Good discussion Miscreanity!
Likewise! I've seen, and agreed with, a lot of your comments in other threads. You brought up some good points and the opportunity to cross-examine conclusions is always welcome.
... However, it is still desirable to maintain price stability in order for an economy to function efficiently.
These two sentences contradict each other. On one hand you say inflation shouldn't be used to keep prices steady. On the other hand you're saying it's desireble to keep prices steady by continually inflating the currency. Your first sentence is correct, second is false.
Nothing about inflation in that sentence, only price stability.
Agreed, but Bitcoin will not cause wild fluctuations in the long term, will it? It's decreasing rate of inflation is steady and predictable, and there will be no drastic increase nor decrease in money supply, thus price discovery should also occur on a relatively smooth curve. Both Bitcoin and Altcoin would be perfectly predictable and smooth - neither having an advantage in this regard.
I don't imagine Bitcoin would cause fluctuations in the long-term; wider adoption should see the exchange rates settle and fluctuations become the rarity instead of the norm. The comparison I usually use is to gold, where Bitcoin is the digital version of it. That will last as long as the economy's demand for Bitcoins doesn't outpace the currency's inflation rate - that's when convenience starts to trump value.
Altcoin is different, though. It isn't as predictable because there's no set expansion. If the inflation rate were arbitrarily targeted at 2%, sure you could figure out how many Altcoins there would be in the year 2238. With no specified rate, it'll simply expand to accommodate the participating economy's demand. It could top out at ~10mm units for a year or blaze up to ~100mm within the same time.
As with Bitcoin, the initial growth phase could be turbulent. Bitcoin can be inflated by being dividing units, but it requires increasing effort to do so each time based on the number of participating nodes in the network. It's a similar problem to accumulating >50% of the processing power, though perhaps not quite as difficult. An updated fork would have to propagate sufficiently. Exchanges could accommodate further division, but that's basically patching at a higher level to make things work, introducing external failure potential.
Inflating Altcoin's supply would simply involve more mining. That would take place based on the profitability of generating additional blocks, essentially what the situation in Bitcoin will be until it hits ~21mm units. With no expansion limits, Altcoin can continue to grow with the economy, but during a contraction it can't reduce the number of Altcoins that already exist. It's the opposite problem from Bitcoin's - progressive
loss of value instead of progressive
gain.
That's where the balance in competing money supplies comes in - Gresham's law means that oversupply of Altcoins will force Bitcoins to be hoarded/saved until Altcoins have dropped in far enough in value to be supported by Bitcoin's rise in value. The corollary is the decline in USD to a point where gold would be preferable for trade. Obviously, the control of dollar supply is too primitive to secure ongoing viability, but the principle remains the same.
Now this is a very problematic statement =) Your claim is that Altcoin will tend to -match- the rate of economic growth, and thus would keep prices stable. But how can you predict the rate of economic growth? You cannot. If the economy grows faster than you're expecting, Altcoin will resemble Bitcoin in that prices for money will rise. The supposed ills which you see in Bitcoin's slower rate of inflation would be similar in Altocoin's faster rate of inflation. Similarly, if the economy grows slower than you expect, the price for both monies will fall, but Altcoin's price will fall faster.
In other words, any argument that Altcoin is superior because it maintains steady inflation rests on the assumption that the economy maintains a steady growth of precisely that amount as well. If not, then Altcoin is susceptible to the same issues of price changes as Bitcoin, just leveraged differently.
Heh exactly. It's a bit tricky, but the pattern of growth would be about the same as Bitcoin's is now. The two are complementary, but we'll get to that in a moment.
There's no need to predict economic growth - the inflationary expansion occurs in response to it. If the money supply in Altcoins lags the economic growth, you can bet it'll be very worthwhile to mine, so there will be processors working overtime to generate as many as possible while the mining's good.
Imagine if Bitcoins were still worth USD$30 per BTC today. How many people would be mining their asses off? That'd happen until either the price dropped as demand fell off, or USD rates on everything increased 30-fold. Because of that, at this point in Bitcoin's growth phase, I entirely agree that they both would share the same inflation problem and that Altcoin's relative price would fall faster than Bitcoin's during a contraction. Once Bitcoin hits its ceiling, Gresham's law becomes apparent.
