Topic: The effects of savings and debt on bitcoin based economy (Read 2037 times)

Bitcoin is a great invention and with this, everyone which known and like it, agree. So an economy based on it as a currency is (must be) theoretically almost perfect. Mainly because, according to me but even for to, to many others, this economy will not suffer from inflation. But I write "almost" perfect. Because it will be a deflationary economy. Your post explain a similar case. You wrote: "deflation is a great incentive to save money". That's correct. Buy it will be such for overall economy of this country? You can find exhaustive answer to this question here: https://en.wikipedia.org/wiki/Deflation

As for me the "word" almost expressed above shows my thoughts about this economic model.

I see. Makes sense now. Most people think in terms of dollars and cents at the most.

Yes, I somehow agree. There are technology devices that create a particular commodity. Then they compete with their rivals trying to give more value for money. They increase prices adding services which people might not really need but market it in a way which makes people believe they do. 

There is no such thing as a deflationary spiral, because there is a balance between money value and consumption.

Since money have no intrinsic value, nothing real is held back from the economy by saving, neither consumption nor investments. What is consumed and invested, is what is produced, no more, no less. A saver defers consumption on his part, products can then be consumed by others. The price signals incur it.

With a lot of saving, money value will increase. Or the price of money, as expressed in some other goods, is increasing.  Increasing money value incurs the savers to save less and spend more. All savings will eventually be spent, there is no point in saving if not to be able to spend later.

The interest rate is the price you pay to consume or invest earlier than otherwise, it is the price of the time factor, it is different from the price of money itself. If lots of money are saved (high money value), the interest will be low, because the savers want to invest or supply money on the loan market. When a project with favorable risk and profit shows up, money will be available for loaning with a low rate. If everybody wants to loan and invest, interest will go up until equilibrium is found.

Trying to regulate the level of investment by force, through taxation and public works, is the fallacy. It only disturbs the balances and creates turbulence.

Are we assuming that this community earns exclusively in bitcoin as well? Because if people are earning in fiat than the deflation of BTC or inflation of fiat (to BTC) would result in fewer and fewer BTC being acquired for the same amount of fiat, which would minimize some of the supply constraints you're hypothesizing. It's a good question, I hope all of us are the right side of it!

In this era where money must also allow people to compare the value of dissimilar goods and services, and then hold that value into the future....
And as compare to bitcoin which is haven't yet popular it's economy cannot run a healthy course, at least as far as the dynamics of money in the economy are concerned. 

First off, I am not sure what you are trying to argue by citing output from the producer side.  Can you elaborate?  Specifically, you seem to say that there will be some kind of progressive price, demand or output squeeze, as in a spiral.  I don't argue that a general lowering of these levels, compared to the present system, might well happen under sound money.  I do beg to differ when we talk about some kind of spiral.

If a spiral would ensue, then the Italian Renaissance and 18th century Scottish free-banking era (both enjoying the rare examples of sound money and state-free credit during modern history) would have squeezed prices pretty hard.  Not to mention, the thousand year plus of gold and silver would have squeezed prices to almost zero.  Instead, the Scottish GDP rose from half to equal to that of England during its free-banking period, and the progress and prosperity during the Renaissance goes without saying.

The youth saving vs. elderly spending thing is a non-issue, as we are only talking about the steady-state.  It doesn't matter which one is higher, as long as some steady state obtains.  The key point is that the entire system would be self-correcting and steady-state-seeking, as opposed to self-reinforcing and chaos-seeking as in modern finance and money.

Ultimately, though, all we have are theories at this point.  The reason is that the sound money system has never been sufficiently experienced and studied since the birth of modern economics, as compared to features of the modern system.  We do know that the problems of deflation, as we know them, only apply to the modern system (as you said, experienced a "million times.")  Typically, this form of economic pain occurs when the system tries desperately to regain monetary confidence, say, by holding on to a peg to a stronger money, either precious metals or a hard currency, after confidence is already busted.   Examples are Britain's attempt to stick to the gold standard at the pre-war gold price in the 1920s, or the attempt by many a developing country to maintain their hard currency pegs by raising interest rates and cutting fiscal deficits after a financial bust, either under pressure from the IMF or of their own accord.  It is all par for the course for a basically deceptive system.

