Topic: Inflation and Deflation of Price and Money Supply - page 64. (Read 1455603 times)

I think your view of the recent bubble/burst is overly simplistic.  I hope you don't take it the wrong way when I say that you appear to have swallowed the populist line about greedy bankers hook, line and sinker.  That episode was far too complicated to blame on one party (unless that party is government*).  Basically everyone in the country was an active participant in that fiasco.

It would take a while to sort that whole mess out and identify all of the groups participating, and what they did wrong.  The short version is that "greedy lending" takes two: a lender and a borrower.

The credit freeze was an overreaction, but a temporary one.  No one knew if they were solvent, and no one knew how creditworthy any potential borrowers were.  The rules had been on vacation for a long time, and it took a while to adjust when they got back.  Lending is once again constrained by the credit demand of creditworthy borrowers, which is a much smaller market than the credit demand of everyone with a pulse.

The most important part missing from your description is the malinvestment.  During the bubble, the markets were sending the wrong signals to the wrong places.  Millions of new houses were built.  Everyone and their cat got a real estate license.  Home improvement stores sprang from every corner, and the manufacturers of the goods sold in such stores expanded capacity.  We ended up with a glut of things that we don't need, and a shortage of things that we do need.  We've also made the, erm,  "bold" decision to do everything in our power to prevent those malinvestments from clearing.

In my opinion, it looks like the deflation was caused by the mess, rather than the other way around.


Hyper-deflation would probably be horrible.  But I can't imagine any realistic way that it could ever happen.


The properties you describe don't seem to have anything to do with "stake", assuming that such a thing has meaning.  Bitcoin's subsidy decreases to zero because we want it to, not because proof-of-work requires it to.

* Government gets special mention for shielding pretty much everyone from individual risk.  Since no one had their own skin in the game, they all had incentives to be stupid.  In a free market, those that take bad risks end up losing their capital and they have to sit out the next round.

One of the most recent examples is Japan. I don't think we can speak in this case about the kind of "meddling" which Austrians say can forebode or provoke negative effects on the economy. There was a large price bubble in stocks and real estate there in the 1980s, which topped in 1989 and popped in the early 1990s. They say that for almost ten years after 1990, Japan had been caught in a deflationary spiral. It brought about high levels of bankruptcy and low consumer demand, which, in turn, put further downward pressure on prices. The Bank of Japan was slow to react and embarked on a quantitative easing only in 2001...

Isn't this exactly what Keynesianism is all about? I always thought that theories based on Keynesian economics advocate government monetary and fiscal programs aimed at increasing employment and stimulating business activity, that is, active meddling into economic problems by the state... Or did I get something wrong from your post?

First, thanks for your response. I appreciate being able to have a rational discussion about this. I am extremely excited about virtual currency and would like to discuss my concerns without being having to combat blind fanboi-ism.

I think it's difficult to find an instance of a deflationary episode after 1929, because so much is done (since then) to stop them. It's definitely difficult to find any instance of rampant deflation or inflation that wasn't or couldn't be contributed to an external factor. After all, something always has to start the ball rolling.

But we do see them start, and then governments go on money printing sprees to correct them before they get out of hand. You only have to go back to 2007-2009 during the housing bubble burst in the United States to see this. Yes, the most recent US recession was caused by greedy lending and trading schemes that created a price bubble, but the result of this bubble bursting was an influx of personal and corporate debt defaults that caused some banks to close, and virtually all banks to freeze credit. Since the United States money supply is largely generated by debt, this created a deflation in the money supply which is what caused all the problems you can still see signs of today including unemployment, entire industries failing, skyrocketing government debt (to correct the issue), etc.

