Bitcoin is a fantastic idea, with one crucial mistake: the finite nature of bitcoins. The fact that coins will one day "run out" will almost certainly lead to increased speculation, which will in turn lead to a deflationary spiral, followed by a "bubble burst" when speculators sell all their bitcoins and average coin holders are left holding the bag.
Infinite coins would tie the value to the opportunity cost of computation, which is actually a really cool idea. Inflation based on the log of moore's law would ensure a steady inflationary rate based on computing power. This would deter speculators and incentivize innovation in computing power in order to more efficiently mine currency.
My hunch is that an uncapped bitcoin competitor would have a more difficult time getting off the ground, since the finite nature of bitcoins favors the first mover.
There is a finite amount of bitcoins because it is designed to mimic a natural resource - easy to "mine" at first, much more difficult to mine as time goes on, and eventually there are none left. If there were an infinite amount of bitcoins that could be generated, there would always be inflation in place roughly proportional to the amount of computational power being used to mine, and soon your bitcoins would be worthless.
As well, bitcoins are divisible to 8 decimal places, so I don't think there's any problem of "running out" in practice, bitcoins will just become more and more valuable. And why shouldn't they? Miners and investors now are expending time and money investing in them, which is a risk because bitcoin may never become popular. The greater the risk, the greater the reward, same in any type of business.
You know I've thought about this for awhile and I'm starting to come to the conclusion that inflation is a good thing. Having a currency that doesn't inflate is bad for 2 reasons. 1. The population keeps growing, 2. Humans are hoarders. Having currency inflate encourages society to use their money instead of squirreling it all away. Everything in life devalues over time and I don't think currency should be any different.
However I don't believe currency should be unpredicatble and inflate at the whims of the government.
That's not true. Violins, clinker bricks, gold, wine, classic aston martins, original prints of the Book of Mormon tend to appreciate. Some wisdom for you: cheese. When sovereign debt collapses, those of us who have been quietly stashing wheels of cheese will laugh all the way to market.
Humans are hoarders, but humans like stuff too. If they hoard everything, they're either conceptually sticking it under their mattress, or they're loaning it out to make more, which is putting it back in the market. If they like stuff, they'll eventually buy something with what they've been hoarding.
I know that's the core argument against deflationary currency, but I don't see how it's valid. I find it much more likely that it's a belief pushed on our society by money lenders, as they thrive on people buying things now that they can't afford at the moment. Not implying a conspiracy - that implies organization, which isn't necessary for such an emphasis. It's in the lenders' best interest, so they'll do so.
No one squirrels away money-- savings in a bank is still reinvested into the economy, by the bank through lending. Unless you are literally sticking money under a mattress, it gets circulated.
Rather than debating the validity of the Gold Standard (which is essentially what this discussion boils down to) I would direct you to a great set of podcasts from Planet Money[1] in particular [2][3] which discuss the general current thought on the Gold Standard, and show why most economists agree it is untenable in the long run.
You might want to read Rothbard's What Has Government Done to Our Money. It's available free both in pdf and mp3 at mises.org.
The tl;dr reply to the arguments in podcast 3 (banks fail if forced to redeem paper for gold) is that fractional reserve banking is incompatible with the gold standard. The gold standard treats paper money as mere warehouse receipts for gold. But bankers tend to issue more receipts than they have in gold, i.e., they commit fraud. When the public cash in their paper, the banks run out of gold, something that shouldn't happen if the bank only issued paper for gold in the first place. Rather than blame the bankers and put them in prison, governments have taken away people's right to use gold as money and even to own gold. Far from an argument against the gold standard, the history related in your reference 3 (about the collapse of the English and American banking industries) is a lesson of government tyranny, bank fraud, and an argument for real money as a check on government power.
Most of these arguments apply if you are going to be using a finite supply of money as your "main" currency. I agree that not having an inflatable supply is bad in such situations. However it is incredibly unlikely that bitcoin will ever occupy this niche(I highly doubt anyone is going to ever pay taxes in BTC). For what it is, an easy and quick way to transact payments anonymously* and securely online, it is incredibly valuable and I hope it caches on.
