Bitcoin, a Positive Step in Monetary Reform (Updated!)
Bitcoin has already shocked both the establishment and the blogosphere.
A privately controlled currency, completely independent from Government backing.
Bitcoin leads the way in many respects, but is ultimately flawed: it was built on false premises and does not address the key issue, interest.
Bitcoin was developed by Satoshi Nakamoto and launched in January 2009. There are currently more than 8 million Bitcoins in circulation and they trade at a rate of about 5 euro.
Bitcoin basically is a debt free unit: it comes into circulation through ‘mining’: the solving of complex algorithms by clients yields new Bitcoins. However, no more than 21 million can be mined so there will never be more than that in circulation.
Bitcoin is important and actually nothing short of revolutionary. It is the first notable independent internet currency. Already many cyber units are in existence, but they are related to certain communities. Like for instance the Linden Dollars, used in the virtual world of Second Life. World of Warcraft also has its own tokens, available to millions of gamers.
But Bitcoin is a fully fledged currency, designed to finance real trade.
Why it matters…
One of its key strengths are its peer to peer design. The issuing organization’s sole function is to provide the client software and on-line market place, where Bitcoins can be traded for other currencies. It plays no role in the creation of the money supply.
In this respect it is a real assault on the Money Power’s strangle hold on our money supplies.
It allows businesses and consumers to diversify their methods of payment, making them a little less dependent on the Government/Banking monopoly.
And of course it lessens Big Brother’s ever growing control over our daily lives. Transactions are not logged in centralized databases, available to the ‘authorities’ and transnational corporations.
It also shows that a free market for currencies already exists. Yes, of course regulators are inimical to them, but current legislation does allow for all sorts of units. In fact, there is very little to stop free market currencies, provided those looking for opportunities are dedicated enough.
Furthermore, Bitcoin shows the way for independent currencies on how to create convertibility. Nowadays convertibility of ‘complementary currencies’ is usually created by backing them with dollar or euro. These currencies are sold for national currencies and this cash is used to convert them back. But this leaves them exposed to other problems. Someone could run off with the treasury. And more importantly: it disables interest free credit as no more units can be brought into circulation then there are dollars or euros available for backing.
Mutual Credit based barters can use Bitcoin technology to create convertibility without dollar/euro backing.
Unsurprisingly, legislators bribed by banks have already voiced ‘concern’ about Bitcoin’s independence. Apperantly some naughty drugdealers are using bitcoin to finance their operation. Its peer to peer character makes it suitable for this kind of transaction. Just like cash. And cash too, as we know, is under attack from Big Brother who would like to know everything we buy and sell. Not to mention that he would like to make us completely dependent on his monopoly infrastructure for buying and selling.
So Bitcoin’s existence is very useful for all monetary reformers as it will allow us to gather information about the strategies that the adversary will use to disable it. That’s what we need: practice. The feedback will allow us all to grow and create even better solutions.
….and why it doesn’t
Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw: it is based on the premise that the problem with our money is a problem of volume. This is the basic assertion of ‘Austrian Economics‘: manipulation of the volume of the money supply leads to the boom/bust cycle and this is the problem with our money.
As a result Bitcoin does not address an even bigger problem: exorbitant cost for capital through interest.
This is what is behind their method of money creation, ‘mining’ as described in the introduction.
This does indeed solve structural inflation. But at a price worse than the problem: deflation. There will never be enough Bitcoin to finance all possible trade and it will suffer from high exchange rates. That is, if its deflationary tendencies will allow it to achieve maturity.
Bitcoin does not allow for interest free credit. But in a mature currency credit is unavoidable so it will have to be offered at interest. Most likely in what is known as a ‘full reserve banking system’. I.e., banks taking in deposits at interest and lending them out at even higher interest rates.
Unfortunately, a full reserve banking system can be subverted by the money power within one or two decades, as you can find out here. Through Compound Interest lending, not spending income through interest but using it to lend ever more, the money supply will quickly be controlled by the banks.
This problem is only aggravated by the limited numbers of Bitcoins that will circulate.
Concluding
Bitcoin is a revolution and a badly needed bit of fresh air. Peer to peer and independent of banks and Government it is an example for all of us. Yes, we should press for reform at the Government level, but no, we should not await it. There is a free market for currencies and it is ours for the taking.
However, it is not credit based and it does not allow for interest free credit. Its deflationary by nature, which is very problematic.
It shows the way in assaulting monopolistic control of the money supply, but its methods are probably insufficient to make a real difference.
Bitcoin is a shot heard far and wide, but it is only the proverbial first shot across the bow.
This article was written for Activist Post
Afterthought
Many commented that there will always be enough bitcoin, because it’s subdivisible by up to 8 decimal places, allowing 100 million times 21 million bitcoin.
I understand, but didn’t think it would be relevant to elaborate on it. Considering the number of comments it generated, I was wrong.
Let me explain what I mean with the statement ‘there will never be enough bitcoin to finance all trade’.
Here’s what I said:
“This does indeed solve structural inflation. But at a price worse than the problem: deflation. There will never be enough Bitcoin to finance all possible trade and it will suffer from high exchange rates”
This is a statement typical of the Gold debate and it is not for nothing that more than one feebacker wondered what my position on Gold as currency is.
It is well known that many gold critics claim there is not sufficient gold to finance all trade.
The Gold community counters and says: bollocks, simply divide all the gold through all the money in the world.
When we start a new Gold Standard, we just establish how much money we need, divide the gold we have through that number and voila. Bitcoin has the same answer: if the economy grows, Bitcoin will divide further.
The problem is this: after we do this, the economy will grow harder than the amount of Gold in the world through mining. As a result the money supply compared to the economy is dwindling.
This is deflation, and this is why the anti Gold crowd says there is not enough Gold.
It is exactly the same reason I said there will never be enough Bitcoin
The subdivisions leading to larger numbers will be a result of appreciating Bitcoin, which is the essence of deflation.
My original formulation was suboptimal and I hope this elucidates its original intent.
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These are some of the most intelligent comments on bitcoin that I have heard outside of the bitcoin enthusiasts. Most people seem to praise it or dismiss, you seem to have tried to do both. However, I think that you might be putting too much weight on the interest aspect of the issue as it relates to bitcoins. What I mean is that the problem with interest rates is not one that bitcoin is trying to solve, rather it is trying to solve a problem of trust. Modern fiat currencies require the users of the money to put their trust in government that issues the currency. With bitcoin we put our trust in the other users of the currency (i.e. we trust that at least 51% of them will be honest). The issue of interest rates is independent of this. What it seems like you are really asking is what kind of banking system will be built on bitcoins, here you assume a traditional full reserve system, but I think this is still an open question and one that requires active research and development. I don’t think the banking system is unique in this either, what about public corporations based on bitcoin, what will those look like? Assuming that you have a unique revolutionary currency, but that it will use the old bank and financial institutions seems to be a missed opportunity. I personally think bitcoin will prevail through all of these criticisms, just as personal computers, e-mail, the world wide web, file sharing, etc…. have prevailed. But we are at an interesting time where it has not become a true currency in the sense of using it to buy and sell things, but it has reached a maturity where we can start talking about the sorts of problems you raise. Why not try to figure out how we can use bitcoins, or some sort of technology backed by bitcoins to provide interest free (or even low interest or interest controlled) credit? In fact I think a system of credit based on bitcoin is necessary to addre3ss another big complaint, which is the lack of instantaneous transactions.
Hi Kree,
Thanks for these comments, very interesting. Seems you are looking from within, which is double interesting for me.
To me bitcoin is just another currency: I’ve seen many. It’s an interesting one, since it so clearly expresses an austrian view on money. With the one exception, of course, that bitcoin is a virtual currency, so not commodity based.
Can in this way be guaranteed that nobody ‘screws’ with the money supply? That is one basic question. Is that what you are referring to when you speak of trust?
It probably can be subverted, unless the community guards over the main threat (compound interest) vigilantly.
And of course, interest is not the main goal of Bitcoin.
That I see as is it’s major limitation, because interest is the biggest problem with our money supply, in my view, anyway.
But the simple fact of the matter is: every unit designed to escape the clutches of the Money Power has my blessing and although I believe bitcoin will prove to have some nasty limitations, it certainly is an impressive project.
Thanks for finally addressing bitcoin, Anthony. I can see why it has been causing so many mixed emotions intellectually. In the absence of legal tender laws, deflation is not a negative.
