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I'm no bitcoin defender, but that's not really how inflation works. Inflation is not just an increase in the base money supply. For example, a supply chain cris

I'm no bitcoin defender, but that's not really how inflation works. Inflation is not just an increase in the base money supply. For example, a supply chain crisis can cause inflation without the money supply changing at all. And central banks can control inflation by controlling lending without printing or destroying money. Lending creates "virtual money" that contributes to inflation, so one of the ways central banks control inflation is by increasing or decreasing interest rates. Bitcoin makes these things much more difficult, of course, and would never be a good currency compared to what we have now. But the gold standard has almost exactly the same properties as bitcoin, and gold-backed currency worked okay in the US for a long time.

cjensen 4y ago
The gold-backed currency did not, in fact, work okay in the US for a long time. Between 1836 and the Great Depression, the economy went 3 or more years between recessions only 4 times. By comparison, the last three gaps between recessions were 7, 10, and 6 years; and it's now been 13 years since the last one. [1] https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...
- ekianjo 4y ago
  Lol we are constantly living in recession in case you failed to notice. Its just protracted.
  - cjensen 4y ago
    To clarify, the word "recession" has a strongly defined meaning. It does not mean "things are bad" although bad times are strongly associated with recessions. Things can seem bad even without a recession. Historically speaking, each time we climb out of a recession over the last 50 years it's been a bit slower of a climb than the previous climb out. That is a worrisome trend in its own right. I believe that's the kind of bad you feel people are experiencing -- a barely perceptible improvement starting from a bad situation.
- hooande 4y ago
  this kind of assumes that the only goal of an economy is to avoid recessions. growth is also very important to the average person, and the gold standard does not optimize for that
  - lottin 4y ago
    Recession means absence of economic growth.
  - bratwurst3000 4y ago
    The goal of an economie should also be stability of the system. So that people can have a good baseline for living
    - kgantchev 4y ago
      Why is economic stability more important than higher economic prosperity?
      - ivoras 4y ago
        How does this sound: Optimizing for ever higher economic prosperity has so far had the side-effect of ever higher economic inequality, in no small part because only a small number of people are able to succesfully get rich off of moments of instablity. Optimising for stability means less homless people on the streets (which is an appaling situation in US which still despite that wants to call itself a first world country) because a larger part of society can plan their futures and actually have those plans come true. This also necessary includes socialised healthcare and schooling, for the same reasons (which again probably won't happen in the US for the forseeable future).
- G3rn0ti 4y ago
  Come on. The 1800s „recessions“ were minuscule at worst compared to today‘s global meltdowns happening every decade. Think about the Asian crisis of the 1990s, the New Economy bubble burst at the beginning of the 2000s, the sub prime crisis 12 years ago and now a post Covid recession. Also you‘re taking one feature „they had a gold standard back then“ and take it as the single point failure. In reality having a „Gold Standard“ does not guarantee a non-inflating currency. In the 1920s the FED was printing more dollars than were backed by gold to pay back the government’s war time debts. The same happened in the losing nations like e.g. Germany, too, in a much greater force causing a death spiral completely destroying the German Reichsmark. In the US you were lucky to just experience a stock market boom that spectacularly burst in 1929. This would have caused a recession for sure. However, the decade long depression that actually followed was a result of unprecedented economic meddling by the federal government under Hoover and then Roosevelt. The Gold Standard was removed after the „Bretton-Woods“ system broke down in 1971. That was an attempt at establishing an international currency system with fixed exchange rates. It worked in a pyramidal fashion: The US promised to have their Dollars backed by gold and the middle power nations‘ central banks backed their currencies with US dollars. Of course, the US printed more dollars than they actually could back by