That was a real useful link there. You linked back to the post where you simply stated "inflation is 10%". I'm not seeing your extensive detailed calculations anywhere.
Given your complete lack of referenced facts, I'll just have to go back to those CPI tables, which calculate that the dollar has retained about 3.7% of it's 1913 value, not "less than 1%". That's a pretty big error.
So, your view is that the current BTC is "flying", and therefore I should offer no constructive input for BTC 2.0? It isn't an opinion that the currency is volatile and illiquid; that's a fact. Something with a net value of $150M (or whatever it is this hour) should be way more liquid than it is. It isn't liquid because the BTCs are being hoarded.
"Keep [my] idea way the [explitive] away from the current Bitcoin project." Worry not. My ideas aren't directed at the current BitCoin project. I realize it's infeasible to rescue it.
Damn skippy I'm not using it... When the EFF decides to return donations in this currency (even though it's technical ideas are right up their alley), I'd say the likelihood of BTCs becoming a useful form of electronic value transfer is approximately zero.
And I never said fixed-expansion-curve currencies were bad. They are not inherently inflationary or deflationary. I said that the curve that was chosen was a poor one, that DID guarantee deflation.
The BTC exchange volumes are still far too low for a sane merchant to accept; the bid/ask spread and intra-day volatility is far too high. So, I'd accept my BTC, wait the required 10 minutes before I can turn it around (the BTC FAQ talks about this), and then end up collecting several percent less (or more) actual currency than I priced for. And that's if I implement totally dynamic pricing feeding off the data feed of my preferred exchange.
And Visa/MC provide far more services than just transfer. I guess for a more fair comparison would be the ACH system, which runs $0.25 and up per transaction.
1) The expansion curve has nothing to do with the volatility BTC is currently experiencing; that's because it's a new currency with an uncertain future (in terms of who will accept it later).
The expansion curve has everything to do with BTC's issues. The poorly-chosen curve guarantees deflation if the currency is going to expand to a level where the net value of every BTC in existence is more than a trivial, useless, quantity. Expected deflation triggers hoarding. Hoarding triggers illiquidity. Illiquidity triggers volatility.
2) People's expectations of a nascent currency's volatility are way too high. Any new currency is going to be that way! This expectation is effectively ruling out any new currency that can't get its volatility down to that of the USD immediately -- which means you're against any new currencies that don't start with some stabilizer. (Btw, no you can't tell me how much gasoline a USD will buy tomorrow.)
This is a problem with the currency, not "people." If the currency was more liquid because of a better chosen expansion curve, it would not be an issue. (BTW, I can say that my USD will purchase 93-octane gas at around $3.90 to the gallon tomorrow in my area. I can say that with error bars of around 2%, barring some major swing in the world oil markets that have nothing to do with currency valuations. I can make no such statement about BTCs.)
3) Inflation and deflation are caused by changes in *expectation* of the growth the money supply. That is, it's only unexpected money shocks that change the price level/inflation rate. Bitcoin has broadcast how many there will be at all points in time, eliminating this uncertainty. This means that there will be no unexpected growth (though their could be unexpected velocity, liquidity, or acceptance level), and so the limited (final) quantity of bitcoins is *already priced in*.
So you won't have a scenario where, in 20xx, people say, "golly, they just stopped minting bitcoins, now they're suddently ultra scarce so we have to bid MORE MORE MORE for them." No: everyone will price in this event well in advance of the termination of growth.
At current prices, the total number of BTCs, after every single one has been mined many years from now, is roughly $303M (at current supply levels, it's much smaller, but I'm trying to cut the BTC some slack here.) For a currency that seeks worldwide adoption as an alternative to Visa/MC, this is, to be blunt, puny. Last year, Visa ran $5.4T in payments. If BTCs achieve the pathetic ubiquity of Discover (not accepted most places, little international presence), they managed to transact about $100B. If every BTC in existence at the end of BTC creation changed hands twice a week (which would be an unheard of currency velocity for an economy with a vaguely stable currency... the USD's velocity is approx. once a month.), the currency would have to deflate by a factor of 30 to reach $100B. (At the velocity of the USD, it would have to deflate by a factor of 240-ish.) Because it would have to deflate so much to be useful, it's unlikely to ever actually do so. T
Screw an inflationary currency and all those pro/con arguments. I'd settle for one that was vaguely stable. I can tell you about how much [insert product or service here] 1USD will buy tomorrow. I haven't the least flipping clue how much a BitC is worth tomorrow because it's a niche, illiquid, broken-by-design, proof-of-concept. And as I've made a zillion posts on Slashdot pointing out, a "global currency" that must experience many orders of magnitude of deflation in order to be something other than a toy is worthless.
They screwed up the BitC expansion curve, and screwed it up badly. And it's fatal to the currency.
His "solution" was that merchants should just instantly move into and out of BitCoins on currency exchanges so that the swings were not an issue. And somehow using these currency exchanges will magically be cheaper than Visa/MC/ACH.
Unanswered inevitable followup: Why would anybody go through that much trouble instead of just trading in their desired currency to begin with? And who pays to run these currency exchanges?
