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> Perhaps when Bitcoin reaches supply maturity the value will stabilize I absolutely hate Krugman, but this is Econ 101 and even he gets it right. Bitcoin was

by maratd 15y ago

> Perhaps when Bitcoin reaches supply maturity the value will stabilize I absolutely hate Krugman, but this is Econ 101 and even he gets it right. Bitcoin was a flawed experiment from the start because it has an absolute supply limit. Reaching that limit won't help. It'll make things worse. The money supply needs to expand for healthy economic activity and growth. If it doesn't, weird shit starts to happen. Here's an example. In a normal economy, the population is constantly expanding. That means you need more $$$ in the system for each new person. If more money doesn't enter the system, the value of money goes up because of increasing demand and you start experiencing deflation. Deflation is really really bad. Imagine you're a store owner. All of a sudden, people stop buying your stuff. Not because they don't want to, they love your stuff ... they just don't have enough money. So you lower your prices. Things go back to normal. Your own expenses go down as well, after all, everybody experienced deflation. No big deal, right? This is what happens when a computer scientist creates a currency. Just adjust to the new price level, right? WRONG. It IS a big deal. Think of the psychological effect of having to CONSTANTLY lower your prices on your goods. At some point, you'll hang yourself. You want to charge more, not less. It is absolutely depressing and has a real effect. Deflation is absolutely horrible.

