Topic: Would the failure of Bitcoin lead you to reconsider your assumptions? (Read 10325 times)

hahaha good one. Note it is only a flea on the USD elephant ass in terms of market cap.

Too big to fail now...

Incorrect. Consider the Quantity Theory of Money.

M x V = P x Q

When you distribute in a way that 90+% of the coins end up in <10% of the hands, then you have created deflation, because velocity V is in the equation. Read this link to understand why. Hint: wealthy don't spend much of their net worth, they invest to accumulate more coins (net worth).

Not all Libertarians are goldbugs. I am a minanarchist (small government) which is a subset of Libertarian, and I am no longer a goldbug although I was briefly (yet had serious doubts while I was and took me some time to figure it out).

Economies don't thrive because of the (small decrease or increase in the) money supply, they thrive (and increase productivity very fast causing deflation) because the government is small. Here is the very simple math and QTM model which refutes your popular goldbug delusion.

Since you didn't state if you view the "merits" positively or negatively, your statement appears to be ambiguous.

I assume the first sentence means you view competition as one of the positive aspects of decentralization. I agree.

However, you could also mean that competition means crypto-currencies are inherently inflationary, which is what I hear as a criticism from my silverbug friends.

NO it would lead me to a Alt coin, heh. 

Sorry to wake the dead, but I just saw this now.

A thing, in this case, a "fiat dollar" cannot be evil since morality only applies to beings with volition.

Nope, but it sure as hell is something I'm willing to fight against.

So we have a State that says "use this paper as money or we will be unhappy."
if you don't do it, they will then order you to do it.
If you still don't do it, they will arrest you.
If you resist arrest, they will shoot you.
If you go to prison and try to escape, they will shoot you.
Meanwhile, they print more money, robbing you of purchasing power.
That's not evil?  That's not inherently evil?

But this is like saying, dictatorships are not inherently evil, its just that dictators abuse. Well, that is the issue, and that is why dictatorships or fiat currencies are bad.

The IMF trades gold certificates on the market that will never be redeemed effectively dropping the price. I'm not touching gold. Silver is rarer anyway.

I'm going to go out on a limb here and say that fiat currencies are not inheritly evil.


Rather the people who control the currency and inflate with reckless abandon without respect or concern for those who hold the currency that are evil. The rules have to be written in stone... or backed by gold.

And there is nothing I can think of that will provide something more stone-like than a extremely strong hashing algorithm.

So long as the rules are written in stone and cannot be changed, we are far safer.

-

Any and all banks is a very strong statement. There are lots of other services banks offer.
Only a central bank issued paper currency allows such a bank to guarantee its deposits. Under hard money, maturity mismatching will result in the bank failing.
An honest bank can offer current accounts for a fee and time deposits with interest which is then lend out as fixed-term credit. It can also offer brokerage services like the ability to buy bonds directly, with all associated risks and benefits.
A hard currency will prevent moral hazard and make it simpler for customers to actually understand what's going on. What's wrong with that?
Fractional reserve banking is popular, because it makes people feel richer than they actually are, but this leads to lots of problems like too cheap credit, malinvestment and capital consumption.

Doesn't Bitcoin respect the Equation of Exchange which is a tautology?  Can a tautology be reconsidered?  Is a tautology an assumption?

The computer industry experiences constant deflation. Does nobody buy computers? 
To answer your question, yes- the failure of bitcoin for economic reasons would cause me to reconsider my economic assumptions. Would the success of bitcoin cause you to re-examine yours?

If the sum of goods/service/other increases and the sum of the medium of exchange remains constant - won't deflation in terms of the medium of exchange's value ratio against the sum of goods/services/other follow?  Isn't this deflation suppose to be allocated pro-rata to the sum of the medium of exchange holders and not to a select few?  Isn't it an indication of productivity if the medium of exchange's value ratio against the sum of goods/services/other devaluated?  Shouldn't everybody on a pro-rata basis be rejoicing that humanity's productivity has added to the goods/services/other that they can exchange for the medium of exchange they are holding because they sacrificed earlier joys by holding on to it?  Didn't gold as a medium of exchange had a fairly constant quantity of existence - although it could be divided down to the molecular / atomic level - ensuring equitable wealth distribution to all holders of the medium of exchange automatically?  Did this happen without interest rate adjustments?  Does everybody get and pay the same interest rates?  Who benefit from imbalances in usury?

Confiscation via inflation is as bad/good as confiscation via taxation, a distinct political issue.
On the other hand, deflationary currency is provably impossible for any sensible definition of "currency".

