[ekianjo]

No, the currency would not appreciate much more if you keep it down the road, since bitcoin's value curve becomes almost flat when you reach that point, so there's no real value in hoarding your bitcoins when you reach that stage.

[gnaritas]

> since bitcoin's value curve becomes almost flat when you reach that point

What? The value of a currency is not only determined by how much of it there is, but by how much the economy needs to function. If the economy grows bitcoins will have to depreciate to allow smaller and smaller pieces to be traded. That's deflation, and it's bad. Divisibility isn't a feature, it's a bug that'll kill the currency in the long run because prices are sticky (people raise prices faster than they drop them) and the economy handles inflation far better than it handles deflation.

[ekianjo]

Hahah. Funny argument. Inflation is killing your economy, rather, because it encourages spending and frenetic consumption, this depleting the banks of the well needed savings that will be used for investment by private companies. Yeah, inflation works "so well", right.

[gnaritas]

> Funny argument.

That's not an argument, it's simply how the economy works.

> Inflation is killing your economy

No it isn't.

> rather, because it encourages spending and frenetic consumption

Our economy is based on consumption, like it or not.

> this depleting the banks of the well needed savings that will be used for investment by private companies.

You don't really know how banks work do you.

> Yeah, inflation works "so well", right.

Actually yes, it does. You should educate yourself a bit on how the economy actually works, you sound like someone with little more than a high school understanding full of misconceptions and bad ideas.

[dllthomas]

Inflation encourages investment. If I can get a return sticking my money under a (literal or metaphorical) matress why would I take a risk with investing it? Funding your startup would be more expensive and more difficult in a deflationary world.

[nunb]

Actually it seems to be your assumptions that need questioning: the idea of "conflating all saving" is itself wrong.

Saving is a matter of time preference, specifically, preferring to consume in the future. That implies carrying forward surplus value from today to be spent tomorrow. It matters not whether you stash gold in a mattress of buy stock of Webvan: you merely hope to have X+delta at T+t time where {X, T} represent the present and {d,t} represent increments and can be zero.

In order for you to then invest your gold in Webvan, said company has to offer you a higher rate of return than merely holding the gold.

Gold will increase in value if more produce is offered in exchange at time T+t; assuming stock of gold is constant (which it is, to an approximation). Of course, I prefer the word price since gold has no intrinsic value.

So what Webvan has to offer you (a sane investor) is a better return than the rest of the aggregate efforts of human-kind, assuming of course, that said aggregate efforts are barter-able with gold (that is, can be bought with gold).

This is precisely what makes unbridled capitalism and free-floating interest rates so wonderfully efficient. That damn company cannot get away with peddling something that doesn't improve all our lives. It has a high return on investment barrier to cross in a hard-money economy (defined in this case as a fixed supply of gold).

Conversely, when Greenspan is pumping money, it's pets.com's time to shine! And of course, what most don't seem to realize is that the current crop of startups is mostly just Bernanke's easy money that needs a place to park itself. That's why VCs just can't get enough flow and bitch about deal-sizes.

Another way to phrase the 'investment barrier' is to say that the ratio between spending preferences now and in the future determines the interest rate. A high interest rate implies only higher-credit (in the sense of faith in their success) companies will get money. The highly 'speculative investment' in pet-dating will simply not happen. Note again, I don't like the word investment, savings is just fine as a word for deferment of consumption, and speculation itself is not bad. Here 'speculative investment' is a synonym for unproductive stupid shit money's being spent on.

Nor will houses be given to bad-credit home-buyers, incidentally, which really troubles some. But ask yourself -- if Bob-the-builder built a house and the home-buyer promised him ten apples, and couldn't pay him dem apples, would Bob in hindsight have wanted to build that house for him? If he defaults on Bob, Bob is impoverished. If the Fed bails him out (or actually bails the home-builder out) all of us are impoverished (currently above 50K USD per person in the USA approx). Charity is fine, forced-labor is not.

