Topic: Uncapped coin vs capped coin supply - page 2. (Read 4993 times)

The principle in these types of discursions if it is not:
1) Austrians economic principals - a fixed supply of money eg. a gold standard leaving a free market to monitor and respond to supply and demand (no central management necessary).
or
A Keynesian economic principals - a regulate the money supply to manipulate the free market to respond to an artificially created supply and demand (an all knowing, benevolent central planner is necessary).
Then it's
2) About how do you distribute the new money efficiently, delaying uptake, verses rewarding early adopters, or taxing early adopter, or stabilising the exchange value, or infinite inflation.

The truth be told, it's a messy process and while there is room for improvements, you can't compromise the most attractive feature it enables, that is one to imagine an economy with a fixed supply of money.

During the great depression, the government tried to prevent prices from falling (fearing deflation!), they accomplished this by doing the following:

1. Buying food off the market with taxpayer dollars, then storing it in huge silos and eventually allowing it to spoil.
2. Paying farmers not to farm.
3. Ordering farmers to destroy their crops (essentially criminalizing production).

The government did everything they could to prevent prices from falling, and the price of labor was definitely not allowed to fall. As a result, massive unemployment. Supply and demand was not allowed to function properly because of government policy.

I can't tell you how many stories I have with police officers going around town, looking for people making pants illegally (see national recovery act), what a great use of police resources.

Had the government done nothing, prices would have fallen, along with incomes, but the purchasing power would have been roughly the same. If you had a job during the great depression, you were doing awesome.

The price of labor would have fallen, allowing people to be hired again.

Think about it, imagine today if we had a -50% deflation instantly, so that a min. wage job became worth twice as much in real terms. What would happen?

Massive unemployment.

Fair question and if the system had faith in a deflationariy economy it would be fine. It works for consumer electronics but would it work for our entire society?

Let's take a look at when we had deflationary periods.

We had a nice deflationary period during 1932 about -10% for about 10 years, coinciding with the great depression (coincidence?). The reason was because the velocity of money grinded to a halt (see my first post) and liquidity was drained.

How could that happen in a deflationary environment?

As prices dropped demand didn't rise enough because people didn't have jobs any more. Service side of things went downhill faster than the benefit of getting something cheaper.

Then banks did not have incentive to lend out money as it began clear that 1) people were going bankrupt and 2) risk reward wasn't there to lend freely, it wasn't safe for the bank. This caused demand to tank, but supply wasn't affected, thus creating hyper deflationary cycle. There are things to take into consideration about deflation as we learned from the great depression.

As demand decreases, price will decrease. Service/manufacturer's earn less, and no incentive to spend. As consumer market fell so did real estate. Obviously banks wont give out a penny in this circumstance as it is not appealing to lend to someone who will probably lose his shirt and default, causing losses on the banks balance sheet.

Another thing to note is that todays economy in a deflationary environment is ever so scary, 10x more than 1932 because here is bigger segregation between the classes, just say rich and poor to be simple. The number of poor is gigantic and in a deflationary environment ofcoures it will hit these indebted people the most because the amount they owe will remain static however the amount they earn will be less and less, making them more likely to default and create this spiral.

Like I said I was overly simplistic in my explanation earlier because I thought many of you would just "get" those simple parts, and I got a few good responses but providing an example of an industry that is deflationary doesn't mean you can say that our entire society can live in that model.

This is why I said that we need a hybrid where we focus on being more of hte deflationary side but have some inflation to combat some issues I pointed out.

Dividing your currency in smaller parts to me is just another way of saying, do nothing it will fix itself. Nothing fixes itself.

If 210,000,000,000,000 Satoshis is not enough for the world economy to handle, they will start using mSatoshis.

As for deflation.

Ever bought a computer?

Why did you not wait so that your dollar would increase in comparison with the computer technology?

Interesting will have to think this one over a bit too.

Population cannot grow faster than the ability to feed. Population self-regulates. Noticed how there has only been an explosion of human population after the industrial revolution. If the planet can't support x billion people, people start dying off (sad but true).


The amount of currency in circulation is irrelevant. What matters is the amount of products and services available to purchase.

If the price level is 100, and $100 buys you a weeks worth of provisions, it is no different than a price level of 1000, and $1000 buying you a weeks worth of provisions.



It's only going to be 'hyper-deflation if the world adopts bitcoins as a monetary standard. If that happens, once it has been adopted the price levels will only drop at whichever rate the economy expands. Economies don't hyper-expand, so there can't be hyper-deflation.