their gold reserves. At some point France demanded to redeem their dollar reserves in Gold. The US did not comply and in 1971 Nixon declared the Dollar not being redeemable into Gold any more because the FED didn’t have enough gold left. Since then the US dollar as well as all international currencies are backed only by the people’s trust in them and by the fact you have to pay your taxes in those currencies. So you see the monetary history is primarily a history of failure induced by bad economic policies. How currencies were implemented is just of secondary interest. Bitcoin could easily serve as an international currency compared to the US dollar. Its value is based on trust like the US dollar. Governments could collect their taxes in the form of bitcoin if their wanted to without a major systemic change. And unlike the Dollar or Euro, Bitcoin couldn’t be inflated. Whether that will happen and change economy for the better is still left to be seen.
  - objclxt 4y ago
    > The 1800s „recessions“ were minuscule at worst compared to today‘s global meltdowns happening every decade. One of those recessions (the panic of 1857) was one of the main contributing factors to the American Civil War breaking out, which hardly seems ‘minuscule’.
- willmadden 4y ago
  That’s because the banks issued more gold certificates than they had reserves. Those bank shenanigans were the origin story of fractional reserve banking.
majormajor 4y ago
Lending is often talked about as "printing money" but isn't investing in anything other than money also able to do the same thing? Some seed investor puts a million pieces of money into a company, that company starts getting a lot of customers, new people are willing to pay much more for pieces of that company. But now this company has gone from zero to lots of value, and so that first investor can behave like they now have a billion pieces of money instead of the million they had originally (whether that's cashing out a small amount, or borrowing against it). So if the economy grows in a non-zero-sum way, how do you avoid inflation? The total value in the system (due to the circulation of money and the productive activity) goes up, and lots of it isn't in the form of "pieces of currency." Is there so much difference between "lending money" - giving money on the belief that the counterparty will pay you back more over time - and "investing" - giving money on the belief that the share of the thing will be worth more over time? In the absence of regulations, even someone like a bank who's holding other people's deposits could do either sort of investment (and so is VC just a special sort of "bank")?
- bb88 4y ago
  The way I think of it is that when you make a purchase, the money just basically switches bank accounts. The money is still in the banks, and currency is not created or destroyed, just exchanged between players. When a bank makes a loan using it's customer's money, the balance in the account doesn't disappear -- and the money is still available to the customers. But now a loan for a car financed by a bank goes into the car dealer's bank account which then gets loaned out by that bank. This happens over and over again in a recursive manner. This is the Monetary Multiplier Effect as part of Fractional Reserve Banking. It's basically kind of a regulated shell game. The bank has to have so much in cash to pay out in case of a bank run, and the FDIC protects customers from bad bank management. But your money is literally replaced with a number in an account balance. And your $10k in the bank might generate $40k of loans in the economy based upon your deposit. An investment however removes cash from your account and replaces it with shares and that money is given to someone else. So it's an exchange of money and an exchange of shares. And thereby doesn't have the same multiplication effect. In this case value is created or lost which makes your shares worth more or less on the market. Again, value doesn't create money. Money is exchanged between parties for different amounts. A 1981 bordeaux doesn't create currency over time, just increases it's value.
bb88 4y ago
> Inflation is not just an increase in the base money supply. Actually it can. During WWII, Germany was trying to make enough counterfeits and launder it to destabilize the allied powers' currencies. Many third world countries ended up remaining poor because their political leaders printed as much money as they wanted. > But the gold standard has almost exactly the same properties as bitcoin, and gold-backed currency worked okay in the US for a long time. God only filed some of the gold under the ground in the USA. He filed the rest of it elsewhere. The currency would then be based upon how much gold was mined and third parties could potentially be in control of the US currency. As one freshwater economists argued: "Why gold? Why not french bordeaux?"