Did the dropping of the Gold standard start the taking from Jack (pensioners, savers and holders of the money supply) to give to John (labor) for a job well done for the taker (democratically elected government, elected by the labor majority triumphing over the saving/depositing minority) ?

Did the dropping of the Gold standard ultimately end up nearly bankrupting everyone including majority labor, and minority pensioners, savers and holders of the money supply, after years of dwindling true value money supply?

1. As a matter of historical fact, the gold standard was in force for the period since the fall of bimetallism at the turn of the century, throughout the roaring 20s and the start of the depression, until being denounced by Roosevelt in 1933, fixing the value of the dollar at $20.67 per troy ounce.
http://en.wikipedia.org/wiki/Gold_Standard_Act
http://en.wikipedia.org/wiki/Gold_Reserve_Act

2. The Federal Reserve Act of 1913 required that each Federal Reserve Note issued to be backed by 40% of it's value in gold, and this provision was still in force at the time of the Great depression. It is this debasement from 100% to 40% that created high, 20%/year inflation during and after the 1st world war. This 1:2.5 devaluation was a means to finance war expenses, and continued after the end of the war due to sticky prices.

3. After this, beside acquiring more gold (which required tax income) the only possible form of monetary expansion was via fractional reserve banking. It is natural to assume that one who implies that the Fed "printed" money during the 20s is someone who does not understand how fractional banking works - economic illiterates the likes of which these forums are full (see above). Indeed, the Fed went as far as allowing an insane level of reserve of only 3% for time deposits, without dropping the 40% backing in gold of the FRNs:
http://www.fff.org/freedom/0397b.asp
The resulting monetary expansion enabled the economic growth of the US during the 20's, bringing real prosperity to millions of Americans.

4. When the illiquid and instable banking system finally imploded in 1929/30, so did the money supply created by such ridiculous shenanigans. The corset of the gold standard was once again choking the money supply of an economy that in the meantime grew much larger. The ensuing deflationary spiral halted economic activity, and the fed actually made it worse by hiking interests rates in defend of the gold standard, which was considered a critical political issue after the post-war inflation.

5. It was exactly when the gold standard was finally dropped that the economy returned to growth, enabled by an expanded, stable money supply able to grow with the underlining economy (if slightly inflationary). You may insult Keynesians at your discretion, but they do not have the ability to print jobs out of thin air:


Conclusion: the price deflation caused by a fixed monetary base was a key enabler of the Great Depression, together with dubious lending practices tolerated by the central bank, and bad reaction during the ensuing implosion. Going back to the primitive gold age is not the solution, what we need is a currency that is both stable (free of inflation/deflation in terms of PPP) and also out of the hands of bankers/goverments.

Are you a troll? I did not even mention once fractional reserve banking. I did not state that fractional reserve banking was or not possible with or wihtout a central bank. Is this some kind of message you have stored in your computer that use for everybody or are you directly crazy?


Yes, that was the issue, until you changed it here as I denounced. So you changed the issue, I called you on that but decided to answer you anyway, and now you accuse me of chaning the issue... I have no words.


Baseless statement. A price deflationary monetary system does not choke the economy as seen in history. You keep disregarding reality.


No, the USA did not mantain a 40% gold standard until the winter of 1933-1934. The Fed did not keep a 40% gold way before that. Please learn some monetary history.


The Great Depression did not end until the 40's. What some keynesians like to point as "prove" of their mesures working is just some statistics improving because of the government manipulations. But those manipulations is what caused the economy to stall until the 40's. There was no recovery, just some statistical improvements in the same way Obama likes to point out to some statistics as "prove" that the recession is over while everybody knows we are in a depression.


The situation in the UK was extremely different than in the USA, because the pound was overvalued during the 20's because of the decission of the Bank of England to return to a gold ratio it could not mantain after what he printed for the IWW. So it made sense that the economy benefited from loosing that stupid position that the central bank kept for so long.

The situation in the UK and the USA during the 20's was completely different, and comparing them just shows your historic ignorance again.


Yes, Keynes is well known for changing his economic views constantly. In fact, weeks before his death, he said he did not agree with a lot of what the keynesians were saying. How is constantly changing your views in contradictory ways a good thing? It shows that he did not understand how the economy worked.


And any quote of Keynes after 1930 too.


I am sorry to tell you that the one having selection bias is you. You can check the statements of Mises and Hayek predicting the 1929 crash. If you dont like reality and prefer to ignore it its not our problem.


I just wanted to answer you for the record, but I think you are just a troll so this is the last answer.

You don't even know the difference between armchair, amateur, professional, and expert and which two are worth talking to.

