Topic: The Big Question: 21 Million Coins (yes, I know its been asked before) - page 5. (Read 9025 times)

Addressed above. Don't be so snide.



Again, 1907 still had those issues I mentioned. Fractional reserve banking, and laws which prevented banks from branching. Even regardless of this, let's assume such panics can happen in a free banking environment. So what? If you don't like banks that are prone to runs, don't bank with fractional reserve banks! In a free market, vulnerable institutions go away, because people don't like risk when they bear it themselves. Today instead, the Federal Government bails out banks meaning everyone has to pay for their failures. If a bank is so vulnerable that a panic/run ensues, then that bank shouldn't exist and the market will get rid of it in due time.



When did I praise the FRB (I assume this stands for Federal Reserve Board?)? The Fed was created in 1913... and I was referring to the 19th century, which is the 1800's, as a time of massive economic growth that occurred without the Fed.



Free market banking = capitalism. Capitalism refers to the absence of state coercion in the marketplace, meaning a free market in everything. And yes, Bitcoin permits "free market banking." I'm doing it right now, actually. Bitcoin is not "the most extreme form of banking regulation." Bitcoin is not regulation... regulation means mandates which come from the State. The fact that a bank can't "print" a Bitcoin doesn't mean the bank is "regulated." I can't magically make gold appear in my hands either, but I'm not "regulated" by gold. You need to work on your terminology I think.

I think price stickiness refers to certain types of prices on (usually) short timescales. When there are strong economic incentives one way or the other prices will adjust. So I don't think it can be invoked as a serious factor when talking about whole economy destruction.

Other than that, the idea that people will always hold off on buying because their money will be worth more or (equivalently) prices are expected to be lower is empirically wrong.

The amount forfeit can be HUGE too. Like walking hungry into a burger place that has a half off sale on their Big Juicy Burger tomorrow. Or renting a hotel room on the weekend. Getting something today really is a different and more valuable (often) than getting it tomorrow and that keeps things moving very reliably.

Yeah so if there was deflation then smaller amounts would be more valuable and therefore more desired to be transferred.  I'm not saying it's the answer to deflation but it's very likely due to deflation.

Another great chart...  

"In other words, the value of the dollar remained extremely stable for 150 years, then The Fed was created in order to "stabilize the value of the dollar" and the result has been a 95% devaluation of the dollar in less than 100 years following its creation. "

http://www.lewrockwell.com/orig10/voorhees1.1.1.html

Alright since you require a response to each part of your initial posting, I'll oblige. I singled out your last point originally because I thought it was the most important to address.


I'm not forgetting that interest rates increase as money becomes scarce. That's no different from what I'm saying. Prices rise when goods are scarce. When money is scarce, the price of money (interest rate) rises. This brings incentive for savers to deposit their money with those interest-bearing accounts and through this mechanism the supply and demand for money is brought into balance.

I don't see what you mean by a "negative interest problem." Who cares if interest rates go negative? Is it that odd that under a world of falling prices, a rate of -2% might still be a good deal? If prices fall at a rate of -3% per year, then one should be happy with a -2% interest rate. It is not the nominal rate which is important for enabling an economy to function, but the real rate.  I see no reason to think interest rates can't or shouldn't go negative in a world of falling prices.



Sorry, what am I being unclear about? Both monetary inflation and deflation are equally bad. Money supply should tend toward constancy. A rate of 0% inflation/deflation means money is unchanging, and this enables a market economy to better use it as a unit of measurement, in the same way that a yard stick ought to remain at one length, or that a foot shouldn't be 13" next year and 14" after that.

Bitcoin is the first money that is neither inflationary nor deflationary - it approaches constancy. This is good.

A graphical representation:

Fun how you only respond to the part of the post for which you have an answer.

http://en.wikipedia.org/wiki/Panic_of_1907


You go from bashing FRB to praising it within two sentences. http://www.economicsreform.com/index.php/the-industrial-revolution-a-new-view/ - this guy claims it is a new view but I have read it before and it does make sense. Although I will not claim it is the defining force of the industrial revolution like you would equate Mises to being an infallible economic god. Btw, he agrees that money supply != monetary base.


I think you mean free market banking, not capitalism. And what bitcoin is most certainly not is free market banking. It is the most extreme form of banking regulation you could possibly imagine.

Separate issues.

"Deflation" deals with the supply of money. The eight (or more) decimals of Bitcoin deals with notation. Adding zeros doesn't increase or decrease supply, it just changes the way it's notated, allowing smaller pieces (of the same supply) to be transferred.

Ah, ok. It seemed like you took one minor part of his post and ran with it, where he addressed the myths that falling prices leads to delaying purchases indefinitely, and that purchasing is what drives an economy rather than production. If those two assumptions are not proven true, I see no further argument against having a fixed money supply and letting improved capital drive down prices.

