Topic: Serious flaws in Bitcoin monetary policy (Read 7086 times)

I fully agree with this, Bitcoin is not designed to manage the daily payment network at global size.

But what would be the caracteristics of this "BTC-derivative"

It interest me, I'm thinking about exactly this part, design a payment protocol, with "good" economical qualities.

I have some ideas, but would like to read more on this topic, to see the options, the eonomical specifications, and eventually technicall implementation of the payment network, reward to use the system...

I am not sure I would wish to have that kind of function. Lots of reasons:

If and when bitcoin will be world money, it will have a relatively stable value, far more stable than any fiat money's value and even more stable than the value of gold during history.

The fluctuations in value and the floating interest rate (that is also a consequence of its soundness) creates important price signals to the actors in the economy: Shall I spend, save, lend or invest, and when investing, should I go for investments with a quick return, or investment that produce something useful far into the future.

The fluctuations in value will be spread among individuals relative to their current holding of money, thus introducing far less distortions into the production structure compared to the current situation.

The fluctuations in value will be partially predictable, opening a market for evening out short time fluctuations through speculative trade.

The last point is that by connecting the value (through varying the volume) to anything outside the money itself, you centralize it. Someone has to decide what the reference value is, and from time to time adjust the formula as new good types are invented and old good types fall into irrelevance. Just look into how modern mobile phones are valued compared to old, for the purpose of figuring out the consumer price indexes, to see how absurd it can be. As it is designed, bitcoin is not connected to anything, there is therefore nothing in the real world which use can be distorted by its moneyness. Bitcoin it is more pure money than anything that has been before.

That was what I was proposing in the OP and subsecvent posts.

It's easily trackable though, it just needs an API between major exchanges. If too much if it is sold, then interest rate rises, if too much of it is bought then interest rate lowers.

Now interest rate here means that coins can be burned/deleted or it would offer some kind of return like peercoin.

And the opposite would be to just increase the monetary base.

It would be a longshot, but it can be programmed I think if enough dedicated programmers would come together.

+1 odolvlobo

What you are proposing are notes.  It's like silver notes except w bitcoins

What does it mean ? Bitcoin is infinitively divisible. As long as a satoshi can buy a cup of coffee there will always be enough BTC for exchanges.
Your problem is : "what if the price of Bitcoin goes up ?"

Savers will win, spender will loose, what is the problem with that ?
"Less consumption" ? Why is it a problem ? People will always buy for eating, sleeping, housing.
"Less investment" ? Why is it a problem ? If you get rich and see that there is a need to fulfill for the market, you will still invest in a solution if you believe the potential is higher than deflation rate.
At least investments will be more profitable, which is what matter at the end of the day. (less mis allocation)

Yep, this is what excites me too.
If someone somewhere invents this BitCurrency in a way that intrinsically tracks a reliable independent measure of demand, so it auto-deflates or inflates as required, we will have a stable currency that cannot be centrally manipulated.
If this happens I'd get as much base commodity (BTC) as I could

Maybe I should refine.
While commerce can exist in a world of imposed deflation (we have to buy food at least right), a payment mechanism that is deflationary cannot compete where an inflationary one exists**.
So unless BTC creates a market where only it can operate, it has to operate in markets where inflationary fiat exists.
Unless as I say, a BitCurrency can be used for trading that uses BTC as it's base.
What would be really cool is if this BitCurrency can be hardwired to inflate in line with a reliable measure of demand. This would keep the value of this currency stable.
BTC however will grow in value, but it wont matter anymore because people would use BitCurrency rather than fiat.

**The evidence for this is logical as I mentioned at the beginning. People would save BTC and spend using something else**

The consensus here has been that commerce needs an "inflatacoin". So if you think consumer spending can exist without it you are dreaming.

Toknormal, however makes a very good point in that we shouldnt be comparing BTC with fiat, but instead with gold as a base commodity. So while BTC will always be deflationary, a BitCurrency could be put into circulation that uses BTC as it's base. But this Bitcurrency mustn't deflate with demand, which means there must be a flexible mechanism for inflation that allows the BitCurrency to remain decentralised.

Thats true, people often think of a house as asset but it's a liability first then an asset once it's paid off.  When you take on a mortgage you are technically speculating that once the house is paid off you can sell it for more than the value of loan plus interest minus the equivalent what you would have paid in rent.  However, they don't think about that when they are shopping.  It's more about if the house suits their style, the neighborhood, etc..

But a lot of the capital markets are funds that provide the capital for business.  It's just not many people use that or is in the finance industry so whenever talk about loans they think of either student loan or mortgages.

Yeah the inequality gap is a hot topic because it's getting crazy out of control.  A lot of people can feel this in their everyday life.  I think what will probably happen is that there will be some tax restructuring.  Especially on capital gains.

I think Bitcoins importance is that it's a broadast eminating from a wounded population.  Especially with the millennials.  Burdened with student loans in a thin job market.

The problem though it got appropriated by the libertarian/ anarcho capitalist crowd so some of the politics attached bit coin is contradictory. Made worse by YouTube celebs like Molyneux and Max Keiser.  These kids need a voice but it's do them more good if they rallied around less controversial people.  But the youth is attracted to controversy.

What Imfind funny is that the St Louis  Fed chairman tried to say something about banking is a protocol like Bitcoin and he got booed. (Figuratively).  That type of guy is who you want on your side.  He's extending an olive branch and he's got connections to the establishment.

Thanks for that interesting commentary.

To me, a big part of the problem is the huge disparity between ordinary people's understanding of banking / money and the reality.

For example, take the concept of interest and "loans". I think most people generally understand the word "loan" to mean the transfer of some some asset from one entity to another on a temporary basis while ownership clearly resides with the lender.

Note 1 very important aspect of this understanding: during the period of the loan, the lender's assets are *depleted* by the amount lent. So, for example if I run a car hire business with 10 cars and I lend you a car for a week, I will only have 9 cars left. It arises from this that an interest payment is reasonable to compensate the lender for the use they could otherwise have made on their asset.

Now lets look at banking. As we know, it doesn't remotely work like this. What happens instead is:

[1] - the bank creates new money levered off a capital reserve base

[2] - that new money is backed by THE BORROWER'S FUTURE ECONOMIC ACTIVITY

Note that second part. It's actually the borrower who underwrites the value of the new money by signing a pledge to work for the next 25 years of their life in order to service and repay the loan. If their ability to do that is compromised then the loan defaults and the money is extinguished.

If the vast majority of ordinary people understood this principle, the banking system would not look anything like it does today. If they understood that the bank is only a liquidity provider but it is the borrower who endows that liquidity with 'value' then they would never accept the conditions under which such liquidity is provided.

What banks do as akin to supplying the paper to the book publishing industry, yet they are remunerated as if they were the authors generating the content.

The problem is with the words "loan" and "borrowing". They are misnomers which dupe the world into accepting a highly asymmetric financial system. The proof that it's asymmetric lies in headlines such as these...http://www.theguardian.com/business/2015/jan/19/global-wealth-oxfam-inequality-davos-economic-summit-switzerland

You mean you've been brainwashed.


It's an excellent monetary policy.  We like it that way.  If you want inflatacoin, you can keep using what your govt doles out and be happy.

My opinion on Euro is that it was mainly formed formed for political motives between France & Germany.

But for the Euro members like Greece had to default because they had no money printing mechanism to deal that crisis because their debt is not denominated in their own currency.

But I think the Euro was mainly a benefit to German economy.  It's raised the buying power of the periphery countries and lowered prices of German goods.  For example, people in Greece, Sapin, etc.  took on debt to buy German cars

But I don't follow forex so I don't know much about it.

I think the trouble has more to do with rise of shadow banking and derivatives.  A central bank like Fed has power to do is raise or lower the overnight interest rates or Fed Funds rate.  And now they can do QE, but not much else.

What happens in modern banking is that created new money is created when banks create loans. The whole fractional reserve thing is incorrect.  The Bank of England already put out a paper saying this.  Banks create loans THEN they look for reserves after.  They borrow the reserves from other banks.  If they can't get it by end of day they borrow it from the Central Bank. 

But as we know there's plenty of reserves.  So it's not for lack of reserves it's lack of good borrowers.

