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How do you avoid a deflationary spiral (same issue as gold standard)? You can kind of get around it by continuing below 8 decimal places but it seems like a po

by asdf333 16y ago

How do you avoid a deflationary spiral (same issue as gold standard)? You can kind of get around it by continuing below 8 decimal places but it seems like a potentially fatal issue as the bitcoin economy expands.

kiba 16y ago
Deflationary spiral is a heavily debated topic on the forum but I believe most bitcoiners come to accept it as a good thing, rather than a bad thing. Here's some of the search result: http://www.bitcoin.org/smf/index.php?action=search2 http://www.bitcoin.org/smf/index.php?action=search2
gwern 16y ago
Astoundingly, that's in the FAQ: https://en.bitcoin.it/wiki/FAQ#Bitcoin_s_monetary_policy_causes_a_deflationary_spiral https://en.bitcoin.it/wiki/FAQ#Bitcoin_s_monetary_policy_cau... Linking to https://en.bitcoin.it/wiki/Deflationary_spiral https://en.bitcoin.it/wiki/Deflationary_spiral (Answer may not be great, but someone has thought about it.)
po 16y ago
Another example of the issues faced by a private currency were related by Krugman in 1998. It describes the economic issues of a Capitol Hill baby-siting club that issued a limited amount of scrip to keep track of hours of time for people offering and using baby sitting services: http://www.slate.com/id/1937/ http://www.slate.com/id/1937/ It's a good description of an unexpected problem. Edit: also don't miss the sidebar about solving the problem of cycles with inflation: http://www.slate.com/id/1937/sidebar/42410/ http://www.slate.com/id/1937/sidebar/42410/
- nickpinkston 16y ago
  Though really that analogy isn't to say small groups shouldn't use non-fiat currencies. It's referring to an economy as a whole using them and not being able to use Keynesian techniques to smooth boom/bust cycles. No one could stop "ByteCoins" from coming out and issuing similar currency that might be backed similarly - unlike the problem of not having anymore gold. As this happened more, people would create synthetic currencies (like the IMF's SDR) to hold a basket of these goods - which would probably be adopted by many, or used for collateral for risk-mitigation instruments. TL;DR: Yes, there are some problems, but this doesn't have many of the issues the gold-standard did.
- nas 16y ago
  Fascinating. Still, I'm not sure the problem with the babysitting scrip applies to bitcoin. You must be very careful to differentiate between monetary deflation and price deflation. In the case of the babysitting scrib, it sounds like it was clearly a problem of monetary deflation. The payment of dues took coupons out of circulation, deflating the monetary supply. Aside from lost wallets, bitcoin does not have monetary deflation. A doomsday scenario involving price deflation is just a theory since as far as I know there has never been an example in real-life. Logically, it does not make sense to me but I-Am-Not-An-Economist. Bitcoin has been undergoing price deflation for much of its life. So far, it has not caused a problem except that vendors are inconvenienced by relatively quickly changing prices.
  - po 16y ago
    I not sure if the lessons there are applicable either. There are a ton of differences. For one thing the coupons 'value' was fixed to an amount of work and they were not divisible. Also don't miss the sidebar at the end of that article. I was firmly in the "inflation is always bad" camp until I started thinking about it a bit. Inflation is definitely an incentive not to hoard the currency. It causes money to flow back into the economy. Now I'm not sure where I stand on the issue other than I know that I don't understand it enough. Suppose a Buffet-like successful person was able to hoard up 10% of bitcoin. This money is effectively out of circulation because he's a scrooge that will never spend it. Because bitcoin is divisible, it doesn't really matter much and the price reflects the amount in circulation. Then let's say he died and passed it onto his kids who were irresponsible and spent it all in 3 years. The amount in circulation would be increased by a huge amount (assuming that most people have some savings) relative to the amount in circulation before. The liquidity of the bitcoin would change significantly but the underlying value of it doesn't. I believe that's what you were talking about with monetary deflation and price deflation, no? Based on that, it means I would expect the price of bitcoin to fluctuate quite wildly. Then again, I guess gold has the same problem.