No it isn't. 1 BTC = 1 BTC, no matter how much you divide it. This is pretty simple logic. This is the same principle:

https://www.youtube.com/watch?v=YtLEWVu815o

Kids don't seem to get it even if it's obvious. In the Bitcoin context, adults seem to have problems too, because it's not as obvious as something physical, but it's basically the same. Bitcoin will be scarce, no matter how much you divide it.

The smallest bitcoin unit currently is a satoshi 10^-8
If it comes to a situation when all bitcoin except one is locked away a single bitcoin can be split even further than a satoshi.
That does not however change the value of that one btc in any way.
It's like u have a $ but if value of $ begins to increase you start using cents for your daily transactions and if value increases more u need a smaller unit than a cent say 1/10th of a cent. In this process however the value of btc remains the same.
So no it is not increasing money supply in any way we are just splitting the same $ value in smaller parts.

Yes the interest problem always is existent, and it does give the illusion of an increased money supply leading to inflation. Bitcoin is a naturally deflationary currency and depending on the market conditions it will counter the inflation surge, in a way that the overall currency shall still remain deflationary.IMO

Thanks Aayush. I think I have a lot of difficulty wrapping my head around how exactly a bitcoin unit is divided. Seems really confusing to me. Isn't that the same as increasing the money supply by stealth?
The problem I see with interest is exponential growth (http://www.nlcpr.com/compoundinterest.php) and the fact that it causes inflation because of the hidden costs of borrowing in the production supply chain. Is interest a way of balancing the deflation tendencies of bitcoin/the gold standard?

Actually I'm not an economist at all. With regard to monetary hoarding leading to inflation you might have a point. When people save money there is a lack of capital in the economy. This conceivably causes interest rates to rise providing an incentive for the owners of capital to lend money which creates inflation as the money supply is increased and also has to match the returns on  higher interest rates. Just my guess though, not an expert

One flaw I find in your assumptions, is that you cannot take bitcoins as a unit, since bitcoins are limited you cannot earn 25,000 units and save 2,500 units endlessly, however what can be done is that the value remains the same, that is to say the purchasing power. Like 2500$ btc worth eac month and saving 250$ eac month.
This will have the same deflationary effect putting an equal value of bitcoins each month out of circulation.
This is entirely sustainable as bitcoins can be divided infinetly, so the units remaining of btc won't matter, so the saving's do not affect that in any actual manner.People do keep assets and those 25,000 units per person u say will just be an asset.

With bitcoins I do beleive a interest world is set to exist thanks to it's deflationary nature.
Te kickstarter type concept would be hard to bring forth on a larger scale as it contains many inefficiencies, people do not like to loose money and be arbitrary about gains the interest model guarantees a much safer  and reliable path.
Whatever currency we may use, the expected amount will always exceed the actual amount, thanks to interest.

I understand the logic of people spending as they get older but could a case be made for transferring accumulated wealth to the next generation also or is this typically in the form of assets (housing, artwork, gold, diamonds e.t.c)?

This has been discussed a million times already. First, you say that people start spending when they get older. That's okay, but again you somehow forget that when the elders start spending, the youths may start saving (just as their ancestors in their time). And you can't prove it logically that they will be saving less. Second, you say that people spend more under deflation since they know that their savings won't be eaten away by inflation. This is just plain wrong and against all logic since in the latter case people obviously have more incentive to spend than in the former (since money is constantly losing its purchasing power, and it gets spent immediately). That has been proven by practice a million times again...