And if there is 'hyper-deflation', suddenly being able to buy a new Mercedes Benz for $1 doesn't strike me as a bad thing. (And yes, I know incomes would fall in a hyper-deflation scenario, but the purchasing power would be the same as before)


The reality is when currencies have been allowed to deflate, it's happened at a very slow rate. It depends on how much the economy expands. The only 'hyper-deflation' we're going to see, is if bitcoin goes world-wide with massive adoption, after that it will stabilize and prices in bitcoins will fall slowly over time depending on how economies expand (or contract which would cause prices to rise).

Absent aliens dropping machines that last forever that automagically make everything we could ever want, you're not going to see hyper-deflation where purchasing power rises 500% a year.

But what about a cap system that doesn't allow infinite spending but a slow tap that outputs a distinct amount to accompany growth in the economy, 210 billion vs 21 million in 100 years is not that bad considering where we are right now.

Kind of what I was saying, we def need more deflation with our society now but we don't want to hyper deflate either, its a fine balance and thats why I think a controlled supply is atleast inflationary in a minor sense as it is still not enough to satisfy those big corporations who ruin it all for the rest of us.

It's good to have smart people coming in and shining light, people that may be in economics.

The 21 million cap is a major selling point, but not one I particularly agree with. There's such a thing as too much deflation, which can cause hyper mania and crashes several times a year. Hopefully it doesn't get that volatile, and there is something to stabilize it by then. Then again, if the hoarding/saving rate stays roughly the same, there's not much to worry about.

FUCKING WITH THE 21 MILLION CAP IS BITCOINS ANIMAL FARM MOMENT...you must understand this is what gives btc life over and above fiat as dilution/debasement has destroyed every fiat currency ever...

I don't want anything more, I read through the entirety of your post and loved it. The heart was not sarcastic at all. I agree with all your points and wish I had a means of making a statement as well as you do. However, I don't have many good examples, I just have much logic, reasoning and wisdom.

Uh, have fun over there in your corner, hehe.

Haha, I used paragraphs and a TL:DR what more could you want???

In all seriousness though the issues discussed in the topic are complex and, despite all internet logic, cant be adequately discussed without a serious understanding of economics (ie several textbooks worth) I did my best to summarize.

I'll go back into my corner now. Learning to read sarcasm (or lack thereof), progress...slow

Checks on topic again
<3

This is the crux of it I think.

Nobody complains about million dollars being too expensive. They just use dollars instead.

If the price of bitcoins goes up to 1000000 dollars, only idiots will complain that they are too expensive, the rest of us will just price things in uB (microbits) instead.

I don't think you have clearly defined what "the problem" is. The divisibility of bitcoins solves the granularity problem that would happen if bitcoins were deflationary but not divisible. Sort of like what has happened with gold - try going to a store and buying an apple with gold, what are you going to do give the clerk a couple flecks?

The underlying "problem" of having a deflationary currency is unrelated to the divisibility issue. Look through these forums, there are plenty of discussions on why deflation is not necessarily a problem.

ok, you're trying to argue some of the finer points of economic theory without a basic understanding of the economic knowledge that underpins said argument. For example your assumption about why we went off the gold standard is 100% wrong, it had 0 to do with a finite supply of gold and everything to do with competitive currency devaluation and the funding of an unpopular war in Vietnam. For reference see this for the short version

https://en.wikipedia.org/wiki/Nixon_Shock

Or this for the more complete coverage

https://en.wikipedia.org/wiki/Bretton_Woods_system

Also if you think that we didn't realize their was a finite supply of gold until the 20th century you are seriously insulting the intelligence of everyone who lived from the Renascence (and probably before that) until 1971 when the gold standard was officially abandoned. In addition you must realize that the supply and demand for a medium of exchange is inherently different from the simple supply and demand curves discussed in most econ classes. Growth in population does not ipso facto mean an increase in demand for currency. Prevailing interest rates have a much bigger effect on the supply of money than population growth. This will be especially true as population growth stalls, which according to the UN will occur sometime in the 22nd century at around 10 billion people. The capacity for population growth is not unlimited, thus invalidating this "obvious fact:"


As to the argument that deflation promotes hoarding and stifles economic growth and innovation, you are partially right but your logic in getting the the almost correct conclusion is faulty. My first counter example is any kind of electronic you have ever purchased in your entire life. You knew with 100% certainty that if you waited a year you could get the same performance for cheaper or better performance for the same price. Yet at some point you decided to go ahead and buy said electronic. This is a perfect example of what would happen in a truly deflationary economy, it promotes responsible consumption, rather than rampant conspicuous consumption promoted by our current economic model.

