Topic: "A currency that increases in value is a terrible thing" - page 2. (Read 3019 times)

Bad always begs the question: "Bad for who?". Nobody complained so far that the prices for computers went down. If it were bad, the IT industry would be in a deep crisis since the early 60s and we would all suffer from cheap PCs, mobile phones, ABS and ESP in cars....

If you are chin-deep in debt you need prices to go up. So you need to tell everyone that printing more money is good for them.

1. Inflation could also run with a fixed supply. Fixed supply means that there is no consideration about the present economic situation when regarding money circulation. That there is one unchangeable static rule in which new money is added to the circulation.
It doesn't work in creating a stable currency, because economic growth is not fixed. The availability of important strategic resources like fossil fuels is always changing together with production capacity. The modern finance is built in a way that money changes by following the economy, so the money in circulation is in balance with the economic development. If you keep the money supply static, while the economic growth is dynamic as usual, then the outcome is an unstable currency with constantly changing prices. You could say that people could manage this when there is a new quick IT based system to keep the prices dynamic, but it creates load of unpleasant problems and difficulties, especially with financial planning. Value of currency has to be stable, so it would be predictable and plans could be made based on these predictions.

2. I think that it is certainly possible to create an inflationary currency without a central planner. Like you said before, it could be easily done by just couple of changes from todays cryptos code to create inflation. But what remains, is the fixed supply, that is The difficult problem. I would even give it a try to a stable 1% year deflation, but fixed supply is what would create financial havoc.
I think that the answer for stable inflation vs stable deflation problem isn't very clear because it hasn't been tested in the modern world. But the answer from fixed money supply model vs dynamic supply model isn't hard. Fixed money supply is too simplistic to enable currency value stability in modern global trade.


With bitcoin, the most important flaw isn't deflation per se, but the rate in which deflation is created. Bitcoin was created to have a strong starting momentum, with attracting people to adopt because it will be much harder to adopt later. That is why the supply is 50% coins in 5 years, and the rest in 120 years. I would give bitcoin a chance if the deflation rate wouldn't be this steep, but with this curve it won't ever be an serious financial tool. The first users will adopt because of greed, and the later users won't adopt because of that same greed. It will mostly be a get-rich-quick tool for gamblers, and will be far from being a serious currency.
But I won't get tired of repeating that it doesn't mean that we should laugh at the entire idea. The idea of creating an transparent open sourced monetary system, that is supported by the internet, is a major leap in the evolution of finance. The future will probably bring forward currencies that have the complexities needed to be a quality currency in the world of modern global trade. But the difference between bitcoin and this "future currency", is like between the first digital calculators and todays PCs. If bitcoin can't handle the complexities, then it doesn't mean that no open-sourced digital currency can't do it also.

We are now seeing the benefits of a fixed-supply currency.  Bad actors are being eliminated.  If bitcoin were a centrally managed currency, then MT gox and possibly other failed exchanges would have been bailed out at the expense of all other users of the system and Mark Karpeles would have been given 10s of thousands of counterfiet BTC for his "handling" of the crisis.  Thankfully, bitcoin doesn't support "To Big To Fail."  The legacy financial system is basically full of propped-up failures.  Most major failed banks in the US would not exist today if the US $ had worked as efficiently as bitcoin does. 

Further, this has initiated another round of innovation.  Cryptographic proof of reserves (https://iwilcox.me.uk/2014/proving-bitcoin-reserves) and voting pools (http://bitcoinism.blogspot.com/2013/12/voting-pools-how-to-stop-plague-of.html) are designed to further reduce trust in people.  This innovation would never happen with a centrally managed currency. 

Cryptocurrency has the potential to almost entirely eliminate trust.  Of course this won't happen overnight and there will undoubtedly be more trials and tribulations along the way.  So far, bitcoin is working as planned.

As opposed to those such as you who have learned about economics from Keynes, Samuelson and Krugman?

Given the choice, I'll take YouTube any day. 

Thanks for the question, Proudhon.

For a myth to be adopted by a society, it must have at one point in time been useful.  Between 1700 - 1900, England was on a hard-money standard and price levels over these two centuries were fairly stable (although sometimes volatile).  The "deflation is bad" myth had not yet been adopted¹.

Around the turn of the last century is when the "deflation is bad" myth truly took hold.  Our productive abilities were increasing extremely fast--so much could be produced with so little human input.  We had the factories in place to increase real output Q (from M V = P Q) and the will of the capitalists to push technology forward, but with a fixed-supply currency the only way Q could increase was if P decreased.  

Like you said, we didn't have the internet back then and efficiently communicating real-time prices was difficult.  Q increased only modestly, but since productivity had improved to such an extent, there was less work available an unemployment increased during the Great Depression.  And thus was born the myth that "inflation is good."  The Fed increased the money supply M (by devaluing the dollar vs gold), which allowed Q to reach its potential without the fast drop in P that would have been required due to mankind's rapid advances in productivity.

