You seem pretty accustomed to economics. Can you explain how exactly or why would anyone buy any items (that's what currencies are for after all) using a deflationary currency?
Then again, it's not a design a flaw - as I once thought - it's a clear choice: Why would anyone would want to own a non-deflationary asset? :-)
So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Best Regards,
ps. FIAT currency is regulated by the FED and you know who runs the FED. BTC market is run by those who have huge amounts of BTC and you don't have a clue about who they are. Not sure which one is more secure for a society.
Exactly. The traditional keynesian definition of rationality (wrt inflation/deflation) is so far removed from reality that it should be a joke by now. Nobody actually behaves the way their mental model says they should.
Except that's not what Keynseian's say, and people do behave the way Keynseian's say, deflation does curb spending and inflation does encourage it; Keynseian's don't claim people will stop spending, they claim they'll spend less.
None of them seemed to act like that was their view when we were looking at 0% inflation. The general attitude of mainstream Keynesians was that we were on the verge of an unstopable downward spiral if we didn't act in that very moment...which I remind you was driven by housing prices crashing back down after their biggest bubble ever. In reality, people don't sense inflation or deflation as it is reported by the CPI, PPI, or any other price index. They sense it locally on a product by product basis. And it is still entirely uncertain as to the relative attribution of reduced income vs deflation as a cause of reduced spending.
Because (1) people do not agree that SPY ETFs are a reliable way to earn a return, (2) the process of moving money in and out of ETFs is far from frictionless, and (3) once people move money into an investment vehicle, they are in fact hesitant to liquidate it simply to make purchases, in a way they are not with "currency".
Look, the real problem with deflation is that it increases real interest rates and makes structural rigidities caused by sticky wages/prices more potent. If you want to argue against bitcoin on Keynesian grounds, start there.
The only way deflation will reduce consumption is if the rate of deflation exceeds all other rates of return. Simple math: I consume if
(value of consumption now) > exp(-(discount rate - rate of return) x time) x (value of consumption in future)
The `rate of return` term is the rate of return on my best investment - this is affected by deflation primarily if the deflationary currency becomes or improves my best investment.
If you plug in some example the numbers, you'll see that the effect this has on consumption is miniscule compared to the effect this has on the allocation of investment. That's because when choosing between investments both sides of the equation have the discount rate, and it cancels.
Atmosx is appealing to newspaper column keynesianism (that vague "I dunno what AD is, but I want more of it" flavor), and doesn't really understand what he is talking about. Do a back of the envelope calculation and you'll see I'm right.
I think the better question is: why would anyone invest if simply holding currency is an investment?
If you are an entrepreneur or a company going IPO, the you'd have to offer a better expected return than the currency itself. Your competition for investment dollars would be not only other companies, but cash.
I don't see a relevant distinction between them for the purposes of this discussion. Can you explain what you believe the relevant difference is, and why it matters?
(Express your model in maths as much as possible, for the purpose of clarity.)
Asset[2]: Anything that has value and can be converted to cash.
For the purpose of this or any other discussion I've made this argument, the author of the comment/post clearly confuses the two above stated words or uses them interchangeably.
Currencies, in modern economics, are control by central authorities (FED/EBC/etc) which control their performance and try to adjust them. In their optimal status, when the economy goes well currencies loose value (inflation) by 1-2%. This behavior enhances money exchange and induces a spending behavior which is viewed as good for the economy. You will buy a computer today because your money will not buy the same model/computer tomorrow. When you buy something, you fight unemployment, pay taxes to the state and so on.
The computer you buy can be an asset though. The moment you buy it, starts loosing value. You won't go to the grocery store to exchange the computer for tomatoes. You will need a medium to do that, that medium is money (and that's exactly what BTC claims to be, but up until now it's not). The computer though except from an asset is also an investment. It can help you, generate value either in form of entertainment or money (programmers/designer/etc.) but it's still not money. Sure you can exchange it for something but that's not a straight-forward process as buying beers with a currency.
