Topic: Why a fixed aggregate makes sense (Read 1316 times)

People use the same flawed thinking to support their belief that it would be impossible to return to a gold standard -- "there isn't enough gold".

This is simply a result of a misunderstanding in which people naively believe that all wealth must be backed by currency. Of course, this couldn't be further from the truth. If I have a house worth $100,000, it does not mean that there exists $100,000 somewhere that is allocated to the value of my house. As you said, money is a measure of value. Currency and assets are stores of that value. In other words, I have a house worth $100,000, and I have a $20 bill worth $20.

Consistent measurement of what?

A consistent measurement of market demand would allow purchasing power to change appropriately, in accordance with the market.

A consistent measurement in terms of gallons of milk would create many problems. The actual value of milk is likely to change with market demand too, so to match 1 bitcoin to 1 gallon of milk would skew the exchange rate of every other good, and it would NOT match the market demand.

Salmon fillets, gasoline, t-shirts - you name it and it the prices will be skewed because the "consistent measurement" of a bitcoin was determined by its ratio of gallons of milk.

Markets will change through time, due to supply and demand trends, as well as technological advances. Relative prices of all goods must change to keep balance. The only consistency that is beneficial to a currency, is a constant derivation of value by markets, absent of forceful, manipulative entities.

Nobody here talked about any "hyper" whatever.

The total amount of bitcoins is constant.   It's not like it's decreasing in any substantial way.  I don't see how this could lead to a hyper-deflation.

It doesn't even have to lead to deflation.  It really depends of the economic context.  During economic growth, the amount of goods and services augment compared to the monetary aggregate (which stay constant), so prices gets lower, and you have deflation.  During economic recession, the amount of goods and services decreases, and you have inflation.   To me it does not seem absurd to imagine that an equilibrium could be found.  And if it doesn't, well it would just be economic reality.  You don't have to try to control it with the monetary tool.   Same as you can't control weather with your barometer.

Its really funny to me that you guys seem to be so conversant with the Austrian/bitcoin philosophy that you can no longer conceive of the other perspective.

A hyper-deflationary event can actually be just a bad as a hyper-inflationary event.  They both massively interfere with long term financial planning which results in economic stress and puts people into poverty.  In the hyper-inflationary event everyone holding currency gets screwed.  In the hyper-deflationary event people with loans are screwed (because everything else, like your salary, is adjusted to reflect the increased worth of the currency) and rich people start saving instead of investment resulting in stagnant growth.



Consistent measurements imply that purchasing power is not lost...

Financial planning is difficult if you consider that 1/XXXX of nothing is nothing.  But easy if you can rely in the future on 1 BTC to buy 1 meal.  Of course, that's the lie -- the current system has inflated away most of the value of the currency.  So you simply CAN'T rely on this and need to take that into account when planning.



1 kilobyte has "marginal utility"; it stores 1024 characters.  So it really does measure something.  But a Bitcoin has no fundamental measurement.  Its value is set by the market and since there are only 21 million, its value (how many it takes to get what you want) rises and falls over time as the relationship between the scarcity of the currency and the scarcity of the good.

Please don't use this analogy; everyone who hears it will drill it full of holes... its better to use the balloon analogy.  In bitcoin's case the balloon is the market, so the value of a bitcoin finds its optimal worth.  In fiat currency the balloon is the central bank and they can blow it up until it pops!

BTW, Your quote works exactly the same with the dollar: "1 dollar today will still be 1 dollar 20 years from now..."


Sure, but what people *should* want and what they *do* want are very different things.

Its all about wild swings, living in a world where the currency varies by 25% (say) monthly is like gambling with one quarter of your life savings every month.  Not fun for most people...

Coming into the creation of the Fed, there was a lot of currency uncertainty in the US... but some revisionists actually believe that this may have in fact been due to poorly conceived prior regulation not despite it.

People should not want that.  Prices are supposed to vary according to economical reality, not according to our assumption or desire of stability.

Otherwise, I have a great idea to solve global warming issues.  Since we would like the global temperature to stay more or less stable, let's change the definition of the temperature to cancel out the effect of greenhouse gazes.


Also, I would be very surprised if Jane or Joe was unhappy about a decreasing price of a sixpack.

I think the disk analogy is perfect.

1 kilobyte is still 1 kilobyte today just the same as it was 20 years ago.  We just refer to storage mediums in terms of gigabytes or terabytes now, because file sizes are so large as to make kilobytes mostly irrelevant in day-to-day file management.  1 Bitcoin today will still be 1 Bitcoin 20 years from now.  We'll just refer to them in terms of milliBitcoins or microBitcoins 20 years from now, because they'll be worth so much as to make 1 Bitcoin mostly irrelevant in day-to-day transactions.

Now, granted, 1 BTC could be worth a lot more in the future, thus the purchasing power of 1 BTC would have increased.  But the corollary still exists to an extent: 1 kilobyte could have stored more 20 years ago than it does today (in terms of documents and images), largely because of the additional metadata in document files and additional quality in imagery present today.

A very nice correlation in logic IMO, even if not perfect.  I think I'll use that when speaking with others about the 21 million coin limit.

