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> since they're not backed by a central authority (government or bank). That's a weird way of wording that. The US Dollar (along with many other currencies) do

> since they're not backed by a central authority (government or bank). That's a weird way of wording that. The US Dollar (along with many other currencies) doesn't meet the definition of a "backed currency", because it doesn't have a direct correspondence with the value of a commodity. If the value of a currency isn't guaranteed, it isn't backed. Instead, the value of the US dollar is determined by imports/exports, interest rates, monetary velocity, confidence, etc. There are many other differences that the US dollar has with bitcoin that are more concrete: 1) It's legal tender in the US 2) It's exclusively accepted for the purposes of taxes (follows from 1) 3) It has a dynamic (as opposed to bitcoin's fixed) monetary policy (which is either good or bad depending who you talk to) 4) It's the world's reserve currency 5) It's far more popular than bitcoin 6) It's not deflationary (which is either good or bad depending who you talk to)

polotics 9y ago
Nice list. Two questions: How would you distinguiah "not deflationary" and "inflationary"? How is a non-shrinking money supply deflationary?
- im_down_w_otp 9y ago
  Because there's a fixed amount of it, but not a fixed amount of people, and not a fixed amount of demand for economic activity/transactions, which makes it deflationary. It's not that it's explicitly shrinking itself. It's that it's shrinking relative to other factors because it has a fixed supply.
- irln 9y ago
  Not saying this is true, however, I believe the fear of deflation on the "non-shrinking money supply" is that if the money supply doesn't expand beyond a certain point (e.g. bitcoin 21M limit), folks will horde the medium of exchange instead of spending it. With less demand for goods because no medium of exchange to purchase it, prices drop. Caveat: this presupposes that Bitcoin will become a medium of exchange.
- zzalpha 9y ago
  Do you buy into the quantity theory of money? https://en.wikipedia.org/wiki/Quantity_theory_of_money https://en.wikipedia.org/wiki/Quantity_theory_of_money If so, then a fixed money supply is necessarily deflationary in an expanding economy. Of course, by that same argument, the US should be experiencing massive inflation right now due to the actions of the government during the financial crisis which led to a tripling of the monetary base, and yet it never materialized...
  - unknown_apostle 9y ago
    Inflation is very hard to truly understand and track: - Monetary inflation and price inflation are different things. Right now we have unprecedented monetary inflation in terms of base money, but almost no price inflation. - Price inflation is always a very non-linear function of its drivers. - Price inflation also doesn't have to be uniform. Some people would argue that the monetary measures taken after the financial crisis have already led to price inflation, namely price inflation of financial assets such as bonds and stocks. In this view, the money has been sloshing around the world as excess liquidity, being passed on like a hot potato that nobody wants to hold, propping up new bubbles but without leaving the financial system. - A simple quantity theory of money may not apply because we live in a complex credit based system. Base money is just a liability of the central bank. We don't pay and save much in base money, we pay and save mostly using liabilities of private banks. As long as the increases in base money don't trigger increases in these broader forms of money and credit (this is what it means when they say "the transmission mechanism has broken down" or "the velocity of money is too low"), we shouldn't normally expect any direct impact of base money increases on price inflation. About bitcoin: any healthy, advancing economy running mostly on actual bitcoins as a medium of exchange would probably see price deflation in terms of bitcoin. If we were to have technological progress like we had the last 50 years, the price deflation would probably be unprecedented. But if we could manage to piramid ever increasing amounts of credit on top of actual bitcoins and pay and save mostly in those credits, probably not so much :-)
- flashdance 9y ago
  As for question 1: The US dollar is not deflationary because it is inflationary. I wasn't really trying to make a distinction between the two, I just worded it weirdly in the OP. As for question 2: There's two parts to this answer. First, you don't need a money supply to be shrinking to have deflation. In May the US dollar deflated 0.1%, and plenty were printed [1]. Many things can cause deflation, see this: https://en.wikipedia.org/wiki/Deflation#Causes_and_corresponding_types https://en.wikipedia.org/wiki/Deflation#Causes_and_correspon... Second, bitcoin does have more money mined every day, just like the US dollar. And the rate of bitcoin mining (4%/year) is actually higher than the rate of US dollar printing. However, bitcoin has a predetermined monetary policy: the mining rate will eventually drop to zero, which is why many people argue that bitcoin is deflationary. [1] https://blogs.adobe.com/conversations/2017/06/may-dpi-report-second-month-of-u-s-deflation-after-a-long-stretch-of-rising-prices.html https://blogs.adobe.com/conversations/2017/06/may-dpi-report...