- sumedh 4y ago
  > As one freshwater economists argued: "Why gold? Why not french bordeaux?" Because people have loved gold for thousands of years.
  - bb88 4y ago
    And they haven't loved wine? https://www.bbc.com/news/world-europe-41977709 https://www.bbc.com/news/world-europe-41977709
    - sumedh 4y ago
      No, maybe the people in West not the east, the love for gold is universal.
neilwilson 4y ago
> And central banks can control inflation by controlling lending without printing or destroying money. Lending is printing and destroying money. Central banks cannot control lending by changing interest rates as we have seen since the GFC. They couldn't get inflation up for ten years, and now they can't keep it down. The belief in central banks and gold (why are gold miners so special?) is just as much of a cult as cryptocurrency. All prices are relative, that's why they move all over the place.
- incrudible 4y ago
  > Lending is printing and destroying money. Central banks cannot control lending by changing interest rates as we have seen since the GFC. They couldn't get inflation up for ten years, and now they can't keep it down. I beg to differ, asset prices experienced massive inflation during that period. Obviously, nobody was borrowing money to buy loads of hamburgers or other things that greatly influence the CPI. That demand is mostly inelastic and asset prices have little influence on it. That said, government spending accounts for almost half of spending in total. If this is increasingly financed by (the equivalent of) debt monetization, you will see debt chasing the hamburgers as well, causing runaway inflation like in Turkey. The central banks are very much in control of that not happening.
  - neilwilson 4y ago
    "I beg to differ, asset prices experienced massive inflation during that period." Massive inflation, or just a return to their free market value. Setting interest rates is an artificial market intervention. In a free market the base cost of money is zero, since it can be produced on demand at the push of a button. The private price of money is then determined correctly by market action based upon credit risk and/or exchange risk.
manholio 4y ago
> Lending creates "virtual money" that contributes to inflation, so one of the ways central banks control inflation is by increasing or decreasing interest rates. One way to understand how this works is by visualizing the circulation of the monetary base, aka physical coins and central bank reserves, or bitcoins/lunas in the crypto case. Without lending, you have people and companies entering transactions, accumulating money and saving them for a later investment, for example putting a penny in the mattress or a bitcoin in cold storage. The penny might physically change hands once or twice a year. So in agregate you have: V = PQ/M with V, velocity of money ( = 1 transaction per year), PQ is the gross product (price level * quantity of goods), and M is the money supply (say, 21 milion bitcoins). So one way to generate inflation is to increase M (print more money), since the ability of the economy to produce goods changes slowly, so P will need to increase to maintain equilibrium. But another way to do that is to promote lending: instead of placing the penny in the mattress, is is deposited to a bank who immediately places it in the hands of a lender who buys a house or a TV, giving it to another entity that deposits into a bank etc. So you have a physical penny on steroids that can travel with a much higher velocity in the economic system, say 8 transactions per year as it was typical for the dollar last time I estimated this. Banks can effectively print unlimited money substitutes (deposits denominated in bitcoins, luna, pennies etc) and as long as depositors trust them to be solvent this entire virtual monetary base will participate in the MV=PQ equation. This is true in a fiat world as well as in a Bitcoin world, unregulated banks can greatly amplify the velocity of bitcoins without any technical support from the currency itself, in effect putting significantly more bitcoins on the market available for transactions, so overall reducing their market value, or "creating inflation" without printing a single bitcoin.
Abishek_Muthian 4y ago
Can the traditional inflation control measures such as increasing/decreasing lending rates continue to work with skyrocketing income-inequality? While the Nobel laureates keep stressing about wealth inequality, I don't see media-economists even mention inequality as a factor.

