it seems to me that in the BTC economy removing money sitting in deposit accounts like Mt. Gox from the accounting of the money supply may not go far enough in this attempt to measure “live” versus “dead” money. In the BTC economy we would have to estimate and remove all the actual BTC that have been destroyed through lost public keys, or destroyed on purpose
And that demonstrates a problem with lonelyminer's definition of money supply. If it is only currency in circulation, then we must take out the cash grandma hides under her bed, and bitcoins people save for a long long period of time without spending.
I think, or at least hope, that we can all agree that deleted coins are no longer part of the monetary base. That's where the word monetary base is useful. And a smaller monetary base does affect the money supply. But it is not the same thing. If lonelyminer wants to propose another word which means currency-in-circulation, that would be fine. But lonelyminer's definition of money supply is problematic and
not useful.
Per the links that I cited,
Money Supply is defined as "currency in circulation plus demand deposits (depositors' easily accessed assets on the books of financial institutions). This definition, Bitcoin included, is
useful. I wasn't going to bother explaining the following, but seeing as I'm now losing
Brucebwagner and possibly other readers, I must explain.
The number of bitcoins people think they own, and the amount of value that they are willing to trade, determines how much bitcoins are worth. For example, If people collectively think they own 7.673 million bitcoins, and everyone who knows about Bitcoin is collectively willing to pay 17.26 million dollars for them, then bitcoins are worth $2.25 each.
But suppose that Satoshi decided long ago that there were 100 bitcoins in each block instead of 50 starting out. The project would have developed the same exact way except that bitcoins would have maxed out at a value of $15 rather than $30 several months ago, would be worth $1.12 now, and everyone would have twice as many. The total value of the Bitcoin economy would be the same as it is in real life. The amount of money or other value that people collectively exchange for bitcoins is constant, but the value of each bitcoin depends on how many bitcoins each individual thinks they own.
But everyone must recognize that it isn't the monetary base that determines how valuable bitcoins are, it is the money supply. The difference is the demand deposits. And this is why I asked such an important question at the beginning of this thread: If you have 100 bitcoins in your wallet, and 100 on MtGox, how many do you have? Most people think of a bitcoin in MtGox as being just as easily accessible as one in their wallet and they consider themselves to have 200 bitcoins.
Lonely miner says that those 100 bitcoins in MtGox cease to be part of the money supply. If that was true, and everyone moved their money into MtGox and other banks, then the value of each Bitcoin would skyrocket because the money supply would drop significantly. Clearly that isn't what would happen because everyone still considers themselves to have bitcoins,
and they would behave as such which means that many people would sell if the value rose an unreasonable amount. Under my definition of money supply, the money supply stays the same, as we would expect.
Let us consider a further situation. Almost all of us would agree that if Satoshi started us at 100 bitcoins per block, then each bitcoin would be worth half as much and there would be twice as many of them, right?
Lets go back to real life where there are 50 bitcoins per block, but let's imagine that MtGox lends out half of their bitcoins, which raises the money supply (under My definition) by, lets say, 5%. The people who get these bitcoins would be free to do with them whatever they want and they would do various things: they would spend them further on goods and services, they would store them in a wallet, and they would sell them. These are important points. You and I still have our same number of bitcoins in MtGox, but suddenly there are Bitcoins that weren't there before suddenly on the market. This would lower the value of each bitcoin. It would lower it by about 5% because that is how much the money supply increased. Even the people who only have these bitcoins stored in their wallet contribute to this phenomenon because these people are now holding bitcoins,
despite not buying bitcoins from You or I. This is why my definition of money supply is
useful: because it accounts for this phenomenon.
The factor by which the monetary base increases into the money supply is called the Money Multiplier.
http://en.wikipedia.org/wiki/Money_multiplier