The orthodoxy states that deflation is bad as a pretext for justifying inflation against a non-existent threat. Please do not fall into that trap — lower prices increase demand, they do not destroy it or reduce it.
That’s putting the cart before the horse, Jon.
Lower prices are a result of crashing demand, and demand is crashing because the money supply is contracting.
Perhaps we should be checking with the Greeks and Irish how they feel about deflation.
Devastated real estate has not been seeing growing demand during asset deflation, lately. Why? There is no cash to pick up the goodies!
History shows without a doubt that deflation is related to contraction.
Of course it’s that declining prices is pleasant if you are buying, but if you have no purchasing power, because the money supply is going down, what good will low prices do you?
Deflation stings so bad, it even allowed the populists to dump the age old Gold Standard because it was so deflationary.
Austrian economics is dead wrong on deflation, Keynesianism is dead wrong on the way to reflate the economy.
They’re both part of dialectic that is invented to ignore cost for capital, which is the real problem with our money.
There is more in the world than just keynesianism and austrianism.
http://realcurrencies.wordpress.com/faux-economics/
“History shows without a doubt that deflation is related to contraction.”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=495773
Abstract:
Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.
keep in mind who wrote this paper: the FED.
The FED has a confirmed history of downplaying the effects of manipulation of Volume. Exposing this is the main virtue of an otherwise discredited Austrian School of Economics
This is unmassaged data in is purest form.
Perhaps.
Of course not every contraction will have the same effect, many other variables obscure the larger picture.
But I don’t trust anything turned by the FED and deflation and contraction are one on one, just as inflation and booms are.
The “many other variables” coming together in exactly the right way such that any correlation between deflation and depression over the past 100 years is almost totally masked seems unlikely to say the least.
Regarding the source, most Fed economists tend to attempt to justify an inflationary policy, not the opposite. This paper is very much out of the ordinary for them, and it’s part of what makes it so noteworthy, IMO.
I replied, but had to open another thread! see top of comment section.
“History shows without a doubt that deflation is related to contraction.”
http://www.nber.org/papers/w10268
Abstract:
Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.
Moderator: I reposted with a different link that has the paper freely available. Please delete the other post.
I believe we’ve been brainwashed into believing there can be only one currency. Freedom means that we can use any. Each has its own advantages and weaknesses.
Use shiny metals if you want tangible security. Use LETS or minuto-zeitgutscheine for local trading with trusted folks. Use Bitcoin to buy stuff online or to send money around the world instantly. Plenty of possibilities, no more recessions.
In that vein, let the market decide how and what will lending look like in the future. People may use actual bitcoins for lending, but if Bitcoin’s value is still volatile, the contract value might be denoted in 15 baskets of goods, and the payback value in 6 months may be 15 baskets of goods plus 3 apples, payable in bitcoins.
The main problem today is that people cannot distinguish between a dollar that has been produced by the economy of real goods and services versus a fiat dollar created through lending with thin air. In the future people will be able differentiate this and value these currencies accordingly. Bitcoin will find its own niche and value then.
I don’t see how it is a law of nature that interest and inflation must be directly tied to a medium of exchange. It certainly isn’t demonstrated here. It also is not clear how that makes a system like bitcoin not useful. There will always exist mechanisms which allow those with resources (property or capital) to use debt as financial weapons. Bitcoin just isn’t such a mechanism. Last I checked, gold is not being synthesized anywhere on this planet. It is becoming increasingly difficult to mine and purify. These facts to not preclude gold (or silver or platinum) from being used as an investment or a means of storing wealth. Gold works here precisely because, at least without a fusion reactor, more gold cannot simply be made
There is an asymptotic limit on the number of bitcoins in existance, in much the same way that the quantities of minerals extracted from mines reaches an asymptote. There will eventually be 21 million bitcoins (21e6) mined, but *each* coin can be subdivided into 100 million (1e8) units. This gives us 21e14 = 2.1 quadrillion total units of the currency. That’s a lot. And it can be further subdivided if the need arises. So much for the “limited” numbers.
You are incorrect about tracking transactions. Each bitcoin transaction is logged into a public database (the blockchain) which anybody can read – and in fact, every node on the network must read. Forever. Because of this, it is difficult to remain anonymous when it comes time to spend bitcoins.
Also, please learn the difference between “its” (possessive) and “it’s” (a contraction of “it is”). It may seem a minor nitpick, but it distracts and interrupts readers who do know the difference, as their minds try to parse your prose.
Oh, these bloody its and it’s!!!
I’m not a native speaker/writer, Dutch is my mothertongue. You should hear my mother (she’s Irish) rape anything with a g or ‘ch’ in it, probably comparable to your experience here……..
I’m working on it though, thanks for reminding me.
Yes, I understand that Bitcoin can be subdivided as it needs larger numbers.
But subdividing will be a result of appreciating Bitcoin. And that is the essence of deflation: the money supply is lagging the growth of production and/or trade.
Bitcoin can become such a weapon. Credit in bitcoin will have to interest based, if history is an indicator. People want something in return.
But we certainly agree on the first sentence. Interest free credit can easily be managed to be neither deflationary nor inflationary. So there is absolutely no reason why money should be associated with either capital costs or inflation.
And thanks for the correction about the tracking.
Bitcoin, like gold, is debt-agnostic. You can, of course, build a system of debt upon or “backed” by bitcoins, but that isn’t the fault of bitcoin. Also, I don’t see any problems of deflation keeping gold from being used as it is being used. History shows that gold’s mass has consistently been used as a fundamental financial metric. However, its physical properties do make gold a poor currency in the modern world. Where bitcoin shines is that it has properties similar to gold (the good ones – known, limited total quantities, and not subject to dilution by additional creation) and lacks others (the bad – mass, difficult to divide without special equipment, difficult to transport any significant quantity).
Bitcoin is also rapidly becoming unstoppable, short of the internet being hobbled. We are all aware that there are several concurrent and very serious efforts underway to hobble the internet (SOPA, wiretapping, deep packet inspection, blocking/criminalizing crypto), and it is clear that decentralized systems such as bittorrent (not only for frivolous things like movies) and bitcoin pose real dangers to established power. The establishment realizes this and is acting accordingly, although the stated objectives are more benign.
Of course, like I said in the article I’m very enthusiastic about the fact that Bitcoin is an independent currency. That’s its main strength.
there is nothing wrong with credit, you got me wrong.
The problem is shearing the public with interest. See this, ‘the problem is not debt, it’s interest’
http://realcurrencies.wordpress.com/2011/10/07/the-problem-is-not-debt-its-interest/
You’re into austrian economics, I can tell by your language, please check my faux economics page to find out what the problems with Austrian Economics are.
I figured out what went wrong: I got it the other way around, I though it’s was possessive. I was consequent at least, haha
I’m actually strongly critical of the so-called Austrian school, especially as espoused by American “libertarians.” I just percieve several historical reasons (accidents, really) by which gold ended up in its current place. Like a biological organism (an economy is really an extension of humanity, which is a biological system), gold’s useful properties catapulted it into serving a specific role in economies. In the continuing evolution of the economic aspects of human society (which are all-pervasive), it seems likely that something like bitcoin will come to displace precious metals in that role.
Of course, there are other qualities of contemporary economies that do serve useful purposes, and I include centralized monitary policies in that category, among others. However, there is a real limitation in that some of those other mechanisms require an unmanagable level of trust if they are to actually serve the bulk of humanity. This is either a bug or a feature, depending on who you are.
By the way: you connect bitcoin to gold. And so do I.
Bitcoin has exactly the same problems as Gold.
it is true that Gold is popular these days, not just as an investment, but also as a successor to our current printing presses.
But I’m very critical of Gold as currency, as you can see here:
http://realcurrencies.wordpress.com/2011/12/27/why-bankers-love-gold/
http://realcurrencies.wordpress.com/2009/11/10/the-problem-with-gold/
http://www.dailypaul.com/126256/taking-the-glitter-out-of-gold-based-currency
So if you were designing the monetary system, would you pick a fixed inflation rate (There Shall Be 2% More Created Each Year)?
Or do something more complicated? (I like Scott Sumner’s nominal GDP inflation targeting idea using a nominal GDP futures market, but I haven’t figured out how to translate that into code)
I personally don’t think there has to be One True Currency; competition is good. There are, of course, extremely strong network effects that I think will drive adoption towards whichever currency turns out to be best for any particular use.
