5 ms·

This is a nice summary of what you might call the Bitcoin economic party line, but it's not particularly insightful or rigorous for something so long. I'm by n

by bcoates 14y ago

This is a nice summary of what you might call the Bitcoin economic party line, but it's not particularly insightful or rigorous for something so long. I'm by no means an expert on monetary policy, but I can recognize a lot of common errors in this presentation. It opens with a story about how currency came from barter, but barter is a way of exchanging goods with outsiders, which is not the main way of trading in a functioning society. Money didn't arise as a way of making barter systems practical, it arose as a way of memorializing debt obligations that eventually got securitized into something you could exchange for stuff directly. The parts about how the USD works and the suggestion that Demurrage would do anything at all to fix the deflation issue are also particularly weak. It also doesn't do any favors to Bitcoin by suggesting Freicoin alongside it; It's possible to imagine a world where the advantages of Bitcoin economics outweigh the disadvantages, but Freicoin is outright kookery.

kyledrake 14y ago
My intention wasn't to suggest people use Freicoin, it was to highlight that there are people experimenting with designing cryptocurrencies, and that Bitcoin isn't necessarily the end-all. Apologies if that wasn't clear! I took a huge topic and reduced it to bite sized pieces, and likely did make a few mistakes in the process. And for those mistakes, I want to apologize, and would love some feedback so I can improve this discussion in the future. But I think it's important to distinguish factual errors from economic opinions. Economics IMHO, like psychology, is fundamentally a behavioral science (there are a lot of people that even disagree on this topic!), so it can be hard to model it. That's one of the reasons why economists (like psychologists) can differ so radically in their views. But feel free to disagree with my opinions of course! Vigorous debate is very important to understanding what's going on here, and I'm very comfortable with changing my mind. My goal is to get people to start thinking about the ideas of economic exchange, so that they can have a framework to truly understand what Bitcoin is trying to accomplish. If you demystify how every other currency in the world works, then you can compare them to how Bitcoin works, and make up your own mind if Bitcoin is a crazy idea, or the real thing.
- bcoates 14y ago
  I agree with you about Economics: the USD is based on one economic "story" and Bitcoin on a different one. The part that gets weird is when people describe the USD through the lens of the Bitcoin story, which is really common in the Bitcoin and Gold communities but I don't think actually helps people understand the USD and how it works. If people are going to make an informed decision, they should be looking at Bitcoin through the lens of the claims of Bitcoin Economics, and USD through the lens of Fed Economics, and decide which if any are credible. Sorry if the tone in the grandparent post came across as a little harsh, I know it's always easier to criticize than to create something yourself.
13b9f227ecf0 14y ago
A lot of the monetary history stuff is wrong in the way that most economic texts are wrong. "Debt: The First 5000 Years" is a fantastic book from an anthropologist's perspective that clears up the real origins of money. For just one example of how this presentation is misleading, gold has never really been selected by free markets as a currency. What happened repeatedly was imperial governments with big war machines minted gold and silver coins, paid soldiers and military contractors with them, and then required the coins back from the general population in payment of taxes. This fostered markets to service the war machine. In terms of true free market currencies what you usually found were tally sticks and cheques; debt based money with no gold backing. But these currencies had personal history to them and would only be honored within webs of social trust. The issuing name on the cheque and the chain of endorsements were considered when accepting payment.
- kyledrake 14y ago
  One of the unfortunate things I did not add to the slides were Gift Economics, and I apologize for that. This was indeed the first form of economic exchange, predating bartering for sure. The problem, of course, is that it only works when you have a small number of trustable people (I'll leave Dunbar's number out of this, pick your favorite). When you get into the realm of billions of people, it's a system that just doesn't work. And there's plenty of romanticism out there from people that would love to go back to such a system. But -that- to me is ideologically driven economics. I'm not saying that Bitcoin is morally superior, or that gold is better than paper money, I'm trying to relay the verdict that large numbers of decentralized people have arrived at. Which could be a worse system in many ways. But I'm not so sure, for the reasons you bring up. I do agree with you that governments capture these systems and control them. And the principal reason for this has been to wage war. War is so closely attached to control and devaluation of money, that you can almost predict monetary instability based on it, as these governments use it as a form of taxation. We've had quite a few currency devaluations in our own history, beginning with the colonies during the Revolutionary War (printing money to pay the soldiers, that they would take home and discover was essentially worthless). This is where Bitcoin becomes interesting: It becomes a form of gold that is so liquid, that it is arguable if a government could even take control of it. You certainly can't stop someone from going through customs at the airport with it (or are we going to require a scan of all computers before leaving the country now?). If Bitcoin prevents/disrupts governments from amassing war chests, I see that as a potentially very positive development. Time will tell, as with all things.