But what you said is ultimately irrelevant since it is not the collapse in consumers' demand (which is always short termed per se). You completely left out from consideration the producers' side, as if the total output were not affected by the appreciating money

What you describe is a self-reinforcing pattern of deflation, which is by no means certain to happen (as I argued earlier.)

Money serves many more functions than that.  For example as a record of how much contribution each person has made, and thus how much reward is due.  In this capacity it serves a moral function.

In fact, the very discussion of the nature of money is politically and ideologically tainted from the get-go.  Best to stick to how the system works, and its implications, in practice.

A spiral is a pattern that gets more and more intense, but the initial deflation going into a sound-money system (if that's what happens -- it would depend on how we did it) is self limiting.  People will start spending when they get older, and actually spend more since they know the savings they have left won't be eaten away by an inflationary system.

Another self limiting factor of this deflation is that the more money is saved away in aggregate, the more incentive to spend, since the lower the price levels would be.  Thus it is a naturally self-balancing system, just as healthy systems should be.

Again, the terror inspired by modern commentary about deflation only relates what I call "bad deflation," ie price and demand collapse after an asset bubble bust, which is precisely the kind of thing the modern system produces periodically (much more frequently in the developing world than, say, in the US -- but then it comes back to bite us as war and terrorism.)

Since the modern system moves more and more towards the production of luxuries for its beneficiaries, consumed at their whim, it's no wonder that spending and demand are fragile.  This is the result of inequality and instability reinforcing each other.

Money only represents value, i.e. the value of goods and services that can be bought with it. It doesn't have much value in itself (save for the transactional and exchange utilities). If money appreciates, that means that it represents more value, and vice versa. And no, slightly depreciating money (about a few percentages annually) facilitates the exchange of "values" better than non-depreciating money, since it disfavors hoarding which affects the exchange utility of money, thereby making it less efficient. Furthermore, slight depreciation favors producers since they are among the first after the bankers to get the money, thereby making them less affected by the negative effects of money depreciation, which contributes to production (depreciation adds up a little to their profits)...

If you happen to challenge this (which you evidently do), bring forward a viable argument in favor of your position. Just saying that you disagree obviously won't suffice

According to your statement, the "people" you mentioned here meant fixed-investor ?. If it is, then the fixed investor are the hardest hit during inflation. According to me without the money flowing in the market there is not a single solution to avoid inflation crisis. Since you are an economist can you enlighten my knowledge regards to this.

Money serves to facilitate the exchange of value, and "better" is a matter of opinion. I prefer a constant value, and slightly appreciating or depreciating values are equivalently inconsequential.

The fact that money is infinitely divisible is irrelevant here. What matters is the change in the amount of money per change in the amount of goods produced and services rendered, which would lead to either depreciation of money or its appreciation. Ultimately, money serves to facilitate the exchange of goods, and a slightly depreciating money does this better than an appreciating money (or just time invariant money)...

Since people are hording money, there is greater demand of it. In other words, the demand for money results from people's desire to hold money. Hoarding money inevitably causes money appreciation because there is less quantity of money per same amount of goods (initially). As I said, the decrease in the amount of money in circulation can be offset by an increase in money velocity (which actually happens in the short term), but money velocity increases only when people spend (or invest) money (in the long term). Therefore, greater demand for money (hoarding) ultimately leads to a decrease in the velocity of money, thereby further unwinding the deflationary spiral...

That's why it is called spiral

You are calculating something even after 100 Years, What if an again future new satoshi invent some other way which nourish the bitcoin in digital platinum way. Weill, your statement about Islamic Banking, I would suggest that is the best banking I have ever seen in my life, compared to the current interest loan or bebt banking systems.

I totally agree that what you describe is technically true, but these are transient issues while we go from an inflationary to a sound-money system.  In the long run (steady-state,) the sound money economy would get back to balance between spending and saving, as the incentives to spend grows ever greater as each saver grows older and richer.

