You are the one who described inflation as "stealing from savers, and transferring wealth to the people who are the earliest recipients of the inflated currency". That is talking about purchasing power and not money supply.
There are certainly some situations when you want to encourage saving over spending and investing. However I would argue it is not an ideal stable state. It is more difficult for an economy to grow when people don't circulate money through spending and don't increase future productivity through investing.
The benefit of a central bank that can control the money supply is that you can adjust these things on the fly depending on what is happening in the economy. Bitcoin cannot adjust the money supply in reaction to the economy.
I've never seen convincing evidence that inflation is a good thing (to be honest I haven't spent my life searching for it).
It is however pretty easy to see why inflation is good for people in power, in particular governments; it's a hidden tax. And yes it does encourage people to spend, in fact it encourages people to borrow and then spend. Even borrow so much that it crashes the system.
So as far as I'm concerned the fixed money supply is about the only good property of Bitcoin. Other than that it's a ponzi scheme and it's a lot more cumbersome than electronically traded gold.
You tell me. By the way, you still have not explained why a zero inflation is not preferable to some low inflation. You said:
"it encourages spending and investment and discourages hoarding cash."
But inflation discourages savings (as I said, critical for the banking system, and therfore impacting investment), and hoarding cash would be anyway discouraged in case you have zero inflation, because you would be able to place your money in portfolio to gain more than 0 on yearly returns (dividends at least). So there would be no net return in hoarding cash. Or are you saying you need inflation to have growth ? In that case you would be mistaken, there was ample growth even when the markets were following the Gold standards...
So I am not really sure where you come from to recommend "low inflation". Besides, who can ensure the inflation remains low, and who can control that there is no dumping of cash on the market when there is a central bank in charge, serving the current political agenda ?
Again, what's good with Bitcoin and Gold is that they are both neutral and relatively free of political control (well, at least for Bitcoin).
I agree on the importance of inflation, but with a difference in how it happens.
Bitcoin currently inflates slightly. I think it should target a 1-2% steady inflation forever both to encourage spending and to replace lost coinage.
At the same time, inflation should not be a spending power advantage. By distributing inflation among miners, you don't give disproportionate advantage to any one group like governments currently enjoy. I view this as more fair and it removes the incentive to attempt to change inflation rates in the future.
On a philosophical level, I think the flawed premise you’re presenting here is that inflation is a problem that needs to be solved. Inflation is unpopular because it’s effectively a tax on unproductive wealth. Inflation incentivizes investment because idle wealth will lose it’s value at the rate of inflation.
On a technical level, Bitcoin is worse than a currency because it’s value can fluctuate wildly constantly and transaction fees are high. I don’t know what’s going to happen when we get a “Run on the bank” type of scenario but I suspect it’s not going to be good for the little guy.
The ability of central banks to manage a crisis isn’t a bug, it’s a feature. The trade off is one we’ve made throughout history, we have to give control to other folks who may not have our best interest at heart.
I fundamentally believe Bitcoin will collapse the next time we have a global economic catastrophe and it’ll have no tools to handle it.
Bitcoin can change depending on the need of the users, assuming it's something accepted by them, which sounds fair to me.
As for the inflation/fiat it just seems to me that you keep ignoring the possibility of a failure of such system. A failure of such system would for sure have terrible consequences and the poor unlike the wealthier will have harder times. Investing the fiat is a good idea, not something remotely popular in my country alas. Here, saving mostly means saving money at the bank (which devalues over time). No wonder why they feel they're losing purchasing power. People who work shall earn wealth simply put, not diminished wealth if they don't learn about financial tricks from someone they trust.
Given the choice between bitcoin and what you have suggested (a money that is engineered to lose value over time), any sane person would choose bitcoin. Regardless of whether or not you believe that everyone using an inflationary currency is Pareto optimal (I do not), it is not a stable equilibrium. On the other hand, people using an appreciating asset like Bitcoin forms a Nash equilibrium.
The only reason people use inflationary fiat money is that A) it was by far the most convenient thing before Bitcoin (and still is, depending on your use case), B) it has a decent track record for stability, and C) most governments aggressively attack private monies with good monetary properties, often in the name of anti money laundering. More Machiavellian motivations include that governments don't want to lose seigniorage power or control over monetary policy.
