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> A thought experiment: how would an economy run solely on a Bitcoin-like currency behave? And how would it respond to business cycles? Terribly. Bitcoin is b

> A thought experiment: how would an economy run solely on a Bitcoin-like currency behave? And how would it respond to business cycles? Terribly. Bitcoin is by design deflationary, which creates an incentive to maintain currency under the mattress. This is accentuated by the fact that bitcoin can't be used in fractional-reserve-banking. This means that there is little accumulated capital available to borrow and invest. It also means that any investment would need higher returns than the expected appreciation of a bitcoin, which might set a very high bar for investments, making raising capital nearly impossible. Today, in most open economies, nobody controls the supply of money, it is increased and decreased dynamically by the market according to supply and demand and to maintain a certain level of risk on the banking system (with some adjustments from the central bank).

theseatoms 8y ago
> which creates an incentive to maintain currency under the mattress. Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money. > Today, in most open economies, nobody controls the supply of money, ... With all due respect, this is demonstrably false. The Federal Reserve and its member banks control the supply of money.
- AznHisoka 8y ago
  "Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money." I love this comment. Everyone just blindly says "People will put money in their mattress. Economy will go down" and then it's case closed.. but then what happens next? They just won't buy food? water? won't go to the mall? They just stay at home and hunker down? They won't even be watching entertainment since they won't be paying for a Netflix subscription too, apparently.
  - luckydata 8y ago
    It's not like it never happened before. Just read up on the great depression and you'll get an idea.
    - ucaetano 8y ago
      Deflation and deflationary episodes aren't the same as a deflationary currency.
      - luckydata 8y ago
        read up on the gold standard then.
        ucaetano 8y ago
        Sight...seriously? Gold wasn't a deflationary currency, not only that, the supply of gold increases over time, and some times suddenly such as when the Spanish empire started extracting gold and silver from the new world resulting in the Spanish Price Revolution. Seriously, please go take some economics classes...
  - lmkg 8y ago
    The proposition is not that people won't spend money. The proposition is that they won't invest the money that they're not spending. Keeping money under the mattress is not competing against groceries and Netflix, it's competing against government bonds and/or interest-bearing bank accounts.
    - logicchains 8y ago
      If people sudddenly hoard money, they're essentially reducing the supply of money, which means the value of money will go up (as there's less of it), effectively acting as a transfer of purchasing power to the people who are actually spending it at that time. Imagine for instance I do something that generates a lot of value (money), then burn that money (or hide it under my mattress 'til I die of old age). This essentially means I gave "value" to society for free, as I created "value" but did not consume any "value" in return, leaving that "value" I could have consumed with my money to be consumed by others.
      - ucaetano 8y ago
        Nope, the problem isn't people hoarding money, the problem is doing so outside of a banking system, where such money is put to work in investments. If the economy is growing in the long term and the supply of money is constant, the value of money (vs. goods) will always increase, and everyone has an incentive to hold currency instead of investing in the economy. The result is that you can't raise capital for a startup or for an infrastructure project.
        throwawaylolx 8y ago
        This is not responding to GP's argument: the point is that "hoarders" implicitly provide capital for others by reducing the circulating supply.
        ucaetano 8y ago
        Driving deflation isn't providing value. The claim isn't even wrong, it doesn't make sense.
  - ucaetano 8y ago
    I'm not talking about spending, I'm talking about savings, capital accumulation and re-investment. Your entire point (and your parent's) isn't even wrong. And no, the federal reserve doesn't control the supply of money by any means. It influences it, sure, but it doesn't control.
  - kristjansson 8y ago
    The deflationary argument is about a difference in degree, not in kind. A deflationary monetary regime does not stop all commerce, it just creates incentives to defer or forgo discretionary spending and investment. That, by traditional economic measures, is Bad.
