Whitepaper: Decentralized Monetary Policy for Crytographic Currencies

[Lauda]

(Warning, I am not advocating the theory I will explain below. In fact, I happen to think that it is complete nonsense. But it is the theory accepted by the mainstream economists.)

The economy does not consist of consumers alone. You need producers. These producers must either invest their accumulated capital, or take on credit, in order to produce. If the value of the currency is increasing (due to deflation, i.e., due to its quantity decreasing or remaining constant while the population and the productivity is increasing), they will not invest (they will hoard capital instead, in the hope that it appreciates) and they will not take on credit (because they will have to repay in appreciated currency). Result - no production or at least decreased production. They will also lay off workers (not needed, since less is being produced), resulting in increased unemployment, meaning fewer money paid in wages to the consumer, meaning even less consumption, etc.

Did I ask about producers? No.

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[Vessko]

Did I ask about producers? No.

You should have, though. I already explained to you how, according to this theory, deflation will hurt consumers too, by hurting the producers (who pay they wages the consumers need, in order to pay for their consumption).

[inBitweTrust]

Did I ask about producers? No.

You should have, though. I already explained to you how, according to this theory, deflation will hurt consumers too, by hurting the producers (who pay they wages the consumers need, in order to pay for their consumption).

Producers benefit from deflation as well as long as the deflation is caused by a fixed monetary supply and not externalities and there is plenty of liquidity. Producers do not need a middle man to issue predatory loans as they can get credit for free by saving their deflationary currency. Other options are available such as angel investors and Venture Capitalists willing to offer money in exchange for stake or simple kickstarters.

There is plenty of liquidity within bitcoin because of the inherent divisibility of the currency. Even if 99% of coins are "horded" there is enough divisibility to be a functional unit of account and if more than 8 decimal places are needed a soft fork can accomplish that.

You are attempting to apply economic principles which are based upon flawed assumptions supported by special interests who are content at misleading he public. I have heard their reasoning for not mentioning true inflation rates which fail to include healthcare, food and fuel and it doesn't hold water .

The emperor has no clothes.

We already have plenty of digital currencies which embrace keynsian economic principles to choose from, their called fiat. All we ask for is a option to use a currency that follows the wisdom from a different school of economics, namely Austrian.

[Vessko]

Producers benefit from deflation as well as long as the deflation is caused by a fixed monetary supply and not externalities and there is plenty of liquidity.

Deflation is the reduction of money supply relative to the availability of goods and services. That is, you can have deflation by keeping the money supply fixed (not declining), provided that the amount of goods and services in the economy increases, which is usually the case. Or you can have deflation by reducing the money supply, but this is rare. Deflation is not "caused" by the relative reduction of money supply. Deflation is the relative reduction of money supply.

Producers do not need a middle man to issue predatory loans as they can get credit for free by saving their deflationary currency.

Yes, if they have savings (which are basically equivalent to investment). But if they do not, and cannot afford to save, which is the case for most business nowadays, they are forced to take on credit. As I said, our current society runs mostly on credit. We can argue whether this is "bad" or "good" or "how things ought to be" - but if we fail to admit how things actually are, we are just burying our heads in the sand.

Other options are available such as angel investors and Venture Capitalists willing to offer money in exchange for stake or simple kickstarters.

I suspect that you have never run a business or at least have never had to do turn to a vulture capitalist.

In any case, all these arguments are bogus. The correct argument against this theory is that producers make their profit from the spread between the production costs and the sale price, so they will thrive as long as the prices of raw materials and labor move (up or down) at the same pace as the prices of the end product, so deflation shouldn't really hurt them.

There is plenty of liquidity within bitcoin because of the inherent divisibility of the currency. Even if 99% of coins are "horded" there is enough divisibility to be a functional unit of account and if more than 8 decimal places are needed a soft fork can accomplish that.

Liquidity or divisibility has nothing to do with this, although deflation can cause lack of liquidity in some cases.

You are attempting to apply economic principles which are based upon flawed assumptions supported by special interests who are content at misleading he public.

And you have a problem with reading comprehension. I clearly stated above that I personally think that this theory is complete nonsense. So, I am not doing anything of the kind you are accusing me of. I am just trying to explain the theory used by most mainstream economists; a theory I personally disagree with. Learn to read before you post.

I have heard their reasoning for not mentioning true inflation rates which fail to include healthcare, food and fuel and it doesn't hold water .