Where does shadow banking come in?  Well, not so good borrowers, like people who lack collateral or credit rating.  They don't go to commercial banks they go to shadow banks because there's less regulation there.  In the shadow bank sector the banks can't go to the Fed and borrow reserves so they go to the repo market.  Shadow banking ( which can also occur inside a traditional commercial bank like JPM or Citi) uses tools like securitization, (CDOs, ABS, ABCP), and derivatives (CDS).  In this system all the assets are highly leveraged and that's why an external shock can topple a bank.

Shadow banking is a recent phenomenon, With dramatic growth from 2000 fueling the housing bubble.  In 2008, prior to the GFC more than 50% of money was created from within shadow banking.  The St. Louis Fed has a paper about shadow banks if you want to read more.

But essentially, regardless of the Fed, money gets created either in commercial banks or shadow banks.  But the Fed only has minimal with commercial banks by adjusting the Fed Funds rate.  The systemic comes from the interconnectedness of commercial banks to shadow banks

It's unfair to blame central banks for everything that's happens in banking because regulations come from legislature/ Congress.  The difficulty in regulating shadow banking is that by definition it's off balance sheet.  So Dodd Frank, Vockker Rule, ring fencing, etc..  All those regulations only affect commercial banks.

The whole Bitcoin 1:1 reserve ratio, blah, blah is a non sequitur because it's so left field from how the entire financial industry operates.  In a thought experiment: if Bitcoin replaced the Central Bank, and people need money they would still go borrow it somewhere.  But without a Central Bank there's no lender of last resort.  Thats the big difference.  The system would still be fragile except you don't have this entity to print money and inject liquidity in recessionary times and raise interest to suck the money out of the system in times of inflation.

Ah ! I wondered about that. I realised that stocks were soaring due to QE and not the underlying corporate growth, but I couldn't really see what the actual mechanism was that drove money into the stockmarket. (Presumable there's only 4 places to go - stocks, bonds, cash or commodities. Under ZIRP, cash has no ROI, bonds are expensive as you point out, commodities have crashed so all thats left is stocks).


Do you think the system is headed for trouble ?

I'd be interested to see what you thought of this guy's commentary. It's quite long (about an hour) but very listenable...

http://www.silverdoctors.com/jim-willie-swiss-dump-the-euro-go-long-gold/

You are correct elasticity just means the money supply can expand contract.  Most money these days come from commercial banks making loans. 

The problem is though it's easier for banks to create money than destroy it.  They can't close out the loans unless the borrower pays it back.  What they do is " deleverage". The reason for QE is mainly to inject liquidity in the reserves can continue to make loans.  However, it didn't do that at all.  That's why earlier I said QE was a failure.  If you are interested in this topic I suggest Richard Koo and his theory of balance sheet recession

What QE probably did was make bonds expensive so the funds rebalanced their portfolios towards equities, hence the bull market

I don't think you've quite understood me properly.

I'm talking about the fact that a monetary medium with a fixed or limited supply does not have any bearing on how "elastic" a financial system can be that uses that medium as a monetary base.

You don't need an economics degree to understand that - just an observation that when we were on a gold standard, people didn't have to wander around with lumps of yellow metal in their pockets just to buy a packet of cornflakes. Nor did the numerical balances in depositors accounts have to deplete so that new loans could be made to creditors.

Thats because a modern economy is complex and moves from "narrow" to "broad" money through various stages of abstraction and leverage. (http://en.wikipedia.org/wiki/Money_supply). The same thing would (and does) apply in  crypto-based economy.


We've maybe got our terminology 'transatlanticfied' here. In my country we'd call that "loan security" and the principle I described is indeed exactly how banks loan out money.

What you've understood as "collateral" is simply a condition of the mortgage agreement that minimises the lending risk. The "house" does not form part of the bank's capital reserves (though having it as loan security may enhance the leverage available on those reserves). I agree that the loan manifests itself as an asset and that such 'assets' can, to various extents, contribute to the bank's capital reserve, but none of that has anything to do with the basic principle of whether a limited supply monetary medium can serve as part of "M0" in an elastic financial system. There still has to be a progression from base to credit money (or "narrow" to "broad" money as the M0...M(x) would express it).

In the modern fiat system, this 'hierarchy' became somewhat obscured because, as you pointed out in your answer, the types and grades of asset that qualify as 'capital reserve' have diversified so much that the definition of what constitutes "base money" is much more obscure.

Nonetheless, the principle is still very much there, just with a more fancy name. It's now known as "Tier 1 Capital"...http://blog.usbasel3.com/slr-basel3-leverage-comparison/

(P.S. A 1975 Fender Strat valued at around $400 in 1975, $800 in 1990, $1500 in 2000. Today you'll be lucky if you can pick up just the neck for that price, so probably better or as good as most triple A bonds   )
 

I think Bitcoin Foundation should do like Xapo, launch a few asic miners into space, and make a permanent mining pool that mines from the orbit, so that it can't be raided by swat teams.

Also it would be nice if it would have few metals in it, to make it undetectable by military missiles so that they can't take it out.

This way we would have a permanent mining base in the orbit that cannot be taken out so that even if miners on earth give up , still there would be enough mining capacity in the orbital miners that would sustain the network.

Oh and also they would use solar energy from solar panels so that they would be self sustainable


Hehe, ratings are actually done by measuring the volatility of the assets and the trend's direction.Guitars are pretty deflationary because there's always a new version that comes along so it would actually have a very low rating 

You actually complicate the things very much, that is not how banks loan out money, the collateral varies from credit to credit to compensate for the risk.

For a house mortgage the collateral is the house itself and perhaps some downpayment, if needed. For a short term loan like credit cards there are usually no collaterals, but if you dont pay them they will confiscate your wealth from any source available, and if you dont have any they`ll put you in jail and make you do forced labour to pay it off, or atleast in my country is that.

The credit instrument is issued from the loan itself, so that the bank can sell some of its loans to ease its balance sheet and get immediate cash. A credit sold is actually an asset because it generates income to whomever buys it, because of the interests.

Bitcoin's supply cant be grown because its hardcoded to be limited, you still can have a fractional reserve model here, but only if you take loans from others, you can't put money out of thin air.

This is actually what I was saying, that 1:1 leverage is the correct, and you can only get more if you prove your competence, a.k.a get a loan from someone who is willing to give one to you and not just print it yourself.

This is a very fair system we have here, but still the problem was not the fractional reserve that i tackled in post #1, it was the lack of liquidity which arises when people hoard money, this is what causes crashes, so a QE mechanism is imperative if we want stable prices, there is just no way around this.

1)Of course I emphasize again, I never said that CB should be the one doing it, it should be decentralized.

2)And QE should not be used to inflate bubbles, and support fractional reserve with leverage > 1:1.

If these 2 criterias are met, then QE is legitimate, otherwise it's just a scam tool.

I just discovered this thread and wanted to remark on the original point re. elasticity and inflationary/deflationary currencies.

First of all, you've kind of skipped over a very important point which lies at the heart of all this, and that is the concept of "base money". With me not being an economist, I define the concept of "base money" intuitively as being the "last asset in a chain of trust".

For example, lets say your a plumber and you do a plumbing job for me in exchange for my 1975 Fender Blond Stratocaster (it was a luxury bathroom  ). At the end of the job, I don't actually give you the strat because your too busy to take it away for now, so you get a signed certificate stating you own it. We've now created a derivative - the certificate - which is backed by the base money of the deal: the strat.

Later, you find yourself in debt to the bank, and the bank (regarding '75 Strat's and my signature as AAA ranked assets) accepts the certificate to pay off the debt.

Now the bank goes to the FSA and gets them to endorse '75 strat' ownership certificates as approved reserve capital, so I can use it to sell mortgages levered off that capital according to the reserve ratio, thereby creating new credit money backed by the future economic activity of its respective mortgage holders.

So here we've created an elastic economy with liquidity which varies according to demand, all from a fixed supply base money system (namely 1 1975 Fender Stratocaster).

I realise it's a fractional reserve credit money system as far as the last step goes, but the principle would be the same, for example, in full reserve gold standard. The only difference is the value of the underlying collateral (i.e. the gold price) would increase as liquidity increased.

This is what would happen in a Bitcoin economy.