*How anonymous it is obviously depends on how sophisticated you are at using it.
It will still be bad for the adoption of Bitcoin as a trading currency. If I have a Bitcoin that is worth $1 today but will almost certainly be worth more than that in a month, what is my incentive to give you the Bitcoin? Wouldn't it be smarter for me to just give you $1 directly via PayPal?
As it stands the only reason to use Bitcoin currently is for shady deals, novelty, and speculation. I find it laughable that Bitcoin advocates laud the increase in the currency's value as a good thing. It is most certainly not a good sign for a currency when it's value increases dramatically over time such as the Bitcoin has.
>Wouldn't it be smarter for me to just give you $1 directly via PayPal?
Which you would get by... selling some amount of bitcoins to an exchanger. And the person you give $1 to would turn around and buy the same amount from another exchanger, less overall fees both ways.
It amounts to the same thing, unless you view bitcoins as a dead-end worthless location to put money in, because you never use them. Which is irrational - it's pure loss for you if you never use them.
But we're speaking hypothetically as if they were actually buying bitcoins, but not withdrawing them, because it's cheaper in the long run to pay with other currencies.
But if you never withdraw them, they have no value at all. Therefore some are withdrawn, and at least some of that $1 came from bitcoins. If you even withdraw one penny worth, you have added one penny to your net bank account, which has influence on your account forever.
The simpler hypothesis is that they intended to show the uselessness of a deflationary currency by infinitely hoarding. But that's completely irrational, so an alternate, simple hypothesis is that they are using bitcoin, so any money they have is influenced by bitcoins they exchange.
That also sounds suspiciously like the description of a Ponzi scheme, where the first people in make all the profit, and the people at the end get shafted.
I fundamentally disagree. The purpose of currency is to facilitate efficient trade. It is dangerous when currency is seen as an appreciating asset (deflation) as this will encourage hoarding (speculation) and discourage spending and investing.
These are well-worn fallacies. First, falling prices do not cause hoarding--demand for goods will increase if anything. Mild deflation is actually the sign of a healthy economy, competition, and technological innovation. Just look at the consumer electronics industry. Why do people buy iPads when they know a cheaper and better one will come along in the next couple years? According to your theory, wouldn't they just sit on their money?
The second fallacy is that 'hoarding' (long term saving, in other words) is a problem for an economy. It simply demonstrates a longer term time preference, which is actually necessary for larger and more complex uses of capital which can often take 10-20 years of investment and planning to pay off. It is axiomatic that the only purpose for hoarding cash is to eventually spend it. Trying to eliminate this 'problem' by confiscating wealth through inflation is both short-sighted and immoral.
Deflation is almost invariably a sign of economic distress. This can easily be observed historically.
By the way the term I think you mean is "quantity demanded" with respect to price, "demand" is invariant to price.
Under deflation average income decreases. It's not like everyone is suddenly richer. Your employer gets less money, and so has to pay you less, or lay off a portion of their workforce. The price of labor is a price like any other.
Assuming a fixed money supply, hoarding currency will cause deflation. Hoarding currency takes money out of the money supply. Saving by making investments is different; the money is still participating in the economy. Deflation discourages investment in useful activity. If you can earn a 5% rate of return just for already having money, why bother with a investment could return 5% or less?
America had steady deflation during a period of massive economic expansion in the late 1800s.
Deflation is only a sign of distress historically when preceded by government-induced monetary expansion. A boom causes a bust.
Wages are sticky so moderate deflation strongly benefits workers. Both wages and savings will gradually increase in purchasing power. Inflation punishes the lower classes disproportionately for the same reasons. It is the primary driver of income inequality in the world.
That anyone has been convinced a massive counterfeiting scheme in their currency is doing them a favor is a monumental feat of propaganda.
> Inflation punishes the lower classes disproportionately for the same reasons. It is the primary driver of income inequality in the world.
