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Inflation is a function of money supply and velocity. If everyone adopted bitcoin, the velocity of the dollar would approach zero. Which means that inflation w

by slurry 13y ago

Inflation is a function of money supply and velocity. If everyone adopted bitcoin, the velocity of the dollar would approach zero. Which means that inflation would go down, not up. And yes, I would rather have my [savings] account in a hard, non-inflationary currency. On the other hand, I can only earn interest when someone is willing to take a loan in the currency and pay interest on it. And I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. So, you're going to have a hard time finding a bank that pays interest on bitcoins. This is why "bad money drives out good", aka Gresham's law.

prutschman 13y ago
> I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. Assuming the interest rates are the same, I'd agree. Would they be?
- slurry 13y ago
  > Assuming the interest rates are the same, I'd agree. Would they be? I doubt they'd be the same in either nominal or real terms. But that's a side issue. You could already do what you're talking about with gold. A bank could offer gold savings accounts that pay interest on gold loans. They don't do it. Borrowers are deflation-averse and no one wants to deal with the exchange rate fluctuations. BTC has some legit uses (like buying unjustly banned consciousness-expanding products over the internets) but the built-in deflationary death spiral in its design pretty much ensures that it will never be a serious full-spectrum parallel currency, much less a replacement for the dollar and euro.
  - natrius 13y ago
    When gold was the primary currency, there were interest-bearing gold deposits. When paper currency was pegged to gold with full convertibility, interest-bearing currency deposits were effectively interest-bearing gold deposits. When Bitcoin is the primary currency, there will be interest-bearing Bitcoin deposits.
  - mike_hearn 13y ago
    It isn't designed to deflate. That's a common misconception: http://bitcoin.org/en/faq#wont-bitcoin-fall-in-a-deflationary-spiral http://bitcoin.org/en/faq#wont-bitcoin-fall-in-a-deflationar...
- icambron 13y ago
  This is an important point, because interest rates would exactly make up for the undesirability of the inflationary currency; i.e. the inflation risk would just be "baked into" a lower interest rate for the dollar-denominated loan. Unless you had a substantially different inflation risk tolerance than society as a whole, you'd be neutral about what currency to make the loan in. Same goes for the borrower and deflation risk. Edit: I guess if the deflation risk tolerance for the borrower and the inflation risk tolerance for the bank are asymmetrical, then you would just end up with being able to loan one or the other. I suspect, per Slurry's point, that it's BTC that loses here.
natrius 13y ago
I'm referring to price inflation. You seem to be referring to monetary inflation. Less dollar use will lead to fewer dollar equivalents in circulation, but prices in dollars will go up because people will value them less.
- slurry 13y ago
  Okay, sure. In your (imho wildly implausible) scenario, the transaction costs of doing business in dollars would rise and consumers would pay an increasingly steep premium for using them. Don't really have an argument with that logic.
deleted 13y ago
[deleted]
roblev 13y ago
>I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. Sadly it is not so easy to make money this way, the forward exchange rates will cancel out any gain from the interest earned in the inflationary currency. Otherwise everyone would do this. You can make money doing this but really you are just taking a bet on exchange rates, you can easily lose money as well if the fx goes the wrong way during your investment period. There are very few risk free ways to make more money than investing in US Treasuries.
- Canada 13y ago
  If you plan to spend your investment on rent, food, or fuel then Treasuries are a losing investment for sure. At best they reduce the amount of loss compared to holding cash.
  - lmm 13y ago
    30-year government bonds grow faster than inflation, at least over here. (This is possible because economic growth is a thing)
- slurry 13y ago
  Sorry, to clarify: I meant take out a loan as a borrower. Deflation will tend to increase my real interest rate over time, inflation the opposite. Obviously in equilibrium theory, interest rates will cancel out these effects; but they do not always do so in practice. So borrowers will tend to favor moderately inflationary currencies like the dollar.

by slurry 13y ago

prutschman 13y ago

> I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. Assuming the interest rates are the same, I'd agree. Would they be?

slurry 13y ago
> Assuming the interest rates are the same, I'd agree. Would they be? I doubt they'd be the same in either nominal or real terms. But that's a side issue. You could already do what you're talking about with gold. A bank could offer gold savings accounts that pay interest on gold loans. They don't do it. Borrowers are deflation-averse and no one wants to deal with the exchange rate fluctuations. BTC has some legit uses (like buying unjustly banned consciousness-expanding products over the internets) but the built-in deflationary death spiral in its design pretty much ensures that it will never be a serious full-spectrum parallel currency, much less a replacement for the dollar and euro.
- natrius 13y ago
  When gold was the primary currency, there were interest-bearing gold deposits. When paper currency was pegged to gold with full convertibility, interest-bearing currency deposits were effectively interest-bearing gold deposits. When Bitcoin is the primary currency, there will be interest-bearing Bitcoin deposits.
- mike_hearn 13y ago
  It isn't designed to deflate. That's a common misconception: http://bitcoin.org/en/faq#wont-bitcoin-fall-in-a-deflationary-spiral http://bitcoin.org/en/faq#wont-bitcoin-fall-in-a-deflationar...
icambron 13y ago
This is an important point, because interest rates would exactly make up for the undesirability of the inflationary currency; i.e. the inflation risk would just be "baked into" a lower interest rate for the dollar-denominated loan. Unless you had a substantially different inflation risk tolerance than society as a whole, you'd be neutral about what currency to make the loan in. Same goes for the borrower and deflation risk. Edit: I guess if the deflation risk tolerance for the borrower and the inflation risk tolerance for the bank are asymmetrical, then you would just end up with being able to loan one or the other. I suspect, per Slurry's point, that it's BTC that loses here.

natrius 13y ago

I'm referring to price inflation. You seem to be referring to monetary inflation. Less dollar use will lead to fewer dollar equivalents in circulation, but prices in dollars will go up because people will value them less.

slurry 13y ago
Okay, sure. In your (imho wildly implausible) scenario, the transaction costs of doing business in dollars would rise and consumers would pay an increasingly steep premium for using them. Don't really have an argument with that logic.

deleted 13y ago

[deleted]

roblev 13y ago

>I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. Sadly it is not so easy to make money this way, the forward exchange rates will cancel out any gain from the interest earned in the inflationary currency. Otherwise everyone would do this. You can make money doing this but really you are just taking a bet on exchange rates, you can easily lose money as well if the fx goes the wrong way during your investment period. There are very few risk free ways to make more money than investing in US Treasuries.

Canada 13y ago
If you plan to spend your investment on rent, food, or fuel then Treasuries are a losing investment for sure. At best they reduce the amount of loss compared to holding cash.
- lmm 13y ago
  30-year government bonds grow faster than inflation, at least over here. (This is possible because economic growth is a thing)
slurry 13y ago
Sorry, to clarify: I meant take out a loan as a borrower. Deflation will tend to increase my real interest rate over time, inflation the opposite. Obviously in equilibrium theory, interest rates will cancel out these effects; but they do not always do so in practice. So borrowers will tend to favor moderately inflationary currencies like the dollar.