- ucaetano 8y ago
  > Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money. Sorry, but you didn't understand how capital accumulation works. People work and so on, get paid and so on. Then they spend part of it on their living expenses and save part of it (that's the domestic savings rate). The money saved doesn't just sit under a mattress, it becomes the stock of capital in a country (plus and minus capital imports and exports and so on), which is then invested in projects (startups, infrastructure, etc.) that need capital. Banks are the intermediaries in this market, taking capital from savers and providing investments and loans to projects that need capital. That's why so many emerging countries are desperate to get people into the banking system and to move their savings to the banks (the US did it by Executive Order 6102 for example). Without this stock of capital, it is impossible to start a business, or to fund large infrastructure projects. It is a key and necessary component of a healthy economy. And bitcoin kills it completely.
  - logicchains 8y ago
    >The money saved doesn't just sit under a mattress, it becomes the stock of capital in a country (plus and minus capital imports and exports and so on), which is then invested in projects (startups, infrastructure, etc.) that need capital. Money doesn't become the stock of capital; money isn't capital. Money is a proxy for value. Capital is created by consuming less value than is produced, so the non-consumed value can be invested, which savings can achieve even if the money itself is not invested. This is because saving/hoarding essentially reduces the money supply, thus increasing the value of money - transferring purchasing power from the saver to people currently spending money. If I create x dollars of value, then burn the money I recieved in compensation, I've essentially gifted the value I produced to other currency holders, which they can consume or invest. The US experienced deflation through much of the 19th century, yet saw higher growth rates then than in the 20th century. For instance, from https://www.investopedia.com/ask/answers/040715/were-there-any-periods-major-deflation-us-history.asp https://www.investopedia.com/ask/answers/040715/were-there-a... (don't have time to find a more formal source): "The period between 1873 and 1879 saw prices drop by nearly 3% per year, yet real national product growth was almost 7% during the same time." And overall "the price level (the average of current prices across the entire spectrum of goods and services produced in the economy) was actually 50% higher in 1800 than it was in 1900." So clearly it's possible to have strong economic growth during deflationary times.
andrewmu 8y ago
It's true that Bitcoin can't be used legally in fractional-reserve banking, but given the behaviour of exchanges to continue trading despite a proportion of their holdings having been hacked or embezzled, there was an element of de-facto fractional reserve going on.
- briatx 8y ago
  That's not fractional reserve, that's just fraud. Exchanges are not banks.
- andrewla 8y ago
  I don't know what it means to say that it can't be used legally in fractional-reserve banking. Fractional-reserve banking is just a pooled-risk lending instrument. If you can lend something, then you can fractionally reserve bank with it. To put it another way, when you have dollars deposited in a bank, you exchange your dollars for a contract saying that the bank will remit so many dollars to you on demand. You value that contract at pretty much the face value of the dollar amount of the deposit because the risk of default on that contract is considered extremely low. Fractional reserve banking in Bitcoin would work the same way -- the bank would give out loans while promising to make their depositors (creditors) whole should they require their deposits. They cannot satisfy that contract if more than a certain number of depositors come knocking, but that's true for regular banks too. With a liquid credit market, even runs on the bank, as long as they are slow, are fairly tractable; you can just sell your debts for their face value (discounted, most likely, for the fact that the counterparty to the sale may not use the same risk metrics) and thereby make your depositors whole without having to call in any outstanding loans.
narrator 8y ago
We were on the gold standard in the late 19th century and the economy grew very fast. A fixed money supply puts more economic power in the hands of the industrialists and their retained earnings instead of the banks.
- ucaetano 8y ago
  Gold standard != using gold as currency.
- Filligree 8y ago
  The gilded age isn't a joyful standard to follow, however