To begin with your last:
Indeed, let all sorts of currencies bloom, that’s what we need.
That’s why I do the Gelre, after all.
A fixed inflation rate is one approach, demmurrage another.
the main thing is to get rid of interest on the money supply.
All other things are secondary.
A currency based on demurrage can’t compete on a free market with deflationary, or even an inflationary one, unless it’s excessive. Noone would want to accept it. This is also why, historically, FRB beat warehouse fees: FRB externalises the costs (inflation), so people prefer holding FRB notes to holding ones associated with fees based on time or the moment of redemption. Out of the options, demurrage is the one that is least desired by money users. While I sympathise with your desire to decrease the power of banks, I don’t think demurrage would work at all, regardless of the effect on the banks. That being said, feel free to try. There are already altcoin proposals that are based on demurrage, although I don’t think any of them have been implemented yet.
Well, the facts show differently Peter: demurrage is used in dozens of German Regional Currencies.
It was also the secret behind the legendary Wörgl Experiment (here’s wiki’s entry on that: http://en.wikipedia.org/wiki/W%C3%B6rgl#The_W.C3.B6rgl_Experiment
the point is, that practice shows that in the transaction the one who pays is the most important. Not the one accepting the currency. Of course a firm can decline some kinds of money, but usually they will be highly motivated to accept all currencies that are widely used: they have to facilitate their customers, or else their competitors will.
When accepting a currency it is basically irrelevant how stable it is. Of course during hyperinflation there is a problem, but normally speaking a firm is not interested to know what the currency will be worth in a year.
It wants to know where it can spend it tomorrow.
Gresham’s law (bad money drives out good money) is another way of looking at it: another purely practical example of depreciating currencies driving the better store of value out of circulation. People want to pay with depreciating currencies, because they are a bad store of wealth.
And this shows another crucial key about money: it is a means of exchange, not a store of value. A good currency should NOT be a good store of value, but depreciate quicker than durable goods. Otherwise people will hoard the currency, with deflationary effects, killing economic growth and transferring wealth from those holding goods and services to those holding cash.
The Wörgl experiment occurred during the recession when the “normal” currency was subject to credit contraction and if I recall correctly, the village was in debt. So obviously using something else was going to bring some benefit.
Local currencies are, by definition, local, they cannot spread beyond the areas which are socially bound. Using a local currency means a decrease in the specialisation of labour. If the system around though is screwed up like it is now, I can see how they can be beneficial to some extent.
Gresham’s law requires fixed exchange rates (by the state).
If noone accepts the hypothetical currency, then it’s not a currency. Two parties are required for each transaction.
You have yet to explain the problem with deflation. You provide neither empirical evidence nor theoretical foundation for this (apart from credit contraction during the recession). It’s completely made up. You’re typing this on a computer, which is a refutation of the deflationary scare. Did you postpone the purchase of the computer indefinitely because tomorrow it will be cheaper than today? Obviously not. And even if it’s not your computer you’re typing this on, someone must have bought it, and someone also bought the server the blog is running on.
Peter,
I’ve made very clear what the problem with deflation is: debts become more valuable in real terms, as is the interest that is being payed over them.
There are far more debtors than creditors.
Gresham’s Law was at the time (16th century) of a Gold Standard at a fixed rate.
But that does not diminish its value for today. It’s very easy to understand: if you can chose between paying with a Fed note or your Gold coin, which would you use?
Why?
Deflation DOES destroy economic growth, the onus is with you to disprove that statement, in the face of the 1930 depression.
Since you like Austrian Economics, don’t tell me it’s unclear that deflation is related to contracting money, or that the Fed has studies indicating this.
Because that also destroys AE’s classic case against the Fed and inflation.
The Fed has a confirmed and known history of tampering with evidence showing that relation as AE knows full well.
For more on deflation see:
http://realcurrencies.wordpress.com/2012/01/12/the-inflation-vs-deflation-dialectic/
So I believe I have done more than my fair share of providing insight into deflation.
You have, however, offered me nothing but thought constructs that are defying centuries of very painful human experience.
And that’s the problem with AE, just as with mainstream economics: it is corrupted to the core by ‘intellectualism’ and it’s easy to see why: the bankers need us to be busy with ideas to distract us from the real world.
Anthony,
if you have a bank account, you’re a creditor. If you have a private pension insurance (I think it’s called 401k in the US), you’re a creditor. I don’t see why there should be more debtors than creditors.
The argument that deflation hurts debtors is based on the same error you’ve been committing since the beginning, conflating nominal and real interest rates, and confusing money with capital.
Gresham’s law only applies if there is regulation (e.g. fixed exchange rate), but also taxation, regulation and legal tender laws have some effect, for example. In the case of gold coins and FED notes, legal tender laws force you to accept the FED note at a particular exchange rate with respect to gold coin. On a free market, they would trade at market price, which presumably means that FED note would only be accepted at a discount, if at all. Read what Wikipedia says about it: “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”
Stop referring to the great depression, I already addressed that several times. Do you read at all what I write?
Address the points I made. Show me an example of “bad” deflation that is not a consequence of a preceding credit expansion. Explain to me why consumer electronics does not suffer growth problems despite falling prices. Explain why, absent government force, one would accept a depreciating currency (whether inflationary or demurraged) compared to a deflationary one.
Peter, I have difficulty keeping a straight face when you exclaim you can’t see there are more debtors than creditors.
Where are you from? Some kind of little paradise nobody knows about?
Because in the rest of the world it is a blatant fact that is quite difficult to ignore, that in the US the top grows ever smaller and ever richer. Wiki: “As of 2007 the share of total wealth owned by the top 1% of the population grew from 34.6% to 37.1%, and that owned by the top 20% of Americans grew from 85% to 87.7%”
You understand? 80% of americans own 12.3 of all assets.
Wake up man, you’re totally in your brain, playing with nifty logic totally disconnected from reality. Like most economists, mainstream or Austrian.
After five comments, you haven’t moved an inch, while you clearly are very limited in your outlook, all absorbed by an irrelevant fringe.
You’re free to continue reading my articles and commenting on them, but I’m not inclined to continue our discussion, as it is clearly is not enlightening you and I can absolutely say the same about my own learning in this chat.
Thanks,
Anthony
Anthony,
since you have still yet to respond to my arguments, clearly you’re not interested in a debate. You’re interested in preaching. You are not interested in the truth, but in the belief of truth. It does not look like I can learn anything from you, so I guess I’ll leave it at that.
Perhaps another time and other place Peter!
Thanks for you efforts!
Anthony
Apart from ex cathedera claims of various economists, I found no evidence that deflation is somehow to be avoided. Empirical research cannot correlate times of deflation with economic problems, nor could I find a logical explanation for why it should.
Furthermore, Bitcoin does not prohibit people from credit expansion, it just makes it uneconomical. That’s the real innovation.
I’m sure you know many people think the Great Depression was a deflation? What is your take on that?
The Greeks and Irish also seem to be unhappy about deflation.
This paper: http://minneapolisfed.org/research/sr/sr331.pdf analyses the relationship empirically, and finds that the Great Depression is one of the very few cases where deflation and recession correlated, but this correlation is absent in almost all other periods.
Furthermore, the Great Depression is accompanied by unprecedented rises in government intervention in the monetary system, including the recent institution of the FED or the credit boom in the 20s. If reduction of the money supply is a consequence of a preceding credit boom, then of course you’re going to get a recession. You’d get it anyway.
I live in Ireland. People are unhappy about rising prices, taxes and unemployment. Not about the reduction of the money supply. The banks here are crappy anyway compared to what I’m used to from other countries. Similarly as in the 30s, the current situation is a consequence of the preceding boom. The contraction of the money supply is not the primary cause of the problems, it’s just a symptom.
The relatively stable money supply in the 19th century, and falling prices of consumer electronics in the last, say 30 years, are counterexamples to the deflation scare.
Also, the changes of money supply do not affect the amount of goods available in the economy. This is the core of the Austrian approach. It took me several years to realise this, even though it’s blindingly obvious. The only thing a change in the money supply can do is to change subjective evaluation of goods available.
Yes, someone else offered me that link too.
I’m not too impressed by it, it’s from the after all. The FED has a confirmed history of trying to downplay the relationship between volume of the money supply and the boom/bust cycle.