Prior to the creation of the Federal Reserve, when the U.S. went for many years without a central bank, and instead the currency operated on the bimetallic standard, the economy was not some shining example of stability and gradual deflation as the economy grew. It was a volatile roller-coaster that makes our current economy look solid as a rock.
Deflation during strong economic activity is due to increased demand for investment capital from all sorts of competitors, who are fighting for the customer base, and this is awesome, as this drives prices down for end consumers, that's why in 19 century US, things ended up costing half the price by 1913 if compared to prices in 1800.
You are confusing deflation with an increase in productivity triggering an increase in living standards. They most certainly are NOT the same thing. My $300 laptop making a $10M 1970's Cray look like a toy is not an example of deflation of millions of %, it's simply a higher living standard. This is why the "market basket" used to compute the CPI changes periodically. Higher living standard? Good. Decreasing CPI (more than a trivial amount)? Bad. This is why things cost less in 1913 than they did in 1800. If you use an 1800 "market basket" in 1913, of course things look cheaper! If you use a 1970 market basket in 2010, we haven't experienced very much inflation in 40 years. You, making a median income in 2010, could afford far more house, food, technology, medicine, leisure, transportation, energy, etc. than was available in 1970 for a median income. And this is the case despite a CPI-U increase of approx. 445% between 1970 and 2010. Would we be better off if the CPI had not increased at all? Of course! You'll get no argument from me there. But had the historical CPI-U chart been reversed over those 40 years? Economic catastrophe. '74, '79, and '80 would have more than parts of minor recessions due to the cost of capital sending the economy into a deflationary spiral. (In 1932 the CPI-U deflated by 10.8 percent; I hope you are not going to argue that 1932 was a shining example of economic prosperity that should be emulated by future economies.)
Deflation (where a given unit of currency buys you a larger slice of capital and labor) is not a good thing if there is a risk of it going over just a few percent in a year. As I have stated before, inflation can be "baked" into the interest charged for a loan in fairly large amounts. You can certainly bake far more inflation into the rate for a loan than you can deflation.
An example: Lets say your expect your ROI to be 10% (measured in increased economic productivity) for an capital investment you would like a loan in order to purchase. This is not great, but not horrible either. If deflation is expected to hit 8%, you will NEVER even consider making that capital investment because once the bank charges you about 2% for overhead, profit, and risk (and that's low risk and profit pricing for a business loan), the true interest rate of the loan exceeds that of the investment return. If instead inflation is expected to hit 8%, your creditor can simply charge you 10% interest. Your productivity increase nets you a 20% nominal rate of return, you subtract the 2% to the bank/lender, 10% for inflation loss, and you end up with an 8% real rate of return on your investment. With deflation, your real rate of return would have been a big fat zero, because loans cannot carry a negative interest rate.
So all other things being equal, moderate inflation (with the risk of spikes of higher inflation) is far better than moderate deflation (with the risk of spikes of higher deflation.) But ideally, the value of the currency, in relation to the amount of capital, and CPI-adjusted capitial and expenses it purchases should remain constant.
Deflating currency doesn't have a "half-life" If they hold on to their $1, at the end of the year they still have a buck. If they lend it to you and charge a -25% rate, they have 75 cents at the end of the year.
The CPI is currently running at an annual rate of 3.57%, not 10%. And I'm not sure how you equate deflation over the course of the 19th century with constant growth and prosperity. There WERE several recessions, and they were quite severe.
I'm speaking as an investor also... consumer credit has been a perfectly respectable and profitable business for decades. Yes, some bankers made some VERY bad choices about risk recently (without a near-free Discount Window), but that does not negate the entire idea of consumer credit.
My debt right now consists of my mortgage. I win, because my cash isn't tied up in my house, and my bank wins because they are taking in my interest payments. A transaction where both parties feel they have a fair deal is the essence of capitalism. I'm not sure why you insist this is a horrible deal for the investor that currently owns my loan. (It happens to be a Credit Union)
Hey, if credit cards are profitable for the bank at 18% interest, what's the problem? Don't you want profit? What are you, some kind of central banker?
You should deploy your capital where it will make you the most money, given your risk tolerance.
Economies do not benefit from currency fluctuation
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An economy does not benefit from currency changes at all, as both deflation and inflation cause issues with investment, spending, and credit. An ideal currency is one that does not change in value at all. Barring that, one that has an eminently predicable (and low) rate of inflation or deflation.
You want your investments to increase in value, not your currency.
Again, I would not (while in sane mind) loan money in currency that is losing value, it is a losing proposition. I would especially not loan money to anybody at all, who wants to use that money just to spend on products/services and not put it to productive use - build/increase a business, grow the money, so they can pay interest and principal.
Why not?
If you can make a prediction as to what the rate of inflation (or deflation) will be, you can price that into the loan (the debtor will be doing this too.) This is not a radical idea.
And why not loan money for consumption (by businesses or consumers)? If the loan can be repaid with principal and interest, what's the problem?
- credit is not there for your consumption needs, it exists as an idea so that more production capacity can be obtained.
