #40


So the #1 question I have for you is, as the chances of being awarded blocks goes down. Why on earth is anyone going to want to play the silly game invented by you people who happened to stumble upon easy BTC first?

After all, Knightmb has 10% of all the exiting BTC. He probably bought and generated them for less than $1,000 at the time. If I decide to trade some commodity worth $10,000 I would likely end up with less than half of his stash.

He put in $1,000 and I put in $10,000 a couple of months later. He is more than twice as rich as me. If someone tries to trade $100,000 worth of commodities for BTC a few months after me, is he going to be half as rich as me and a quarter as rich as knightmb?

That seems like a poor game for him to play.


Why does one cares about the relative wealth of another individuals versus our own, especially in a system where people can mutually gain from exchanges? If anything, one should be concerned about one's own absolute wealth over time, not one's relative wealth to another.

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