In any case this [blank] economist can buy diapers at a significant savings over last week and business for the supplier has made it possible to find even cheaper suppliers in larger quantities. 6 years ago my economics knowledge was not worth much.

Now I'm getting into the loans business and have the audacity to stay in BTCs as much as possible.

The rest of your response is a load of copy pasta.

That's not what fractional reserve is.  Not even close.  Today, a bank makes a loan first, and then seeks new deposits to cover between 0% and 10% of it.

And yes, the central bank is exactly what makes this scheme possible.  Fractional reserve lending wasn't created in 1913 when the Fed came online, but it did explode around that time.  The whole point of the Federal Reserve System was to set up a bank that could create money at will and lend it to other banks when necessary.  Bank runs simply do not happen now because the Fed can step in with an instant loan and prop up any failing bank.  FDIC stepped it up another notch, but that is a different topic.

First of all please let me take a stance regarding fractional reserve banking: accepting deposits, putting a fraction aside and lending out the remainder is the standard way any and all banks operate, regardless if they use gold, green paper or bitcoins. The notion that fractional reserve banking is somewhat only possible if enabled by a central bank is a Zeitgeist conspirationista type of fallacy. One who doesn't understand what fractional reserve banking is, and the way it enables monetary expansion from M1 to M2, like our friend here AV, is nothing but a crackpot armchair economist who does not even warrant a response.

Secondly, the issue in question is not whether a government-imposed gold standard is better than other types of "sound money", but rather if deflation is good or bad for the economy. Regardless if it's 100% or 40% backed by gold, any fixed money supply has the same natural tendency to deflate and choke the economy, by rewarding the hoarders and punishing debtors. The US maintained the 40% gold standard until the winter of 1933-1934, which unsurprisingly coincided with the very bottom of the depression. Comparatively, the keynesian decision to float the Pound in UK lead to a much quicker recovery.

The anecdotal evidence you present regarding the deep foresights of Austrian economists is largely irrelevant. Fisher was in no way a keynesian, not even Keynes was until after the onset of the depression (The General Theory was published in 1936). Indeed the depression was such a catalytic event that it provided deep insights to Keynes, much to the despair of Hayek who painstakingly prepared a compelling rebuttal of Keynes earlier work, only to be scoffed with the famous quip "I no longer believe that". So any quote from the Keynes before cca 1930 should be taken with a pound of salt. The ability to predict the future would have made Misses a very rich man shorting the stock market, I believe in this instance we're simply dealing with selection bias.

No problem.

First of all, I dont defend a government imposed gold standard. I defend competing currencies, be it gold, silver, bitcoins a combination or whatever peole like to use. Monetary freedom.

Second, why dont you answer to my post instead of ignoring the corrections I made? You just changed the subject to the Great Depression without answering anything I said. Its a lame tactic to avoid debate when you dont have an answer because your theories dont hold.

Third and most important, talking about "the gold standard" is terribly vague. The monetary systems that people label under "gold standard" are extremely different and only someone very ignorant about economics would join them together and treat them all the same. There are times where people used gold as money without any government intervention. Then governments usually start the shenerigans by imposing some type of specific gold coin, to later on create a central bank with paper (suposedly) backed by gold. But each monetary system is completely different (even when they all are using gold in some way) and its stupid to treat them all the same.

Specifically for the period of time you are mentioning: When the Federal Reserve was created in 1913 it wasnt that bad actually. It could only create dollars if they were backed by so called "real goods" and 40% of gold. Obviously this was only temporary and not 5 years were gone when they started changing the law so the Fed could expand. The first big expansion was for IWW where the Fed doubled prices in the USA in 5 years (if I recall corectly). To pay for the war the government gave the Fed the power to buy government bonds. Housing bubbles appeared all over the USA, specially in Florida. Finally the bubble popped and there was the crisis of 1921-22. This is a crisis keynesians dont like to talk about and ignore it because the government lowered taxes and reduced spending: the crisis was over in a year and a half, even when it started worse than the Great Depression.

Then the Fed finally got definitive powers to expand and it created the roaring 20's with a big stock market bubble that popped in 1929. How is this the fault of gold? And how is this related to other type of monetary systems like the ones I have explained earlier? Its stupid to group all the monetary systems that use gold in some way together because they can be very different.

For the record, during the 20's Fisher congratulated the Fed for its great job at managing the economy and during 1929 said that the collapse would not happen, that it was only a plateau. In 1927 Keynes said that they had now the hability to control the economy and that crisis were a thing of the past. Hayek and Mises said there was a bubble and that a crisis was coming. Mises even rejected a job at a big bank and remained in his professor job (earning a lot less money) because he said the bank would fail and he did not wanted his name associated with all that. His wife was not happy, but the bank end up failing 2 years later. There is unwritten law in economics: When a keynesian says they have now control of the economy and crisis are things of the past, a big crisis is coming.

