While price is unstable, Bitcoin will be used as an intermediary currency, quickly bought and sold to purchase goods or services whose price is stable in another currency.  While Bitcoin deflation is rapid, it's other use will be as a value store. An rapidly inflating coin would be either unused or highly circulated. A quasi-stable, slowly deflating coin seems to me to be the steady-state for Bitcoin in the long term, should it survive.

I agree with this. However, it will only happen after Bitcoin can be bought and sold quickly and Bitcoin markets can support the volume.

For the time being it is. Anyone doing fractional reserve banking *now* without the *intention* to default is plain stupid.

In a mature Bitcoin economy, the situation may change and the "real" Bitcoin (the ones in the blockchain) may take the position of gold in gold backed currency.

At some point, the Bitcoin window may be closed like Nixon closed the gold window and we call a currency "Bitcoin" that has nothing to do with the stuff we use now - we go full circle

I just don't see how fractional reserve banking will ever be a major force wrt Bitcoin. FRB only operates to expand the money supply when I.O.U.'s begin to be treated as the equivalent of money. Why would we expect this to happen with Bitcoin? The I.O.U.'s wouldn't provide an advantage over actual BTC that would compensate for the risk of default. In contrast, people began using the first bank notes (I.O.U.'s from the gold-smith) way back when because they were easier to transact with than physical gold. And there's no system of implicit and explicit governmental guarantees that would back up the issuers of Bitcoin I.O.U.'s. Some have speculated that Mt. Gox could be operating in FRB mode. And I understand that some people pay each other by simply transferring from one Gox account to another, but most people, most of the time are going to want real money to settle payments (i.e., "Blockchain or it doesn't count").

I haven't read this whole thread but here is my answer to this question.

There are two important things to consider for your example. I'll address both. The first thing you've overlooked is whether or not bitcoins are used by everyone or not. Consider this: there are consistent sellers on SilkRoad. Over the last few months bitcoins have gone from about $5 to more than $10 - double the price.

Let's say I'm a canabis dealer on SR and last month my price was 10 BTC for 1 ounce of premium canabis. With bitcoin value on the rise your argument is I would no longer sell on SR and simply sit back and hold onto the BTC I have, because this month I have to sell the same product for 5 BTC which was double that amount awhile ago.

Of course, SR sellers are still selling and SR isn't shutting down anytime soon. Why? Because sellers still rely on outside currencies, such as dollars, for most of their costs. Paying a canabis grower for their time and resources costs the same in dollars now as it did 3 months ago, so if I made a profit by selling at 10 BTC (value of $5 per BTC) then I make the same profit selling at 5 BTC (value of $10 per BTC).
___________

That's the first answer to your question. But there is something else to consider, which leads into the second part of the answer. If BTC prices have deflated then everyone holding BTC is richer. The same customers that were buying canabis before can now afford twice as much! Certainly good for business! That's assuming they had savings in BTC of course and don't convert from another currency like USD on demand.

In the second scenario we imagine the majority of people now use BTC as the world currently uses USD. Let's look again at your question:

why should I work hard as a car-dealer instead of hoarding?

You do so because you want to increase your BTC, like everyone else. That includes hoarding.

The purpose of being in business is to profit. It's that simple. If bitcoins are deflating and you're old and retired perhaps you might choose to sit at home and allow your BTC savings to become more valuable.

On the other hand, if you're young and ambitious you will probably want to amass as many BTC as you can, just as people do with dollars now, but more so since the currency is deflationary!

Here is the situation. You have 1,000 BTC and your goal is to increase that. You know you have that chance by selling cars. Everyone uses BTC including your supplier. Let's say it costs 100 BTC for 1 new car and BTC is deflating at a rate of 5% per month. It also takes 1 month on average to sell a car. That means you buy a car for 100 BTC but by the time you sell it you can only charge 95 BTC - deflation.