You haven't researched deep enough. They have done something much worse - they have redefined "inflation" to mean "rising prices", instead of "increase of the money supply relative to the available amount of goods and services", which used to be the proper definition for centuries. Ludwig von Mises has a nice critique of this nefarious move in one of his articles. The real problem is not that the core CPI does not include food and energy; the real problem is that they have redefined "inflation" to mean one of the symptoms instead of the actual thing.

We already have plenty of digital currencies which embrace keynsian economic principles to choose from, their called fiat. All we ask for is a option to use a currency that follows the wisdom from a different school of economics, namely Austrian.

I am a fan of the Austrian school of economics myself, but the knowledge of it that you are demonstrating here is rather shallow.

[inBitweTrust]

Deflation is not "caused" by the relative reduction of money supply. Deflation is the relative reduction of money supply

While deflation is indeed a relative reduction in monetary supply there are many potential causes for this relative reduction and many economic conditions coinciding which give rise to a financial crisis.

Yes, if they have savings (which are basically equivalent to investment). But if they do not, and cannot afford to save, which is the case for most business nowadays, they are forced to take on credit. As I said, our current society runs mostly on credit. We can argue whether this is "bad" or "good" or "how things ought to be" - but if we fail to admit how things actually are, we are just burying our heads in the sand.

I suspect that you have never run a business or at least have never had to do turn to a vulture capitalist.
In any case, all these arguments are bogus. I suspect that you have never run a business or at least have never had to do turn to a vulture capitalist.
 The correct argument against this theory is that producers make their profit from the spread between the production costs and the sale price, so they will thrive as long as the prices of raw materials and labor move (up or down) at the same pace as the prices of the end product, so deflation shouldn't really hurt them.

Strawman fallacy. Your original statements I was refuting was your insinuation that credit wouldn't be available or taken with a deflationary currency. This isn't an argument refuting the non exhaustive list of options for available credit with a deflationary currency which doesn't depend upon a fixed loan interest rate.
Savings (credit from appreciation) , angel investors, venture capitalists, crowd funding, loans from friends and family, non profit donations, credit agencies who take no stock but a percentage of future sales till loan is paid off, ect... all represent different forms of credit.

Producers need credit at certain times regardless of the spread between the production costs and the sale price.

Liquidity or divisibility has nothing to do with this, although deflation can cause lack of liquidity in some cases.

Thus the reason I pre-empted potential concerns and how bitcoin is different than fiat with limited divisibility.

And you have a problem with reading comprehension. I clearly stated above that I personally think that this theory is complete nonsense. So, I am not doing anything of the kind you are accusing me of. I am just trying to explain the theory used by most mainstream economists; a theory I personally disagree with. Learn to read before you post.

I read you correctly the first time. Don't take things personally, as I am arguing against your statements and obviously not against you.

You haven't researched deep enough. They have done something much worse - they have redefined "inflation" to mean "rising prices", instead of "increase of the money supply relative to the available amount of goods and services", which used to be the proper definition for centuries. Ludwig von Mises has a nice critique of this nefarious move in one of his articles. The real problem is not that the core CPI does not include food and energy; the real problem is that they have redefined "inflation" to mean one of the symptoms instead of the actual thing.

Non-sequitor. I believe misleading the public about the true CPI is a problem. We can discuss the relative importance of different problems if you would like.

I am a fan of the Austrian school of economics myself, but the knowledge of it that you are demonstrating here is rather shallow.

Let's stick to addressing the arguments directly themselves instead of venturing off into ad hominem territory.

[Vessko]

Your original statements I was refuting was your insinuation that credit wouldn't be available or taken with a deflationary currency.

Even if we leave aside that it wasn't "my" argument, that wasn't the argument at all. The argument wasn't about a "deflationary currency", the argument was about deflation in general. In deflation, currency tends to appreciate, cetes paribus. This doesn't necessary mean that credit will not be available - it means that those who have already taken credit will suffer and those who could use credit will be afraid to take it.

Savings (credit from appreciation) , angel investors, venture capitalists, crowd funding, loans from friends and family, non profit donations, credit agencies who take no stock but a percentage of future sales till loan is paid off, ect... all represent different forms of credit.

Savings aren't credit. Having worked with vulture capitalists myself, I assure you that going to them is generally a desperate move. I haven't found one who was interested only in "percentage of future sales" yet. They wanted all sorts of things, like dictating how the company is to be run, supporting the company only as long as they could sell it for profit and so on. Of the other forms of credit - it doesn't really matter, unless the creditor is willing to have the principal adjusted (down!) for deflation. Even if the credit is interest-free and you have to return only the principal in nominal terms, it will still hurt you if the currency has appreciated meanwhile.