The next question is: Why I should own a currency? Because the local authority (a government) impose you to use it's currency to pay taxes. Currencies are never adopted, they are always enforced to populations by supreme state governments, as means of exchange. There is no other for anyone wanting to own an inflationary currency, except for that fact that you can't do anything without it. Of course in my example, I take for granted that we're talking about a relatively healthy state. Otherwise, people will prefer a foreign, more stable (less inflationary, or deflationary if possible currency. Note that less inflationary means deflationary for them anyway).
Now, BTC introduces a currency that has some characteristics. One of them is that it's finite[4]. So, deflation is chosen here by design.
Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.
Then, why Satoshi choose to add deflation in BTC: Because otherwise no-one would even care holding any. What kind of value an inflationary digital (non-backed) currency could ever have? None.
Bitcoin is better viewed as Gold in digital form. Say you have 10.000.000.000 USD and you wanna convert that money into some asset. Would you chose a 5 year old asset or a 5.000 old year asset to do that? The rational (obvious) choice is gold. It's 5.000 old and pretty much stable, BTC as long as we know can turn to ~ 0 tomorrow if the big players choose to opt-out or USA/CN/EU/RU decide to ban it.
Why is all this relevant for the purpose of this discussion: Because the commenter (Aqueous iirc) is talking about bitcoin as a currency and not an as an asset.
NOTE: Currency is viewed as assets at FOREX[3] but I'm sure it's not relevant for the purpose of this discussion.
Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.
It doesn't matter. Say you want to maintain a portfolio of 90% bitcoins, 10% dollars. You have $100 USD and $900 worth of bitcoins. If you use the BoA card, you spend $50. Then you shift $45 from bitcoins to USD and maintain a 10/90 portfolio. If you use the Bitcoin card you instead shift $5 from dollars to bitcoins.
The only reason to choose one over the other is transaction costs. I.e., if it costs you $1 to make this transaction, and you expect a $50 USD deposit in the next month, you'll use USD to avoid the $1 transaction fee. If transaction costs are a % of the transaction size, you'll pay with the BTC card (and pay only x% of $5, rather than x% of $45).
Your post still doesn't explain why a deflationary currency will cause a person to stop consuming. Just as we could hypothesize a BTC backed credit card, we can also hypothesize an SPY backed credit card. The mechanics would basically be identical - at the point of transaction, the card company converts from the buyer's preferred asset to the seller's preferred asset. Both BTC and SPY backed credit cards already exist - it's equivalent to getting a regular USD credit card and selling BTC/SPY whenever you want to make a monthly payment (modulo a couple of extra clicks).
Incidentally, your post completely ignores the reason central banks manipulate currencies. The reason has nothing whatsoever due to the distinctions you make between currencies and assets (which, if I'm understanding correctly, is merely liquidity and the ability to pay taxes in them).
> Your post still doesn't explain why a deflationary currency will cause a person to stop consuming.
I never said will stop consuming. It will consume less. It makes sense, a consumer will spend whatever has bigger Y% of having LESS value in X time, not more!
Secondly: Have you tried buying/selling bitcoins? If you use a bank it's a pretty straight forward process but has huge costs.
Thirdly: Do you buy products using bitcoin? Do you think that people uses bitcoin to buy products online? Because all the transactions I'm aware off are either illegal (hard to track) or perceive bitcoin as an asset.
Central manipulate currencies in order to adjust the economy of a certain group, which is under their authority, as far as I know.
The distinction I make between currencies and assets come from ~ 300 BC (at least, probably way back) and I don't understand why even is a topic of discussion. BitCoin is treated by 99% of it's users as an ASSET not as a CURRENCY. No one is buying services in Bitcoin, if does not want to hide. Isn't it weird that while Silk Road used BTC as it's main currency, Amazon, eBay, Apple and every other big player, doesn't even care? You think it's out of spike or anything?