temphn 14y ago
The presentation has plenty of historical data going back to Roman times, including links to sites with debased currency, so I'd humbly suggest that you enumerate the "common errors" in the presentation. Moreover, experts in "monetary policy" have not exactly covered themselves with glory over the last few years (decades?). As for Freicoin, it might be silly, but it just puts the Bernanke-ist inflation into the protocol and makes its purpose explicit: namely to break up long-term holdings of wealth, force spending, and discourage saving. The part that isn't silly about it is that said destruction of long-term wealth is distributed rather than centralized, and the wealth redistribution essentially provides increased transaction fees and thereby a reason for more people to validate transactions. Bernanke-nomics or "monetary policy" constitutes the redistribution of wealth via inflation from the people to the banks. Hard to say that's crazier than Freicoin.
- djur 14y ago
  A handful of anecdotes about hyperinflation do not amount to "plenty of historical data". Inflation has the important role of decreasing the value of debt, which is something demurrage does not provide. Neither does a constant rate of 'inflation' via demurrage allow any kind of countercyclical policy. "[inflationary monetary policy] constitutes the redistribution of wealth via inflation from the people to the banks" Do you have any evidence for that claim?
- cynicalkane 14y ago
  Inflation redistributes wealth from the people to the banks? You understand that inflation reduces the value of bank debt, which is almost always nominal. And surely you must know that tight money has the objectively observed effect of rewarding capitalists and punishing earners (viz. the wealthy parts of the Eurozone, right now). What are you trying to say that I'm missing?
  - 13b9f227ecf0 14y ago
    Inflation transfers wealth from savers and creditors to those with first access to newly created money. In our system it is the banks and the federal government that have first access to newly created money.
deleted 14y ago
[deleted]
DividesByZero 14y ago
The biggest hole in the presentation is the casual dismissal of deflation as an economic risk for a currency. Advancing demurrage as a solution is sheer madness.
- kyledrake 14y ago
  I did not propose demurrage as a solution, I was trying to describe the concept for people that were interested in alternatives to printing-based inflation. I did not dismiss deflation as an economic risk, it certainly could be. But I'm saying that deflation is toxic to our current economic structure, simply because we are inflation biased, and so everything is designed with that in mind. Switching from an inflationary economy to a deflationary one would certainly be devastating.. but in the long run, once the correction had happened, what would it be like? That's a question we actually don't have a lot of evidence on. My thoughts on this came right out of this book: http://www.amazon.com/Deflation-Current-Historical-Perspectives-Macroeconomic/dp/0521153565/ref=sr_1_10?s=books&ie=UTF8&qid=1364590012&sr=1-10&keywords=deflation http://www.amazon.com/Deflation-Current-Historical-Perspecti...
- largesse 14y ago
  In a world of alternative currencies, is deflation of one such a bad thing? I think that the salient issue with Bitcoin is that it is going to deflationary at a set time and while people may hoard it, its divisibility 1/(10^8) should allow it to be used for exchange for a very long time. I'm eager to see what happens. As far as I know, this is an unprecedented experiment in absolute scarcity psychology. Real Estate is still being developed, gold and other precious metals can be mined, but past a point, Bitcoin won't be. Imagine the economies around irreplaceable fine art along with divisibility. My suspicion is that Bitcoin has been given sociological imprinteur as a store of value, and it is hard for that to be erased entirely. In curious whether later virtual currencies can compete in a way which devalues Bitcoin.
  - joeyo 14y ago
    Here is a related thing that I haven't full wrapped my head around: if I were to lose the key of my hypothetical bitcoin wallet, any bitcoins contained within are lost from the economy ... forever. So it is actually a finite and slowly decreasing number.
bitcartel 14y ago
What is the potential impact of Bitcoin forking, given that it's trivial[1]? Q1. We can differentiate between fiat currencies by looking at the qualities of the issuing authority, and thus determine that it's better to have savings in Swiss Francs rather than Zimbabwean Dollars. With Bitcoin, Litecoin and other forks, how do we differentiate apart from popularity of the network? Q2. I've heard the argument that Bitcoin is valuable because there is scarcity in the system, a limit to the number of coins, thus it is similar to gold. However, if tomorrow somebody discovered vast amounts of pink gold, with exactly the same chemical and physical properties as gold, except for the colour, it's likely the price of gold would fall. As Bitcoin is facing this exact scenario via forking, what are the potential consequences, and does it even matter? [1] http://litecoin.org http://litecoin.org (changed the hashing algorithm from SHA256 to Scrypt)

