
Gold standard was bad, but Bitcoin standard is even worse - jrx
http://blog.millionintegrals.com/gold-standard-was-bad-but-bitcoin-standard-is-even-worse/
======
yummyfajitas
So much pop Keynesianism spreading real misunderstandings. I really wish
people who argued against deflation would take the time to understand the
underlying theories.

 _Deflation means, that the most fundamental law of finance is broken. The
law, that says: It is much better to be given one dollar today, than to have
one dollar next year._

Deflation does not break this law. It is always better to be given one bitcoin
now than one bitcoin in the future - if you get it now you have the _option_
of spending it, which has value. (If 1 BTC is worth 4 bags of pot today and 5
next year, 1 BTC in a year is worthless to me if I want to smoke now.)

He then argues that investment vehicles with a positive rate of return reduces
consumption. This is true of both BTC and SPY. Unless bitcoin has the highest
rate of return of all investment vehicles, the effect on consumption is
irrelevant. I.e., if bitcoin has a return rate of 1% and SPY has a return rate
of 2%, bitcoin will _not_ affect the savings rate or reduce consumption [1].

If you are worried about people investing in bitcoin, consumption is
irrelevant - the worry is that people will shift investments from SPY to BTC.

The fundamental problem with deflationary currencies is _nominal rigidity_. If
you argue against deflation without mentioning this, you don't know what you
are talking about.

[http://en.wikipedia.org/wiki/Nominal_rigidity](http://en.wikipedia.org/wiki/Nominal_rigidity)

tl;dr; Go learn Keynesian economics from a textbook that does math and
carefully states assumptions. Don't learn it from newspaper columns.

[1] I oversimplify slightly. Since SPY and BTC are likely to be minimally
correlated with each other, you can construct portfolios of both securities
which will likely have a higher risk-adjusted return SPY alone. So the
portfolio rate of return might go up a few bps, and consumption will shift a
little bit towards investment. This is a _small_ effect.

~~~
daveungerer
> It is always better to be given one bitcoin now than one bitcoin in the
> future.

A counter-example: Your pot dealer says you can have 4 bags of pot now, and
you have 1 year to pay the 1 BTC you owe him. Being a man of better impulse
control than you, and a prudent financial manager of his drug enterprise, he
values 1 BTC in a year more than 1 BTC today.

That is, of course, assuming the expected value (after applying the deflation
and factoring in risk of non-payment) is greater than the value he could build
by investing the 1 BTC in his business today - an open question until we have
some real deflation figures.

> (If 1 BTC is worth 4 bags of pot today and 5 next year, 1 BTC in a year is
> worthless to me if I want to smoke now.)

As I tried to illustrate above, finance is not something that's based on your
personal preferences - it's a complex inter-dependent system.

~~~
yummyfajitas
Your counterexample makes no sense. If I pay him 1 bitcoin today and he puts
the bitcoin under his mattress, he has 1 bitcoin in 1 year with 0 probability
of non-payment.

    
    
        1 x 1 > 1 x P(payment)
    

He also has the _option_ to invest in his business or anything else, which has
value.

Your claim amounts to the idea that giving someone a loan at 0% interest can
be profitable. It can't.

~~~
daveungerer
You're reasoning in circles. The loan is not 0% interest when denoted in
dollars, since a deflationary currency will be worth more dollars as time goes
by. Your reply only makes sense in a world where bitcion is the only currency
in existence - a logical absurdity. You've disproved your point by negation -
giving someone a 0% interest loan should indeed not be profitable, but with a
deflationary currency it is.

Disclosure: I have no stake in the success or failure of bitcoin. I'm
interested in knowing if you do, just so I know to stop wasting my time?

~~~
yummyfajitas
Suppose 1 BTC = $X today and $Y in a year. If I pay my dealer 1 BTC today and
he doesn't spend it, he has $Y in a year. If he extends me a 0% interest loan
for 1 year, there is a probability P < 1 he has $Y in a year, for an expected
value of P x $Y < $Y.

Loaning someone an asset at 0% is always worse than holding the asset. The
value of the loan is P(repayment) x value of asset in future. The value of the
asset today = value of asset in future + option value. There is no escaping
this mathematical identity. Provided P(repayment) < 1, you are better off
holding the asset, regardless of the rate of return on the asset.

If you were correct, then you could make a profit by loaning out shares of SPY
or other security with a positive expected rate of return at 0%. You can't.