Your question is whether or not you can do better than a 5% return. Now, that's pretty good and many might live off that, but being in business you might be clever. If you see the trend is cars are becoming cheaper and cheaper in BTC every month what does that mean? Yep. More people can afford them. More buyers equals demand, and demand puts upward pressure on price. Wouldn't it make sense to try and profit with volume? Instead of going to your supplier and buying 1 car for 100 BTC why not ask how much of a discount would there be for 10 cars? Perhaps 5%?  That sounds possible, and if so you've just broken even with your problem of deflation provided you sell the 10 cars. Now you're a volume dealer. Bigger dealership means more customers as you have more selection, etc. Now you just need to make a profit, and you do that anytime you sell more than the 10 cars per month, or negotiate a better supplier discount, or put a slightly higher markup on cars. Does that sound impossible? Not at all.

In short: it's probably better to be in business when your product becomes more affordable to customers than more expensive (inflation).

Well that depends on which government you're talking about.

In the U.S. the government is supposed to be the people... of the people, by the people, for the people...

However, the Federal Reserve bank was conceived of outside of Congress and brought into law dubiously - over a holiday when lawmakers were headed home, as opposed to being ardently debated.


No.


I agree debt-free fiat is far preferable to debt-based fiat. In fact, the U.S. Constitution does give Congress the power to coin money and regulate the value thereof. At the same time the States are to make nothing but gold or silver legal tender. The result is that legally the U.S. Congress can define how much silver, for example, goes into a dollar, in effect controlling the money supply (inflation/deflation). And states can accept that as legal tender.

What you mean by governments spending debt-free fiat into existence is, for example, if a government decided to build a bridge and other infrastructure for the public good. The government then paid contractors to hire workers and complete all the work. The money then enters the economy. Unfortunately, however, government is a natural magnet for corruption and abuse. So those with favorable influence over government can benefit disproportionately.


If you have inflation, the ones that get the money first always benefit more than ones getting it later. Inflation saps purchasing power, and I don't see how that can be argued to be a good thing.


I don't think bitcoins would have much problem competing against other currencies, especially inflationary ones. Just look at gold, for example. Gold is winning in value compared to fiat by a margin of about 1500 to 1. And bitcoins are better suited for currency exchange than gold.


No, salary doesn't go down in a deflationary economy. No boss will walk into your office and say, "Your groceries are going to cost you less this month, so I'm cutting your pay". That doesn't happen. Deflation means job opportunities decrease, but it doesn't affect people who have jobs, unless it gets to the point they lose them totally.

Any system using hard currency has to be partially debt-based as well. The US has had mostly a debt-based currency through its history, though there were periods without it (scrip, greenbacks). The Federal Reserve was the "solution" to the problems of a fixed supply, it did not introduce the national debt.


But this is the way it works anyway, so the only difference it probably makes is one has bankers at the helm, the other has large corporations.


Because we witnessed the power of deflation with the great depression. Why this little nugget is so easy for deflationistas to forget is beyond me. Inflation saps purchasing power only because there is a preference to who receives new money first. Deflation doesn't have any shame in saying it is those who have money who benefit.


This doesn't address what I said and is just rhetoric.


One way or the other, "more people can buy cars" is a complete falsehood. Salaries reduce or people get fired. Assuming a healthy economy aware of the deflationary aspects, salaries would have to go down over time just like many now receive a typical 3% cost-of-living raise every year.

Hold on a second. We need to clarify a couple of your terms.

First, debt-based for whom, the government, or citizens? I designed a theoretical fiat-currency system that is debt-based for citizens but not the government.

Second, when you say "hard currency" I must say I don't like that term at all. To me you can't say hard currency if you're not talking about hard backed, as in backed by a precious metal.

The Wikipedia definition for hard currency even points out this danger:

http://en.wikipedia.org/wiki/Hard_currency



I designed a theoretical system where neither bankers or corporations is at the helm.


The effects of the Great Depression came from inflating before (the roaring 20s) culminating in the crash of 1929. Deflation in that case had a cleansing effect on the market allowing it to move on.

Deflation has no shame in saying those who have money benefit... What are you saying exactly? There shouldn't be a benefit to having money? What use would money be then? As least with deflation even if you have little money you can rest assured the value you have will be the value you expect, at a minimum.


No, it's not a falsehood.

*sigh*

Let me break it down for you.

Say you have a town, call it BoomTown. In BoomTown there are 100 residents and all they have is the clothes on their back and the houses they built.

