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Excessive hoarding is obviously dangerous to a currency though. Imagine a fixed supply of 1.000.000 coins and suppose 99 people managed to nab 10.000 coins ini

by mtrimpe 14y ago

Excessive hoarding is obviously dangerous to a currency though. Imagine a fixed supply of 1.000.000 coins and suppose 99 people managed to nab 10.000 coins initially and are just sitting on them. The bitcoin economy will then run as though the remaining 10.000 coins is the entire economy, but 99 people will have spending power equal to the value of the entire economy.

snitko 14y ago
"Buy an economy" is a meaningless term. They can either buy products and services or invest. And this is dangerous why? If they decide to start spending their money, this would indeed mean temporary inflation as the money supply circulating would increase. But this also means that they themselves, the rich ones, will lose a lot of the value of their remaining money. Also, they wouldn't be able to spend it all at once, so with each new chunk of investment the value of their money will be less and less and less. The truth, as it turns out, that in a deflationary system rich are only rich as long as they don't spend too much and invest wisely. Thus the incentive is there to continue hoarding, even though this incentive is quite different from the incentive of the poor: for the poor in a deflationary system the incentive to hoard is making money. For rich the incentive is not losing them.
- makomk 14y ago
  I don't think you're thinking this through properly. The same loss of value will happen no matter how they spend or invest their money, so a rational wealthy person should conclude that it was never really "worth" the face value in the first place. (What good is money that only holds its value if you never spend it?) So that's not an incentive against spending.
temphn 14y ago
First, Moore's law is technological hyperdeflation. Your dollar buys more computer power in 18 months than it does today. Yet people still buy computers. And computers are the one bright spot in this otherwise Fed-bubble-governed economy. Second, a deflationary currency is inherently viral. The more people in it, the more valuable it is. Third, 99 median powers are better than one government having power over the whole world currency. Power over the economy is linked to the capacity to delay gratification, rather than the ability to maintain a monopoly on counterfeiting dollars through violence against alternate currency providers (see Executive Order 6102, Bernard von Nothaus, e-gold, et alia). In your scenario, spending by those guys would drive down the value of the currency. But they couldn't do so to an infinite extent; at best one guy could devalue it by 50%. USG by contrast has devalued the dollar 96% since 1913. Moreover, their purchasing power will rapidly decline as they sell more and more off. Finally, the blockchain will show the global distribution of holdings, making "monetary policy" of this kind more predictable than the opacity of the Fed. People have gotten into this mindset that inflation and infinite debt are good. But I'll go with something backed by computer science over macroeconomic pseudoscience anyday. At best, consider this a controlled experiment, Satoshi vs. Bernanke. I know what side my mine is on.
- XorNot 14y ago
  Computers are in no way deflationary. They're manufactured. Better ones are made. There are so many computers in the world now compared to demand that their value has simply inflated away, making them accessible to everyone. If the computer market were deflationary, then computers would really only be affordable by the 5 richest men in the world. You seem to under the mistaken assumption that money itself is an investment. It's not. Investments produce value - which hoarding money does not. Neither does hoarding computers for that matter. The moment you buy a computer it decreases in value, so unless you use it productively it really is just inflated away - much faster then your money is.
  - pothibo 14y ago
    Agreed! And he also conveniently forgets to mention that computers increasing in power comes from research & technological advancement. Both these things are possible because of investments. Why would someone build a 2b$ factory to produce new chip when they could sit on their money selling the same chip forever.
  - temphn 14y ago
    Let's focus on a single parallel: True or false: under Moore's law, your dollar can buy K transistors today and 2K transistors in 18 months (ignoring inflation for now). Nevertheless, people do buy and sell computers in immense volume. True or false: under hyperdeflation, your bitcoin can buy K dollars today and (at least) 2K dollars in 18 months. Nevertheless, people are trading Bitcoin in large and exponentially increasing volume (see blockchain.info/charts). Now, I agree that the mechanisms behind the deflation in each case are different. Technological improvements are behind Moore's law while Bitcoin's ramp is due to the controlled currency supply. But what I'm getting at is that we've already faced a situation in which people could "hoard" dollars indefinitely to buy an increasingly valuable asset, namely computer power. The empirical result: they don't hoard indefinitely despite this exponential rise. In fact, they buy by the billion.
    - XorNot 14y ago
      Computers do not increase in value with time. The relative value of your money with respect to the computer market increases. But your money is subject to inflation, and interest, and other markets - computer purchases can be valued against the interest accrued in not buying a computer vs the expected returns of doing so. Which, if you don't have a computer, might be forgoing a massive amount of return profit (starting a startup, running a home office, being entertained). Deflationary currency is a very different matter entirely. Because the currency gains value relative to every other thing you could spend it on. Money you might spend on a computer, does not. These situations are not analogous in the slightest. If you want to treat computers as a currency (money-like object), then the reality is that computers are a currency experiencing hyper-inflation. They don't hold any value at all, to the point that people consume them as commodities instead.
Houshalter 14y ago
The only reason prices get so low in the first place is that no one wants to buy anything. The same amount of goods is now divided among much fewer people. Which makes the people who aren't hoarding incredibly rich at the expense of the hoarders, since the hoarders aren't getting any of it. The second the hoarders "cash out" prices go up back to normal to cover the increased demand. They only gain insofar as the actual amount of goods in the economy increases (which is natural deflation.) And in a real economy most people who save money do so by investing it or putting it in a bank, which lends out 90% of it back into the economy anyways. At the end of the day, the loans are paid back and they get the same amount of bitcoins back, so its all the same to them, but they also get interest.
Djehngo 14y ago
The analogy I like is that traditional currencies work in the same way, the money supply is the 10,000 coins and the central bank represents the 99 people and has the 1,000,000 coins. (In practice they have an infinite amount but whatever) In traiditional currency systems the central back adds more money to the supply by buying financial products In your scenario the 99 people add currency to the money supply by buying whatever they opt to buy. The differences are that the central backs can print as much currency as they want rather than being limited to what they bought earlier and that it's many people vs one institution with some mandate to keep the currency and economy stable. That said, if I was one of those 99 I would be careful and probably collude with the other 98, if I tried to cash out too fast I would collapse the value of bitcoin and the rest of my investment would be rendered valueless. So they do have an implicit motivation to preserve stability.
- XorNot 14y ago
  You actually have an incentive to collude and carefully manage the market, then crash it and buy all the money back and go back to hoarding it. With sufficient deflation, you end up spending less on necessities (food) then the rate of increase in the value of your horde. Making you the permanent upper class, and making everyone else the permanent lower class. It's a return to feudalism.