Credit serves multiple purposes. It is a perfectly legitimate use of credit to enable the purchase of something that I do not have immediate liquid capital to obtain. If I can more usefully deploy my capital (i.e. my savings) elsewhere, why tie up all up in my house or car? If I have to live somewhere and drive something, why should I be unable to obtain a loan to enable me to do so now? If the bank will loan me money at a rate lower than I think I can recover via investment, it is irrational to NOT take the loan. Yes, eventually I have to pay the car or house loan back, with interest, but in the meantime I had use of that cash for whatever purpose I deployed it.
The reason credit is not for your consumption needs is that credit is given to you so that you can pay it back. With interest. I know, this is a revolutionary idea, totally backwards from what an average person in the West is taught to believe, but nevertheless, this is the actual truth.
Holy Straw Man Batman! Just because some people default on loans does not mean that the idea of principal + interest is some kind of foreign concept to the average citizen. They may miscalculate how much that interest is going to cost them (which is why credit cards exist) but that doesn't mean the entire concept is not understood.
If I loan you money, I expect you to pay it back. With interest. If I don't think that loaning you money will result in you paying it back with interest, I won't give it to you. The way I know it's a feasible investment to loan you money is to look at your plan for growing it. So if your plan is to buy yourself a house or a car, I know I must look somewhere else for an investment opportunity, because your house and your car are expenses, not production capacity that could be used to grow my investment (and to make you rich in the process as well.)
The mortgage market and auto-financing market has not always been a sinkhole of capital. A great many bankers deluded themselves about the value of the collateral they were taking an interest in, but that does not make the entire concept of a residential mortgage faulty.
You can only borrow safely if you can be almost certain money won't increase in relative value in the future, and to make a borrower feel truly safe currency value should have a near certainty of decreasing somewhat
- this comes from your complete misunderstanding of what credit is for in the first place (real credit, not government printed nonsense fiat that destroys opportunity to have meaningful investment via inflation and debt.)
In 19 century USA the value of dollar was growing, not falling, yet the economy of USA was also growing very quickly, as innovation and businesses was increasing, not falling.
I'm sure what you meant to say was "...the economy of USA was also growing very quickly, (except for the Panic of 1819, the Panic of 1837, the Panic of 1857, the Panic of 1873, and the Panic of 1893)..." These were steep recessions that made the recent unpleasantness look like a minor bump in the road.
Why would I want to loan you money in currency that devalues? It makes no sense. I only want to loan money in currency that is increasing in value (I am not talking about a bubble, I am talking about free market economy, that is unhindered by insane government destroying the free market to grow itself by promoting monopolies and killing off capital investment opportunities via inflation).
What makes credit difficult is a volitile currency, not necessarily an inflating or deflating one. With an inflating currency, I must simply add my inflation expectations to the real rate of return I would like to obtain. (Although in a deflating-currency environment, this can make it d
Loans with negative interest? I don't think so.
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Not true. In a deflationary period, loans will simply carry a negative interest rate.
They will "simply" have a negative interest rate?
Outside of a few rare exceptions, there is no such thing as a loan with a negative interest rate. What possible motive would a bank (or investor) have for issuing such a loan? Why not just hold onto the cash?
Even if a deflationary period, retail loans still have a non-zero interest rate. The yen has been deflating for many years, yet retail loans are still not free. (Money from the central bank is essentially free, as it is in the U.S. at the current time.)
I suppose in a way you are correct. In practice, BitCoins are a commodity that you happen to be able to occasionally barter with other geeks. However, they were designed to be a currency. It's right there on the BitCoin homepage: "Bitcoin is a peer-to-peer currency." It's whole infrastructure is set up as a currency (albeit as a poorly-designed, unscalable, one.) There are lists of merchants for real goods and services that inexplicably have chosen to accept these things.
That said, there are national currencies that wouldn't meet your definition of "universal acceptance"; Zimbabwe individual dollars were good for nothing more than toilet paper prior to the country dollarizing.
BitCoins are simply a hobby, not a currency
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Usefulness as a currency is inversely proportional to potential as an investment. BitCoin fans, when you boast that your "currency holdings" have shot up in value by several hundred percent in a year, this is NOT A GOOD THING for BitCoins as a currency. You, Joe Merchant, would have to be a complete blithering idiot to set yourself up to accept BitCoins as a form of payment if deflation of several orders of magnitude is REQUIRED in order for your "currency" to be anything but a niche toy. In addition, credit, the lifeblood of any economy is completely impossible under such conditions; it would be the height of insanity to take out a loan if you had the potential of owing the equivalent of several hundred percent interest after a year. (As in, if you took out a loan for a thousand BitCoins a year ago, you'd be praying for an event like this to happen right now...)
An ideal currency remains relatively stable in value in relation to something you actually want to buy. An illiquid currency that gyrates wildly in value is useless, as it makes proper pricing of goods, services, and credit impossible.
In the end, BitCoins are no more a "currency" than Beanie Babies were. And at least Beanie Babies are cute. (And tulips were/are pretty flowers.) BitCoins are an interesting experiment in cryptography, nothing more.
Yep... there are lots of happy BitCoiners out there who are pleased as punch with the current "value" of their holdings. Just as there were a lot of happy owners of "investment condos" five years ago, Beanie Baby owners about 15 years ago, and Dutch tulip investors many decades back. I leave the appropriate conclusions you could draw from this as an exercise for the reader.