If you disagree with this, please express your disagreement in math.

I don't own any bitcoins, and have no stake in it. I think it's a good idea
that might solve the current mess of payment systems, however.

~~~
daveungerer
> Loaning someone an asset at 0% is always worse than holding the asset.

Exactly. My previous reasoning was indeed a bit muddied, but what you're
saying now clarifies it. I don't disagree with your math.

There are so many logical contradictions in the concept, which is why I end up
making silly assertions that you correctly pointed out. Instead, the argument
should simply be that the rate of return on bitcoin, due simply to built-in
deflation, and expressed in dollars, may or may not be so high that it always
makes sense to hold the asset rather than use it as currency to buy other
assets. In which case it can't function as a currency: contradiction.

Of course, I do believe the BTC USD exchange rate will be the dominant factor
in determining prices expressed in BTC in the long term, but I'm sure plenty
of people would disagree. If that does happen, a lot of this becomes
theoretical - the worsening exchange rate will take care of the deflation.

Note I'm not necessarily for or against bitcion. Thanks for the discussion.

------
dcc1
Ah jebus another blogger who misunderstands bitcoin ecosystem, technology and
its users. Who is looking for attention for his blog since its good linkbait.
Well he/she got it.

Economists (including the armchair variety like this blogger) should be
delighted bitcoin exists, it gives them something to compare and measure and
write about for their dismal "science"

In meantime some of us continue to build for bitcoin and have profited nicely
out of it (not the rise in price but saving on fees and no chargebacks)

If I hoarded all those coins over last few years instead of using bitcoin as a
means of exchange, i be a bitcoin millionaire now (personally i am happy
bitcoin is where it is now and where its headed), if everyone did that bitcoin
be useless, the fact that its not useless now shows that whole "deflationary"
argument is flawed here in the real world.

p.s: There is no lack of alternate cryptocurrencies, if you want inflation, go
make your own "inflate-a-coin"TM

p.s #2: I bet in next decade we would have some central bank(s) creating their
own cryptocurrencies, for example the Fed could create a "Bit-dolla" and set
an inflation rate of 2% and they could control all the mining, if they get IRS
to agree to accept it for taxation purpose we overnight have a state
sanctioned crypt-ocurrency. Actually whats scary about this scenario is the
state knowing everything you buy/sell (if your wallet is tied to SSN for
example). I could definitely see governments embracing bitcoinlike
techonlogies in order to get more power and control.

~~~
cstrat
it already exists: [http://en.wikipedia.org/wiki/Inflate-a-
coin](http://en.wikipedia.org/wiki/Inflate-a-coin)

~~~
timpattinson
Link is returning "page does not exist"

------
jdreaver
> _...I know no modern country that currently adheres to gold standard and no
> plans for its return have emerged across a large number of economical
> cycles. This leads us to believe that the decision to abandon it was backed
> by real economical incentives to do so, not emotional or political._

Most "modern" countries also want to spy on their citizens, curb free speech,
and spend their way out of debt. Since most of them do it, their decisions
must have been backed by real incentives, not emotional or political. /s

The gold standard at least kept the money almost sane, but now any government
can print as much money as they want. Inflation created as a result is one of
the biggest hidden taxes on the poor there is. Giving governments a monopoly
on the money supply is part of the reason our current currencies are worth
less and less every year.

My favorite aspect of Bitcoin is that it isn't created by committee, and no
secret team of government economists gets to control the supply. I personally
think Bitcoin in particular will be supplanted by something better, but I
can't wait until crypto-currencies become the norm and we look back to see
that the naysayers were on the wrong side of history.

------
grondilu
Well, the good news is that there will probably never be a "bitcoin standard".
The gold standard consisted in Nations basically enforcing the convertibility
of currencies into gold (or indirectly into dollars, which were convertible
into gold). So it was an authoritative enforcement of what money was supposed
to be.

Bitcoin is a free currency. You're free to use it, or not. You're free to fork
it, to create an other one with different monetary rules. And people do.
Bitcoin is thus not exactly a "standard" as gold was. If you worry about the
fixed aggregate idea, just don't. If there is no more bitcoins to create, and
if the economy needs additional monetary units, then they will appear in the
exchange market, as the price of other cryptocurrencies will rise, or others
being created.

------
davorb
> _In mathematics, when you write a paper, you are always standing firmly on
> the shoulders of generations of common knowledge that you don 't need to
> prove yourself - you can safely assume your readers agree with you on the
> matter. In the same way, I will assume that we agree on the following
> statement: Implementing gold standard in the modern economy will have no
> beneficial effect for the mankind, but may have very dire consequences._

You might as well postulate the existence of God.

