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I don't think you understand how currencies or economics work. Currencies are by nature inflationary in a growing economy. This is a good thing, because infla

by rprasad 14y ago

I don't think you understand how currencies or economics work. Currencies are by nature inflationary in a growing economy. This is a good thing, because inflation encourages spending and/or investment. Deflation is fatal to an economy: because the value of the currency will grow with non-use, deflation inhibits spending and investment. Bitcoin's fatal flaw is that it is deflationary. At any given monent, you're better off not spending your bitcoins, because that same quantity of bitcoins will be worth more in the future. Bitcoins other fatal flaw is that roughly half of all bitcoins mined thus far are held in the hands of the inventor of bitcoins and his closet buddies. They haven't been spending their bitcoins--but they're encouraging others to spend bitcoins as they are mined. This is close to (but not quite) the definition of a Ponzi scheme.

davidw 14y ago
> Currencies are by nature inflationary in a growing economy. That depends on the supply of the currency though, no? If it's not expanding, but the economy is growing, it will cause deflation, which is indeed viewed as 'bad'. Right? Or am I missing something?
- rprasad 14y ago
  That would be true in a strictly hard currency world, as each dollar in circulation would become more valuable (because it would be increasingly more difficult to find another dollar to spend). However, when you take into account credit-based spending (i.e., loans, credit cards, etc.), the "limit" at which deflation kicks in gets pushed up significantly. I know there are papers/studies on this, but as I haven't had access to a university library subscription in a while, I couldn't provide sources.
- nhaehnle 14y ago
  It's never that simple. First of all, the currency supply is kind of a red herring. What really matters here is the relation: Real GDP = Nominal GDP * Price level So if you care about growth in Real GDP (ostensibly because you consider Real GDP to be a proxy for Living Standards, and that's what really should matter), then obviously the right hand side of the equation must somehow move accordingly. But: that's not the only constraint on what can happen. Not all trajectories of the variables in this equation are equally plausible, even when they all satisfy the equation. I read your statement as an implicit one-directional causality. Let me rephrase your statement with the goal of clarifying what we're talking about (and please correct me if I mis-interpreted): if the economy grows (Real GDP is growing), and then nominal GDP is somehow forced to remain constant, then that will cause prices to go down. But why would it? The main direct driver of real growth is demand. Having more customers is what ultimately causes firms to produce more, build new factories, hire employees. Somewhat more indirectly, the belief of being able to get more customers in the future also causes firms to produce more, build new factories, hire employees. Now if you force nominal GDP to remain constant, then the first signal that firms receive is that demand stops growing. Hence the first signal that firms receive will most likely cause them to stop increasing production. Granted, it is conceivable that firms interpret the signal of flat demand differently, and that they react by reducing their prices. This is an empirical question, which seems to be answered mostly in the direction that prices are "sticky". So in summary, if you force Nominal GDP to remain constant, you will most likely stop the economy from growing. Note that the reverse of your implied causality is more plausible in a limited sense: if for some reason prices decrease, then this could well cause Real GDP to grow while Nominal GDP remains constant (this is true as long as wages do not decrease along with prices, because then nominal demand can remain the same, while more goods are moved for the same nominal demand). But then you somehow have to explain how that decrease in prices is caused.
erikpukinskis 14y ago
| At any given monent, you're better off not spending your bitcoins, because that same quantity of bitcoins will be worth more in the future. If I am hungry, I am better off buying bread than watching my bitcoin wallet's "value" increase on a computer screen. A deflating currency might disincentivize spending, but it won't halt it. And what's so great about incentivizing spending?
- dllthomas 14y ago
  When I spend, someone else has a job. We measure the health/strength of economies based on the amount of economic activity, and this does seem to correlate (though not perfectly, obviously) with human flourishing and other things we care about.
- adgar2 14y ago
  > A deflating currency might disincentivize spending, but it won't halt it. And what's so great about incentivizing spending? When you find yourself challenging the basis of nearly all economic theories, it might be time to step back from the bitcoin breadbowl.
  - kmm 14y ago
    I don't know a lot about economics, so I don't see why spending is always the best thing to do. Maybe spending doesn't lead to the best allocation of resources, as I could be blocking someone from using resources I bought, but cannot utilise as well as the other person could.
    - adgar2 14y ago
      Never spending is at odds with mainstream economic theories. You are proposing reducing spending without any particular bound beyond "necessity." If you want our economy to be based on food, water, and shelter, just say so. But it will conflict with how the rest of us want the world to work.
      - 14y ago
guylhem 14y ago
