Topic: The Big Question: 21 Million Coins (yes, I know its been asked before) - page 6. (Read 9041 times)
May 07, 2012, 01:19:41 PM
Gresham and Thier advise against flipping the yield curve with all those assumptions.
May 07, 2012, 01:14:18 PM
Although I would like to fully understand this topic, Im afraid some of the first 2 paragraphs went over my head. So if your reasoning already explains some of my questions, I apologize.
Why is this statement assumed to be true?
"As every economic actor tries to save more (e.g. by holding out for the better price), total spending in the Bitcoin economy would slow."
The way I look at it is, even if deflation was guaranteed, and I knew the the price of goods tomorrow would be less than the price of good today, Im still going to buy those goods at some point, because the only other alternative is to hoard money until you die. And the dead dont need money.
Also if you look to the technology industry you will find goods and services that are better and cheaper today than they were yesterday. Following the deflationary death spiral logic, no one should ever buy PCs becasue they will be better and cheaper next year...
Why is this statement assumed to be true?
"As every economic actor tries to save more (e.g. by holding out for the better price), total spending in the Bitcoin economy would slow."
The way I look at it is, even if deflation was guaranteed, and I knew the the price of goods tomorrow would be less than the price of good today, Im still going to buy those goods at some point, because the only other alternative is to hoard money until you die. And the dead dont need money.
Also if you look to the technology industry you will find goods and services that are better and cheaper today than they were yesterday. Following the deflationary death spiral logic, no one should ever buy PCs becasue they will be better and cheaper next year...
May 07, 2012, 12:59:37 PM
Coming from a financia and economics background, I'm always hit with this same question. I'm playing devils advocate here, and would like to see other responses
My big question on Bitcoin is: What happens after 21 million?
According to the quantity theory, zero growth of the money supply (here, the Bitcoin supply) implies that prices will rise if velocity grows at a faster rate than the Bitcoin economy. Similarly, prices will fall if velocity grows more slowly than the Bitcoin economy. But why would velocity grow? In the Bitcoin economy, velocity may rise as economic actors become more active in the Bitcoin economy and engage in more digital transactions. However, in traditional currencies, velocity tends to be fairly constant, so it stands to reason that growth of Bitcoin velocity will slow as the Bitcoin economy matures.
Then, when the upper bound of 21 million is reached, zero growth of the Bitcoin supply coupled with constant velocity implies that prices in the Bitcoin economy will have to fall at the same rate that the Bitcoin economy grows. But how will prices fall? In traditional currencies however, we observe "price stickiness." Why wouldn't we observe the same in the Bitcoin economy?
If prices don't fall, then constant money supply and constant velocity would bring the Bitcoin economy to a halt. If prices do fall, then the deflation may induce economic actors to "hold out for a better price," slowing the pace of spending.
In practice, we would observe some combination of the two. But regardless of how you conceptualize the collapse, it's important to emphasize that holding the money supply constant would push the Bitcoin economy into a death spiral. As every economic actor tries to save more (e.g. by holding out for the better price), total spending in the Bitcoin economy would slow. Bitcoin interest rates would skyrocket because no monetary authority can step in to provide liquidity. Then -- given the equality of spending and income (what is spending for me is income for you and vice versa) -- the lower income would further discourage economic actors from spending, thus deepening the slump.
In my view, such a collapse would occur despite the fact that participants in the Bitcoin economy are well-aware of the upper bound of 21 million. Even though participants expect deflation, they will still be individually unwilling to lend at negative nominal interest rates. "Why should I lend you 100 BTC today, if you will only repay me 95 BTC tomorrow?" That's the rational position of each individual economic actor, but it's collectively ruinous to the economy.
The granularity of the currency does not change the basic math. The fact that infinite deflation is technically feasible because "eight bits in a byte" takes the number of units all the way to 2.1 quadrillion does not change the fact that the total supply of Bitcoins will have stopped growing.
And that halt will cause a deflation death spiral.
UNLESS the Bitcoin economy avoids that spiral by becoming a freely floating, highly liquid, alternative means of payment for all electronically purchased goods and services. In such a scenario, the Bitcoin would appreciate over time, allowing it to serve as an investment vehicle.
My big question on Bitcoin is: What happens after 21 million?
According to the quantity theory, zero growth of the money supply (here, the Bitcoin supply) implies that prices will rise if velocity grows at a faster rate than the Bitcoin economy. Similarly, prices will fall if velocity grows more slowly than the Bitcoin economy. But why would velocity grow? In the Bitcoin economy, velocity may rise as economic actors become more active in the Bitcoin economy and engage in more digital transactions. However, in traditional currencies, velocity tends to be fairly constant, so it stands to reason that growth of Bitcoin velocity will slow as the Bitcoin economy matures.
Then, when the upper bound of 21 million is reached, zero growth of the Bitcoin supply coupled with constant velocity implies that prices in the Bitcoin economy will have to fall at the same rate that the Bitcoin economy grows. But how will prices fall? In traditional currencies however, we observe "price stickiness." Why wouldn't we observe the same in the Bitcoin economy?
If prices don't fall, then constant money supply and constant velocity would bring the Bitcoin economy to a halt. If prices do fall, then the deflation may induce economic actors to "hold out for a better price," slowing the pace of spending.
In practice, we would observe some combination of the two. But regardless of how you conceptualize the collapse, it's important to emphasize that holding the money supply constant would push the Bitcoin economy into a death spiral. As every economic actor tries to save more (e.g. by holding out for the better price), total spending in the Bitcoin economy would slow. Bitcoin interest rates would skyrocket because no monetary authority can step in to provide liquidity. Then -- given the equality of spending and income (what is spending for me is income for you and vice versa) -- the lower income would further discourage economic actors from spending, thus deepening the slump.
In my view, such a collapse would occur despite the fact that participants in the Bitcoin economy are well-aware of the upper bound of 21 million. Even though participants expect deflation, they will still be individually unwilling to lend at negative nominal interest rates. "Why should I lend you 100 BTC today, if you will only repay me 95 BTC tomorrow?" That's the rational position of each individual economic actor, but it's collectively ruinous to the economy.
The granularity of the currency does not change the basic math. The fact that infinite deflation is technically feasible because "eight bits in a byte" takes the number of units all the way to 2.1 quadrillion does not change the fact that the total supply of Bitcoins will have stopped growing.
And that halt will cause a deflation death spiral.
UNLESS the Bitcoin economy avoids that spiral by becoming a freely floating, highly liquid, alternative means of payment for all electronically purchased goods and services. In such a scenario, the Bitcoin would appreciate over time, allowing it to serve as an investment vehicle.
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