Of course above we're talking about a potential for rampant deflation. One could argue that a small amount of deflation can be just as benign as a small amount of inflation. Of this, I'm not so sure. My hunch would be that hyper-deflation has a more inheritant run-away effect than hyper-inflation. If you like analogies I would hypothesize hyper-inflation is caused by a continual effort from a government to print too much money, or over-value goods and services and thus participate in pushing a hypothetical boulder up a hill. While hyper-deflation would be pushing a boulder down a hill. It doesn't take a whole lot to get it started, and once it's started it's hard to stop. But again, this is just an educated guess. I am not certain, and don't think anyone can be.

So, I guess I'm a Keynesian (I didn't know this). And as a Keynesian, the deflationary nature of bitcoin is worrying. Whether or not this will be an issue, I guess time will tell.

As for POS. What I like about POS is that blocks are generated for saving the currency (as in not spending it). The rate of generation can be controlled at whatever value you like, say 1%. This acts as a built-in Treasury Bill generation to the currency constantly inflating it at a maximum of 1% per year. This pre-defined POS generation rate would also define the prime lending rate, and give the currency room to generate interest for private loans. The community could also agree to raise or lower the POS rate based on economic indicators that would require it. Currently, all implementations of POS try to offset the POS block generation by requiring mandatory transactions fees that become 'destroyed' by the network. But in principle, without these mandatory destroyed transaction fees, POS could guarantee the continual slow growth of a virtual money supply.
 

My post on http://zeroprofits.blogspot.com/:

Bitcoin high price and hoarding is normal, no constant deflation is expected.


Several arguments against the success of Bitcoin are doing the round:

1. Bitcoin is a bubble, the present $1000+ price level bears no relation to the small bitcoin economy.

2. People are hoarding bitcoin and not using it. How can that possibly be a successful currency?

3. Bitcoin has a deflation problem. The general price level would have to keep falling to accommodate the growing bitcoin economy, given the fixed supply of bitcoin. (And somehow predictable deflation is assumed to be a bad thing.)

All these arguments are FALSE, and below I will show why. I will do this in terms that many economy students are familiar with; the Quantity theory of money:

M · V = P · Q

or the Money supply times the Velocity of money equals the Price level times the Quantity of goods.

People could use this relationship to 'prove' that when the money supply M is fixed and the economy Q grows, the price level P must drop to accommodate it, which means deflation.

But then you are falsely assuming V, the velocity of money, to be constant.

When you expect a sizable drop in price level P, you would postpone spending. You know your bitcoins will be worth more tomorrow, so there is a free profit to be had. This drop in spending now would mean there is less bitcoin chasing after goods today, and more bitcoin spending tomorrow. People are hoarding bitcoin. Price levels will adjust, going down today, and you can expect the price level to be higher tomorrow. (Saying that the price level in bitcoin goes down, is the same as saying the value of a bitcoin goes up.)

This hoarding will continue until the expected change in price level does not provide a free lunch anymore. In a bitcoin economy with a fixed money supply it can't be the Price level adjusting to the growing economy. It is the amount of bitcoin used in spending, or the Velocity of money. The bitcoin value should be expected to climb rapidly and stabilize.

So what the Quantity theory of money shows us is:

1. The price of a bitcoin should be expected to move now, to a level fitting the size of the future bitcoin economy. Assuming bitcoin adoption, the high price is rational given the low market capitalization compared to that needed in a reasonably sized future bitcoin economy.

2. Bitcoin hoarding is normal. The velocity of bitcoin will be higher tomorrow than it is today. Bitcoin hoarding is a logical consequence of the expected growth in the bitcoin economy in combination with the limited supply of bitcoin. It is rational and here to stay for the foreseeable future.

3. There will be no constant deflation. The price level, or the value of a bitcoin, will reach a stable level that fits the future size of the bitcoin economy. It is the velocity of money, or the number of bitcoin actually used in spending that will adjust to the growing economy, not the price level.

Everything you said has been said around here plenty of times.  It is kinda the core of Keynesianism, and I promise you that the our problem is not lack of familiarity with his work*.

The problem you run into is that you are asserting your conclusion.  You are stating a bunch of things as if they were established facts, when they are not.