There is an obvious inflation/deflation twist, as explained in another post. My mistake - I'm not familiar enough yet with economists vocabulary and perspective. If the economy is not growing as fast as your currency supply is, I'd prefer calling that "purchasing power" deflation since I think on the purchaser side - and you will get less and less stuff for a given amount of your money (while of course the token price will inflate - sorry if this was not clear) Besides that twist, I don't agree with your conclusions. It's all about perspective, and IMHO you are too clear cut. Currencies being inflationary in a growing economy - it's good if you are productive and don't have much capital. It's not good if you are not productive but already have acquired capital, because you must then do something - like invest or spend - or you will be less well-off. There is a clear link between spending, investment and economical activity, but saying that this link is better to the alternative - the link between not spending, not investing and not trading is all about one's values. (I mean, like many here I share your opinion, hence my initial remark about bitcoin not being good for economic growth, but many leftists and "deflating" folks would say that it would be better for the planet and so on if we stopped growing and even inverted the tendency) Likewise, half of the bitcoin being held by the inventor is a good thing for this inventor, and is a statement of how good he think his product is. Just like an IPO - he hasn't cashed in yet, so I take this as a statement of trust. It's not good for you and me because it might have bad effects on bitcoin if the cash-out is too fast.
snitko 14y ago
Inflation is not the only reason why I want to spend/invest money now rather than save them. In fact, it's not even a good reason, because it forces me to spend money. Deflation doesn't discourage spending by itself. The price of holding to the money is the lost opportunity of investing those money into something else. I'd say, generally saving money is a good thing rather than bad because it allows me to only invest them when I consider the opportunity good enough. Presently, inflation punishes me if I save money. So, if we talk about particular individuals saving money, inflation is not a good thing for them. It might be good for specific groups of people who receive the money I spend, but then one might say it is good for them at my expense. Which brings us to the idea that inflation is simply a tax.
- guylhem 14y ago
  Wow you just laid down in words what I was thinking and couldn't express! Opportunity costs are more important than deflation or inflation. Thanks a lot - it's quite clear!!
- enki 14y ago
  i love your description of this. using up resources is not valuable by itself. forcing someone to spend on anything, anything at all, does not lead to a good allocation of resources. it might increase GDP, but it does not create value. under inflationary interpretations of value creation, building a road circling back onto itself - not connected to anything - in the middle of a desert that no one ever visits - increases GDP and thus helps the economy. the better if you afterwards tear it up and rebuild it a second time. on the other hand, in a stable currency system, if someone holds on to their capital, they actually free up resources for those who do spend. this means the purchasing power of those who do spend goes up. in such a system money flows away from those who spend on things that have no return (consumption), and towards those who create (value creation by seizing and creating opportunities).
- kybernetikos 14y ago
  > it's not even a good reason, because it forces me to spend money. It doesn't force you to spend money, it does however attach a cost to you hoarding your currency. This makes sense, because you're harming the system as a whole by hoarding. If you were allowed to hoard currency without paying some sort of price that would be an externality.
andreyf 14y ago
Bitcoins other fatal flaw is that roughly half of all bitcoins mined thus far are held in the hands of the inventor of bitcoins and his closet buddies. They haven't been spending their bitcoins--but they're encouraging others to spend bitcoins as they are mined. Any basis for this, or just spreading FUD?
- bcdefender 14y ago
  True, that claim was FUD. The problem bitcoin has is that there is no better refutation of the claim than yours. As politicians well know fud-slinging can be effective. When deciding whether to use bitcoin, people will either have to hold their nose and hope it is not true, or turn around and go elsewhere. The bigger bitcoin becomes, the greater the miasma.
  - icebraining 14y ago
    Uh, we can know exactly how many early mined bitcoins are being kept and how many aren't; it's a matter of downloading the public transaction block and following them. You don't need to "hope" it's not true. And in either case, I don't see what's the problem with that. People don't refuse to invest in Google just because the founders control the majority of stock votes. As long as one benefits from using Bitcoin, why should we care?
    - bcdefender 14y ago
      It is not possible that we can know to whom they once belonged nor to whom they currently belong. "And in either case ..." We are now several levels deep in this thread. Even if I agree with your point - and I do - the point is almost entirely lost already. Most would have stopped reading at the grandparent of my first post. Notwithstanding the special case of the hackernews domain. In the wider world, just a little shit that sticks - smells. So how do we manage the perception - not just the fact - of this problem? Because it WILL be necessary if bitcoin is to flourish.