I'm not making any assumptions here, I'm stating facts. It's you who are suddenly re-writing 2000 years of economic history by assuming that buying with Gold (bitcoin) is the same as buying with FIAT.
I'm not arguing with your distinctions between currencies and assets. I don't care what label you choose to apply to BTC or SPY. I'm asking why a positive real rate of return on BTC will cause consumption to drop in a manner that a positive rate of return on Gold or SPY would not.
I strongly suggest you go read an economics textbook that actually does the math. Working the models will help you avoid arguing with yourself about definitions (a pointless exercise even if you had a partner http://lesswrong.com/lw/np/disputing_definitions/ ).
> You seem pretty accustomed to economics. Can you explain how exactly or why would anyone buy any items (that's what currencies are for after all) using a deflationary currency?
This is identical to arguing: Why would anyone buy computers when they are getting cheaper every year. At some point you make a choice where your preference for owning a computer is greater than your preference to save money.
> So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Gold is deflationary. When gold was the primary currency for the world commerce was very vibrant. Gold not being currency is a fairly recent development.
People currently purchase things online with bitcoins when they could use dollars but choose to use bitcoins. I think it's very early to write off bitcoins as a failed currency.
It depends on how fast the deflation happens. BitCoin is not all that useful as a currency right now because it's value is so volatile. This is because it is subject to huge increases in demand as it spreads to more places across the globe. It is not hindered by any export controls or borders, which means it can "infect" whole nations/societies/cultures in lumps, as we saw recently with China, sparking a huge jump in price.
But eventually everyone will have heard of BitCoin, and I believe BitCoin's growth will slow down, and its curve will flatten and look more stable. The more people have BitCoin the less small groups of individuals, or even countries, can influence its price.
But look at the growth of vendors who are accepting BitCoin over the same period. For the same reason it doesn't make a whole lot of reason to spend BitCoin during this growth phase, it does make sense to accept BitCoins. And even though most merchants don't wish to speculate with their revenue, even keeping a "float" of currency in BitCoin could be profitable, and so it is reasonable that merchants and vendors might want to accept BitCoin even though not a whole lot people are spending them these days. That can only increase BitCoin's value as a currency in the long run.
If it was unwise or wise to spend something based on its changing value, no matter how slowly, then it would be rational for me to want to spend all my dollars for goods and services today because the dollar value is going down. But the US dollar isn't depreciating at a fast enough rate for it to be rational for me to spend all of my dollars today, right? This is because the currency is inflating at a pretty slow percentage rate. A slow inflation rate is not all that different from a slow deflation rate.
It all depends on what will ultimately be the rate of deflation of BitCoin. If it is sufficiently slow(1% annually, for instance) it will be useful as a currency. If it is all over the place, it won't be.
How does the volatility of BTC make it desirable for merchants to accept it? Either they hold BTC and are exposed to the volatility, or they convert to a fiat currency and are exposed to some transaction fees.
Perhaps the transaction fees turn out to be lower than those for credit cards, in which case BitCoin maybe becomes an alternative payment network.
If your assumption were true, I wouldn't have bought a computer because I could have delayed my purchase and bought a cheaper+better one later. Even if I forecast computers falling from the sky in a year I would still buy one now if I didn't have one already. Wouldn't you?
USD and BTC are very easy to interchange. I see no difference between the dollars in my wallet and the Bitcoin in my e-wallet from a spending perspective. I'd spend my Bitcoin at any merchant willing to accept them. I think their value will go up, but I can buy more at the same price at which I just spent them.
Then again, it's not a design a flaw - as I once thought - it's a clear choice: Why would anyone would want to own a non-deflationary asset? :-)
So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Best Regards,
ps. FIAT currency is regulated by the FED and you know who runs the FED. BTC market is run by those who have huge amounts of BTC and you don't have a clue about who they are. Not sure which one is more secure for a society.