The Big Question: 21 Million Coins (yes, I know its been asked before)

[koin]

And you make that point by telling me to "tread lightly"?

What did you expect this thread to be? It's either gonna be filled with bitmiseslibtards who think a fixed supply is the cat's meow and will extol all its many virtues, or you'll have one of the rare non-groupthinkers around here like me who will actually argue against it. And what do I get for my arguments? "lol 2+2 equals potato" as a counter-argument. You've got two libtards in this thread using themselves as sources for crying out loud.

i can just picture the spittle as he's screaming at his monitor.    

[symbols]

The clear resolution to this is that consumption can not go to zero, as its necessary for existence, and especially for modern existence. This lower bound establishes at least some supply, limiting the deflationary spiral.

I don't understand why people view banks and lending as so critical... but I agree with voorhees argument that if the bitcoin 'GDP' is growing at e.g. 4% with a constant money supply, lending at -3% would be making a profit

-s.

[Etlase2]

I expect this to be an argument and discussion where we can have a decent economic conversation without resorting to immature personal insults.

When can we do that without evoorhees resorting to immature obfuscation and meandering, most likely intentionally misleading trains of thought and arguments?

[dooglus]

I don't see what you mean by a "negative interest problem." Who cares if interest rates go negative? Is it that odd that under a world of falling prices, a rate of -2% might still be a good deal? If prices fall at a rate of -3% per year, then one should be happy with a -2% interest rate.

I'm probably missing something here, but why would anyone make a loan at -2% interest?

I can 'loan' to my cat and get 0% interest (she doesn't know how to spend it, so gives it all back untouched), so why would I loan to you and get less than that?

[miscreanity]

I don't see what you mean by a "negative interest problem." Who cares if interest rates go negative? Is it that odd that under a world of falling prices, a rate of -2% might still be a good deal? If prices fall at a rate of -3% per year, then one should be happy with a -2% interest rate.

I'm probably missing something here, but why would anyone make a loan at -2% interest?

I can 'loan' to my cat and get 0% interest (she doesn't know how to spend it, so gives it all back untouched), so why would I loan to you and get less than that?

In an environment where real rates are negative, lending at a less negative rate will still result in loss, but it'd be less of a loss than it would be otherwise.

In other words:

At a -5% real rate, earning -2% would be 3% better. You therefore only lose 2% instead of losing 5%.

That assumes your primary business is lending, and the business is a long-term venture. Typically, there are other areas of economic activity that will balance out, meaning that a return of 5% may be earned elsewhere.

It's a classic loss leader situation that is seen especially with electronics - below-cost mobile phones with profitable contracts, cheap game consoles with online subscriptions, etc.

[MoonShadow]

Coming from a financia and economics background, I'm always hit with this same question. I'm playing devils advocate here, and would like to see other responses

My big question on Bitcoin is: What happens after 21 million?

Since I know that you have, and will continue to, be hammered by the Austrians in the crowd for echoing this Monetarist theory position, I'm going to address the questions posed about 'price stickiness' and velocity.

Fiat currencies, as they are used today in a functionally digital form (i.e. bank accounts, credit cards, debit cards etc; not cash in hand transactions), all have a maximum velocity that is largely constrained by the settlement period of these payment methods on the one end, and the payday cycle on the other.  To illustrate this point, the laborer may be able to spend on credit, but only to a point.  Over his lifetime average, he tends to spend paycheck to paycheck, like most people.  So he earns his money, and that money cannot (generally) be spent before payday.  If he buys something with credit, he has it before payday but the funds are not (practically) available to the vendor until the cc transaction clears; so his velocity cycle is no faster than the 30 day average clearing time for credit cards or the average 7 day clearing time for personal checks.  Prices appear sticky for many reasons, but the max velocity time for the consuming public is one major contributor to that perception.  However, it's just a perception.