The first thing the increased Q went to was WWII.  We could produce so much stuff that we had to destroy it in order to keep the people employed!

But this got the people working, validated the "inflation is good" myth, and gave birth to our modern consumer economy.  Our consumer economy is a relic from the Great Depression that says that if we don't consume our resources fast enough then people will lose jobs and will be back in a depression.  

Our "deflation is bad" myth stems from our grandparents' inability to communicate real-time prices in 1933 efficiently enough to just let P fall to where it needed to be.  


¹But already early pioneers in anarchism like your namesake were working towards ways to provided fair access to capital for the people.  Pierre-Joseph Proudhon "unsuccessfully tried to create a national bank, to be funded by what became an abortive attempt at an income tax on capitalists and shareholders...it would have given interest-free loans."  I think Proudhon saw the unrealized potential in the people to increase real output Q if they only had equitable access to money.  [Wikipedia]

Peter,

It may be that under historic conditions, deflation does tend to be bad.  Though, I wonder conditions have changed sufficiently to mitigate its historical "badness".  Specifically, I wonder if being able to price goods in real-time helps mitigate deflation's badness.  Is it possible to assess the extent to which the inability to price in real-time affected historical cases of depression from deflation?  Just thinking out loud here. 

Perhaps there are two disagreements here:

1.  Is a mildly-inflating currency better or worse than a fixed-supply currency?

2.  It is possible to inflate a currency without having to trust a central planner?

The answer to #2 is "YES".  If you modify bitcoin to have a constant % block reward then what you get is a forever-inflating currency.  But if this were the case, we would also know for a fact that the freshly-printed money would go entirely to garbage output (miners will simply consume electricity [natural resources] faster than is required to secure the network).  

So, to have any hope of not wasting the extra money inflation, you must argue that the central planner is not only wiser than the free-market, but vastly wiser to turn a net waste into a net gain.  This is a tenable position in my opinion, and I think the answer to #1 is "WORSE."


Hmm, maybe we can put this into a theorem.  Still half-baked, but here's a start:

Peter R's Theorem on Monetary Inflation for Fully-Adopted Currencies

Money created by a trustless currency by way of inflation goes entirely to exploiting natural resources.  

Corollary #1

An inflating currency that is not provably inferior to its fixed-supply equivalent requires trust in a central planner.

Corollary #2

An inflating currency is superior to its fixed-supply equivalent if and only if the unproveable efficiencies made possible by the wisdom of the central planners outweighs the loss of monetary freedom that placing trust in central planners entails.

I think that our main disagreement comes between your opinion that inflation creates garbage output, and my opinion that inflation has little to do with garbage output, but the problem is in management supervision and corruption.
That is the main reason why more developed countries, with better education and tradition, can handle inflation better. They can handle the fast money flow, while still keeping constructive directions in production. When you throw a lot of money at fools, then they can't do anything constructive with it, and they are just wasteful.

I think that a rule emerges there, that better developed countries can use higher inflation where deflation could fit to less developed countries.

I'm totally pro privatized monetary systems, where people could choose the currency they use without the restrictions of legal tender. Just bitcoin itself is far from something that could be trusted. The idea has a lot of potential for the future though.

I agree that deflation would be less "efficient" for the "major powers" who presently have first access to the newly printed money and that this is why we haven't adopted it.    



I agree that trust is important.  A society that values honesty and integrity will be happier and more productive than a society that doesn't.  We want to trust people and have them trust us back, because business and relationships are more efficient after trust has been earned.  

I am only making the point that with bitcoin trust is optional.  

Would you rather have a financial system where trust in third-parties and authorities is required (whether you feel they've earned it or not), or one where trust is optional and at your discretion?  

It isn't probable that the increased market cap will create stability. It will only attract players with deeper pockets and better knowledge on how to manipulate the market. The problem is that the main attraction towards bitcoin is speculation, so there will always be volatility, that is the outcome of speculative play. Right now we have these "whales" who play with millions of dollars. But in the future, we would have large institution playing the same game but only with billions and also with better ability to understand market manipulation.
Only way to lose this instability is for it to be unattractive for speculative play.

While I agree that stable deflation (1% year) could be done without heavy drawbacks, then it's still not as efficient as with stable inflation. (with bitcoin there is no stability with deflation either). In the modern world, the major powers are in a constant economic battle with each other. If deflation would be more efficient, then you could be sure that they would adopt it just to have an edge over their competition. The world isn't stupid and bitcointalk isn't the community of tortured geniuses, who are the only ones who know how to do it right.
Without trust, bitcoin will just die. Trust is the main thing that makes people put their wealth into bitcoin. Without trust there will be no wealth in bitcoin, and it will be just a fun innovative play money.

