[gutnor]

Thing is Bitcoin fails miserably as a currency TODAY(2013). It currently cannot be used as a currency because of its volatility, unlike other fiat currencies, it cannot be controlled, potentially destroying any economy based on it. ( Think of it, some random panic on the dollar supply would send the value of the dollar spiraling to 100 time its value over the course of 1 year, with absolutely no way the US could do anything about it )

Bitcoin is successful as a proof of concept of how you can create a modern currency that retains most the benefit of electronic and physical money. For the supply, I have just the opposite reaction. I used to think that the limited supply of bitcoin was a great idea, now I'm thinking all the clever people that wanted to get us out of the gold standard may have had a point after all.

It is also not a ponzi scheme, just a risky investment.

[NikolaTesla]

Agreed on your first point.

(no sarcasm intended) Are you saying that a currency that cannot be controlled (e.g. the money supply controlled by something like a federal reserve) is more dangerous than one that is?

[gutnor]

Just to reply in my own words without being labelled as "having my stake in the Keynesian camp". I don't know what that means (not exactly anyway) but that does not seem like a compliment here on HN. I'm a regular IT guy, unless I create a hot startup I will always be a guy whose influence can only be measured by statisticians.

With that out of the way. I don't want to live in a country or principally trade in a currency that can react as bitcoin. I don't have a lot of cash sitting in my bank account, instead I have a small amount of debt (only Banker salary allow you to buy a flat cash in London) so I fail to see any situation where a 10,000 % deflation rate can affect me positively. (Similarly 10,000% inflation - actually 0% inflation is the stuff I can deal and be happy with)

So I don't mind a uncontrollable currency as I don't mind the wind being uncontrollable. I mind hurricane and if I cannot afford to deal with it, I simply prefer to live in an area without hurricane or as a last resort, government provided countermeasures. So in my situation, one I share with the majority of the first world, I prefer a currency controlled by FED-like central banks, than a currency without control that can increase my debt by 2 order of magnitude and at the same time likely put me out of work. So it is a choice 100% pragmatic rather than based on any type of economic theory.

I would not mind to be convinced otherwise, preferably without assumption like "when everybody uses it", or "if a country like China uses it as its currency".

But right now, it seems opinion are split between people in denial with 10,000 bitcoin in their wallet assuring me that what is happening with bitcoin right now is Good (sometime with the argument "deflanationary currency is good" as if that did not require further explanation). Others are blog like this one made by doomsayer simply angry they didn't buy 10,000 bitcoin last year.

[cheald]

I suspect most people here will be in the Keynesian camp; folks heavily invested in Bitcoin probably aren't (specifically, most folks who tend to be heavily free-market/hardline capitalist tend to favor Austrian economics), but I would be surprised if that's the majority position. Other than a small bump in the 1970s, we've more or less been operating on Keynesian economic policy since FDR.

Inflation and deflation only really impact you when a) your wages get out of sync with cost-of-living prices, or b) you are borrowing or lending money (or just have cash sitting around that isn't being utilized in any fashion). If your wages and prices all fell to 1/10000th of what they are today, your purchasing power (in terms of hours worked per loaf of bread gained) would remain the same.

Deflation would harm your ability to (responsibly) take on debt. But, it's arguable that our current economies are so heavily debt-fueled because of our inflationary policies, as well, so it's worth keeping in mind as a variable when processing the concept that deflation = less borrowing. Deflation is scary to Keynesian economists because the Keynesian model only works when people aren't significantly saving anything beyond what they invest - that is, their money is all either spent on goods, or is loaned to other people. Holding money in an inflating economy is irrational since it is constantly losing purchasing power; thus, since it is in your best interest to spend your money as soon as you make it (either on goods and services, or by investing it somewhere that will offer a return greater than the rate of inflation), money keeps on rolling around in the economy.

The theory is that once people start socking away money in their mattresses, you get recession or depression. Deflation would encourage lending (either directly or through investment), but since it discourages borrowing, people may end up unable to find people to accept their money, and the economy grinds to a halt.

[cheald]

that's the Keynesian viewpoint. The prevailing wisdom right now is that policy-controlled inflation helps prevent a wide range of issues. Bitcoin is inherently deflationary, which scares the crap out of people with their stake in the Keynesian camp.

[NikolaTesla]

When you say prevailing wisdom, are you referring to the prevailing wisdom from the Keynesian viewpoint?

What would be an example of the "wide range of issues" that policy-controlled inflation helps prevent?

[cheald]

Well, yes -- the Keynesian school of economic thought dominates our political economics right now. The folks in charge tend to subscribe to Keynesian economic theory.

The tl;dr on "inflation is good" is that it benefits people borrowing money. If your wages keep pace with inflation, then things like your car loan and mortgage ultimately cost less, leaving you with more inflation-adjusted money to lubricate the economy with. Inflation stalling (or even receding into deflation) means that it's much more expensive in terms of wage-hours to pay back an existing debt, which discourages people from taking on new debt. http://www.nytimes.com/2013/10/27/business/economy/in-fed-an... is a decent article on the concept.

A deflationary currency, by contrast, will heavily discourage borrowing. This analogy is a little stilted by the BTC<->USD conversion, but if I agree to loan you 10 BTC to be paid back over 5 years so you can buy a $10,000 car, and over the term of the car loan, let's say that the value of BTC is going to increase from $1000 to $4000 (that is, the amount of value traded in BTC is increasing faster than the amount of BTC in the market), then you'd be a fool to take my loan, since you would effectively end up paying me $40,000 worth of BTC for a $10,000 car. This would discourage you from taking my loan and buying the car, just because of the behavior of the currency.

(That said currently, since lenders get a chunk taken out of their loan by inflation, they make it up in the interest rate. In a consistently deflationary market, it seems to my non-economist brain that the answer would be a smaller - potentially even negative - interest rate, which would be pegged at a point that the lender still makes money over the course of the loan without being overly discouraging to borrowers.)