The consequences of Bitcoin

realitykeeper

Many of you will have heard by now of the computer generated currency Bitcoin. Having done a little research on this currency I have some thoughts on how it could effect the Irish economy and the world economy.

Firstly lets look at why people use bitcoin. From a global citizen`s point of view - bitcoins free you of governments which steal money to fund their own corruption, their inefficiently run public services and their auction politics. Whether or not you agree with the last statement is largely irrelevant because many of the people who buy bitcoin are likely to think like this which is why they use the currency.

Bitcoin is also an attractive currency to criminals who simply do not want to contribute to society even if they happen to live in a country where the Government is lean, efficient and non corrupt.

Finally, bitcoins are used by people who do not like the notion of their wealth being eroded by the printing of money by central banks. It is this final point that I would like to focus on. Bitcoin is not like other currencies because the maximum number of bitcoins that can be "mined" is 21 million. Therefore if all money was in bitcoin - prices would generally go down. In the present system where money can be printed, prices generally go up. Therefore many people with money are drawn to this idea that the money they have can (in theory) become more valuable if they hold bitcoins as opposed to less valuable if they hold a traditional currency.

Consequently, the more money central banks print - the more popular bitcoins are likely to become. Again I should point out that this is how people with money tend to think so on that basis alone the growth in popularity of bitcoin may become a self fulfilling event.

So this brings us to the question of why do central banks "print" money. In many cases it is a mechanism for cheapening a currency to boost exports. It is also used at times of spiraling national debt or in the case or our own country where we cannot print money - alternative methods are devised by creative accountants to try extend the lifetime over which our debt has to be repaid. These measures are designed to alleviate the amount of austerity required to bring public spending under control. Traditionally, the effectiveness of these measures was countered to some extent by the wealthy putting their wealth out of harms way - in this case the harm being quantitative easing. However, with bitcoin there may be no need to change currencies or move money out of the country. People could simply trade tax free in bitcoin without fear of their choice of currency depreciating. Bitcoin is in many ways a virtual black market currency but lets not judge those who use bitcoins to harshly. Bitcoin is a monitory equivalent to the vigilante. If there were no criminals there would be no vigilantes.

So what can the government do about this bitcoin black market? As I see it there is only one thing that will make the bitcoin seem less attractive and that is massive austerity. Why? Because people who believe in austerity also believe in the preservation of existing wealth and in theory at least, the bitcoin enables them to preserve their wealth. To read more about bitcoin: http://bitcoin.org/en/

Declaration of interest: I presently own one litecoin (a sub denomination of the bitcoin)

dartup

bitcoms are hard to use few places take them,you have to trust the people that make them,when the crash happens you will be left with notthing

Schnitzel Muncher

Not a very balanced post.

KyussBishop

Here is a brilliant article on Bitcoin, explaining in-depth the problems with it (it's the best one I've seen thus far, that really nails this):
http://yanisvaroufakis.eu/2013/04/22/bitcoin-and-the-dangerous-fantasy-of-apolitical-money/

The only democratic way to have a currency, is to have one controlled by the state. You don't want excessive deflation anymore than you want excessive inflation, and if you want to avoid both, you need a central authority in control of the money supply (which is impossible with Bitcoin).

Bitcoin (and the gold standard, which is very analogous to Bitcoin) lead to deflation, and this favours creditors over debtors (making the principal of debt, minus interest, grow in real terms over time, and it causes the interest on that debt to be compounded twice-over as that is also increasing in real terms over time).

It also leads to the value of each unit of currency increasing over time, but this isn't free, this increase in value has to come from somewhere, and this comes from economic growth; so what you get, is the wealthy hoarding money, being able to effectively 'tax' economic growth itself, and leading to a very regressive distribution of that economic growth 'tax', towards the most wealthy.


Bitcoin is a nice idea for a transactional currency that is potentially anonymous if used right, which would be extremely useful indeed, but that can be done in far better ways and you will see Bitcoin replaced entirely eventually.

Also, Bitcoin is not tax free, countries like Canada are starting to mandate that people pay taxes on transactions with Bitcoins, treating it as any other form of financial transaction.

KyussBishop

With regards to central banks: Remember, that these are institutions largely staffed and managed by people from the private banking and finance industry; it is banks that create money all of the time.
When central banks 'print' money through other means as well, such as through quantitative easing, where does the money go? It goes to the banks.


Most of the money creation (printing) in economies is done in the favour of private banks, who get to create money out of nothing, attach an equal amount of debt on that, and charge interest on it (this is called 'debt-based' money); not only that, but in most economies, something like 95% of the money in the economy is made up of this debt-based money created by private banks.

Think about this though: When money is loaned out by a bank, i.e. when debt-based money is created, there is a 1:1 ratio between Money:Debt, but banks charge interest; this means that the total stock of private debt in the economy, grows beyond the size of the total money stock (the money supply), and it will keep on growing unless something happens (up to 2x, 4x, 10x etc. the money supply, eventually), and that something is usually mass-defaults.

This is unsustainable, because there is immediately not enough money in the economy to repay that amount of debt, and the debt stock keeps on growing forever, and the only way to arrest that is for people to start defaulting on their debts, to reduce the total stock of private debt.


So, what do we need to make this sustainable? We need to end debt-based money, i.e. we need to make private banks full-reserve to stop them creating money.
We're left with a problem though: The money supply still needs to grow, so that we can avoid deflation caused by a static money supply, but not so fast as to cause excessive inflation.

To do this, we need a source of non-debt-based money, and this is something government can provide: Government can create money (without a debt attached) and spend it into the economy to increase the availability of money, and if inflation starts becoming a concern, government can tax money back out of the economy (and can even target the taxes, specifically at overheating/inflating areas of the economy).