I'm not an economist but if deflation becomes a problem won't they just add a a few digits to the eight bitcoin has already got?

Yes,

Albeit, him and I have been discussing this on skype before/after/during.

Full disclosure, Erik is part of the Bitinstant team as well.

Yep, we argue Econimics in work all day- don't you wanna work for us 

Did you bother to read the rest of evoorhees' reply?

Sigh. Those were due to A) fraction reserve banking and B) US laws which prevented banks in the 19th century from having multiple branches, thus preventing them from diversifying their risk pools (if anything bad happened in a town, there'd be a run on the bank, since it was known that bank couldn't by itself cover the deposits).

And let's also remember that even regardless of those short-term banking panics (which were not as common as you seem to indicate), the 19th century saw the rise of the most productive and powerful economy in the world, lifting tens of millions of people out of poverty and raising living standards immeasurably, even with multitudes of immigrants arriving. I'll take that over the stagnant, debt-riddled socialist mires of the modern era.

The more you look into the "problems of free market capitalism" the more you will discover they tend to stem in fact from government policy. The free market is not perfect, but it gets unfairly shit on by people who seek to control others.

Someone recommended this book, when I showed him this thread

http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640/ref=tmm_pap_title_0


Overnighting this one!

Except that we're forgetting that interest rates will be going high if money is scarce. By putting money back into circulation by investing at interest, you are lowering the scarcity of the money and lowering its value. Ergo the whole negative interest problem.


God this board is such a trolling economist's wet dream. "Deflation is good, here is why (give examples of price deflation). Inflation is bad, here is why (give examples of monetary base inflation)." MAKE UP YOUR MIND. Money supply = currency in circulation. The supply can deflate and inflate even against a fixed monetary base.


Let's also forget the yearly banking panics prior to central banking because it suits our point of view better.

I'd rather not pay money to ensure that my purchasing power is continually reduced. That's a pretty silly insurance policy. Should we also argue that our 35% income tax rate is the "insurance policy" we pay against anarchy risk?


Yes let's assume Bitcoin supply is constant at 21m. How does the Bitcoin financial system respond to velocity and exchange rate shocks?  Prices are self-correcting, they don't need to be managed or shepherded over. If the USD/BTC exchange rate goes out of whack, then speculators will tend to take advantage of the discrepancy and the rate will be corrected (this happens everyday using BitInstant!).

Interest rates are also self-correcting. When they go too high, they encourage savers to deposit funds and invest them, and money becomes less scarce. Interest rates then fall, and the savers lose the incentive. Thus, it's constantly rebalancing. The interest rate cannot shoot off in one direction forever, except in cases of extreme hyper-inflation or hyper-deflation. Both of which are impossible with Bitcoin (let's also remember Bitcoin is not actually deflationary... it's merely neither inflationary or deflationary, because the money supply is constant).

Let's also remember that "financial meltdowns" are more common and more serious when central banks exist. Great Depression? Central Bank. Post WWI currency crises in Europe? Central Banks. 20% interest rates in the 80's? Central Banks. 98% devaluation of USD happened since Central Bank was created (currency had no devaluation prior). Current global financial crisis and destruction of Europe? Central Banks.

The central banks are what CAUSE the financial problems, because they are trying to centrally plan the price of money. Just as the Soviet Union learned that central planning fails when it comes to food and clothing, it also fails (and for the same reason) when it comes to money itself.

This isn't true. Satoshi and other bitcoin elites will happily step in and liquidate the market for the price of a few islands in the bahamas. JP Morgan did it prior to the fed on several occasions.

Now the real question is how often will this be necessary, and how likely are the the wealthy to collude and manipulate to cause these financial messes?

"Perpetual debasement" is the insurance premium we pay against deflation risk.

Suppose we have already reached the point where the Bitcoin supply is constant. How does the Bitcoin financial system respond to velocity and exchange rate shocks? What happens when a capital-inflow bonanza goes into reverse? What natural force pushes Bitcoin real interest rates back down to levels at which borrowing and lending occurs?

If no such natural force exists, then ONLY a central bank can provide the liquidity needed to avert a financial meltdown.

OMG,  TEH DEFLATIONS!


Economists and others stuck on this deflationary spiral never consider transaction costs in their arguments.  

Why not?

When I spend a $100 on something and pay using a payment card, the person I'm making the purchase from gets $97.  So the merchant that accepts payment cards raises the price charged for the good 3% more than it would otherwise need to be.   When I spend using bitcoin, that transaction cost -- even when exchanging to and from fiat on both ends -- is a fraction of that level.  

So with USD you have a currency that inflates at 1.5% per year but has transaction costs of 3% for each time the funds are turned over.  With Bitcoin you have a currency that will (eventually) inflate at a much lower level but whose transaction costs are just 1% or less, for example, with each turn of the money.

So at the point-of-sale, the customer is asked to choose:

Option A.) For about $103 USD using your payment card you get $100 worth of goods.    