The great depression is generally cited as the evidence to back up your position, but the people that make those claims take a peculiar view of history.  They tend to skip over the decades of malinvestment and manipulation that caused the great depression, and pretend that the deflation fairy sprinkled some deflation around, causing the whole mess.  A few economists will give the problems from ~1865 to ~1929 a token mention, or call them the instigating factor, but then forget all about them and carry on finding the conclusion they wanted to begin with.**

In much the same way, the analyses of that period tend to either ignore or gloss over the insanity pushed by the central banks and the governments.

Modern economic theory is that all problems are caused by a lack of meddling.  If the people that know better than you can't or don't meddle in the markets, we have a crash.  And when we have a crash anyway, the problem is always that they didn't meddle enough.

So, with that in mind, I'd like you to think very carefully about your position.  Are you aware of any deflationary episode anywhere in the world at any time during all of recorded history?  One that didn't follow closely on the heels of a period of meddling of the sort that Austrians say causes the the effects you are basing your arguments on?

P.S.  "Proof" of "Stake" systems don't solve the money supply problem (assuming that there is indeed a money supply problem to begin with).  If the devs all got lobotomies and switched bitcoin to POS, and all of the bitcoin users got hooked on crack and followed along with that change, the limit would still cap out a bit short of 21 million.

*  And by "his work", I don't just mean his work, but the work of the branch of economics voodoo that bears his name.

** At the cost of a few hundred million dead, much of the world has learned, finally, not to give a bunch of power to people just because they say they want it.  Now we ask them to come up with good excuses first.  "Proving" that giving them power is scientifically necessary is a good way to stay in the club and get your bills paid.

I'd have to take exception with the following quote:


I definitely don't want to get into a pissing match with you (like some people seem to be doing in this thread) but perhaps I'd need you to explain this a little better.

From what I can reason, when the bitcoin supply stops growing we will have a rampant effective supply deflation due to many factors:
- lost/damaged currency
- population growth
- saving/hoarding

Supply deflation also causes other problems which, in themselves, cause more effective supply deflation and price deflation. Ex:
- reduction in currency supply causes unemployment, which in turn causes more effective supply deflation
- reduction in currency supply causes "effective debt value" to increase which slows credit re-payment and tightens credit availability, which causes hoarding, which causes more effective supply deflation
- supply deflation encourages hoarding, over spending, which therefore causes more effective supply deflation
- loans with interest go into default since the interest required to repay the loans is never created. This causes an economic downturn and ultimately more deflation.

It is for these reasons, and many more, that deflation can quickly become an unstoppable beast, and is therefore a economy's worst nightmare. This is why virtually all central banks across the world try to keep the money supply at a growth rate of 1-3%, and go on T-Bill printing sprees whenever a hint of deflation is detected. And since most fiat currency is generated through credit, this is why a credit freeze is so detrimental to the world economy.

Because of population growth, lost currency, and people's desire to save, you can never have a "neutral" money supply. You will always have either inflation, or deflation, and due to deflation's exponential run-away nature it is considered the lesser of two evils to keep a well controlled, very low, supply inflation rate. Furthermore, a low level of inflation determines acceptable interest rates which aid in economic growth and wealth re-distribution.

There is also a human psychological element. Supply deflation, or even stagnation, requires continual lowering of prices and wages in the face of economic growth. People typically are more resistant to a reduction in wages and revenues, versus increases.

This is the biggest problem I see with bitcoin, and why I favor altcoins that solve this issue with proof-of-stake (like Peercoin).  

I also see problems with a mining incentive relying entirely on transaction fees. Transaction fees will be completely controlled by "purchasing power" of sorts. The entities capable of providing the lowest transactions fees will invariably be the largest (in terms of infrastructure). This will naturally create transaction titans, and likely a monopoly by cartel, which is the worst thing that can happen for the bitcoin network.