Where today, private banks add money into the economy through loans (creating money in the process), government would add money through public spending, and where private banks would remove money through debt+interest payments, government would remove money through taxes.

Consequently, governments having this ability would also obsolete the need for a 'national debt' (no need to borrow to spend) and the desire for inflation to reduce that; since government-created money is also non-debt-based, governments do not need to turn a profit in their spending (profits are only required for debt-repayments, and if availability of money is a concern - neither would be for government), thus government spending can be used for purposes that prioritize social, environmental or other long-term values, instead of 'money' (this is something that is impossible for private industry - money must be the priority, because private business must profit or die, and short-termism is rife).

SupaNova2

KyussBishop wrote: »

Bitcoin (and the gold standard, which is very analogous to Bitcoin) lead to deflation, and this favours creditors over debtors (making the principal of debt, minus interest, grow in real terms over time, and it causes the interest on that debt to be compounded twice-over as that is also increasing in real terms over time).

Yeah that would be the case if bitcoins are lent, and who would borrow them if they would impose such an extra penalty? They don't have to be lent. Money is defined by its functions, medium of exchange, store of value, and unit of account. Bitcoins have 2/3 and why should it stop?

KyussBishop

There are lenders out there for Bitcoin, they do get lent, though you're right that it's not currently important for Bitcoin (this is not the primary negative aspect, of the currencies deflationary nature). I don't think Bitcoin should stop, just that it suffers quite fundamental deflationary drawbacks, among other issues well described in Varoufakis' article above.

It is a useful currency in many ways, particularly for potentially anonymous transactions (if done right), but claims that it will usurp fiat currency and the like (particularly given its deflationary problems) are very very oversold, and there are many other overhyped claims regarding the currency.


The other, arguably primary, issue with the currency being deflationary, is the 'early-adopters/wealthy-hoarders win' aspect of the currency, as described in my previous post:
It [] leads to the value of each unit of currency increasing over time, but this isn't free, this increase in value has to come from somewhere, and this comes from economic growth; so what you get, is the wealthy hoarding money, being able to effectively 'tax' economic growth itself, and leading to a very regressive distribution of that economic growth 'tax', towards the most wealthy.

So you have the early-adopters/bitcoin-wealthy, able to effectively 'tax' all economic growth in the Bitcoin economy, where that tax is distributed regressively, based upon who holds the most Bitcoins, without them having to invest those Bitcoins or doing anything productive with them at all.


Examples of this kind of 'unearned-wealth-going-to-the-rich' or 'rent-seeking' often seem to get glossed-over or ignored, when discussing economic issues across a wide variety of topics; it seems to be the hallmark of right-wing economics.

SupaNova2

KyussBishop wrote: »

It [] leads to the value of each unit of currency increasing over time, but this isn't free, this increase in value has to come from somewhere, and this comes from economic growth; so what you get, is the wealthy hoarding money, being able to effectively 'tax' economic growth itself, and leading to a very regressive distribution of that economic growth 'tax', towards the most wealthy.

This all assumes the value of bitcoin will rise faster than inflation, there is no reason to assume that will be the case. If it was the case, a sure thing, everyone would be saving in what would be the perfect inflation hedge.

KyussBishop

We're talking about deflation, which by definition means no inflation (or rather, negative inflation).

SupaNova2

Yeah I know and the question posed is how can you be sure that prices measured in bitcoins will deflate?

SupaNova2

If a bitcoin costs $100 and so does a barrel of oil and a year later a bitcoin costs $102 and so does a barrel of oil, owning bitcoin protected your (oil)wealth but did not increase it. For bitcoin to impose a heavy tax on growth, it would have to rise in value faster than the the rise in value of goods and services. If this was a sure thing everyone would buy bitcoins, people are not, are they stupid?

touts

Consequences of Bitcoin? A few will get rich. Many will lose their money. Bitcoins are the 21st century version of Dutch Tulip Bulbs.

SupaNova2

Possibly a fad, I haven't given it much thought until now, the longer it lasts the more it starts to get interesting though.

KyussBishop

SupaNova2 wrote: »

Yeah I know and the question posed is how can you be sure that prices measured in bitcoins will deflate?

Bitcoin has a money supply that halves in growth every 4 years, and if the rate of economic growth of the bitcoin economy exceeds the rate of growth of the money supply at any stage, then you will get deflation.

In total, there will only ever be 21 million Bitcoins in existence (that is a hardcoded limit), and there are already 10.5 million of the total 21 million in existence; so that means half the total possible money supply already exists.

The total money supply isn't expected to be reached until 2140:
https://en.wikipedia.org/wiki/Bitcoin#Distribution


So, this means that to avoid deflation between now and 2140, the Bitcoin economy must only grow to 2x its current size (requiring a doubling of the money supply along with, i.e. hitting the money supply limit) in that period of time, and then it has to stop growing permanently if deflation is to be avoided.

If people promote Bitcoin as a serious currency, it would be absurd to propose such a small rate of growth, so given the increasing mismatch over time, of the rate of growth of the money supply and probable economic growth, the currency is going to become increasingly deflationary.


Also, apart from all that as well: Eventually the cryptographic algorithm used for Bitcoins is going to become crackable, leading to an early finish to the hardcoded 21 million Bitcoin limit, and making all economic growth after that permanently deflationary.