~~~
logfromblammo
Well, if you don't agree with the premise, you can save yourself the trouble
of reading the rest of the article. If more people stated their possibly
controversial premises right from the start, we could all save ourselves a lot
of time that would otherwise be wasted on arguments.

So, at least there's that.

------
cstrat
I had the same thoughts about this in my head, but wasn't able to express them
as well as this guy. The more you think about it all, the more of a false
economy it is - the only people keeping the hype going are the ones who have a
vested interest in doing so.

I did buy some BTC about 18 months ago, unfortunately I didn't hang on to them
until now - but I didn't expect things to go this far.

------
johnzim
Tldr: bitcoin is bad because it is inherently deflational and inhibits
fractional reserve banking by virtue of its seamless operation.

------
kolinko
tl;dr; gold standard was abandoned a long time ago, we survived, and therefore
it was a good choice to do so.

Or, in the words of the author: "no plans for its return have emerged across a
large number of economical cycles"

First of all - it's a weasel-talk. What is that large number of cycles he's
talking about? Why is this number sufficient enough to come to the conclusion?
Also, the plans to get back to the gold standard come up all the time, they
are just unsuccessful.

(even if I agree with the claim of the article, the argumentation is lousy)

~~~
dcc1
I like how he ignores recent past of almost the whole global economy imploding
due to debt based fiat system, and only being "resolved" by issuing even more
debt and printing more dollars

~~~
rtpg
Proponents of the gold standard also ignore the slightly-less recent past of
currency crises in Europe and Asia in the 80s and 90s, all due to fixed
currency exchanges (which is basically just a variant of the gold standard,
with gold being replaced by whatever basket you're using). The fact that we
were able to print our way out of a crisis of confidence is a _good_ thing,
because in a gold standard world we couldn't do anything of the sort. A credit
freeze would have lasted a lot longer.

~~~
dcc1
The confidence is not in the currency or the central bank.

The confidence (of the markets) is that the central bank (on behest of the
government) will use currency as a tool in order to ensure that economies dont
sink due due to negative outlook on the future.

There is nothing stopping central banks from creating their own cryptocurrency
and controlling it by controlling all the mining (and hence being able to
change the rules of deflation/inflation set into protocol). In fact a "bit-
dolla" could probably be used much more effectively as such a tool since
everyone would know what everyone else has as blockchain is public. Would
these banks have gotten "too big too fail" if their "wallet addresses" were
public?

------
wisfool
The article brings a very important perspective to the discussion of bitcoins.
The perspective is very much grounded to our current economic system. And it
is in this 'grounding' that brings a discussion about the macro view bitcoins.

The global perspective is rather difficult to consolidate with the current
state of bitcoins. The perspective also is one that if we want to maintain the
status quo of our current economic engine then bitcoins is not the answer but
the antithesis. If we want to maintain the status quo then bitcoins or any
other medium wouldn't be necessary or sought after. The fact of the matter is
that so many people dislike our current system let alone understand it anymore
than our leaders.

Bitcoins wasn't an answer to how to fund more wars more easily or how to help
banks manage their portfolios with less fees or how to make corporations more
productive. Bitcoins was an answer to the ruling class endless excuse of
knowing more than the little man. Bitcoins was an answer to the endless
excuses of why you should have less and them more. Bitcoins was an answer to
the continue mismanagement of the individuals worth and burden. Bitcoins was
an answer to the simple want of transacting without a middleman who will rob
you in the process. Bitcoins was a solution at the most fundamental level: Me
making a transaction using my own hardwork 'money' with you.

Will bitcoins be an answer to the global perspective brought forth by the
author? Who knows but it's a good question.

------
erikpukinskis
Yet another person who doesn't realize that the financial markets will price
any predictable deflation into Bitcoin , as fast as they can predict it, until
it is not longer deflating.

------
ianpenney
Cryptocurrency and elemental metal will be the last bastions of money because
credit is only money when there is trust. Everything else can be
counterfeited.

The "bad for humanity" thing this author is talking about is called "reality"
in some circles. An economy is supposed to transmit the pain of dwindling
resources by the proxy of dwindling money, so as a society we then act to
conserve. The last decade of the US consumer and several US-led invasions of
other countries probably wouldn't have happened without so much easy credit.

When the US borrows money from others, it burdens them with an eventual
default risk. When the US makes unfunded future promises to americans like
social security, and medicare, and inflates their dollar with QE, their
people's pain is merely amplified and delayed.

I don't believe there is an absolute right or wrong answer to Keynesianism. A
little is okay, too much is catastrophic. The US has been borrowing
continuously for decades. I don't think you can really call that Keynesianism.

------
seanhandley
Fractional reserve banking is the root of all evil. It's why the US national
debt stands so high and why it can only keep growing.

[http://www.brillig.com/debt_clock/](http://www.brillig.com/debt_clock/)
[https://www.youtube.com/watch?v=lrQX4CF6Bxs](https://www.youtube.com/watch?v=lrQX4CF6Bxs)

