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SilasBarta comments on General Bitcoin discussion thread (June 2011) - Less Wrong

4 Post author: SilasBarta 10 June 2011 11:21PM

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Comment author: SilasBarta 12 June 2011 04:03:53AM *  9 points [-]

Well, this is just the difference in worldview between two camps, based on their differences in experiences and research.

See, the anti-inflation types among us have been trying to live responsible lives, saving for the future. We thought that the economy rewards those that defer their consumption until later and who invest for the future. But at every turn, those in charge of managing the money supply have stymied us. They've jacked up the money supply, making our purchases more expensive, all while denying the severity of it. (In the case of technological improvements that imply a lower effective price, they've made them more expensive than they would otherwise be.)

This debasement of the currency has amounted to a subtly-hidden transfer of wealth to privileged classes. The government has granted financial intermediaries privileged positions and, through the central bank, funded new spending with printed money that will never be paid back, murdering our ability to earn a fair inflation-beating return on our savings, when the market is supposed to reward those who defer consumption. And then it takes even more to bail out failing business, making it impossible to decouple ourselves from the rot in the economy, all while telling us to lock up our money in IRAs invested in government approved dinosaur businesses .

Folks that have actually had to live through this economic insanity "get it". Those who go ever deeper into debt to double-down on economy's increasingly lost production structures don't see the problem -- they want their debts inflated away. They want that new money to slosh around and get the dumb rubes back spending spending, spending -- on anything, it doesn't matter how short-sighted, how wasteful, how ill-considered: an arbitrary economic metric needs to act like it did in the glory days of 2005 (when the financial sector was busy defrauding pensions), and, well, that's that. That's the key to economic prosperity.

Well, the responsible class is fed up with this. That's what drives these people to alternative currencies that can potentially protect them from Fed asininity, reasoning that an appreciating currency doesn't quite sound so bad. They like the idea of a currency with a predictable supply so a tiny committee can't arbitrarily decide to give a big f***-you to the savings of the only folks actually driving the real production these days. And, when a bank wants to make irresponsible loans with the currency, they want to be able to decouple themselves from the shenanigans by holding onto real, uncopiable units that will keep their value when the house of cards comes tumbling down.

But unless you've tried to actually save for the future, none of this makes a lick of sense to you, and I can understand that. But maybe now you can see why an un-debasable currency might appeal to some folks that we should care about quite a bit. [/rant]

Comment author: bogus 12 June 2011 10:30:41PM 2 points [-]

See, the anti-inflation types among us have been trying to live responsible lives, saving for the future. We thought that the economy rewards those that defer their consumption until later and who invest for the future. ...

I know that this is labeled as a [rant] but it really is a terrible argument. Inflation rates do not affect investment returns in the long run. High inflation only hurts those who directly hold currency. High surprise rises in inflation only affect those who have fixed-income investments, or those who are exposed to nominal fluctuations due to e.g. long-term contracts.

The secular fall in real returns to investment has nothing to do with monetary inflation: it's due to emerging countries and oil-financed sovereign funds flooding Western nations with large amounts of capital, and to sharply falling transaction costs for access to the stock market, which encourage more domestic investment as well.

Comment author: SilasBarta 13 June 2011 02:57:33AM *  3 points [-]

In theory, yes, interest rates are bid up to be high enough to compensate for inflation and then some. In practice, that is not happening right now, because the market for interest-rate-determining instruments (like Treasury bonds) is saturated by people who by and large don't care about making up for inflation in the return: the Federal Reserve, exchange-rate-manipulating foreign central banks (like China), and insurance companies.

When even stock holdings won't cover inflation over the long term (like stock indexes have failed at for 10+ years), there is a serious problem.

Comment author: bogus 13 June 2011 03:23:49AM 0 points [-]

In practice, that is not happening right now, because the market for interest-rate-determining instruments (like Treasury bonds) is saturated by people who by and large don't care about making up for inflation in the return: the Federal Reserve, exchange-rate-manipulating foreign central banks (like China), and insurance companies.

You're missing my point. What you're saying translates to: "In theory, real interest rates are positive, but in reality they've been driven to negative levels because savings are so high." But nothing in theory stops real rates from being negative at any point in time.