A major part of the modern fear of deflation comes from the very problem of the modern system: since most spending and investment is propped up directly or indirectly by the state, when this system goes out of whack for some reason (say, just after a financial crisis,) beliefs about a prolonged and truly serious deflationary spiral become very justified (since there was no real reason for the spending and lending in the first place, and the authorities' hand has just been weakened.)

But to get back to the sound-money system...  Certainly, *in aggregate*, this steady state would probably see a portion of money permanently saved away.  Whatever the size of this portion, it needs not be a concern.  Money is almost infinitely divisible.  Whatever is left circulating would just have to be priced appropriately to reflect the goods and services available in the economy.

When people's savings are safe, they would feel free both to spend and invest, at a level that is appropriate to the risks and rewards of reality.  This is what I mean by what is intended by nature.


Could you elaborate on this one?   I'm not sure what you mean.

This doesn't hold on the scale of the whole economy. since spending now and spending tomorrow (or in a few years) is quite different in its effects. An aggregate hoarding would amount to extracting some portion of money from circulation for an indefinitely long period of time. Besides, that wouldn't be a problem in a fiat world where banks would effectively compensate for the void. On the contrary, in the "sound money" system the decreased amount of money in circulation could only be offset in the short run by the increased money velocity, but in the long run it will only further unwind the deflationary spiral...


The nature intended us to copulate at twelve and die at twenty, to be "sustainable"

The deflationary spiral due to sound money is a major scare that the elites set up to get the population to accept their monetary inflation.

There would be a natural barrier to the infinite hoarding that is so feared: the more you have saved, and the less time you have left on this earth, the more incentive to spend.  Eventually, everyone will spend.

The rate of spending and investment wouldn't be nearly as high as under modern money, but perhaps it'd be as nature intended and thus sustainable.  When there are no good investments, you don't invest.  When merchants don't offer good enough quality and price, you don't buy.  There is no forced lending and artificially encouraged spending, and no financial bubbles and pain from their bust.

Some losses to investment are always inevitable, but people wouldn't panic and make busts worse, because they would have a safe place for the part of their savings they want to be risk-free.  Also, when investments weren't artificially propped up by the authorities, they would be naturally safer anyway.

Under this system, individuals, not central authorities, make decisions about spending and lending.  It would be the market economy at work, in the capital markets as well as in goods and services.

Granted, if we had sound money right now, we would be in for a painful deflationary shock.  This is only because the economy is addicted to monetary inflation and doesn't know how to function without fattening up all the (major and minor) beneficiaries of the system and depending on their spending on luxuries.  This argument may be relevant in the short run, but has no part in the long-term design of the system.

Humanity survived millennia under gold and silver.  With better technology, we would be more than fine.

You are right. The idea of currency stability is a very hard one to get rid of. I think humans are probably wired for this. Possibly why cheating or back stabbing is frowned upon. It reminds us of instability.
There is another idea I've seen floating around which involves backing a currency with energy. You can get the gist of it here. http://p2pfoundation.net/Energy-Backed_Currencies.
Basically the idea is we can use bitcoins as currency for normal trade. However to prevent hoarding and the deflationary spiral which could possibly result from it, excessive savings (perhaps greater than 10 percent of money supply or whatever is deemed safe) can be stored as energy credits. Since energy is used by producers and by consumers alike it is always valuable and is constantly bought and sold. This way I could buy a memory card for the price 1 kilowatt of power or something. Since the price of energy will not always be constant (can increase or decrease), there is no incentive to hoard savings.

