Topic: Deflation and Bitcoin, the last word on this forum - page 8. (Read 135976 times)

Deflation has practical consequences. Who would invest on "real world" companies on GLBSE if You can expect more profits from the rising value of the BTC.

It was very interesting and allowed me a better understanding of the broader social context of TEM, thanks.

There's the scenario of a growing number of people in the economy, at a faster rate than monetary supply. That can make business difficult for everybody. General market equilibrium doesn't account for externalities like this. And this is a very predictable one.


That is oversimplifying. The problem would be not "throwing money away on stuff nobody wants/needs" but investing in stuff people want or need, but still failing to make the gap between profitability (in terms of real interest) and beating deflation.

In a real free market economy, if doing nothing beats doing most things, would mean that the people have fullfilled almost all their needs.

In that scenario it SHOULD be more profitable to hoard instead of throwing money away on stuff nobody wants/needs. With the hoarded money people could save for future investments that would benefit them.

That would be a real nice scenario.

That's correct, that's why that can't happen. You need an economy where almost all productive action was impossible, yet there was enough production to sustain steep deflation. It can't really happen unless some coercive entity forces people to use an artificially deflating currency.

Right.

It won't be because constant, predictable deflation is impossible. It would require me to value 10 bitcoins today as worth less than 10 bitcoins in a year. But 10 bitcoins today *includes* the option to have 10 bitcoins in a year. So it must be worth at least as much (assuming the deflation is predictable).

In a very strongly deflationary scenario like the one described above, almost all action would be discouraged and, what's worse, money supply wouldn't adapt to a less stringent policy to make more activities possible. People would rather barter than trading an ever so strongly appreciating good. Or rather, they'd trade in other currencies as described in my reply to point 3 above.

We're talking about an economy where doing nothing beats doing most things, unless they pass a profitability standard, even before taking risk into account.

But then again that's not the case for Bitcoin and it won't be for a long time. It may never be. Of course, there's the perceived expectation that it may well be.

I disagree. If the work actually produced a loss because it was a bad investment of resources, it should be discouraged.

By you buying those seeds, you prevent someone else from buying them, someone who could have made a larger profit. Or by buying those seeds, you steer the economy towards producing seeds rather than trucks.

If you can't outperform deflation (assuming the currency isn't being deflated by coercive manipulation) your action should be discouraged. Here's a case where your consumption should have been deferred to later, and deflation encouraged it. Just like it should.

1. A scenario where work is punished vs just hoarding as much as you possibly can is not desirable for the economy or society.


2. No, they have an investment instead of money.


3. Yep but fiat exists and simply can't be ignored. People would always prefer to use the devaluing currency. Gresham's law.


However Bitcoin is hardly deflationary at this point. There's the expectation that 4-year period halving will continue applying indefinitely until block reward is basically residual. But that's it, an expectation that this won't be changed, and for the time being the monetary base grows at 25%+ yearly, soon to be ~12% which still is high for Western standards.

Lots of fair questions for which there are equally unfair answers.

Try to explain why interest rates and capital yields should never drop to zero like in theory every economic profit should in perfect competition, please.
Why you equate investment with low yields (say 0.5%) with risk.
And why people should profit from hoarding instead of lending/investing?
What would be so wrong with a free financial market (not manipulated by a central bank) that has near zero interest rates due to demurrage in the currency?
Why is preferable to destroy the financial market cyclically through runaway deflation over a currency with demurrage?

Except for those holding balances at that time, of course. I think that would be even less likely to hold, close to the adjustment date you'd see huge movements due to arbitrage opportunities.

You misunderstand my arguments. I do not claim that velocity could never drop, but that velocity is not a meaningful variable for evaluating the health of the economy. Money coordinates production and consumption over time and space. It does not create either of them.

If the prices can freely fluctuate, the demand and supply for goods would move towards an equilibrium without a change in the quantity of money.

If the money is injected into the economy by other ways than credit expansion, you would still get a disequilibrium, but not necessarily the business cycles. In one of the books (I think the one by de Soto) socialist economies were used as examples. Huge amounts of goods were produced that noone needed, but those goods that were needed were not available or very scarce.

The problem is not creation of new money per se, it's the disequilibrium it creates. During my research, I determined what I think is the main cause of the problems: when the production costs of new money significantly exceed their market price. I think that if the marginal production costs equal the market price, then this effect is minimised. This however does not mean any particular change in the quantity.