KyussBishop

SupaNova2 wrote: »

If a bitcoin costs $100 and so does a barrel of oil and a year later a bitcoin costs $102 and so does a barrel of oil, owning bitcoin protected your (oil)wealth but did not increase it. For bitcoin to impose a heavy tax on growth, it would have to rise in value faster than the the rise in value of goods and services. If this was a sure thing everyone would buy bitcoins, people are not, are they stupid?

It is not a sure thing, it is (as touts said) a version of the Dutch Tulip Bulbs, a bubble, since its severe deflationary aspects (among other faults) will limit its useful lifespan; the 'sure thing' you describe, is a win for speculators in the Bitcoin economy, and a loss for people doing business/transactions in Bitcoins (the ones who are 'taxed' by either the deflationary aspects or volatility of the currency).

This is all well described in the Yanis Varoufakis' article I linked in my first post; the main people who will 'win' with Bitcoins are the early adopters and speculators profiting off of hoarding (with deflation) and its massive volatility, at the expense of many of the late-adopters and people doing business in and transacting with the currency.

SupaNova2

I'm in total agreement if you are talking about bitcoins being used as a major transactional currency that is lent, borrowed and guarenteed to increase in value but it isn't any of those!

It is used as a medium of exchange for some transactions as well as a speculative store of value. How long that will continue is what is interesting. The disadvantages you talk about don't affect it in its current form.

Jonny7

If it is to become widely accepted, then it will naturally evolve to be regulated and stable with mechanisms and controls like a real currency.

Anyone with lofty notions of two-fingers up to the establishment will very quickly change their minds when their investment halves in value overnight.

SupaNova2

Jonny7 wrote: »

Anyone with lofty notions of two-fingers up to the establishment will very quickly change their minds when their investment halves in value overnight.

Off memory some of the last big dips came from early miners dumping in large amounts, in one case selling off $250,000 worth of bitcoins. I have no idea of what the distribution of coins is now, but once all the early miners are done selling off their large collections that would make it less swingy.

Jonny7

Ah I think it will remain a "protest-currency" against the corporations and the banksters man and the majority of it's current and future use will be the epitome of pure greed and profit-making... speculation.

Apart from being an untraceable way of buying drugs online, it doesn't appear to have many practical advantages over normal currency, which is safer, more secure and less hassle to use.

It's been an interesting experiment never-the-less.

SupaNova2

Jonny7 wrote: »

Ah I think it will remain a "protest-currency" against the corporations and the banksters man and the majority of it's current and future use will be the epitome of pure greed and profit-making... speculation.

My guess is most of the large profit making is done. Those speculators who have already bought high will see losses, and unlike houses or commodities, bitcoin can go all the way to zero.

Apart from being an untraceable way of buying drugs online, it doesn't appear to have many practical advantages over normal currency, which is safer, more secure and less hassle to use.

Well black market use along with the protest aspect is what can keeping it going even as the pure speculators lose interest. It being an untraceable way to buy drugs is not a bad USP. If it does that well, demand for bitcoin for black market use could grow even if demand for bitcoin as a "protest currency" fades.

So why not a future as an untraceable black market currency?

Valmont

KyussBishop wrote: »

Government can create money (without a debt attached) and spend it into the economy to increase the availability of money, and if inflation starts becoming a concern, government can tax money back out of the economy (and can even target the taxes, specifically at overheating/inflating areas of the economy).

Do you trust governments to put the brakes on during the good times? Have you been awake during the last ten years? Why all of a sudden are we supposed to support central banks doing the one thing they haven't been doing for decades?

KyussBishop

Valmont wrote: »

Do you trust governments to put the brakes on during the good times? Have you been awake during the last ten years? Why all of a sudden are we supposed to support central banks doing the one thing they haven't been doing for decades?

Since an unmanaged money supply means guaranteed deflation and/or inflation, depending upon the rate of economic growth, you pretty much need a central authority to control the monetary system (the addition and removal of money from the economy) if you want to avoid that.

Do you want the money supply controlled by democratic means (government), or undemocratically by private banks? (we already know we cant trust private banks to put the brakes on, because they, in collaboration with finance, inflate enormous asset bubbles all the time)

If you want to remove undemocratic control over money creation from private banks (i.e. put them back to full reserve), how else are you going to expand the money supply without excessive deflation/inflation, other than by government creation of money?


We have a monetary system that gives use of money creation exclusively for private benefit, for those in banking/finance, and which we have increasingly little democratic control over, and which is allowing these industries to willfully cause enormous recurring damage to the world economy (which I think is far greater damage, than democratic control over the monetary system would allow); what I want is democratic control over money creation, and for it to be used for public benefit, not the benefit of the banking/financial elite.

Valmont

But the government explicitly allows the central banks to control the money supply -- why should anyone trust them to do what you think is now the right way of controlling the money supply when they have sold everyone down the river already?

Surely the most democratic approach to money would be the one we use towards grocery shopping: let each individual decide what he wants to use whether it's bitcoins, gold, cigarettes, or crumpled up pieces of paper. My problem with your solution is that it is ripe for capture by vested interests and until you can explain how this time the government won't capitulate and help out their big-business buddies or the unions or whomever they're in thrall with, I'm not convinced of the safety of centralised control of the money supply at all.

KyussBishop

Central banks don't control the money supply, just the interest rates; the money supply is currently endogenous, i.e. determined from within the economy (through loans), not externally by the central bank.

As mentioned earlier, banks create money when extending loans, and because of the way such money creation works (loans create deposits, because person B getting paid with person A's loaned money, will most often deposit it back into a bank), reserve rates don't restrict this expansion (because, since loans create deposits on a 1:1 ratio, the deposits expand reserves more than enough to accommodate the loan).