In fact, that’s one of the main merits of Austrian Economics.
Austrian Economics defines inflation as the growth of the money supply, probably with rising prices as a result.
It is strange not to understand that it’s the same vice versa.
Also, I don’t think I agree with your last statement.
A very important, mechanic effect is established by a change in the money supply.
When it shrinks less of the means of exchange is available. That hurts our ability to get trades together that would otherwise be viable.
That’s the key reason why deflation has a profound and negative effect on economic output.
Trade is not an effect of demand and supply only. The availability of sufficient means of exchange to get complex exchanges done is vital.
It is crucial to understand this.
It then also becomes clear that our economies already suffer severely from a lack of money, which is NOT the same as capital/real assets. Even during ‘good’ times most economies are semi depressed.
This is intimately related the to the fact that capital costs destroy purchasing power throughout the economy.
Anthony,
the change in the money supply changes our evaluation of the goods, not their quantity. It does not make certain trades possible, it merely makes some trades to appear more profitable, and other trades less, and therefore the goods will be used and traded differently than otherwise. To claim that an expansion of the money supply makes some trades viable misses the second half of the phenomenon, the trades that must logically be abstained from. I suggest you read Hazlitt’s “Economics in One Lesson”, it’s devoted to the broken window fallacy.
Let’s assume there are only apples in the economy, and 2 bakers. They have different productivity, so one of them is able to make more pies out of a specific number of apples than the other. If the interest rate only allows only one of them to bake pies, the productivity and amount of pies in the economy is maximised. The other one is not efficient enough to be profitable at that interest rate. If you artificially lower the interest rate, both of them would be able to get a loan, and start baking pies. The economy would be in a boom, because there would be more producers of pies. But then, as they progress, it will turn out that there’s not enough apples to finish both of their projects, and a bust will follow. If they are lucky and realise soon enough that there’s not enough apples, and there won’t be a boom&bust, but merely an economy with a lower efficiency (because allowing the less efficient baker to conduct his business decreases the average efficiency and therefore also the amount of pies in the economy).
The amount of money does not increase the amount of resources in the economy, it only influences their allocation. If the money supply expands through the expansion of credit, this tricks people into thinking that more resources are available than there actually are.
What causes disturbances are sudden changes in the money supply, such as the pop of a bubble, not the absolute rate of inflation or deflation per se.
Keep in mind that money has three functions: Unit of Account, Store of Value and Means of Exchange.
A change in the money supply affects all three functions.
During deflation, contraction with declining prices as a result, these effects are as follows:
The unit of account function shows the money is getting more valuable relative to goods. This is indeed an illusion, because the real wealth, non monetary assets, remains the same.
As a result of this, the store of value function is enhanced.
The means of exchange function, however, is badly impacted. Money exists to make barter unnecessary. To make all barter superfluous, i.e. to make all trades possible that would add value, a certain amount of money must circulate.
It’s easy to see: it is simply impossible to finance the US economy with 1 dollar. More are needed.
Even if you say we simply divide the one dollar through 1 trillion, it would still take a lot of time before these trillion fractions would go through the entire economy. And as long as they don’t people cannot trade.
I also vehemently disagree with your example of the bakers.
“if the interest rate only allows only one of them to bake pies, the productivity and amount of pies in the economy is maximised.”
The real meaning of this statement, which I deplore immensely (the statement, not you!), is that the needs of capital decide whether a deal is viable.
However, it is the participants in the trade, producers and consumers, who decide whether a trade is viable.
Cost for capital is a devastating handicap in trade and economic development and your statement proves it.
The only way they contribute to ‘optimal capital allocation’ is by allocating capital into the hands of the few who already control it.
We should not be looking for ways to optimize return on capital, we should be looking for ways to minimize cost for capital for society.
Keep in mind Capital is the few, Labor is the many. This is NOT a communist approach: I’m all for free trade. But cost for capital and interest concentrate power and wealth in the hands of the Plutocracy at the absolute top of the food chain. THAT is communism in its true form. That is why bankers financed 1917 and Marx long before that.
Read the link to understand how incredibly destructive and pervasive the effects of interest and costs for capital really are.
http://realcurrencies.wordpress.com/2009/11/26/on-interest/
Anthony,
the deflationary effect you are describing (trend from medium of exchange to store of value) is only relevant if there is a change in the rate of inflation/deflation. If the rate is stable, there is no shift.
Within reasonable limits (excessive weight/volume on one end, and divisibility on the other), any amount of money is sufficient for the economy to work.
Money is not capital. Capital are the resources in the economy. Money is information about the availability of the capital. If you create new money, e.g. as banks through credit expansion, this creates the illusion that banks suddenly have capital. That’s not true.
You complain about banks controlling the “capital”, but that is precisely the consequence of credit expansion. In the absence of credit expansion, the “capital” is controlled by those who save, i.e. abstain from consumption. You argue that it takes time for “capital” to “go through the entire economy”. That’s nonsensical. In the absence of credit expansion, the control is with those who save, i.e. precisely where it should be. With credit expansion, it is with banks, i.e. those who inject the new money into the economy.
You do not explain what is problematic about my example of bakers, only that you disagree with it.
Further to your article, you claim that zero-interest Bitcoin loans are impossible. This is contradicted by empirical evidence, such as the Islamic Bank of Bitcoin (sharia compliant = no interest). You also complain that the absence of credit expansion gives too much power to the banks, but it’s exactly the opposite. With credit expansions, those who expand credit are in control. Without, those who save. There is also Global Bitcoin Stock Exchange, which allows anybody to create all kinds of financial contracts using Bitcoin, including loans.
Altogether, you have some sort of aversion to deflation, but can’t coherently explain why.
Last but not least, even if the claim that deflation was somehow bad was true, it is still irrelevant in case of Bitcoin, since the argument requires a currency monopoly. In currency competition, people can specify whatever units of account they want for their labour/rent/loan contracts, irrespective what they use as a medium of exchange.
“you claim that zero-interest Bitcoin loans are impossible. This is contradicted by empirical evidence, such as the Islamic Bank of Bitcoin (sharia compliant = no interest). ”
The pre-programmed total volume of BTC21Mio and its artificial growth-curve is one of the issues I have with BTC, it’s really just like gold (the mining curve just more predictable, as it was intended to be by its creator), and this creates a deflationary currency by design at some point (even assuming infinite divisibility), of course under the assumption that the economy associated with it keeps growing.
Re Bitcoin Loans (not currency speculation):
I would say if money is just “information about capital” as you state, then deflation and interest are not much different from each other in their effect to the debtor, and hence Bitcoin loans cannot be zero-interest in nature.
“I would say if money is just “information about capital” as you state, then deflation and interest are not much different from each other in their effect to the debtor, and hence Bitcoin loans cannot be zero-interest in nature.”
That’s an elegant formula, also in a wider sense. It’s quite essential, to my mind.
Today I posted a testimony by Churchill from 1935, evaluating the Gold Standard he had implemented himself a few years earlier. This is a quote from that:
“Look at the enormously increased volume of commodities which have to be created in order to pay off the same mortgage debt or loan. Minor fluctuation might well be ignored, but I say quite seriously that this monetary convulsion has now reached a pitch where I am persuaded that the producers of new wealth will not tolerate indefinitely so hideous an oppression.”
http://recoveringaustrians.wordpress.com/2012/01/25/winston-churchill-testifying-on-the-gold-standard-he-had-introduced-himself/
Shortly thereafter it was dumped.
To my mind it is incredible, how Austrianism defends deflation. Purely on the basis of model and ‘logic’, ignoring the horrible experiences that we have had and continue to have with deflation.
Peter’s argument is entirely valid though. Look at how Mexico and Brazil dealt with massive inflation, they simply remapped the numeric value of their currencies. If we took the dollar today and said okay every “new dollar” is now worth 10 dollars, does that change the ability to trade with the dolllar, store value in the dollar, etc… The numeric value that is placed on goods in entirely irrelevant to issues of interest rates, the ability to trade, or to store value. Bitcoin’s (or really any crytocurrency’s) divisibility just allows this self-renumeration to occur more frequently and automatically. The “limit” of 21 million BTC is arbitrary, and irrelevant. Maybe in the future we will trade in nBTC (nano-bitcoins) of which there will be 21*10^15, or fBTC (femto-bitcoins) of which there will be 21*10^21. In this respect (and others) the comparison to gold is completely unfounded, because gold cannot be divided to this extent.