euroclydon 15y ago
How is it any better when prices keep going up? Imagine you're, gasp, a saver, and one day you decide to buy that hamburger, but now you need five or ten times the money to make the purchase as you did, when you stashed it away twenty years ago.
- rabidsnail 15y ago
  Inflation encourages the savers to put their money to work (by investing in the stock market, for example) so that the amount of money that they have increases in proportion to the growth of the overall economy. This is a benefit.
  - 3pt14159 15y ago
    You can't have it both ways. Either consumption is encouraged via inflation or investment is encouraged. For example, say that prices were slightly deflationary, as they are with computer equipment, across the board.* I could easily make the case that saving goes up! Why? Well if I took my goldbucks and lent them to you at 1% interest we would both be happy. My total return would be something like 3% per year (2% deflation + 1% interest) non-risk adjusted. You would be happy because there are plenty of people that are willing to lend money to you. Because you have access to lending capital, you hire more decreasing unemployment. You can try to make the case that you wouldn't hire because there would be no demand for your goods, but in practice there are A. Other countries, and B. A precedent that people do continue to buy, even during deflationary pressures. The reason people buy computers and cars despite the fact that they are becoming better and cheaper as time goes on is that they expect that cars and computers are going to continue to get better and cheaper as time goes on. They know that they will face the same "save or spend" decision 2 year later, and they really do need a computer and a car. The problem with inflation is that "encouraging spending" practically only happens to the poor or middle lower class. I can afford to research gold, silver, lithium, cesium, grain futures, bitcoins, etc. and protect my assets from long term depreciation, but they can't. So you end up with a class of people that have a negative net worth, that is totally unprepared for long term retirement. * I know that money velocity starts to make a difference, but it is in effect the same as printing more money.
    - alenlpeacock 15y ago
      Inflation/deflation has very little impact on the poor; the poor spend almost 100% of their income within a short window of receiving it just to survive. From the view of poverty, saving money is a rich man's luxury, and worries about inflation/deflation rates goes along with it. For those with excess money, inflation does encourage investment. Under a steady inflationary pressure, it is irrational to hoard your excess money under a mattress or put it in the bank and earn interest, because interest won't keep up with inflation. Your money evaporates away under that scenario. Instead, if you want to act rationally, you would look for other places to put your money where it could outperform inflation. That's the only way you have a chance of holding onto the value it represents. Deflation discourages spending, but it also discourages investment. Sure, you could justify rolling the dice on some investments to try to outperform the constant bump in value you get every day from deflation, but why bother with that extra risk? If you just sit on your money, trying not to spend it, you'll have way more value in the future than you could ever hope to get out of it today. This isn't about saving vs. spending, it's about using money for what money is meant for -- exchange of value for value, not as a durable permanent store of value.
johnthedebs 15y ago
The problem isn't the psychological effects of needing to constantly lower prices – this happens all the time in the tech industry, and everyone in that industry is doing just fine psychologically. Rather, it has to do with the fact that constantly down-shifting prices cause people not to buy nearly as often as they would if prices were stable or slightly inflationary. As a result of that, the economy slows down (sometimes dramatically).
- danielsoneg 15y ago
  The other big problem is that debt loads don't drop along with prices - which effectively makes them rise. Falling prices (which lead to falling wages) + stable debt loads make it far harder for debtors to pay off their debts, which puts even further drag on the economy.
  - stevenwagner 15y ago
    I would not short gold or Apple either, the risk would be huge! So are you agreeing that bitcoins will become worth more then? So I shouldnt take a bitcoin loan out, I should take a dollar loan out and buy bitcoins with it. Or you are saying bitcoins are bad so they will go down in value ... and I should... whaaat?
    - msbarnett 15y ago
      He's saying that the characteristics of bitcoins make it a lousy currency (people have little incentive to spend or loan it). Whether or not it's an asset worthy of investing in is a separate question. (I'd argue that it isn't, but that's a separate issue from the characteristics that make it a bad currency).
      - jarek 15y ago
        As an investment, it's like gold but without the intrinsic value part and the "historically used as an investment for the past couple of millenia" part.
padmanabhan01 15y ago
But isn't one rule of money that it should at least hold it's value? Isn't that the main reason gold was used before? What is the point of using something as money if it keeps decreasing in value?
- tptacek 15y ago
  http://3.bp.blogspot.com/-_KuUh8iKx_c/TX_URc8gLpI/AAAAAAAAA6M/ES2msXT72PI/s1600/U.S.%2BYearly%2BInflation%2Bsince%2B1900.jpg http://3.bp.blogspot.com/-_KuUh8iKx_c/TX_URc8gLpI/AAAAAAAAA6... Please cite a source on this "one rule of money" you're thinking of?
  - padmanabhan01 15y ago
    http://wiki.answers.com/Q/What_are_the_four_properties_of_money_please_identify_and_explain http://wiki.answers.com/Q/What_are_the_four_properties_of_mo... says one of the properties of money is that it has to be a 'store of value'.
    - tptacek 15y ago
      Logic that suggests that roads aren't a medium for transportation because they have friction.
- 2arrs2ells 15y ago
  If money is decreasing in value, it gives people a huge incentive to do something with it - buy something or invest. As long as the decrease to the value is small (1-3%) and predictable, this is a good thing.
  - tptacek 15y ago
    Since deflation is an obvious tax on investment and purchasing, arguments that increases in the value of a currency are "obviously" a good thing serve as a sort of litmus test for why people are interested in things like Bitcoin. The subtextual motivation for Bitcoin advocacy has always been "it's a speculative asset and I hold a position in it". Everything else is just rhetorical cover. The unfortunate reality is that even by reasoning through Bitcoin's programmed-in deflation, we're dignifying Bitcoin. Bitcoin itself is a sham. The original paper may have been a good-faith contribution to the state of the art in cryptocurrencies, but the "economy" is a trap; a realistic-looking distributed transaction clearing system built on a deliberately volatile wholly synthetic "asset" that exists for the purpose of creating pump-and-dump scams.
sesqu 15y ago
> In a normal economy, the population is constantly expanding. That may be, but the western world is then abnormal. US population is projected to peak at 2030, and a number of countries already have negative population growth. Exponential growth assumptions should not be made for long periods ahead. http://en.wikipedia.org/wiki/List_of_countries_by_population_growth_rate http://en.wikipedia.org/wiki/List_of_countries_by_population...
- maratd 15y ago
  Our economies, culture, the whole of our civilization is based on the assumption of population growth. Because, quite simply, that's how it's always been. We have never before experienced a reduction in the human population for any extended period of time. I wouldn't count the US out yet, it can easily augment its population with immigration. So can all the other developed countries. Anyway, regardless, making a currency with a fixed supply doesn't work under any scenario. With a constant or increasing population, you want to increase the money supply. With a decreasing population, you want to decrease it.
- stevenwagner 15y ago
  Most people don't seem to realize that when your currency inflates, there are people who get the new money. Inflation=wealth redistribution
  - maratd 15y ago
    You're assuming the government turns on the printing press and then spends some money on some social programs? That really doesn't happen anymore (if it ever did). Various operations by the Treasury and Fed affect the banks. Then you get a shiny new credit card in the mail. I wouldn't call that wealth redistribution.
    - nazgulnarsil 15y ago
      I've never seen anyone, including keynesians try to claim that newly created money goes directly to consumers. wow. read more.
stevenwagner 15y ago
Thats it? Your big punch on deflation is the "psychological effect"? You seem to fundamentally not understanding math and have an emotional attachment to a particular scale of measurement.
Duff 15y ago
Bitcoin is not a flawed experiment -- it made the mysterious early adopters quite a bit of money.
api 15y ago
"In a normal economy, the population is constantly expanding." Exponential growth can never continue forever. We are probably at or near the practical limits to growth on this planet. I think inflationary currency is an ugly hack to cope with the era of exponential growth.
SkyMarshal 15y ago
>Bitcoin was a flawed experiment from the start because it has an absolute supply limit. Reaching that limit won't help. It'll make things worse. The money supply needs to expand for healthy economic activity and growth. If it doesn't, weird shit starts to happen. Everyone has an opinion about BTC's deflationary nature, but few people seem to consider the possibility that BTC might be the first currency that works substantially differently in this regard to all other past currencies. BTC is the first currency that is infinitely subdivisible. Ostensibly only 21 million BTC will be created, but since it is subdivisible to 8 decimal places, there will be [21 million / .00000001] = 2.1 quadrillion atomic units. And that is only an artifact of the data structure used to implement it in code, not an inviolable requirement of the protocol. The precision, and hence the quantity of BTC, can be increased in the future if necessary. This aspect of BTC, along with the fact that is not a debt-backed interest-bearing fiat currency might require a rethinking of the Quantity Theory of Money as it applies to Bitcoin-like currencies. Additionally, only ~7 million Bitcoins have currently been created, only ~33% of the eventual total. The BTC economy is so new you can't buy much with it besides other currencies, computer parts from Newegg etc., and perhaps illegal drugs. Finally, forks like Solidcoin are appearing based on perceptions of consequential flaws in the BTC technology (absolute dependence on miners to extend the blockchain, etc.). Imho it's worth withholding judgement for a few years at least and just observing how it develops. It's something potentially new, to which the old rules may not apply.
- gamble 15y ago
  > The precision, and hence the quantity of BTC, can be increased in the future if necessary. The ability to subdivide BTC is irrelevant to the question of depreciation. If 1 BTC goes from $10 USD to $20 USD, then 0.5 BTC goes from $5 USD to $10 USD. It doesn't change the money supply any more than slicing up a gold nugget creates more gold. Bitcoin is still inherently deflationary. All subdivision does is avoid imposing a minimum transaction size. Bitcoin is also unique in that a substantial portion of the total BTC that will ever exist have already been destroyed, as many early adopters abandoned or lost their wallets.
Amincd 15y ago
"Think of the psychological effect of having to CONSTANTLY lower your prices on your goods. At some point, you'll hang yourself. You want to charge more, not less. It is absolutely depressing and has a real effect." This is not a big deal and people adapt to what provides the maximum real profit. You're only going to get depressed if you're used to the old trend of ever increasing prices.
anon5 15y ago
> I absolutely hate Krugman.... Why? ... Perhaps your views are different. Can you please point to a few good writers which you like with contrasting views than his. (Asking a serious question. Since I, for one, like his views a lot)
- maratd 15y ago
  > Why? He has a tendency of twisting basic economic theory to fit his political agenda. It makes me nauseous. > Can you please point to a few good writers which you like with contrasting views than his. Just read the Wall Street Journal. They actually specialize in this sort of thing. You'll get a far more accurate picture of what's going on. NYT is good for regional and national news, not for business and economic commentary.

