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If Bitcoin ever graduates to anything more than a toy currency (last count was a billion or two USD globally?) then it's going to have to deal with graduate lev

If Bitcoin ever graduates to anything more than a toy currency (last count was a billion or two USD globally?) then it's going to have to deal with graduate level problems. The business cycle is a thing I'm afraid, and the management of a recession to prevent it's becoming a depression is as close to a fusion of science and art as you'll ever see. The necessity for this isn't going to change as long as the human brain continues to function as it does. In good times people want more money - a discussion on what they should want is irrelevant, lets stick to the facts - and in bad times people want to protect what they have (aggressively so). Now consider that what makes times good vs bad is not determined by money - it's determined and prolonged by some other shock like an asset misvaluation, the destruction of a massive crop, or some combination of external factors underlying the real or nominal non-money thing. Let's say it's a rice crop. Those dependent on rice freak out, and push all their money into safe assets, those dependent on those dependent on rice do the same. The chain reaction continues until all the economy's money is tied up in safe assets, not being spent, and everyone is sat at home waiting for it to blow over. If policymakers do not intervene correctly at this point, this situation will become a depression, and much misery will ensue. So what do we do? We make safe assets more expensive to lower the risk/reward ratio for commercial activities: we make bank holdings very unrewarding (lower interest rates), we devalue the money in circulation and provide liquidity in one move (print money), and government invests in big infrastructure (liquidity, jobs, momentum, signalling etc). All of this is designed to keep things moving and ward off a depression. And it works - this is why we abandoned the gold standard. So given that Bitcoin means nothing to rice, or most other external factors, and not to the rigidities that exacerbate recessions - how exactly do we deal with this in the described autonomous utopia? I very much agree that the regulators of currency leave a tremendous amount to be desired, but unfortunately this appears to be one of very few economic problems where decentralisation is not the answer.