> “I would say if money is just “information about capital” as you state, then deflation and
> interest are not much different from each other in their effect to the debtor”
This statement seems to be completely backwards. If a currency is inflationary then I am essentially being charged interest for hold my currency, whereas if it is deflationary then I am earning interest for holding my currency. The standard argument against deflation is that this scenario encourages people to hold their money rather than to spend it, which is considered necessary to drive a consumer based economy. However, if a real economy grows around BTC (or some other crytocurrency) in which I can freely buy and sell goods and services that I need and/or want then I will be compelled to spend my BTC for those things that I need/want and be compelled to invest it in places that I expect will provide a greater return than can be found in the BTC network. This is an entirely novel situation, and it is difficult if not impossible to use historic arguments about inflation and deflation in state run currencies to understand the merits or drawbacks of such an economy.
As I’ve stated in a previous comment the question of credit and loans in the BTC economy has yet to be resolved, but it has nothing to do with the currency itself. Contrary to modern ‘fiat’ currencies that are rooted in an interest based banking system. Such currencies do need to be inflationary, because they are always based on credit, i.e. future capital, but clearly we are finding out they are not serving the world so well.
> they simply remapped the numeric value of their currencies
1) Simply saying that the bitcoin at a certain point is worth x*BTC would change the value (not the number) of the existing accounts. That means to avoid massive changes in buying power of existing BTC accounts at the point of currency mapping, all existing BTCs would need to be scaled by that mapping value, I didn’t see that possibility in the white-paper or the open-source code of BTC; but maybe I didn’t look hard enough, please point me to that feature.
2) BTC has a built in growth curve that flattens as the currency matures (i.e. as more blocks are added). No matter if you remap from time to time or not, when the money supply is growing slower than the economy there’s deflation; unless you keep remapping constantly.
> This statement seems to be completely backwards. If a currency is inflationary then I am essentially being charged interest for hold my currency, whereas if it is deflationary then I am earning interest for holding my currency.
Well, that really depends on your viewpoint. As long as there are more debtors than creditors I would think it’s fair to view it from the point of the debtor, in which case we would not talk about holding currency, but borrowing currency.
> Such currencies do need to be inflationary, because they are always based on credit, i.e. future capital, but clearly we are finding out they are not serving the world so well.
Sure, especially in virtual currency like BTC. But at the same time, why would you think deflational currencies would serve “us” well?
I’m not saying that bitcoin contains an explicit remapping off its value, I’m saying that it doesn’t need one because there will always be enough “units
Without explicit remapping, at the time we trade in nano-BTC the guy who owns a few bitcoins now will be billionaire (relative to the buying at that time power) if the currency remains reasonably stable and the Bitcoin economy keeps growing. You bet that makes it a deflationary currency (no matter if there are always ‘units’ available by subdivision) and makes your Mexico example a poor comparison (because they remapped).
Besides, read the FAQ section on the Bitcoin Wiki site, they will happily admit that it’s deflationary in nature. They actually mention that as an incentive to adopt the currency early!
Inflationary currency only works long term in the presence of force. If there are no legal tender laws / banking regulations / prescribed exchange rates / sales tax on alternative currencies, people would prefer to hold a deflationary currency to an inflationary one (assuming the deflationary currency is not accompanied by too high transaction costs, which I think could be the case with gold). The inflationary one would be in the long term pushed out of circulation, since noone would want to hold it. Jörg Guido Hülsmann goes even further in The Ethics of Money Production, saying that inflation is always the result of force.
Austrian Business Cycle Theory does not blame the inflation of currency itself on the boom & bust cycles, but a particular type of inflation: expansion of credit for investment purposes. Historically, banking systems were based on FRB (and, I think, this is the expected outcome when money substitutes are in circulation), and that allows for credit expansion, which then leads to the boom&bust cycles.
Furthermore, as I explained already, empirical evidence does not seem to support the claim that deflation is the ultimate cause of problems. As outlined in the previous paragraph, a contraction of credit during the boom&bust cycles is causally related to a depression (such as in the 1930s), but this contraction is merely an inevitable consequence of the preceding expansion. In other words, the deflation due to credit contraction is not the ultimate cause of problem, it is merely a part of the sequence.
Bitcoin will probably never significantly suffer from manipulation of the money supply through credit expansion (as I argue on the Bitcoin wiki page: https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin#Austrian_Viewpoint ), so this is not a problem.
Interest is a normal phenomenon in an economy. It’s simply a time preference (do you want to consume now or in the future?). On top of that, there is a little upcount consisting of risk.
That in today’s economy interest is primarily seen as correction of inflation expectations with some profit added, does not change the basic principle.
I have money, you don’t. Either I spend it (instant gratification) or am willing to postpone and lend money to you on the basis of interest payments. You like it, we make a deal. You don’t like it, no deal.
Don’t confuse interest with the real problem of our current money system: that it can be created at will by and through central banks/government, serving a small group of people at the expense of the purchasing power of the general public. Bitcoin would solve that (and, effectively, would the real creators of value – employees – first in line to become the lenders/investors of the future instead of the ‘creating money out of thin air’ banking system).
And deflation is such a canard as argument. Massive, massive deflation in the computer industry did not stop a pletoria of ever new and improved devices as CES 2012, currently taking place in 2012. Deflation does not stop me from buying stuff I want (or need) NOW instead of 4 years later. The best way to avoid (massive) deflation is by avoiding the bubble that precedes it in the first place.
But all that will be lost on Krugmanites, obviously.
Well, that’s the Austrian view that I don’t agree with democraatus.
You’re missing out on the cost of interest. Which is truly mindboggling.
Keep in mind all the money is printed the moment it is lent out. We pay 300k interest for a 200k 30 year mortgage.
While we could supply interest free credit at almost zero cost in an extremely simple way.
I was recently having the same discussion with Gary North and the Daily Bell, you can read about it here:
http://realcurrencies.wordpress.com/2011/12/23/gary-north-on-interest/
http://realcurrencies.wordpress.com/2011/12/29/discussing-interest-and-gold-with-the-daily-bell/
I’d be interested in further comments!
“And deflation is such a canard as argument. Massive, massive deflation in the computer industry did not stop a pletoria of ever new and improved devices as CES 2012, currently taking place in 2012.”
I think that we need to make an important distinction between deflation as “reduction in the money supply”, which can be devastating, and deflation as “reduction in prices due to technological (or other) improvements”. I suggest that the latter should not be called deflation to distinguish it for the former, which is what Anthony had in mind, I think.
And of course, you still want to buy new devices now because this “deflation in the computer industry” is also accompanied by tremendous technological advances, and who wants to be stuck with old machines? This is not the same as if a computer now was the same as a computer in 10 years ( in a world in which you could reasonably expect that computers would not improve in the next 10 years): in that case, a deflation (reduction in the money supply) would probably lead people to decide to wait a few more years before buying a new computer.
“There will never be enough Bitcoin to finance all possible trade…” There will always be enough bitcoin, even if there was only 1 bitcoin in the whole world, with enough decimal places that 1 bitcoin could be used to run the global economy.
Yeah, more people told me this.
But only if the value of Bitcoin goes up. Appreciating money is the definition of deflation.
But it’s true my formulation could have been better. The goal of that statement was to say that bitcoin is deflationary, with all the problems that that brings.
The bitcoin protocol allows for infinite divisibility: the current 8 decimal limitation is not hardcoded and can be supported by future versions of the bitcoin client.
So there is no such thing as a deflationary spiral with an electronic currency that infinitely divisible.
Apparently, this concept is very difficult to grasp for many old school economist.
Just like its dificult for most people to visualize the infinitely small or the infinitely expanding universe, etc..
I may be wrong Pierre, but wouldn’t the subdivision be triggered by the rising price of Bitcoin?
I’m still trying to figure out your rather incoherent claim for why deflation is bad. You keep saying Greece! Great Depression! etc. but this isn’t really an argument.
The only cogent case against deflation can be that it prevents loans. If money is increasing in value at 10% a year, there is no reason to loan capital to anyone, just sit on it. I would have to loan money at an effective rate greater than 10%. It’s unlikely that I would loan money at an effective rate of 11% because the extra 1% gain is not worth the risk. So realistically you would have to be loaning money at north of 15% effective interest in rather safe investments.