by bcoates 14y ago

kyledrake 14y ago

My intention wasn't to suggest people use Freicoin, it was to highlight that there are people experimenting with designing cryptocurrencies, and that Bitcoin isn't necessarily the end-all. Apologies if that wasn't clear! I took a huge topic and reduced it to bite sized pieces, and likely did make a few mistakes in the process. And for those mistakes, I want to apologize, and would love some feedback so I can improve this discussion in the future. But I think it's important to distinguish factual errors from economic opinions. Economics IMHO, like psychology, is fundamentally a behavioral science (there are a lot of people that even disagree on this topic!), so it can be hard to model it. That's one of the reasons why economists (like psychologists) can differ so radically in their views. But feel free to disagree with my opinions of course! Vigorous debate is very important to understanding what's going on here, and I'm very comfortable with changing my mind. My goal is to get people to start thinking about the ideas of economic exchange, so that they can have a framework to truly understand what Bitcoin is trying to accomplish. If you demystify how every other currency in the world works, then you can compare them to how Bitcoin works, and make up your own mind if Bitcoin is a crazy idea, or the real thing.

bcoates 14y ago
I agree with you about Economics: the USD is based on one economic "story" and Bitcoin on a different one. The part that gets weird is when people describe the USD through the lens of the Bitcoin story, which is really common in the Bitcoin and Gold communities but I don't think actually helps people understand the USD and how it works. If people are going to make an informed decision, they should be looking at Bitcoin through the lens of the claims of Bitcoin Economics, and USD through the lens of Fed Economics, and decide which if any are credible. Sorry if the tone in the grandparent post came across as a little harsh, I know it's always easier to criticize than to create something yourself.

13b9f227ecf0 14y ago

A lot of the monetary history stuff is wrong in the way that most economic texts are wrong. "Debt: The First 5000 Years" is a fantastic book from an anthropologist's perspective that clears up the real origins of money. For just one example of how this presentation is misleading, gold has never really been selected by free markets as a currency. What happened repeatedly was imperial governments with big war machines minted gold and silver coins, paid soldiers and military contractors with them, and then required the coins back from the general population in payment of taxes. This fostered markets to service the war machine. In terms of true free market currencies what you usually found were tally sticks and cheques; debt based money with no gold backing. But these currencies had personal history to them and would only be honored within webs of social trust. The issuing name on the cheque and the chain of endorsements were considered when accepting payment.

kyledrake 14y ago
One of the unfortunate things I did not add to the slides were Gift Economics, and I apologize for that. This was indeed the first form of economic exchange, predating bartering for sure. The problem, of course, is that it only works when you have a small number of trustable people (I'll leave Dunbar's number out of this, pick your favorite). When you get into the realm of billions of people, it's a system that just doesn't work. And there's plenty of romanticism out there from people that would love to go back to such a system. But -that- to me is ideologically driven economics. I'm not saying that Bitcoin is morally superior, or that gold is better than paper money, I'm trying to relay the verdict that large numbers of decentralized people have arrived at. Which could be a worse system in many ways. But I'm not so sure, for the reasons you bring up. I do agree with you that governments capture these systems and control them. And the principal reason for this has been to wage war. War is so closely attached to control and devaluation of money, that you can almost predict monetary instability based on it, as these governments use it as a form of taxation. We've had quite a few currency devaluations in our own history, beginning with the colonies during the Revolutionary War (printing money to pay the soldiers, that they would take home and discover was essentially worthless). This is where Bitcoin becomes interesting: It becomes a form of gold that is so liquid, that it is arguable if a government could even take control of it. You certainly can't stop someone from going through customs at the airport with it (or are we going to require a scan of all computers before leaving the country now?). If Bitcoin prevents/disrupts governments from amassing war chests, I see that as a potentially very positive development. Time will tell, as with all things.