Of course, cash or bullion used in person have a near instant max velocity, limited mostly by the time & costs of moving physical objects from person to person & marketplace to marketplace.  While Bitcoin doesn't have an instant max velocity, since it generally requires a minimum of 6 confirmations for turnover; nor does it suffer from the physical limitations of transportation.  Overall, the delays of cash & bullion versus bitcoin are likely a wash; or perhaps even favor bitcoin.  (After all, an hour after you pay for your groceries in bitcoin at wal-mart, they could be paying a cashier in Bangladesh with those same coins, and in another hour that same cashier's wife could be buying cloth in another business while her husband is still at work)  Therefore, bitcoin doesn't have the constraints on velocity, or economic 'friction' as many here refer to it, as any other secure distance payment option available before bitcoin.  The illusion of 'sticky' prices in bitcoin will either not exist, or be a local pricing issue.

[MoonShadow]

I don't see what you mean by a "negative interest problem." Who cares if interest rates go negative? Is it that odd that under a world of falling prices, a rate of -2% might still be a good deal? If prices fall at a rate of -3% per year, then one should be happy with a -2% interest rate.

I'm probably missing something here, but why would anyone make a loan at -2% interest?

I can 'loan' to my cat and get 0% interest (she doesn't know how to spend it, so gives it all back untouched), so why would I loan to you and get less than that?

While no one would loan at a loss, investors might invest at a potential loss, if the investment is ideal.  Take the example of Warren Buffet 'loaning' money to General Electric following the crash of the GE stock price around 2007.  His loan rate was below market, but he had a clause that permitted him to convert those bonds directly into preferred stock, if the stock price turned around during the loan payback cycle.  Thus, the official interest rate represented a loss limit, not a certain loss.  So Warren Buffet did risk losing a small amount of money on the actual corporate bond rates (compared to other similar investments) but stood at least as much chance of being able to turn a very nice profit if the stock price rose significantly over the following several years, which is what happened.

[Stephen Gornick]

since it generally requires a minimum of 6 confirmations for turnover;

If running the local client or Blockchain.info, for instance, the coins can be spent after just one confirmation.  Ten minutes.

After all, an hour after you pay for your groceries in bitcoin at wal-mart, they could be paying a cashier in Bangladesh with those same coins,

I used that as the basis for a question on Quora:

But consider someone who doesn't have access to credit and is short on funds.  As soon as those funds are received the money often goes right back out for purchases or for repayment of debts.  For instance with "Food Day" where the parking lot is full at WalMart at 11:30 pm on the last day of the month ( http://communities.washingtontimes.com/neighborhood/making-change/2011/nov/29/food-day-rivals-black-friday-and-cyber-monday/ ).  The turnover of that money in that first hour, on an annual basis, is astronomical!

Can these electronic payment systems that work like cash (including same-day bank transfers such as the U.K.'s Faster Payments scheme) cause the velocity of existing money to rise to where price inflation is the result?

- http://www.quora.com/Inflation/Are-PayPal-Dwolla-M-Pesa-and-Bitcoin-responsible-for-inflation

[istar]

You assume that Bitcoin will be the only currency in a country. If its not, its not a problem.

We have this situation in reality with prices on mobilephone and computer. Which half in price quickly after a year but we still consume them because sooner or later we want that new phone eventhough we know it will be half the price in a year.

[MoonShadow]

since it generally requires a minimum of 6 confirmations for turnover;

If running the local client or Blockchain.info, for instance, the coins can be spent after just one confirmation.  Ten minutes.

After all, an hour after you pay for your groceries in bitcoin at wal-mart, they could be paying a cashier in Bangladesh with those same coins,

I used that as the basis for a question on Quora:

But consider someone who doesn't have access to credit and is short on funds.  As soon as those funds are received the money often goes right back out for purchases or for repayment of debts.  For instance with "Food Day" where the parking lot is full at WalMart at 11:30 pm on the last day of the month ( http://communities.washingtontimes.com/neighborhood/making-change/2011/nov/29/food-day-rivals-black-friday-and-cyber-monday/ ).  The turnover of that money in that first hour, on an annual basis, is astronomical!

Can these electronic payment systems that work like cash (including same-day bank transfers such as the U.K.'s Faster Payments scheme) cause the velocity of existing money to rise to where price inflation is the result?

- http://www.quora.com/Inflation/Are-PayPal-Dwolla-M-Pesa-and-Bitcoin-responsible-for-inflation

While an increase in velocity across an entire market can have the effect of inflation, velocity isn't inflation.  The effects of velocity are reversible, and therefore naturally balancing.  Bitcoin will find it's own velocity, eventually.  After which time whatever effects on overall prices that bitcoin's ever changing velocity has will be lost in the daily transaction noise, too small an effect for anyone to define nor care about.