Thankfully proof-of-stake solves both of these problems, so I think virtual currency has a future, but I don't believe that future is secured in BTC.

Thoughts?

Interesting post, and subsequent discussion. I am trying to get a grasp on measuring the complexity of the bitcoin economy. Fortunately, the blockchian records every transaction. I do need help in accessing and parsing the blockchain into a file I can pull into Mathematica or Matlab.

Frustrated by there being a lack of formal aggregation of microeconomics into macro phenomena (Keynes and neo Keynesian does not count as rigorous in my book), I aggregated von Neumann and Morgenstern's game theory (micro model of individual action) into macroecon, by adding every individual's action together.  Keynesian tend to look at the individuals resulting from the aggregate instead of the aggregate being composed of the individuals (an Austrian perspective). Basically the Keynesian's have the logic backwards (along with their math) and the Austrians who have the logic in the right direction but reject math.  Go figure.

Because my approach is based on statistical measures, I am very concerned with distributional information, which is why the blockchain is so important.

In earlier derivations I derived a similar relationship that you posted very early regarding the velocity of money, but with a twist:
lambda*M=C*N*T

lambda-marginal utility of money (amount of action that a unit of money can achieve in exchange)
M-quantity of money
C-constant of proportionality
N-number of degrees of freedom of the system. These are the number of logically independent participants within the economy
T-temperature-the marginal utility of information, it is the measure of action of the individuals in the economy.

I looked a 10 blocks (269609 to 269618) and found that the received transactions are LogNormal. I go through some of the interpretations and consequences of that distribution in this post:
http://statisticaleconomics.org/2013/11/29/measuring_the_complexity_of_bitcoin/
Examining the distribution results in measures for the temperature and the number of degrees of freedom. Because we know the quantity of money, at least until fractional reserve takes hold in bitcoin (just wait it is coming) we can easily compute the marginal utility of bitcoin.

I need to push the model further and develop a better/more complete model that describes the functional relationships, but need larger chunks of the blockchain to do so. Any help would be appreciated.

If you are curious of some analysis of the dollar under this framework here is a post Theft at the Grandest Scale:
http://statisticaleconomics.org/2013/11/13/theft-at-the-grandest-scale/

This is why I use bitcoin, and moving away from fiat. Money that is created benefits those who get to use it first. I would rather the expansion of the money supply be used to fund a service that I benefit from (validating transactions and prevent double spending by paying the miners) than where my action goes to benefit some group of individuals who I never met and don't get anything in return.

An economy is not its money or means of exchange. It is it's annual production. Bitcoins have really only served to produce bitcoin mining hardware and online services.

What money does in an economy is convert one commodity (stuff or services) into another. Once there is a sufficient division of labor, and say you go to work and make shoes. You must rely on somebody else for your bread. Presumably the breadmaker only makes bread and needs you for shoes and needs yet another person for toothpaste. The toothpaste producer only makes toothpaste and relies on the others etc. etc. etc.  Once this is the case, producers are inclined to produce a stock in excess of their own personal needs (of shoes, bread, or toothpaste, etc.) and exchange those for other goods that are the want of each producer. (We need not talk about capitalists and workers here, just assume everybody is a worker who is a producer self-employed).
In order to mediate exchange between to producers, Commodities become Money in order to become Commodities again. Marx called this circuit C-M-C. 

The problem with bitcoins is that it is not really mediating exchange of commodities (YET). It is as if everybody involved in this so-called economy were gold miners who hoard their gold and only occasionally exchange it for stuff.

This is the gap that needs to be bridged before we can see it become a useful currency.

It's not that simple and straightforward. Actually there's not much difference between "asset backed currencies" and "fiat moneys" in respect to what makes them all money

Yes.

Asset backed currencies have been the ONLY succesful models tried. They stood for centuries, none ever "failed" they were all replaced by fiat systems.