If that was true, then economies that use gold and silver as currency, and where there isn't a large supply of new money, there wouldn't be much income inequality. But there was plenty of income inequality in ancient Rome, and in most ancient despotisms. So I suspect your hypothesis is wrong.
"The problem of debasement in the Roman economy appears to be pervasive, although the severity of the debasement often paralleled the strength or weakness of the Empire."
Political authoritarianism, corruption, direct taxation, seizure, and military plunder are also effective ways for a ruling class to steal from the rest, so you can certainly have terrible inequality in societies with sound currency, but inflation is the most efficient and covert method, and has been the most popular way for governments and their corporate allies to gain at the expense of the world's poor and middle class in the last 100 years.
The deflationary periods in the 1800s correlate exactly with economic shocks during that time, especially the panic of 1837 and the Long Depression. If you think deflation is associated with growth you are simply wrong.
"The Great Deflation or the Great Sag refers to the period from 1870 until 1890 in which world prices of goods, materials and labor decreased.This had a negative effect on established industrial economies such as Great Britain while simultaneously allowing incredible growth in the United States which was just beginning to industrialize. Deflation has historically been more associated with recession, than growth, but this is one of the few sustained periods of deflationary growth in the history of the United States."
"Deflation is almost invariably a sign of economic distress."
Perhaps deflation isn't traditionally associated with growth, but it clearly can be and has been in history. Note 'one of the few'. Deflationary growth isn't that rare of a phenomenon in history, though its rarity will be inversely proportional to the prevalence of central banking, monetary expansion, and economic authoritarianism. The market's had an uphill battle.
In general, deflations associated with recessions will also be associated with reckless monetary expansion. Including this form of deflation in statistics can be misleading. Its cause is entirely different from the cause of gradual, moderate deflation as the natural result of an expanding economy with limited currency.
I feel like you're being pedantic. The key point is that the causal relationship between the deflationary periods and the associated recessions is in doubt.
> According to your theory, wouldn't they just sit on their money?
No, because they gain utility from the use of their iPad for the next couple years which they deem to be greater than the dollar value the iPad has lost due to depreciation. Furthermore, if their cash was earning interest they would have less incentive to buy iPads because the utility of 2 years' iPad use would have to outweigh both the depreciated value of the iPad as well as the appreciated value of their currency, which would lead to fewer iPads sold.
Productive investment means spending cash on something, like property, R&D, or plant and equipment. I don't see how this is the same as hoarding cash.
There is a psychology that iPads, and to an even greater extent iPhones, are a short life time product. So their price in a couple of years does not matter. Buying one now will not prevent you from buying one at the cheaper price in a couple of years as well.
"Productive investment means spending cash on something, like property, R&D, or plant and equipment. I don't see how this is the same as hoarding cash."
Exactly. No one actually hoards cash. Why would they? There is an enormous incentive to make idle money useful. But the greater point is: even if they do, so what? The money will be utilized at some point. That's what it's for. Why is it better used now than in the future? What is the 'correct' ratio of savings to immediate consumption? Given that you're unlikely to provide a convincing answer to this, wouldn't it be reasonable to let the owners of the money determine its allocation?
"There is a psychology that iPads, and to an even greater extent iPhones, are a short life time product. So their price in a couple of years does not matter. Buying one now will not prevent you from buying one at the cheaper price in a couple of years as well."
This is because the iPad's price falls and its quality increases. If each new iPad were twice the cost for the same performance, I don't think the lines at the Apple Store would get quite as long.
This is aggravated, in the long run, by the fact that they intend to support/incentivate the people who run nodes by transaction fees. Another friction factor.
It would be better to have small, fixed, predictable inflation, and pay the infrastructure with that (that is, with the newly generated money).
It worked in ancient Egypt. There was a currency that was more or less a receipt on stored grain. That "money" lost value over time due to storage costs and loss to decay and rodents. That inflation stimulated trade.
Currencies with so-called demurrage worked wonders in middle-century central Europe until they were banned.