Bitcoin is *base money*. It is not backed by anything which is why it's such a powerful monetary medium and store of value. I don't think many people who have thought about this seriously think that in an advanced crypto-economy we would be using base money on a day to day basis. (We do today when we buy a packet of cornflakes with a fiat note, but most of the economy revolves around credit money).

A more realistic scenario for crypto-economy is that as its value grows, it serves as a base for a derivatives market which begins to deliver liquidity into various sectors of the economy. It can still be a full reserve derivative, but liquidity can grow and as it does so the value of the underlying cryptocurrency collateral will grow.

There is already a working model of this type of derivitive - Bitshares and its associated "Bit Assets". This provides an elastic monetary model whereby a limited supply base collateral is used to back an unlimited supply pegged asset which is borrowed into existence just like fiat. The only difference is that it's more than full reserve (200% collateral is required I think to create BitUSD) and margin calls are automatically generated by the blockchain when ratios fall below minimum.

Just a last note on the fiat economy - what serves as base money in the fiat economy ?

I like to look at this in very fundamental terms. Fiat is either backed by past economic activity (or "wealth") or future economic activity. When the world was on the gold standard or Bretton Woods system, gold served as base money. There was nothing backing gold (in the sense that there was nothing to exchange it for - it was the last man standing in the trust chain, equivalent to the Fender Strat above).

Gold was limited supply with an element of annual inflation, just as bitcoin is. Despite that we had an elastic financial system. Banks made loans and the value of the collateral went up to compensate so that there was always enough gold to represent the currency that it backed.

While we were on the gold standard base money could be regarded as being "past wealth". i.e. wealth already created.

AFTER the gold standard, however, base money became more ambiguous. But essentially it involved governments issuing bonds. The bonds then get sold to the commercial banking sector which levers it according to the capital reserve multiplier to create credit money.

Note the difference - here, the base money is *future wealth*. The government is selling the country's future economic activity ("debt" in other words) into the financial system instead of gold. This is where the corruptibility sets in because there is no limit on future wealth whereas there is a limit on past wealth. This brings us to where we are today, with governments inflating their base money supply on an almost permanent basis.

So the conclusion of all this for me is that there is no problem with elasticity as long as we are restricting ourselves to the specific domain of *base money* because a mature financial system has many layers and it isn't the job of the base layer to support elasticity - in fact the contrary, its job is to serve as a fixed capital base which gives integrity to the expanding / contracting liquidity supply that's circulating in the economy.

Yeah like BitPesa and other systems. I just saw a news on coindesk that they finished another new system for Kenya an it's now fully operational. So that is 1 thing with mobile phones and SMS as 1 phone tower can cover a large area.

However still the paper currency note or just the paper BTC with scratchable private key is still good as a backup plan.

Why not have both, and let people decide which one is better to use in an emergency situation.

Hashrate will be ok, there are enough miners in Iceland that are loyal, and they have very low mining cost there because the electricity is cheap due to geo-thermal energy.

Perhaps China can be a good place too if they stop the hostility, because many miners are there aswell.

And besides if the oil price remains low, then its even better, in a crash you generally have very low prices and deflation all out the board so, the mining cost will be very low.

I`m more concerned about the 51% attacks in a crisis like that, but I hope mining pools will think about that aswell.

Yea i think he is afraid of the government, as they can charge him with some bogus charges , like money creation without authorization, and that only CB are allowed to create currency, and common people are not.

He would be probably constantly surveiled and threatened by the governments throughout the world.

It was a really big step to do this and he surely took a big risk to stand up against the global banking cartel... 

So he is respected, and let's respect his privacy aswell.

Maybe his intentions are good, but don't you think if Satoshi came out and said "yes I have a lot of BTC, but I am committed to spending them, not for disposal, but for day to day purchases and in new innovative niche markets" then everyone would have a lot more confidence the growth of users long-term bottom up.
It would be akin to the majority stakeholder CEO endorsing his company rather than hiding in the shadows. that would be a company worth the majority considering investing in.

i dunno if it was mentioned anywhere in the above pages (TLDR), but one of the things I think you forget is network consensus / forking

at any given point in time, for whatever reason, an alternate version of bitcoin core can be released that modifies the total amount of coins. This current experiment could run its course, and when 1.2 btc or whatever are trickling out, the world (because its all connected to bitcoin) could go "yeah this aint workin", and then participants download and install the new core and then vavooom, all of a sudden block rewards go up again.

(I think this is true).

Thus, it really is a decentralized central bank that the people control.

Of course, if such a fork were to happen (im assuming its some future where bitcoin (or some variant) is the global / solar-system wide currency), people would vote with their nodes / hashpower. Hence why real effort needs to be put into finding a way to decentralize mining.

Yes, but just think about Africans, there are not many internet connections there, so we have to think about everyone. Even if we survive the collapse with the internet intact (which we will, the internet is the last thing to go away, your pension savings will be the first  ), still you will have poor villages without acces to it, where the BTC Note as I call it would come handy, and they can just redeem that whenever they want in an exchange, to their wallet, if they get acces to internet.

Besides, i think the fallout games exagerate a little bit, i didnt played them but I sawed videos, so I think people in USA exagerate about those FEMA camps and survival kit and whatnot. Even the 1929 collapse wasnt that horrible, so it wont be worser than that, because we can recover from it much quicker with the internet intact.

If the dollar will collapse and it will, then the internet trading and bartering economy will grow by atleast 5 orders of magnitude 

I mean you will see people in Facebook trading stuff because the local shops will be bankrupt and closed, and they will use postal service or whatever courier to exchange goods, that is how it will be.

It wont be a post apocaliptic world where armed vigilant mobs will be on the streets because you still have an army which would keep relative peace. It will be just that normal shops will be closed and a lot of services bankrupt.

So twitter,facebook, youtube and other social sites will become the global exchange 2.0 

So do will be BitMessage and OpenBazaar.

So don't exxagerate, I know that people are scared and stuff but, really we need to put things in perspective, the majority of the collapse will only hit banksters, because they inflated the 1.6 quadrilion derivative bubble, and still they own the majority of it, so if it will pop, only they lose their money mostly . Middle strata and poor people doesnt have much to loose, but only gain freedom of commerce and trading, by bartering peer-to-peer and they would become much richer than before the crisis because there will be no central power to steal from them.

No, you can test the private key, if it corresponds to the address.

You can also test if the address contains bitcoin.

After you accept the paper coin you quickly transfer it to another address, and wait for 1 confirmation.

Also remember it's not you who would issue the notes, it would be a trusted 3rd party, so you would not know the private key unless you would scratch it, but then if you do then the note would be compromized and it could not be traded.

So you see you just buy that note from a 3rd party who would keep the private keys safe like blockchain.info, and you can trade the note, until you dont scratch it, because when you do then it is already compromized, like this:



======================

Another way of doing it, if the previous version seems flawed,

Is to just issue a paper currency which would be denominated in BTC. The note would be exactly pegged to BTC, and would have watermark and other security features like normal notes, to prevent counterfeiting .

And of course 1 BTC NOTE can be redeemed for 1 BTC from anyone, so if you just happen to live in a zone where you have no internet, you could just use the BTC NOTE, and then when you get to an area with internet you can redeem it from an exchange to real BTC into your BTC wallet.

Or just have both versions, nothing is impossible , there are many creative and innovative people in bitcoin who thought about this

Bottom up is certainly right. It will never happen top down because commerce wont support it without a market to tap into.
The only way that market will be created is if people spend their BTC rather than save it.
So when you say 'Bitcoin as saving account during transition to a full Bitcoin world', the only way that transition will happen is if you dont just use it as a speculative savings account.

If you spend it, they will come.
Problem is, when playing in the same market as fiat, it's detrimental to spend our BTC.

Stan I like the link, innovation into new markets rather than competing with current ones is the only way BTC can thrive.


P.S. One last point that worries me. If I was BTC's creator and had a huge proportion of supply. I would want to encourage the adoption of my new technology by spending my BTC. Instead Mr Creator remains anonymous.
Is it to hide what he's really doing? That being maybe sitting on his BTC while hoping it gains traction through the support of others.
If Mr Creator came out and confirmed that he is not spending his BTC, then we'd all lose confidence very quickly and BTC would die.