polarix 13y ago
Consider that with bitcoin the "safest" asset is also the most liquid (easiest to exchange).
- clienthunter 13y ago
  In a recession in a Bitcoin economy, Bitcoin wouldn't be the safest asset. That's also not quite the same meaning of liquidity.
gwern 13y ago
> If Bitcoin ever graduates to anything more than a toy currency (last count was a billion or two USD globally?) This isn't a response to any of your points, but I'm deeply amused to see someone still calling Bitcoin a 'toy currency' at a market cap of $2b. Many people were calling Bitcoin a toy currency when the market cap was more like millions. Truly, people can differ in opinions a great deal.
- clienthunter 13y ago
  I knew I'd get called out on that no matter how I worded it. I have nothing against Bitcoin, but in regard to the points I made - yes, it's a toy currency: it's magnitude is nowhere near enough to be even close to relevant to the business cycle. There are many circumstances where the phrase "Bitcoin is a toy currency" would not apply, this just isn't one of them.
  - mcollinsblog 13y ago
    The point is $2bn is a significant amount of money. There's a LOT that can get done transaction-wise with that kind of money. It's the start of a mini-economy of its own... but only mini in comparison to current economies.
    - zik 13y ago
      It's already a bigger economy than some small countries. That's a pretty decent size in my book. Add to that the fact that it's increasing in size exponentially at the moment and it's looking like it's going to be a pretty serious currency.
      - pathy 13y ago
        Th problem with bitcoin, if nothing else, is that the exchange market, USD:BTC is rather illiquid. Doesn't MTGOX take forever to process the withdrawals in USD? This is a big problem that does make it a toy currency. The slow exchange probably brings up the price. I expect, without much proof, that the USD:BTC ratio would be lower, at least short term, if you could exchange them easier. $2b in circulation is pretty decent of course, but if you cannot convert those BTC to USD with ease then the valuation is flawed.
kaonashi 13y ago
It's for this reason I feel that Bitcoin itself is a failed experiment. To the extend that people come to rely on it, we will see increased volatility. Other crypto-currencies such as http://freico.in/ http://freico.in/ have seemed to at least tried to address this issue.
- clienthunter 13y ago
  From the article: > the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle This is far from accepted wisdom.
  - kaonashi 13y ago
    Regardless of how the boom/bust cycle originates, an elastic money supply can accommodate those swings so that they do not cause harm to the overall economy. Bitcoin is the opposite of an elastic money supply, and eventually it becomes a completely static money supply. This is a feature as far as a store of value goes, but a liability when it comes to medium of exchange.
javert 13y ago
This is a completely backwards view of the economy. There is a reason there are rice futures: those that depend on the price of rice, which is people that _sell_ rice, can hedge. There is a reason India is constantly running out of onions: Online futures are illegal. http://en.wikipedia.org/wiki/Onion_Futures_Act http://en.wikipedia.org/wiki/Onion_Futures_Act There is a reason we need to have a global economy for food production. Bad weather in one region? Import from elsewhere. (Same applies to all commodities and services.) The economy works quite well naturally, but for massive government invervention, such as what you are proposing, which would have massive unforseen consequences (such as improverishing people, which punishes the poor the most). By the way, were it not for abandoning the gold standard, the US would not be able to finance a perpetual state of war. (It would have to pick wars with terminal conditions and actually win them.) It would also be much harder to finance 1984.Net. The typical response to this is for me to get screamed at about how I am obviously wrong because all economists disagree with me and because it's just obvious. I don't think that's a legitimate response.
- clienthunter 13y ago
  Rice was an example that was palatable to both my lazy fingers and I hoped to those who may not have appreciated a jargon filled response. It does not detract from the clearly presented general case which you are more than encouraged to investigate, I have done my part in spelling it out for you. > but for massive government invervention, such as what you are proposing I am not proposing anything, I am merely describing. The issue at hand is not readily solved by the markets, which in this situation a) are in a state of risk aversion and b) possess very bad quality information that is difficult to reason about. This is classic market failure that is documented in places better than my mind - go forth and google. If you are so used to receiving that response that you describe it as "typical" then I would suggest that you are either quite the revolutionary thinker, or that you are, in fact, typically wrong. Which do you think it is?
  - javert 13y ago
    > Rice was an example that was palatable to both my lazy fingers and I hoped to those who may not have appreciated a jargon filled response. It does not detract from the clearly presented general case which you are more than encouraged to investigate I am also using rice as a stand-in for the general case. > I am not proposing anything, I am merely describing. That's a meaningless distinction. Academic communists who supported Stalinism also claimed innocence when Stalinism resulted in the deaths of millions. I am not accusing you of anything on that scale, but I am saying that ideas have consequences. You are responsible for the consequences of the ideas you support and promulgate. > This is classic market failure Right, and I don't think markets are inherently failure-prone. If I drive my car into a light pole, is that a classic automobile failure? So I dispute the very terminology here. Case in point: The 2008 mortgage crisis was caused by a massively distorted market for mortgages and easy credit. The first was created by Barney Frank with Freddie and Fannie, the second by the Fed. Future generations will remember this as a "market failure" and use it to justify the existence of future incarnations of Freddie, Fannie and the Fed. > I would suggest that you are either quite the revolutionary thinker, or that you are, in fact, typically wrong. There is a third possibility, which is that lots and lots of people think like me.
