Topic: Deflation and Bitcoin, the last word on this forum - page 27. (Read 135976 times)

I just don't see why this is such a big deal. When the price drops, buy some more, when the price rises, sell for profit and keep doing it. Who cares if its deflation or not, either way you make money from it.

In my opinion, the point Andrew Vorobyov brought in, cannot be overemphasized: Without inflation, people don't invest. Bitcoin isn't really the electronic version of cash money. It rather is a kind of electronic gold (as the term 'mining' for the money creation process suggests). Indeed it could be a very good means of exchange, but as a replacement for a 'currency', it lacks an inflation mechanism.

I know, by now you probably are about to reply with the usual 'but inflation is bad' / 'you are wrong here' / 'just don't use bitcoin' / 'you misunderstood bitcoin' / 'go away, evil Keynesian thug' phrases -- or just ignore me. But don't get me wrong: I am quite enthusiastic about the idea behind bitcoin, the decentralized architecture and so. But right now, bitcoin merely makes a good gold substitute: people are eager to speculate with it, hoard it, but spending it for real goods and services seems to be a miniscule application of the system despite the obvious benefits. So why is that?

If bitcoin is ever to replace real currency, it needs to implement an inflation mechanism beyond the one currently implemented to reward the creation of new blocks: It has to be one that distributes new coins more equally around the peers than with the current algorithm which just prefers users with mining rigs. Maybe a combination of CPU/GPU/FPU power and another sparse resource like IPv4 addresses. As a side effect, the acceptance of the new currency can be further enhanced.

Without an inflation mechanism, bitcoin is doomed to stay in the bubble state, waiting to burst and see $/€-Exchange rates that will only stabilize at rates where idealists like me are still willing to trade real goods for it. Only exchange for goods can stabilize the exchange rates. And goods will only be produced, if investments in their production is more profitable than hoarding. A bitcoin v0.4, or maybe rename it to bitfiat or so, could initially be coupled to bitcoin v0.3 somehow to inherit the trust it earned and -- just like the national currencies -- liberate itself from its hoarding roots and develop its exchange value to the fullest.

I'm well aware that I'm posting in a forum that is dominated by miners and speculators and so I really can understand the reluctance to depart from the deflation model that is so accessible to the common sense. Maybe it's inevitable in this early stage to just focus on the creation of trust. But for the sake of bitcoin's full potential, I hope the community finds a way to let it evolve before the burst without losing trust in bitcoin because of the patch. Smooth inflation by algorithm is really better than by a bursting bubble which would leave bitcoin to live a niche existence among other projects.

One scenario I can imagine is: There will be a bunch of forks soon, which resemble state currencies and rely on bitcoin as 'gold'. They can be exchanged for one another with different rates depending on the 'fiscal politics' of the respective group (which will be connected to strategies to get p2p emoney into the production process). Divide and rule...

Anyhow, trying to ban questions that address social sciences from the forum, I think, is a tactics with limited range.

They are in another thread. They're very cool.

I don't know if this has already been shared, for those interested, there are two pretty cool "Hayek vs Keynes" rap videos on this subject.

http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

I personally like the second one better.

A (growth) implies B (deflation).
Therefore, you say, B cannot cause -A (recession).

When I'm happy I drink. Therefore, I cannot get sad by drinking.

This is intuitively correct. I'd like to see a counter-example in human English. If the economy is healthy, production and consumption high, then I understand that commodity prices will necessarily drop, except for scarce resources. As I understand it, the only reason we have inflation along with economic growth is because we increase the money supply in line with the growth rate (and apparently we double the money supply with declining growth). If the money supply remained fixed, then economic growth would see a deflated currency as more products and services are buying relatively fewer monies.

Just because someone once published a book on the topic, doesn't make them right.

Perhaps you are referring to "Golden Fetters: The Gold Standard and the Great Depression" by Barry Eichengreen.
Book learning isn't tolerated around here. So you are right to expect to get flamed.

Enter the ignorant hordes....

Yeah, many people think that the gold standard worsened the Great Depression because the Fed was limited by what it could do.

(please don't flame me)

Agreed.


This statement is even more brave than "deflation caused by growth is harmless".
You mean nowadays or it has been always like that?


That's what some people don't like about bitcoin and why many people think central banks are a good thing.

You can't have infinite growth in a finite world. The only reason we get "boom and bust" cycles in RL is because of our instable currencies, there is no real growth on a global scale (except monetary growth).

Bitcoin is a non-deflationary, non-inflationary currency, therefore it can't face the problems of inflation/deflation itself.

This is exactly what I think is to be proven.


I'm talking about bitcoin after all 21 are issued (or any other currency with a stable monetary base).
Growth is the opposite of a recession. But growth (with a fixed monetary base) causes deflation and deflation can cause recession.
It wouldn't happen all at the same time: first growth, then deflation, then recession.  

You might want to edit your posts above this as well, it would make your argument more coherent.

I'd love to know what you call these non-assumptions of yours.

These things would come in real handy when writing economics papers.
 

Nobody with an IQ lower than 40 could feed themselves, much less make any rational choice about currencies.

Nobody with an IQ over 40 will take any currency that functions on a deflationary basis, notably a significant deflationary basis, seriously.

If you were my student, you would be held back.  The part that I find most amusing is that some teenager actually believes that he is giving me an economics lesson.

EDIT:  BTW, mine were not assumptions.

I build a model with certain assumptions, then X is possible.
You build a model with other assumptions, then X is impossible.
If you want to say something is impossible/possible you need to specify under what assumptions.

If you would like to show appreciation for your economics lesson.


I pwn for the lulz, but I'm not sticking around to hand wave with you for free.

p would always affect g.  They are never independent in an economic venue.  Thus your little attempt at mathmatic bs is just that. 

Let me try this another way.  Assuming everything else remains the same, and that the monetary base is static; the price deflation is an effect of the overall economic growth.  Price deflation is the symptom while the economic growth is it's cause.  So long as the economic growth continues, the price deflation does as well, yes?  When the economic growth declines, so does the rate of price deflation, yes?  Thus, when the rate of price deflation stops or goes negative, it's a symptom that the economic growth has already gone into recession.  The symptom follows the cause.  The symptom cannot be the cause.

Granted, a real economy is complex, with many feedback effects; which means that this is an overly simple way of looking at the issue.  However, taken alone, the price deflation cannot logically be the cause of a recession in this scenario.  Even though the prior price deflation could contribute to the severity of a decline, it cannot cause it.

Suppose y is the real economic growth rate, t is the inflation rate, g is a variable that affects economic growth directly (but not inflation), and p is a variable that affects inflation directly (but not economic growth).

Consider the following mathematical relationship:
t =  ALPHA*y + p where  -1y =  BETA *t + g  where 1>BETA1>0 (interpretation inflation causes economic growth)

Now lets set solve for y and t as a function of g and p.

y = (g+p*BETA)/ (1-ALPHA*BETA)
t = (p+g*ALPHA)/(1-ALPHA*BETA)

Now note that an increase in g causes economic growth directly [and deflation through its influence on economic growth] (i.e. dt/dg<0 , dy/dg >0)
Note that an increase in p causes inflation directly [and economic growth through its influence on inflation] (i.e. dt/dp>0, dy/dp>0)

Not saying it actually happens this way, but logically impossible, apparently not.

That took me two seconds.  Logic reviewed.  You should try learning some.