Potential as an investment != usefulness as a currency.
If the currency is so volatile that my customers won't have the least clue how much they will pay until they hit "submit", why on earth would I EVER set myself up to accept such a lousy currency? Moreover, why would any of my customers do so either, unless their sole reason for shopping at my store is to unload some BitC's they got suckered into taking?
Large corporations do accept trades of highly volatile things (it's called the commodities market.) Most web retailers, even those that trade internationally, do not. They have the currency(ies) their store accepts, prices posted in those few currencies, and if you don't have it, you let Visa/MC take care of the exchange. And their rate only adjusts once a day.
It's a volatile currency because it's too thinly traded to be stable. And the inherent deflationary spiral ensures it will never get any better.
As I have stated many times, the BitCoin fans are confusing utility as a currency with value as an investment. They are NOT the same thing. Yes, you, investor in X, want the value of X (in relation to some other thing you desire) to rise over time.
Ideally, you do NOT want is the value of your currency to change over time (you don't want it to increase OR decrease.) Why? Because the inevitability of somebody getting the short end of the stick tends to limit economic growth. Inflation harms savers, who then choose to spend instead of lend (crippling credit availibility) and deflation hurts spenders (who choose to hoard instead of spend.)
Yes, people invest in currencies. But those investors aren't USING that money as a currency, they are merely investing in something that happens to be a currency. If the "currency" was nothing BUT an investment by everyone holding it, as opposed to a nearly universal medium of exchange, then it isn't a currency at all.
If the economy is growing fast enough, money supply deflation won't mean price deflation.
You have it exactly backwards. If the economy grows AT ALL, price deflation is guaranteed, given a fixed money supply. To avoid deflation you'd need to have the economy size grow (or shrink) in lockstep with the money supply. (This, by the way, is why virtually every single modern economy uses a central bank controlling the supply of a fiat currency. Although some countries are better at it than others...)
Let's say the current BitC total currency value is $50M (or, if you don't want to use USD, 0.5M barrels of oil, 10 bars of gold, whatever...), and that value exists in a maximum of 1M BitCs. (I have no idea what the actual numbers are, and it doesn't matter...) Now, that $50M is nowhere near enough of an economic size to be anything but a niche currency unit. To be viable, lets say it needs to be $5B USD (or 50M barrels of oil, etc.)... that means that you MUST have price deflation of 99% to reach the size of viability. "Utility" depends on getting people to accept it, and a system doomed to a deflationary spiral were that to actually occur is not one destined for wide use. (Deflation inhibits spending and trade, and therefore inhibits the desire of anybody to go through the trouble of getting set up to accept them.)
You are absolutely right that we can't predict what will happen tomorrow. But I can confidently predict that well before "five years from now", most of the people playing around with this will have given up and moved on to another hobby because their currency was doomed to irrelevancy from the start.
It doesn't matter WHAT time or money constraints they were under. This is simply not something that would be acceptable out of somebody that codes for money. To call this a "beginners mistake" is an insult to Web Development 101 students everywhere. If you have to be TOLD that maintaining authentication to a secure website based on the contents of the URL bar is a bad idea, then you do not deserve to be coding for anybody. I haven't EVER coded a website (I haven't written anything longer than a ten-line shell script in 13 years) and I could have told you this was a mind-bogglingly stupid mistake. This is not 20/20 hindsight at work here... it really is that stupid.
Heads should roll, including the programmer(s) responsible for this travesty, and two levels of management above him/her. And the remaining employees in the department should all have to apply for their jobs again (by the new management team), as their suitability as programmers could not have been properly evaluated before if the original moron managed to keep his job longer than a week.
I'm actually willing to cut the testers some mild slack... maybe they chose not to test for the developer having the IQ of a turnip. (Just a little slack... a tester should NEVER assume the developer has the least clue what they are doing when figuring out what needs testing.)
Yes, I realize PayPal is unreliable, and you should never keep your money there for any length of time. But what does that have to do BitCoin's usefulness; the analogy is simply is not valid. If I have $100 in my PayPal account, and sweep that money into my Checking, at the end of the day I have reasonable certainty I'll have $100 - fees. If I collect a pile of BitC's over the course of the day, I cannot predict with any certainty whatsoever how many dollars/Euros/genuine viable currency I can change that into without changing my BitC-denominated pricing on a continuous basis.
BitCoins are a currency. PayPal is a payment network. The inherent issues with one have nothing to do with the inherent issues with another.
You can chalk up occasional PayPal losses as a cost of doing business. I suppose you could hedge your BitC pricing against currency volatility and call THAT a cost of doing business, but that would be REALLY expensive.
Slashdot Mirror
I give up.
That was a real useful link there. You linked back to the post where you simply stated "inflation is 10%". I'm not seeing your extensive detailed calculations anywhere.
Given your complete lack of referenced facts, I'll just have to go back to those CPI tables, which calculate that the dollar has retained about 3.7% of it's 1913 value, not "less than 1%". That's a pretty big error.
