Topic: Defaltionary Spiral -- Is there a way to make this workout? (hoarding bitcoins) (Read 3229 times)

Why is it fair to give it to the rich? Is there really any difference? (Besides the obvious that you and your bitcoin buddies stand to make millions.)


No, it isn't. You didn't even offer a solution, you offered the exact same problem with a shiny new box.

Why is it fair to give it to the government to give the banks?

The only solution to this problem is a currency that doesn't inflate.

Don't forget the guy with $10,000,000 is now worth $10,500,000.


It's more difficult for the poor and middle classes. It is easier for the wealthy.


I'm not sure where salesmen come in, but bankers and politicians won't make a killing off of any currency they can't control--inflationary, deflationary or otherwise. It is an advantage to any decentralized currency, not an advantage of deflation. Inflationary and deflationary transfers of wealth may be different mechanisms, but the end result is the same: a select group benefit at the cost of everyone else.

If everything is cheaper in bitcoins everyone will buy bitcoins before spending driving the price to even more maddening heights!

edit: And don't tell me it will be canceled by the merchants unloading them because why would merchants lose 15% just to turn around and get fiat!?

That's a good point, if BTC's price can rise continuously, then it is very reasonable that everything paid by BTC will get at least 15% discount

This research was supported by the Citi Foundation.

Yes, Bitcoin's value will be the result of speculation.   Your hoarding helps someone else (someone who is hoping to sell at a higher price).   Your dumping helps someone else (someone who is hoping to buy at a lower price).   Also, your buying and selling helps liquidity, thus shrinks the spreads between the buy and sell.

Now think about it this way.  You live in a small town that uses bitcoin after the 21M cap has been reached.  The town's population is growing, but chasing the same 21M bitcoins.  Now the $100 in your savings account is worth $105.  You no longer invest in the risky bank because you don't need to fight inflation.  The only people investing in the bank expect a decent return on top of inflation.  Now it is more difficult to purchase a new car, house, or start a new business.  This causes the amount of debt per person plummet.  People are no longer working to pay off their mortgages or car payments.  Salesman, bankers, & corrupt government officials aren't making a killing while the rest of us suffer.

After ASIC release - a the expected development steps to up the transactions per second we should be in the ballpark of being able to handle visa's transaction volume. Then will be the time to push for mainstream adoption by some super-entity...

If BTC is the only currency, it will go into deflation spiral, but since there are other fiat currencies, it will just get hoarded without causing too much problem

If some very popular product (like Iphone) only sell to BTC owners and reject payment in USD, that will cause a mass adoption of BTC

I am ignorant on all the ins and outs of this.  I am posting this to try to learn what the possible economic outcome is of bitcoin.  I am prompted by this comment from the 'Hoarding Bitcoins' 'study' that hit slashdot and everywhere else.  

Comment: "So what you're saying is that there is a limited resource which we cannot make more of that people are hording? And the more people horde it, the higher the deflation? And people watch their value rise in USD as this happens? And you're surprised?

What motive is there to spend your BTC? Isn't this how deflationary spirals [wikipedia.org] occur? Wasn't this an effect of The Great Depression and lead to FDR implementing a pump-priming strategy [wikipedia.org]?

Could someone explain how they would escape that spiral? I'm not an economist so I don't know if there are other routes of which I'm unaware."

What are the economists thoughts on this?  Could small businesses such as satoshidice and webhosting for bitcoins spark an actual economy?  Or is this just a long term pump and dump?



EDIT:  I was made aware below that the article being commented on was funded by institutions that have something to lose if bitcoin goes primetime.  Does anyone have information about this?

Someone may come along with some killer service (eg Kim DotCom) and vastly increase the Bitcoin economy's GDP, this will obviously allow for a higher evaluation compared to Fiat.

I appreciate the economic background here, thank you.  I kind of see it working out the same way.  How do you feel about the current price?

... Now it is more difficult to purchase a new car, house, or start a new business.  This causes the amount of debt per person plummet.  People are no longer working to pay off their mortgages or car payments.  Salesman, bankers, & corrupt government officials aren't making a killing while the rest of us suffer.

I personally pick option #2.  But that's just me...

Now the $100 in your savings account is worth $105.

Now it is more difficult to purchase a new car, house, or start a new business.

This causes the amount of debt per person plummet.  People are no longer working to pay off their mortgages or car payments.  Salesman, bankers, & corrupt government officials aren't making a killing while the rest of us suffer.