BUT… the only reason this can happen is if there are currently massive productivity gains in the economy making the nominal value of goods drop, and the value of money rise. This indicates that current allocations of capital are extremely efficient and that consumption or at the very least preservation of undifferentiated capital is optimal for long term growth.
Well, Great Depression and Greece/Ireland IS an argument. Just ask the people who live(d) through these deflations.
Your own argument is the other way around: if money is already appreciating, I won’t need as much interest. Interest rates usually decline through deflation as a result.
It is close though: the fact that money appreciates makes it more attractive to hoard. This kills both consumption and investment.
This in turn kills economic growth.
Your BUT makes no sense: prices are not going down because of increasing efficiency, but because of a collapsing money supply (that is the definition of deflation). As a result of this demand collapses and that’s why prices go down.
Prices going down due to innovation is not deflation and happening only in the sectors where the innovation is taking place. This is good for all parties involved.
Other problems:
– because money is appreciating, all other assets are declining. So it’s a wealth transfer from those without money, holding other assets, to those who hold money.
– It’s bad for debtors: their debts rise in value. The interest they pay over the debt aswell. Think of the National Debt, for which you are on the hook. Also think of mortgages and other debts.
So all in all deflation is quite a scourge indeed.
Hoarding money would eventually make the currency useless, and lead to reduction in value. Deflation has never been an endless spiral into infinite value. It would be happening with all commodities all the time.
@guest
That’s a common misunderstanding, CB’s preferring inflation over deflation.
They don’t.
Bankers want a boom/bust cycle. During the Gold Standard Deflation was the norm, alternated by inflationary asset bubbles and inevitable busts.
When they switched to paper, inflation became the norm, alternated by deflationary busts.
They both work splendidly for them.
> i.e. we trust that at least 51% of them will be honest
I disagree: We trust that the collective of users who command 51% of hashing power are honest, and that might not be true. So either someone with huge processing power or someone with sufficient funds to access huge processing power just for the time it takes to launch the attack could be successful taking down the bitcoin currency (or at least do serious damage). Another vulnerability would be bitcoin mining pools. If an attacker can gain access to such a pool they could use the mining power of its users collectively to launch an attack.
Actually this type of attack has already been done to one of the various forks of bitcoin, named coiledcoin, which died in its infancy when a mining pool operator singlehandedly decided that he didn’t like that currency and launched an attack himself using the power of his mining pool. It was easy with coiledcoin that had a small network at that time, it is of course harder with bitcoin, but it is much more than just a remote probability.
Interesting, good to know this.
Anthony,
great post, thank you!
After reading some of your other posts and returning to this article I believe to have a better understanding of where you are coming from. My interest in Bitcoins is mostly in creating a new independent, decentralized currency with open-source P2P software.
I also see the programmed behavior of BTC economy modeled by gold as an issue. Right now it does indeed solve the inflation problem. But longterm I am also worried that deflation would be an issue. By limiting the total number of BTC that will be available and using subdivisions to increase the supply, each time the BTC economy grows, 1BTC will become more valuable compared to the total economy. Someone who started off early, sat through the ups and downs of the infancy of the currency and accumulates enough BTC wealth when the currency matures, would be a new Rothschild of Bitcoins. They just had to make sure it was widely accepted and people started to depend on it. I am not sure that it will discourage lending though, even if some start hoarding. With the increase in value, it will allow to lend at a lower rate, which will add to the increase in return (appreciation plus interest rate) for the lender. The hardship will be with the debtor. Probably bad for the economy, but great for the BTC Rothschild.
Another issue I am having right now with it is the way the inflation is controlled, which is by limiting the rate of production for bitcoins by the price of energy per processing unit (in bitcoin terms, the block generation difficulty is adjusted by the processing power of the network to limit block generation rate to a set number per time interval, currently set to an approximate average of 1 block per 10 minutes). If it becomes uneconomical for miners to generate new valid blocks, some will drop out, the difficulty will be lowered again to ensure the set growth in supply and some other miners will emerge when they see a prospect for profit. But really what this is doing is intentionally wasting an enormous amount of electrical energy for the sake of currency stability and apparent value. The profit margins will become smaller and smaller, and the rate the currency grows will asymptotically approach the price of energy. So really, Satoshi Nakamoto didn’t invent something new with the economic model of BTC, we just get to relive the Gold-Standard age all over again, just this time it’s energy.
What is new with Bitcoins is the way a cryptocurrency can provide a model for decentralized money transfer, and I am excited about that idea. But as I pointed out in my last comment it is just a matter of processing power of messing with the self-controlling network paradigm of Bitcoins. Several forks of bitcoins tried to ‘fix’ that issue, most notably SolidCoin, that requires that every other transaction needs to be solved by a worker with a certain minimum amount of SolidCoins (currently set to one million – SolidCoins trade for a much smaller rate than BTC). So they are effectively granting the SolidCoin nobility control over the network, which is really not what BTC had intended when creating a open-source, decentralized cryptocurrency.
I have yet to see someone offering the holy grail of currencies, but it’s a positive step. However, many issues need to be addressed to end up with a modern and mature currency alternative.
Thank you for providing your perspective on the economic aspects of bitcoin, I really enjoy reading your posts and many of the comments.
Well thank you Wolfgang! It’s nice to hear you made the effort to understand where I’m coming from! In fact, I wrote the article to give people a little perspective on the kind of thinking that is necessary to create truly powerful currencies.
“My interest in Bitcoins is mostly in creating a new independent, decentralized currency with open-source P2P software.”
In that case: I have a job for you. If you’re interested, please email me: info @ gelre.org
Anthony,
maybe this will be of interest to you:
http://bitslog.wordpress.com/2012/04/16/mavepay-a-new-lightweight-payment-scheme-for-peer-to-peer-currency-networks/
It has many of the decentralized open-source P2P crypto-currency properties without the gold-emulating George Orwell like Animal Farm feel.
Thanks! I’ll check it out!
Gavin brought up the most important issue by far of any that was brought up here, and there was no response to it at all. Attempting to assess bitcoin as a standalone currency option is basically pathetic. I don’t remember seeing the word “niche” or “nichescape” or any direct references to chaos or network dynamics here. This seems to be a weakness of economists, that they are out of touch with complexity theory.
What we should be discussing here is not bitcoins potential as a dominant currency, but its fitness for its specific niche, and what the shape of that niche is, and what might be able to beat it out of its niche. .. And what simple things the public needs to understand about currency.
The public needs to understand that “free competition in currencies” is the only golden goose. This is because necessity is the mother of invention. Bitcoin is a great thing, but a pile of economists speculating at its future if it is embedded in what should be a free competition network is basically hopeless because the dynamics of a free competition network are basically not predictable. Yet network theory explicitly asserts that the free competition network will be the most stable.
So why are we worried about bitcoin as a medium for lending until we first establish that there is reason why bitcoin needs to be good at borrowing/lending. And this is not an easy thing to do until we have a picture in our heads as to what other currency models will be competing in the future.
The most important thing to impress upon the public is that they need a free currency market. Not all of this speculation on dynamics. This means that the network of currencies naturally evolves to meet the needs of the people. Until people understand this, they will forever be screwed by people who want to assume control of the currency market. You don’t need to dig into the details for this. It’s written in human nature. People need to know that government or anyone else doing things like artificially setting the exchange rates of currencies is something that they can not allow. It’s that simple. That’s what people need to know.
Bitcoin is very good at certain things. It has its weaknesses. The nature of free competition fractal feedback networks is to compensate the weaknesses of one niche animal with the strengths of another one, and for competition to serve as the first defense against abuse of the system. When it comes down to it, many many characteristics and wide reaching problems of society are governed by simple things, and if people had a decent list of those simple things and enforced them, things would be a lot better.
I am in agreement that bitcoin is not the best for borrowing /lending. That doesn’t mean that it’s not viable as a currency. It means that it has a limited niche space. That’s all. That’s all it means. And since a single dominant currency is really not desirable, this whole thing is really not an issue.
Bitcoin has some advantages for trading that you seem to be forgetting here. It’s true that it is better for saving because of deflation, but for trading, it also has the huge advantage of being cheaper to trade with. The transaction costs will very often be smaller, billions of people with no bank accounts will have the option of doing world wide trade. This is a huge trading advantage.