So, your view is that the current BTC is "flying", and therefore I should offer no constructive input for BTC 2.0? It isn't an opinion that the currency is volatile and illiquid; that's a fact. Something with a net value of $150M (or whatever it is this hour) should be way more liquid than it is. It isn't liquid because the BTCs are being hoarded.
"Keep [my] idea way the [explitive] away from the current Bitcoin project." Worry not. My ideas aren't directed at the current BitCoin project. I realize it's infeasible to rescue it.
Damn skippy I'm not using it... When the EFF decides to return donations in this currency (even though it's technical ideas are right up their alley), I'd say the likelihood of BTCs becoming a useful form of electronic value transfer is approximately zero.
And I never said fixed-expansion-curve currencies were bad. They are not inherently inflationary or deflationary. I said that the curve that was chosen was a poor one, that DID guarantee deflation.
Left out a zero there... ACH (according to an old ComputerWorld, anyway) starts at $0.025 per transaction, and tops out at 25 cents.
The BTC exchange volumes are still far too low for a sane merchant to accept; the bid/ask spread and intra-day volatility is far too high. So, I'd accept my BTC, wait the required 10 minutes before I can turn it around (the BTC FAQ talks about this), and then end up collecting several percent less (or more) actual currency than I priced for. And that's if I implement totally dynamic pricing feeding off the data feed of my preferred exchange.
And Visa/MC provide far more services than just transfer. I guess for a more fair comparison would be the ACH system, which runs $0.25 and up per transaction.
1) The expansion curve has nothing to do with the volatility BTC is currently experiencing; that's because it's a new currency with an uncertain future (in terms of who will accept it later).
The expansion curve has everything to do with BTC's issues. The poorly-chosen curve guarantees deflation if the currency is going to expand to a level where the net value of every BTC in existence is more than a trivial, useless, quantity. Expected deflation triggers hoarding. Hoarding triggers illiquidity. Illiquidity triggers volatility.
2) People's expectations of a nascent currency's volatility are way too high. Any new currency is going to be that way! This expectation is effectively ruling out any new currency that can't get its volatility down to that of the USD immediately -- which means you're against any new currencies that don't start with some stabilizer. (Btw, no you can't tell me how much gasoline a USD will buy tomorrow.)
When the Euro was introduced, nothing even remotely like this volatility occurred. Nothing like this: http://bitcoincharts.com/charts/chart.png?width=1228&m=mtgoxUSD&k=&r=60&i=&c=0&s=&e=&Prev=&Next=&v=1&cv=0&ps=0&l=0&p=0&t=S&b=&a1=&m1=10&a2=&m2=25&x=0&i1=&i2=&i3=&i4=&SubmitButton=Draw& That's a chart that I'd expect to see with a pump-n-dumped penny stock or a fad like Beanie Babies. Not a serious means of value transfer.
This is a problem with the currency, not "people." If the currency was more liquid because of a better chosen expansion curve, it would not be an issue. (BTW, I can say that my USD will purchase 93-octane gas at around $3.90 to the gallon tomorrow in my area. I can say that with error bars of around 2%, barring some major swing in the world oil markets that have nothing to do with currency valuations. I can make no such statement about BTCs.)
3) Inflation and deflation are caused by changes in *expectation* of the growth the money supply. That is, it's only unexpected money shocks that change the price level/inflation rate. Bitcoin has broadcast how many there will be at all points in time, eliminating this uncertainty. This means that there will be no unexpected growth (though their could be unexpected velocity, liquidity, or acceptance level), and so the limited (final) quantity of bitcoins is *already priced in*.
So you won't have a scenario where, in 20xx, people say, "golly, they just stopped minting bitcoins, now they're suddently ultra scarce so we have to bid MORE MORE MORE for them." No: everyone will price in this event well in advance of the termination of growth.
At current prices, the total number of BTCs, after every single one has been mined many years from now, is roughly $303M (at current supply levels, it's much smaller, but I'm trying to cut the BTC some slack here.) For a currency that seeks worldwide adoption as an alternative to Visa/MC, this is, to be blunt, puny. Last year, Visa ran $5.4T in payments. If BTCs achieve the pathetic ubiquity of Discover (not accepted most places, little international presence), they managed to transact about $100B. If every BTC in existence at the end of BTC creation changed hands twice a week (which would be an unheard of currency velocity for an economy with a vaguely stable currency... the USD's velocity is approx. once a month.), the currency would have to deflate by a factor of 30 to reach $100B. (At the velocity of the USD, it would have to deflate by a factor of 240-ish.) Because it would have to deflate so much to be useful, it's unlikely to ever actually do so. T
Screw an inflationary currency and all those pro/con arguments. I'd settle for one that was vaguely stable. I can tell you about how much [insert product or service here] 1USD will buy tomorrow. I haven't the least flipping clue how much a BitC is worth tomorrow because it's a niche, illiquid, broken-by-design, proof-of-concept. And as I've made a zillion posts on Slashdot pointing out, a "global currency" that must experience many orders of magnitude of deflation in order to be something other than a toy is worthless.
They screwed up the BitC expansion curve, and screwed it up badly. And it's fatal to the currency.