The dollar was removed from gold backing in 1971, but it was weaned from gold onto oil and the "petrodollar" was formed, it was a brilliant plan and when put forth to Saudi "leaders" they realised that if they got in on the ground floor of the pyramid scheme they would greatly benefit.

Fiat moneys have ALWAYS failed. The ability to "print your way out of trouble" is in fact "printing your way into trouble" and will always end bad for the users (good for the bankers).

Fiat money ALWAYS ends up being backed by debt, that is what fractional reserve banking is, when you go into a bank and borrow $100, that bank is allowed to create $1000 out of thin air and loan that out to other users. This $1000 is not moved from some reserve to the bank, it is literally created out of thin air at the press of a key.

The word "Fiat" is latin for "It is" or "Let it be". Like a magic utterance allowing something to be created from nothing.

As to the thread title: Inflation and Deflation are only good for those that wish to control the money supply. Keynes would have you believe that this is necessary, but history tells us that it ALWAYS fails. It fails in a very lucerative way for the bankers and a very painful way for the majority of its users.

You have a point, but it seems that the gold is stuck, by the way states does'n seem to clear out deficit and surplus these days, they prefer just to acumulate debt.

Other indications are the possible manipulation of paper gold prices, I guess some heavy fractional reserve gold certificating is going on.

Also in India, the state refers to gold import as consumer goods, while the people still regard it as money. If India had instead counted gold as money, I guess their trade deficit would turn to surplus right away. I wonder why they don't, politicians are normally good at cooking the books, and this wouldn't really be cooking.

Some countries have VAT on gold.

Most people prefer cards instead, or bills, in stead of carrying a bag of coins.

Gold is of course a threat to the elites. I prefer gold as money, measured in grams or troy ounces, instead of dollars, because in a (true or not so true) gold standard it is to easy to redefine the dollar to a different amount of gold.

It may seem that way, but gold is still used as a hedge for dollars on foreign exchanges from what I understand.  There's solid evidence that the federal reserve activity works to control the price of gold in order to anchor the dollar's value internationally.  Gold is still an international currency in its own right.