by mtrimpe 14y ago

snitko 14y ago

"Buy an economy" is a meaningless term. They can either buy products and services or invest. And this is dangerous why? If they decide to start spending their money, this would indeed mean temporary inflation as the money supply circulating would increase. But this also means that they themselves, the rich ones, will lose a lot of the value of their remaining money. Also, they wouldn't be able to spend it all at once, so with each new chunk of investment the value of their money will be less and less and less. The truth, as it turns out, that in a deflationary system rich are only rich as long as they don't spend too much and invest wisely. Thus the incentive is there to continue hoarding, even though this incentive is quite different from the incentive of the poor: for the poor in a deflationary system the incentive to hoard is making money. For rich the incentive is not losing them.

makomk 14y ago
I don't think you're thinking this through properly. The same loss of value will happen no matter how they spend or invest their money, so a rational wealthy person should conclude that it was never really "worth" the face value in the first place. (What good is money that only holds its value if you never spend it?) So that's not an incentive against spending.

temphn 14y ago

First, Moore's law is technological hyperdeflation. Your dollar buys more computer power in 18 months than it does today. Yet people still buy computers. And computers are the one bright spot in this otherwise Fed-bubble-governed economy. Second, a deflationary currency is inherently viral. The more people in it, the more valuable it is. Third, 99 median powers are better than one government having power over the whole world currency. Power over the economy is linked to the capacity to delay gratification, rather than the ability to maintain a monopoly on counterfeiting dollars through violence against alternate currency providers (see Executive Order 6102, Bernard von Nothaus, e-gold, et alia). In your scenario, spending by those guys would drive down the value of the currency. But they couldn't do so to an infinite extent; at best one guy could devalue it by 50%. USG by contrast has devalued the dollar 96% since 1913. Moreover, their purchasing power will rapidly decline as they sell more and more off. Finally, the blockchain will show the global distribution of holdings, making "monetary policy" of this kind more predictable than the opacity of the Fed. People have gotten into this mindset that inflation and infinite debt are good. But I'll go with something backed by computer science over macroeconomic pseudoscience anyday. At best, consider this a controlled experiment, Satoshi vs. Bernanke. I know what side my mine is on.

