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The Bitcoin Report 2 [pdf]

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Re: The Bitcoin Report 2 [pdf]

#91

Post by el_senor_duerpo »

rhizome wrote: post #88
el_senor_duerpo wrote: post #48

Earlier quoted context omitted.

I am an economist, and I have no idea what that means. Sounds to me like confusion over two things: (i) the difference between "supply and demand" and the "quantity supplied" or "quantity demanded" and (ii) equilibrium. The circular logic is a tell tale sign. Price goes up, so people demand less, so price goes down, so people demand more... That's the whole point of equilibrium. Where does all of that net out.

I think they are trying to say that demand forces supply.

Exactly, that's a huge mistake. Shifts in demand cause shifts in supply? That's not obvious at all. The whole point is that supply and demand have different determinants, but they mutually determine quantities and prices.

Re: The Bitcoin Report 2 [pdf]

#92

Post by el_senor_duerpo »

tquai wrote: post #43

The market is capitalized at $2.5 billion, but what does that mean in an economy with no production? Does the author define "production" as manufacturing where the exclusive currency used (for raw materials, wages, utility bills, etc.) is bitcoin? If so then I'm not sure of the relevance. One could make all sorts of clever but offtopic points about a fiat paper currency when viewed through the lens of a P2P currency…

No, production is not exclusive to manufacturing. It means valued-added. For example, if you bought a dvd from amazon using bitcoin (I have no idea if this is possible), then very little of what you paid would count in bitcoin GDP. All of the costs of production (warehouses, delivery, labor, servers, etc.) are done in the US economy using dollars, so that basically doesn't register as bitcoin GDP.

On the other hand, let's suppose someone is buying a bag of... something. Well, everything that got that bag to the dealer was done in some other production economy. So the only value added, that would count as a service in bitcoin GDP, would be the dealer's profits, measured in bitcoins.

To my knowledge, there are no investment projects being financed in bitcoins. If there were, then they probably just defaulted on their loans, which increased tremendously under deflation. Therefore, it's best to think of the bitcoin economy almost entirely as pure exchange, with very little value added and very little wealth created.

As for fiat currencies, why is everyone so interested in the nominal exchange rate anyway? This was a peculiarity that I noticed a while ago. In college, I went on a study abroad program to Mexico. When we arrived, we all exchanged our dollars for pesos. Everyone was carrying on about how strong the dollar was, because one dollar could buy ten pesos. But then I noticed something. I went to McDonalds, and instead of a "dollar menu", they had a "10 peso menu". Who cares how many pesos you get for a dollar? It's about how much you can buy with that dollar worth of pesos, and that's measured by the real exchange rate. I realized at that moment that purchasing power was much closer to parity than most people think, because they put so much weight on nominal rates.

Re: The Bitcoin Report 2 [pdf]

#93

Post by el_senor_duerpo »

mortehu wrote: post #56

> [...], sudden and large increases in the user base cause dramatic increases in the nominal exchange rate. This is because the money supply is exogenously fixed by the mining algorithm. I think the reasoning here is too specific. Most currencies are only inflationary long term. If during a 10 day window a trillion euros flood into the US dollar market, I doubt the Fed will be able to respond fast enough to keep the…

First of all, if our actual markets started to experience this kind of volatility, circuit breakers would kick in.

Second, even if they didn't the Fed could easily respond in real time. It's not as if the Fed actually, literally "prints money". They would just go onto those forex markets and sell people dollars, transferred digitally and made up out of thin air. And their servers wouldn't crash while doing it.

Edit: I should add to this that, at least to a first approximation, the Fed is not terribly concerned with the nominal exchange rate. They are charged with maintaining full employment and price stability within our own economy, while the nominal exchange rate is allowed to float against other currencies. Because have have our own production economy, there are good fundamental reasons for fluctuations in the real exchange rate that should be permitted to occur.

Re: The Bitcoin Report 2 [pdf]

#94

Post by el_senor_duerpo »

plaxis wrote: post #59
calciphus wrote: post #2

Background - despite the absurd name, a friend of my posted this (relatively anonymously) to Reddit last night. Unfortunately, it got downvoted into oblivion for not possessing enough cute memes. The data shows what happens to a currency like this is very predictable, and the behaviors we're seeing (deflation, currency hoarding, stagnation of real bitcoin output) are great predictors of crashes like this.

Your friend goes to columbia? It's pretty good. Not perfect, but what is. Great Job!

Ha, um no... That would be nice.

Re: The Bitcoin Report 2 [pdf]

#95

Post by el_senor_duerpo »

hotpockets wrote: post #55
vyrotek wrote: post #7

"There is no capital nor wealth creation to speak of; only as much money as was put in. While somebody may buy a bitcoin for $1 and then sell it for $200, no value was added in this process, so it is simply a transfer of wealth. The people who profit will do so by taking from those who lose. As the deflationary feedback amplifies the desire to hoard, the exchanges will become illiquid. Eventually, buyers will give up…

I don't get this argument. Bitcoin lets you do things you can't do without it. That's not zero sum, that's creating value that wasn't there before. And we are only at the beginning. Pretty much no one understands what can be done with it in the future. Smart property, oracles, etc.