I will check it out.

This is so mind numbingly simple, it scares me that this needed to be explained.

Deflation is good for anyone using bitcoins.

All that really needs to happen for deflation to be a net positive with a slow trend of ROI on hoarding, is for people to realize that a few things are inevitable.

1. You can have your bitcoins as your day to day spending money, and value them against another currency as if they were just a stock, if you do this, it makes it act as though you can be gain money even by acting in only bitcoins during a deflationary period.

for example, you put 100 BTC into buying seeds, you grow your crop, and at the end of the year, your crop sells for 99 BTC. This seems like a horrible deal because you lost 1 BTC, and put in the work to grow your crop, but this can be an illusory loss if you value the coins from the beginning differently than you do for the coins at the end. If you had 100 at $10.00 each at the start, and you end up with 99 at 10.15, you have still made a profit in absolute monetary value of your coins. Obviously it would have been better to just hold onto the coins, but the benefit of having a fiat to value your coins against during a deflationary period is that even when you lose, you win.  (you can still lose, but there is a cushion)

2. If people hoard indefinitely, they don't actually have money, a snowbank is not a river and can't erode a canyon until it melts.

3. Ignoring the existence of fiat currencies makes deflation a much slower process because all of your buying and selling will be done in a currency that must function for both parties when they turn around to spend it somewhere else. People won't be willing to lower their prices just because the value has supposedly gone up compared to some fiat. A cup of coffee doesn't change with the dollar every day, and it won't change with the bitcoin if the people selling it have any sense of self preservation.

So if the 1970usd adjusted for inflation only once a year, for example, there wouldn't be much of a problem, right?


You believe that money is never lacking, but when there's no velocity, there's actually a lack of a medium of exchange.
They're making trades that they wouldn't be making otherwise, but they're not manipulating interest rates like a central bank or anything, just meassuring debts among themselves.
A common example when explaining mutual credit is saying something like...
"It's like if we had all the materials, the expertise, the labor force and will to build a house and we said. Wait, we got no inches (or meters). It would be absurd, but that happens with today's monetary system. Sometimes we just lack the unit of value and LETS can help with that."

You seem to be saying that the economy is going to bust later because some old lady sold cakes in exchange of getting his garden cut or something.
If you think that for making something productive and getting something in exchange they're being irresponsible in the same sense as Bernanke is when he creates monetary inflation, I think you're wrong.
Sure mutual credit may be inflationary, so is barter (because it also competes with money as a medium of exchange, doesn't matter that it isn't a proper "money substitute" accoriding to your definition). When money isn't providing its main function properly, barter is better than nothing.

EDIT: Here's a little video on the TEM currency (a LETS) in Volos, Greece: http://www.youtube.com/watch?v=JTMXhSSOBSk

The problem is fluctuations, not the exchange rate changes as such. Most people are risk averse and even if you'd want to push a currency that has a variable exchange rate, even if in long term it appreciates, they would still avoid it (assuming, of course, that there is no issue with transaction costs and liquidity, which take precedence over the exchange rate). In short term, the potential user might lose if the rate is fluctuating.

The volatility is probably more apparent with Bitcoin, but it affects all situations where you have a fluctuating exchange rate.

I think that this is just an odd twist on the inflationary boom. Obviously, if you increase the quantity of money, the holders of this new quantity can purchase more, until the increase is reflected in prices. But it does not mean that this increase shifts the relationship between supply of resources and demand for consumer goods towards an equilibrium. Eventually, the disparity will manifest itself somehow.

A more localised economy is also poorer and can sustain less people. Be careful what you wish for.

Yes. But maybe you're using 1970usd (or 2002eur or whatever) precisely to hedge against inflation. But, yes, you would need to adapt your business plan to that (that may include not accepting the full payment on the complementary currency, just a percentage).


This has to do more with the price volatility of bitcoin (due to its relatively small economy), but I agree.


In Volos (Greece), there's a LETS currency denominated in euros. Most business only accept a proportion of the price in the complementary currency.
That's not only enough to cover their costs. If they weren't accepting it, they would sell less. There's a little documentary on this, but I can't find it right now. Everybody's willing to spend their "Volos", but people are more hesitant to spend their euros. Although euros are a liability of the several central banks in the eurozone and the ECB, they effectively act as "scarce/anoynmous/cash money". In the other hand mutual credit is "abundant money", as it can be created when is needed and destroyed later. There's no point in hoarding abundant money and you can't ask interest for it (people can just create it instead of borrowing it from you).