cjensen 4y ago

The gold-backed currency did not, in fact, work okay in the US for a long time. Between 1836 and the Great Depression, the economy went 3 or more years between recessions only 4 times. By comparison, the last three gaps between recessions were 7, 10, and 6 years; and it's now been 13 years since the last one. [1] https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...

ekianjo 4y ago
Lol we are constantly living in recession in case you failed to notice. Its just protracted.
- cjensen 4y ago
  To clarify, the word "recession" has a strongly defined meaning. It does not mean "things are bad" although bad times are strongly associated with recessions. Things can seem bad even without a recession. Historically speaking, each time we climb out of a recession over the last 50 years it's been a bit slower of a climb than the previous climb out. That is a worrisome trend in its own right. I believe that's the kind of bad you feel people are experiencing -- a barely perceptible improvement starting from a bad situation.
hooande 4y ago
this kind of assumes that the only goal of an economy is to avoid recessions. growth is also very important to the average person, and the gold standard does not optimize for that
- lottin 4y ago
  Recession means absence of economic growth.
- bratwurst3000 4y ago
  The goal of an economie should also be stability of the system. So that people can have a good baseline for living
  - kgantchev 4y ago
    Why is economic stability more important than higher economic prosperity?
    - ivoras 4y ago
      How does this sound: Optimizing for ever higher economic prosperity has so far had the side-effect of ever higher economic inequality, in no small part because only a small number of people are able to succesfully get rich off of moments of instablity. Optimising for stability means less homless people on the streets (which is an appaling situation in US which still despite that wants to call itself a first world country) because a larger part of society can plan their futures and actually have those plans come true. This also necessary includes socialised healthcare and schooling, for the same reasons (which again probably won't happen in the US for the forseeable future).
G3rn0ti 4y ago
Come on. The 1800s „recessions“ were minuscule at worst compared to today‘s global meltdowns happening every decade. Think about the Asian crisis of the 1990s, the New Economy bubble burst at the beginning of the 2000s, the sub prime crisis 12 years ago and now a post Covid recession. Also you‘re taking one feature „they had a gold standard back then“ and take it as the single point failure. In reality having a „Gold Standard“ does not guarantee a non-inflating currency. In the 1920s the FED was printing more dollars than were backed by gold to pay back the government’s war time debts. The same happened in the losing nations like e.g. Germany, too, in a much greater force causing a death spiral completely destroying the German Reichsmark. In the US you were lucky to just experience a stock market boom that spectacularly burst in 1929. This would have caused a recession for sure. However, the decade long depression that actually followed was a result of unprecedented economic meddling by the federal government under Hoover and then Roosevelt. The Gold Standard was removed after the „Bretton-Woods“ system broke down in 1971. That was an attempt at establishing an international currency system with fixed exchange rates. It worked in a pyramidal fashion: The US promised to have their Dollars backed by gold and the middle power nations‘ central banks backed their currencies with US dollars. Of course, the US printed more dollars than they actually could back by their gold reserves. At some point France demanded to redeem their dollar reserves in Gold. The US did not comply and in 1971 Nixon declared the Dollar not being redeemable into Gold any more because the FED didn’t have enough gold left. Since then the US dollar as well as all international currencies are backed only by the people’s trust in them and by the fact you have to pay your taxes in those currencies. So you see the monetary history is primarily a history of failure induced by bad economic policies. How currencies were implemented is just of secondary interest. Bitcoin could easily serve as an international currency compared to the US dollar. Its value is based on trust like the US dollar. Governments could collect their taxes in the form of bitcoin if their wanted to without a major systemic change. And unlike the Dollar or Euro, Bitcoin couldn’t be inflated. Whether that will happen and change economy for the better is still left to be seen.
- objclxt 4y ago
  > The 1800s „recessions“ were minuscule at worst compared to today‘s global meltdowns happening every decade. One of those recessions (the panic of 1857) was one of the main contributing factors to the American Civil War breaking out, which hardly seems ‘minuscule’.
willmadden 4y ago
That’s because the banks issued more gold certificates than they had reserves. Those bank shenanigans were the origin story of fractional reserve banking.

majormajor 4y ago

Lending is often talked about as "printing money" but isn't investing in anything other than money also able to do the same thing? Some seed investor puts a million pieces of money into a company, that company starts getting a lot of customers, new people are willing to pay much more for pieces of that company. But now this company has gone from zero to lots of value, and so that first investor can behave like they now have a billion pieces of money instead of the million they had originally (whether that's cashing out a small amount, or borrowing against it). So if the economy grows in a non-zero-sum way, how do you avoid inflation? The total value in the system (due to the circulation of money and the productive activity) goes up, and lots of it isn't in the form of "pieces of currency." Is there so much difference between "lending money" - giving money on the belief that the counterparty will pay you back more over time - and "investing" - giving money on the belief that the share of the thing will be worth more over time? In the absence of regulations, even someone like a bank who's holding other people's deposits could do either sort of investment (and so is VC just a special sort of "bank")?

bb88 4y ago
The way I think of it is that when you make a purchase, the money just basically switches bank accounts. The money is still in the banks, and currency is not created or destroyed, just exchanged between players. When a bank makes a loan using it's customer's money, the balance in the account doesn't disappear -- and the money is still available to the customers. But now a loan for a car financed by a bank goes into the car dealer's bank account which then gets loaned out by that bank. This happens over and over again in a recursive manner. This is the Monetary Multiplier Effect as part of Fractional Reserve Banking. It's basically kind of a regulated shell game. The bank has to have so much in cash to pay out in case of a bank run, and the FDIC protects customers from bad bank management. But your money is literally replaced with a number in an account balance. And your $10k in the bank might generate $40k of loans in the economy based upon your deposit. An investment however removes cash from your account and replaces it with shares and that money is given to someone else. So it's an exchange of money and an exchange of shares. And thereby doesn't have the same multiplication effect. In this case value is created or lost which makes your shares worth more or less on the market. Again, value doesn't create money. Money is exchanged between parties for different amounts. A 1981 bordeaux doesn't create currency over time, just increases it's value.

