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This is the classic argument you hear a lot, particuarly from Keynsian economists is: bitcoin is bad because it's deflationary like gold. In the past when we w

by base698 14y ago

This is the classic argument you hear a lot, particuarly from Keynsian economists is: bitcoin is bad because it's deflationary like gold. In the past when we were using gold, like during the Civil War, we couldn't pay soldiers so we went to greenbacks (paper money like today). That allowed the soldiers to get paid so we could continue to fight the war. Gold obviously has a physical practical limit that can be traded and transfered. When a gram becomes worth so much it buys a house that makes other purchases of food and bills become impractical and people stop buying, and when building a billion dollar construction project moving it and protecting it has another set of problems and overhead. Bitcoin does not have the division problem--a single coin can be divided into pieces 10^8 pieces as the code currently works. That can also be changed in future versions to be divided even smaller. Ie, when one bitcoin can buy a house, you can just pay 0.0000001 for your stick of gum. So, we are then left with the argument, "Oh My God people won't buy because of the psychology that 0.01 coin today that currently buys a pack of gum being able to buy a car in the future." But, that's almost true now with savings and stocks and people still spend their money today and go into debt. Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc. Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. Venture Capital also would have issues, but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time. Inflation is built into the current model to encourage investment and prevent concentration of capital. Clearly, given the wealth divide that isn't working (blame exploitation of 3rd world or robots).

dragonwriter 14y ago
> Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borrowing, but it exacerbates the problem it creates for lending. Specifically, if the the BTC I have in my pocket today is going to be worth 10 times as much tomorrow, what's my incentive to lend it at all? I've got a strong return without default risk if I just hold on to it. If you propose something that reduces the lenders BTC-denominated payments over the life of the loan to account to mitigate the effect deflation has on the value they are paying back, it makes it even less attractive for me to lend the money. > Inflation is built into the current model to encourage investment and prevent concentration of capital. Inflation doesn't prevent concentration of capital (it prevents hoarding cash, but by doing so encourages concentration of capital.) Things like progressive taxation of income are intended to prevent concentration of wealth (but this is undercut by things like favorable tax treatment of income derived from capital compared to income derived from labor.) > Not to say bitcoin is the solution, but it's something different. That's a bit like pointing to imperfections in representative democracy caused things like gerrymandering, and then saying "I'm not saying that hereditary monarchy is the solution, but it's something different."
- teeja 14y ago
  While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for. If John's $45,000 house and Jane's $4.5M mansion are built in the same year and equally subjected to wear/tear, 20 years the value of John's house is probably less than 1 percent of Jane's mansion.
  - dragonwriter 14y ago
    > While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for. I'm not looking for risk. I'm pointing out that a currency that appreciates in value when you stuff it in your mattress makes you far less likely to lend it out to someone and assume the risk of default, especially at interest rates that will be attractive to someone who is going to be uncomfortable paying it off even without interest, since just paying of the original loan value (denominated in the appreciating currency) without interest will mean paying over time many times the value (in purchasing power) of the original loan over its life.
bayesianhorse 14y ago
Actually, given the wealth divide, it's working extremely well. We sometimes underestimate the progress the world has made in the last 100 years. We tend to overlook that we live in the most peaceful times in the history of mankind, and that poverty and hunger in the world is declining steeply. We don't know what a bitcoin economy will look like. Stimulus packages over the decades have been known to work and not to work. We don't know how a bitcoin economy reacts to depressions and risk. We do know that the current bitcoin economy and any financial engineering (or even just opening a bitcoin-accepting webshop) is extremely more complicated and risky than the traditional money systems.
- Houshalter 14y ago
  I think he meant that the wealth divide is worse in relative terms. Everyone is richer than a century ago, but the top x% are richer than before, than the poor are richer than before.
- L0j1k 14y ago
  Troll Level: Expert.
BadCRC 14y ago
> Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc. How are you expecting to get a ton more after 20 years? Even with a ridiculous constant real interest rate of 5%, you'll get only 2.6x your original investment after 20 years.
- ph0rque 14y ago
  Well, if you start out with 400kg, you'll get a ton after 20 years, based on a 5% growth. :)
leishulang 14y ago
"but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time." Well, for last couple weeks, bitcoin is the best investment, just saying ....
- fusiongyro 14y ago
  Well, why don't you put your money where your mouth is and throw all your savings into it today? I mean, if it keeps growing like it has for the past couple weeks, you stand to be a gajillionaire even though you didn't buy when it was low, right?
seandougall 14y ago
> Loans clearly have issues in a deflationary system. I would think, even more than that, loans would have issues in an anonymous system.
- wmf 14y ago
  You can probably get payday loans in cash, but that doesn't mean the loan is anonymous.
- ryusage 14y ago
  Nah, that should be a non-issue. US Dollars are anonymous, after all.
- dragonwriter 14y ago
  > I would think, even more than that, loans would have issues in an anonymous system. Not really; the fact that the currency is anonymous doesn't make the loans anonymous. The lender cares that someone is on the hook for the payment being made, they don't care if that person is the person to whom the cash loaned is actually transferred or the person from whom the payments will, in fact, be transferred. Of course, to establish credit worthiness and get attractive loan terms when the currency itself is anonymous -- whether its paper dollars or Bitcoins -- people are probably going to have to engage in transactions that are recorded and verifiable by the people who they want to trust them (either directly or through trusted third parties), mitigating the benefit of any anonymity inherent in the underlying currency system. And, loan terms aside, if you want to take out loans whose enforcement relies on the compulsory powers of the states rather than the compulsory powers of lenders who act outside of the rules imposed by the state, you probably need to adopt some kind of protocol that allows you to prove in court that a loan agreement was made with particular terms by a particular lender and borrower and that repayments of specific amounts were made on that loan, which, again, will require sacrificing some of the anonymity inherent in the underlying monetary system.
- mesm 14y ago
  Mike Hearn has talked some on how you could use existing functionality in the bitcoin protocol to issue loans. Around 25:50 he talks about ripple + bitcoin which is a practical autonomous lending system. A little bit simpler than the smart property way which is pretty deep down in the protocol. http://www.youtube.com/watch?v=mD4L7xDNCmA&t=17m30s http://www.youtube.com/watch?v=mD4L7xDNCmA&t=17m30s
Houshalter 14y ago
Actually inflation causes the wealth divide, since the printed money goes to the top first, making them better off, then trickling to the bottom only after prices have gone up and people are poorer.