The confrontation between John Maynard Keynes, and his Austrian born free market adversary and friend, Friedrich August von Hayek, is one of the most famous in the history of contemporary economic thought.  The debate took place during the Great Depression of the 1930s about the causes and remedies of business cycle downturns in market economies.
The origins of this debate can be traced back to the book ‘Treatise on Money’ (1930) written by Keynes, a rather obscure book, that was superseded by his masterpiece ‘The General Theory of Employment, Interest, and Money’ (1936).  ‘Treatise on Money’ was a difficult book to read, and this probably caused Hayek and Keynes to misunderstand each other.  As Keynes and Hayek were building their economic models at the same time, their debate was very much dominated by terminological definitions.  One of the main topics that Keynes and Hayek corresponded about was the definition of savings and investment, and Hayek wrote three extensive systematic reviews of ‘Treatise of Money’. (1 - footnotes below) In turn, Keynes wrote only one article in response accusing Hayek of misrepresentation. (2)
The debate on ‘Treatise of Money’ was rather one sided, and in 1932 Keynes withdrew from the debate to reshape and improve his central argument, which was to become ‘The General Theory’.  This work became probably one of the most influential economic treatises immortalizing Keynes as one of the greatest 20th century economists.  His lasting legacy, that was to become known as Keynesianism, is an economic perspective that argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes.  The theory, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank, and fiscal policy interventions by the government, to stabilize economic output over a business cycle.
Many Keynesian economists have not regarded Hayek as their man’s equal.  However, there is an increasing agreement today that Hayek, although controversial, was one of the most influential 20th century economists.  He made fundamental contributions to economics in the theory of business cycles, capital theory, and monetary theory.  He was also awarded the Nobel Prize for economics in 1974, jointly with Gunnar Myrdal, “for their pioneering work in the theory of money and economic fluctuations”.
Most of Hayek’s work in the 1930s and the 1940s focused on the Austrian theory of business cycles.  He believed that the price system of a free market was an efficient mechanism to coordinate people’s actions, and that markets were a result of spontaneous order that had evolved slowly over a long period of time, as a result of economic exchanges between people.  Contrary to the statement in Wapshott’s book, that the Austrian School economists were more theoretical and mechanistic in their approach to economics, Hayek believed that markets were highly organic, and any interference with the spontaneous order of free markets would distort their efficient operation.  In fact, it can be argued that Keynes’ economic theory was more mechanistic, as economies could be manipulated in a machine-like fashion to behave according to the wishes of economic planners.
A true Renaissance man, Hayek also made intellectual contributions in political theory, psychology, and methodology.  It is perhaps because of his work in political theory that some economists, especially those with a Keynesian orientation, have wrongly dismissed his core economic research as ideologically motivated.  This is the trap that Wapshott seems to walk in, either intentionally, or because of Hayek’s criticism of the Keynesian model, that had become de facto orthodoxy for the most part of the 20th century, extends many decades, and to some extent, has remained unnoticed, or ignored, by many economists and policy-makers.
Wapshott’s book ‘Keynes Hayek: The clash that defined modern economics’ is a commendable effort to bring economic thought to the attention of the general reading public.  It is written in an engaging ‘human interest’ style, and I am certain it will sell well.  Its publication is also well timed, because there has been a marked increase in public interest about economics and economic policy, as a consequence of the ‘Great Recession’, and sovereign debt crisis that currently grips the world.  And this is where the book fails to deliver.  A reader should not expect any great insight into how Keynesian or Hayekian economics could be applied in today’s economic situation beyond ‘truly Keynesian’, e.g. political, government policy interventions, as outlined in Wapshott’s book.
Nevertheless, the book provides a delightful insight into the personalities of Keynes and Hayek.  Keynes is portrayed as a privileged and bright economist at the top of his game effortlessly moving between academia, political elites, and his bohemian ‘Bloomsbury group’ of friends.  Hayek, however, is painted as a stiff, humorless, theoretical, and linguistically challenged, central European scholar, brought to London School of Economics (LSE) by Lionel Robbins to provide an alternative to the theories of Keynes and his ‘Cambridge circus’ of almost evangelical followers. (3) Robbins, and the dons of the LSE, considered Keynes’ view that when free markets were left to their own devices, this sometimes caused economic slumps, and that decisive government action was needed to pull the economy back to an equilibrium state of full employment, as heresy.  In contrast to Keynes, the Austrian economists thought that free markets, driven by people’s choices tended to adjust to equilibrium if left alone, and free from government intervention.  Concerned with the increasing intellectual and policy influence by the new generation of Keynesian economists at Cambridge, Hayek was appointed to LSE to counterbalance Keynesian interventionist doctrine.
Much of Wapshott’s book is about the political philosophy that divided Keynes and Hayek in terms of the role of the government in the running of an economy.  Much less is spent on understanding the economics upon which the big-picture conflict was based.  Indeed, Wapshott overemphasizes Hayek’s 1944 book ‘The Road to Serfdom’, on the dangers of socialism.  This book was written after Hayek moved to Britain where he observed that many British socialists were advocating some of the same policies of government control that had been advocated in Germany in the 1920s.  His basic argument was that government control of people’s economic lives was a form of totalitarianism: “Economic control is not merely control of a sector of human life which can be separated from the rest…. it is the control of the means for all our ends” (1944).  The book became a best seller in the USA and it established Hayek as a leading classical liberal, or ‘libertarian’, as he would be called today.  However, the success of the book, which was serialized in ’Reader’s Digest’, typecast Hayek as a free market ideologue, detracting attention away from his scientific contribution in economics.