That doesn't mean that it is not possible to manage a business in a deflationary environment - but it does mean that the current modus operandi of most businesses becomes unworkable and many of them would fail. That, in itself, might not be a bad thing in the long run - but it is one of the reasons why the current society is unlikely to accept a deflationary environment voluntarily.

Producers need credit at certain times regardless of the spread between the production costs and the sale price.

They do now, yes. They won't, if they evolve to survive in a deflationary environment. But it would be a painful process.

I believe misleading the public about the true CPI is a problem.

I believe that you are wrong. In fact, the whole concept of CPI is nonsensical, because there is no such thing as "general price level" and it, of course, cannot be measured. The invention of the CPI is just one of the scams to mislead the public about inflation via money creation out of thin air. Its constant manipulation to understate inflation is just a minor shenanigan in the grand scheme of things.

[inBitweTrust]

I think we are talking past each other.

Bitcoin and deflationary currencies will be disruptive. Those that don't hedge their bets will suffer, businesses will shutdown, and governments will start migrating over to different ways to fund operations like higher sales tax and VAT.

I welcome it all.

[funtotry]

Did I ask about producers? No.

You should have, though. I already explained to you how, according to this theory, deflation will hurt consumers too, by hurting the producers (who pay they wages the consumers need, in order to pay for their consumption).

Producers benefit from deflation as well as long as the deflation is caused by a fixed monetary supply and not externalities and there is plenty of liquidity. Producers do not need a middle man to issue predatory loans as they can get credit for free by saving their deflationary currency. Other options are available such as angel investors and Venture Capitalists willing to offer money in exchange for stake or simple kickstarters.

A fixed money supply would not cause deflation, it would cause there be to neither inflation nor deflation (all else being equal).

Deflation would be caused by either a falling money supply or a falling demand for products.

Producers would be hurt by deflation because the price/value of what they produce would decline between the time they buy the raw materials to produce something and the time they can actually sell their product. Any company that is attempting to realize any kind of economy of scale will need to have inventory on hand, a general rule of thumb is 2 months supply of their inventory.

Angel investors and VC investors still expect to earn a return on their investment just like lenders/creditors do. If either of these kinds of investors can earn a return (by having their money be worth more by having it sitting under their mattress over time) then they will be less likely to invest in companies with potential

[Vessko]

The confusion in this thread is an excellent illustration of von Mises' critique that the banksters have muddled the issue by re-defining inflation and deflation to mean one of the symptoms (price movement) and leaving us with no term for the real thing.

A fixed money supply would not cause deflation, it would cause there be to neither inflation nor deflation (all else being equal).

The "all else being equal" part is critical here. In reality, all else is never equal. Deflation is the reduction of money supply relative to the available pool of goods and services. That is, you can have a fixed money supply and still have deflation if the pool of available goods and services is expanding (which is usually the case, as human civilization progresses). That's why they say that Bitcoin is a deflationary currency. Or you can have an expanding money supply and still have deflation if the pool of available goods and services is expanding even faster. That's why they say that gold is a deflationary currency.

Deflation would be caused by either a falling money supply or a falling demand for products.

No, deflation isn't "caused" by that. Deflation is the reduction of money supply relative to the available pool of goods and services.

It is falling prices that are caused by falling money supply or falling demand for products (among other things). Most people know that prices depend on the balance between supply and demand. Few people realize that they actually depend on the balance of four things:

1) The supply of products.
2) The demand for products.
3) The supply of money.
4) The demand to hold money.

The last one is especially difficult to quantify. Basically, money is a good like any other; the good with the highest liquidity. The laws of supply and demand apply to it too. In fact, products are always paid with products; money is just the medium of exchange.

Producers would be hurt by deflation because the price/value of what they produce would decline between the time they buy the raw materials to produce something and the time they can actually sell their product.

True in general but the reality is a bit more complex than that. It depends on what time we are talking about and how much the currency appreciates during this time. If the numbers involved are relatively small (i.e., deflation is mild), most businesses will still thrive.

Angel investors and VC investors still expect to earn a return on their investment just like lenders/creditors do. If either of these kinds of investors can earn a return (by having their money be worth more by having it sitting under their mattress over time) then they will be less likely to invest in companies with potential

Exactly. And if deflation becomes stronger, this can increase the demand to hold money, putting additional downward pressure on prices - the so-called deflationary spiral. This is what happened during the Great Depression and this is what has the mainstream economists scared to death. A simple, mild deflation isn't really a problem and can be actually beneficial for the economy, since it stimulates savings and savings are equivalent to investments and capital accumulation.