Even where one bank hits its reserve ratio with a loan, they would be creating excess deposits in another bank which can be used for providing more loans.


I don't trust private banks having this power, because they have shown how they grossly misuse it to inflate asset bubbles (very likely deliberately and fraudulently, for the benefit of bank executives and their friends in finance), and I don't trust the central banks which are (contrary to all the talk of 'independence') staffed almost exclusively with ex-banking/financial people, and where the regulatory capture is so bad, that central banks are more under the control of banking/finance than of government or the people.

This is not democratic, it is very undemocratic, and we can see in the economic crisis right now, that it is causing enormous damage to world economies (and helping to significantly harm and sometimes destroy peoples lives), and that these institutions are pretty much being run for the benefit of the banking/financial elite, and their wealthy business/political friends.


So, contrary to what you say, we already have a monetary system that is captured by vested interests, and I want one where this is not the case, and where the people managing the monetary system are accountable to the public (this requires government control).

Government can be held more accountable to public, than these private actors in banking/finance; these private actors are in fact holding governments and entire countries to ransom, by requiring them to use debt to fund public spending when taxes fall short, debt which is controlled by banking/finance and the wealthy, who attach strings and demand austerity (which just so happens to benefit them at the expense of the rest of society).
Giving government control over money creation thus greatly reduces the influence banks/finance and the wealthy hold over government and the economy, by removing this symbiotic relationship where governments need banks/finance to fund spending.


Also, as I explained earlier: If you want to avoid excessive deflation or inflation, you need a central authority in control over the monetary system, and fiat currency is mandatory for achieving this; only government can do this democratically, because we can't allow our monetary system to be run undemocratically by private interests.
Once it can be seen that most non-fiat money systems lack control over the money supply, and lead to excessive deflation/inflation (depending upon economic activity), then it is inescapable that fiat money is required for economic stability, and that the only democratic way for it to be controlled is by government.


I understand the skepticism towards this stuff, but once the consequences of how the monetary system really works are seen (and this is something most economic schools of thought get 100% wrong, yet it is critically important), and the extremely powerful economic/political changes reform allows are seen, it will provide a pretty enormous perspective change on both politics and economics.

SupaNova2

KyussBishop wrote: »

So, contrary to what you say, we already have a monetary system that is captured by vested interests, and I want one where this is not the case.

Not many would disagree, especially free marketer's. You recognize some faults in the current system and equate that to a private money system being bad, but the current system doesn't even remotely resemble a market system.

What is the harm in bitcoin, if people adopt it and prefer it to other money?

SupaNova2

KyussBishop wrote: »

Central banks don't control the money supply, just the interest rates; the money supply is currently endogenous, i.e. determined from within the economy (through loans), not externally by the central bank.

Yes they do, even if it is in a reactive manner and through setting interest rates. In some cases CB's target monetary aggregates.

KyussBishop

SupaNova2 wrote: »

Not many would disagree, especially free marketer's. You recognize some faults in the current system and equate that to a private money system being bad, but the current system doesn't even remotely resemble a market system.

What is the harm in bitcoin, if people adopt it and prefer it to other money?

I don't say it resembles a market system though, just that it is captured by private interests.

If Bitcoin became the primary currency, it has all the problems I discussed earlier in the thread (my last couple of posts though, were more about the monetary system overall), particularly the regressive aspects of permanent deflation.


How would you propose a non-centralized monetary system, avoids excessive deflation/inflation? This pretty much requires expansion of 'money', whatever that would be under such a system, in line with economic growth, where under/over-expansion, may lead to excessive deflation/inflation; you can't really do this without a central authority.

If your system would not exclude fiat money (just not have it force a monopoly over other currencies), then you could still run that fiat currency exactly as I suggest, and government use of taxes (payable only in the fiat currency) would generate the demand needed for it to be dominant.

SupaNova2 wrote: »

Yes they do, even if it is in a reactive manner and through setting interest rates. In some cases CB's target monetary aggregates.

Sure, central banks can temper the demand for loans, but they can't directly set the money supply; the money supply is still determined endogenously through people taking out loans.

SupaNova2

Cryptocurrencies are pretty new, there are lots of possibilities, you could have a money supply that expands and contracts in line with population or price indices.

In a deflationary system, companies would get more bang for their buck with profits. And investment would not come from loans but straight from pockets of those who want to chase gains greater than those from leaving their money sit still.

And there wouldn't have to be just one crypto-currency, if you imagine two competing one with a restricted supply, the other more elastic, a startup in need of cash would look for investor's in one currency or look to borrow in the other currency.

KyussBishop

SupaNova2 wrote: »

Cryptocurrencies are pretty new, there are lots of possibilities, you could have a money supply that expands and contracts in line with population or price indices.

In a deflationary system, companies would get more bang for their buck with profits. And investment would not come from loans but straight from pockets of those who want to chase gains greater than those from leaving their money sit still.

And there wouldn't have to be just one crypto-currency, if you imagine two competing one with a restricted supply, the other more elastic, a startup in need of cash would look for investor's in one currency or look to borrow in the other currency.

You can't make a currency expand in line with population or price indicies, without a central authority; cryptocurrencies rely upon the computational difficulty of generating hashes, for slowing the growth of the money supply (which happens to be an enormously inefficient waste of computing power), thus there is no real control at all.

I've explained earlier on, the negatives of a deflationary system:
This favours creditors over debtors (making the principal of debt, minus interest, grow in real terms over time, and it causes the interest on that debt to be compounded twice-over as that is also increasing in real terms over time).