by rprasad 14y ago

davidw 14y ago

> Currencies are by nature inflationary in a growing economy. That depends on the supply of the currency though, no? If it's not expanding, but the economy is growing, it will cause deflation, which is indeed viewed as 'bad'. Right? Or am I missing something?

rprasad 14y ago
That would be true in a strictly hard currency world, as each dollar in circulation would become more valuable (because it would be increasingly more difficult to find another dollar to spend). However, when you take into account credit-based spending (i.e., loans, credit cards, etc.), the "limit" at which deflation kicks in gets pushed up significantly. I know there are papers/studies on this, but as I haven't had access to a university library subscription in a while, I couldn't provide sources.
nhaehnle 14y ago
It's never that simple. First of all, the currency supply is kind of a red herring. What really matters here is the relation: Real GDP = Nominal GDP * Price level So if you care about growth in Real GDP (ostensibly because you consider Real GDP to be a proxy for Living Standards, and that's what really should matter), then obviously the right hand side of the equation must somehow move accordingly. But: that's not the only constraint on what can happen. Not all trajectories of the variables in this equation are equally plausible, even when they all satisfy the equation. I read your statement as an implicit one-directional causality. Let me rephrase your statement with the goal of clarifying what we're talking about (and please correct me if I mis-interpreted): if the economy grows (Real GDP is growing), and then nominal GDP is somehow forced to remain constant, then that will cause prices to go down. But why would it? The main direct driver of real growth is demand. Having more customers is what ultimately causes firms to produce more, build new factories, hire employees. Somewhat more indirectly, the belief of being able to get more customers in the future also causes firms to produce more, build new factories, hire employees. Now if you force nominal GDP to remain constant, then the first signal that firms receive is that demand stops growing. Hence the first signal that firms receive will most likely cause them to stop increasing production. Granted, it is conceivable that firms interpret the signal of flat demand differently, and that they react by reducing their prices. This is an empirical question, which seems to be answered mostly in the direction that prices are "sticky". So in summary, if you force Nominal GDP to remain constant, you will most likely stop the economy from growing. Note that the reverse of your implied causality is more plausible in a limited sense: if for some reason prices decrease, then this could well cause Real GDP to grow while Nominal GDP remains constant (this is true as long as wages do not decrease along with prices, because then nominal demand can remain the same, while more goods are moved for the same nominal demand). But then you somehow have to explain how that decrease in prices is caused.

erikpukinskis 14y ago

| At any given monent, you're better off not spending your bitcoins, because that same quantity of bitcoins will be worth more in the future. If I am hungry, I am better off buying bread than watching my bitcoin wallet's "value" increase on a computer screen. A deflating currency might disincentivize spending, but it won't halt it. And what's so great about incentivizing spending?

dllthomas 14y ago
When I spend, someone else has a job. We measure the health/strength of economies based on the amount of economic activity, and this does seem to correlate (though not perfectly, obviously) with human flourishing and other things we care about.
adgar2 14y ago
> A deflating currency might disincentivize spending, but it won't halt it. And what's so great about incentivizing spending? When you find yourself challenging the basis of nearly all economic theories, it might be time to step back from the bitcoin breadbowl.
- kmm 14y ago
  I don't know a lot about economics, so I don't see why spending is always the best thing to do. Maybe spending doesn't lead to the best allocation of resources, as I could be blocking someone from using resources I bought, but cannot utilise as well as the other person could.
  - adgar2 14y ago
    Never spending is at odds with mainstream economic theories. You are proposing reducing spending without any particular bound beyond "necessity." If you want our economy to be based on food, water, and shelter, just say so. But it will conflict with how the rest of us want the world to work.
    - 14y ago

