The mining system provides the block chain that verifies transactions; yes. And eventually the payoff to miners becomes dominated by transaction fees rather than by payouts for finding blocks.
One of my concerns with Bitcoin is that today, on the margin, choosing to accept BTC in exchange for goods means agreeing to give lots of goods, on demand, to the people who currently are sitting on a lot of BTC — who have not (on the whole) done anything particularly useful to earn that wealth. Even a merchant who thinks a Bitcoin-like system is a good idea may be reluctant to agree to participate in making a bunch of nerds with video cards very, very rich.
Even a merchant who thinks a Bitcoin-like system is a good idea may be reluctant to agree to participate in making a bunch of nerds with video cards very, very rich.
I don’t think the merchants really care about that. They care about make themselves rich. If making nerds with video cards also rich is a side effect, so be it. But if nerds with video cards can dilute the value of their currency, they may have a problem. If this dilution occurs on a known schedule and will slow down over time and eventually stop altogether, and competing currencies can be diluted at any time by central bankers, it may not be much of a problem.
A bit of a tangent, but the increase in supply of bitcoin is not the only thing that affects the value of bitcoin. A key determinant is how much people want to hold bitcoin. How much people want to hold a currency is not a very stable thing, meaning that the even with a fixed quantity of bitcoin in circulation, the future value of bitcoin will be highly uncertain. This will also tend to produce gluts and shortages of bitcoin, which have their own negative effects.
Well the problem is arguably worse with regular money since the number of bitcoins that will ever exist is limited, whereas with regular money governments can, and sometimes do, print arbitrarily large quantities.
Have you heard the criticism that bitcoin is significantly suboptimal because the quantity of bitcoin can’t adjust the quantity to fluctuating demand to hold bitcoin? Do you take it seriously?
I’ve heard it, and I don’t take it too seriously: adjustments are as adjustments do. A fiat currency like the US dollar seems to be getting the worst of both worlds—vulnerability to pathologies like hyperinflation, and yet, the Fed won’t loosen money despite inflation expectations that verge on zero or negative. What’s the point, then?
Gotcha, I guess it depends on what you’re comparing bitcoin to.
Though bitcoin will generally be in constant deflation at a bit less than the rate of economic growth. Some people think that would be bad, though I personally don’t have a strong opinion about that.
I’ve heard it argued that the predictability of the amount of inflation/deflation could be more important for stability than the actual amount. If so, that would be an advantage for bitcoin over other currencies.
Do you have any thoughts on that?
EDIT: just saw your other comment where you said, “A bit of a tangent, but the increase in supply of bitcoin is not the only thing that affects the value of bitcoin. A key determinant is how much people want to hold bitcoin. How much people want to hold a currency is not a very stable thing, meaning that the even with a fixed quantity of bitcoin in circulation, the future value of bitcoin will be highly uncertain. This will also tend to produce gluts and shortages of bitcoin, which have their own negative effects.”
Yup, predictable inflation/deflation is going to be better than unpredictable inflation/deflation because people can plan for it. Bitcoin will have uncertainty about its future value. I don’t know whether this would be more or less than for USD.
As a side note: because money is an asset, expectations about its future value are very important for its present value so most of the time “predictable inflation/deflation” will mean “constant inflation/deflation”.
The following is just cause I misunderstood your post at first:
Another way: if central banks don’t pay interest on cash, then people will have inappropriate incentives about how much money they should hold. If you have strong inflation and pay 0 interest on cash then it has a large negative real return and you punish people for holding it even if that doesn’t reflect real costs. If you have strong deflation and pay 0 interest then cash has large positive real return and you reward people for holding it even if this doesn’t reflect actual benefits. The interest rate on cash should probably be lower than short term real interest rates since otherwise people will choose to hold cash rather than other short term securities leading to an explosion in the demand for cash (and if it were higher, the currency issuer would probably be losing money). The Fed recently (2008) started paying interest on reserves (which is cash banks hold at the Fed), but they set that interest rate in a stupid way (it should probably be negative right now).
You do understand why Bitcoin is analogous to making coins out of precious metal rather than fiat, and what purpose the mining system serves, right?