The problem is, this brings us back to the smart grid with all the problems of government control and interference it entails. Not to mention what happens to your "savings" when the US military bombs your country in the name of freedom (microgrids might be a solution to the Americans  though)

Ignore this. Idea completely taken down here: http://www.garynorth.com/public/10797.cfm

OP's question is quite interesting

People tends to believe that the currency's value is relatively stable (They use it as a standard unit to measure value, they don't like the value of the unit itself fluctuate, a currency with floating value will make average people's decision making very difficult, they would prefer the value of the currency to be a constant)

Following this thought, you will see that the "deflation spiral" is true: When people are hoarding coins more and more, less and less coins will be used on trading. To merchants, less coins means less sale, thus they will scale down the production, laying off workers, and workers get less income, less spending, and even less coins in circulation, a negative feedback loop until almost every spending are cut to minimum

So the solution is that people must get rid of the idea that currency's value is constant. If merchants understand that currency's value is floating depends on supply and demand, they would cut the product price, and cut the income for his employees when currency becomes scarce. Theoretically, if currency supply reduced by half, then everything's price inclusive salary would be cut by half, to make the whole economy work as usual. But I'm afraid that this approach will result in the resistance from workers, they don't understand that currency's value is constantly changing. Another problem is that all the merchant must do this at the same time to make it work, and typically they are limited by the lowest wage regulations

If everyone accept this, then just like Forex market, this trend will not continue forever, because everyone are facing the same decision making difficulty like a currency trader: Sooner or later, majority of whales who holding the currency will consider current product price is too low, they will spend their money to buy, then the trend will turn and the price of everything will rise up again. After a while the market will reach a new equilibrium around a new price level

In fact that is market based currency valuation, should be the most efficient way for economy. Today's system is trying to fix the value of currency, then the value fluctuation is absorbed by FED changing money supply constantly. During normal time, FED does nothing, there is no big difference, but overtime, their influence on market accumulated, and eventually will cause a large volatility, and then they will gain a lot from its operation, they just printed 5x money for themselves because people did not want USD's value to rise a lot when the market said it should

Another possibility is: When merchants are running out of currencies, they would issue their own currencies/certificates to carry out the trade (backed by each merchant). With multiple transaction medium running parallel, the effect of each currency is less predictable

Well thought out. Thanks for the explanation

But don't forget that instead of buying a phone, watch, etc, you buy an i-phone and then you can either save the free money (which you didn't spend on all these things) or spend it on something else. You guess, most people prefer spending to saving, thereby ending up buying even more technology (in terms of functionality) than they could allow earlier... 

As far as I'm acquainted with the question, the money which is allegedly saved by the elderly for their pensions was actually spent on paying pensions to their ancestors, so today's elders can only be paid from the money earned by their descendants, i.e. today's workers...

So the answer ultimately depends on a few things, e.g. the ratio of the number of workers and pensioners, the productivity of today's workforce, the average lifespan after retiring, etc

Also is it always true that we will buy more with more technology? Consider the iphone. I no longer need a phone, watch, game machine, compass, walkman, camera and many other devices. It seems technology is clumping up different devices and selling them for the price of one these days.

thanks deseik I get it now. Just one more niggle. What do you think about pensions though since most societies seem to have it. It would seem the US and Japan liberalized pensions (401k, privatizing Japan Post) to put the money saved by the elderly to what seemed to be more productive uses. Should pensions simply be set aside (not monetized) and paid by companies/governments when due (the company or government might not exist however) or should they be abolished altogether?

Ultimately, it doesn't matter how many coins are in circulation, provided the money is divisible enough (therefore even 1 bitcoin could potentially suffice). What matters here is the quantity of goods (and volume of services) per capita produced by the economy (which is why GDP is important). When people begin saving (and don't spend later, as your question assumes), they buy less goods, so less goods will be produced later. Thereby the quantity of goods per capita diminishes, and the society impoverishes itself overall. If the population of such society diminishes (e.g. due to mortality rate exceeding birth rate) and diminishes faster than the number of coins in circulation, then the quantity of goods per capita remains either the same or actually increases, thereby somewhat offsetting saving (though that would most likely not hold true in reality, since less people will produce less goods). If the population increases, but the society is technologically advanced, then the diminishing number of coins can be offset (to a degree) by technological innovations, so that with less money people can buy more (since people could still buy more even if they didn't save)...

