Topic: Deflation and Bitcoin, the last word on this forum - page 9. (Read 135972 times)

In order to be money, a medium of exchange needs to be the dominant one. So Bitcoin is also not money at the moment and neither is gold or silver. They are highly liquid (even though with Bitcoin this can be disputed) but not dominant. In the Austrian terminology, they are secondary media of exchange (Mises) or quasi-money (Rothbard).

Correct, and this is one of the issues I have with Austrian writers so far (as they assume real convertibility, and sometimes even a legal connection). WIR, for example, has been in existence for over 70 years, it's neither directly convertible nor is legally connected to the Swiss franc.

To me (and to Austrians), they are merely media of exchange.

I agree that there is no technical impediment, but here I have to side with the Austrians, there is an economic one. The economic link would be missing, even if technological progress eliminates some issues that were argued to be problematic in the past (e.g. quick exchange rate calculation).

Yes, exactly.

Then I guess mutual credit money is not money according to Mises definition. They would be just mutual credit based media of exchange.
But they exist and they're not redeemable for their denomination. They're not backed in the traditional sense.
For me money and medium of exchange are synonyms, so mutual credit systems are also money.
I only know about mutual credit systems denominated in "national" currencies such usd, cad, eur, etc, hours or silver (I think that last one didn't succeed), but there's no technical impediment for using 1970usd or any other of the examples I gave.


Great. Mutual credit currencies aren't backed by dollars, for example. They're pegged just because it is the unit that the users have voluntarily accepted, but there's no one manipulating any market to achieve that peg. It is just an agreement.

As far as I know, this is only an assumption but does not actually exist. And it probably won't. Mises' Regression Theorem explains that the price of money can only arise through market behaviour, or through a peg onto an already existing money. You cannot just pick a random commodity or a basket and peg a new money onto that, it wouldn't work. The commodity/basket already needs to be money (or at least be highly liquid) before pegging something else onto it.

I agree with you here. A lot of people, including professional economists all over the spectrum, conflate backing and peg and I think it's erroneous.

I never said that it was impossible, only not likely to happen.
Anyway, thank you for the clarification.


Yes, free monetary market. Let the people chose.


Now I need to amend that. Some complementary currencies are backed by national currencies. Those are cash/scarce/anonymous/one sided money like national currencies, bitcoin and gold.
But there's also mutual credit (abundant/credit/two sided money). Mutual credit monies such as LETS or Ripple may or may not be denominated in existing currencies or commodities.
You could denominate a LETS with a unit you invent based on a basket of all the commodities in the world similar to Lietaer's Terra (note that the denomination is not backing, LETS are only "backed" by the goods and services offered by its users, what really gives value to any money), 1970 usd (adjusted for inflation by fed, shadowstats or the statistics the community likes more), hours of unskilled labor or whatever the community thinks is fair. They don't need to "import" inflation from other currencies.
Maybe you already know it, but I wanted to stress the difference between denomination and backing because this is the root of many misunderstandings on mutual credit money.
Another typical error is "Hours? You people are communists!!"

What we can say is that chain currencies are the only complementary CASH (scarce/anonymous/one sided) currencies that aren't backed by anything.
Some people see it as a disadvantage, but I see it as a quality that makes them superior.
Money doesn't need "backing", only users who accept it. That's what many metal-bugs don't understand.

I'd like to amend that. FRB is technically possible, if with that we just understand maturity transformation. Some of the service providers appear to be practicing that but it's unclear since the operations of many are opaque.

What however is more difficult is credit expansion, ie. credit affecting the money supply. So there is a much clearer separation between a medium of exchange and credit.

While I disagree with you on the benefits of demurrage, I guess we both agree that it's up to the users to decide what they want to use. There are many people that like demurrage, so they should be free to use it.

Correct. Complementary currencies are pegged to other currencies/commodities/baskets, while blockchain-based currencies have a floating exchange rate.

Yes. Bitcoin is very similar to Gold, but superior in several senses. As lonelyminer says, there's not a real need for substitutes and thus fractional reserve banking is not likely to appear.
My criticisms against bitcoin are basically the same ones I have against gold, though. A demurrage currency with the properties of gold (no centralized issuer and a non elastic supply) wasn't possible until now.
Definitely block-chain monies are a realm on their own. There's many kinds of alternative (or complementary) currencies, but this is a new species.

I enjoyed this story its a great reed, the centralized currency is going to have to have its own schools. Previous schools can not and will not work on this system.