It also leads to the value of each unit of currency increasing over time, but this isn't free, this increase in value has to come from somewhere, and this comes from economic growth; so what you get, is the wealthy hoarding money, being able to effectively 'tax' economic growth itself, and leading to a very regressive distribution of that economic growth 'tax', towards the most wealthy.


Companies also do not get more bang for their buck, they get less, because when a company starts production on an item, they convert $ into materials for production which appreciate less in value than money, and they spend time and more money manufacturing, and then have to wait for a customer before selling the item.
All of this time, the potential profits are being eaten into, because the appreciation of value in the money spent in production (money the company does not have anymore), will eventually surpass the value of the resulting item, unless it is sold quick enough.

Economists largely judge deflation as disastrously damaging to economies, and view it as something that should be avoided; favouring a deflationary system, carries a lot of political repercussions, which almost universally favour the wealthy and harm the less well off.


With Bitcoin in particular, the currency would become increasingly deflationary over time (if it were dominant), up to the point that hoarding money is way more profitable than investing it in anything; hoarding is a risk-free profit as well, whereas investment is not.

KyussBishop

Again, it all goes back to this:
How would you propose a non-centralized monetary system, avoids excessive deflation/inflation? If you can't avoid either excessive deflation/inflation, you're going to have economic instability.

SupaNova2

KyussBishop wrote: »

Again, it all goes back to this:
How would you propose a non-centralized monetary system, avoids excessive deflation/inflation? If you can't avoid either excessive deflation/inflation, you're going to have economic instability.

I'm not proposing one, just that I see no problem with people voluntarily adopting bitcoin, if turns out to be a failure fine, whether deflationary or inflationary fine.

KyussBishop

Sure, there's no problem with people adopting Bitcoin if they want to; keep in mind though, that government can still ensure their fiat currency stays dominant, by using taxes denominated in the fiat currency (which generate enough demand to make the fiat currency dominant).

SupaNova2

KyussBishop wrote: »

Companies also do not get more bang for their buck, they get less, because when a company starts production on an item, they convert $ into materials for production which appreciate less in value than money, and they spend time and more money manufacturing, and then have to wait for a customer before selling the item.

I said they get more bang for their buck with profits. And your point with a little thought can be applied equally to problems of inflation.

KyussBishop

SupaNova2 wrote: »

I said they get more bang for their buck with profits. And your point with a little thought can be applied equally to problems of inflation.

Only if they hoard money, not spend/invest it. Also, prices are constantly falling in a deflationary system, and the longer it takes to go from spending $ for production, to selling the good for $, the greater the chunk of profits that are eaten into due to deflation (both from the initial $ being worth more if it were not spent, and the falling price the good is eventually sold for).

SupaNova2

KyussBishop wrote: »

Only if they hoard money, not spend/invest it. Also, prices are constantly falling in a deflationary system, and the longer it takes to go from spending $ for production, to selling the good for $, the greater the chunk of profits that are eaten into due to deflation (both from the initial $ being worth more if it were not spent, and the falling price the good is eventually sold for).

I'm sure anyone dumb enough to buy and hold raw materials for a couple of years before they start to produce wouldn't be around for long. And yes they do get more bang for their buck with profits, unless you are assuming no deflation in their input costs to make your point.

You will have to explain the second bolded part further?

If there is a trend of a falling price of a good, a company is hardly going to start out production expecting the current market price of the final good, they estimate the price they can sell the final product for, if its greater than their costs that is good enough for them. They deal with similar issue's in an inflationary environment, not only do sales for the final product have to be high enough to cover costs, but large enough to start the process again with larger input costs.

KyussBishop

SupaNova2 wrote: »

I'm sure anyone dumb enough to buy and hold raw materials for a couple of years before they start to produce wouldn't be around for long. And yes they do get more bang for their buck with profits, unless you are assuming no deflation in their input costs to make your point.

You will have to explain the second bolded part further?

If there is a trend of a falling price of a good, a company is hardly going to start out production expecting the current market price of the final good, they estimate the price they can sell the final product for, if its greater than their costs that is good enough for them. They deal with similar issue's in an inflationary environment, not only do sales for the final product have to be high enough to cover costs, but large enough to start the process again with larger input costs.

Businesses profit by spending money for production, not by hoarding it; (in a deflationary system) they do not need to have years-long delays between buying production materials and selling the final product, in order to have their profits cut into, it occurs constantly as they are making an immediate loss once holding materials that appreciate less than money itself, and the constantly-decreasing sale price relative to the initial money spent on production (which for Bitcoin, would gradually worsen over time as the bitcoin economy grows, pushing the currency into greater and greater deflation).

On the second bolded part: Since deflation means constant falling prices, that means money spent on production goods today, means an increase in the value of the spent money tomorrow, and loss in the nominal value of the production goods you bought, and as more time goes on there is a constant loss in the nominal value of the final product, until it is sold and converted back into money.

The worse deflation gets (which there is no control over for a cryptocurrency), the more profitable hoarding (which is a risk-free profit) becomes relative to production, disincentivizing production and promoting ever greater amounts of hoarding.
Such hoarding is unproductive deadweight money, that could be spent on investing (and no, storing that money in banks doesn't mean reinvestment, because banks would be full reserve), and a constantly increasing monetary value without any productive effort, is (in real, not nominal terms) like constantly throwing bucketloads of free money at people (for doing nothing), where most of that goes to the rich, constantly worsening regressive concentration of wealth.


If you would seriously support a deflationary currency as the base for a countries monetary system, then (for many of the reasons I've previously listed, not limited to just the above) you are supporting a system which expressly exists to regressively benefit people that are already wealthy, at the expense of the rest of society, and which creates all the wrong incentives for an efficient and functioning economy (promoting hoarding over investment, to a greater and greater degree the worse deflation gets).