  - narrator 8y ago
    For the late 19th century, compared to the rest of the world, it was pretty good.
jpmattia 8y ago
> This is accentuated by the fact that bitcoin can't be used in fractional-reserve-banking. I don't know what you mean to say here, but you can absolutely use bitcoin for fractional-reserve banking, just as gold was used through history. Pretty much since the dawn of banking, a bank collects reserves from its depositors, and then loans outs a designated fraction of those reserves. It's not like that process was somehow invented with the Federal Reserve. What you cannot do is have a lender of last resort with the ability to print money out of thin air, who can then flood the economy with cheap money; But that has nothing to do with fractional-reserve banking.
- ucaetano 8y ago
  No, you can't, you need to create a new "currency" to do so. You can't do fractional reserve banking with gold. What banks did was create "gold bonds" that were just a promise to pay. And then you're just creating a bitcoin-back currency, which at some point will inevitably see the same fate as all currencies did, and being de-linked from bitcoin just as other currencies were de-linked from gold.
  - andrewla 8y ago
    People can and did do fractional reserve banking with gold. Notes for deposits was a much later innovation. Nothing stops you from lending out physical specie from your vault as long as you can give depositors their money with high probability when they demand it.
    - ucaetano 8y ago
      No, they didn't. They did fractional reserve with gold-denominated currencies. Sure, you could create a bitcoin-denominated currency (a terrible idea, but let's entertain it) and perform fractional-reserve banking on it. But at that point, bitcoins become irrelevant.
      - andrewla 8y ago
        Well, we could go back and forth with "no they didn't" and "yes they did". Let's throw in some citations. You're in a hard place, because proving a negative is tricky. So I think it's incumbent on me to provide some examples. Let me start by throwing out a little bit of terminology just to make it clear if we're on the same page. Loans have existed since money existed. The only difference between a private loan and fractional reserve banking is that the lender is a) lending someone else's money and b) allowing depositors to withdraw money despite the fact that the sum of all depositor's money is not physically possessed by the bank. Wikipedia's page [1] is a reasonable place to start. The Babylonians were issuing loans in gold. The Greek and Egyptians were issuing loans in gold. The Romans were issuing loans in gold. None of these (except the Egyptians, with their seed grain short-term currencies) were issuing any sort of derivative currency or notes. Throughout medieval times, letters of credit were frequently used as a form of correspondence banking [2] for travelers. The lack of high-speed communication meant that the settlement and clearing of loans could take months or years, but the depositors (correspondent banks in foreign countries) were unlikely to make any immediate claims on their deposits except through such letters. The letters could be redeemed, usually, directly for gold. You can argue whether this constitutes fractional reserve banking; it's in some ways closer to what we would now call "corporate paper"; very short-term credit extended to very high trust individuals or institutions. [1] https://en.wikipedia.org/wiki/History_of_banking#Earliest_forms_of_banking https://en.wikipedia.org/wiki/History_of_banking#Earliest_fo... [2] https://en.wikipedia.org/wiki/Merchant_bank https://en.wikipedia.org/wiki/Merchant_bank
andrewla 8y ago
> Bitcoin is by design deflationary I keep hearing this. Saying that Bitcoin is deflationary is exactly equivalent to saying that the value of Bitcoin will always go up. In a Bitcoin economy, the value of Bitcoin would vary over time in response to various factors; technological innovation causing actually cheaper goods, and credit markets that allow people to trade on the future vs. the present value of money.
- ucaetano 8y ago
  If the supply of money is constant but the demand for it (due to economic growth) is growing, the value of money will always increase, and the prices of things will always decrease. This is trivial. And the consequence is that everyone is better off holding currency than investing it. Which is disastrous for the economy.
  - andrewla 8y ago
    This is not trivial. Even a pure monetarist admits monetary velocity into this equation. If we lived in a universe where the price of Bitcoin would always increase in a reliable fashion, then it is straightforward to integrate that information into the current price of Bitcoin based on prevailing interest rates. There is simply no such thing as an asset that will always increase in value -- _that_ is trivial.