temphn 14y ago

The presentation has plenty of historical data going back to Roman times, including links to sites with debased currency, so I'd humbly suggest that you enumerate the "common errors" in the presentation. Moreover, experts in "monetary policy" have not exactly covered themselves with glory over the last few years (decades?). As for Freicoin, it might be silly, but it just puts the Bernanke-ist inflation into the protocol and makes its purpose explicit: namely to break up long-term holdings of wealth, force spending, and discourage saving. The part that isn't silly about it is that said destruction of long-term wealth is distributed rather than centralized, and the wealth redistribution essentially provides increased transaction fees and thereby a reason for more people to validate transactions. Bernanke-nomics or "monetary policy" constitutes the redistribution of wealth via inflation from the people to the banks. Hard to say that's crazier than Freicoin.

djur 14y ago
A handful of anecdotes about hyperinflation do not amount to "plenty of historical data". Inflation has the important role of decreasing the value of debt, which is something demurrage does not provide. Neither does a constant rate of 'inflation' via demurrage allow any kind of countercyclical policy. "[inflationary monetary policy] constitutes the redistribution of wealth via inflation from the people to the banks" Do you have any evidence for that claim?
cynicalkane 14y ago
Inflation redistributes wealth from the people to the banks? You understand that inflation reduces the value of bank debt, which is almost always nominal. And surely you must know that tight money has the objectively observed effect of rewarding capitalists and punishing earners (viz. the wealthy parts of the Eurozone, right now). What are you trying to say that I'm missing?
- 13b9f227ecf0 14y ago
  Inflation transfers wealth from savers and creditors to those with first access to newly created money. In our system it is the banks and the federal government that have first access to newly created money.

deleted 14y ago

[deleted]

DividesByZero 14y ago

The biggest hole in the presentation is the casual dismissal of deflation as an economic risk for a currency. Advancing demurrage as a solution is sheer madness.

kyledrake 14y ago
I did not propose demurrage as a solution, I was trying to describe the concept for people that were interested in alternatives to printing-based inflation. I did not dismiss deflation as an economic risk, it certainly could be. But I'm saying that deflation is toxic to our current economic structure, simply because we are inflation biased, and so everything is designed with that in mind. Switching from an inflationary economy to a deflationary one would certainly be devastating.. but in the long run, once the correction had happened, what would it be like? That's a question we actually don't have a lot of evidence on. My thoughts on this came right out of this book: http://www.amazon.com/Deflation-Current-Historical-Perspectives-Macroeconomic/dp/0521153565/ref=sr_1_10?s=books&ie=UTF8&qid=1364590012&sr=1-10&keywords=deflation http://www.amazon.com/Deflation-Current-Historical-Perspecti...
largesse 14y ago
In a world of alternative currencies, is deflation of one such a bad thing? I think that the salient issue with Bitcoin is that it is going to deflationary at a set time and while people may hoard it, its divisibility 1/(10^8) should allow it to be used for exchange for a very long time. I'm eager to see what happens. As far as I know, this is an unprecedented experiment in absolute scarcity psychology. Real Estate is still being developed, gold and other precious metals can be mined, but past a point, Bitcoin won't be. Imagine the economies around irreplaceable fine art along with divisibility. My suspicion is that Bitcoin has been given sociological imprinteur as a store of value, and it is hard for that to be erased entirely. In curious whether later virtual currencies can compete in a way which devalues Bitcoin.
- joeyo 14y ago
  Here is a related thing that I haven't full wrapped my head around: if I were to lose the key of my hypothetical bitcoin wallet, any bitcoins contained within are lost from the economy ... forever. So it is actually a finite and slowly decreasing number.

bitcartel 14y ago

What is the potential impact of Bitcoin forking, given that it's trivial[1]? Q1. We can differentiate between fiat currencies by looking at the qualities of the issuing authority, and thus determine that it's better to have savings in Swiss Francs rather than Zimbabwean Dollars. With Bitcoin, Litecoin and other forks, how do we differentiate apart from popularity of the network? Q2. I've heard the argument that Bitcoin is valuable because there is scarcity in the system, a limit to the number of coins, thus it is similar to gold. However, if tomorrow somebody discovered vast amounts of pink gold, with exactly the same chemical and physical properties as gold, except for the colour, it's likely the price of gold would fall. As Bitcoin is facing this exact scenario via forking, what are the potential consequences, and does it even matter? [1] http://litecoin.org http://litecoin.org (changed the hashing algorithm from SHA256 to Scrypt)