Of course, let's start about some inflammatory comments about Mr. Leftwing Strawman, as per usual: did you know that hyperinflation is inevitable because ZIMBABWE!?
"I'll use a visual aid," says Mr. Andresen. "He opens his wallet and presents me with a gift: a 10-trillion-dollar bill once issued by the government of Zimbabwe."
Deflation is good, because SAVING! (Here the Calvinist roots of old-school good Flemish capitalism start showing again, with careless disregard to any theory of supply-demand equilibrium. How do I miss Schumpeter/Marx...)
"If prices are falling, he says, it does encourage people to save instead of spend, because the currency will be worth more later. It encourages people to lend instead of borrow. [and that's a good thing]" (Yeah, because as we know, in a given economy at a given time there can be more lending than borrowing. Or that saving > spending doesn't mean a contraction in the economy, by the magic of Austerian Economics. You people...)
A classic: fiat currency is a FAITH! Heathens!
"Federal Reserve Bank of Dallas President Richard Fisher calls the U.S. dollar a 'faith-based currency.'"
(Not pictured: other things based in "faith", like civil oversight over the military, the Constitution, the enforcement of laws, the concept of credit itself, the currently overpriced exchange value of gold... basically anything that isn't enforced by AK-47's, except of course those enforced by the promise of AK-47's)
"[...] what about a digital currency programmed to maintain stable prices, avoiding mischief by central bankers as well as the possibility of deflation? He says the engineer in him likes the simplicity of Bitcoin's fixed money supply."
Yeah, great engineering dude, let's disregard things like, you know, minimal acceptable performance for simplicity ;) You know, Unix was simple, but at least it didn't crash every five minutes. And the Apple II was simple, and it even had color!
Had many laughs. Would read again.
I wanted to actually learn something from your post but it reads like a madman wrote it.
I own exactly zero bitcoins, but following the market since 2011 has proven that it is getting easier to use and more prevalent. People will be putting down bitcoin as a serious entity even after PayPal is accepting them.
Here is a summary of what he is trying to say:
1. Bringing up hyperinflation in Zimbabwe is a common tactic of right-wing/Austrian economists to warn of the evils of government control over fiscal spending and currency, and that our current course of monetary expansion means that we in the US too are on the same path.
This ignores of course that (a) Zimbabwe had a civil war at the time and the government confiscated or destoyed most private productive capacity; (b) we are in a liquidity trap currently, which in short means that money is nearly free to borrow at 0% interest. Companies are sitting on piles of cash or continuing to unwind their debt from the 2008 crisis, therefore we have not enough people spending. Printing money has had no discernible impact on inflation over the past 5 years. In fact, we could use a bit right now - to encourage spending!
2. The thought that "encouraging saving is good" therefore fixed currency and deflation is good.
An economy is a closed system - if some are saving, others have to spend to keep the music going. If we all stop spending, we get into a depression, where people lose their jobs, and the economy isn't working to its potential - all because the currency is rising in value.
In short, it is arguable the point of an economic system is to make and consume goods and services, not sit and watch your bank balance grow due to the psychological whims of the market.
3. A currency based in faith is not a dangerous thing - basing currency on gold is mostly a form of superstition. and it has real drawbacks (see #2).
Lots of things in the world are based on faith in institutions or theorems. Bitcoin is too - faith in the algorithm, that it works and won't be compromised. Also (blind) faith that a fixed amount of Bitcoin will not lead to destabilization.
Now. Does that help? These arguments lead to exasperation because they seem to happen over and over across decades in slightly different forms.
Yep. I'm seeing more and more of these signs in my neighbourhood:
https://plus.google.com/100751105859582805241/posts/RpQ5adUF...
You know, you failed to specifically pick out the most relevant thing that is also based on faith: bitcoin.
Like any currency, its value in exchange for anything else is dependent on faith that people will accept in the future.
The use of the word "encouraged" makes sense to me. If people are "encouraged" to lend vs borrow, that means they will have more desire to lend vs borrow. This has an important effect on the supply vs. demand equation. Supply of loans, ie. people willing to borrow, goes down and the demand, ie. people willing to pay money now for interest later, goes up, causing prices (interest rates) of loans to go up (down).
In other words even though every dollar lent must be a dollar loaned, people's willingness to lend affects supply and demand.
If currency is deflating at a low, constant rate (say, 2-3%, comparable to the normal rate of inflation), then the interest rate -- in real terms -- must be strictly higher than this. A 0% loan with 2% deflation the equivalent of a 2% real interest rate. But no one will ever lend money in this situation. You take on risk, but have no reward. So the rate of deflation is the minimum real interest rate of any loan in a deflationary currency.
In an inflationary currency, people will lend out money at even a negative real rate of interest and effectively lose money on an investment because the alternative is losing even more money by holding cash. If inflation is 2%, you will consider lending out money at 1% interest (if that is your only choice) because getting 99 cents back on your dollar by investing is better than getting 98 cents back on your dollar by holding cash.
Hence, an inflationary currency encourages both lending and borrowing: lenders lose less real money than holding cash, borrowers pay back less real money than they borrow. A deflationary currency encourages neither: lenders would prefer to hold cash, because it's safer and has decent returns, and borrowers have even higher real interest rates.