The mining system provides the block chain that verifies transactions; yes. And eventually the payoff to miners becomes dominated by transaction fees rather than by payouts for finding blocks.
One of my concerns with Bitcoin is that today, on the margin, choosing to accept BTC in exchange for goods means agreeing to give lots of goods, on demand, to the people who currently are sitting on a lot of BTC — who have not (on the whole) done anything particularly useful to earn that wealth. Even a merchant who thinks a Bitcoin-like system is a good idea may be reluctant to agree to participate in making a bunch of nerds with video cards very, very rich.
I don’t think the merchants really care about that. They care about make themselves rich. If making nerds with video cards also rich is a side effect, so be it. But if nerds with video cards can dilute the value of their currency, they may have a problem. If this dilution occurs on a known schedule and will slow down over time and eventually stop altogether, and competing currencies can be diluted at any time by central bankers, it may not be much of a problem.
A bit of a tangent, but the increase in supply of bitcoin is not the only thing that affects the value of bitcoin. A key determinant is how much people want to hold bitcoin. How much people want to hold a currency is not a very stable thing, meaning that the even with a fixed quantity of bitcoin in circulation, the future value of bitcoin will be highly uncertain. This will also tend to produce gluts and shortages of bitcoin, which have their own negative effects.
Doesn’t regular money have this same problem?
Sure, in a sense; but merchants don’t really have a meaningful choice of whether to accept it. BTC is new.
Well the problem is arguably worse with regular money since the number of bitcoins that will ever exist is limited, whereas with regular money governments can, and sometimes do, print arbitrarily large quantities.
Tangent:
Have you heard the criticism that bitcoin is significantly suboptimal because the quantity of bitcoin can’t adjust the quantity to fluctuating demand to hold bitcoin? Do you take it seriously?
I’ve heard it, and I don’t take it too seriously: adjustments are as adjustments do. A fiat currency like the US dollar seems to be getting the worst of both worlds—vulnerability to pathologies like hyperinflation, and yet, the Fed won’t loosen money despite inflation expectations that verge on zero or negative. What’s the point, then?
Gotcha, I guess it depends on what you’re comparing bitcoin to.
Though bitcoin will generally be in constant deflation at a bit less than the rate of economic growth. Some people think that would be bad, though I personally don’t have a strong opinion about that.
I’ve heard it argued that the predictability of the amount of inflation/deflation could be more important for stability than the actual amount. If so, that would be an advantage for bitcoin over other currencies.
Do you have any thoughts on that?
EDIT: just saw your other comment where you said, “A bit of a tangent, but the increase in supply of bitcoin is not the only thing that affects the value of bitcoin. A key determinant is how much people want to hold bitcoin. How much people want to hold a currency is not a very stable thing, meaning that the even with a fixed quantity of bitcoin in circulation, the future value of bitcoin will be highly uncertain. This will also tend to produce gluts and shortages of bitcoin, which have their own negative effects.”
I suppose that answers my question.
Yup, predictable inflation/deflation is going to be better than unpredictable inflation/deflation because people can plan for it. Bitcoin will have uncertainty about its future value. I don’t know whether this would be more or less than for USD.
As a side note: because money is an asset, expectations about its future value are very important for its present value so most of the time “predictable inflation/deflation” will mean “constant inflation/deflation”.
The following is just cause I misunderstood your post at first:
Predictable inflation/deflation can have real effects if it’s expensive for plan for it. For example if it’s not very practical to index things to inflation or costly to change prices (supermarket prices have frequent sales, but their reference prices only change about once a year).
Another way: if central banks don’t pay interest on cash, then people will have inappropriate incentives about how much money they should hold. If you have strong inflation and pay 0 interest on cash then it has a large negative real return and you punish people for holding it even if that doesn’t reflect real costs. If you have strong deflation and pay 0 interest then cash has large positive real return and you reward people for holding it even if this doesn’t reflect actual benefits. The interest rate on cash should probably be lower than short term real interest rates since otherwise people will choose to hold cash rather than other short term securities leading to an explosion in the demand for cash (and if it were higher, the currency issuer would probably be losing money). The Fed recently (2008) started paying interest on reserves (which is cash banks hold at the Fed), but they set that interest rate in a stupid way (it should probably be negative right now).