Yes I saw you guys above making good points about being a consumer based currency. You are right, because if people were to use bitcoins for commerce, then by default the value of it would appreciate, as the value of the goods and services would flow into Bitcoin.

The problem now is that they just buy bitcoin and then even if they buy good with it, the jerks merchants quickly converts it back into fiat.Which will just pump out all of its value back into fiat and help the USD grow.

The only industry that is growing is perhaps the gambling industry and bitcoin based investments, but this is a very small percentage, the others either sell it through merchants or hoarding it, and doing nothing with it.

So at the moment there is not much you can do with it.

However when the USD collapses that would be a different story.

You can already see barter going on with bitcoin on a peer-to-peer basis at localbitcoins and similar places, so if the global enomy would be devastated, which it will (i dont know hold long the FED can hold a 77:1 leverage on its balance sheet without popping), then people would lose confidence in everything centrally controled, and would again return to small community trading, where BTC is perfect.

Yea some of you can come up with the argument that without electricity and internet BTC is worth nothing, well not so fast.
You can easily create "paper bitcoin". How to create a 1BTC worth paper bitcoin?

Easy just write the address down on a paper which contains 1 BTC, then write on the other side the private key, and put another black paper on the private key to hide it and glue it down, so that it can be see only if it is removed.

See, you can easily create an offline paper bitcoin note in 5 minutes which can be traded in a non-internet community.
You can use a mobile phone to verify if that address contains BTC or not, and can be easily used to barter

Like this:


Of course you need to hide the private key initially, but it can work

They buy the bonds if nobody else does. Why would the treasury issue bonds if nobody need them, is because they desperately need funds to do this or that, and if you cant force it into the population or external investors then the FED is the only one that can buy it.

In my country, they pay the pensions from deficit money, so if the bond market were to collapse here, you would see many grandpas on the streets protesting...

QE is not a failure, its just a tool, it depends on how is used, again I pointed out, if the QE is used to pay wreckless spending of the government, then its badly used. If it's just used to control the price then it's goodly used.
But QE seems like a well of infinite money, and can be easily abused, so its a very delicate tool.

I am a libertarian.

My MS thesis was about the relationship between price volatility and market liquidity in the financial markets, so this is kind of my forte. I`ve studied the flexibility of the monetary base for quite along time.


Who said that the institution of the CB is correct?

It's not the QE's fault that it was used badly, QE was needed because the whole fractional reserve banking, which I don't support. Perhaps a 1:1.25 Leverage at most, but definitely not a 1:77 leverage as now is used by the FED.

Leverage can sometimes be good to boost the speed of innovation, by giving out more money, with extra risk. Of course this should only be used with competence, only competent banks should be able to use leverage.  I think a rating agency is needed which would rate Banks, and only A tier banks could use leverage based on their performance.

Otherwise with 1:1 Leverage, you would not have huge inflation, it would always be under 1%, which is tiny and tolerable.

QE would be hardly needed, however, if there is an liquidity crisis, then it's needed, so you can't just throw it away.

Agree you're English isn't bad at all. We British are often the worst
I completely agree that spending beyond your means is a bad thing, and I for one never do so.
But unfortunately if we spend less with BTC (however sensibly) in favour of saving for future gains, the Amazons of this world will never switch from the fiat that we spend so freely.

As Stan says, maybe the only way that BTC can really compete with fiat in terms of consumer usage, is if there are products that can only be purchased in BTC, and then BTC can operate in a niche market.
The thing is, someone sooner or later would tap into that market with fiat and we will then inevitably stop using BTC.

The sad truth is that fiat currencies are more adaptable to market conditions so will always win. Survival of the fittest innit.

Exactly, if I see that by not transacting today I will have more value in my pocket tomorrow then I'd be stupid to transact.
In fact I'd never transact unless I had to or I really really wanted to buy something.
When that happens I'd think "if only there was another way to get that thing I really want without me having to spend my increasingly valuable BTC...oh wait there's those £'s I have knocking around that are not doing anything for me. Happy days! I can keep my cake and eat my newly purchased cake"

Irrefutable I'm afraid.

And this reinforces my point. Currently in the world of fiat we see the folly of saving, so we are taking on cheap debt to enable us to spend more (or some of us look for inflation beating investment opportunities). Business loves this and encourages it because we will buy more of whatever they are trying to sell.
Bitcoin needs big business to adopt and encourage BTC, and while many argue that low transaction costs provide enough incentive, what they really need is volume of spenders.
But BTC's increasing demand:supply will encourage us to save not spend, so companies won't be able to sell their products to us in BTC when people have the option of using £.
Then companies will drop BTC and pop!

Consumer driven spending economies are based around the fact that deflationary currency is a bad thing because it deters spending (slightly).
If Bitcoin is to succeed it needs to become a Consumer driven spending economy. But Bitcoin is destined to be deflationary, and that coupled with the other option of spending inflationary fiat instead, will mean that sensible people will never spend BTC.

So in my example do you really think most people will do A rather than B?? because if BTC is to succeed this is what needs to happen.

In your analogy, those who spend spend spend in a growing economy are the sheep that represent the 99% that push every economy to a bubble. Those who invest fare better until the bubble bursts and debt is made cheap to save the sheep from oblivion.
This is how capitalism works, it is fuelled by consumer debt and designed to suck money from sheep debt while never allowing the sheep to die.

If you spend your BTC amidst rapid price appreciation, and spent less as it falls, you will always lose money in relative terms.

But I am inclined to invest in the next bubble because I'm willing to bet that most people won't realise this and spend BTC regardless.
That and my ££ is going nowhere at the moment so I may as well take a punt on humanities stupidity.

Completely agree with Greenstox. In fact I has just joined to post the same realisation.

I want Bitcoin to succeed, I want to invest in it, but it is inherently economically flawed as a large scale currency replacement.

While I see the potential for Bitcoin to reach even $1,000,000 in value looking at market share projections. It is wishful thinking over reality because those projections can never come to pass.

Bitcoin is designed to appreciate. Yes sure there's is inflation currently in place through mining control, but everyone knows there is a limit to supply. So everyone knows that as demand increases through adoption, then the price will always increase.

That's when reality hits, in that people wont spend a rapidly appreciating asset which will be a massive barrier to capturing market share.
Lets be honest, say you want to buy a TV, you could A) spend $400 worth of your Bitcoin even though it may be worth $1000 the following year.
Or B) you could spend $400 from your dollar account knowing that due to controlled inflation it would be worth say $395 the following year in real terms.
So anyone sensible would do B and hold onto their BTC, and this is the reason I cannot see it taking off no matter how much we want it to.


Bitcoin will just destined to be a series of bubbles until all confidence is lost.


P.S I would love to be wrong

I proposed some change to the monetary system of NXT platform. (if you don't know about it : http://nxt.org/about/monetary-system/ . It's basically PoW for repartition of coin when PoS secure the network)

It would solve your "second problem". --> Difficulty never go down so no inflation if price is already too low

Introducing the Monetary System of NXT which solved this issue;




https://bitbucket.org/JeanLucPicard/nxt/issue/205/monetary-system-documenation

So, What is the value of NXT?



http://nxter.org/the-value-of-10-nxts/

"Elastic" means that the price doesn't change much as the supply or demand changes. One ideal for a currency is for the value to remain constant (a.k.a. stable). A non-elastic currency has a difficult time doing that because the supply cannot be easily adjusted in response to changing demand. Bitcoin is fairly non-elastic because the total supply is fixed.

Note that the OP assumes that a central bank has the ability to correctly adjust supply to match demand. History has shown that to be false -- all those failed currencies, and inflation has been a major problem in the U.S. ever since the Fed was formed.

LOL that's what you think is wrong with the statement?  Some guy thinks you could live on 1 Bitcoin.  Try living off $200 so stupid

You can divide anything infinitely in digital.  Doesn't mean that you should

$200 aren't divisible down to nano pennies. That's the problem with fiat.

You could live off $200 cause it's divisible down to nano pennies?   

Yeah they buy back the bonds when they want lower long term interest rates.  Still doesnt mean the war was funded by Fed lending money to Treasury.  Myth about govt lending money to itself debunked

http://www.treasurydirect.gov/kids/what/what_borrow.htm

Who cares how much leverage they have?  They have printing press.  