grinnbearit 13y ago
> We make safe assets more expensive to lower the risk/reward ratio for commercial activities: we make bank holdings very unrewarding (lower interest rates) Wouldn't this force people already worried about the future to buy into less abstract stores of value like houses? Wouldn't that just end up monetizing houses eventually leading to a bubble? Isn't the risk/reward ratio an indicator for the health of an economy and isn't skewing it treating the symptom not the cause? > we devalue the money in circulation and provide liquidity in one move (print money) But we use this newly created money to buy assets which the market had no interest in buying inflating their price and funding contractors at the expense of everyone else. > and government invests in big infrastructure (liquidity, jobs, momentum, signalling etc) But unlike market investors, there's no worry about ROI. Building these large infrastructure projects may pay off but theres no downside and they could just end up making a few people very rich. > And it works - this is why we abandoned the gold standard. I thought the gold standard was abandoned because Nixon refused to convert France's dollar holdings back to gold in 1971.
- clienthunter 13y ago
  > Wouldn't this force people already worried about the future to buy into less abstract stores of value like houses? It forces people to spend/invest money primarily, which keeps the economy growing, prevents job losses etc. Houses are one form of investment, but they're no less tangible than many others from the point of view of your average investor. > But we use this newly created money to buy assets which the market had no interest in buying inflating their price and funding contractors at the expense of everyone else. This is not about magicking up new demand, it's about restoring the previous demand before the fear set in. Inflation is a reality, yes, but it's not inherently a bad thing - in these situations there's an acceptable level where the benefits outweigh the costs. > But unlike market investors, there's no worry about ROI. Building these large infrastructure projects may pay off but theres no downside and they could just end up making a few people very rich. It barely matters if they pay off at all, the end product in this kind of capital expenditure is much less important than the process of doing it. Making a few people rich is the usual outcome of high-value expenditure, why would that be any less true in a recession? It's a nothingness on the scale of rescuing a flailing economy. > I thought the gold standard was abandoned because Nixon refused to convert France's dollar holdings back to gold in 1971. I'm not a historian. It's certainly why we don't go back to it, and why not a single country on the planet uses a fixed monetary system anymore.
theschwa 13y ago
>The chain reaction continues until all the economy's money is tied up in safe assets, not being spent If people put their money in savings, isn't the bank still spending it? Investing in things like new businesses? Couldn't the same thing happen regardless of the currency?
- clienthunter 13y ago
  No, the banks are scared of investing too. Edit: sorry, incomplete response. Yes it happens in every currency, the difference is they have mechanisms for handling these issues.
Sammi 13y ago
> So what do we do? (1.) We make safe assets more expensive to lower the risk/reward ratio for commercial activities: (2.) we make bank holdings very unrewarding (lower interest rates), (3.) we devalue the money in circulation and provide liquidity in one move (print money), (4.) and government invests in big infrastructure (liquidity, jobs, momentum, signalling etc). I clearly see how 3. is not possible with Bitcoins, but how are the others not possible?
DennisP 13y ago
That's a real effect, but implicit in your description is an assumption that there's only one standard currency, like dollars or gold. An alternative is to allow anyone to issue currency. Worgl, Austria got itself out of the Great Depression by doing just that, creating a currency with built-in devaluation (until Austria's central bank shut it down). We already have multiple bitcoin-style currencies, and it's easy to create more. Some even devalue, much like Worgl's currency. So I don't think this is likely to be a problem, unless somebody is silly enough to make bitcoin the only legal tender.
- clienthunter 13y ago
  This is an novel thought, but I don't see how this does much to mitigate agent expectations as regards the valuations of real assets, which is the underlying issue here. Theres also the question of how practicable such a scheme could ever be with global capital markets.
  - DennisP 13y ago
    It's not really novel, Hayek wrote a book arguing that competitive private currencies would provide economic stability without central control. Whether new money is issued by a central bank or other agents, it seems to me the effect is pretty much the same.
    - clienthunter 13y ago
      I've done some reading. This idea is about refining the concept of money, to give control to the agents and remove the untrustworthy and incompetent regulatory control. Interesting indeed. However the mechanics of maintaining stability as described by Hayek are largely the same, it's only the controlling party who has changed. Edit: And back to the point - Bitcoin has no controlling party, it cannot be manipulated in this way at all. It cannot respond to business cycles.