This is 100% a good thing for humanity and society as a whole. Just as the total supply of bitcoins is limited, the total sum of all natural resources is limited. You cannot have economic growth in the 5-6% range every year going forward to infinity. Their are limiting constraints (land area, oil, minerals, water, etc) that will impose upper limits on our consumption. I cannot stress this point enough, a money supply that is allowed to grow infinitely will eventually destroy itself as natural resources are not infinite.

On to the divisibility of bitcoin. Many deflationary economies ran into trouble because the medium of exchange was not fungible enough. As deflation occurs and prices fall, things eventually should be priced below the smallest possible denomination. Bitcoin solves this problem by being essentially infinity divisible (obviously its not truly infinite but for the purposes of this discussion we can assume that it is). This means that no matter how far prices fall bitcoin can adjust so that no product or service becomes to cheap to purchase. For example int he US you cannot buy something that costs .5 cents with cash, you need to buy do or make the transfer electronically, bitcoin avoids this problem entirely.

This completely invalidates your "obvious fact":


In fact more currency coming in to circulation simply devalues all currency currently held in circulation, it does nothing to "supply the demand for these resources" a quote I cant make any sense out of. (To avoid future misunderstandings I suggest you replace the blanket terms supply and demand with more specific terminology, especially when taking about multiple supply demand curves). I think here you are trying to say that as demand for natural resources increases (while supply of NR stays constant) the supply of currency needs to increase if we want to keep the price of said natural resources consistent. If the supply of currency is constant while demand increases the price of said currency will rise meaning the price of said natural resources will decrease (currency is more valuable so you can buy more with it).

So instead of increasing the supply of currency in a futile attempt to maintain prices why not let prices fall as the value of money increases? This dovetails nicely into a discusses of innovation. You talk about profits being squeezed out so people would be less likely to pursue innovation. Because bitcoin is infinitely dividable we never have to worry about profits going to 0, as we can just divide the currency into smaller and smaller denominations. At the same time the price of goods is going down. Would you be willing to risk money to make a 1 Satoshi profit per product sold today? of course not. But would someone 100 years from now be willing to do it when a Satoshi is enough o feed a family for a year? Of course.

Their are numerous examples in history of deflationary economies succeeding, they are just ignored by Keynesian economic thinkers, which is why you probably have never heard of them. Scottish Free banking in the 18th and 19th centuries come first and foremost to my mind. The Mystery of Banking by Murry Rothbard has some great examples of how deflationary economies can work and how inflationary ones are doomed to failure by definition(as well as a host of other interesting topics). He does a much better job of explaining why in great detail so if you don't believe my brief and incomplete treatise on the subject I would suggest you read it.

I know I probably didn't address all of your points or concerns but I think this is a good starting point.

TL:DR Population growth is capped by natural resources, an infinity divisible deflationary currency allows for innovation through lower prices. People will accept lower wages because prices are lower. Supply and demand for a medium of exchange cannot be equated to supply and demand for a good or service. Read stuff by Murry Rothbard

I honestly do not like to think of other currencies that will run alongside Bitcoin or any other currency that may take control, because honestly they're more like an investment as Bitcoin is compared to USD right now. DVC I think would become too inflationary to incorporate into the situation.

I'll bring back my point that, yes, in a hundred years things will have changed. I hope that Gaven implements a system that tapers off the Bitcoin supply reward to miners the closer we reach the cap. This would remove the hyper-deflation problem altogether. Inflation is evil, taking peoples' money away to provide fluidity is immoral.

I've got nothing more to input, so I guess just keep the discussion going while I attempt to understand terms like "0 sum" and "deflation issues."

This is what I hoped to see from you, good points! Yes there may be some sort of equilibrium once deflation hits because it may be a 0 sum game (never though of this)... however resources we know are not 0 sum for out intents and purposes, they will always seem like they are in abundance until we learn that we only have so much left (oil, water). The system needs to be able to cope with this in some way, and I'm not sure which method will help with this regard and provide a more smooth transition between running out of the resource and being replaced through innovation or something.

Yes no backing at all is not the way to go because of the mess we are in now, but no a total hard cap is also just as bad, this is why i'm a proponent of a no cap but controlled supply increase which will fight deflation issues but not introduce the same inflation problems. In 100 years there will be something like 200 billion dvc? compared to 21 million btc? Does it matter, in 100 years alot of things will have changed, and we have far more usd in our system than dvc would at that point, so the fact that it is uncapped should not hinder the viability of adaption as a medium of exchange. Infact I would say it would provide smoother responses to external pressures that we do not control, and a more stable currency rate over the long term.