For businesses to use bitcoin as a mainstream payment gateway, it's value (market cap) and liquidity is far from sufficient, however large it might seem.  If it reaches stability too early and too low it will not be able to achieve that purpose.  That is why I believe it will be mostly speculative for a few more years, and hopefully increase in value a lot more before it stabilizes.

Just my noob opinion.

I simply argued that we operate under a myth that "deflation is bad."  

I made no claim that inflation caused "the financial problems that we see in US."  What caused the problems in the US financial system is the same thing that's been causing problems in the bitcoin financial system: trust in third parties.

In the US dollar financial system trust is required; in the bitcoin financial system trust is optional.  

Stable inflation didn't cause the financial problems that we see in US. The problem is not in the school of thought, but in lose management principles and corruption. Greenspan was the one who started promoting that everyone should just trust the private sector of finance, without any regulation or supervision. And he was the one who promoted the idea that the private sector of finance should have safety-nets for all the risks it took. These management principles created a careless environment, where certain privileged people could only win even if they lost. And all of course at the expense of everyone else.

It's funny to read some of the posts here, who are anti-Fed and pro-ultra liberal at the same time. The ultra liberal principles allowed all the crooks to leech on everyone else, because there were no rules why they shouldn't do this. This is the same reason that has ruined any trust towards the bitcoin market system. Most of the community were sheep who thought that the free market will take care of everything, just so they could justify their passiveness. But the free market can't handle corruption, and if there isn't enough supervision and regulations then you can be sure that crooks will exploit the free market in their favor.

Sounds reasonable. But if we can assume that most posters here are not part of the establishment, why then are so many people opposed to it? Simple brainwashing? That answer seems a little too easy somehow.

to be fair, TERA does have a point. A currency which is not relatively stable in its value (be it by losing or gaining value) might be impractical for business and settlement of contracts.

Besides that most of the argument of "deflation = bad" seems to stem from the assumption, that without a currency which is constantly losing value, people will resort to *gasp* saving and not consuming beyond their means, which is supposed to be universally bad for any economy. Though that is only correct for a fiat economy based on debt with interest, which is demanding perpetual growth to avoid inflationary collapse.

To summarize: a currency that increases in value is a terrible thing for the current establishment, which is in charge of the current monetary system. It is a wonderful thing for its users and the biosphere in general, because it provides incentive to spend and consume less - which seems to be exactly what is needed now.

Presently, we operate under a myth that mild inflation is a positive.  We believe that the mild deflation that a fixed supply currency would entail (once adoption equilibrium had been achieved) would be a bad thing and lead to decreased wealth in the aggregate.  

I disagree:

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What I wrote above can be understood as fact.  Now let's talk mythology.  (Myths can be useful as they align peoples' views, permitting communication from a common frame of reference.  However, it is important to question from time-to-time whether our shared myths are still useful).  

Presently, we operate under a myth that "deflation is bad."  This means that if we want to increase real output, Q, we must rule out Option #3:

   1.  Money supply, M,  can increase.
   2.  Money velocity, V, can increase.
   3.  Price level, P, can decrease. NOT ALLOWED DUE TO OUR SHARED MYTHS

According to our mythology, we must choose #1 or #2.  So the Fed lowers interest rates to encourage spending (increase V) and buys assets to increase its balance sheet (increase M).

I would argue that focusing on #1 and #2 tend to increase output, but the increase is mostly garbage output, not real and useful output.  Manipulating #1 and #2 cause us to exploit our natural resources at a faster rate but provides less real and useful output than if the economy was left to its own devices, also leaving less resources available for our children.  

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It's because price stability is THE quality aspect of every currency. Low quality currencies are those of high volatility.
The reason is simple, you can't use low quality currencies to do business. When your company gets billed X amount of bitcoins, but you have a 3 weeks to pay that bill, then it's a lottery if that bill increases in value or decreases. You can't run a business where most of the liquid asset prognosis are based on a lottery.

Currency stability is created by complex calculations, based on the relation of current available resources and money in circulation. This calculation will decide if it's necessary to add or remove money from the circulation, so available resources and circulating money is in constant balance. The better the balance is kept, the higher is the currencies quality and more stable the prices.
Bitcoin has a fixed coin supply, without any consideration given to available resources. Bitcoin can never be a quality currency because it just lacks the necessary complexity to keep the balance. If anyone wants to do business with bitcoin, then it's only possible through services like Bitpay, who offer fiat stability to support bitcoin.
There is a chance that we will see a new open sourced monetary system in the future, that could handle all the necessary complexities to create an real quality transparent currency. I certainly hope we do. But right now, bitcoin seems like a quality currency only to those, who have learned about finance from youtube videos.

Don't make assumptions. Instead try reading the WORDS in your screen. I specifically discuss bitcoin as a currency here. So I ask you, specifically: Why would you be upset that your purchasing power keeps increasing (assume for the sake of discussion that it does)?