polarix 13y ago

Consider that with bitcoin the "safest" asset is also the most liquid (easiest to exchange).

clienthunter 13y ago
In a recession in a Bitcoin economy, Bitcoin wouldn't be the safest asset. That's also not quite the same meaning of liquidity.

gwern 13y ago

> If Bitcoin ever graduates to anything more than a toy currency (last count was a billion or two USD globally?) This isn't a response to any of your points, but I'm deeply amused to see someone still calling Bitcoin a 'toy currency' at a market cap of $2b. Many people were calling Bitcoin a toy currency when the market cap was more like millions. Truly, people can differ in opinions a great deal.

clienthunter 13y ago
I knew I'd get called out on that no matter how I worded it. I have nothing against Bitcoin, but in regard to the points I made - yes, it's a toy currency: it's magnitude is nowhere near enough to be even close to relevant to the business cycle. There are many circumstances where the phrase "Bitcoin is a toy currency" would not apply, this just isn't one of them.
- mcollinsblog 13y ago
  The point is $2bn is a significant amount of money. There's a LOT that can get done transaction-wise with that kind of money. It's the start of a mini-economy of its own... but only mini in comparison to current economies.
  - zik 13y ago
    It's already a bigger economy than some small countries. That's a pretty decent size in my book. Add to that the fact that it's increasing in size exponentially at the moment and it's looking like it's going to be a pretty serious currency.
    - pathy 13y ago
      Th problem with bitcoin, if nothing else, is that the exchange market, USD:BTC is rather illiquid. Doesn't MTGOX take forever to process the withdrawals in USD? This is a big problem that does make it a toy currency. The slow exchange probably brings up the price. I expect, without much proof, that the USD:BTC ratio would be lower, at least short term, if you could exchange them easier. $2b in circulation is pretty decent of course, but if you cannot convert those BTC to USD with ease then the valuation is flawed.

kaonashi 13y ago

It's for this reason I feel that Bitcoin itself is a failed experiment. To the extend that people come to rely on it, we will see increased volatility. Other crypto-currencies such as http://freico.in/ http://freico.in/ have seemed to at least tried to address this issue.

clienthunter 13y ago
From the article: > the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle This is far from accepted wisdom.
- kaonashi 13y ago
  Regardless of how the boom/bust cycle originates, an elastic money supply can accommodate those swings so that they do not cause harm to the overall economy. Bitcoin is the opposite of an elastic money supply, and eventually it becomes a completely static money supply. This is a feature as far as a store of value goes, but a liability when it comes to medium of exchange.

javert 13y ago

This is a completely backwards view of the economy. There is a reason there are rice futures: those that depend on the price of rice, which is people that _sell_ rice, can hedge. There is a reason India is constantly running out of onions: Online futures are illegal. http://en.wikipedia.org/wiki/Onion_Futures_Act http://en.wikipedia.org/wiki/Onion_Futures_Act There is a reason we need to have a global economy for food production. Bad weather in one region? Import from elsewhere. (Same applies to all commodities and services.) The economy works quite well naturally, but for massive government invervention, such as what you are proposing, which would have massive unforseen consequences (such as improverishing people, which punishes the poor the most). By the way, were it not for abandoning the gold standard, the US would not be able to finance a perpetual state of war. (It would have to pick wars with terminal conditions and actually win them.) It would also be much harder to finance 1984.Net. The typical response to this is for me to get screamed at about how I am obviously wrong because all economists disagree with me and because it's just obvious. I don't think that's a legitimate response.

clienthunter 13y ago
Rice was an example that was palatable to both my lazy fingers and I hoped to those who may not have appreciated a jargon filled response. It does not detract from the clearly presented general case which you are more than encouraged to investigate, I have done my part in spelling it out for you. > but for massive government invervention, such as what you are proposing I am not proposing anything, I am merely describing. The issue at hand is not readily solved by the markets, which in this situation a) are in a state of risk aversion and b) possess very bad quality information that is difficult to reason about. This is classic market failure that is documented in places better than my mind - go forth and google. If you are so used to receiving that response that you describe it as "typical" then I would suggest that you are either quite the revolutionary thinker, or that you are, in fact, typically wrong. Which do you think it is?
- javert 13y ago
  > Rice was an example that was palatable to both my lazy fingers and I hoped to those who may not have appreciated a jargon filled response. It does not detract from the clearly presented general case which you are more than encouraged to investigate I am also using rice as a stand-in for the general case. > I am not proposing anything, I am merely describing. That's a meaningless distinction. Academic communists who supported Stalinism also claimed innocence when Stalinism resulted in the deaths of millions. I am not accusing you of anything on that scale, but I am saying that ideas have consequences. You are responsible for the consequences of the ideas you support and promulgate. > This is classic market failure Right, and I don't think markets are inherently failure-prone. If I drive my car into a light pole, is that a classic automobile failure? So I dispute the very terminology here. Case in point: The 2008 mortgage crisis was caused by a massively distorted market for mortgages and easy credit. The first was created by Barney Frank with Freddie and Fannie, the second by the Fed. Future generations will remember this as a "market failure" and use it to justify the existence of future incarnations of Freddie, Fannie and the Fed. > I would suggest that you are either quite the revolutionary thinker, or that you are, in fact, typically wrong. There is a third possibility, which is that lots and lots of people think like me.

