No problem, if you're planning to go to the London conference we can have a chat.

The problem is with two aspects: liquidity and economic calculation. Even if people use an alternative currency, they still need to do most of their business with the rest of the world. This requires that the perform economic calculation in that other currency. Accepting a currency with a floating exchange rate that cannot be readily traded somewhere (i.e. does not have high liquidity) screws up their business plans.

The only alternative is complete autarky, I think we already discussed this in the past. This decreases the specialisation of labour and productivity of the economy. I don't think that a significant proportion of users of alternative currencies are willing to do that.

But economics is not just debt, it's production and sales too. And a floating exchange rate across the production and sales screws up the economy as it's more difficult to be profitable.

jtimon,

if you produce something that costs 8 EUR, and then receive payment in the nominal value of 9 EUR (even if it's actually settled with a complementary currency), then you still book 1 EUR profit.

If you however receive a payment that is at the time of payment worth 9 EUR, but has a fluctuating exchange rate, you still need to pay most of your bills (e.g. salaries, rent, raw materials, electricity) denominated in EUR. You might have debt denominated in EUR. If the currency you receive is liquid (e.g. an existing foreign currency), you'd probably sell it right away, or at least take a position on the futures market to hedge against exchange rate risk. If it is not liquid and you cannot use it to pay for your bills, you've introduced a risk element into your business plan, because trades that would be profitable with a fixed exchange rate might become unprofitable.

Bit-Pay (and in the meantime probably other merchant systems too) use the relatively high liquidity of the Bitcoin exchange market to compensate for the exchange rate risk. But they only have a market because using Bitcoin even when there is forex involved can decrease total trasnaction costs. If it wasn't for this, noone would use them.

Businessmen cannot offset this risk by increasing their prices, as that makes them less competitive. I agree that if you only accept partial payments in the compementary currency, you reduce the risk, but I don't this this is sufficient. But I admit that there could be an empirical component to this.

This is, in my opinion, not only the reason why complementary currencies are pegged to local (rather than foreign) fiat money, but also why the peg sticks. People do this to minimise their exchange rate risk. The peg creates an equilibrium due to the network effect of the local fiat money.

In order to avoid this, you need to diminish the network effect of the local fiat money (e.g. increasing autarky). Then you might be able to shift the equilibrium. The strength of the network effect is an empirical factor.

The problem is fluctuations, not the exchange rate changes as such. Most people are risk averse and even if you'd want to push a currency that has a variable exchange rate, even if in long term it appreciates, they would still avoid it (assuming, of course, that there is no issue with transaction costs and liquidity, which take precedence over the exchange rate). In short term, the potential user might lose if the rate is fluctuating.

The volatility is probably more apparent with Bitcoin, but it affects all situations where you have a fluctuating exchange rate.

I think that this is just an odd twist on the inflationary boom. Obviously, if you increase the quantity of money, the holders of this new quantity can purchase more, until the increase is reflected in prices. But it does not mean that this increase shifts the relationship between supply of resources and demand for consumer goods towards an equilibrium. Eventually, the disparity will manifest itself somehow.

A more localised economy is also poorer and can sustain less people. Be careful what you wish for.

Deflation is good for anyone using bitcoins.

All that really needs to happen for deflation to be a net positive with a slow trend of ROI on hoarding, is for people to realize that a few things are inevitable.

1. You can have your bitcoins as your day to day spending money, and value them against another currency as if they were just a stock, if you do this, it makes it act as though you can be gain money even by acting in only bitcoins during a deflationary period.

for example, you put 100 BTC into buying seeds, you grow your crop, and at the end of the year, your crop sells for 99 BTC. This seems like a horrible deal because you lost 1 BTC, and put in the work to grow your crop, but this can be an illusory loss if you value the coins from the beginning differently than you do for the coins at the end. If you had 100 at $10.00 each at the start, and you end up with 99 at 10.15, you have still made a profit in absolute monetary value of your coins. Obviously it would have been better to just hold onto the coins, but the benefit of having a fiat to value your coins against during a deflationary period is that even when you lose, you win.  (you can still lose, but there is a cushion)

2. If people hoard indefinitely, they don't actually have money, a snowbank is not a river and can't erode a canyon until it melts.

3. Ignoring the existence of fiat currencies makes deflation a much slower process because all of your buying and selling will be done in a currency that must function for both parties when they turn around to spend it somewhere else. People won't be willing to lower their prices just because the value has supposedly gone up compared to some fiat. A cup of coffee doesn't change with the dollar every day, and it won't change with the bitcoin if the people selling it have any sense of self preservation.

Except for those holding balances at that time, of course. I think that would be even less likely to hold, close to the adjustment date you'd see huge movements due to arbitrage opportunities.

You misunderstand my arguments. I do not claim that velocity could never drop, but that velocity is not a meaningful variable for evaluating the health of the economy. Money coordinates production and consumption over time and space. It does not create either of them.

If the prices can freely fluctuate, the demand and supply for goods would move towards an equilibrium without a change in the quantity of money.

If the money is injected into the economy by other ways than credit expansion, you would still get a disequilibrium, but not necessarily the business cycles. In one of the books (I think the one by de Soto) socialist economies were used as examples. Huge amounts of goods were produced that noone needed, but those goods that were needed were not available or very scarce.

The problem is not creation of new money per se, it's the disequilibrium it creates. During my research, I determined what I think is the main cause of the problems: when the production costs of new money significantly exceed their market price. I think that if the marginal production costs equal the market price, then this effect is minimised. This however does not mean any particular change in the quantity.

I will check it out.

Lots of fair questions for which there are equally unfair answers.

I disagree. If the work actually produced a loss because it was a bad investment of resources, it should be discouraged.

By you buying those seeds, you prevent someone else from buying them, someone who could have made a larger profit. Or by buying those seeds, you steer the economy towards producing seeds rather than trucks.

If you can't outperform deflation (assuming the currency isn't being deflated by coercive manipulation) your action should be discouraged. Here's a case where your consumption should have been deferred to later, and deflation encouraged it. Just like it should.

That's correct, that's why that can't happen. You need an economy where almost all productive action was impossible, yet there was enough production to sustain steep deflation. It can't really happen unless some coercive entity forces people to use an artificially deflating currency.

Right.

It won't be because constant, predictable deflation is impossible. It would require me to value 10 bitcoins today as worth less than 10 bitcoins in a year. But 10 bitcoins today *includes* the option to have 10 bitcoins in a year. So it must be worth at least as much (assuming the deflation is predictable).

There's the scenario of a growing number of people in the economy, at a faster rate than monetary supply. That can make business difficult for everybody. General market equilibrium doesn't account for externalities like this. And this is a very predictable one.


That is oversimplifying. The problem would be not "throwing money away on stuff nobody wants/needs" but investing in stuff people want or need, but still failing to make the gap between profitability (in terms of real interest) and beating deflation.