Personally, I think QE is a failure because it's based on the myth of the multiplier.  I'm not here to defend the Fed or govt if that's what you think.  I just think you got it wrong about how banking works and what Keysianism is. I think the brainwashed people here are the libertarians and anarcho capitalist.  You might wanna de brainwash them

What was your MS thesis?  

The main problem that you state is already a moot point imo. How in hell Bitcoin isn't elastic? You could live off a single Bitcoin giving its so damn divisible. I dont see the practical problem in the 21 million cap. It's like complaining about gold being limited in earth. A limitation is needed, otherwise you always end up with the current fiat problem.

Debunk my post ?   The only thing you do is mock me and deny all my posts without any evidence, not a really good argument isn't it?

Do you realize that the central bank can just print money and buy back the bonds ? Right about now I think 80% of the US bond marked is owned by the FED, some say it's even more from offshore sources.
If there is no demand for the bonds in the secondary markets then they have to hold them, and seriously expose themselves to massive leverage.

Why do you think the FED has a 77:1 leverage if not because of this? They just seriously overextended themselves.

They hide the M3 Supply numbers, etc etc.If people would actually know what the real numbers are, then the debt bubble would have bursted a long time ago...

I do have MS degree, believe it or not, i`m not here to prove myself to you, I`m just trying to educate people and
 "de-brainwash" them, weather you like it or not.

Sorry for being rude.  We are not even debating.  You are just ranting about stuff and making weak links to either central banks or Keynes.  Why do you keep changing the subject whenever I debunk your previous post?

You realize that in order for the CB to create money they have to buy bonds from Treasury and sell them on the open market, don't you?  Therefore the money for Iraq war is owed to the private sector.

If you don't know stuff that's forgivable.  But claiming you have a Masters degree in economics and spouting this nonsense is downright fraudulent. 

That is rude and inappropriate, so you can't debate me objectively, you start to insult me. What a typical loser.  

He didnt explained anything, nor resolved anything, his theories only aggravated the already weakened economies by WW2.

Of course there was no CB in Roman Times, do you think I`m an idiot? They had quaestors who supervised the financial affairs of the government. The point I was making is that they used impure silver coins, they mixed it with more and more iron,nickel and copper up to the point when shortly before the West Rome collapse they had 10% purity coins, sold at 99.999% purity prices. Or in other words theft, like any inflation,which was used to pay off the military expansion of them, just like now. History repeats itself.

Yes there were plenty of crisises, all done by fraudulent cartels who blackmailed the politicians to give them more power or else they bring down the whole systems. You should check your facts mate, starting from your nice civil war of 1861.

You dont seriously think that the civil war was because they cared so much of the southern slaves?  
Only an idiot with 20 IQ would accept that story.

Actually the civil war was fought because the union desperately wanted to give more power to the banking cartels, where they desperately wanted to control the money supply via a central bank of some sort, which the confederation rejected. There were atleast 3 major attepts to make a central bank way before 1907 crisis.

You should seriously check your facts, I`m not american but I know your history better than you do.


Ok at this point you demonstrated that you live in a fantasy world completely cutoff from reality.

How do you think your 1 trillion dollar Iraq war was financed, from charities?  Of course the CB gave loans to them.

BTW did you knew that there are some serious funds missing from the FED, you bet that had something to do with the crisis.

Money doesnt just pop out of nowhere and then dissapears? Oh wait, it actually does...

OMG you are a friggin retard.  First you claim to have a MS in Economics and now you can't even get simple shit straight that you can read off of wikipedia.

Keynes got famous because his theories explained the Great Depression.  Things like liquidity trap existed before Keynes that's how he discovered them.  LOL your logic is shite.  Do you think Keynes caused economic problems?

There was no Central Bank in Roman times.  The oldest central bank is the Sveriges Riksbank established in 1668.  Bank of England est. 1694. 

There were plenty of crisis before the Fed appeared.  In fact the Fed was created as a response to Panic of 1907

Even our latest crisis in 2008 was not caused by any Central Bank

Are you serious?


That is because before Keynes there was no problems of this sort. All socialist implementations were done after or at the time keynes was alive.

CB doesnt have to step in, if the government destroys the economy by destroying the middle class, then you add more government in the form of CB to cure their own problem? I dont think so.

There is a supply /demand equilibrium, which part of it do you not understand. It is the intervention that destroys it.

In the 1800's before CB's you had no problem with wages, they were all market determined. If they were too low, tough luck , you can't just magically pretend to have economic growth by manipulating the economy.

I just read a book recentrly about the industrial era before CB, and I see that all depressions were caused by CB. Either by them or by private banks lobbying at the governments and threatening them to form one, or else they deliberately destroy the economy.

Yes if was always the CB fault, from Roman times, when they (the government) devalued the silver coins , to the post and industrial age where private banks blackmailed the government to inflate more. It is all documented in history books.

You don't even know what what these terms mean.  LOL


It makes to sense to say liquidity trap is ineffective nor effective.  Its just an observation that other economists missed

The market does set interest rate.  But when the market fails the CB steps in.  That's how Volcker ended stagflation

Regardless of the reasons, wages are sticky.  The phenomena is observable.  Again, nobody before Keynes observed this.  They all believed in supply/demand equilibrium

BTW Keynes was an astute investor.  His ideas actually come from studying the market and working in public service.  He was not an academic

Liquidity trap is innefective because the private banks themselves are not an efficient way to loan money. So either you remove the central bank, and let the liquidity be distributed bottom-up, or remove the private banks and distribute the loans Peer-to-peer.

Who said that CB is effective? Why do interest rates have to be set by anyone other than the market itself?

Keynesians think that higher prices and higher interest rate result in lower investment spending which is BS.
You will always have more investors when the interest rates rise, it doesnt matter where, the stock market may suffer but bonds, spread based intruments and other interest rate based instruments will flourish.

When you have more investments then you can give out more loans, because you will have more funds  to use as collateral, thus this pressure in the loan giveaways will decrease the interest rates naturally. Who needs a CB here to do it?

Sticky wages is only due to poor labour laws, and socialist minimum wages. Entepreneours can never pay their workers their direct labour production, because the law says that they should pay them atleast X. The minimum wage barrier will equalize the inefficient workers production, thus all products made by that firm (scale it up to the entire country) will become rigid because the price of the product can't drop as the wage cannot drop, so the consumer always has to pay the inneficient prices which resulted from inneficient wages.

Why don't you see for example the bread price never drop? Yet it's very very cheap, compared to other product.
Because the bakery has atleast 5 workers , the workers are inneficient, as we see now robots can make food aswell.
Yet, the owner has only 2 options, pay them inneficient wages, or make a huge investment (which he cannot afford nor take a huge risk of getting a loan) to buy robots to make bread. The other is to fire them but then you bankrupt your self.

The inneficient wage is reflected in the price of the bread (+ the taxes), while also in the price of the resources like corn and wheat (the agriculture is the same deal: automated robot harvesters vs people in combine harvesters  who must be paid minimum wage yet his work is inneficient).

If you remove minimal wages and liberalize the labour laws, then the wages and every single cost of the product will be market determined, and then you can see a bread which gets cheaper and cheaper.

The animal spirits part actually I agree with, but this has been already observed by other economists, so it's not really his invention, besides any 5 year old can come up with behavioral effects on the economy, speculation etc. The fear & greed response is the markets is totally sound.

I myself been trading for a few years now and I can see practical effects of the economy, not just theoretical BS.

Most academics dont even leave their classroom or their office to see the economy how it really looks like.

My professor has admitted that he never even set foot in a stock exchange. 

Well how the heck can you call yourself an economist when you dont even traded atleast once in your life in a financial market?

I myself have traded mostly futures and forex, and now crypto currencies.

I just made 0.2 BTC Yesterday with a TILECOIN arbitrage 

I experience economics directly in real-time 

This is the terrible and secret flaw in Bitcoin that we all have a gentleman's agreement to not talk about EVER. So hush, now.

Genocide?   

If the Congress were to pass a law tomorrow that no more USD were to be created ever and the money supply is to stay fixed from that day on.  What do you think will happen?  Is this the utopia you've been dreaming about?

Do these flaws only apply if bitcoin is used as a medium of exchange? What if bitcoin ends up being seen as a store of value?