We can compare the X-coin relative price valuations as helium-filled balloons, one in the air, the other underwater. Altcoin is in the air - as it inflates, it rises; as it deflates, it drops to the ground. Bitcoin is underwater - as it inflates, it rises; as it deflates it still rises. At zero altitude, the two meet.
It isn't about superiority - the two variants work in a complementary fashion. Price stability is as important as having a solid value base. Bitcoin provides the base, but if an economy is expanding and Bitcoin has hit its limit (it doesn't subdivide units automatically to my knowledge), prices denominated in BTC will start to drop suddenly and rapidly. That means that Bitcoin will be gaining value in relation to the broader economy and would be looked at as an investment (again, similar to gold). This hoarding/saving takes BTC out of circulation, leading to further relative value increase in BTCs until a threshold is reached.
With a functioning implementation of Altcoin, prices remain stable because Altcoin's relative value keeps pace with economic growth. Bitcoin's value is still likely to rise rapidly, but not in direct relation to products and services. It rises in Altcoin value as well (e.g. 10 ATC per BTC to 20 ATC per BTC), but businesses pricing goods and services in ATC wouldn't care. The ATC price remains stable even if BTCs buy more ATC and goods now than before. That's the price stability, and Bitcoin's steady valuation acts as a base upon which all other valuation is finally derived.
If you've ever gone SCUBA diving and been unable to see the surface or the seafloor, you know how important a steady reference point is. Bitcoin is the reference point. Above all, it provides a starting point, the origin coordinate of (0,0) from which all other points on the value map can be plotted.
For an excellent visualization of Altcoin's potential progress,
Artefact2's Eligius charts shows the pattern very nicely. The blue "Current block estimate" line is the path Altcoin would take and the green "Unpaid reward" line that climbs a stairstep pattern represents economic growth. I imagine the steady slope wouldn't be quite as steady, and would be attributable to speculators who keep mining under the expectation that growth will continue (speculators actually stabilize prices).
Change the word "hoarding" to the word "saving" and you'll see why your statement is silly. An increase in savings rates is not a major factor in an economic bust. People save to the extent that future consumption is worth more than what they could consume in the present. When people save, market prices must fall only until those goods become attractive again, and subsequently people will spend. The "deflationary spiral" is a myth... savings is a self-correcting process. One need only look at the electronics market to see this in action. We all know the computer will cost half the price next year, yet how many of us are reading this on 20 year old computers? We buy electronics all the time, knowing full well that prices will fall.
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tl;dr - "deflation" is not a problem. It's a boogeyman. Prices always tend to correct and re-allocate behavior toward efficiency. It's okay for prices of goods to fall, and prices of money to rise.
You're right - deflation isn't a problem. Currently, mismanagement of our mediums of exchange (Euro, USD, Yen, etc.) in relation to outstanding debt is. And hoarding/saving or whatever you want to call it isn't a bad thing either - it's a defensive reaction.
The difficulty comes from having such a dissociation between the real economy and the illusion of prosperity such that large segments of the illusory economy default during the crunch. Lots of pain and social unrest; nobody wanting to admit they were duped or wrong. The monetary system itself isn't at fault, it's the human control element.
Hoarding/saving doesn't
cause the correction, it just accelerates it to completion. Not silly at all - it helps clear up the waste by cutting off access. Even the worst company can continue to function with funding; shut that off and the company fails faster than any other method. Savings: instant deflation!
Electronics are manufactured and their value comes from the way they're used (no electricity, no internet or software == doorstop). Something like that has immediate utility, but certainly isn't a store of value or we'd all be "saving" computers for our retirement. Gold simply exists and for very specific reasons serves almost no other purpose than as money, particularly in the store of value aspect. It also functions as a metric of value, that all-important reference point. Electronics cannot do so reliably. Nor can cars, houses, food, dollars or Euros.
The appropriate asset class needs to be used in the right context. No matter how valid a comparison it might be, imagine how absurd it would be to say that you wanted to pay for a Mercedes with 150 Radeon 5850 cards. Will that still be a legitimate comparison in 5 years?
Speaking of - I have an extra 6-pin power cable and an open PCIe slot - got an extra card?