One day somebody discovers gold in a nearby mountain and a mining rush begins. As it happens there are only 5,000 gold nuggets total in that mountain, and every resident is only resourceful enough to mine about the same as others. After time each resident has 500 gold nuggets.

These residents have different skills. Some are seamstresses, some are farmers, some dentists, etc. They begin trading the gold as currency for other valuable goods and services - economic exchange.

One day a stranger named Bill pulls into town towing a fleet of cars, left to him by a dying uncle (I guess). He sets up a car dealership on the edge of town. The only things Bill has are his clothes and his cars. He needs food from the farmers, he needs his hair cut, his teeth cleaned and worked on, etc. He has no gold so he figures he will trade cars for some, then he can purchase things he needs, including a house.

Bill has about 10 cars. A house costs about 500 gold nuggets - the entire wealth of a resident on average. Bill figures he will price his cars at 100 gold nuggets each, because that way he can afford approximately 2 houses, or maybe one luxuriant one (of course, then he'd be broke). At 100 gold nuggets per car many residents are hesitant to buy from Bill. They prefer to walk than part with 1/5th of their wealth.

Since this town is called BoomTown it draws in settlers. About 300 people arrive one day exploding the population 4 times higher.

Now we get deflation.

The same amount of currency exists but there is increased demand for it. That makes the value of the currency go up. People are willing to sew, or perform dental practice for fewer gold nuggets, because they need nuggets.

What does that have the effect of? The people with the gold nuggets are now richer. They can get goods and services, like buying groceries, for less. If you're suddenly richer you will probably spend money more freely... Don't have a car? Buy one. Even if it costs 100 gold nuggets, you can now afford it because everything else now is cheaper for you.

So, yes, more people can and will now buy cars. All of Bill's stock of 10 cars will sell overnight, and there will be demand for more!

The theoretical fiat-currency system I came up with, which I haven't shared with anyone, including you, you believe is not theoretical?  


What is awfully lofty? The system I came up with? How would you know? It might be completely illogical and/or unworkable.


I don't know what you're trying to convey here.


Yes, I agree the gold standard can be thought of as hard currency.



Yes, I'm quite sure.


No, it's not the exact same result. If you notice in my BoomTown example, all of the residents had equal amounts of money. And obviously all of them were not bankers; also they equally worked for the money they obtained.



Ding, ding, ding!!! Yep, exactly.

This is why deflation is preferred. Your economic exchange is more based on value than debt.


Yes, that's why I gave it as an example.



Now, when do you think a government will "award" people 500 gold nuggets?


That's not taking advantage of anyone. If you can't see that, you've missed the point.

I didn't realize that you were a nutjob and pontificating on something that had no relation whatsoever to the discussion.


Right because for some reason I was obscure in my meaning of hard currency so you gave me an irrelevant wikipedia link and went off on a tangent rather than respond to what I had said in that paragraph. Not that it was anything that important.


Where again is this perfect world you speak of? We can make lots of things sound nice when it's a perfect world, but it's not reality.


Based on what evidence? That bankers didn't exist during pre-government gold currencies? Maybe in that perfect world that we don't live in.


This is your response? The point is that the value of those peoples' production does not hinge on currency. Value exists regardless of currency. Currency is only a means to trade value easily. All BoomTowners did was mine gold, and it's worth something because it's rare and they got lucky. They didn't do anything productive to get it except mine, which in the grand scheme of things is rather unproductive.


All these new peasants moved in and we just happen to be richer! Free money! Oh wait, existing money is just worth more it's totally different! You may think deflation is a fairer system, but it is still a system that takes advantage of people. These simplistic arguments that fly in the face of the history of gold and what was done with it should not carry much weight with people who have studied that history. It is not the governments that started this wealth siphoning, it was the bankers. With 50% of all the bitcoins in existing to be mined by the end of this year, loans are going to be a big part of the bitcoin economy if it is to go anywhere. Rather than actually fixing the problem of wealth transfer, bitcoiners would just prefer that they be the receivers rather than the existing bourgeoisie. Maybe a larger part of the economy will benefit, but probably not.