Almost all economists view deflation as extremely harmful to economies and society; you won't find many outside of financial/business/wealth lobbyist 'economists' promoting such a system.
It's plain to see that the gains go almost entirely to the wealthy (with the less well off who require debt to fund mortgages etc., getting hammered by the debtor vs creditor dynamics, that expressly favour the wealthy/creditor), so I don't understand how you don't see just how bad an idea deflation is, and how it would expressly benefit the wealthy over everyone else?


Businesses do not deal with a similar situation in an inflationary environment either, because businesses are about turning money into goods (or otherwise investing it in useful productive activity, which inflation encourages), not about hoarding money; in an inflationary environment prices increase, which means in the period where companies exchange $ for production materials, and then sell the final good for $, they make no loss on that because the materials likely appreciate in value more than money, and the final price of the good is constantly increasing, without the final sale causing a loss.

Valmont

If as you say, KyussBishop, we have a banking system controlled by private interests and these private interests have a vested interest in deflation, why have central banks set interest rates at historically low levels? According to your analysis the large banks, central bankers, and vested interests should be calling for a tightening of interest rates but it is in fact the completely other way around. How do you explain this disparity?

KyussBishop

That really seems to be making a very tenuous connection/point there; you can see yourself that these banking/financial groups don't have the political power to change the monetary system to a deflationary one, and their current level of control depends upon the central bank (and the current functioning of the monetary system) retaining political legitimacy/credibility, which would disappear entirely if there was a serious push by banks/finance to move towards a deflationary system (the backlash against that would be huge).

They already have massive control, by having control over money creation, by receiving enormous bailouts, and by being able to blow massive asset bubbles wherever they'd like; they don't need deflation to reap enormous profits in this system.


The points as the thread progresses on, seem to be verge more and more towards nitpicking on small parts of what I say, without actually contesting any of my wider arguments.

What do you think of the current monetary system:
Do you think it is acceptable or democratic for private banks to create money?
Would you eliminate fiat currency altogether?
How would you prevent excessive deflation/inflation, without a central authority with some control over the money supply?
If you don't support elimination of fiat currency, how do you think it should work? (how should money be added to or removed from the economy, without giving private banks undemocratic control over money creation?)

I've presented a lot of points detailing problems with alternative currencies and also the current monetary system, and I've even described how to fully reform the monetary system itself to be more democratic; especially in the latter, there are a lot of interesting consequences and things to discuss (and learn), but seem to be getting stuck debating over ancillary/unimportant points instead, without any of the major statements being looked at.

SupaNova2

KyussBishop wrote: »

That really seems to be making a very tenuous connection/point there; you can see yourself that these banking/financial groups don't have the political power to change the monetary system to a deflationary one, and their current level of control depends upon the central bank (and the current functioning of the monetary system) retaining political legitimacy/credibility, which would disappear entirely if there was a serious push by banks/finance to move towards a deflationary system (the backlash against that would be huge).

Why would banks favour a deflationary enviroment?

Valmont

KyussBishop wrote:

these banking/financial groups don't have the political power to change the monetary system

Thank you for acknowledging that power over and control of our financial system does not rest with banks but with politicians and the state (although you seem to argue the opposite when it suits you). The very same politicians who rubber-stamped our current monetary system and then allowed and failed to prevent the current crisis. Why you think giving these fellows more power over something they have proven to be unable to manage is beyond me.

Regarding not engaging with your entire post, may I politely suggest that your multiple posts are often very long and cover several topics simultaneously in a rather slapdash manner. I think narrowing your focus would help the debate considerably -- for yourself and others.

I'll have to get back to you on some of your other points later on this week!

KyussBishop

SupaNova2 wrote: »

Why would banks favour a deflationary enviroment?

I didn't say banks specifically, that was the connection Valmont made, I said creditors; that can include banks, but I wasn't specifically singling out the banks.

el pasco

Didn't bitcoins lose amount of value very rapidly a few weeks back and couldn't hackers just destroy it aswell
http://m.guardian.co.uk/technology/2013/apr/10/bitcoin-new-high-losing-160

KyussBishop

Valmont wrote: »

Thank you for acknowledging that power over and control of our financial system does not rest with banks but with politicians and the state (although you seem to argue the opposite when it suits you). The very same politicians who rubber-stamped our current monetary system and then allowed and failed to prevent the current crisis. Why you think giving these fellows more power over something they have proven to be unable to manage is beyond me.

Regarding not engaging with your entire post, may I politely suggest that your multiple posts are often very long and cover several topics simultaneously in a rather slapdash manner. I think narrowing your focus would help the debate considerably -- for yourself and others.

I'll have to get back to you on some of your other points later on this week!

I said they can't change the monetary system (I also didn't say anything like that regarding the financial system, it was specifically about the monetary system); they already have control over critical parts of the monetary system, as I described (particularly the ability to create money), but they can't get away with making such a huge change as making it run in a deflationary fashion.

Fair enough if my posts are too long; that's more for the sake of completeness and covering every angle; it's usually the bits I leave uncovered that get picked at.


To simplify it a bit more:
Private banks being able to create money through loans, is (for reasons described in a previous post) undemocratic and a privilege that is unjust, so banks should be made full reserve again in my view.
You still need money creation to happen somewhere though, so the money supply expands with economic growth, and I think government is the main democratic way of doing that.

With alternative currencies, you can't avoid excessive deflation/inflation without some control over the money supply, so you need a fiat currency in order to have this control; I'm not opposed to alternative currencies though, I just don't think fiat currency should be abolished.