by base698 14y ago

dragonwriter 14y ago

> Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borrowing, but it exacerbates the problem it creates for lending. Specifically, if the the BTC I have in my pocket today is going to be worth 10 times as much tomorrow, what's my incentive to lend it at all? I've got a strong return without default risk if I just hold on to it. If you propose something that reduces the lenders BTC-denominated payments over the life of the loan to account to mitigate the effect deflation has on the value they are paying back, it makes it even less attractive for me to lend the money. > Inflation is built into the current model to encourage investment and prevent concentration of capital. Inflation doesn't prevent concentration of capital (it prevents hoarding cash, but by doing so encourages concentration of capital.) Things like progressive taxation of income are intended to prevent concentration of wealth (but this is undercut by things like favorable tax treatment of income derived from capital compared to income derived from labor.) > Not to say bitcoin is the solution, but it's something different. That's a bit like pointing to imperfections in representative democracy caused things like gerrymandering, and then saying "I'm not saying that hereditary monarchy is the solution, but it's something different."

teeja 14y ago
While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for. If John's $45,000 house and Jane's $4.5M mansion are built in the same year and equally subjected to wear/tear, 20 years the value of John's house is probably less than 1 percent of Jane's mansion.
- dragonwriter 14y ago
  > While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for. I'm not looking for risk. I'm pointing out that a currency that appreciates in value when you stuff it in your mattress makes you far less likely to lend it out to someone and assume the risk of default, especially at interest rates that will be attractive to someone who is going to be uncomfortable paying it off even without interest, since just paying of the original loan value (denominated in the appreciating currency) without interest will mean paying over time many times the value (in purchasing power) of the original loan over its life.

bayesianhorse 14y ago

Actually, given the wealth divide, it's working extremely well. We sometimes underestimate the progress the world has made in the last 100 years. We tend to overlook that we live in the most peaceful times in the history of mankind, and that poverty and hunger in the world is declining steeply. We don't know what a bitcoin economy will look like. Stimulus packages over the decades have been known to work and not to work. We don't know how a bitcoin economy reacts to depressions and risk. We do know that the current bitcoin economy and any financial engineering (or even just opening a bitcoin-accepting webshop) is extremely more complicated and risky than the traditional money systems.

Houshalter 14y ago
I think he meant that the wealth divide is worse in relative terms. Everyone is richer than a century ago, but the top x% are richer than before, than the poor are richer than before.
L0j1k 14y ago
Troll Level: Expert.

BadCRC 14y ago

> Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc. How are you expecting to get a ton more after 20 years? Even with a ridiculous constant real interest rate of 5%, you'll get only 2.6x your original investment after 20 years.

ph0rque 14y ago
Well, if you start out with 400kg, you'll get a ton after 20 years, based on a 5% growth. :)

leishulang 14y ago

"but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time." Well, for last couple weeks, bitcoin is the best investment, just saying ....

fusiongyro 14y ago
Well, why don't you put your money where your mouth is and throw all your savings into it today? I mean, if it keeps growing like it has for the past couple weeks, you stand to be a gajillionaire even though you didn't buy when it was low, right?

seandougall 14y ago

> Loans clearly have issues in a deflationary system. I would think, even more than that, loans would have issues in an anonymous system.

wmf 14y ago
You can probably get payday loans in cash, but that doesn't mean the loan is anonymous.
ryusage 14y ago
Nah, that should be a non-issue. US Dollars are anonymous, after all.
dragonwriter 14y ago
> I would think, even more than that, loans would have issues in an anonymous system. Not really; the fact that the currency is anonymous doesn't make the loans anonymous. The lender cares that someone is on the hook for the payment being made, they don't care if that person is the person to whom the cash loaned is actually transferred or the person from whom the payments will, in fact, be transferred. Of course, to establish credit worthiness and get attractive loan terms when the currency itself is anonymous -- whether its paper dollars or Bitcoins -- people are probably going to have to engage in transactions that are recorded and verifiable by the people who they want to trust them (either directly or through trusted third parties), mitigating the benefit of any anonymity inherent in the underlying currency system. And, loan terms aside, if you want to take out loans whose enforcement relies on the compulsory powers of the states rather than the compulsory powers of lenders who act outside of the rules imposed by the state, you probably need to adopt some kind of protocol that allows you to prove in court that a loan agreement was made with particular terms by a particular lender and borrower and that repayments of specific amounts were made on that loan, which, again, will require sacrificing some of the anonymity inherent in the underlying monetary system.
mesm 14y ago
Mike Hearn has talked some on how you could use existing functionality in the bitcoin protocol to issue loans. Around 25:50 he talks about ripple + bitcoin which is a practical autonomous lending system. A little bit simpler than the smart property way which is pretty deep down in the protocol. http://www.youtube.com/watch?v=mD4L7xDNCmA&t=17m30s http://www.youtube.com/watch?v=mD4L7xDNCmA&t=17m30s

Houshalter 14y ago

Actually inflation causes the wealth divide, since the printed money goes to the top first, making them better off, then trickling to the bottom only after prices have gone up and people are poorer.