I think this is an important factor but I would say simplicity in pricing is also important. As you say, self-sufficiency (autarky) and more localized economies care less about those risks and are more suitable for using also an alternative unit of account such as hours or the "national" currency inflation adjusted.

jtimon,

if you produce something that costs 8 EUR, and then receive payment in the nominal value of 9 EUR (even if it's actually settled with a complementary currency), then you still book 1 EUR profit.

If you however receive a payment that is at the time of payment worth 9 EUR, but has a fluctuating exchange rate, you still need to pay most of your bills (e.g. salaries, rent, raw materials, electricity) denominated in EUR. You might have debt denominated in EUR. If the currency you receive is liquid (e.g. an existing foreign currency), you'd probably sell it right away, or at least take a position on the futures market to hedge against exchange rate risk. If it is not liquid and you cannot use it to pay for your bills, you've introduced a risk element into your business plan, because trades that would be profitable with a fixed exchange rate might become unprofitable.

Bit-Pay (and in the meantime probably other merchant systems too) use the relatively high liquidity of the Bitcoin exchange market to compensate for the exchange rate risk. But they only have a market because using Bitcoin even when there is forex involved can decrease total trasnaction costs. If it wasn't for this, noone would use them.

Businessmen cannot offset this risk by increasing their prices, as that makes them less competitive. I agree that if you only accept partial payments in the compementary currency, you reduce the risk, but I don't this this is sufficient. But I admit that there could be an empirical component to this.

This is, in my opinion, not only the reason why complementary currencies are pegged to local (rather than foreign) fiat money, but also why the peg sticks. People do this to minimise their exchange rate risk. The peg creates an equilibrium due to the network effect of the local fiat money.

In order to avoid this, you need to diminish the network effect of the local fiat money (e.g. increasing autarky). Then you might be able to shift the equilibrium. The strength of the network effect is an empirical factor.

It would be great but I don't think I can make it. Several deathlines in september...


I'm not saying that economics is only debt. My point is that this kind of money is no different than loans between the users.
The liquidity problem...being mostly local, they're not a substitute of conventional money, only a complement. There's people who see it as a way to promote self sufficiency and the local economy but as you say it has its drawbacks, so let's keep them in the context of complementary currencies for our discussion. It is common that some business accept only a portion of the price in the complementary currency and demand national currency for the rest, to ensure they cover costs that cannot be paid with the Comp. Curr. (The electricity bill, for example).

The economic calculation...They can still use the other currency for calculations, but maybe they prefer to account automatically for inflation. They only need a reliable index to be able to convert from one currency to another. With some units this is really simple. Hours tend to be in practice just equivalent to 10 usd or something like that. Trivial conversion.
For the 1970usd...as said they only need an index to look at.
A loan at zero interest denominated in 1970usd is just equivalent to a loan denominated in usd whose rate of interest is equal to the inflation premium.
Seriously, I don't see any inherent problem with these systems. They're not cash and because of that they have limitations but I cannot see how you would get bankrupt just by using them. Most of them use their "national currency" as denomination, but I don't see how using something else could be that bad.
Please explain me how a profitable business goes to the trash just for accepting a 1970usd denominated LETS. I really think that you need to do something else wrong for that.

No problem, if you're planning to go to the London conference we can have a chat.

The problem is with two aspects: liquidity and economic calculation. Even if people use an alternative currency, they still need to do most of their business with the rest of the world. This requires that the perform economic calculation in that other currency. Accepting a currency with a floating exchange rate that cannot be readily traded somewhere (i.e. does not have high liquidity) screws up their business plans.

The only alternative is complete autarky, I think we already discussed this in the past. This decreases the specialisation of labour and productivity of the economy. I don't think that a significant proportion of users of alternative currencies are willing to do that.

But economics is not just debt, it's production and sales too. And a floating exchange rate across the production and sales screws up the economy as it's more difficult to be profitable.

Thank you for the rest of clarifications.


What's the economic problem? A set of people agree to extend line credits among themselves in a unit of value that just doesn't exists in reality. The can still fulfill the agreement and pay their debts. What would be the problem, for example, with 1970usd?
They're just debts, they come into existence when both parties agree, there's no need for any other link. or at least I don't see it.