Think about it this way.  You live in a small town that uses its own currency.  The bank decides to spur growth by printing more money.  Now the $100 in your savings account is worth $95.  Risky people are given loans because there's a large surplus of money at the bank.  And the rich towns people that invested in the bank are happy because the bank's stock is sky rocketing.  One year later, the risky people that were given loans are all defaulting because they spent their entire paycheck on booze.  Now the rich people that invested in the bank are complaining because the stock is plummeting.  So the bank decides to print more money to make up for the losses to the risky people.  Now the $100 in your savings account is worth $91.  And the cycle starts all over again.  I've basically just explained what has happened since Nixon took us off the gold standard - creating an inflationary currency.

Now think about it this way.  You live in a small town that uses bitcoin after the 21M cap has been reached.  The town's population is growing, but chasing the same 21M bitcoins.  Now the $100 in your savings account is worth $105.  You no longer invest in the risky bank because you don't need to fight inflation.  The only people investing in the bank expect a decent return on top of inflation.  Now it is more difficult to purchase a new car, house, or start a new business.  This causes the amount of debt per person plummet.  People are no longer working to pay off their mortgages or car payments.  Salesman, bankers, & corrupt government officials aren't making a killing while the rest of us suffer.

I personally pick option #2.  But that's just me.  And if you want to start a fork that keeps the mining rate at 50 BTC2, then go for it.  But I'll be staying with the original (or at least close to it).

The fundamentals here have been discussed to death.
But the bottom line net fundamentals from a layperson are:

1) = Stability is when there is:
A  fixed supply of goods and services and a fixed demand, and
A fixed money supply
purchasing power is balanced (the market responds only when there is an imbalance)

2) = cost Inflation is when there is:
A fixed supply of goods and services and increase in demand or
A low supply of goods and services and fixed demand or
A fixed supply of goods and services and a fixed demand but increase in money supply
purchasing power is decreasing (the market responds by spending / investing )

3) =cost Deflation is when there is:
A fixed supply of goods and services and a low demand or
An increase in the supply of goods and services and fixed demand or
A fixed supply of goods and services and a fixed demand but a decrease in money supply
purchasing power is increasing (the market responds by saving / not investing)
 
 The demand being the "subjective human preference " that makes what would be a science a social science.

Now the meme that is money adds a variable, the amount of money in circulation should technically describe all the goods and services available, if you increase the money supply you can artificially create cost inflation, if you decrease the money supply you cause cost deflation.

The Bitcoin ecosystem is different to basic economics*.
 It is appealing to people who have a general leaning to Austrians economic principals - people who subscribe to the more practical approach that lets the free market banking system regulate the supply of money, or forces a fixed supply through a gold standard. Leaving a free market to monitor and respond to supply and demand (no central management necessary). As opposed to Keynesian economists who prefer to regulate the money supply to manipulate the free market to respond to an artificially created supply and demand (an all knowing, benevolent central planner is necessary).   

Now where the problem originates with the Bitcoin economy is: when and if Bitcoin becomes money (ie. the unit of measure of all the traded goods and services in an economy) it will prove the Austrians economic principals are superior to Keynesian economic principals in that a free market system without money manipulation will be feasible and flourish.

*The problem lies in how people buy into the Bitcoin economy, in a free market a limited supply and a growing demand = cost Inflation - this you can see in the price people are willing to pay for a Bitcoin. (What this means is the cost of Bitcoins are inflating outside the economy) a free market typically responds to inflation (lack of supply of goods and services) by producing more to meet demand.(not possible with Bitcoin) 

What this demand above means inside the Bitcoin economy is your purchasing power in Bitcoins is increasing, purchasing power increasing is synonymous with cost Dilation. A free market typically responds to deflation (over supply of goods and services) by saving / not consuming / not investing.)

So with Bitcoin adoption we have a paradox as described by Keynesians as the "paradox of thrift", savings causes prices to drop and dropping prices cause people to save, and this continues into a deflationary spiral.  ( Note: this paradox cannot exist in a free market system because inflation is a result of (2) above and Deflation is the result of (3) above. The free market self regulates. 

However in the Bitcoin economy the demand for money, is not related to the supply of goods and services, so the Bitcoin Economy will tend to respond to (3) above as if purchasing power is increasing. The free market responds to such a stimulus by saving / not investing.

so while Bitcoin makes possible a free market economy where there will be no deflationary spiral, the manner in which Bitcoin is introduced to the world is causing a deflationary spiral.

The way I see it working out is crashing loss of faith and the system picking up years later with organic economic growth, and a crash every time the uber rich cash out. 

Yes, Bitcoin's value will be the result of speculation.   Your hoarding helps someone else (someone who is hoping to sell at a higher price).   Your dumping helps someone else (someone who is hoping to buy at a lower price).   Also, your buying and selling helps liquidity, thus shrinks the spreads between the buy and sell.