by maratd 15y ago

euroclydon 15y ago

How is it any better when prices keep going up? Imagine you're, gasp, a saver, and one day you decide to buy that hamburger, but now you need five or ten times the money to make the purchase as you did, when you stashed it away twenty years ago.

rabidsnail 15y ago
Inflation encourages the savers to put their money to work (by investing in the stock market, for example) so that the amount of money that they have increases in proportion to the growth of the overall economy. This is a benefit.
- 3pt14159 15y ago
  You can't have it both ways. Either consumption is encouraged via inflation or investment is encouraged. For example, say that prices were slightly deflationary, as they are with computer equipment, across the board.* I could easily make the case that saving goes up! Why? Well if I took my goldbucks and lent them to you at 1% interest we would both be happy. My total return would be something like 3% per year (2% deflation + 1% interest) non-risk adjusted. You would be happy because there are plenty of people that are willing to lend money to you. Because you have access to lending capital, you hire more decreasing unemployment. You can try to make the case that you wouldn't hire because there would be no demand for your goods, but in practice there are A. Other countries, and B. A precedent that people do continue to buy, even during deflationary pressures. The reason people buy computers and cars despite the fact that they are becoming better and cheaper as time goes on is that they expect that cars and computers are going to continue to get better and cheaper as time goes on. They know that they will face the same "save or spend" decision 2 year later, and they really do need a computer and a car. The problem with inflation is that "encouraging spending" practically only happens to the poor or middle lower class. I can afford to research gold, silver, lithium, cesium, grain futures, bitcoins, etc. and protect my assets from long term depreciation, but they can't. So you end up with a class of people that have a negative net worth, that is totally unprepared for long term retirement. * I know that money velocity starts to make a difference, but it is in effect the same as printing more money.
  - alenlpeacock 15y ago
    Inflation/deflation has very little impact on the poor; the poor spend almost 100% of their income within a short window of receiving it just to survive. From the view of poverty, saving money is a rich man's luxury, and worries about inflation/deflation rates goes along with it. For those with excess money, inflation does encourage investment. Under a steady inflationary pressure, it is irrational to hoard your excess money under a mattress or put it in the bank and earn interest, because interest won't keep up with inflation. Your money evaporates away under that scenario. Instead, if you want to act rationally, you would look for other places to put your money where it could outperform inflation. That's the only way you have a chance of holding onto the value it represents. Deflation discourages spending, but it also discourages investment. Sure, you could justify rolling the dice on some investments to try to outperform the constant bump in value you get every day from deflation, but why bother with that extra risk? If you just sit on your money, trying not to spend it, you'll have way more value in the future than you could ever hope to get out of it today. This isn't about saving vs. spending, it's about using money for what money is meant for -- exchange of value for value, not as a durable permanent store of value.