In your (and Krugman's, and most of mainstream (read tenured) economics') conception, the idea that stashing gold is not productive is merely another way of saying "gold stashers don't fund Webvan" when looked at through this lens.

Damn well they don't! Everybody should have the right to sit on the side-lines and watch. It is almost Gandhian in its non-participation (excepting grand-nieces, but that's another story).

That is precisely what stashing your savings under the mattress in a hard-money economy does, allows you to step away from the pets.com frenzy.

Wall Street has another way to say it: While the music's playing, you've gotta get up and dance. If a bank didn't take the bail-outs it would have gotten bought out, lock, stock & barrel by one that did. While Ben's fiddling, you've got to join the orgy. It doesn't matter if the country burns in the meanwhile.

So the problem with this inflationary money supply is simply that it distorts interest rates, thereby funding unproductive enterprises. The Webvan's get funded, Facebook & Twitter IPO, and we wring our hands and say: hey why aren't we flying to Mars, or curing malaria? Why are our best and brightest kids tweaking ad algorithms for Google and writing stupid Miley Cyrus hash-tag trend-divining programs?

This is why.

In periods of hard-money we saw great advancements in the standard of living of peoples around the world[correlation?]. The free market always beats a planned economy. It doesn't matter if the planning is overt like the Soviet model or merely a 'plan' to distort time preferences. From 1600 to 1900, perhaps we didn't have a vast increase in leisure, but damn, we got productive things done first. Now if you really think a John Deere on every lawn, and immediate notification of the latest Miley Cyrus nipslip is so important, sit back and enjoy the end of empire, because it's going to happen anyway.

When the system collapses, the only ones ahead will be those who've moved into "real value" in the Misesian sense. That's why the Wall St types are buying 20mn$ condos in NY and chateaux in the south of France -- they know something you don't. Compared to what they get paid (in newly created funny-money) those condos are at a damn discount. And eating cake in France while the peasants can barely afford bread in Austerity-USA? Well, that's sweet too.

Information is power, and those with it don't want you to have it. Therefore you will always get misinformation first. Don't believe the propaganda. Read and learn (but don't read Krugman, the man's a colossal jackass) but mostly, just work through the logic. Logic won't lead you astray (unless you are Yudkowsky trying to figure out economics).

[dllthomas]

What you wrote here seems to be much more ranting and cheering than logic. I'll re-read at some point and see if I can pick out anything of value, but if you can tighten it up that'd be appreciated - I can't tell whether your points coherent or not.

[nunb]

I can't edit the original.

Tightened version has been put in the right place: https://news.ycombinator.com/item?id=6553774

[ekianjo]

I don't see how it can encourage investment if inflation punishes savers. Savers are at the source of investment. If nobody saves where do you borrow money for your startup? Oh, let me guess, by borrowing from other creditor countries, where people actually save, like in China and Japan ?

Yeah, you are right, that worked pretty well for the US industry in the past 30 years to have a galoping inflation. Look where your industries went.

[dllthomas]

"I don't see how it can encourage investment if inflation punishes savers. Savers are at the source of investment. If nobody saves where do you borrow money for your startup?"

You're conflating all saving. Stashing money under my mattress (or in a vault) is not a source of investment. Saving is investment only if investing is how you save - investing is currently how you save partly because cash holdings lose value.

"Yeah, you are right, that worked pretty well for the US industry in the past 30 years to have a galoping inflation. Look where your industries went."

1) Inflation has not been "galloping" over most of the past 30 years. 2) I certainly don't assert that high levels of inflation are a good thing - low, controlled, stable, present seems to give the best results. 3) Nonetheless, yes, look where our industries went: mostly to countries with weaker currencies and more inflation.

[ekianjo]

I'm not sure where you get the illusion that we do not have a galloping inflation. See the gold price vs USD :

http://goldprice.org/charts/history/gold_all_data_o_usd.png

And no, there has not been a "run for Gold" or things like that, Gold is not used as a currency anywhere a demand is still relatively low and stable.