Yes there has. The Great Depression was a deflationary spiral. Bank failures caused people to hoard currency. This hoarding led to decreased investment and economic activity. The decrease in economic activity led people to lose jobs, which caused them to hoard even more money.
In addition, the decrease in the money supply greatly increased the value of debts. You were getting paid less, but the your mortgage payment remained the same. This ended up being a crushing burden even for those who managed to keep their jobs.
> The deflationary contraction occurred between 1929 and 1933.
Sorry, but are you serious? For starters:
"By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product," Ohanian said. "His policy was the single most important event in precipitating the Great Depression."
If you're counting peak annual rate rather than total deflation then part of 1920-1921 was worse than 1929-1933, but if we're talking about momentary deflation then neither was the worst deflation in US history.
Thanks. I was speaking about annual rate. BTW, a very instructional chart.
Can I rant a bit? Thanks again. It'll be about deflationary blips and deflationary spirals.
Have you ever noticed that the definition of a deflationary spiral self-contradictory? You know how it goes, people hoard money in order to spend them later, but when that later comes they do not spend them but continue to hoard even more in order to spend them later-later. Then later-later-later. Then... Well, the endgame is that everybody dies and zombies take over the earth. (Zombies are immune to hoarding, it seems)
Do people really act like this? Because if at any step of such an iteration the people will start spending (and the low prices and increases money balances will provide for an excellent temptation) then the vicious circle is broken, the spiral is no more, and we are contemplating here a deflationary blip. Or event if blip doesn't sound reputable enough.
Looks to me like a totally legit process. Exactly what the Walras Auctioneer will do in his search for a price equilibrium.
The problem is that people hoard money in anticipation of even lower prices down the road. Why should I buy good X for $Y today, when I anticipate that good X will be available for $(.85)Y tomorrow? If enough people think like I do, the quantity of X demanded drops, causing the market to create the very price drop I was anticipating.
In addition, deflation increases the value of debts - any spare cash I have is going to be soaked up by the increasing value of my debts, and will not be available for further consumption.
> Why should I buy good X for $Y today, when I anticipate that good X will be available for $(.85)Y tomorrow?
And why should you buy the good X for $(.85)Y tomorrow, if it will cost $(.7225)Y the day after tomorrow? Right?
I see that's why people never spend money on new phones and computers!!!1!!
Now seriously, the assumption that people will forever postpone consumption is absurd and wrong. But the whole deflationary spiral theory falls apart without that assumption.
Are a big topic, actually, but this one had nothing to do with a deflationary spiral. Hint: A one time deflationary event is not the same as deflationary spiral. Previous deflationary event of similar magnitude happened 1920-1921. The "Forgotten Depression", so to speak.
Of course the FR (fractional reserve) banks are inherently instable and that's a feature of the system. If you want the ability to inflate the money supply at bankers' will and whim, don't act surprised when it (the money supply) collapses to more a sustainable level.
> .. caused people to hoard currency.
Source? Genuinely curious.
> This hoarding led to decreased investment and economic activity.
There was decreased investment and economic activity. But because of hoarding? It's too self-serving argument as such. There were at least 3 other major causes as well, and I can name them.
> the decrease in the money supply greatly increased the value of debts
Sure. So it means that the creditors are wealthier and can afford themselves to spend and invest more. Not what I'd call an economic horror.
Anyway, the most vivid evocation of horrors of a deflationary event is not a example of a deflationary spiral, and that's exactly what I was asking for.
Sure, if for whatever reasons the amount of money in an economy decreases then the prices had to adjust and it can be painful but.. what are options? But what this has to do with a deflationary spiral?
Infinite coins would tie the value to the opportunity cost of computation, which is actually a really cool idea. Inflation based on the log of moore's law would ensure a steady inflationary rate based on computing power. This would deter speculators and incentivize innovation in computing power in order to more efficiently mine currency.
My hunch is that an uncapped bitcoin competitor would have a more difficult time getting off the ground, since the finite nature of bitcoins favors the first mover.