I saw the BTC wiki page of deflation spiral has been updated, now they don't think it is a problem as long as people have expectation for deflation from the beginning

I guess that bitcoin will exist at certain scale to suit those who prefer Austrian school economics, or serve the purpose of saving, people save in BTC, spend in fiat. BTC will act more like a type of real estate, but super easy to transfer internationally.

No, no, I'm saying is a positive externality for the hoarder, not a negative externality. The negative externality is higher interests (and therefore higher capital yields and higher prices in EVERY WARE produced with capital) for everyone else (well, for him too). Those higher interest are also a positive externality for all money lenders and capital owners (called despectively capitalists).

Back to your example...
A pays you with capital-money and B with free-money, right.
Your point is that you will charge more in free-money than in capital money. But you're assuming that in exchange of your wares you want the money itself instead of other wares. If that where the case, as your example shows, B would have to pay a higher price.
But let me change your example so that the symbolic/information nature of money is revelead. Not assuming that "money is a commodity like any other". Not assuming that "money is a real ware". Money is never consumed. People exchange their wares for other people's wares, money is just a tool that acts as a "middle man". If people are only thinking in the wares they can receive later, prices for A and B would be equal (like it actually happens with the euro (A) and the chiemgauer (B), for example).

So let's begin with credit-money and then switch the rules of the social agreement to convert it to cash-money.
Do you know LETS?
If you do, I can save some time explaining it.
If not, I'll be happy to explain you how it works.

A general decrease on interest rates (and capital yields) that is caused just by healthy capital accumulation and prosperity.
See my sequence of events above.


You assume that the right action for the individual is always the better for society (or the economy as a whole, whatever you prefer). That's very common but I don't think it is always the case.
In this case, I don't see how it would work.
The medium of exchange is substracted from circulation on the market and that makes it more valuable on the market. Therefore, we need to substract more money from circulation? I think the signal for the money owners here does not balance the cause (a decrease in money lent).


Only with inflation. With demurrage it should remain constant at a high velocity. No one should ever keep big amounts of money for long. I don't see what circumstances can change this.


When Keynes tries to substitute the hoarded money with newly created money at a lower than market rate the result is lower interest but more hoarding.
When we reach the limit (zero interest), all the money hoarded will flow into the market again in a hyperinflationary spiral that no central bank can stop. The right reaction for the individual is to drop the money first to save himself but I don't see how this is good for the economy.
That inflationary process can also happen (at a lower scale) without an elastic supply of money. After the runnaway deflation (that we agree must stop), the money will flow into the market again, also at an accelerated speed.


I'm assuming a free market and capital money in my sequence of events. What am I missing?


I see how more lending vs spending can lead to more investment. But I don't see how more hoarding vs lending can lead to more investment.
I don's see how more hoarding vs speding can lead to more investment neither. This is what I'm saking you to explain me.

Sure, that would be relevant if some government forced people to hoard. However, ask yourself this -- why would there be an increase in hoarding? And what's the right reaction to that? (Hint: It's an increase in hoarding.)

Same thought exercise: Why would the velocity of money go up? What's the right reaction to that? (Hint: It's an increase in the velocity of money.)

Sure, if you imagine a health, stable, productive economy suddenly has some magic change in some parameter for no reason, the effect will likely be bad. That's the problem with government interference in a free economy. But it's not a problem when people react to real changes with sensible responses.

The "store of value" / "medium of exchange" balance for money is like the supply / demand balance of prices. It pushes consumption and production to optimum times just as prices push production and consumption to optimum items. Sometimes, the optimum time to produce is now, the optimum time to consume is later, and the optimum time to invest is later. When this happens in a sane monetary system, deflation encourages hoarding.

I'm not sure how that's responsive to my objections.  Let's say you want to sell some widgets, i.e., buy some money with them.  You have two potential buyers.  A has 10 gold pieces he's willing to exchange for widgets.  B has 10 identical gold pieces, but B's gold comes with a catch.  If you don't spend B's gold pieces and instead try to "hoard" them, he gets to take 1 one of them back every year they're not spent.  Now you might be willing to trade with both, but you'll probably be willing to give A more widgets in exchange for his gold than you will B.  That difference in the "price" (in widgets) of A's money vs. B's money is the price you pay for the additional "insurance" (to use your term) that's provided by A's gold.  So it's NOT "free." It's a bargained-for benefit of A's gold that he gives up and you acquire when the exchange takes place.

And again, even if something is "free," that's not sufficient to establish that it's a negative externality that someone else is being forced to pay for -- unless you think Bastiat's candlemakers had a point with their petition?