    - ucaetano 8y ago
      Oh, since you want to bring velocity into the game: a currency with infinite velocity has 0 value, and is therefore irrelevant. That's why it is trivial, the velocity of money doesn't change the deal, unless it is varying wildly, and in that case, you're screwed anyway...
      - andrewla 8y ago
        Why do we have to jump to infinity? Why can't the velocity of money vary based on market forces, including economic growth? Credit markets are the closest thing we have to visibility into monetary velocity. This is all assuming that we're talking about modern Chicago-school monetary theory. In Keynsian (i.e. most mainstream economics) there's not even a universally accepted connection between money supply and price inflation/deflation. Most Keynsian theorists (and practitioners) agree that directly manipulating credit markets through artificial price floors on future money is a much more sane way to affect price inflation and deflation, while also having the secondary effect of manipulating the employment market. The idea of an asset that always increases in value (or a "free lunch", let's call it) is explicitly disowned by every theory of economics, from the Austrians & monetarists to the Keynsians & the Marxists.
radiusvector 8y ago
Just the deflationary nature of a currency isn't enough to destabilize cycles. Cycles run on credit-worthiness, or how likely is someone to return x% return in the future on an investment made today. Compared to the Fed, which makes arbitrary (non-cyclical) adjustments to the "cost of money", Bitcoin's more predictable deflationary attributes might lead to more predictability in financial cycles. This is of course, assuming the hundreds of other problems with Bitcoin as a currency, or credit-instrument have been solved.
- ucaetano 8y ago
  > Just the deflationary nature of a currency isn't enough to destabilize cycles. No need for cycles: a deflationary currency means that you're better off holding it than investing it. This is disastrous for the economy. > Compared to the Fed, which makes arbitrary (non-cyclical) adjustments to the "cost of money", Bitcoin's more predictable deflationary attributes might lead to more predictability in financial cycles. Quite the opposite. The money supply wouldn't adapt dynamically to the demand for money, leading to harsher crises.
  - logicchains 8y ago
    >This is disastrous for the economy. This is FUD. The US experienced deflation through much of the 19th century, yet saw higher growth rates then than in the 20th century. For instance, from https://www.investopedia.com/ask/answers/040715/were-there-any-periods-major-deflation-us-history.asp https://www.investopedia.com/ask/answers/040715/were-there-a... (don't have time to find a more formal source): "The period between 1873 and 1879 saw prices drop by nearly 3% per year, yet real national product growth was almost 7% during the same time." And overall "the price level (the average of current prices across the entire spectrum of goods and services produced in the economy) was actually 50% higher in 1800 than it was in 1900." So clearly it's possible to have strong economic growth during deflationary times.
    - ucaetano 8y ago
      You're confusing deflation with deflationary currency.
lkrubner 8y ago
> fractional-reserve-banking You are confusing this with something else. If there was no fractional-reserve-banking under the gold standard, then why did bank panics happen? If the bank had $1 million loaned out, and also had $1 million of gold in its vaults, then why would anyone panic? Yet bank panics were common. And that's because the banks all engaged in fractional-reserve-banking -- if they had $1 million in gold in their vaults, they would make loans worth $5 million.
- ucaetano 8y ago
  Because you literally can't loan $5M in physical gold if you only have $1M in physical gold in your vaults. You can't just make gold out of thin air. Same with a bitcoin. You can, however, issue gold-denominated notes in $5M even if you only have $1M in the bank. But you're not lending gold, you're lending paper currency.
  - lkrubner 8y ago
    I can't tell if you are talking about real life, or if you are talking about a hypothetical scenario. You are aware that bank panics were common when the gold standard was in force? Banks routinely made $5 million in loans when they had $1 million of gold in their vaults?
    - ucaetano 8y ago
      Loaning out a gold-backed currency isn't loaning out gold. You seem to be confusing "1 pound of gold" with "a piece of paper saying that bank X will trade this for 1 pound of gold". The two are not the same.
proy24 8y ago
perversely hyper* deflationary