There are two phenomena we’re talking about here — an increase in the supply of money and the decrease in the purchasing power of money. The term inflation is broadly used to apply to both of these but they’re different which is where part of the hang up is.
In any case, the supply of Bitcoin will continue to increase until it hits 21m coins in approximately 2140, but if it becomes the world’s dominant currency, its purchasing power will continue to increase.
Why should spending and investing be encouraged, can you think of any downsides to encouraging this?
It's not so much that inflation is good (though it does tend to be as long as it's, say, single digit), it's that a fixed money supply is really, really bad.
Unfortunately, the type of people for whom a fixed money supply is an article of faith don't even see the distinction. They basically argue as if the definition of inflation were an increase in the money supply, which just doesn't make sense.
If you want to get an idea for why a fixed money supply is bad, a good exercise is to look at the actual money supply data on a daily basis. You'll see that it fluctuates quite strongly in certain rhythms, especially weekly and monthly. This is clearly related to thinks like paydays, and it reflects the fact that flexible finance allows the economy to function more efficiently. With a fixed money supply, this would not be possible.
Another, perhaps even stronger, point is that the monetarist experiment of the 1970s and 80s failed badly, in the following sense. The attempt to control the money supply by central banks resulted in wildly fluctuating short-term interest rates, which made it very difficult for the real economy to plan properly, leading to inefficiencies. As a result, central banks gave up targeting the money supply as a policy variable; they now target the interest rate as a policy variable, and allow the money supply to grow and shrink as needed to hit the interest rate target.
So, in this sense, Bitcoin is simply not needed as a test of a hypothesis, because the test has already happened!
It is only the (sometimes genuine, sometimes willful) ignorance of a small group of quasi-religiously motivated people that makes it look as if a test were still needed.
In a way, this is a fight between two systems: A decentralized, market-based systems, where money is created and destroyed decentrally, mostly by financial institutions on the one side; and on the other side, a system where the money supply is controlled by a central entity (either the central bank or, in Bitcoin's case, the Bitcoin developers).
It really shouldn't be surprising that centralized decision-making can be much worse.
Too much inflation is obviously bad, but it's also bad if the most attractive investment in an economy is the currency itself. If a system actively discourages people from investing or spending their currency, things grind to a halt. The people who benefit the most are those with the most idle cash. The people who suffer the worst are those who are forced to spend their limited cash on basic necessities.
To be clear: I'm not advocating for unchecked inflation or runaway spending. I think the current US inflation rate is too high and excessive stimulus spending is ill-advised. However, investors have been investing their cash in assets and investments to avoid inflation long before Bitcoin was invented.
The point of this discussion as I understand it is that the limited supply of bitcoin does not help with inflation in practice and, further, that monetary supply is not the only source of inflation to begin with.
It is correct that bitcoin is designed with limited supply in mind, but that does not necesaarily stop inflation and definitely doesn't in practice because currency risk dominates the perceived value of bitcoin.
As far as i remember, people often claimed that bitcoin protects against inflation, that statement has so many requirements attached so it doesn't matter in practice.
The problem with your premise is that you are taking up bitcoin and trying to fit it into today's world view where banks lend out YOUR money for relatively high interest and give you some interest if you're lucky. Now, you have to keep your money in a bank because it appears to be safe, etc. and of course all your arguments about creating liquidity in the economy are correct.
However, there is a lack of choice in this scenario. Due to the way the economy functions, I do have to put my money into a bank, I do have to look into investments because otherwise my hard earned money is worth less in the future. Let's leave the discussion about that being fair or unfair, etc. because this is a subject where people tend to have strong opinions.
Right, so coming to bitcoin. Why can't there be an entity that allows you to lend your bitcoin as a loan and you get a higher return (higher % interest than regular deflation) because you lent your money out (i.e. took some risk) ? Say deflation is 5% per year and you can give out a loan through some entity and get 10% returns ?
Isn't this what the bank does right now for you ? But do you have much of a choice in the current scenario ? Right now, you take on the risk of a bank without having a say in it. It's either that, or have your purchasing power slowly eroded over time.
I personally don't like arguing about inflation vs. deflation because I am not an economist but I can on my own think of trivial solutions that turn the problem around. Maybe these solutions are ultra complex to implement in practice, but so are the economy, currency markets, stock markets, etc.