No, he can't.

You don't get it for free, there is an opprotunity cost associated with 'hoarding' cash.  The interest lost due to favoring cash over lending is just one example of that opprotunity cost.

Money is a tool with lots of alternative designs. Money does affect the way we value things and act. For example, capital-money lead us to think in the sort term, as I've tried to explain many times with the tree metaphor.
Maybe Bernard Lietaer can convince you. I recommend you to listen to him.

Hoarding oil or food is like an insurance for a lack in supply for those things, right?
You pay for that insurance through storage costs and through the deterioration of the wares you're storing.
Well, when you hoard money you get an insurance against uncertainty, because money is like a wildcard. And you get that advantage for free, hoarding bitcoins doesn't have any associated costs.
It is a positive externality for the money hoarder (maybe like getting "profits" from growth caused deflation). The point is that externalities are paid for somewhere else.

Sorry, yes. Proving that an unelastic supply without demurrage can't produce monetary cycles would be only one way of refuting Gesell's theory but you could attack other parts of it as well and, as you point out, that would not prove or disprove the rest of the theory.
If I prove that an unelastic supply without demurrage sistematically produces monetary cycles, I'm not proving the whole gesellian theory on interest neither, but It would be in a privileged possition, since that is one of the things that the theory predicts.


You're dodging the question and answering to another question. You're saying that freicoin would not be competitive, that's a nother question qe can discuss. But what I meant with my question is...
Austrians have teached us how "keynes-money" is flawed and how it causes imbalances in the economy.
Given that you perceibe demurrage as a flawed property in the design of a money, if freicoin were the only currency in the world, how would demurrage cause inefficiencies and harm the economy?
When I answer to that same question for bitcoin, how would be bitcoin flawed if it were the only currency in the world and how would it harm the economy?
I answer:
Bitcoin would produce monetary cycles in which deflation would be destructive. The sequence of events, again, would be:
1) Capital accumulation and sustained prosperity will make capital yields drop
2) Low interest rates would incentive hoarding
3) Hoarding would cause deflation, incentiving hoarding further and discouraging borrowing.
4) The destruction of the finantial market (the clearance of all the debt/credit) and the destruction of capital would lead to a new price equilibrium in which real capitals have higher yields again.

What's wrong with my reasoning?


That's the other question, wheter or not would be freicoin competitive against bitcoin. I think it's hard for me to prove anything here and we will probably have to wait until freicoin gets implemented (for me or someone else) to find out.

Please, let's distinguis between saving and hoarding, since lending is a way of saving.
You claim that "everything starts with hoarding", but I disagree. Everything starts with trade. All a currency needs are users, people that accept it.
In fact, hoarding a money makes no sense if it is not first used as a medium of exchange.
So before borrowers lenders and anything else what's needed are merchants.
Say there's something like bit-pay for freicoin, the merchant accepts freicoins but are sold inmediately for bitcoins and that's what the merchant receives.
Say I'm the only one buying freicoins for bitcoins and I do it at a very low rate, for example, 0.000001 btc per fcn. The merchant doesn't care about the price, he just set its prices in usd or btc but the very fact that he accepts them make them valuable.
Then some merchants can keep take them and spend them directly instead of using bitcoin or usd as a proxy. It would be possible for that one rationaly prefers to lend freicoins than to sell them for bitcoins or take the demurrage loss. And borrowers will prefer (once they can spend them) to borrow freicoins because they're going to invest or spend them directly and won't pay much demurrage fees, while at the same time will be able to negotiate lower interest rates. Hoarders will never prefer freicoin but who needs them?


I disagree again. Means of exchange comes first. By no means bitcoin started as a store of value.
I'm not only against trying to provide the function of store of value when designing a money, I don't even think that can be achieved. All monies can be demonetized. Gold is not an exception, no matter how valuable is its commodity component of its total "value". Say 90% of the total value of today's gold comes from the fact that it is still money and 10% comes from its industrial uses. If it were demonetized, you won't lose everything, only 90%!! What a store of value...


Yes, society is a collective concept. So it is the market or the economy. So what?
My point is that while storing oil or food is like an insurance (not only for the individual but for the economy as a whole). Hoarding money only insurance the individual in relation to the rest of economic agents but the economy as a whole is not better prepared or insuranced in any sense for the fact that "the economy as a whole has more money hoarded".


