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Bitcoin Deflation and Economic Activity

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Re: Bitcoin Deflation and Economic Activity

#81

Post by nardi »

aidenn0 wrote: post #72
nardi wrote: post #70

Earlier quoted context omitted.

How are you measuring gold's value?

Inflation adjusted dollars.

Inflation isn't the only thing that affects the value of USD. UDS's perceived value fluctuates with regard to investors' value perceptions of other currencies, commodities, etc.

Edit: If you think that USD has a fixed value, you are mistaken. You may use it as your reference point, but that just makes you blind to the fact that the perceived values of all currencies and assets are fluctuating all the time. There are some which are more closely tied together, and some which are less.

Re: Bitcoin Deflation and Economic Activity

#82

Post by tokenizer »

aidenn0 wrote: post #71
jwallaceparker wrote: post #22

> why buy something today if it will be cheaper tomorrow? Because you want it today. The "fear of deflation" argument is now pervasive among monetary theorists. The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity. This ignores the time preference aspect of economic decision making. For example, I will buy my cup of coffee today rather than wait a day or week…

I am not an economist, but I thought that both Austrians and Keynsians agree that fiat currency with steady, moderate inflation will increase economic activity versus a steady deflationary currency. The disagreement is whether or not artificially generating economic activity by inducing inflation is a good thing or a bad thing. The Austrians think that the increased economic activity consists largely of malinvestment…

I am also not an economist, but I'd like to frame your Austrian/Keynesian comparison with another one:

Underinvestment (Austrian): There is less investment due to risk being less preferable to steady savings. Example: I won't risk 1 million dollars today on a risky investment if my 1 million dollars next year will be worth more.

Overinvestment (Keynesian): These is over investment due to inflation outpacing savings. People are forced to invest in risky ventures, as at least there is a chance you can earn money as opposed to losing money over time. Example: I risk my 1 million dollars today on a risky (subjective, I'm referring to -10% to 10% gains) investment and if not, will definitely lose 5 percent of that money.

I'd love to hear your thoughts on the matter. Personally, I see strengths in both styles of economic policy, but believe that in our current economical climate, we are overinvesting and through central planning, mis-investing by stimulating the top echelon of investors who simply buy property (real estate asset prices go up), businesses (mergers & acquisitions), and commodities that hold their value. Look at the rise in value of fine art over the last 6 years. These to me, are signs of a bubble.

Re: Bitcoin Deflation and Economic Activity

#83

Post by glomph »

seliopou wrote: post #79
marcell wrote: post #65

Earlier quoted context omitted.

The article uses 90% as the sample figure. There is no direct statement that this is the type of deflation that will occur, but it seems unlikely that bitcoin prices will increase 10x every year, which is what it would take to have that level of deflation in the long run. Using a lower number, like 5%, would have been more reasonable, IMO.

I the the second paragraph, I link to a chart showing the percentage increase of the price of bitcoin in USD between July 25 and November 25, 2013. That increase would correspond to roughly a 90% decrease in bitcoin price levels. People holding bitcoin would perceive this as 90% deflation, while people not holding bitcoin would perceive this as a relative appreciation of bitcoin to the dollar. It is a completely reas…

The thing is the use of such a high figure means that it is actually the lack of stability that is at issue and not the deflation. Imagine we had a currency that was inflationary at a rate of 90%. Then there would be absolutely no reason for anyone to accept payment in such a currency. I t would be impossible to order materials to create widgets. Widgets would also not get made unless we had a more stable currency (or system of exchange) alongside our inflationary one.

It is easy to argue that it would be the rate of movement and not the direction that causes problems in transactions.

Re: Bitcoin Deflation and Economic Activity

#84

Post by lukifer »

dragontamer wrote: post #59
lukifer wrote: post #41

Earlier quoted context omitted.

I think of it as owning shares of stock in a DAC (Distributed Autonomous Corporation). At some point, those shares of stock might become worthwhile as a day-to-day currency. As is, though, I think it's already more stable than local currencies for some parts of the world (though perhaps still not more so than the dollar).