Can I argue that it would be great if I worked hard to earn money and save it, and have it at the very least, retain it's value and purchasing power in the future? Why should the capital that I have worked hard to earn lose it's value because it somehow doesn't help the economy ? Helping the economy comes with it's own risks. Why do I not have a say in whether I have that choice or not ? What happens if my bank goes bankrupt ?
>Inflation is an indirect motive to spend money today and not hoard.
Why is spending good? If I spend money on the things I don't really need because I'm afraid I'm gonna lose otherwise, why do you think it's good for the economy? Some spending is good, some spending is bad. If everyone spends money on cars while they don't really need that many cars, why is it good? Inflation might create some jobs, but those jobs wouldn't be secure for long, because workers would be producing things people really don't want. I don't understand how scaring people into spending is a good idea.
>Bitcoin in my view, will never be a largely used currency because it does not have this imperative characteristic any currency should have. So people would rather spend dollars
Since you argue that people would rather spend dollars, here's a thought experiment. Let's say Bitcoin is accepted in most places. Say you store your wealth in Bitcoin. Now you want to buy something. Why would you want to exchange it into USD, pay commission to the exchange and then make a purchase instead of paying it in Bitcoin in the first place?
A little deflation discourages spending, a little inflation encourages it. A lot of either is ruinous. Your example is one with deflation at an average of 120% for a decade straight. How well would an economy with inflation of 120% work out? Just ask Argentina.
Maybe a little inflation is good for us, the problem is how often it becomes a lot. Since 1920, at least 55 hyperinflation events have taken place, destroying savings and creating economic hardship [1]. Such events generally result from the mismanagement of financial systems and the economy by central governments.
Bitcoin offers an alternative in which sound money exists outside the control of governments and central banks. Who knows where it'll go, but it's an interesting experiment worth study.
Low, steady inflation is better for an economy than the alternatives humanity has experienced thus far. However, if people had the choice between holding a currency they expected to slowly decrease in value like today's central bank currencies and a currency they expected to slowly increase in value like Bitcoin in a post-adoption world, why would anyone pick the former?
Central banks have only had the ability to steer the economy because they controlled the best currencies available in the eyes of consumers. Dollars are much easier to deal with than gold, so people use them even though they know the dollars will be worth less than the equivalent gold in a year or two.
When Bitcoin is as easy to use for trade as dollars are, people won't choose dollars, nor will they chose inflationary altcoins.
2% inflation over 30 years destroys over half the purchasing power of the saved money. So no, moderate inflation doesn't encourage saving. It encourages the unbridled consumerism that has created environmental catastrophe.
Bitcoin, as a deflationary asset, encourages lower time preference, which encourages saving and real investing (generating real world value rather than paper gains), resulting in less consumerism and better stewarding of resources.
The government doesn't really control the economy.
The main job of the central banks is to fight high inflation and stay the heck away from deflation.
The mere fact that bitcoins are deflationary is enough to suffocate the bitcoin economy, why would you spend money now when it will be worth more tomorrow?
The bitcoin wiki states that it has little inflation in its money supply, which misses the point that currencies should remain stable with respect to real goods and services and much less so towards its history.
A small inflation is needed to remove the incentive for money hoarding (saving), this provides a system-wide economic stimulation which keeps it stable.
The amount of money in the system doesn't matter, what matters is that 10k cash now is worth more than 10k of cash hoarded for a year.
imo, the real kicker for bitcoin is that it has no failsafe.
What happens when confidence in bitcoin is lost?
The gold standard was backed by real gold, the dollar is backed by the governments' ability to collect taxes.
The bitcoin currency is backed by what? cpu power?
I read an argument once that an inflationary currency encourages spending and discourages hoarding, and it follows that the reverse would be true for a deflationary store of value like Bitcoin.
And are you saying boom/bust cycles are a good thing? For pretty much any average user of money, they're not.
There are certainly some situations when you want to encourage saving over spending and investing. However I would argue it is not an ideal stable state. It is more difficult for an economy to grow when people don't circulate money through spending and don't increase future productivity through investing.
The benefit of a central bank that can control the money supply is that you can adjust these things on the fly depending on what is happening in the economy. Bitcoin cannot adjust the money supply in reaction to the economy.
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