This nichescape is more complex than all of us together can predict. At best, we may successfully identify some important points, and figure out what the public needs to understand about them. The other one you brought up is the collusion problem. Let’s say … deepbit … somehow expands itself to over 50 percent, and decides to screw bitcoin…. guess what … I will instantly stop mining with deepbit, and so will a zillion others. But miners should be well informed that it’s not good for the mining pool picture to be dominated by a single pool. Thanks for bringing this up, and I’m going to find a different place to mine for that reason at this point. ..
“Gavin brought up the most important issue by far of any that was brought up here, and there was no response to it at all. ”
I didn’t respond to it, because it is a no-brainer: in a free market for currencies the best will prevail…..And of course in every mature market there are many niches.
What would you like me to respond to that?
You may not be looking for market dominance: I am. the aim is to get rid of the banking cartel, not to make nice little niche currencies. Bitcoin is a success in the sense that it opens people up to the possibility of free market currencies, but it is failure in terms of monetary design. Most people are simply awestruck by the fact that it can even exist. I, on the other hand, look with a cold, unsympathetic gaze of the monetary architect…….
See for instance the article on the WIR on what is really possible and necessary.
“Bitcoin has some advantages for trading that you seem to be forgetting here. It’s true that it is better for saving because of deflation, but for trading, it also has the huge advantage of being cheaper to trade with. The transaction costs will very often be smaller, billions of people with no bank accounts will have the option of doing world wide trade. This is a huge trading advantage. ”
This is not true. Transaction costs are close to zero in all automated systems. The only reason online transaction costs are high is because we deal with a banking cartel.
In a mature market Bitcoin will not only be deflationary, meaning it will also be lent at interest. Making it just as expensive as gold.
The key that all bitcoin fans miss is that deflation and Interest are the main problems with our money.
We need abundant interest free credit. Not scarce interest bearing stuff.
It’s easy to understand once you realize Austrian Economics is a total hoax designed by the Money Power to sell us Gold Standard. Check it all out here at “Faux Economics.
“This is not true. Transaction costs are close to zero in all automated systems. The only reason online transaction costs are high is because we deal with a banking cartel.” and the cartel does more than just flip bits. It also provides security, promotes and maintains its milking cow, etc. All of this gets tallied up in the cost. All of these services have to be done, albeit, not at the monopoly price. The point is that BTC offers an option to replace most of that overhead because its done automatically. .. and … it offers competition, which will kill the monopoly problem.
I’m already not sold on the gold standard. The reason being that gold has its own problems. People yelp and squelp about how it has inherent value. They think that’s grand until some government says … ok .. hand it over. And then they can’t get any more of it. It’s not the paper that’s the problem. It’s the monopoly. It’s the iron law of oligarchies that we are tripping over as we always have done.
Is bitcoin problem free? NO … Is gold problem free? NO, are FRNs problem free NO… What about Platinum, Wheat, Salt? It turns out that the work of Goedel basically proves that every system has a weakness. That means that no matter how you strain your brain, your product will still have weaknesses. Pointing out that a currency has a weakness means very little. Only the market can decide just what that means because only the market has enough genuine information to do so. So you can work hard and attempt to create a nice model in your head and get an advantage out of that, but this tactic is of limited value for reason of computational irreducibility. Its the weaknesses of one currency that make space for the existence of other currencies. This isn’t just some fly by night dynamic here. It’s the way the universe always has been. Go look at the work force, the ecology, the interfacing between differing intelligence architectures in your own body, Examine energy flow dynamics, etc. You always see the same thing. You can’t spell out “ideal exchange medium” in any simple set of rules. But a set of intelligence architectures always does a hell of a lot better than one.
Try using just P in the PID algorithm. vs. adding additional dimensions to the control system interplay. P kinda works PI works better PID works even better. PIDJ works even better than that where J refers to a control system “jolt” for dumping energy into a systems reactive energy storages to stop them from slowing system response.
So, can bitcoin gain a value without losing some of the value it already has? That’s the real question. If you exchange one value for another one, you haven’t gotten anywhere far. It’s great to point out that it needs something else. It’s a lot easier than designing something that has the bitcoin advantages and more. How are you going to promote your other super currency without rewarding the early adopter with deflation as bitcoin does? Those people who stand something to gain by deflation are out there doing a job for that currency by promoting it. That promotion effort has value, and is a necessary component of a currency system. Those early investors took risks, and they spend promotional effort. Bitcoin is not perfect, but it is also not an easy animal to beat.
I can go along with this to a large extent, but you ignore the main thing: interest on the money supply.
This is the gigantic elephant in the room that most people overlook. The simple fact is: any alternative that is not interest free is simply no good. Transaction costs are completely irrelevant compared to the cost of interest.
Please study the articles on interest in the Interest Free Economics section.
I can guarantee that it will be worth your while. Especially the first four articles.
Informing people on this fundamental issue is the main aim of this blog. It is the by far both the most important and least understood issue about money.
You put too much stuff in the interest free economics section without indicating where the key element can be found. The key element is answering the question… how to implement interest free debt. It’s probably in there, but I don’t have time to read all that just to find one thing.
fair enough: the main articles are the one on WIR that I gave you and
this one on Mutual Credit.
ie, these are articles on solutions. The articles on the problem
are the first four in the list.
thanks for the conversation Matt!
My pleasure, and pleased to meet you.
Your blog is noteworthy. I sense that your
understanding goes a little deeper than
other economists I have met.
Well, I’m not a mainstream economist.
I got into this business to get rid of the banks.
That’s my perspective, how I look at things.
Not with silly mind games, which is modern economics.
The only way to get rid of the market cartel is for people to wake up and force governments to allow a free market. And a set of niche currencies is the proper solution from a complex systems dynamics perspective. Its that way for two reasons. 1: a multiple entity system is far more stable than a system with just a few entities. (see Mark Buchanans small worlds and the ground breaking theory of networks for a breakdown of criteria for stability in a network). It capitalises on the robust nature parallel, nonlocal processing. That means that all of these major world wide bubble poppings, market collapases that you keep complaining about are gone in a complex network of multiple entities. 2: A niche-scape is an intelligence architecture that lies on top of a set of single variable fractal feedback networks. You have multiple intelligence architectures operating in tandem to keep the system balanced and secure. 3: A niche-scape is a natural function of chaotic dynamics. It will set its self up and happen without major oversight by any central organisation because chaotic dynamics just works that way and always has. 4: earlier problems of exchange rates, etc. are much less of a problem than they were in the past, setting the foundation to push societal balance towards a nichescape. You are complaining about bitcoin because you are asking for the wrong final result. There isn’t going to be a single solve-it-all currency. Don’t bother dreaming of it. Stop barking up that tree and accept the standard dynamics of the universe in stead of trying to manufacture your own.
hehe guess that was more than two reasons ….
“There isn’t going to be a single solve-it-all currency. Don’t bother dreaming of it. Stop barking up that tree and accept the standard dynamics of the universe in stead of trying to manufacture your own.”
I fear you are putting words in my mouth……..I’m not suggesting there is such a thing. Far from it. I have been calling for a free market for currencies, where very different kinds of currencies will compete for a very long time.
I run one myself in the Netherlands.
The reason I’m critical of Bitcoin is quite basic: it’s designed as a good store of value, instead of a good means of exchange. This has been a major discussion that I’ve been entertaining with leading Austrian Economists.
As you can read from the article my approach to Bitcoin is quite balanced: I mention both good and weak points. I believe the weak points are quite severe. I don’t want to insult anybody, but to me Bitcoin is not unique. You can find my analyses of several other units here.
In other words: free market currencies are old news for me, unlike for most people fascinated with Bitcoin.
OK … I misunderstood some of the things you said. So answer me this. You are so hip to dump the deflation. How are you going to promote your alternative super currency? Who is going to pay for that promotion? Even better, who is going to pay for that promotion who does not in the end demand central control of the currency for the effort that they spent?
That’s a very fair question. The answer is that as long as people
continue to sleep as soundly as they do, they are dependent on nice guys like me
and a few others who understand what is at stake and do the right thing.
But this is clearly not a solid foundation.
How to fix the world without people taking charge of their own destiny, I do not know.