This is a large part of my view on how the monetary system needs to be reformed, so I wonder how you would reform it differently, in a way that it doesn't encounter any of the problems above?

WIZE

are bitcoins just a computer code you are buying?

SeanW

KyussBishop wrote: »

I just don't think fiat currency should be abolished.

Yes. We should trust the government fiat money system. It's not like it has ever encouraged boom-bust cycles or anything? :rolleyes: BTW when you look specifically at the greatest economic expansion the First World has ever seen - the Industrial Revolution - it came at a time when there was honest (i.e. commodity standard) currency and private banks that allowed entrepreneurs to borrow the savings of savers ...

KyussBishop

SeanW wrote: »

Yes. We should trust the government fiat money system. It's not like it has ever encouraged boom-bust cycles or anything? :rolleyes: BTW when you look specifically at the greatest economic expansion the First World has ever seen - the Industrial Revolution - it came at a time when there was honest (i.e. commodity standard) currency and private banks that allowed entrepreneurs to borrow the savings of savers ...

So, a question I have asked many times now whenever this comes up: How do you propose we avoid excessive deflation/inflation, without a currency where we have some element of control over the money supply? (i.e. a fiat currency)

You do see also, that it is debt-based money that is causing the cycles? (due to there only being enough money in the economy to pay off the total initial principle of debt, but not the total accumulated interest, which causes debt to grow well beyond the money supply until there is a bust)
This also means that non-debt-based money (created and spent by government), introduces money into the economy without leading to debt-fueled economic cycles.

If you're seriously advocating a gold-standard again, you take a position that even the majority of the economically right-wing regard as a crackpot position; again, that leads directly to deflation, and all the regressive upward-concentration-of-wealth issues discussed earlier.

SeanW

KyussBishop wrote: »

So, a question I have asked many times now whenever this comes up: How do you propose we avoid excessive deflation/inflation, without a currency where we have some element of control over the money supply? (i.e. a fiat currency)

You can't really have inflation in a commodity currecncy, such as the pre-1913 dollar. "Excessive inflation" is what occurs when the government controls the supply of currency: consider the Weimar republic and Zimbabwe under Mughabe. It is also happening today in the Western world, albeit to a lesset extent.

The only way to prevent abuse of a fiat currency system and to empower the people is not to have a fiat currency system.

You do see also, that it is debt-based money that is causing the cycles? (due to there only being enough money in the economy to pay off the total initial principle of debt, but not the total accumulated interest, which causes debt to grow well beyond the money supply until there is a bust)
This also means that non-debt-based money (created and spent by government), introduces money into the economy without leading to debt-fueled economic cycles.

If the government prints money and spends it directly it can have many of the same effects ... inflation and a likely boom-bust cycle.

Giving anyone, including or perhaps particularly government, the right to make "money" out of thin air is an open invitation to abuse. Consider this quotes by the Rothschilds:

Mayer Amschel Bauer Rothschild wrote:

Give me control of a nation's money and I care not who makes it's laws

If you're seriously advocating a gold-standard again, you take a position that even the majority of the economically right-wing regard as a crackpot position; again, that leads directly to deflation, and all the regressive upward-concentration-of-wealth issues discussed earlier.

A currency that can guarantee zero inflation would seriously empower the people, far more so than the government and the corporations.

For example, if we assume that gold is never going to fall in value because the rate of mining versus the desire for holdings will never allow it, which is better?

1. A hard currency backed by gold is given to the poor and middle class, with a not-expected-to-fall value plus market led interest rates, encouraging us to save for our futures, whether that be even more consumption down the line or investment in business education etc.
2. A fiat currency such as the U.S. dollar is given to the poor and middle class. Inflating rapidly and with artificially low interest rates, it makes no sense for the poor and middle to save money, but they can be provoked to splurge wildly on credit. Meanwhile powerful banks and corporations recieve the new money and use it to buy things that are going up in value (i.e. converting their printing press money into a deflating currency)

Which sounds better to you?

yore

SeanW wrote: »

You can't really have inflation in a commodity currecncy, such as the pre-1913 dollar. "Excessive inflation" is what occurs when the government controls the supply of currency: consider the Weimar republic and Zimbabwe under Mughabe. It is also happening today in the Western world, albeit to a lesset extent.

The only way to prevent abuse of a fiat currency system and to empower the people is not to have a fiat currency system.

If the government prints money and spends it directly it can have many of the same effects ... inflation and a likely boom-bust cycle.

Giving anyone, including or perhaps particularly government, the right to make "money" out of thin air is an open invitation to abuse. Consider this quotes by the Rothschilds:


A currency that can guarantee zero inflation would seriously empower the people, far more so than the government and the corporations.

For example, if we assume that gold is never going to fall in value because the rate of mining versus the desire for holdings will never allow it, which is better?

1. A hard currency backed by gold is given to the poor and middle class, with a not-expected-to-fall value plus market led interest rates, encouraging us to save for our futures, whether that be even more consumption down the line or investment in business education etc.
2. A fiat currency such as the U.S. dollar is given to the poor and middle class. Inflating rapidly and with artificially low interest rates, it makes no sense for the poor and middle to save money, but they can be provoked to splurge wildly on credit. Meanwhile powerful banks and corporations recieve the new money and use it to buy things that are going up in value (i.e. converting their printing press money into a deflating currency)

Which sounds better to you?

Zero inflation will mean the rich stay rich and the poor stay poor. Simple as that. And the rich never have to do anything productive with their wealth.

SeanW

yore wrote: »

Zero inflation will mean the rich stay rich and the poor stay poor. Simple as that.