grinnbearit 13y ago

> We make safe assets more expensive to lower the risk/reward ratio for commercial activities: we make bank holdings very unrewarding (lower interest rates) Wouldn't this force people already worried about the future to buy into less abstract stores of value like houses? Wouldn't that just end up monetizing houses eventually leading to a bubble? Isn't the risk/reward ratio an indicator for the health of an economy and isn't skewing it treating the symptom not the cause? > we devalue the money in circulation and provide liquidity in one move (print money) But we use this newly created money to buy assets which the market had no interest in buying inflating their price and funding contractors at the expense of everyone else. > and government invests in big infrastructure (liquidity, jobs, momentum, signalling etc) But unlike market investors, there's no worry about ROI. Building these large infrastructure projects may pay off but theres no downside and they could just end up making a few people very rich. > And it works - this is why we abandoned the gold standard. I thought the gold standard was abandoned because Nixon refused to convert France's dollar holdings back to gold in 1971.

clienthunter 13y ago
> Wouldn't this force people already worried about the future to buy into less abstract stores of value like houses? It forces people to spend/invest money primarily, which keeps the economy growing, prevents job losses etc. Houses are one form of investment, but they're no less tangible than many others from the point of view of your average investor. > But we use this newly created money to buy assets which the market had no interest in buying inflating their price and funding contractors at the expense of everyone else. This is not about magicking up new demand, it's about restoring the previous demand before the fear set in. Inflation is a reality, yes, but it's not inherently a bad thing - in these situations there's an acceptable level where the benefits outweigh the costs. > But unlike market investors, there's no worry about ROI. Building these large infrastructure projects may pay off but theres no downside and they could just end up making a few people very rich. It barely matters if they pay off at all, the end product in this kind of capital expenditure is much less important than the process of doing it. Making a few people rich is the usual outcome of high-value expenditure, why would that be any less true in a recession? It's a nothingness on the scale of rescuing a flailing economy. > I thought the gold standard was abandoned because Nixon refused to convert France's dollar holdings back to gold in 1971. I'm not a historian. It's certainly why we don't go back to it, and why not a single country on the planet uses a fixed monetary system anymore.

theschwa 13y ago

>The chain reaction continues until all the economy's money is tied up in safe assets, not being spent If people put their money in savings, isn't the bank still spending it? Investing in things like new businesses? Couldn't the same thing happen regardless of the currency?

clienthunter 13y ago
No, the banks are scared of investing too. Edit: sorry, incomplete response. Yes it happens in every currency, the difference is they have mechanisms for handling these issues.

Sammi 13y ago

> So what do we do? (1.) We make safe assets more expensive to lower the risk/reward ratio for commercial activities: (2.) we make bank holdings very unrewarding (lower interest rates), (3.) we devalue the money in circulation and provide liquidity in one move (print money), (4.) and government invests in big infrastructure (liquidity, jobs, momentum, signalling etc). I clearly see how 3. is not possible with Bitcoins, but how are the others not possible?

DennisP 13y ago

That's a real effect, but implicit in your description is an assumption that there's only one standard currency, like dollars or gold. An alternative is to allow anyone to issue currency. Worgl, Austria got itself out of the Great Depression by doing just that, creating a currency with built-in devaluation (until Austria's central bank shut it down). We already have multiple bitcoin-style currencies, and it's easy to create more. Some even devalue, much like Worgl's currency. So I don't think this is likely to be a problem, unless somebody is silly enough to make bitcoin the only legal tender.

clienthunter 13y ago
This is an novel thought, but I don't see how this does much to mitigate agent expectations as regards the valuations of real assets, which is the underlying issue here. Theres also the question of how practicable such a scheme could ever be with global capital markets.
- DennisP 13y ago
  It's not really novel, Hayek wrote a book arguing that competitive private currencies would provide economic stability without central control. Whether new money is issued by a central bank or other agents, it seems to me the effect is pretty much the same.
  - clienthunter 13y ago
    I've done some reading. This idea is about refining the concept of money, to give control to the agents and remove the untrustworthy and incompetent regulatory control. Interesting indeed. However the mechanics of maintaining stability as described by Hayek are largely the same, it's only the controlling party who has changed. Edit: And back to the point - Bitcoin has no controlling party, it cannot be manipulated in this way at all. It cannot respond to business cycles.