So that gives you a sense of how much inflation you have been getting over the years. It's certainly faster than the official numbers. And anyone who has lived through the past 30 years should know very well that you could buy more commodities with a single dollar in the 80s than you can buy nowadays with the same amount.

Regarding savings -> you know most people do not get paid directly in cash, right? Most if not not all employers require de facto a bank account in order to pay salaries (we are not in the 60s anymore) and most of the savings go and stay there when you work. These savings become funds that the bank can use to emit loans and different financial services to private companies.

[nunb]

The idea of "conflating all saving" is itself wrong.

Saving is a matter of time preference, specifically, preferring to consume in the future. That implies carrying forward surplus value from today to be spent tomorrow. Let's say you have a choice of how to go about it: G, or W.

Strategy G is to stash gold in a mattress. Strategy W is to buy stock of Webvan/Amazon.

Let X = present value to save T = timestamp at present d = value delta t = time delta

Now at time T+t you want to have X+d value where d=0 is okay, but (d < 0) is unacceptable.

Now the choice between G and W is as follows: W has to offer you a higher rate of return than merely holding the gold in strategy G.

Gold will increase in value (price) if more produce is offered in exchange at time T+t, assuming stock of gold is constant (which it is, to an approximation).

So what Webvan/Amazon must offer a rational investor is a better return than the rest of the aggregate efforts of human-kind. They must have high productivity.

This is precisely what makes capitalism and free-floating interest rates so efficient, capital is allocated to the most productive enterprises.

The ratio between spending preferences now and in the future determines the interest rate. A high interest rate implies that only higher-credit (in the sense of faith in their success) companies will get money.

The highly risky investments will simply not happen. There won't be any bubble mania.

In your conception, the idea that stashing gold is not productive is merely another way of saying "gold stashers don't fund Webvan" when looked at through this lens.

But it is good they don't! Everybody should have the right to sit on the side-lines and watch.

When the word "unproductive saving" and "hoarding" are used, they usually refer to this leave-me-alone strategy.

In periods of hard-money we saw great advancements in the standard of living of peoples around the world [ref Thiel?].

The free market always beats a planned economy. It doesn't matter if the planning is overt like the Soviet model or merely a plan to distort time preferences.

[dllthomas]

Here is how inflation encourages investment. Imagine a simplified world, wherein you are choosing whether or not to invest in a company. The company is able to produce 5000 utils of value later, with your investment, and is willing to give you 10% of the proceeds in exchange for your investment of $300 now.

If the going rate for utils is $1/util now, consider the following situations and strategies.

    Situation 1) Later, the market is clearing $0.50/util:
        Strategy a) Stick money under a mattress:
            You keep your $300 now.
            It becomes $300 later, and can buy you 600 utils.

        Strategy b) Invest in the company:
            You give your $300 now to the company.
            The company produces 5000 utils later.
            The company sells the 5000 utils for $2500.
            You get 10%, or $250, which can buy you 500 utils.

    2) Later, the market is clearing $1/util:
        a) Mattress:
            $300 now -> $300 later -> 600 utils.

        b) Invest:
            $300 now to company
            5000 utils later (for company) -> $5000 later (for company)
            10% is $500, which can buy you 500 utils.

    3) Later, $2/util:
        a) Mattress:
            $300 now -> $300 later -> 150 utils.

        b) Invest:
            $300 now to company
            5000 utils later (for company) -> $10000 later (for company)
            10% is $1000, which can buy you 500 utils.

As you can see, in the setup given - which is clearly a crude abstraction but shares some dynamics with reality - when there is sufficient deflation you would do better not to invest in the company, whereas with no inflation you do a little better to invest, and with inflation you do a lot better to invest. That's how inflation motivates investment. The key point is that investing now translates into some amount of value created that doesn't (in most cases) change with prices, so when you turn it back into money at the later rate (by selling what was produced) its relative value compared to not investing is lessened.