polotics 9y ago

Nice list. Two questions: How would you distinguiah "not deflationary" and "inflationary"? How is a non-shrinking money supply deflationary?

im_down_w_otp 9y ago
Because there's a fixed amount of it, but not a fixed amount of people, and not a fixed amount of demand for economic activity/transactions, which makes it deflationary. It's not that it's explicitly shrinking itself. It's that it's shrinking relative to other factors because it has a fixed supply.
irln 9y ago
Not saying this is true, however, I believe the fear of deflation on the "non-shrinking money supply" is that if the money supply doesn't expand beyond a certain point (e.g. bitcoin 21M limit), folks will horde the medium of exchange instead of spending it. With less demand for goods because no medium of exchange to purchase it, prices drop. Caveat: this presupposes that Bitcoin will become a medium of exchange.
zzalpha 9y ago
Do you buy into the quantity theory of money? https://en.wikipedia.org/wiki/Quantity_theory_of_money https://en.wikipedia.org/wiki/Quantity_theory_of_money If so, then a fixed money supply is necessarily deflationary in an expanding economy. Of course, by that same argument, the US should be experiencing massive inflation right now due to the actions of the government during the financial crisis which led to a tripling of the monetary base, and yet it never materialized...
- unknown_apostle 9y ago
  Inflation is very hard to truly understand and track: - Monetary inflation and price inflation are different things. Right now we have unprecedented monetary inflation in terms of base money, but almost no price inflation. - Price inflation is always a very non-linear function of its drivers. - Price inflation also doesn't have to be uniform. Some people would argue that the monetary measures taken after the financial crisis have already led to price inflation, namely price inflation of financial assets such as bonds and stocks. In this view, the money has been sloshing around the world as excess liquidity, being passed on like a hot potato that nobody wants to hold, propping up new bubbles but without leaving the financial system. - A simple quantity theory of money may not apply because we live in a complex credit based system. Base money is just a liability of the central bank. We don't pay and save much in base money, we pay and save mostly using liabilities of private banks. As long as the increases in base money don't trigger increases in these broader forms of money and credit (this is what it means when they say "the transmission mechanism has broken down" or "the velocity of money is too low"), we shouldn't normally expect any direct impact of base money increases on price inflation. About bitcoin: any healthy, advancing economy running mostly on actual bitcoins as a medium of exchange would probably see price deflation in terms of bitcoin. If we were to have technological progress like we had the last 50 years, the price deflation would probably be unprecedented. But if we could manage to piramid ever increasing amounts of credit on top of actual bitcoins and pay and save mostly in those credits, probably not so much :-)
flashdance 9y ago
As for question 1: The US dollar is not deflationary because it is inflationary. I wasn't really trying to make a distinction between the two, I just worded it weirdly in the OP. As for question 2: There's two parts to this answer. First, you don't need a money supply to be shrinking to have deflation. In May the US dollar deflated 0.1%, and plenty were printed [1]. Many things can cause deflation, see this: https://en.wikipedia.org/wiki/Deflation#Causes_and_corresponding_types https://en.wikipedia.org/wiki/Deflation#Causes_and_correspon... Second, bitcoin does have more money mined every day, just like the US dollar. And the rate of bitcoin mining (4%/year) is actually higher than the rate of US dollar printing. However, bitcoin has a predetermined monetary policy: the mining rate will eventually drop to zero, which is why many people argue that bitcoin is deflationary. [1] https://blogs.adobe.com/conversations/2017/06/may-dpi-report-second-month-of-u-s-deflation-after-a-long-stretch-of-rising-prices.html https://blogs.adobe.com/conversations/2017/06/may-dpi-report...