His "solution" was that merchants should just instantly move into and out of BitCoins on currency exchanges so that the swings were not an issue. And somehow using these currency exchanges will magically be cheaper than Visa/MC/ACH.
Unanswered inevitable followup: Why would anybody go through that much trouble instead of just trading in their desired currency to begin with? And who pays to run these currency exchanges?
Prior to the creation of the Federal Reserve, when the U.S. went for many years without a central bank, and instead the currency operated on the bimetallic standard, the economy was not some shining example of stability and gradual deflation as the economy grew. It was a volatile roller-coaster that makes our current economy look solid as a rock.
Deflation during strong economic activity is due to increased demand for investment capital from all sorts of competitors, who are fighting for the customer base, and this is awesome, as this drives prices down for end consumers, that's why in 19 century US, things ended up costing half the price by 1913 if compared to prices in 1800.
You are confusing deflation with an increase in productivity triggering an increase in living standards. They most certainly are NOT the same thing. My $300 laptop making a $10M 1970's Cray look like a toy is not an example of deflation of millions of %, it's simply a higher living standard. This is why the "market basket" used to compute the CPI changes periodically. Higher living standard? Good. Decreasing CPI (more than a trivial amount)? Bad. This is why things cost less in 1913 than they did in 1800. If you use an 1800 "market basket" in 1913, of course things look cheaper! If you use a 1970 market basket in 2010, we haven't experienced very much inflation in 40 years. You, making a median income in 2010, could afford far more house, food, technology, medicine, leisure, transportation, energy, etc. than was available in 1970 for a median income. And this is the case despite a CPI-U increase of approx. 445% between 1970 and 2010. Would we be better off if the CPI had not increased at all? Of course! You'll get no argument from me there. But had the historical CPI-U chart been reversed over those 40 years? Economic catastrophe. '74, '79, and '80 would have more than parts of minor recessions due to the cost of capital sending the economy into a deflationary spiral. (In 1932 the CPI-U deflated by 10.8 percent; I hope you are not going to argue that 1932 was a shining example of economic prosperity that should be emulated by future economies.)
Deflation (where a given unit of currency buys you a larger slice of capital and labor) is not a good thing if there is a risk of it going over just a few percent in a year. As I have stated before, inflation can be "baked" into the interest charged for a loan in fairly large amounts. You can certainly bake far more inflation into the rate for a loan than you can deflation.
An example: Lets say your expect your ROI to be 10% (measured in increased economic productivity) for an capital investment you would like a loan in order to purchase. This is not great, but not horrible either. If deflation is expected to hit 8%, you will NEVER even consider making that capital investment because once the bank charges you about 2% for overhead, profit, and risk (and that's low risk and profit pricing for a business loan), the true interest rate of the loan exceeds that of the investment return. If instead inflation is expected to hit 8%, your creditor can simply charge you 10% interest. Your productivity increase nets you a 20% nominal rate of return, you subtract the 2% to the bank/lender, 10% for inflation loss, and you end up with an 8% real rate of return on your investment. With deflation, your real rate of return would have been a big fat zero, because loans cannot carry a negative interest rate.
So all other things being equal, moderate inflation (with the risk of spikes of higher inflation) is far better than moderate deflation (with the risk of spikes of higher deflation.) But ideally, the value of the currency, in relation to the amount of capital, and CPI-adjusted capitial and expenses it purchases should remain constant.
Deflating currency doesn't have a "half-life" If they hold on to their $1, at the end of the year they still have a buck. If they lend it to you and charge a -25% rate, they have 75 cents at the end of the year.
The CPI is currently running at an annual rate of 3.57%, not 10%. And I'm not sure how you equate deflation over the course of the 19th century with constant growth and prosperity. There WERE several recessions, and they were quite severe.
I'm speaking as an investor also... consumer credit has been a perfectly respectable and profitable business for decades. Yes, some bankers made some VERY bad choices about risk recently (without a near-free Discount Window), but that does not negate the entire idea of consumer credit.
My debt right now consists of my mortgage. I win, because my cash isn't tied up in my house, and my bank wins because they are taking in my interest payments. A transaction where both parties feel they have a fair deal is the essence of capitalism. I'm not sure why you insist this is a horrible deal for the investor that currently owns my loan. (It happens to be a Credit Union)
Hey, if credit cards are profitable for the bank at 18% interest, what's the problem? Don't you want profit? What are you, some kind of central banker?
You should deploy your capital where it will make you the most money, given your risk tolerance.
An economy does not benefit from currency changes at all, as both deflation and inflation cause issues with investment, spending, and credit. An ideal currency is one that does not change in value at all. Barring that, one that has an eminently predicable (and low) rate of inflation or deflation.
You want your investments to increase in value, not your currency.
Again, I would not (while in sane mind) loan money in currency that is losing value, it is a losing proposition. I would especially not loan money to anybody at all, who wants to use that money just to spend on products/services and not put it to productive use - build/increase a business, grow the money, so they can pay interest and principal.
Why not?
If you can make a prediction as to what the rate of inflation (or deflation) will be, you can price that into the loan (the debtor will be doing this too.) This is not a radical idea.