"We are united by the mantra 'free markets and free people', the principles, if you will, marked in the watershed year of 1776 by Thomas Jefferson's Declaration of Independence and Adam Smith's Wealth of Nations. So over the past century and into the next, the Journal stands for free trade and sound money; against confiscatory taxation and the ukases of kings and other collectivists; and for individual autonomy against dictators, bullies and even the tempers of momentary majorities. If these principles sound unexceptionable in theory, applying them to current issues is often unfashionable and controversial."
What is insane about advocating free markets and sound money?
Suggest what else it could be for a Bitcoin article. Perhaps a visualization of a block-chain? A hash with a lot of zeroes in it? Satoshi walking away from his computer with a wheelbarrow of money?
But then when addressing the negatives, follow that up with an illustration of the current process to obtain Bitcoins.
"And for those who wish to avoid both inflation and deflation, what about a digital currency programmed to maintain stable prices, avoiding mischief by central bankers as well as the possibility of deflation?"
My gut is that this is not possible. Enforcing stable prices requires constant data about price levels, and with decentralized markets there doesn't seem to be an accurate way to get that data.
Imagine if an expanded ebay marketplace, including a wide range of goods and services, were integrated into today's Bitcoin protocol.
Unlikely, and very hard to implement, but not impossible.
Rich people might have been able to use other things as a store of value though, but things can only become lasting stores of value if they start out having some initial use.
http://en.wikipedia.org/wiki/Medium_of_exchange
I think Bitcoin's real promise is as a store of value. Yes, it's extremely volatile now, and people are getting used to the fact that if you lose your Bitcoins, they're gone for good. But compare Bitcoins to cash (tends to lose its value over time) and gold (expensive to store, hard to exchange). It's also incredibly easy to exchange Bitcoins for other digital currencies, like the ones I refer to above.
I think that once Bitcoin reaches a large market cap, like the size of gold, it will be much less volatile, and less risky. At that point, all the advantages above will become apparent. So Bitcoin's future may well be as a digital reserve currency.
The day that Bitcoin arrives as a market force, is the day that prices are denominated in it without the implicit reference to the USD.
And it wouldn't be anonymous, so it could be investigated and relatiated.
The same argument applies to bank robberies.
Sounds like a nightmare scenario to me.
This is the part that has always scared me.
The first problem is that there is a highly predictable and (at the moment) constant supply of bitcoins, which means that the value of the coin will adjust like a commodity as more or less people start to use it. It's like Gold or Oil in the sense that when people want it, it's worth a lot, and when people don't want it, it's not as expensive. That chains the value to the demand, meaning that any time you use bitcoin as a store-of-value, you are putting yourself at the complete mercy of the market.
Many advocates believe that as the number of people using bitcoin grows the price will stabilize, but I think that using bitcoin as a store-of-value is going to end up like using the gold standard, especially because some early adopters have tens of thousands to even a million (Satoshi is believed to have a million) bitcoins, and any of them could decide to 'cash out', which would dramatically change the supply and potentially affect the whole market.
Another problem is that the currency is highly traceable, and while you can do things to obfuscate your spending habits there are lots of techniques involving statistical analysis that shed doubt on the effectiveness of obfuscation. You can take this back to the "I have nothing to hide" argument, but there are plenty of powerful parties that will be more interested in a currency that can't be traced (imagine big business or big finance), and an untraceable currency would certainly be more attractive.
But to me the biggest current problem with bitcoin is the uncertainty. There are many conflicting schools of thought in economics each with their own reasons why bitcoin is good or bad. But beyond the basics, macroeconomics often involves a lot of voodoo, and for any new paradigm there will be major schools of thought that will believe the new paradigm is bad or unstable in some way. There is no real way to fight this except to accept that we ultimately have no idea how new economic paradigms will affect our world, and that some of the naysayers may be correct and thus caution should be used.
This is the "No one will want bitcoins because everybody's buying them" argument- I don't see much credibility in it. Also, what is an example of a commodity that isn't at the mercy of supply and demand?
> Another problem is that the currency is highly traceable ...
I agree with you that that is a major issue, and might hurt the popularity of bitcoin in the long run. Bitcoin is strange in that it separates the argument of "I don't want the government to control what I do" and "I don't want the government to know what I do". I'm not sure how this will play out long term. (yes, I know there is pseudo-anonymity, but if the tax man comes to you and asks you "how did you get the money to buy that car?" the block chain makes it possible to confirm/refute your response.)
> ... and thus caution should be used.
Yeah, I'm tired of folks who think they know with 100% certainty how the economy works. I have some good guesses that suggest to me bitcoin is going to do very well, but things could play out any number of ways and I have no clue whether my guesses are right.
If there is one address in the middle of you paying somebody, and that address was generated either offline or through Tor, there's no way to prove you own that address unless somebody can extract the private keys from your seized hardware and match it up to the public address.
Transactions don't prove anything, anyways. If you sell on localbitcoins or IRC, you have no idea that the anon guy who showed up to buy them with untraceable cash isn't directly 3rd party funding his Silk Rd account. If you look at the blockchain it would appear I paid into SR directly however I sold coins to some random guy I'll never see again, who's contact info I also don't have. Since I sell under my countries $10k cash transaction limit I don't need to take ID or retain contact info. Tracing that transaction proves nothing.
I also can't recall any of the major bitcoin heists being recovered. Only one exchange (mtgox) has a history of holding transactions for ID if they appear to be stolen coins, and they've only done it twice: first time was cleared up with ID, second time they're still holding the coins (bitcoinica/linode theft). Every other bitcoin heist you've heard of through the years the trace leads to nowhere.