By the way, your list of actors seems misguided: (1) The Fed buys Treasury bills when they issue cash, which is basically exchanging one government liability for another: it doesn't change aggregate saving. (2) Insurance companies invest money on behalf of people who buy long-term instruments such as life policies and annuities. (3) China does manipulate exchange rates, but the only reason they are able to buy so many Treasuries is Chinese workers saving large portions of their income and depositing them in the local bank. AFAICT, there is no case for giving any less consideration to Chinese workers than to US-based savers.

Comment author: mutterc 12 June 2011 01:58:03PM 1 point [-]

Let's hear your economic system design where anyone can gain real wealth by simply putting their cash under mattresses (as would be true if deflation were the norm). Who needs to invest in the actual productive economy?

Comment author: Pavitra 13 June 2011 12:24:19AM 6 points [-]

Your argument seems to imply that the existence of even one deflationary good is sufficient to destroy an entire economy. Surely if this were the case then the law of large numbers would have killed us by now.

Comment author: mutterc 13 June 2011 11:05:50PM 0 points [-]

My understanding is that one good wouldn't do it, but persistent, overall deflation would in fact devastate the economy.

Sure, right now you can stick money under a mattress for 6 months and buy more Core 2 laptops than you could today. But that doesn't seem the same as "getting richer".

Where's the line? Good question. Obviously if you could buy more of anything that would be getting richer without investing the money. Or if you could buy more (houses or food or cars or Internet access or electricity or sex or drugs or rock n' roll).

Comment author: Vladimir_M 14 June 2011 12:14:20AM *  6 points [-]

My understanding is that one good wouldn't do it, but persistent, overall deflation would in fact devastate the economy.

There was persistent overall deflation in various periods in the 19th century, and it didn't devastate the economy.

Comment author: Pavitra 15 June 2011 04:06:15PM 0 points [-]

If you consider only cash and laptops, then it looks reasonable to call cash deflationary, but if you consider the economy as a whole, then it's more accurate to say that laptops are inflationary.

What makes the deflation of bitcoins an "overall" deflation, as opposed to the deflation of one good?

Comment author: mutterc 16 June 2011 12:06:11AM 1 point [-]

The implied context of all this is: what if Bitcoin (or something similar) became a/the dominant currency, that paychecks, debts, etc. are denominated in?

If it doesn't then it doesn't really matter, societally, if it inflates, deflates, mutates, or defenestrates (other than to the people who invest in it...) It'd just be another good, as you say.

Comment author: Pavitra 16 June 2011 04:36:42AM 0 points [-]

You seem, then, to be arguing that the behavior of our currency has an importantly different kind of effect on the overall economy than the behavior of any other asset.

...on reflection, I think that's actually right. Under hyperinflation, people tend to run around with wheelbarrows of banknotes rather than reverting to barter. I'll have to think about it some more.

Nevertheless, I would expect the effects of currency deflation to be limited or mitigated by the fact that you eventually have to buy food.

Comment author: jhuffman 06 January 2012 10:43:17PM 1 point [-]

Under hyperinflation, people tend to run around with wheelbarrows of banknotes rather than reverting to barter. I'll have to think about it some more.

Hyperinflation only happens precisely because people have less and less interest in wheelbarrows full of bank notes. The reason it feeds on itself is that people desperately want to turn their notes into real goods or exchange for more stable currencies. That lowers the value of the notes even further since there are more notes chasing the same amount of desirable goods.

I'm not sure a hyper-deflation can really happen. What would that look like, merchants lining up outside my house trying to sell me another Blueray player for increasingly small fractions of a coin?

If no one wants to spend this money, can it really retain value for very long? I'm genuinely perplexed.

Comment author: Pavitra 09 January 2012 07:57:33AM 0 points [-]

I think a key factor is that humans don't actually behave as rational utility-maximizing agents. Most people will treat the value of an asset as being approximately its current market spot price, and only slightly adjust in the direction of what they expect its long-term value to be.

I wouldn't expect merchants to line up outside your house, but their websites might list prices like "Blueray player -- 3.89 millicoins".

Comment author: jhuffman 09 January 2012 03:28:46PM 1 point [-]

The price itself doesn't indicate hyper-deflation. That price could be the product of years of single digit deflation. Hyper-deflation I think can only happen if there is a run on most real goods - where people are literally in a panic to exchange their goods for rapidly decreasing numbers of bitcoins. Otherwise how would it feed on itself the way hyper-inflation does?