I think you better learn what Keynesianism is first before launching a tirade that has nothing to do with Keynesian economics.  Nothing you wrote has anything to do with Keynesian economics.  Sounds like you are not happy about the economy and you want to blame it on a boogeyman.  The biggest flaw with your thinking is that you think someone is responsible instead of seeing that the economy is like the weather.  Things happen because of forces.  Every school of economic thought contribute these forces to different things and have prescription on how to counteract these forces.   

Here's some crib notes.  Tell me why these things attributed to Keynes are BS.

Aggregate Demand

Liquidity Trap

Animal Spirits

Sticky Wages (Nominal Rigidity)

Is Bitcoin money, might be a better starting point for such a discussio.

The whole Government intervention scheme. Which is similar to Monetarism but these theories are like siblings, both are crap.

▪Keynesians just can't let prices drop, ever (which I`m partially supporting, however let me explain *).

▪Communist style central planning with Central banks and government treasury

▪They argue against wage decrese, even in a deflationary enviroment, breaking the laws of supply & demand.

▪They basically let the government overextend, and finance everything from debt, DEFICIT SPENDING.

▪They support fractional reserve banking with a backstop of taxpayer money.

▪Basically everything is cured with debt in this theory, they just cant let the market work alone they must intervene everywhere.

▪They are in denial of reality, they don't recognize economic cycles which have been proven already many times, and if a minor recession comes along they freak out and immediately intervene, instead of having a little more realistic tolerance and let the market sort out minor flaws.It's like if you raise a child full on medication, if he gets just a light cold, you immediately give him medication, well that child when will grow up, will 100% be allergic to everything. So in the same way, if you give too much intervention in the economy, it will become allergic to them and will stay in recession  

And many many more flaws...

Now let me explain the * part.

Ok there are some markets which prices should not drop, like the stock market, however there are dozens of others which should like: food,housing,oil,etc

You can't print oranges and bananas but you can print stocks, so why not just separate these markets from eachother and not use a common denominator, a common devalued currency to price them in?

So let the food market drop and make food accesible to poor people, and let the stock market rise to make business startups easier and investors and speculators to keep happy. There is no need to mix these different markets in the same group and enviroment...

Keeping house prices artificially high is inneficient. Supplying a few homebuilders with jobs to the detriment of all young homebuyers who can't afford to buy a house from savings, but only loans, is inneficient, stupid and will not make benefits to the economy.

For example you indebt all the 20 year olds with student loan and house mortgage, how will they be a productive members of the society with all this burden of them?

Millions of people indebted versus a few thousand people's job in the housing market, which one is more important?

So you see, Keynesianism is rotten from the inside, however the elastic principle is good, not because of Keynesianism but despite of it, because it has nothing to do with it.

Yeah absolutely most economists especially Keynesian ones think money supply need to be elastic.  So I don't know why you think that's even a point of contention.

Please expand what part of Keynesianism is BS?  I see people here throw around the word Keynesian a lot but I don't think they understand Keynes work.  For example, QE is not Keynesian.  That comes more from Monetarism which was Friedman.

First of all "dude" elasticity is a very sound system, after all the only law in economics is that of supply & demand, everything else is just built on that.

So if you think that the central bank is the absolute only one that can do it, then why are you even here?

So you find it absolutely impossible to decentralize it? It's a joke, everything that can be done,will be done, a few years ago people wouldn't even dream of electronic money, and now they all shop with credit cards like madman.

You must be a hardcore conservative if you think this way, but then again what are you doing here in a bitcoin community with is all about open mindedness?

No I was actually talking about any market, even a stock market, you dilute the shares to prevent bubbles from popping and you recall shares if your demand drops, or just increase the dividents, there are many methods, sometimes even a PR method can fix the price.

Look what I`m saying is that you have to think outside the box, Keynesianism is BS, I say that after 6 years of studying it and + 4 years on my own.

The "aha" moment takes a lot of time and study, I can tell you many PH.D.'s that are delusioned about it, so what is their diploma worth then?

Many Keynesianist got nobel prizes, did they deserved it? It can be debated. When you are a sheep in a pack of wolves, then it's hard to be taken seriously.

So give me your educated argument, and address my points from an objective view and then we can understand eachother better.

Did I say anything about Keynesianism?  Elasticity is a concept that Monetary supply should expand and contract in reponse to levels of the economy.  

Only the Central Bank has the mechanism and authority to do that.  It's their job after all

What market are you talking about? The global one that runs on 4 major currencies?  So you are going to introduce your own currency without the support of any govt or central bank?  How will you do that?  By soapboxing "fiat is a scam and Keynesianism is BS!"

Give me a friggin break dude.  I seriously doubt you are a MS Econ

Please explain to me how is my Elastic Monetary Policy Theory equivalent to Keynesianism?

Because I cannot see the connections.

►Keynesianism is an immoral system where 1 Central Bank dictates the monetary policy, and skew it in the favor of the upper 1%, by creating money out of thin air with 0% fractional reserve systems ,which only the banks are allowed to use.


►My Elastic Monetary Policy, is more a decentralized one, which is supports market determined interest rates, that is interest rates pegged to supply & demand, without any corrupt skewing.Inflation is necessary, but not to ease government debt, of which is used by central banks. Inflation needs to be used to halt bubbles and speculators and increase liquidity in markets, and not to ease government debt.

That is the difference my friend, so by far this has nothing to do with Keynesian BS.

Oh I didn't continued my studies, I left the university after I got my diploma which was quite a few years ago.

Yes it took me much time to realize how fake Keynesianism is. But I was always skeptical, which led me to bitcoin, otherwise I would now just be a teacher spreading more BS to poor students...


I`m not from the US, so I`m not familiar with the TARP program, but what I can tell is this.

Tax money is collateral, what do you think the FED balance sheet is made of ? Pink baloons?

They are funded by X% from government money to do their scams, the rest of it is from their own inflated money.

Last time I checked 3% reserve requirement (in my country) is pretty much a "made for collapse" economy.

Your FED has 77:1 leverage and about 0% margin requirement for smaller loans, that is the definition of money out of thin air.

Also the inflation is also a tax, because guess what, it always the poor consumer who pays more, all taxes are targeted at the middle strata or poor strata, the difference is that the poor strata gets is back from subsidies and welfare, but the middle doesnt.

AIG gave 100$ loan for every 3 dollars , they collapsed under the leverage, then the FED bailed it out, by using his own balance sheet as collateral (and also by printing money , increased taxes).

Now what is the backstop if the FED goes bankrupt (due to 77:1 leverage) ?

The IMF or World Bank ? But where do they get their funds ,from individual government subsidization who are members.

And where do the Governments get their money from?

You guessed it, taxes.

So yes, again, taxes are the collateral. End of story.

No It's not a gift.  The TARP Fund was repaid.  How can tax money be collateral?  When the Fed bailed out AIG.  AIG equity was collateral

Why did you start talking about elasticity in the OP? The reason there is elasticity is because central can create money from thin air.  

It has been discussed many times, but your M.Sc in Econ is probably enough to disqualify you right away.  I don't doubt your sincerity, but most Econ departments feed students the pablum needed to justify keeping the authoritarian, control-freaks in power and everyone else under their thumbs, no matter the cost to their students.

Obviously they are loans, but they use the tax money as the collateral, so if the loans default, the tax money is lost  

So it is a gift basically and a scam. As for the loan, its just money out of thin air, like the entire fractional reserve banking.

Yes I know what I`m talking about, but you are right ,this may be a little off topic  

I can't believe you are MS in Econ and you don't know bailouts are loans not gifts.  Your thread started out well but now you are talking about how govt scams citizens?

Well all derivatives , not the main instruments, but the derivatives are there to mitigate risk.

For example a futures contract, which is just a derivative of a commodity or currency, is there to mitigate the risk of the producer and let traders hold their risk.

If a corn farm is afraid of the depreciation of their corns and thus to the loss of money, they can just make some corn futures at the current price while selling the corn later, to make sure he sells it profitable.

If the price of corn does go down then the traders who hold the risk will pay him, if not then he lost a bit of money, but atleast he can now sell his corns at a good price.

So basically the traders hold the risk in every market, but its not a forced risk, it is voluntary, everyone has to know their risk tolerance and not risk more that they can afford.