What brought about the full wrath of the Great Depression was the 'progressive' presidents, Hoover and Roosevelt, who decided to use the force of the federal government to prevent nominal wages from dropping during a massive deflation in the money supply:


More about Hoover's interventions:

Hoover's pro-labor stance helped cause Great Depression, UCLA economist says

This was followed up by FDR's interference with wages:

FDR's policies prolonged Depression by 7 years, UCLA economists calculate

http://www.youtube.com/watch?v=d_YMR1Gk2JU

The FDR administration's other brilliant schemes included paying farmers huge amounts of money to destroy crops and kill livestock.

Classic dodge. It's Zeno's paradox tactics and that goddamm 29 27 25 30 dollar hotel puzzle that I can never get right.

The accusation was that gold caused the depression. The facts bear out that before fractional reserve banking there were not the convulsions witnessed during fractional reserve banking.

Deflecting the frame of reference is an old hack and it fails here every time. Try again.

Do you know what fractional reserve banking is? If you do, what the hell does the time span between 1790-1913 have to do with the lack of fractional reserve banking?

This is demonstrably false. Just look at a graph of dollar value from 1790-1913 and try to reconcile what you just said with the extreme spikes between inflation and deflation that occurred on extremely short intervals.

The truth is that for the last few centuries credit has made up the majority of the money supply, not currency. Even on the gold standard banks could inflate and deflate the money supply at will by manipulating credit and in fact that's where all the depressions in the 19th century came from - all the banks would agree to stop making loans on a certain date and crash the economy so that they could foreclose on everything.

Nonsense.  The Federal Reserve System was created in 1913, and enabled all of the banks to take fractional reserve lending to the next level by not having to worry about bank runs.  The inflation caused by all this fractional reserve lending meant that the gold standard was effectively dead.

If you have inflation, you do not have a gold standard.  If you have the gold standard, you do not have inflation.  These are definitions, not arguments.

What they did was pretend that they had a gold standard, while they actually inflated the currency.  Another name for this practice is "lying".

I love the part where you leave out that defending the gold standard and it's deflationary nature brought the full wrath of the Great Depression, the single most important economic event that shaped modern macro. Far from being relinquished to the outskirts of the economic science as they are today, "sound money" advocates like yourself were the top dogs in 1929, and the full scale of their incompetence has yet to be equaled.

I guess it would be 'market failure', in that the market did not choose it.  That doesn't make it a practical failure.

Free marketers don't necessarily believe the market always makes the perfect value decision.  For example, Car Company A model 1 may be a better value than Car Company B model 1, that doesn't mean it will succeed if everybody likes Car Company B because it is the local employer.

If price goes down, everybody (me included) will start buying again. If price stays stable, more businesses will use it. So price in the long term will increase as long as bitcoin miners do their part in maintaining a secured transaction network, which will happen because difficulty adjusts to network hashing capacity.

That would only be true if new blocks were to produce new coins indefinitely, either with the same amount (50BTC) or with a decreasing amount.  The current algorithm will cut that amount in half every N blocks until it reaches a point where new coin generation will cease altogether. At that point the inflation rate will be effectively 0%, not asymptotically approaching 0%.

It would if all variables were held constant, like in a laboratory. Unfortunately, in economics, there are thousands of variables and it is always dangerous to make conclusions like that. For example, the fact that the economy sucks doesn't mean Obama's socialism isn't good economic policy. And if the economy was strong, it wouldn't mean socialism was good economic policy. Way too many variables - conclusions must be very carefully drawn and examined. 

I think it has already got traction now, don't you?

Assuming that we're talking about a perfectly free market, wouldn't the failure of a deflationary currency in competition against an inflationary one mean precisely that?

Bitcoin is not deflationary, monetarily speaking. It is always increasing in quantity, at a decreasing rate, until it stops increasing in quantity. Thus, it's always inflationary until it becomes constant - ie neither inflationary nor deflationary.

If the money supply of Bitcoins -shrinks- then it could be considered deflationary. But unless a bunch of people are throwing their wallet files in the ocean I don't see that happening.

Thus, if Bitcoin fails, it neither proves nor disproves that inflationary currencies are superior - it is after all an inflationary currency itself. Clearly, humans are so used to using inflating currencies that when they see one which inflates much slower than national fiat monies, they cry out that it's deflationary!   