Yes, it's very simple ...and also wrong :pac: Non-inflating currency with market set interest rates would help the poor and middle classes by promoting savings as the bedrock of a prosperous future. Inflating currency with artificially low interest rates is what encourages a lack of saving and the ocassional bubble-licious spending spree on housing and various forms of short-term consumption.

And the rich never have to do anything productive with their wealth.

Who says they're doing anything productive with it today?

Maybe if you live on another planet, but here on Earth the rich can buy everything from gold and other commodities, property etc down to more questionable things futures, derivative instruments or any other froms of wealth protection.

In short if you inflate the currency the rich can escape to non-currency assets. The poor and middle class? ... not so much.

yore

SeanW wrote: »

Yes, it's very simple ...and also wrong :pac: Non-inflating currency with market set interest rates would help the poor and middle classes by promoting savings as the bedrock of a prosperous future. Inflating currency with artificially low interest rates is what encourages a lack of saving and the ocassional bubble-licious spending spree on housing and various forms of short-term consumption.

Who says they're doing anything productive with it today?

Maybe if you live on another planet, but here on Earth the rich can buy everything from gold and other commodities, property etc down to more questionable things futures, derivative instruments or any other froms of wealth protection.

In short if you inflate the currency the rich can escape to non-currency assets. The poor and middle class? ... not so much.

I take it that you put your money where your mouth is then? As soon as you get paid you convert it to gold?


No inflation means the wealthy have the assets. It means they can sit on their wealth and live off the interest or rent.

With inflation, your wealth decreases if you do nothing with it. It's not rocket science. If you were a very wealthy millionaire in Ireland in 1993, with zero inflation, and decided to leave it in a bank and live off the interest, you'd still have your million and your expenses today would still be the same.

If you just put that million in the bank, in an inflationary world, you'll still have that million but now your costs are multiples of what they were. so you aren't nearly as wealthy as you were.

Inflation affects savings. It is a great leveller. Those with the most savings i.e. the middle-class/wealthy, are affected proportionally more. that is the way it should be.

With inflation it's use it or lose it! Zero inflation means put it under the bed until you need it. Zero positive benefit to the economy as a whole. No such thing as your loan/mortgage being inflated away over time. Your mortgage payment is as difficult at year 30 as it is on day 1

KyussBishop

SeanW wrote: »

You can't really have inflation in a commodity currecncy, such as the pre-1913 dollar. "Excessive inflation" is what occurs when the government controls the supply of currency: consider the Weimar republic and Zimbabwe under Mughabe. It is also happening today in the Western world, albeit to a lesset extent.

The only way to prevent abuse of a fiat currency system and to empower the people is not to have a fiat currency system.

You didn't answer the question, it was "how do you prevent excessive deflation/inflation", and you just said it avoids inflation, while ignoring that it leads to ever-worsening deflation.

You don't seem to think deflation is a problem at all, which puts you at odds with the vast majority of economists (even those on the right).

SeanW wrote: »

If the government prints money and spends it directly it can have many of the same effects ... inflation and a likely boom-bust cycle.

Giving anyone, including or perhaps particularly government, the right to make "money" out of thin air is an open invitation to abuse. Consider this quotes by the Rothschilds:

You're quoting the Rothschilds to bolster your point; the family who historically had great private control over money creation, by owning banks, and thus have had great undemocratic power over governments and society.

You're totally ignoring everything previously discussed again, to put your own selective framing on it: Should money creation be in private hands (through private banks that can create money, or though wealthy gold-mine owners), or should it be in public hands, through government?

Control over money creation resting in private hands is simply undemocratic, and this is what you specifically advocate.

SeanW wrote: »

A currency that can guarantee zero inflation would seriously empower the people, far more so than the government and the corporations.

For example, if we assume that gold is never going to fall in value because the rate of mining versus the desire for holdings will never allow it, which is better?

1. A hard currency backed by gold is given to the poor and middle class, with a not-expected-to-fall value plus market led interest rates, encouraging us to save for our futures, whether that be even more consumption down the line or investment in business education etc.
2. A fiat currency such as the U.S. dollar is given to the poor and middle class. Inflating rapidly and with artificially low interest rates, it makes no sense for the poor and middle to save money, but they can be provoked to splurge wildly on credit. Meanwhile powerful banks and corporations recieve the new money and use it to buy things that are going up in value (i.e. converting their printing press money into a deflating currency)

Which sounds better to you?

It doesn't guarantee zero inflation, it guarantees negative inflation, i.e. deflation. You know this, yet you are ignoring it because you know it is discreditable.
Lets hear your argument in support of deflation (which I've explained in detail, how it is severely regressive and damaging to society, at least 3 times over in this thread already).


The ironic thing about gold bugs, is that even though it would cause deflation in the present, it leads to guaranteed hyperinflation in the future (the precise opposite of their claims), because the oceans contain more than 100 times the current mined stock of gold, which will become profitably extractable within the century, through advancements in nanotechnology (at which point the amount of gold available, i.e. the money supply, will skyrocket).


They also don't seem to recognize how much of a massive waste of resources and human effort it is, digging useless yellow metal out of a hole in the ground, just to put it into another hole in the ground (a bank vault), where it then stays, hardly being touched at all, just so a few numbers can be punched into a computer to increase balance sheets. It's really ridiculous/crackpot stuff, to require that amount of wasted effort, in order to have a monetary system that can work at all, and which can only work in a crippled deflationary state.

You can literally replace an entire industry of gold mining with a single computer (resolving the entire problem of deflation along with it), that's how ridiculous the level of wasted effort is.