I'm skeptical that the apocryphal people in your example would prefer the coin which buys one gallon of milk today to only buy one gallon of milk in the future instead of more than one gallon.

I think what they actually care about is not losing purchasing power, not consistent measurements.

That's preaching to the choir   

Others will argue that you are changing your yardstick.  Bitcoin is like a measuring stick drawn around a balloon as the balloon is inflated (or deflated) the size of a bitcoin increases/decreases.

Joe and Jane sixpack don't care that they can buy 1/XXXX of everything.  They want 1 coin to buy 1 gallon of milk today, tomorrow, next year and 100 years from now.  To them that is a consistent measurement.

Your disk analogy is flawed.  A more accurate example would be if a back in the days of 360KB floppies, someone coined one DU (disk unit) to be 1/360th of a disk.  So with today's 1TB hard drives, the minimum addressable size (1 DU) is 2.7GB.

This actually happened.  Back before Newton, coinage in england was so bad and limited that the smallest denomination did not pay for a meal.  So people would eat for a few weeks and then finally settle up.  Thus the invention of the "bar tab".  And unfortunately, that's why there aren't "car tabs" -- that would be when you buy 5 to 10 cars before you have to head over to the dealership to actually settle up. 


Bitcoin's saving grace and what separates it (in this regard) from all prior currencies is its infinite divisibility.  Yes infinite; if a Satoshi ever actually exceeds the cost of bubble gum a painful but entirely possible client and protocol change count add more zeros.

So Bitcoin can simultaneously encompass the complete wealth of the world and be used to pay for the cheapest item.  This has never before been the case and renders all Keynesian historical-based arguments about the danger of a un-inflatable currency potentially inapplicable.


However, people STILL want a currency with a reasonably steady cost-for-a-representative-basket-of-goods.

Once upon a time, some bankers convinced governments that they could do the above.  And they have attempted to do it.  When the money supply needs to expand they essentially create money backed by an individual's promise of future production (loan) and give the interest on that loan to their friends and colleagues.  And by taking the money from the uncareful/unprepared/unlucky (regardless more evenly across the population) when it needs to contract  .  But they have failed; the value of the currency has dropped over 95%.  That's where we are today.

Bitcoiners are willing to experiment with the idea that some pricing uncertainty is a lesser evil then this alternative.

+2'd

Let's not forget that a fixed aggregate creates scarcity, which in turn fuels supply and demand from which (among other things) the value of the currency is derived. Having a moving target suppresses and in some cases destroys any chance of a stable market forming.

+1

Not oversimplified at all: simply a very well put post. One of the best I've read on here.

The strongest feature of BTC, to me, is that the amount is set in stone and will not increase. It gives an appropriate, finite, and permanent calculation of the amount of currency currently in circulation and in the future.

However, the value of BTC will change over the years, and the definitive nature of the amount of BTC gives the value more meaning for businesses and individuals alike; we can all have an appropriate perspective of value and wealth based on the total number of BTC and it's value. I think this adds a lot to the security of BTC, as long as it continues to grow and gain in user adoption.

There is nothing overly simple about this post in my view.

The value of a bitcoin is determined by the market - regardless of how many units there are, it is a market decision. The unique feature of Bitcoin is the lifespan of its mining. I think this is the first time a currency has been so limited in its unit creation, with so a specifically determined endgame.

There are other monies that will reach this point, gold or silver, but the moment is not known, and it is a long time from now.

I expect bitcoins to be deflationary, in the sense of increased purchasing power, as long as the rate of market demand increases faster than the rate of unit creation. Eventually the market will become near-saturated and bitcoins are likely to cycle through inflationary and deflationary periods, depending on the demand of the economy. There is nothing wrong with either of these states, inflation and deflation are perfectly natural phenomena in a free market.

I believe that the general trend of bitcoins will be increased purchasing power, and this will continue until an alternative is found or its life is shortened by some unforeseen force.

wealth = labor + assets

In my mind it is not moral to own labor, so those who are expanding wealth are only those who own labor to transfer assets to themselves.

I once heard someone ranting about how bitcoin does not make sense because its total amount can not be adapted to follow the amount of wealth created.  To me this is as absurd as if someone decided to change the length of the meter because young people are statistically taller than their parents.

Money is several things, but amongst the things it is, it is a way of measuring quantities.  It is a unit of account.  And one does not change a unit of measure.  You can use an other one, but you don't change it.   When computers started to have disk space above thousands of mega-bytes, we did not decide to change the amount of bytes in one mega-byte, we used an other multiple of bytes and we talked about giga-bytes.   That's how we use units.

An amount of bitcoins is a number.  But this number has no meaning per se.  It means something only when compared to a total amount.  One bitcoin is truly one twenty-one-millionth of a fungible virtual set of things we call "bitcoins".

Now if these bitcoins are supposed to be used as an accounting system for the worldwide wealth, should the amount of bitcoins be increased when wealth increases??  Hell no, otherwise how do you even know that wealth has increased in the first place??

Really it's exactly as if we decided to increase the size of the meter because we noticed that young people are getting taller and taller.  Being fix is the very purpose of a measure unit:  because thanks to this we can compare it to things that are variable so we get an idea of how those things have changed.

Am I oversimplifying or something?