deseik could you explain what effect technology and population would have seeing as people still need to buy stuff whether they have technology or not even if it is each other? Perhaps using the two scenarios below both with a non money printing currency like bitcoin. Because I'm thinking, the government might decide to use money printing to make up tax revenue shortfalls if people are hoarding money and  additionally the share of government expenditure related to GDP would have to rise to spread the wealth and prevent civil unrest.
1.) A scientifically advanced society, say Japan but with self sustaining resources and a fixed or slightly declining population for x number of years
2.) A nation like Chad with little technology and resources but a growing population for x number of years

Thanks

Good point that it will spent at some point. One of the examples I had in mind was people saving for their pensions to be paid out at age 65 or whatever and did not want to invest in the stock market or any other risky investment. This could of course end up being the entire working age population of a country assuming a low unemployment rate.

The number of bitcoins has no effect on the viability or sustainability of Bitcoin. There are 21 million bitcoins. There could be 21 quadrillion or just 21. It is an arbitrary number. It doesn't make a difference.

However, as pointed out by Amph, the bitcoins are not gone forever. They will be spent eventually. Otherwise, what is the point of saving them? The question is moot.

The difference between an interest-bearing loan and buying a share of a company is just the structure of the investment, primarily in the assignment of risk. In the end, the results are the same for the investor: they give some money to someone and they get it back later with a bonus.

don't forget that there will always be fees around, so even if the total amount of utilizable bitcoin would be so slim that many people cannot use it, you can still use receive fee via mining activity

also those 10 saved, will be spent one day, it's not like they are lost forever...

anyway you can always run additional blockchain with other coins, in the worst case scenario, but you need to build everything from zero again

It could potentially be sustainable, for the factors which you didn't mention. What will the population growth be within these 100 years? How technologically advanced is this country? If you keep all other things the same, then no, such an economy is not sustainable in the long run. A closed society built on these conditions will most certainly end up in a civil war (or will switch to barter, if it was not well developed at the start)...

Bitcoin will keep releasing new coins into the economy until year 2140. Sure, after 2025 he curve starts getting pretty flat and there aren't many new coins generated, but by then the price of BTC will be way too high to talk in terms of BTC, mBTC will be the standard.
There is no problem in people saving, if there is demand, that just means the price goes higher, and given the exceptional divisibility of BTC, the economy will still be fluid. I remember hearing somewhere that in theory, the whole BTC economy could perfectly function under 1 BTC available only, it's that divisible.

Hello all. I have been thinking a lot about alternative economic systems and have two hypothetical questions.
Say there is a country of 4 million people and the average earnings every year for each person is 25,000 units of bitcoin. And in this country, the people here save 10 percent of their income (for religious reasons or whatever). And when I say save, I mean they do not want to invest it in the stock market or a company or anything else. They just want to set it aside, like keeping gold coins under your mattress. I assume this because to my understanding bitcoin doesn't support money printing and this means people aren't forced to invest their money to avoid inflation. Come to think of it, deflation is a great incentive to save money. Now, this would mean every year 2500 bitcoins per person is no longer circulating within the economy. Just laying dormant. In 10 years it would be 25,000 per person. In 100 years 250,000. My question is, is this sustainable for an economy? What gives?
Secondly, what effect would an interest free economic system like the muslims supposedly use have on an economy based on bitcoin? To my understanding muslim banking is a bit like kickstarter where people pool funds to create a business (could be occulus rift or lego or whatever) and if the business succeeds they get a share according to what percentage they invested in the company. If it fails then everybody loses. This reduces debt loads because you are not stuck with interest payments and there is really no such thing as borrowing in the traditional sense. Room for fraud obviously but it seems there is a lot of fraud in our current system as well. And with a system like the internet, past reputation can probably be easier to gauge. Is this sustainable also? What are the pros and cons?

Please note I am by no means an economics specialist, just worried about the way most economies around the world seem to be unsustainable and imploding and thinking of solutions. Thanks