So a few traders lose, but the corn market gets saved, and the workers on the corn farm can keep their jobs, otherwise they would be fired because the corn farm would go bankrupt.

So basically a few unlucky traders sacrifice a little bit of their money to save a whole industry from volatility and collapse.

That is basically the role of derivatives.

But when the government starts to bail out wrecklessly them from taxpayer money, thats another story. Because traders voluntarly risked their money, but the taxpayer was forced to pay the taxes.Furthermore, the taxpayer is not even getting any benefit from it. Because the trader atleast has a chance to make money, but the taxpayer is permanently sentenced to lose money...

You see the difference? 

Well I`m an economist so, yes financial instruments are my toys  

It's not that hard to grasp, bitcoin will provide the basic trust needed, and you can build upon that whatever you wish.

It doesn't have to be complicated, but since no system can ever eliminate risk entirely, if you design a system, that atleast tries to do it, then it could be much more flexible than to just hope for the best.

Despite the fact that derivatives got so infamous in the 2008 crisis, they are not that of a boogieman , they are actually very very useful, if used correctly, and only then.

If a CDO is used to clean up the debt of irresponsible politicians, it's not the CDO's fault that it does that, its the politicians fault.

The CDO can also be used responsibly as an investment vehicle on smaller scales aswell. Forcing mortgages to be written into these instruments is never a good idea.

I`m for free market, but also lets face it, somebody has to clean up the mess when it all goes wrong, and its never the banker who will do it.

The supply of coin is somewhat constant when the difficulty changes. Some miners get more does mean some other miner will get less. The total is the same.

Well my instrument is a double derivative, as the base instrument is the Bitcoin, BTC's derivative is the Counterparty (XCP), and my instrument GREENSTOX is a stock derivative based on Counterparty.

If somebody would create a stock option based on my GREENSTOX stock, that that would be a triple derivative 

You see you can build layer upon layers of instruments ,which could mitigate the basic risks of BTC.

If you don't like the ever decreasing price of BTC you can just create a derivative where you can short it, and hedge against the risks.

So based on this mechanism, if BTC is a savings currency, you can still create a commercial "token" or asset that can be used as a commercial currency, by adding inflation to it.

Mastercoin and Counterparty have these features, while Ethereum will also have it soon after it will be released.

You could issue 1,000,000,000 units of a derivative currency and make it inflationary, and control the price of it with this mechanism, while the base instrument would be deflationary.

Although one feature I miss from Counterparty is the lack of a "monetary base tightening" option, where you can delete X amount of units from circulation.

It has a basic "callback" feature but that is only a 1 time and you can't modify it. I would like to see a feature when you can just tighten the monetary base without restriction, and also loosen it without restriction.

I hope Ethereum will have these features.

We shall see, it will be a nice economic experiment, elasticity vs deflation, which one will win.

But to my common sense, I just can't see a comercially used currency to be deflationary, in some nasty way, devaluation does boost demand

Although Bitcoin could have a future as a partially commercial but largely savings oriented currency, where you can get loans from BTCJam or other services, and invest in it.

You could see BTC savings accounts in the future, and decentralized banks operating on the blockchain, so it's not a desperate case.

Otherwise I would not be in the bitcoin myself.

I personally just use BTC as a savings currency, but I have my own instrument GREENSTOX built on the layer of bitcoin by using Counterparty as a mediator

I really like what Counterparty did, you can just add many layers of instruments on one another and create all sorts of complicated derivatives

I`m also excited about Ethereum, they enhanced this feature even more.

So I`m very excited to create my own financial instruments, I think this is how the world should work, everything to be decentralized, not just a few crooks in CB seats to dictate the monetary policy.

An amusing contradiction.

And you know this because.....err....we just witnessed the price drop like 80% in a year.  Yep, 100% known and predictable

I've suggested somewhere else that if a coin has a proof of stake mechanism, we can use that as a monetary policy instrument without too many adverse effects: Make it higher if we want to expand and make it lower if we want to contract. This leaves the Proof of Work "taproot" in place, but Proof of Stake isn't much of a security mechanism by itself, so changing PoS reward isn't too bad.

If you want 100% stability, find someone to sign a futures contract with. That's not the job of monetary policy.

BTC supply is 100% known and predictable. Predictability allows for stability, which is what markets need to function properly.


The giant boom-bust cycles we see in modern economies seem to occur about every 8 years or so, and are very difficult to predict. When a vehicle like BTC cycles more frequently it allows business to more reliably anticipate market fluctuations.

Haha, no. The mining mechanism would be the redistribution mechanism, of course it needs to be reworked to become flexible, and not perma-inflationary.

Also don't forget about deflation, if the demand drops, a deflation algorithm would clear up X% of bitcoins from circulation, from everybody's address.

So if you got 1000 bitcoins, and a 2% "rate hike" would set in, then you would lose 20 bitcoins, however the remaining 980 bitcoins of yours would value 1000 bitcoins of the previous.

This is just to boost demand, in case of price drop, nobody would lose anything actually.

That is why we need this mechanism to prevent pump and dumping. My theory is exactly blocking the pump and dump scheme, by discouraging speculators to form bubbles.

So just decentralize it.

HFT's are not a problem, bitcoin transactions take 10 minutes to confirm, you can't HFT here, this is actually a strength of bitcoin.

You might want to check out a crypto 2.0 project such as Ethereum, Counterparty, or Truthcoin. They're all working on making it so any computable value can be computed without trust (thought Truthoin in a bit of a roundabout way). Once that hurdle is cleared, making an AI trustless will easily follow.

Now you've got a bigger problem: develop a decentralized AI that doesn't require any trust. If someone can do this, then it would be a bigger achievement tan Bitcoin itself.

I'm glad you brought up in inelasticty flaw.  Your analysis in the OP is spot on.  Unfortunately, Nobody here sees that because they're all speculators.  To them the cap limit is the pump used to sell the bitcoins.  "Hard limit means I can be in the 1%"

Their greed will doom them to losing it all because they can't think of external factors.

However, I think your proposal  of an "AI central bank" is lacking in foresight about the political realities.  Notice even in this crappy forum they all talk about politics when someone brings up economics

If the market would remain stable, then no QE is needed, remember QE and Rate hikes are both interventionist tools.

If the market performs well, then none of them is needed, but of course we know the economy is a very delicate mechanism and nothing will be ok forever, so we need both tools to fix it.

My model, is a bottom up model, miners in the bitcoin network are not centralized, because anyone can become a miner, so the distibution resulted by QE in the bitcoin system is more fair than the Keynesian QE distribution which only consists of giving 0% loans to Wall st. and big taxes to the main street.

You still confuse the QE as a tool with the Keynesian QE. I already explained, my QE is not used for "economic stimulus" or "consumer stimulus" because that is a direct form to facilitate fractional reserve ponzis.

Since we dont have fractional system, there is no need to "stimulate" anything (with more credit card debt, student loan, etc).

The QE in my theory is only used to adjust the price to demand & supply, thats all it will do.

So no bond purchase program, to cover the welfare deficit of socialist governments, and no stock market purchase to enrich the 1% strata of speculators and banksters.

It is only used to add more liquidity and all of the generated money will be fairly redistributed

Nobody can steal any of it in a fraudulent way because all of it would be automated.

I can't emphasize it enough, because you still confuse the concept of QE with the way it's used by Keynesian con artists

That is only because the fractional reserve banking is used to support the welfare state that is promised by irresponsible politicians.

So they grow a ponzi scheme global debt bubble and use QE as a tool to ease the debt.

But Bitcoin is already a 1:1 leverage system, no fractional reserve BS. You can't compare the fiat economy to it.

In my theory the QE will only be used to control the price and stabilize it in accordance to the supply & demand mechanism.

In my theory QE won't be used to pay off the debt aquired by irresponsible governments

There is a huge difference there! 

Bitcoin QE generated money wont be used to buy bonds, it will be used to redistribute it  between the miners

1)  A)
Who said here a need for a central bank? I only said that we need a mechanism that controls the money supply, it doesn't have to be a central bank, it can be just a decentralized protocol that watches the price, an AI if you will.

We can limit the corruption and the financial frauds just simply by estabilishing a decentralized control mechanism.

But we need a control mechanism, we can't just have a Laissez faire monetary policy, it won't work.