XorNot 14y ago
Computers are in no way deflationary. They're manufactured. Better ones are made. There are so many computers in the world now compared to demand that their value has simply inflated away, making them accessible to everyone. If the computer market were deflationary, then computers would really only be affordable by the 5 richest men in the world. You seem to under the mistaken assumption that money itself is an investment. It's not. Investments produce value - which hoarding money does not. Neither does hoarding computers for that matter. The moment you buy a computer it decreases in value, so unless you use it productively it really is just inflated away - much faster then your money is.
- pothibo 14y ago
  Agreed! And he also conveniently forgets to mention that computers increasing in power comes from research & technological advancement. Both these things are possible because of investments. Why would someone build a 2b$ factory to produce new chip when they could sit on their money selling the same chip forever.
- temphn 14y ago
  Let's focus on a single parallel: True or false: under Moore's law, your dollar can buy K transistors today and 2K transistors in 18 months (ignoring inflation for now). Nevertheless, people do buy and sell computers in immense volume. True or false: under hyperdeflation, your bitcoin can buy K dollars today and (at least) 2K dollars in 18 months. Nevertheless, people are trading Bitcoin in large and exponentially increasing volume (see blockchain.info/charts). Now, I agree that the mechanisms behind the deflation in each case are different. Technological improvements are behind Moore's law while Bitcoin's ramp is due to the controlled currency supply. But what I'm getting at is that we've already faced a situation in which people could "hoard" dollars indefinitely to buy an increasingly valuable asset, namely computer power. The empirical result: they don't hoard indefinitely despite this exponential rise. In fact, they buy by the billion.
  - XorNot 14y ago
    Computers do not increase in value with time. The relative value of your money with respect to the computer market increases. But your money is subject to inflation, and interest, and other markets - computer purchases can be valued against the interest accrued in not buying a computer vs the expected returns of doing so. Which, if you don't have a computer, might be forgoing a massive amount of return profit (starting a startup, running a home office, being entertained). Deflationary currency is a very different matter entirely. Because the currency gains value relative to every other thing you could spend it on. Money you might spend on a computer, does not. These situations are not analogous in the slightest. If you want to treat computers as a currency (money-like object), then the reality is that computers are a currency experiencing hyper-inflation. They don't hold any value at all, to the point that people consume them as commodities instead.

Houshalter 14y ago

The only reason prices get so low in the first place is that no one wants to buy anything. The same amount of goods is now divided among much fewer people. Which makes the people who aren't hoarding incredibly rich at the expense of the hoarders, since the hoarders aren't getting any of it. The second the hoarders "cash out" prices go up back to normal to cover the increased demand. They only gain insofar as the actual amount of goods in the economy increases (which is natural deflation.) And in a real economy most people who save money do so by investing it or putting it in a bank, which lends out 90% of it back into the economy anyways. At the end of the day, the loans are paid back and they get the same amount of bitcoins back, so its all the same to them, but they also get interest.

Djehngo 14y ago

The analogy I like is that traditional currencies work in the same way, the money supply is the 10,000 coins and the central bank represents the 99 people and has the 1,000,000 coins. (In practice they have an infinite amount but whatever) In traiditional currency systems the central back adds more money to the supply by buying financial products In your scenario the 99 people add currency to the money supply by buying whatever they opt to buy. The differences are that the central backs can print as much currency as they want rather than being limited to what they bought earlier and that it's many people vs one institution with some mandate to keep the currency and economy stable. That said, if I was one of those 99 I would be careful and probably collude with the other 98, if I tried to cash out too fast I would collapse the value of bitcoin and the rest of my investment would be rendered valueless. So they do have an implicit motivation to preserve stability.

XorNot 14y ago
You actually have an incentive to collude and carefully manage the market, then crash it and buy all the money back and go back to hoarding it. With sufficient deflation, you end up spending less on necessities (food) then the rate of increase in the value of your horde. Making you the permanent upper class, and making everyone else the permanent lower class. It's a return to feudalism.