Wapshott provides a ‘workmanlike’ description of Keynes’ theory, but his treatment of Hayek’s economics and the critique of ‘The General Theory’, is woefully inadequate.  The fundamental tenet of ‘The General Theory’ is that there is a direct and positive relationship between employment and the aggregate expenditure in an economy.  Therefore, according to Keynes, total demand determines the employment level in the economy, and the existence of unemployment indicates that aggregate demand is insufficient to employ all factors of production.  Keynes considered that the capitalist system was volatile, and there were times when the level of demand would be insufficient to maintain full employment.  Therefore, Keynes recommended that the public sector should address this by controlling the level of aggregate spending in the economy.  His recommendations to reduce unemployment can be categorized as follows:
• Interest rates should be reduced as far as possible to encourage private investment;
• A progressive tax system should be used to divert income from the wealthy to the lower paid, as their propensity to consume is higher; (4)
• The government should actively participate in public investment activity to supplement private investment, should this prove insufficient to maintain a level of aggregate expenditure that corresponds with full employment.
After the publication of ‘The General Theory’, Hayek did not critique Keynes’ work as was expected; this he regretted ever after (Hayek in Sanz-Bas, 2011).  However, Hayek’s critique of Keynes is incorporated into many of his works including ‘Monetary Nationalism and International Stability’ (1937), ‘Profit, Interest, and Investment’ (1939), ‘The Pure Theory of Capital’ (1941), ‘The Campaign Against Keynesian Inflation’ (1974), ‘The Fatal Conceit’ (1988). (5) It is perhaps because of the extended period of Hayek’s writing that Wapshott fails to provide a full account of Hayek’s economic thinking in general, and the critique of Keynesian theory in particular.
It is beyond the scope of this review to discuss Hayek’s critique in detail.  However, one of Hayek’s main criticisms of ‘The General Theory’ was about Keynes’ assumption that unemployment could be solved through increases in aggregate spending.  Keynes linked aggregate spending with employment; if spending in the economy was increased sufficiently, this would result in workers getting their old jobs back, and the economic crisis would be averted.  In contrast to Keynes, Hayek argued that the crisis was a direct result of the misallocation of resources during the previous economic booms.  Hence, Keynes’ solution to reestablish the same distribution of resources would not provide a sustainable solution to unemployment.  The only solution to systemic unemployment, according to Hayek, required a liquidation of wrong investments and reallocation of productive resources.  To quote Hayek:
“If the real cause of unemployment is that the distribution of labour does not correspond with the distribution of demand, the only way to create stable conditions of high employment which is not dependent on continued inflation (or physical controls) is to bring about a distribution of labour which matches the manner in which in which a stable money income will be spent” (1950).
What we can infer is that Keynes’ solution to economic crises was a short-term panacea, while Hayek advocated a market driven solution that would result in a more sustainable productive economic structure.  Such a structure would be consistent with consumer preferences.  Trade cycles, according to Hayek, were a result of the government interference with the spontaneous order of the markets.  Hence, the only way to avoid booms and busts, trade cycles, is to prevent them form occurring in the first place.
Wapshott concludes his book by crediting Keynes for “saving capitalism a second time”.  He makes a reference to Keynesian doctrine for solving the Great Depression, and the applicability of the same dogmatic panacea for the Great Recession from the 2008 onwards.  He conjures the ghost of the Keynesian high priest, John Kenneth Galbraith, who scolds conservatives in the English-speaking countries for embracing Hayekian economics: “better to accept the unemployment, idled plants, and mass despair of the Great Depression, with all the resulting damage to the reputation of the capitalist system, than to retreat on true principle….”.  What Wapshott misses in his argument is Hayek’s central proposition: booms and busts are a result of malinvestment created by the government interference in the operation of free market, a result of the very policies advocated by the dogmatic Keynesians of today.
In contrast to Wapshott’s conclusion, I leave the reader with Hayek’s comment, that is particularly appropriate to this review:
“I find myself in an unpleasant situation.  I had preached for forty years that the time to prevent the coming of a depression is during the boom.  During the boom nobody listened to me.  Now people again turn to me and ask how we can avoid the consequences of a policy about which I had constantly warned.  I must witness the heads of governments of all Western industrial countries promising their people that they will stop the inflation and preserve full employment.  But I know that they cannot do this.  I even fear that attempts to postpone the inevitable crises by new inflationary path may temporarily succeed and make the eventual breakdown even worse” (1979).
Footnotes:
1. Hayek, Economica, August 1931; Economica, February, 1932; Prices and Production, 1931
2. Keynes, Economica, November 1931.  Keynes on Prices and Production: “The book as it stands, seems to me be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it…. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam.”
3.  A critical reader of the book can’t help notice the leading language used by Wapshott from the start.  Keynes is described to have a ‘commonsense understanding’, while Hayek is described as ‘intellectual’, rather than practical.  Keynes is motivated by understanding ‘real life dilemmas’ and ‘improving the lives of others’, whereas Hayek is boxed in as a ‘theoretician’.
4.  Keynes assumed that as incomes rise, people tend to save more.  Therefore, the society’s propensity to consume reduces as more of the income is saved.  As a result, the society’s investment multiplier will be lower.  According to Keynes, the market mechanism is incapable to connect savings with investment.  Instead, investment is dependent on business expectations and the creditors’ liquidity preferences that determine interest rates.  As a result, the capitalist system is prone to suffer from a systemic lack of demand and, as a consequence, a chronic level of unemployment.