Can you tell me the difference according to your definitions?
Let me guess, if you unearth it after 1000 years and it still has value is money, if not currency.
Or better yet "precious metals are money, the rest are currencies". What a useless definition.
Let me guess more, bitcoin is also money and not just a currency because it is an electronic commodity.
I'll wait for you own version, but I, like the austrian Jesús Huerta de Soto, think that a definition of money that leaves the usd out does not make much sense. He says something like "today paper is money we like it or not".


I call money to anything that owes part of its value to the fact that is used as a medium of exchange.
I agree that gold has been money for most part of our history, but that's not that easy for the history of silver.
My point still is that gold can be demonetized (lose the component of its value that comes from being money) and, because I'm optimist, I think it will eventually demonetized. It will be still valuable as an industrial commodity though.


I shouldn't have used "unfair", that's kind of implicit in the term externality. Not as hoarder, but just as a money user, you shouldn't like to pay for things that others enjoy. And if it is an externality, it is paid for somehow, no matter how difficult it is to see it.
According to Gesell we're paying for it with monetary cycles and with capitalism, which impedes capital yields to drop towards zero, that is, which impedes the demand for real capital from ever being fully satisfied.


I also think that you fail to see how capital-money undermines competition, the free market and prosperity.

There it is, right there.  Your great fallacy.  Money doesn't try to do anything.  It's an inanimate object and/or an abstract concept.  Money doesn't do anything that people who use it aren't trying to use it for, and if people wish to use it as a low risk store of value, then that is what it is for.  Any attempt to design a monetary system that deliberately tries to alter the behavior of those people to do with it what they will is doomed to failure so long as there exists an alternative that avoids those 'features'.  Since such a cryptocurrency already exists, designing an alternative to bitcoin that uses demmurage must have some other overwhelming advantage to the user to ever stand a chance to develop an economy in the first place.

Great so far. Only add that the beans are still there as wares. And wares perish. The perfect example is labor, a ware that perish fast and irreversibly. If today nobody uses one man's labor, those labor hours will be lost forever. Wares that don't perish so fast, imply storage costs thus increasing the cost of commerce (which a good money is supposed to minimize).
Anyway, let's go back to your point...


Ok your explanation is that hoarding money is in certain sense like "owning shares of the economy as a whole" and since you haven't redeemed your services for another service yet, you're somehow entitled to that profit.
But growth comes from investments. I see how lent money enables more investing, but I fail to see how hoarding produces the same thing.
Because you want make use of the demand you deserve and the supply remains the same, prices fall. When prices fall because the supply is increased, everything is fine, we're being more productive. But I don't see how a drop in demand makes us any good. When demand for consumption goods is replaced with demand for capital goods (when investments increase) I understand that more prosperity should follow, but you're saying that deflation is good per se even when it's not a result of an increase of the supply of wares.
This hoarding deflation also reminds me to a ponzi scheme or at least to a bubble on money.
Say we hoard 5% of the PIB each year. Each year, the profit to the money hoarders in concept deflation increases more, because the more we hoard, the more deflation there is. Imagine we reach a point in which we've hoarded 90% of the total money supply and use only the remaining 10% for trade. When the hoarders try to "cash out" those profits, the bubble will burst, only the firsts to "cash out of cash" will take the proffits, the last ones will find that there's an incredible inflation now and all what they counted as "profits from deflation" are gone.
An economy that hoards money during fruitful years is not better prepared for later years of scarcity just for having piled up that cash.
"The harvest has been a disaster this year and the supply of wares in general has been reduced, but don't worry, we all have lots of gold hoarded at home." But with hoarded money you can only increase "the demand" in future years, the supply won't increase no matter how big our monetary reserves.
So why allow the demand to be artificially withdrawn from the market? Why allow hoarding at all?
To enable money to perform the so called "storage of value" function?
That's not even possible. We would be asking for magic.


I agree that the broken window example is a fallacy and that "spending grows the economy" is a myth. But not my myth.
What I'm saying is that money should not try to perform the function of store of value and my island example was in fact an attempt to prove that it is not even possible. When money can be withdrawn from the market, from its function as a medium of exchange, it affects general prices in ways that can be dangerous.
My claim is that a deflation caused by an increase in hoarding is not equivalent to that caused purely by economic growth and increased efficiency. Deflation caused by an increase in hoarding (a decrease in the velocity of money) is not harmless. Ideally the velocity of money should remain more or less constant and demurrage is the only thing that I know that can produce that desired result.

That is beautiful. Not sure its short enough to be used in my future discussions, but still great non the less.