And why not loan money for consumption (by businesses or consumers)? If the loan can be repaid with principal and interest, what's the problem?
- credit is not there for your consumption needs, it exists as an idea so that more production capacity can be obtained.
Credit serves multiple purposes. It is a perfectly legitimate use of credit to enable the purchase of something that I do not have immediate liquid capital to obtain. If I can more usefully deploy my capital (i.e. my savings) elsewhere, why tie up all up in my house or car? If I have to live somewhere and drive something, why should I be unable to obtain a loan to enable me to do so now? If the bank will loan me money at a rate lower than I think I can recover via investment, it is irrational to NOT take the loan. Yes, eventually I have to pay the car or house loan back, with interest, but in the meantime I had use of that cash for whatever purpose I deployed it.
The reason credit is not for your consumption needs is that credit is given to you so that you can pay it back. With interest. I know, this is a revolutionary idea, totally backwards from what an average person in the West is taught to believe, but nevertheless, this is the actual truth.
Holy Straw Man Batman! Just because some people default on loans does not mean that the idea of principal + interest is some kind of foreign concept to the average citizen. They may miscalculate how much that interest is going to cost them (which is why credit cards exist) but that doesn't mean the entire concept is not understood.
If I loan you money, I expect you to pay it back. With interest. If I don't think that loaning you money will result in you paying it back with interest, I won't give it to you. The way I know it's a feasible investment to loan you money is to look at your plan for growing it. So if your plan is to buy yourself a house or a car, I know I must look somewhere else for an investment opportunity, because your house and your car are expenses, not production capacity that could be used to grow my investment (and to make you rich in the process as well.)
The mortgage market and auto-financing market has not always been a sinkhole of capital. A great many bankers deluded themselves about the value of the collateral they were taking an interest in, but that does not make the entire concept of a residential mortgage faulty.
You can only borrow safely if you can be almost certain money won't increase in relative value in the future, and to make a borrower feel truly safe currency value should have a near certainty of decreasing somewhat
- this comes from your complete misunderstanding of what credit is for in the first place (real credit, not government printed nonsense fiat that destroys opportunity to have meaningful investment via inflation and debt.)
In 19 century USA the value of dollar was growing, not falling, yet the economy of USA was also growing very quickly, as innovation and businesses was increasing, not falling.
I'm sure what you meant to say was "...the economy of USA was also growing very quickly, (except for the Panic of 1819, the Panic of 1837, the Panic of 1857, the Panic of 1873, and the Panic of 1893)..." These were steep recessions that made the recent unpleasantness look like a minor bump in the road.
Why would I want to loan you money in currency that devalues? It makes no sense. I only want to loan money in currency that is increasing in value (I am not talking about a bubble, I am talking about free market economy, that is unhindered by insane government destroying the free market to grow itself by promoting monopolies and killing off capital investment opportunities via inflation).
What makes credit difficult is a volitile currency, not necessarily an inflating or deflating one. With an inflating currency, I must simply add my inflation expectations to the real rate of return I would like to obtain. (Although in a deflating-currency environment, this can make it d
Not true. In a deflationary period, loans will simply carry a negative interest rate.
They will "simply" have a negative interest rate?
Outside of a few rare exceptions, there is no such thing as a loan with a negative interest rate. What possible motive would a bank (or investor) have for issuing such a loan? Why not just hold onto the cash?
Even if a deflationary period, retail loans still have a non-zero interest rate. The yen has been deflating for many years, yet retail loans are still not free. (Money from the central bank is essentially free, as it is in the U.S. at the current time.)
I suppose in a way you are correct. In practice, BitCoins are a commodity that you happen to be able to occasionally barter with other geeks. However, they were designed to be a currency. It's right there on the BitCoin homepage: "Bitcoin is a peer-to-peer currency." It's whole infrastructure is set up as a currency (albeit as a poorly-designed, unscalable, one.) There are lists of merchants for real goods and services that inexplicably have chosen to accept these things.
That said, there are national currencies that wouldn't meet your definition of "universal acceptance"; Zimbabwe individual dollars were good for nothing more than toilet paper prior to the country dollarizing.
Usefulness as a currency is inversely proportional to potential as an investment. BitCoin fans, when you boast that your "currency holdings" have shot up in value by several hundred percent in a year, this is NOT A GOOD THING for BitCoins as a currency. You, Joe Merchant, would have to be a complete blithering idiot to set yourself up to accept BitCoins as a form of payment if deflation of several orders of magnitude is REQUIRED in order for your "currency" to be anything but a niche toy. In addition, credit, the lifeblood of any economy is completely impossible under such conditions; it would be the height of insanity to take out a loan if you had the potential of owing the equivalent of several hundred percent interest after a year. (As in, if you took out a loan for a thousand BitCoins a year ago, you'd be praying for an event like this to happen right now...)
An ideal currency remains relatively stable in value in relation to something you actually want to buy. An illiquid currency that gyrates wildly in value is useless, as it makes proper pricing of goods, services, and credit impossible.
In the end, BitCoins are no more a "currency" than Beanie Babies were. And at least Beanie Babies are cute. (And tulips were/are pretty flowers.) BitCoins are an interesting experiment in cryptography, nothing more.