  B)
Not even that, i`m all for 1:1 leverage loans, fractional reserve system is flawed, I said nothing about it.
Since bitcoin is international, it won't facilitate the loans of any government, it can't create loans out of thin air from fractional reserve system.

The only way to increase the monetary supply (in my theory) was to make QE after every liquidity shortage, but only then, not before not after.

The money generated from QE will be used to redistribute it between miners , who will after sell it to the market.

In the bitcoin eco-system, the miners are the reserve banks, and the central bank (if would exist) would just be a protocol built into the system, there is no need for a government agency to control the money supply, it could be all automated and decentralized.

In the same way if there is a demand shortage, then a % of bitcoins will be deleted from circulation, be removing them from everyone's wallet simultaneously.

It can be all automated, I don't imply any sort of central bank!

2) Yeah but until that happens, we will see many crashes, and bubbles, after every major positive news, suppose giant corporations adopt BTC.

Speculators will hoard in BTC again, and year 2013-2014 will happen again, nothing will change.

And after all BTC will be mined out, it will be even worse, you could see 50% increase /decrease swings daily.

It will be forever a speculative currency unfortunately :|

3) Care to elaborate on that, or do you understand how supply & demand mechanism affect the price?

#1

A. You believe that inelasticity is a problem only because you believe that central bank control of the money supply is a benefit. However, to many people, the central bank is the problem that Bitcoin is trying to eliminate. The idea that an organization can have enough knowledge of the economy in order to control it is preposterous. The central bank only adds another element of instability.

B. Your "problem" of inelasticity is only temporary. I believe that fractional reserve banking of Bitcoin is inevitable, and with FRB will come the inevitable central bank. It will be limited compared to a fiat central bank because it can't print money, but it will give the central planners something to keep them happy, hopefully not enough to really screw everyone.

#2

The difficulty self-adjusts to maintain an inflation rate that eventually goes to 0. The idea that "[when] miners halt their progress, [it] will create more inflation because they can mine more BTC now" is simply wrong.

#3

There is too much speculation and too many unsubstantiated conclusions to comment on. Plus, it depends on #2, which has been shown to be incorrect.

I`m not even talking about when the coins will be mined, i`m talking about a bubble forming every year due to this flaw, way before all coins will be mined. But yes, i know what will happen then, massive selloff, and big crashes.

1) QE needs to be applied before crash to stabilize the price and deflate the bubble, which will prevent the crash.
Nowadays central banker wannabees do it inversely, which is stupid and irresponsible.

Stimulus package does inflate it more, you are correct, but i`m not talking about keynesian BS here, i`m talking about monetary base elasticity = monetary base adjusted to the supply/demand.

2) Inflation is not controlled, the mere fact that miners halt their progress, will create more inflation because they can mine more BTC now, is really stupid.

3) No this is not Keynesianism, it's only a principle of it, there are some good principles in the Keynesian theory, but as it is is just flawed I don't deny it, the whole central planning style economy is flawed, yes, but still, somebody needs to control the monetary supply.

That can be decentralized aswell, so i`m not advocating here central bankism, that can be a decentralized protocol aswell, but still something needs to control it, otherwise it's just chaos.


See the 2 illustrations I drawed (sorry for my poor artistic skills).

Scenario 1, with fixed monetary base (a.k.a current scenario, this is how bitcoin will end)



Scenario 2, with elastic monetary supply (monetary base adjusted directly to supply & demand)



Scenario 1 is not viable for commerce, and is fully speculative, while scenario 2 is closer to the perfect monetary policy (its nothing similar to the current monetary policy used by central bankers, it's actually the opposite)

With Scenario 2, you can just increase the monetary supply whenever there is a bubble forming (lack of supply/liquidity), and decrease it (delete X% of bitcoins from everyone's walled simultaneously), to make the bitcoin more valuable, and increase demand

I think the elastic monetary theory proposed by me is way superior to the current Bitcoin monetary policy, and to Keynesianism in general. It is the perfect monetary theory in my opinion 

You cannot even claim to know what will happen when all coins are mined, no one knows.

First problem: You are trying to convince that QE is applied directly before the crash, and not after it. Is that even factually correct?
Stimulus packages inflate bubbles even more for obvious reasons.

Second problem: Supply is FIXED. By the way, inflation is controlled. 10% per year right now, and from now on, it will be less. (if bitcoin succeeds)

Third problem: Yes, you are defending Keynesianism.

I don't know if it has been discussed yet, or that anybody observed it yet, so I apologize if it has been discussed already, but I`ve just observed a serious flaw in Bitcoins monetary policy which is very critical to the Bitcoin's price, and it's probably the main cause why the price of it drops for 1 year without stop.

Ok, I have a M.Sc in economics, so I know what I`m talking about, the flaw is in the mining/difficulty adjustment process/mechanism which makes the Bitcoin actually a heavy inflationary currency, and in some cases even worse than fiat.And also there are other problems.

Now i`m not saying that the fiat currencies are perfect, but surely the flaws of the fiat money has been thought about, and some solutions have been offered, while in Bitcoin i see none.

The main problem with bitcoin is the non-elasticity of the monetary supply, which means that it's monetary base it's capped. 21 million, and no more, which is not a good monetary policy.

Here's why, what happen's if there is a shortage in the supply ? For example everyone hoards the bitcoins in anticipation of a higher price, like we see now (it's a fact), which makes bitcoin a speculative currency, creating heavy swings in the price and not very viable for commerce.

So what happens if everyone hoards it (like it is happening without a doubt), is that the price will increase rapidly, and after there is no more supply left, the price will crash. You see, with a Central Bank, when they see a bubble forming, they immediately fire up the printing press, to add more liquidity into the market, and to slow down the speculative price increase by devaluating the currency (ok, the fact that they buy junk bonds and crappy assets is a side issue, but the QE itself is not a flawed principle, it has it's own need if liquidity is small)

Without QE, or any form of increasing the monetary supply, you will definitely have bubbles. Which is funny because bitcoin was created to avoid the flaws of the fiat currency (inflation and depressions), but without inflation you will get crashes  

So let's recap: if there is no way of increasing the monetary supply and people would not sell their bitcoins (because everyone hoards it, in anticipation of a bigger price), then bubbles will form guaranteed! And eventually it will pop out in a big crash.There is no way to avoid it, as we saw in 2014, when the bubble popped.

Second problem:
Elasticity & The mining/ difficulty adjustment mechanism

Pretty flawed in my opinion, here's why:

If the demand for mining is lacking, due to small prices ( as miners wont mine if the incentive is small/ the profit margin)
, then the difficulty will decrease ,yes ? Yes.
A decrease in difficulty will mean that, the other miners which have better equipment /a.k.a can mine at a cheaper price, so their profit margin is higher, they will keep mining, further more, at a lower difficulty level, they can mine more.
=>WHICH RESULT'S IN: HIGHER INFLATION. => EVEN LOWER PRICES

The mere fact that the difficulty drops due to lack of demand and lower prices, will make the other miners mine more faster, which will create more inflation, and will decrease the prices even further.

This is a huge flaw, I cannot believe nobody saw this before, so this mining mechanism is completely flawed, it will forever decrease the price, as the difficulty will drop, and create more inflation which will decrease prices even more!

Third problem

External demand: yes, both problem 1 and problem 2 can be avoided if the demand for BTC will always rise, but that's not the case. With problem 1 due to price swings and bubbles, merchants will have a hard time adopting a currency which fluctuates like madman, without any value stability.And without merchants you can hardly build an economy on it!

It's better to have a small inflation, than to have bubbles and crashes every single year.

And due to problem 2, as it's price decreases perpetually, perhaps we can gain some stimulus, so that people would consume, but not that much since i`ve seen nobody to shop with bitcoins if the price decrease, they will rather convert it back to fiat.

Keynesian consumer stimulus theory doesn't apply to it, because the monetary base it capped, so basically everyone will just buy bitcoins, to anticipate a better price, and not for to make a currency that can be used to build an online economy.

Because of this BTC will forever remain a speculative currency, and will have a really hard time becoming a real money that can be used in trading

I`m really sad that this is the case, but this is the truth, now I`m not defending Keynesianism here, it has it's flaws aswell, fiat money is not perfect, but compared to bitcoin, i think its better.

Any opinions?