I'm pretty sure I explained the value of use of bitcoins as a medium of exchange in footnote 2. The convenience and ability to facilitate transactions on the black/grey market might cause bitcoins to trade at a slight premium. On the other hand, volatility, concerns over hacking, exchange lag, and the threat of future government regulation may overshadow this and cause them to trade at a slight discount. I split the difference and assume that prices in the bitcoin economy adjust relative to the spot price, so that the real exchange rate is one-to-one. The problem isn't with the utility of a crypo currency in the abstract. It's that this will never come to fruition with built-in flaws like deflation, which inevitably lead to bubbles.

Re: The Bitcoin Report 2 [pdf]

#96

Post by el_senor_duerpo »

zenocon wrote: post #26
dragonwriter wrote: post #18

Earlier quoted context omitted.

> Every article that portends doom via deflationary measures trots out the same 'ol tired arguments and examples (great depression, hoarders, etc.) You have to admit this is new ground. In what relevant sense to deflation and its effects is it new? > There are a lot of new ideas here (i.e. divisible to 8 decimal places, de-centralized, etc.) How are any of these relevant to the incentives created by deflation?

Bitcoin is an infant. Hoarders will happen, sure. We'll see what happens in the long term. Gold as a fixed medium may not be practical to slice to 8 decimal places, but then again...the central authority that is in charge of deciding that never tried. They just gave up and Keynes won. Let's see what happens.

I'm always peeved by this reference to Keynes. This is a topic that is universally recognized by almost all economists, with the exception of a few Austrians. In fact, the main proponent of this concept was a conservative economist from the University of Chicago named Irving Fischer. Because the Great Depression was a period of absolute deflation (falling prices and falling output), this was a central concern to Keynes as well. However, it was none other than Milton Friedman, a lead figure in the resurgence of neo-liberal (libertarian) thought in the mid 20th century. In fact, Milton Friedman's most famous work (the work with Anna Schwartz), was all about how the Fed caused the double-dip in the Great depression by enforcing the gold standard and contracting the money supply. See? Friedman (a libertarian) rose to fame for his claim that the Fed destroyed too much money during the Great Depression!

Edit: One quick thing I forgot. Keynesian economics is all about the idea that, if prices are "sticky" and cannot fully adjust in real time, then that leads to drops in output. The flip side of this, which is evident in the current crisis, is downward nominal wage rigidity. The fact that prices are slow to adjust partially mitigates the threats of deflation. So if anything, Keynesians have less to worry about from deflation than other factions of macroeconomists.

Re: The Bitcoin Report 2 [pdf]

#97

Post by zenocon »

el_senor_duerpo wrote: post #96
zenocon wrote: post #26

Earlier quoted context omitted.

Bitcoin is an infant. Hoarders will happen, sure. We'll see what happens in the long term. Gold as a fixed medium may not be practical to slice to 8 decimal places, but then again...the central authority that is in charge of deciding that never tried. They just gave up and Keynes won. Let's see what happens.

I'm always peeved by this reference to Keynes. This is a topic that is universally recognized by almost all economists, with the exception of a few Austrians. In fact, the main proponent of this concept was a conservative economist from the University of Chicago named Irving Fischer. Because the Great Depression was a period of absolute deflation (falling prices and falling output), this was a central concern to Keyn…

It isn't entirely clear to me what you're trying to say. With respect to Friedman and the Great Depression, he drew the conclusion that the Fed a) failed to act as a lender of last resort (i.e. they could have adjusted the price of gold -- which they never tried), but more importantly b) the crisis would have never occurred, and the economy as a whole would have been better off if the Fed were never created in the first place [1].

[1] http://www.fee.org/the_freeman/detail/the-great-depression-a...

Anyway, this is all taking a left turn here. It has been fun, but there are probably better forums than HN for discussing macro-econ. Maybe I'll see you in one of the subreddits, and we can debate it in more depth there.

Re: The Bitcoin Report 2 [pdf]

#98

Post by hotpockets »

el_senor_duerpo wrote: post #95
hotpockets wrote: post #55

Earlier quoted context omitted.

I don't get this argument. Bitcoin lets you do things you can't do without it. That's not zero sum, that's creating value that wasn't there before. And we are only at the beginning. Pretty much no one understands what can be done with it in the future. Smart property, oracles, etc.

I'm pretty sure I explained the value of use of bitcoins as a medium of exchange in footnote 2. The convenience and ability to facilitate transactions on the black/grey market might cause bitcoins to trade at a slight premium. On the other hand, volatility, concerns over hacking, exchange lag, and the threat of future government regulation may overshadow this and cause them to trade at a slight discount. I split the…

But you seemed to leave out an important component of valuation, unrealized capability. The protocol supports more than has been implemented.
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