Yep... there are lots of happy BitCoiners out there who are pleased as punch with the current "value" of their holdings. Just as there were a lot of happy owners of "investment condos" five years ago, Beanie Baby owners about 15 years ago, and Dutch tulip investors many decades back. I leave the appropriate conclusions you could draw from this as an exercise for the reader.
Potential as an investment != usefulness as a currency.
If the currency is so volatile that my customers won't have the least clue how much they will pay until they hit "submit", why on earth would I EVER set myself up to accept such a lousy currency? Moreover, why would any of my customers do so either, unless their sole reason for shopping at my store is to unload some BitC's they got suckered into taking?
Large corporations do accept trades of highly volatile things (it's called the commodities market.) Most web retailers, even those that trade internationally, do not. They have the currency(ies) their store accepts, prices posted in those few currencies, and if you don't have it, you let Visa/MC take care of the exchange. And their rate only adjusts once a day.
It's a volatile currency because it's too thinly traded to be stable. And the inherent deflationary spiral ensures it will never get any better.
As I have stated many times, the BitCoin fans are confusing utility as a currency with value as an investment. They are NOT the same thing. Yes, you, investor in X, want the value of X (in relation to some other thing you desire) to rise over time.
Ideally, you do NOT want is the value of your currency to change over time (you don't want it to increase OR decrease.) Why? Because the inevitability of somebody getting the short end of the stick tends to limit economic growth. Inflation harms savers, who then choose to spend instead of lend (crippling credit availibility) and deflation hurts spenders (who choose to hoard instead of spend.)
Yes, people invest in currencies. But those investors aren't USING that money as a currency, they are merely investing in something that happens to be a currency. If the "currency" was nothing BUT an investment by everyone holding it, as opposed to a nearly universal medium of exchange, then it isn't a currency at all.
If the economy is growing fast enough, money supply deflation won't mean price deflation.
You have it exactly backwards. If the economy grows AT ALL, price deflation is guaranteed, given a fixed money supply. To avoid deflation you'd need to have the economy size grow (or shrink) in lockstep with the money supply. (This, by the way, is why virtually every single modern economy uses a central bank controlling the supply of a fiat currency. Although some countries are better at it than others...)
Let's say the current BitC total currency value is $50M (or, if you don't want to use USD, 0.5M barrels of oil, 10 bars of gold, whatever...), and that value exists in a maximum of 1M BitCs. (I have no idea what the actual numbers are, and it doesn't matter...) Now, that $50M is nowhere near enough of an economic size to be anything but a niche currency unit. To be viable, lets say it needs to be $5B USD (or 50M barrels of oil, etc.)... that means that you MUST have price deflation of 99% to reach the size of viability. "Utility" depends on getting people to accept it, and a system doomed to a deflationary spiral were that to actually occur is not one destined for wide use. (Deflation inhibits spending and trade, and therefore inhibits the desire of anybody to go through the trouble of getting set up to accept them.)
You are absolutely right that we can't predict what will happen tomorrow. But I can confidently predict that well before "five years from now", most of the people playing around with this will have given up and moved on to another hobby because their currency was doomed to irrelevancy from the start.
It doesn't matter WHAT time or money constraints they were under. This is simply not something that would be acceptable out of somebody that codes for money. To call this a "beginners mistake" is an insult to Web Development 101 students everywhere. If you have to be TOLD that maintaining authentication to a secure website based on the contents of the URL bar is a bad idea, then you do not deserve to be coding for anybody. I haven't EVER coded a website (I haven't written anything longer than a ten-line shell script in 13 years) and I could have told you this was a mind-bogglingly stupid mistake. This is not 20/20 hindsight at work here... it really is that stupid.
Heads should roll, including the programmer(s) responsible for this travesty, and two levels of management above him/her. And the remaining employees in the department should all have to apply for their jobs again (by the new management team), as their suitability as programmers could not have been properly evaluated before if the original moron managed to keep his job longer than a week.
I'm actually willing to cut the testers some mild slack... maybe they chose not to test for the developer having the IQ of a turnip. (Just a little slack... a tester should NEVER assume the developer has the least clue what they are doing when figuring out what needs testing.)
When I said "non-trackable" I meant you cannot track WHO the BitC's were traded with. I wasn't referring to the audit trail of the individual units.
Yes, I realize PayPal is unreliable, and you should never keep your money there for any length of time. But what does that have to do BitCoin's usefulness; the analogy is simply is not valid. If I have $100 in my PayPal account, and sweep that money into my Checking, at the end of the day I have reasonable certainty I'll have $100 - fees. If I collect a pile of BitC's over the course of the day, I cannot predict with any certainty whatsoever how many dollars/Euros/genuine viable currency I can change that into without changing my BitC-denominated pricing on a continuous basis.
BitCoins are a currency. PayPal is a payment network. The inherent issues with one have nothing to do with the inherent issues with another.
You can chalk up occasional PayPal losses as a cost of doing business. I suppose you could hedge your BitC pricing against currency volatility and call THAT a cost of doing business, but that would be REALLY expensive.