good

Here are two scenarios where I think a Central Bank will consider utilizing some form of a crypto currency and why:

1 - A complete overhaul (like Greece or an emerging nation)
2 - As a supplemental sovereign payments system (The Federal Reserve already intervened on the interchange fee for debit cards)

In both examples, I am not naive enough to think that any central bank wants an economic majority model for change, so they will certainly be "official" repository for adjustments. However, in both scenarios, there are very compelling reasons to consider using crypo currencies

- The government would "own" the sovereign payments mechanism (like they do with cash), except now this medium facilitates infinitely more robust international payments. The Federal Reserve and many other world central banks already have laws mandating how much card processors can charge, so I think they would relish being in charge of a competing payments mechanism that they own. Keep in mind that crypto currencies also replace the system of paper checks, so this is yet another huge cost savings

- The cost to issue currency could almost be completely eliminated. ATM's could literally print bills on demand for any amount. Citizens could print their own bills/checks right at their house through some official web site.

- Accountability - The Government would/could require registration of account numbers, making the tracking of financial records completely transparent (at least on the surface and for the citizens...dont expect the government to disclose their ID's). This makes tax collection and auditing much easier

- Money supply manipulation - No change here than current. They could decide when and how much to ramp up the money supply or they could do a proof-of-burn to draw down the supply

- Peer to Peer processing would still be used. The government would certainly not want to invest in a huge server farm for transaction processing, so let miners do their job and simply dial in a reward that is attractive enough for them to do it. It just like printing money to them anyway and it is much more robust than managing a check clearing system and a paper currency system

- Counterfeiting is virtually eliminated, another cost savings

The list would go on but I think you get the idea.

The technology is not mature enough today to facilitate such a transition (just look at the sad state of wallets...) but in 5 or 10 (or 20 to 50..) years both governments and citizens should be much more adept with this technology to potentially consider the extraordinary benefits.

I really wanna price of BTC increasing more=]]..equal a real value of BTC

Yes but nowadays it seems that gold is completely taken out of the picture. You don't hear about governments using the gold to cover deficits. France could do that. Rather, it seems like states and individuals like to keep some gold just in case gold should become money again.

The world went off of gold in 1971.

But gold systems are rarely 100% "hard".  It would be more accurate to say that in 1971 the world switched from a moderately hard gold system (Bretton-Woods) to a very soft gold system (the US still has tons of gold, and everyone else still has tons of dollars, but you can't necessarily convert anything other than on the market).