by asdf333 16y ago

kiba 16y ago

Deflationary spiral is a heavily debated topic on the forum but I believe most bitcoiners come to accept it as a good thing, rather than a bad thing. Here's some of the search result: http://www.bitcoin.org/smf/index.php?action=search2 http://www.bitcoin.org/smf/index.php?action=search2

gwern 16y ago

Astoundingly, that's in the FAQ: https://en.bitcoin.it/wiki/FAQ#Bitcoin_s_monetary_policy_causes_a_deflationary_spiral https://en.bitcoin.it/wiki/FAQ#Bitcoin_s_monetary_policy_cau... Linking to https://en.bitcoin.it/wiki/Deflationary_spiral https://en.bitcoin.it/wiki/Deflationary_spiral (Answer may not be great, but someone has thought about it.)

po 16y ago

Another example of the issues faced by a private currency were related by Krugman in 1998. It describes the economic issues of a Capitol Hill baby-siting club that issued a limited amount of scrip to keep track of hours of time for people offering and using baby sitting services: http://www.slate.com/id/1937/ http://www.slate.com/id/1937/ It's a good description of an unexpected problem. Edit: also don't miss the sidebar about solving the problem of cycles with inflation: http://www.slate.com/id/1937/sidebar/42410/ http://www.slate.com/id/1937/sidebar/42410/

nickpinkston 16y ago
Though really that analogy isn't to say small groups shouldn't use non-fiat currencies. It's referring to an economy as a whole using them and not being able to use Keynesian techniques to smooth boom/bust cycles. No one could stop "ByteCoins" from coming out and issuing similar currency that might be backed similarly - unlike the problem of not having anymore gold. As this happened more, people would create synthetic currencies (like the IMF's SDR) to hold a basket of these goods - which would probably be adopted by many, or used for collateral for risk-mitigation instruments. TL;DR: Yes, there are some problems, but this doesn't have many of the issues the gold-standard did.
nas 16y ago
Fascinating. Still, I'm not sure the problem with the babysitting scrip applies to bitcoin. You must be very careful to differentiate between monetary deflation and price deflation. In the case of the babysitting scrib, it sounds like it was clearly a problem of monetary deflation. The payment of dues took coupons out of circulation, deflating the monetary supply. Aside from lost wallets, bitcoin does not have monetary deflation. A doomsday scenario involving price deflation is just a theory since as far as I know there has never been an example in real-life. Logically, it does not make sense to me but I-Am-Not-An-Economist. Bitcoin has been undergoing price deflation for much of its life. So far, it has not caused a problem except that vendors are inconvenienced by relatively quickly changing prices.
- po 16y ago
  I not sure if the lessons there are applicable either. There are a ton of differences. For one thing the coupons 'value' was fixed to an amount of work and they were not divisible. Also don't miss the sidebar at the end of that article. I was firmly in the "inflation is always bad" camp until I started thinking about it a bit. Inflation is definitely an incentive not to hoard the currency. It causes money to flow back into the economy. Now I'm not sure where I stand on the issue other than I know that I don't understand it enough. Suppose a Buffet-like successful person was able to hoard up 10% of bitcoin. This money is effectively out of circulation because he's a scrooge that will never spend it. Because bitcoin is divisible, it doesn't really matter much and the price reflects the amount in circulation. Then let's say he died and passed it onto his kids who were irresponsible and spent it all in 3 years. The amount in circulation would be increased by a huge amount (assuming that most people have some savings) relative to the amount in circulation before. The liquidity of the bitcoin would change significantly but the underlying value of it doesn't. I believe that's what you were talking about with monetary deflation and price deflation, no? Based on that, it means I would expect the price of bitcoin to fluctuate quite wildly. Then again, I guess gold has the same problem.