johnthedebs 15y ago

The problem isn't the psychological effects of needing to constantly lower prices – this happens all the time in the tech industry, and everyone in that industry is doing just fine psychologically. Rather, it has to do with the fact that constantly down-shifting prices cause people not to buy nearly as often as they would if prices were stable or slightly inflationary. As a result of that, the economy slows down (sometimes dramatically).

danielsoneg 15y ago
The other big problem is that debt loads don't drop along with prices - which effectively makes them rise. Falling prices (which lead to falling wages) + stable debt loads make it far harder for debtors to pay off their debts, which puts even further drag on the economy.
- stevenwagner 15y ago
  I would not short gold or Apple either, the risk would be huge! So are you agreeing that bitcoins will become worth more then? So I shouldnt take a bitcoin loan out, I should take a dollar loan out and buy bitcoins with it. Or you are saying bitcoins are bad so they will go down in value ... and I should... whaaat?
  - msbarnett 15y ago
    He's saying that the characteristics of bitcoins make it a lousy currency (people have little incentive to spend or loan it). Whether or not it's an asset worthy of investing in is a separate question. (I'd argue that it isn't, but that's a separate issue from the characteristics that make it a bad currency).
    - jarek 15y ago
      As an investment, it's like gold but without the intrinsic value part and the "historically used as an investment for the past couple of millenia" part.

padmanabhan01 15y ago

But isn't one rule of money that it should at least hold it's value? Isn't that the main reason gold was used before? What is the point of using something as money if it keeps decreasing in value?

tptacek 15y ago
http://3.bp.blogspot.com/-_KuUh8iKx_c/TX_URc8gLpI/AAAAAAAAA6M/ES2msXT72PI/s1600/U.S.%2BYearly%2BInflation%2Bsince%2B1900.jpg http://3.bp.blogspot.com/-_KuUh8iKx_c/TX_URc8gLpI/AAAAAAAAA6... Please cite a source on this "one rule of money" you're thinking of?
- padmanabhan01 15y ago
  http://wiki.answers.com/Q/What_are_the_four_properties_of_money_please_identify_and_explain http://wiki.answers.com/Q/What_are_the_four_properties_of_mo... says one of the properties of money is that it has to be a 'store of value'.
  - tptacek 15y ago
    Logic that suggests that roads aren't a medium for transportation because they have friction.
2arrs2ells 15y ago
If money is decreasing in value, it gives people a huge incentive to do something with it - buy something or invest. As long as the decrease to the value is small (1-3%) and predictable, this is a good thing.
- tptacek 15y ago
  Since deflation is an obvious tax on investment and purchasing, arguments that increases in the value of a currency are "obviously" a good thing serve as a sort of litmus test for why people are interested in things like Bitcoin. The subtextual motivation for Bitcoin advocacy has always been "it's a speculative asset and I hold a position in it". Everything else is just rhetorical cover. The unfortunate reality is that even by reasoning through Bitcoin's programmed-in deflation, we're dignifying Bitcoin. Bitcoin itself is a sham. The original paper may have been a good-faith contribution to the state of the art in cryptocurrencies, but the "economy" is a trap; a realistic-looking distributed transaction clearing system built on a deliberately volatile wholly synthetic "asset" that exists for the purpose of creating pump-and-dump scams.

sesqu 15y ago

> In a normal economy, the population is constantly expanding. That may be, but the western world is then abnormal. US population is projected to peak at 2030, and a number of countries already have negative population growth. Exponential growth assumptions should not be made for long periods ahead. http://en.wikipedia.org/wiki/List_of_countries_by_population_growth_rate http://en.wikipedia.org/wiki/List_of_countries_by_population...