I might be misunderstanding the OP's question, but assuming I'm not...
Bitcoin could very well fail in the marketplace.  That doesn't mean a deflationary currency is inferior to an inflationary one.  It just means more people 'vote' for inflation by adopting the inflationary currency.

Just as they've voted for inflation over the last 100 years by constantly re-electing politicians who promise them 'freebies'.

Bitcoin has an inflation rate that asymptotically approaches 0%...

Much obliged! There are some forum members here who respond very negatively to anyone who doesn't know as much as they do about a given topic. Thanks for not being one of those and taking the time to elaborate in a polite and informative manner!

Bitcoin and Austrian economics are two pair of shoes. Have you actually gone to an Austrian website and asked them what they think of Bitcoin?

There are lots of potential reasons for Bitcoin failing, but deflation is not one of them.

You have two periods during the USA XIX century. One, after Andrew Jackson closed the Second Bank of the USA (the central bank of the USA back then) until the civil war, and then after the depression that the civil war brought until the beggining of the XX century, although during this last period there was the National Banks Act that centralized the credit in the New York banks and allowed for some expansion of credit and some bubbles. But it was very tame compared to what a central bank could do, so there was still price deflation. Its very important that you keep in mind that a lot of the statistics during this period are just bullshit. Because the data of this period was not precise lot of economists applied models to extrapolate the data and they pushed their own view with the model. Even keynesians like Cristina Rommer (worked for the Obama admin) admits that the data was grossly exagerated for the worse. If you want to get a good picutre you need to look at big intervals like 10 or 20 years.

Canada during big periods of the XIX century had a price deflationary economy. Scotland during the XVIII and XIX centuries. Etc...

I am an armchair economist (at best) and would be honestly interested in reading more about non-inflationary economies thriving in history. Would you mind listing some of these examples or at least giving me some Google search terms to set me in the right direction?

It would be much appreciated!

oh.  you're one of those "i've been screwed by the early adopters" people?

< shrug >

they took the risks to make it work.  you didn't.

i hope they all get a million times richer than i do.

Honestly, I have started mining now so it goes against my short term interests, but deep inside I hope Bitcoin collapses and a lot of the people that is in here not for the community or the currency and just purely for the monetary gain go away. Nothing wrong in wanting to earn money (I do), but Bitcoin is much more than that. If Bitcoin crashes to some degree and some people get caught on it, maybe we can focus 100% in Bitcoin as a currency and have a nice community here.

1 internet is worth 1000 internets. Bitcoin is a set of protocols as is the net. A crash would be an opportunity of a lifetime. All that would occur is a reboot with hindsight. It would be criminal to not take a ride on a much stronger project at flea market prices.

There are plenty of examples of how price deflationary economies grow and thrive. In fact, it is inflation that stops growth because it creates malinvestments.

The problem is that keynesians ignore the empricial evidences and keep repeating the same nonsense. If Bitcoin works or it does not it wont be due to price deflation.

Note that I was not referring to Bitcoin's many technical merits.  Me too, I'm convinced that the basic idea of a digital P2P currency will succeed.  The only point of contention is whether this currency will have builtin deflation (Bitcoin), or will it be technically identical except that it has a small but non-zero rate of inflation.

the failure of Bitcoin due to competition with a more successful form of crypto-currency would obviously only serve to strongly reinforce my assumptions as to the merits of the basic idea.

Bitcoin's failure due to some kind of unilateral implosion would definitely lead to reassessment.

http://twitter.com/#!/bramcohen

Consider the scenario where Bitcoin fails to get any sort of traction in the real world, its value ultimately implodes, and it ends up failing as either an alternative currency or as a store of value.  Moreover, this scenario occurs purely due to market forces, ie, there is no government crack down or any action against Bitcoin by The Powers That Be™.  Perhaps it simply happens that tomorrow someone starts Inflato-coin, a digital P2P currency based on Bitcoin but with the "tiny" difference that instead of a hard-cap on the total number of coins, Inflato-coin has an inflation rate that asymptotically approaches 1% or 0% or whatever small number without ever actually being 0%.  And it just so happens that Inflato-coin manages to overtake and eclipse Bitcoin.

There's no shortage of people warning on this forum and on the wider blogosphere that Bitcoin's builtin deflation may lead to the above scenario and thus ultimately to its demise. And I know there's a fair amount of Austrian School apologists in this forum who simply dismiss these warnings without further ado.  But would the realisation of this scenario lead Austrians to reconsider their views on Economic theory?

(Obviously the dual scenario also applies.  Should deflation turn out not to be a problem for Bitcoin's success, then inflationistas (me included) may need to revise their assumptions.)