It isn't a stock however, and never will be. The reason why people invest in companies is to make more money. Companies may not offer dividends today, but eventually they will. (IE: Even Apple, once allergic to the idea of dividends, offers a regular one to its investors). Any company that churns a profit will eventually share those profits with its investors. "Owning" BTCs is not about churning profits eventually, i…

I suppose the proof-of-stake coins act a little like stock, in that one gets to contribute to the 51% that writes the rules of the network, but I take your point.

Ultimately, crypto-coins are a new type of financial instrument that don't fit cleanly into either currency or commodity (given that they're not exchangeable for something tangible). Owning BTC is subjectively stock-like, in the sense that its present value is based primarily on network effects, and its future value is highly uncertain.

Re: Bitcoin Deflation and Economic Activity

#85

Post by bigiain »

InclinedPlane wrote: post #68
bigiain wrote: post #61

Seems to me the problem pointed out only exists if you view the transactions without taking their larger context into account. Take his "100 Widget @ 1BTC each to produce, sell them later at a different value of BTC." scenario, which he characterises as an 80% loss. Now consider where the widget maker would have got his initial 100BTC from, and what he'll do with the BTC he sold the widgets for. Using his numbers, le…

You're missing the point entirely. It's about opportunity costs. If you try to use a deflationary currency for any economic activity then you get bitten by deflation, you end up losing money. The fact that the total revenue you get back is still worth the same (in butter or what-have-you) is irrelevant. You still had to buy equipment, you still had to pay people wages, and so forth in that currency to start with. But…

I think I was making a _different_ point.

I think BTC is a perfectly fine transactional tool. Much like credit cards. I can buy and sell things with my credit card, but I can't eat positive or negative numbers on my bank statement - in one sense it's not "real" until I turn those numbers into something of "value", perhaps butter - perhaps some other abstraction of "value" that I trust, like dollars.

Dollars as an "asset" are reasonably safe. Using dollar assets for investment in other value-generating activity is fairly well understood. But ask anyone from Greece or Zimbabwe if they'd entrust their families future to their local fiat currency…

BTC as an "investment" or "asset" are quite different. There's _very_ much more reason to hold on to BTC rather than invest them in any activity that's going to return less than several hundred percent annualised returns (there's a _very_ good reason why Silkroad's major commodities were what they were). If I can expect to double the dollar value of my bitcoin holding just by waiting another few weeks, of course I'm not going to invest any of that into widget raw materials or manufacturing plants. But there is definitely a US property market style risk for people sitting on large number of BTC. The notional "value" keeps going up at a startling rate - but it's still a crap shoot - there's nothing _guaranteeing_ you'll get any value at all out of your BTC - it's even less "sure" then US residential property market or Credit Default Swaps or Collateralized Debt Obligations from a few years back. It's not impossible you could buy "$25kUDS worth of BTC" today, and find you've got _nothing_ next year, instead of $50k or $100k or $500k - there were _lots_ of investors and property speculators with expectations like that 5 or 10 years ago≥

Re: Bitcoin Deflation and Economic Activity

#86

Post by jwallaceparker »

tokenizer wrote: post #80
jwallaceparker wrote: post #42

Earlier quoted context omitted.

> What's your opinion on inflation as an economic driver? My opinion is that inflation does not drive economic growth. > Are they right and both deflation and inflation can supply economic growth? Neither one supplies economic growth. > does that mean another factor is the main proponent for growth? Increased productive capacity is the source of economic growth. Not the supply of currency. Take a simple example. Thre…

Thank you very much for your response. Furthering your point on neither deflation nor inflation driving economic growth but rather productivity increases, does that mean what the FED is doing through monetary policy zero sum? I subscribe to a camp that believes that what the FED is doing through quantitative easing and zero percent interest rates, is actually harming the economy by sacrificing quality of life of pers…

> does that mean what the FED is doing through monetary policy zero sum?

It leads to malinvestment as you pointed out.

> Can this be true? Or am I looking at the situation too simplistically?

I agree. It's a wealth transfer.

> Or do you look at the protocol as having no intrinsic value (pure fiat)? And do you think that that matters as a currency?

I'm not a Bitcoin expert. Right now I see no value in it in the short term other than a speculative investment.