Option B.) Optionally, you can pay using bitcoins, first convert $101 of your USDs to get $100 worth of Bitcoins and then with that you are able to purchase $100 worth of goods.

Which option will the consumer choose?

And thus, even with an expected increase in the value of bitcoin, using Bitcoins will continue to be the choice made when making payments.

-----

Faced with competition at the point of sale, an argument would be that the payment card transaction will drop to a more competitive level.  A 2% or so difference is enough of an incentive to switch for many consumers.  1% ... not so much.

What might happen though is normal payment flow will move over to bitcoin to take advantage of the discount, but the payments occurring from fraud can't (or at least if it does those losses won't be borne by the banks or the issuer) and as a result that 3% truly might be the actual floor that payment cards can still function at profitably.

Incidentally, Bitcoin's currency inflation rate just dropped below 30% per annum and slowing each and every day.  When the block reward drops in half around December, its currency inflation rate will drop from about 25% to just 12.5% per annum.  So Bitcoin still is at a rapid inflationary level yet hoarding also is happening at the same time.

tl;dr: The appreciating value of the currency is not the only factor used when choosing which method to use when making a payment.  The cost savings from using Bitcoin more than offsets the cost to replenish the amount of bitcoins used for spending, thus protecting it from any deflationary spiral.

(this is a cross-post from here: https://bitcointalksearch.org/topic/m.876761 )

Yes, this is the "Big Question"... does an economy work without perpetual debasement of the money supply? In the way I have phrased it, it almost answers itself, doesn't it? Stated differently to further point out the absurdity of the notion, will human beings stop trading with each other if the means of exchange they use isn't made increasingly worthless over time?

The answer, of course, is that yes, humans will trade with each other even if their money does not get debased. In fact, I would argue that in a world in which the currency is NOT debased, we might observe much healthier economic activity.

Charlie's points are representative of most of the world's opinion of monetary economics. We learn economics in school, and schools teach us (invariably) that inflation should be "low and constant", and that if we observe "deflation" the world will, in fact, end! We've been taught extensively that no matter what happens, the worst thing for an economy is deflation. The mere utterance of the word sends children crying for the hills.

Yet, what if the economics taught in school is wrong? What if deflation is, in fact, not the end of the world? Is this possible? Would people continue to buy and sell goods if they know the nominal price of those goods is likely to fall in the future? I argue that yes, absolutely people will buy things. There is certainly a question of extent here - if my grocery bill will be 1% of the price tomorrow (a 99% discount from today), then I might actually go without eating for the day, and enjoy more food tomorrow. BUT, I will not wait to eat forever. And it is in this phenomenon which the scary demon of deflation is slain.

For just as I won't wait forever to eat food (even if prices are falling), neither will I wait forever for other things. I need a car, and a house, and clothes, and a million goods that I enjoy. If prices are falling, I'll make a judgement - should I buy now, or later? The argument of the Scary Deflationists is that people will continually make the judgement "later" and will halt their purchases indefinitely, sending the economy into Paul Krugman's favorite terrifying term, a "deflationary spiral". Yikes!  But upon just a bit of consideration, we know people will not halt their purchases forever. They will buy things, and consume things, and produce things. While the patterns of these behaviors may differ under and environment of inflation vs deflation, it cannot be true that trade simply stops under the latter.

In reality, what you would find is that people may spend and consume less than they would under inflation. This means they will necessarily save more. Inflation incentivizes people to save less, spend more. Deflation incentivizes people to save more, spend less. Why is it that economic text books (those found in public schools) argue in favor of the lower savings, and against the higher savings?

The reason tends to come from a misunderstanding of how economies work. Most people think that "consumption" is what drives an economy... basically that "eating things" is what makes economies strong. Those of the Austrian School of economics, on the other hand, argue that it is in fact "production" which drives an economy. That "making things" is what makes economies strong. And thus if you understand and agree with the production argument, you would find that an environment of high savings is much more suited to permit economic growth - for most development tends to come from capital that is saved and invested. Capital that is consumed cannot be invested. And thus a deflationary environment, where people are encouraged to save more and consume less, permits a fertile ground for investment and growth.

This big argument comes down to one's fundamental view of how economies work. The majority of the world advocates consumption, and a minority advocates production. I happen to be in the minority, and thus I look forward to a world where money is not debased in perpetuity - where instead of ongoing inflation we have a money supply that tends toward constancy. The constancy of money (even if it causes falling prices) will enable a vastly stronger economy than we have today, where savings is punished and destroyed.

Now, there are Nobel Prize winning economists on both sides of this debate. One side is right, and one is wrong... and again I refer back to my first remark. Will people trade with each other without their currency being debased? I think they will, and I think they'd come to prefer it.

We all live in a world where prices are always rising. It can be scary to imagine a world where they are falling. But perhaps, just perhaps, that is actually how an economy is supposed to work.