[grinnbearit]

You're not taking risk into account, the company is not guaranteed to produce 5000 utils of labour, it could produce less or worse go bankrupt and produce nothing.

With no inflation, my risk free investment of money under a mattress produces no return. My risky investment with the company has the probability of a positive or a negative return.

With inflation, I'm forced to make a risky investments to break even. True, I can no longer keep my money under a mattress but I'm still an unsophisticated investor and choose to park my labour in houses for example which inevitably leads to a housing bubble.

With deflation, I agree, people would rather not invest in a business producing a lower return than the rate of deflation but why would that deflation occur? One reason could be more goods chasing the same amount of money implying real economic growth.

The problem I have with the current inflationary system is the distribution of new money, if all currency held and prices denominated in that currency increased by the same factor. It would result in a nominal increase in prices. No one would be richer or poorer after the increase. The current system distributes new money to people who directly interact with the central bank, rewarding them at the expense of everyone else.

[grinnbearit]

Inflation encourages a flight to other stores of value, houses for example, the problem is you're not encouraging investment based on ROI, its simply a drive to preserve value.

All you end up with is another monetized good which isn't actually constrained in the same way as gold or bitcoin leading to overproduction (tulips/houses) and a crash.

[dllthomas]

So, the economy is growing, with the same number of bitcoins chasing more goods (or actually, fewer and fewer bitcoins chasing more goods, as some get lost or destroyed) and (as you pointed out) people deal with this in part by splitting the bitcoins smaller in terms of what they actually spend. That obviously leads to the currency becoming more valuable as you can exchange the same amount of currency for more other stuff, right?

It's worse than that, because expectation of deflation means people hoard rather than spending, which means still fewer coins actually in circulation.

[grinnbearit]

The entire economy can run just fine with 1 infinitely divisible bitcoin in circulation. Any bitcoins held can only have an effect if they are spent.

The buyer who converted his labour into bitcoin has, in effect, provided free labour unless he converts the bitcoin back.

[dllthomas]

> The entire economy can run just fine with 1 infinitely divisible bitcoin in circulation.

That's a strong empirical statement made without evidence.

> Any bitcoins held can only have an effect if they are spent.

Kind of. But bitcoins (or fractions thereof) being removed from circulation has an effect. And the expectation that that will happen has an effect.

[grinnbearit]

The only way it can be removed from circulation is by providing the labour in the first place. That effect has already been accounted for.

On another note why would this a problem?

[dllthomas]

The problem is (an expectation of) fewer bitcoins chasing more goods. Removing bitcoins while adding labor doesn't counteract that dynamic, it adds to it. (It's also not true that that's the only way bitcoins are removed from circulation - some have already been lost/destroyed - but given my previous point that's simply an aside).

It's a problem because of what money is. It's not an asset to be held as store of value, it's a medium of exchange to make trade work better. If everyone is refusing to spend their bitcoins because they expect them to be more valuable tomorrow, bitcoin is not being a currency and people have to use other currencies to get things done or things aren't getting done, either of which is an issue for bitcoin-as-a-currency (and the latter an issue for everyone). Arguably bitcoin could continue to serve as an asset anyway, but I don't understand that to be the vision.

None of this is to say that I am confident this will be sufficiently an issue that things stop working, but I definitely see it as a risk.

[grinnbearit]

The primary function of bitcoin is as a store of value, its utility as medium of exchange comes after that.

The only reason people choose to store their labour in bitcoin today is that they predict the same amount of bitcoin will buy the same or greater labour in the future less the costs of converting to/from bitcoin (transaction costs). The only reason they'd store their labour in any other way is if they were getting a better deal.

Said another way, if bitcoin's primary use was as a currency the silkroad shutdown should have lowered the price of bitcoin proportionally. People using bitcoin as a currency could convert into it at the last possible minute instead of holding it. You need people treating it as a store of value for it to have a price tomorrow.