bb88 4y ago

> Inflation is not just an increase in the base money supply. Actually it can. During WWII, Germany was trying to make enough counterfeits and launder it to destabilize the allied powers' currencies. Many third world countries ended up remaining poor because their political leaders printed as much money as they wanted. > But the gold standard has almost exactly the same properties as bitcoin, and gold-backed currency worked okay in the US for a long time. God only filed some of the gold under the ground in the USA. He filed the rest of it elsewhere. The currency would then be based upon how much gold was mined and third parties could potentially be in control of the US currency. As one freshwater economists argued: "Why gold? Why not french bordeaux?"

sumedh 4y ago
> As one freshwater economists argued: "Why gold? Why not french bordeaux?" Because people have loved gold for thousands of years.
- bb88 4y ago
  And they haven't loved wine? https://www.bbc.com/news/world-europe-41977709 https://www.bbc.com/news/world-europe-41977709
  - sumedh 4y ago
    No, maybe the people in West not the east, the love for gold is universal.

neilwilson 4y ago

> And central banks can control inflation by controlling lending without printing or destroying money. Lending is printing and destroying money. Central banks cannot control lending by changing interest rates as we have seen since the GFC. They couldn't get inflation up for ten years, and now they can't keep it down. The belief in central banks and gold (why are gold miners so special?) is just as much of a cult as cryptocurrency. All prices are relative, that's why they move all over the place.

incrudible 4y ago
> Lending is printing and destroying money. Central banks cannot control lending by changing interest rates as we have seen since the GFC. They couldn't get inflation up for ten years, and now they can't keep it down. I beg to differ, asset prices experienced massive inflation during that period. Obviously, nobody was borrowing money to buy loads of hamburgers or other things that greatly influence the CPI. That demand is mostly inelastic and asset prices have little influence on it. That said, government spending accounts for almost half of spending in total. If this is increasingly financed by (the equivalent of) debt monetization, you will see debt chasing the hamburgers as well, causing runaway inflation like in Turkey. The central banks are very much in control of that not happening.
- neilwilson 4y ago
  "I beg to differ, asset prices experienced massive inflation during that period." Massive inflation, or just a return to their free market value. Setting interest rates is an artificial market intervention. In a free market the base cost of money is zero, since it can be produced on demand at the push of a button. The private price of money is then determined correctly by market action based upon credit risk and/or exchange risk.

manholio 4y ago

> Lending creates "virtual money" that contributes to inflation, so one of the ways central banks control inflation is by increasing or decreasing interest rates. One way to understand how this works is by visualizing the circulation of the monetary base, aka physical coins and central bank reserves, or bitcoins/lunas in the crypto case. Without lending, you have people and companies entering transactions, accumulating money and saving them for a later investment, for example putting a penny in the mattress or a bitcoin in cold storage. The penny might physically change hands once or twice a year. So in agregate you have: V = PQ/M with V, velocity of money ( = 1 transaction per year), PQ is the gross product (price level * quantity of goods), and M is the money supply (say, 21 milion bitcoins). So one way to generate inflation is to increase M (print more money), since the ability of the economy to produce goods changes slowly, so P will need to increase to maintain equilibrium. But another way to do that is to promote lending: instead of placing the penny in the mattress, is is deposited to a bank who immediately places it in the hands of a lender who buys a house or a TV, giving it to another entity that deposits into a bank etc. So you have a physical penny on steroids that can travel with a much higher velocity in the economic system, say 8 transactions per year as it was typical for the dollar last time I estimated this. Banks can effectively print unlimited money substitutes (deposits denominated in bitcoins, luna, pennies etc) and as long as depositors trust them to be solvent this entire virtual monetary base will participate in the MV=PQ equation. This is true in a fiat world as well as in a Bitcoin world, unregulated banks can greatly amplify the velocity of bitcoins without any technical support from the currency itself, in effect putting significantly more bitcoins on the market available for transactions, so overall reducing their market value, or "creating inflation" without printing a single bitcoin.

Abishek_Muthian 4y ago

Can the traditional inflation control measures such as increasing/decreasing lending rates continue to work with skyrocketing income-inequality? While the Nobel laureates keep stressing about wealth inequality, I don't see media-economists even mention inequality as a factor.