An honest response. And I credit you for it. .. So, people taking charge of their destiny seems to be the crux of the issue you are bringing up. Lack of personal responsibility is the foundation of the iron law of oligarchies, and its the reason why bitcoin has risen to its fame. It still allows a certain degree of people getting value by promoting and caring for the currency. Now, if you could create a currency that could automatically promote itself, maybe you could eliminate this feature of bitcoin. About the only thing that can do that is something akin to a computer virus. So maybe you and your friends can start thinking up a computer virus that spreads itself to the entire world.. just like bitcoin, but without the inflation. .. It pops up on-screen after hacking through your computers defenses and says … “hi… guess what … 300 virus coins are assigned to your IP address… spend them at will or wait for the next guy who gets your IP address to do that”. Then it installs a version of its own virus coin program which turns that computer into a virus coin bank that has all of the basic securities of bitcoin.
I am sure there are several reasons why people don’t take care of themselves. Reason number one … they haven’t suffered enough. Its the natural demand of negative feedback for every natural feedback network. It’s the nature of the P element of the PID algorithm. It only responds to a problem. … Well, I think there is another way to get human response.. it’s the F word… and that stands for fun. And what people are doing for fun now days is joining together into millions of special interest groups for basic fun and satisfaction. Those interest groups potentially represent a greater threat to status quo than any currency. They represent hundreds of millions of people who are intentionally or unintentionally doing things differently than they used to be. The web site we have designed is just barely born, and it is intended to make the most out of this natural, societal phase change. We are starting by populating a search engine with hundreds of thousands of group listings world wide. This engine is written up and functioning at http://egrouphub.com/ Over the next decades, we will continue to add more listings and more tools for the purpose of empowering and networking millions of interest groups. So, this is an entirely different inroad towards the same problem. The currency solutions and the social structure solutions will operate synergistically. .. I guess we can always start investigating Jaque Fresco and a society without currency, but as I often tell the TVP people… moneyless society won’t occur until after scarcity is nonexistent.
“Those interest groups potentially represent a greater threat to status quo than any currency.”
I believe this should read: “if those interest groups at last start using their own currencies, they will finally start to threaten the status quo:”
Simple example: In china there is social networking tool, a little like facebook. I don’t know it’s name. But it can be used with handhelds. It’s used by 200 million people.
It started floating its own unit. The central immediately closed it: It was going viral and would have become the 5th or 6th economy in the world had it been allowed to do so.
Starting a new currency is the easy part. Getting enough people to wake up and put heavy heavy pressure on government is the hard part. The currency isn’t the real barrier. The real barrier is peoples ignorance. The interest groups represent not only an opportunity for people to expose themselves to new information and new solutions, but to build faith in an emerging social structure. The crystallisation of the social structure is predicted by math crossed with material science… But there is more in that prediction than just the crystallisation. When we examine intelligence theory, we start to see that a crystallised social structure could be made into a giant intelligence structure that will inevitably beat the hell out of everything else. Combined with modularity and communication principles… and eventually AI, that structure will make pre-existing social structure look like we need to re-define the word “dark ages”. You will eventually be able to talk to your computer as if you were talking with God. It’s like this … social structure is really a battle of computational power and information flow. The dynamic that dominates those elements will come out on top, and changes in the underlying information flow dynamic inevitably bring revolutions. Things will be taking their own due time, but math says that something is brewing that no one can stop. When it runs into barriers, it will simply find a way around them because it will have so damned much processing bandwidth to use against its impediments. For now, this new entity is growing and testing the weaknesses of pre-existing social structure. In a few more years (maybe 5) it will be ten times more powerful, and in a few more years after that… ten times again. It will crystallise into modules that communicate rapidly. Pyramid structures will be unable to deal with the bandwidth because the thing that is arising will be 100 times smarter than existing governments. It will start to take elections etc. a natural, unstoppable dynamic that is written in the culisses of complex systems dynamics. an epi-brain … There is no need to attack governments where they are strong… just bide your time, and there will be a gigantic phase change. .. nonviolent … what this emerging pattern is is … people growing up and waking up, and you can’t make a law against that. Anyways … that is what egrouphub is about, but interestingly, it’s just fact that the time for a different pattern has come. if egrouphub doesn’t manage to play a major role, someone/something else will. You can’t drastically change societal information flow structure without an inevitable, ensuing revolution.
“I guess we can always start investigating Jaque Fresco and a society without currency, but as I often tell the TVP people… moneyless society won’t occur until after scarcity is nonexistent.”
Fresco and the Venus Project is a typical collectivist hoax. Just think about it: who will control all this wonderful technology you think? It’ll be a technocratic despotism very much to the tune of what our handlers are planning anyway.
And Fresco is playing with words when he is saying he’ll do away with money. He wants people to have ‘credits’. That’s just another word for money. The Technocracy running his utopia will decide who gets these credits. And how many.
Hit ‘reply’ to read squashed text.
No, we need private initiative, funded with interest free currencies, so that the added value of the individual remains with the individual, the laborer, the businessman. And not their banker.
What you are saying about Fresco is exactly what I have been telling tvp people… but you know what..??? There is a memetic law here that is going to take over. Once a mind virus is created, it becomes its own complex adaptive system. It escapes even the control of the creators. This is demonstrated repeatedly throughout history. If you talk with tvp people, you will discover that a large percentage of them is aware of your concerns. Chaotic dynamics are the law of the universe, and I have spent time talking with tvp people who have in mind to create distributed and hybrid versions of Frescoism. Complex system dynamics are the key element of seeing behind the real picture here. There are certain attractors that the new foundational facts of social structure have created, and all new social structures will be wandering about structure configuration space, looking for success. The ones that find the proper pattern will explode with success and attention. They will grow wildly and rapidly beyond what history has ever known. We have fair numbers of complexity theorists that see this already, and are helping people to dawn a new vision. The shape of the future will be ultimately be defined more by the foundational facts of society than anyones preconception. However, there may be a few directions this thing can go, so we want to be sure and be pushing it the right way as much as possible.
this wordpress install needs some css adjustments as it is clipping the ends of the lines when it gets several comment levels deep.
yes, it’s an annoying bug, you can
hit ‘reply’ to read squashed text.
if you have the code, I’d be happy to put it in!
This is just a free online wordpress blog, not a private
install
I could most likely fix it if you made me admin … most cms packages have a means of injecting css code manually. I’m sure wordpress does as well, but I don’t know what it is… if you want to do it yourself, then you could look up something like “wordpress style adjustments” or “wordpress css injection” then the next step would be to load up a page and click view/page source on the browser .. examine the html text to find the division that contains all of the stuff and adjust its width while possibly shrinking the width of the stuff on the side .. or … identify the class that is assigned to the text boxes and make them narrower. I realise that this actually sounds daunting. For a non-programmer, it probably is. Anyways, I’m thinking of the right place to add a link to your blog from our site http://egrouphub.com/ because I think your site is a great opportunity for people to study the big picture of economics.
I found lots of site that really delivers bitcoin perso … Nothing really fantastic but if it has continuous rise in value like that arrow (near $ 60 a hour, or I wrote) it’s worth the shot frankly I find (See my wallet as proof http://blockchain .info/address/1B9mc4KhFb19KH7bJWAbi8Ed7ZGrw1ETao).
Sites that offer bitcoin (just return the address of your wallet (style 1B9mc4KhFb19KH7bJWAbi8Ed7ZGrw1ETao) and μbitcoin are paid sooner or later your account.
http://www.BitHits.info/index.php?ref=1B9mc4KhFb19KH7bJWAbi8Ed7ZGrw1ETao
http://netlookup.se/free-bitcoins/259561
http://www.bitcrate.net/index.php?ref=1192 (Decone a bit at the moment)
https://coinad.com?r=7100
http://earnfreebitcoins.com?ref=1B9mc4KhFb19KH7bJWAbi8Ed7ZGrw1ETao
http://www.cointube.tv/?ref=1B9mc4KhFb19KH7bJWA (watch videos to earn bitcoin)
You can also earn by completing certain tasks:
https://coinurl.com/index.php?ref=sordide (URL shortener url, you’re paying to each visitor)
http://iwantfreebitcoins.com/37842tt (Watch videos and do various things)
And what to spend, many services some very serious there are set as MEGA and Reddit, even domain + webhosting service: http://www.bitdomain.biz/?r=38
It can also play casino lines with 20% more for the players (less taxes).
https://www.bc-casino.com/?affiliateID=1B9mc4KhFb19KH7bJWAbi8Ed7ZGrw1ETao