[evoorhees]

ohhh hey look evoorhees is a complete assclown!!! can't actually counter any argument I have with actual logic, so must resort to strawmen!

I think an objective observer can review all the posts, both from myself and Etlase2. Then, tally the number of times each person calls the other a name. Then, from that data, figure out who has the better arguments.

Hopefully, Etlase2, we can both agree that one of us is gravely mistaken about that which he purports to know.

[matthewh3]

If you think about it the 21Million hard limit will never be reached as the block reward keeps half'ing the block reward will just keep getting exponentiation'ly smaller and smaller.  So at some point in the future the supply of bitcoins will be like the supply of gold into the current gold market and for quite some time.  That where we are now with the block reward is like a gold-rush.    

[matthewh3]

If you think about it the 21Million hard limit will never be reached as the block reward keeps half'ing the block reward will just keep getting exponentiation'ly smaller and smaller.  So at some point in the future the supply of bitcoins will be like the supply of gold into the current gold market and for quite some time.  That where we are now with the block reward is like a gold-rush.    

So if more and more digits keep getting added to bitcoin then the reward will keep on going just getting smaller and smaller as bitcoins value hopefully keeps going up and up.

[MoonShadow]

ohhh hey look evoorhees is a complete assclown!!! can't actually counter any argument I have with actual logic, so must resort to strawmen!

I think an objective observer can review all the posts, both from myself and Etlase2. Then, tally the number of times each person calls the other a name. Then, from that data, figure out who has the better arguments.

Hopefully, Etlase2, we can both agree that one of us is gravely mistaken about that which he purports to know.

I, for one, find Etlase2 amusing.  I doubt that it's in any way that was intended by himself, however.

But I suppose that I'm just another Mises libtard anyway, so I admit that I'm biased upfront.

[Realpra]

In a pure bitcoin economy prices will be deflating, but as mentioned the decimal will be moved.

The bitcoin protocol can be updated to allow extremely small amounts such as nano-satoshi, there is no limit.

Alternatively 1 satoshi could be made the permanent block reward and coins unmoved for 200-1000 years could be deleted to save harddisk space.


Those and cryptographic updates are the only ones anyone will really accept when it comes to their OWN bitcoins, nor will I update my client for anything else.


Deflationary death spiral?
1. Bitcoin deflation will be small once adoption is broad - people are unlikely to loose very many coins with better and better software helping them.
2. Even if it was high investments in the important things would still happen, if not people or their economies would die and smarter ones rise.
3. Consumerism and its slavery might well die, who will miss it? Only the looter elite.
Those who opt out with bitcoin and choose the important things in life will come out as the new more rightful elite.


If BTC deflation was 20% and no one worked I would still make bread and as the only guy with bread sell it for something that gave me minimum 21% return on investment.

It is weak currencies that invariably die, not strong ones like gold which is a useful today as in biblical times.

Think inflation protects the little man? Think again; the poor hold most value in pure currency as they need it all from day to day while the rich protect themselves with stocks etc..

Bitcoin is for the poor and the smart.
Inflating fiat is for the stupid to use and the filthy rich to control others.

[DeathAndTaxes]

Yes, this is the "Big Question"... does an economy work without perpetual debasement of the money supply? In the way I have phrased it, it almost answers itself, doesn't it? Stated differently to further point out the absurdity of the notion, will human beings stop trading with each other if the means of exchange they use isn't made increasingly worthless over time?
 

"Perpetual debasement" is the insurance premium we pay against deflation risk.

Suppose we have already reached the point where the Bitcoin supply is constant. How does the Bitcoin financial system respond to velocity and exchange rate shocks? What happens when a capital-inflow bonanza goes into reverse? What natural force pushes Bitcoin real interest rates back down to levels at which borrowing and lending occurs?

If no such natural force exists, then ONLY a central bank can provide the liquidity needed to avert a financial meltdown.