theseatoms 8y ago

> which creates an incentive to maintain currency under the mattress. Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money. > Today, in most open economies, nobody controls the supply of money, ... With all due respect, this is demonstrably false. The Federal Reserve and its member banks control the supply of money.

AznHisoka 8y ago
"Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money." I love this comment. Everyone just blindly says "People will put money in their mattress. Economy will go down" and then it's case closed.. but then what happens next? They just won't buy food? water? won't go to the mall? They just stay at home and hunker down? They won't even be watching entertainment since they won't be paying for a Netflix subscription too, apparently.
- luckydata 8y ago
  It's not like it never happened before. Just read up on the great depression and you'll get an idea.
  - ucaetano 8y ago
    Deflation and deflationary episodes aren't the same as a deflationary currency.
    - luckydata 8y ago
      read up on the gold standard then.
      - ucaetano 8y ago
        Sight...seriously? Gold wasn't a deflationary currency, not only that, the supply of gold increases over time, and some times suddenly such as when the Spanish empire started extracting gold and silver from the new world resulting in the Spanish Price Revolution. Seriously, please go take some economics classes...
- lmkg 8y ago
  The proposition is not that people won't spend money. The proposition is that they won't invest the money that they're not spending. Keeping money under the mattress is not competing against groceries and Netflix, it's competing against government bonds and/or interest-bearing bank accounts.
  - logicchains 8y ago
    If people sudddenly hoard money, they're essentially reducing the supply of money, which means the value of money will go up (as there's less of it), effectively acting as a transfer of purchasing power to the people who are actually spending it at that time. Imagine for instance I do something that generates a lot of value (money), then burn that money (or hide it under my mattress 'til I die of old age). This essentially means I gave "value" to society for free, as I created "value" but did not consume any "value" in return, leaving that "value" I could have consumed with my money to be consumed by others.
    - ucaetano 8y ago
      Nope, the problem isn't people hoarding money, the problem is doing so outside of a banking system, where such money is put to work in investments. If the economy is growing in the long term and the supply of money is constant, the value of money (vs. goods) will always increase, and everyone has an incentive to hold currency instead of investing in the economy. The result is that you can't raise capital for a startup or for an infrastructure project.
      - throwawaylolx 8y ago
        This is not responding to GP's argument: the point is that "hoarders" implicitly provide capital for others by reducing the circulating supply.
        ucaetano 8y ago
        Driving deflation isn't providing value. The claim isn't even wrong, it doesn't make sense.
- ucaetano 8y ago
  I'm not talking about spending, I'm talking about savings, capital accumulation and re-investment. Your entire point (and your parent's) isn't even wrong. And no, the federal reserve doesn't control the supply of money by any means. It influences it, sure, but it doesn't control.
- kristjansson 8y ago
  The deflationary argument is about a difference in degree, not in kind. A deflationary monetary regime does not stop all commerce, it just creates incentives to defer or forgo discretionary spending and investment. That, by traditional economic measures, is Bad.
ucaetano 8y ago
> Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money. Sorry, but you didn't understand how capital accumulation works. People work and so on, get paid and so on. Then they spend part of it on their living expenses and save part of it (that's the domestic savings rate). The money saved doesn't just sit under a mattress, it becomes the stock of capital in a country (plus and minus capital imports and exports and so on), which is then invested in projects (startups, infrastructure, etc.) that need capital. Banks are the intermediaries in this market, taking capital from savers and providing investments and loans to projects that need capital. That's why so many emerging countries are desperate to get people into the banking system and to move their savings to the banks (the US did it by Executive Order 6102 for example). Without this stock of capital, it is impossible to start a business, or to fund large infrastructure projects. It is a key and necessary component of a healthy economy. And bitcoin kills it completely.
- logicchains 8y ago
  >The money saved doesn't just sit under a mattress, it becomes the stock of capital in a country (plus and minus capital imports and exports and so on), which is then invested in projects (startups, infrastructure, etc.) that need capital. Money doesn't become the stock of capital; money isn't capital. Money is a proxy for value. Capital is created by consuming less value than is produced, so the non-consumed value can be invested, which savings can achieve even if the money itself is not invested. This is because saving/hoarding essentially reduces the money supply, thus increasing the value of money - transferring purchasing power from the saver to people currently spending money. If I create x dollars of value, then burn the money I recieved in compensation, I've essentially gifted the value I produced to other currency holders, which they can consume or invest. The US experienced deflation through much of the 19th century, yet saw higher growth rates then than in the 20th century. For instance, from https://www.investopedia.com/ask/answers/040715/were-there-any-periods-major-deflation-us-history.asp https://www.investopedia.com/ask/answers/040715/were-there-a... (don't have time to find a more formal source): "The period between 1873 and 1879 saw prices drop by nearly 3% per year, yet real national product growth was almost 7% during the same time." And overall "the price level (the average of current prices across the entire spectrum of goods and services produced in the economy) was actually 50% higher in 1800 than it was in 1900." So clearly it's possible to have strong economic growth during deflationary times.

andrewmu 8y ago

It's true that Bitcoin can't be used legally in fractional-reserve banking, but given the behaviour of exchanges to continue trading despite a proportion of their holdings having been hacked or embezzled, there was an element of de-facto fractional reserve going on.

briatx 8y ago
That's not fractional reserve, that's just fraud. Exchanges are not banks.
andrewla 8y ago
I don't know what it means to say that it can't be used legally in fractional-reserve banking. Fractional-reserve banking is just a pooled-risk lending instrument. If you can lend something, then you can fractionally reserve bank with it. To put it another way, when you have dollars deposited in a bank, you exchange your dollars for a contract saying that the bank will remit so many dollars to you on demand. You value that contract at pretty much the face value of the dollar amount of the deposit because the risk of default on that contract is considered extremely low. Fractional reserve banking in Bitcoin would work the same way -- the bank would give out loans while promising to make their depositors (creditors) whole should they require their deposits. They cannot satisfy that contract if more than a certain number of depositors come knocking, but that's true for regular banks too. With a liquid credit market, even runs on the bank, as long as they are slow, are fairly tractable; you can just sell your debts for their face value (discounted, most likely, for the fact that the counterparty to the sale may not use the same risk metrics) and thereby make your depositors whole without having to call in any outstanding loans.