guylhem 14y ago

There is an obvious inflation/deflation twist, as explained in another post. My mistake - I'm not familiar enough yet with economists vocabulary and perspective. If the economy is not growing as fast as your currency supply is, I'd prefer calling that "purchasing power" deflation since I think on the purchaser side - and you will get less and less stuff for a given amount of your money (while of course the token price will inflate - sorry if this was not clear) Besides that twist, I don't agree with your conclusions. It's all about perspective, and IMHO you are too clear cut. Currencies being inflationary in a growing economy - it's good if you are productive and don't have much capital. It's not good if you are not productive but already have acquired capital, because you must then do something - like invest or spend - or you will be less well-off. There is a clear link between spending, investment and economical activity, but saying that this link is better to the alternative - the link between not spending, not investing and not trading is all about one's values. (I mean, like many here I share your opinion, hence my initial remark about bitcoin not being good for economic growth, but many leftists and "deflating" folks would say that it would be better for the planet and so on if we stopped growing and even inverted the tendency) Likewise, half of the bitcoin being held by the inventor is a good thing for this inventor, and is a statement of how good he think his product is. Just like an IPO - he hasn't cashed in yet, so I take this as a statement of trust. It's not good for you and me because it might have bad effects on bitcoin if the cash-out is too fast.

snitko 14y ago

Inflation is not the only reason why I want to spend/invest money now rather than save them. In fact, it's not even a good reason, because it forces me to spend money. Deflation doesn't discourage spending by itself. The price of holding to the money is the lost opportunity of investing those money into something else. I'd say, generally saving money is a good thing rather than bad because it allows me to only invest them when I consider the opportunity good enough. Presently, inflation punishes me if I save money. So, if we talk about particular individuals saving money, inflation is not a good thing for them. It might be good for specific groups of people who receive the money I spend, but then one might say it is good for them at my expense. Which brings us to the idea that inflation is simply a tax.

guylhem 14y ago
Wow you just laid down in words what I was thinking and couldn't express! Opportunity costs are more important than deflation or inflation. Thanks a lot - it's quite clear!!
enki 14y ago
i love your description of this. using up resources is not valuable by itself. forcing someone to spend on anything, anything at all, does not lead to a good allocation of resources. it might increase GDP, but it does not create value. under inflationary interpretations of value creation, building a road circling back onto itself - not connected to anything - in the middle of a desert that no one ever visits - increases GDP and thus helps the economy. the better if you afterwards tear it up and rebuild it a second time. on the other hand, in a stable currency system, if someone holds on to their capital, they actually free up resources for those who do spend. this means the purchasing power of those who do spend goes up. in such a system money flows away from those who spend on things that have no return (consumption), and towards those who create (value creation by seizing and creating opportunities).
kybernetikos 14y ago
> it's not even a good reason, because it forces me to spend money. It doesn't force you to spend money, it does however attach a cost to you hoarding your currency. This makes sense, because you're harming the system as a whole by hoarding. If you were allowed to hoard currency without paying some sort of price that would be an externality.

andreyf 14y ago

Bitcoins other fatal flaw is that roughly half of all bitcoins mined thus far are held in the hands of the inventor of bitcoins and his closet buddies. They haven't been spending their bitcoins--but they're encouraging others to spend bitcoins as they are mined. Any basis for this, or just spreading FUD?

bcdefender 14y ago
True, that claim was FUD. The problem bitcoin has is that there is no better refutation of the claim than yours. As politicians well know fud-slinging can be effective. When deciding whether to use bitcoin, people will either have to hold their nose and hope it is not true, or turn around and go elsewhere. The bigger bitcoin becomes, the greater the miasma.
- icebraining 14y ago
  Uh, we can know exactly how many early mined bitcoins are being kept and how many aren't; it's a matter of downloading the public transaction block and following them. You don't need to "hope" it's not true. And in either case, I don't see what's the problem with that. People don't refuse to invest in Google just because the founders control the majority of stock votes. As long as one benefits from using Bitcoin, why should we care?
  - bcdefender 14y ago
    It is not possible that we can know to whom they once belonged nor to whom they currently belong. "And in either case ..." We are now several levels deep in this thread. Even if I agree with your point - and I do - the point is almost entirely lost already. Most would have stopped reading at the grandparent of my first post. Notwithstanding the special case of the hackernews domain. In the wider world, just a little shit that sticks - smells. So how do we manage the perception - not just the fact - of this problem? Because it WILL be necessary if bitcoin is to flourish.