There is much political uncertainty surrounding it. It could go to zero in a day.

Like you say, gold has over 5000 years as a consistent store of value. Bitcoin is a few years old and wildly volatile.

Do I believe a crypto-currency with no real-world backing could thrive? Sure, someday.

Do I believe that crypto-currency will be Bitcoin? I have no clue.

Re: Bitcoin Deflation and Economic Activity

#87

Post by jwallaceparker »

dragonwriter wrote: post #18
jquery wrote: post #16

Earlier quoted context omitted.

> Gold and silver have been around a long time, but both are still relatively volatile. Are gold and silver not less volatile than government-issued currencies, the long-term value of which has traditionally ended at $0?

> Are gold and silver not less volatile than government-issued currencies Which government issued currencies? Government issued currencies are not all alike. > the long-term value of which has traditionally ended at $0? Fiat currencies only end if the issuing entity ceases to exist or abandons them, and even so the market value of currency issued may not become zero, so the claim about ending value is suspect. More i…

> Fiat currencies only end if the issuing entity ceases to exist or abandons them

I'm curious - can you point to one example of this happening?

To my knowledge they've all gone to zero in a hyperinflation but I'd love to know of a counterexample.

Re: Bitcoin Deflation and Economic Activity

#88

Post by aidenn0 »

nardi wrote: post #81
aidenn0 wrote: post #72

Earlier quoted context omitted.

Inflation adjusted dollars.

Inflation isn't the only thing that affects the value of USD. UDS's perceived value fluctuates with regard to investors' value perceptions of other currencies, commodities, etc. Edit: If you think that USD has a fixed value, you are mistaken. You may use it as your reference point, but that just makes you blind to the fact that the perceived values of all currencies and assets are fluctuating all the time. There are…

I still stand by the statment that gold is more volatile than the USD.

[edit] I have not done the analysis, but would wager that gold measured against a basket of goods or currencies is more volatile than USD similarly measured.

Re: Bitcoin Deflation and Economic Activity

#89

Post by aidenn0 »

tokenizer wrote: post #82
aidenn0 wrote: post #71

Earlier quoted context omitted.

I am not an economist, but I thought that both Austrians and Keynsians agree that fiat currency with steady, moderate inflation will increase economic activity versus a steady deflationary currency. The disagreement is whether or not artificially generating economic activity by inducing inflation is a good thing or a bad thing. The Austrians think that the increased economic activity consists largely of malinvestment…

I am also not an economist, but I'd like to frame your Austrian/Keynesian comparison with another one: Underinvestment (Austrian): There is less investment due to risk being less preferable to steady savings. Example: I won't risk 1 million dollars today on a risky investment if my 1 million dollars next year will be worth more. Overinvestment (Keynesian): These is over investment due to inflation outpacing savings.…

Another argument from the Austrian school is that even if a theoretical impartial Keynsian could manage the economy better than the free-market, the reality is that such an impartial entity doesn't exist, and the more centralized the power over the economy is, the more prone it is to corruption.

That is to say the wealthy will ensure that the central banks make policy decisions that benefit them at the expense of others.

Re: Bitcoin Deflation and Economic Activity

#90

Post by InclinedPlane »

bigiain wrote: post #85
InclinedPlane wrote: post #68

Earlier quoted context omitted.

You're missing the point entirely. It's about opportunity costs. If you try to use a deflationary currency for any economic activity then you get bitten by deflation, you end up losing money. The fact that the total revenue you get back is still worth the same (in butter or what-have-you) is irrelevant. You still had to buy equipment, you still had to pay people wages, and so forth in that currency to start with. But…

I think I was making a _different_ point. I think BTC is a perfectly fine transactional tool. Much like credit cards. I can buy and sell things with my credit card, but I can't eat positive or negative numbers on my bank statement - in one sense it's not "real" until I turn those numbers into something of "value", perhaps butter - perhaps some other abstraction of "value" that I trust, like dollars. Dollars as an "as…

Given that bitcoin only has notional value: if it's not used as a currency, with prices denominated in it, then what supports its value? If nothing does then you have the recipe for a speculative bubble, and crash, and little else.

At least gold can be made into pretty jewelry and electronics.

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