narrator 8y ago

We were on the gold standard in the late 19th century and the economy grew very fast. A fixed money supply puts more economic power in the hands of the industrialists and their retained earnings instead of the banks.

ucaetano 8y ago
Gold standard != using gold as currency.
Filligree 8y ago
The gilded age isn't a joyful standard to follow, however
- narrator 8y ago
  For the late 19th century, compared to the rest of the world, it was pretty good.

jpmattia 8y ago

> This is accentuated by the fact that bitcoin can't be used in fractional-reserve-banking. I don't know what you mean to say here, but you can absolutely use bitcoin for fractional-reserve banking, just as gold was used through history. Pretty much since the dawn of banking, a bank collects reserves from its depositors, and then loans outs a designated fraction of those reserves. It's not like that process was somehow invented with the Federal Reserve. What you cannot do is have a lender of last resort with the ability to print money out of thin air, who can then flood the economy with cheap money; But that has nothing to do with fractional-reserve banking.

ucaetano 8y ago
No, you can't, you need to create a new "currency" to do so. You can't do fractional reserve banking with gold. What banks did was create "gold bonds" that were just a promise to pay. And then you're just creating a bitcoin-back currency, which at some point will inevitably see the same fate as all currencies did, and being de-linked from bitcoin just as other currencies were de-linked from gold.
- andrewla 8y ago
  People can and did do fractional reserve banking with gold. Notes for deposits was a much later innovation. Nothing stops you from lending out physical specie from your vault as long as you can give depositors their money with high probability when they demand it.
  - ucaetano 8y ago
    No, they didn't. They did fractional reserve with gold-denominated currencies. Sure, you could create a bitcoin-denominated currency (a terrible idea, but let's entertain it) and perform fractional-reserve banking on it. But at that point, bitcoins become irrelevant.
    - andrewla 8y ago
      Well, we could go back and forth with "no they didn't" and "yes they did". Let's throw in some citations. You're in a hard place, because proving a negative is tricky. So I think it's incumbent on me to provide some examples. Let me start by throwing out a little bit of terminology just to make it clear if we're on the same page. Loans have existed since money existed. The only difference between a private loan and fractional reserve banking is that the lender is a) lending someone else's money and b) allowing depositors to withdraw money despite the fact that the sum of all depositor's money is not physically possessed by the bank. Wikipedia's page [1] is a reasonable place to start. The Babylonians were issuing loans in gold. The Greek and Egyptians were issuing loans in gold. The Romans were issuing loans in gold. None of these (except the Egyptians, with their seed grain short-term currencies) were issuing any sort of derivative currency or notes. Throughout medieval times, letters of credit were frequently used as a form of correspondence banking [2] for travelers. The lack of high-speed communication meant that the settlement and clearing of loans could take months or years, but the depositors (correspondent banks in foreign countries) were unlikely to make any immediate claims on their deposits except through such letters. The letters could be redeemed, usually, directly for gold. You can argue whether this constitutes fractional reserve banking; it's in some ways closer to what we would now call "corporate paper"; very short-term credit extended to very high trust individuals or institutions. [1] https://en.wikipedia.org/wiki/History_of_banking#Earliest_forms_of_banking https://en.wikipedia.org/wiki/History_of_banking#Earliest_fo... [2] https://en.wikipedia.org/wiki/Merchant_bank https://en.wikipedia.org/wiki/Merchant_bank

andrewla 8y ago

> Bitcoin is by design deflationary I keep hearing this. Saying that Bitcoin is deflationary is exactly equivalent to saying that the value of Bitcoin will always go up. In a Bitcoin economy, the value of Bitcoin would vary over time in response to various factors; technological innovation causing actually cheaper goods, and credit markets that allow people to trade on the future vs. the present value of money.