Even if BTC continually grew that wouldn't provide any protection from the shocks that you describe.  The only thing (in theory) that could is monetary intervention.  Looking at the last 50 years I would say in practice given the constraints of fallable humans and fallable models intervention is equally futile.

Gold has essentially being experiencing price deflation for some time.   Demand has grown over decades at a faster rate that supply expansion.

Supply expansion alone isn't sufficient to prevent price deflation. 
If supply grows 5% but demand grows 10% you are still going to experience price deflation. 

Given the goal of BTC model is to be uncontrollable I see no value in having a preset supply growth as opposed to a supply growth of zero.  The difference should be immaterial.  Unless we are accepting central control and intervention deflation is going to occur.  It is simply unavoidable. 

Given the strength of market segments which face continual price deflation I feel the risk hasn't been proven by the economist.  Rather it has just been taken on faith that chaotic and corrupt interventions are BETTER than even the risk of deflation.  I no longer accept that argument without hard evidence.

[Qoheleth]

I'm no student of economics. My understanding of the issues at play is novice-level at best.

But the reason I've ceased to be so worried about this is because of thinking over what it means for deflation (in the sense of a rising value-per-currency ratio) to be happening.

See, we have this assumption that the value side of the equation - the total "worth" of the goods and services being traded in an economy - will always increase. And in a sense, yeah, that's inevitable; right now we have a worldwide population growth of 1.32% per year, so unless everyone is getting worse and worse off, there'd better be at least a 1.32% growth in the value that moves within the world economy.

So where is that growth coming from? Short answer, from invested capital.

You take money. You use it to buy goods and services that allow you to produce something valuable at over-unity - that creates more value than was invested. That's business. That's economies. That's why all this works.

So let's say that money stays constant. 21 million bitcoins, in saecula saeculorum. Then, if the value in the economy is growing at 1.32% per year, a bitcoin becomes 1.32% more valuable every year. And people have a choice to make: do I bury this coin in the ground, and spend it for a bit more in a month? Or do I spend it now?

But really, they have three options: hoard the money, or spend it, or invest it.

Because, really, some people are just going to spend. And for those who would hoard, they are trying to figure out how to have the most purchasing power they can get at X time down the line. And if the value in the economy is growing at 1.32% per year, someone is definitely getting at least 1.32% per year on their investments, or else value is being created ex nihilo and you've got something very strange going on. In fact, if the value is growing at a rate of 1.32% per year, someone is getting many times 1.32% return on their investments, because people consume valuable goods, which means you can only direct value which is not being consumed towards the creation of new value.

So in the case of a constant money supply, the expected return from sound investments must always be greater than the expected return from hoarding, because otherwise where would the value be coming from? And so, someone who could be convinced to hoard instead of spend could be even more easily convinced to invest, which means the money is turning in the wheels of the economy and being used to create value - the stated goal of Keynesian "modest inflation".

[BlackPrapor]

A graphical representation:

This is a pretty nice chart:

Deflationary economics will reverse consumer oriented economy into resource based economy. Reverse the graph on the right side and you'll see how it will look like with bitcoins. Economy will stabilize, people will spend BTC on things they really need. Nothing more, nothing less.

[Realpra]

So where is that growth coming from? Short answer, from invested capital.

That is incorrect: Invested capital moves human effort towards some endeavor, but that endeavor may well fail and produce nothing at all.

The overall success rate of human adventures is what will give you the true growth rating.

If there is crisis (such as now) due to fundamental factors such as resource scarcity (such as now) everyone may indeed see worse times (such as now, especially in the west that has the most to loose).


Some of the few things really growing today is bitcoin and renewable energy - which are both things I am invested in.

[MoonShadow]

So where is that growth coming from? Short answer, from invested capital.

That is incorrect: Invested capital moves human effort towards some endeavor, but that endeavor may well fail and produce nothing at all.

The overall success rate of human adventures is what will give you the true growth rating.

If there is crisis (such as now) due to fundamental factors such as resource scarcity (such as now) everyone may indeed see worse times (such as now, especially in the west that has the most to loose).


Some of the few things really growing today is bitcoin and renewable energy - which are both things I am invested in.

I disagree that the current crisis is rooted in resource scarcities.  I would say that the past several years are the result of bad investments trying to clear from the previous two decades.