maratd 15y ago
Our economies, culture, the whole of our civilization is based on the assumption of population growth. Because, quite simply, that's how it's always been. We have never before experienced a reduction in the human population for any extended period of time. I wouldn't count the US out yet, it can easily augment its population with immigration. So can all the other developed countries. Anyway, regardless, making a currency with a fixed supply doesn't work under any scenario. With a constant or increasing population, you want to increase the money supply. With a decreasing population, you want to decrease it.
stevenwagner 15y ago
Most people don't seem to realize that when your currency inflates, there are people who get the new money. Inflation=wealth redistribution
- maratd 15y ago
  You're assuming the government turns on the printing press and then spends some money on some social programs? That really doesn't happen anymore (if it ever did). Various operations by the Treasury and Fed affect the banks. Then you get a shiny new credit card in the mail. I wouldn't call that wealth redistribution.
  - nazgulnarsil 15y ago
    I've never seen anyone, including keynesians try to claim that newly created money goes directly to consumers. wow. read more.

stevenwagner 15y ago

Thats it? Your big punch on deflation is the "psychological effect"? You seem to fundamentally not understanding math and have an emotional attachment to a particular scale of measurement.

Duff 15y ago

Bitcoin is not a flawed experiment -- it made the mysterious early adopters quite a bit of money.

api 15y ago

"In a normal economy, the population is constantly expanding." Exponential growth can never continue forever. We are probably at or near the practical limits to growth on this planet. I think inflationary currency is an ugly hack to cope with the era of exponential growth.

SkyMarshal 15y ago

>Bitcoin was a flawed experiment from the start because it has an absolute supply limit. Reaching that limit won't help. It'll make things worse. The money supply needs to expand for healthy economic activity and growth. If it doesn't, weird shit starts to happen. Everyone has an opinion about BTC's deflationary nature, but few people seem to consider the possibility that BTC might be the first currency that works substantially differently in this regard to all other past currencies. BTC is the first currency that is infinitely subdivisible. Ostensibly only 21 million BTC will be created, but since it is subdivisible to 8 decimal places, there will be [21 million / .00000001] = 2.1 quadrillion atomic units. And that is only an artifact of the data structure used to implement it in code, not an inviolable requirement of the protocol. The precision, and hence the quantity of BTC, can be increased in the future if necessary. This aspect of BTC, along with the fact that is not a debt-backed interest-bearing fiat currency might require a rethinking of the Quantity Theory of Money as it applies to Bitcoin-like currencies. Additionally, only ~7 million Bitcoins have currently been created, only ~33% of the eventual total. The BTC economy is so new you can't buy much with it besides other currencies, computer parts from Newegg etc., and perhaps illegal drugs. Finally, forks like Solidcoin are appearing based on perceptions of consequential flaws in the BTC technology (absolute dependence on miners to extend the blockchain, etc.). Imho it's worth withholding judgement for a few years at least and just observing how it develops. It's something potentially new, to which the old rules may not apply.

gamble 15y ago
> The precision, and hence the quantity of BTC, can be increased in the future if necessary. The ability to subdivide BTC is irrelevant to the question of depreciation. If 1 BTC goes from $10 USD to $20 USD, then 0.5 BTC goes from $5 USD to $10 USD. It doesn't change the money supply any more than slicing up a gold nugget creates more gold. Bitcoin is still inherently deflationary. All subdivision does is avoid imposing a minimum transaction size. Bitcoin is also unique in that a substantial portion of the total BTC that will ever exist have already been destroyed, as many early adopters abandoned or lost their wallets.

Amincd 15y ago

"Think of the psychological effect of having to CONSTANTLY lower your prices on your goods. At some point, you'll hang yourself. You want to charge more, not less. It is absolutely depressing and has a real effect." This is not a big deal and people adapt to what provides the maximum real profit. You're only going to get depressed if you're used to the old trend of ever increasing prices.

anon5 15y ago

> I absolutely hate Krugman.... Why? ... Perhaps your views are different. Can you please point to a few good writers which you like with contrasting views than his. (Asking a serious question. Since I, for one, like his views a lot)

maratd 15y ago
> Why? He has a tendency of twisting basic economic theory to fit his political agenda. It makes me nauseous. > Can you please point to a few good writers which you like with contrasting views than his. Just read the Wall Street Journal. They actually specialize in this sort of thing. You'll get a far more accurate picture of what's going on. NYT is good for regional and national news, not for business and economic commentary.