ucaetano 8y ago
If the supply of money is constant but the demand for it (due to economic growth) is growing, the value of money will always increase, and the prices of things will always decrease. This is trivial. And the consequence is that everyone is better off holding currency than investing it. Which is disastrous for the economy.
- andrewla 8y ago
  This is not trivial. Even a pure monetarist admits monetary velocity into this equation. If we lived in a universe where the price of Bitcoin would always increase in a reliable fashion, then it is straightforward to integrate that information into the current price of Bitcoin based on prevailing interest rates. There is simply no such thing as an asset that will always increase in value -- _that_ is trivial.
  - ucaetano 8y ago
    Oh, since you want to bring velocity into the game: a currency with infinite velocity has 0 value, and is therefore irrelevant. That's why it is trivial, the velocity of money doesn't change the deal, unless it is varying wildly, and in that case, you're screwed anyway...
    - andrewla 8y ago
      Why do we have to jump to infinity? Why can't the velocity of money vary based on market forces, including economic growth? Credit markets are the closest thing we have to visibility into monetary velocity. This is all assuming that we're talking about modern Chicago-school monetary theory. In Keynsian (i.e. most mainstream economics) there's not even a universally accepted connection between money supply and price inflation/deflation. Most Keynsian theorists (and practitioners) agree that directly manipulating credit markets through artificial price floors on future money is a much more sane way to affect price inflation and deflation, while also having the secondary effect of manipulating the employment market. The idea of an asset that always increases in value (or a "free lunch", let's call it) is explicitly disowned by every theory of economics, from the Austrians & monetarists to the Keynsians & the Marxists.

radiusvector 8y ago

Just the deflationary nature of a currency isn't enough to destabilize cycles. Cycles run on credit-worthiness, or how likely is someone to return x% return in the future on an investment made today. Compared to the Fed, which makes arbitrary (non-cyclical) adjustments to the "cost of money", Bitcoin's more predictable deflationary attributes might lead to more predictability in financial cycles. This is of course, assuming the hundreds of other problems with Bitcoin as a currency, or credit-instrument have been solved.

ucaetano 8y ago
> Just the deflationary nature of a currency isn't enough to destabilize cycles. No need for cycles: a deflationary currency means that you're better off holding it than investing it. This is disastrous for the economy. > Compared to the Fed, which makes arbitrary (non-cyclical) adjustments to the "cost of money", Bitcoin's more predictable deflationary attributes might lead to more predictability in financial cycles. Quite the opposite. The money supply wouldn't adapt dynamically to the demand for money, leading to harsher crises.
- logicchains 8y ago
  >This is disastrous for the economy. This is FUD. The US experienced deflation through much of the 19th century, yet saw higher growth rates then than in the 20th century. For instance, from https://www.investopedia.com/ask/answers/040715/were-there-any-periods-major-deflation-us-history.asp https://www.investopedia.com/ask/answers/040715/were-there-a... (don't have time to find a more formal source): "The period between 1873 and 1879 saw prices drop by nearly 3% per year, yet real national product growth was almost 7% during the same time." And overall "the price level (the average of current prices across the entire spectrum of goods and services produced in the economy) was actually 50% higher in 1800 than it was in 1900." So clearly it's possible to have strong economic growth during deflationary times.
  - ucaetano 8y ago
    You're confusing deflation with deflationary currency.

lkrubner 8y ago

> fractional-reserve-banking You are confusing this with something else. If there was no fractional-reserve-banking under the gold standard, then why did bank panics happen? If the bank had $1 million loaned out, and also had $1 million of gold in its vaults, then why would anyone panic? Yet bank panics were common. And that's because the banks all engaged in fractional-reserve-banking -- if they had $1 million in gold in their vaults, they would make loans worth $5 million.

ucaetano 8y ago
Because you literally can't loan $5M in physical gold if you only have $1M in physical gold in your vaults. You can't just make gold out of thin air. Same with a bitcoin. You can, however, issue gold-denominated notes in $5M even if you only have $1M in the bank. But you're not lending gold, you're lending paper currency.
- lkrubner 8y ago
  I can't tell if you are talking about real life, or if you are talking about a hypothetical scenario. You are aware that bank panics were common when the gold standard was in force? Banks routinely made $5 million in loans when they had $1 million of gold in their vaults?
  - ucaetano 8y ago
    Loaning out a gold-backed currency isn't loaning out gold. You seem to be confusing "1 pound of gold" with "a piece of paper saying that bank X will trade this for 1 pound of gold". The two are not the same.

proy24 8y ago

perversely hyper* deflationary