~~~
betterunix
Right, it's not like we were ever on track to pay it off at the beginning of
the 21st century or any such nonsense...

------
rglullis
Author's reasoning suffers from the problem of trying to apply old models into
new environments.

For instance, the mentioning of impossibility of credit, or how that
manufacturers won't be able to finance new products with a long-ish
development cycle, and how that is only beneficial for the wealthy.

He would be right if we lived in a world where the only possible way to do
business is to create the product first and sell it later. I would argue the
opposite. Futures markets already exist. I can buy a house when it is still
just a blueprint and a folder with nice pictures. In fact, I wish people could
do the same with phones, groceries, clothes, electricity...

The more certainty we have about money flowing around, the easier it is to
have efficient financial products. The less risk there is. And the less risk
there is, the easier it is to provide credit affordable to everyone, including
the little guy.

------
aric
Bitcoin doesn't control you.

Bitcoin isn't absolute. Everything can coexist. Blabbering on about bitcoin's
"deflationary" model is as purposeless as writing incessantly about gold,
coffee, national currencies, tiddlywinks, real estate, oil, and crown jewels.

There will be no "bitcoin standard" written into law. Bitcoin isn't
_intending_ to be everything to everyone. Nothing is everything to everyone.
No one thing is absolute. Until a day comes when we're all serving the same
cyborg empire, one need not worry about being forced to have all chips in one
basket. Until then, deflation and inflation of particular assets will continue
to have little overall bearing. As for bitcoin, only the artificial appearance
of deflation exists. It's artificial because choice is still possible. You
place value into things. You decide. If you don't like or trust bitcoin (or
gold) to maintain value, don't use them. If you don't like or trust national
force-backed currencies to maintain value, then try not to use them.
Diversify. Talking about deflation in bitcoin becomes as meaningless as
talking about the deflationary aspects of dogecoin, computer parts at a point
in time, or the current yield of corn.

In other words...

More options and competition do not contract or stifle an economy. It expands
choice within a form of economic homeostasis. [ _Wait, but, doesn 't bitcoin
hurt bailed-out bankers and a debt-based society!?_] Right. That's the point.
That's one of its many strong competitive attributes. Every asset is
predicated on faith. It's faith that it will exist tomorrow, or in ten years,
and have your name on it. It's just that some people would rather not place
their faith into 'US economics.' Many people like that status quo. Other
people do not. Other people may, on principle, find the status quo violent and
abysmal; person-to-person trade itself acts as a path to peace. It's a
personal decision. Choice is important like that.

------
josephagoss
The "About me" part really distracted and made the article sour for me.

We always tell others not to attack someone's character but rather focus on
their argument, in a way this is the reverse.

It's like you're setting up your credibility to make your argument stronger. I
suggest remove that part completely.

------
drcode
I know people in the bitcoin world are sometimes overzealous and can sound
like salespeople...

...However, it's articles like this that make me glad that bitcoin doesn't
need much PR and will succeed (or fail) on its own merits.

No matter hour much baloney like this gets written, this guy and others like
him can't stop people from using bitcoins, thankfully.

<sarcasm>

The dollar will never work because it's an inflationary currency, and if your
money is worth less tomorrow than it was today no one would ever save anything
and society would collapse the first time there is a drought or other
calamity.

</sarcasm>

------
belorn
The part about credit sounds a bit fishy.

Ordinary people deposit money in the bank, and the bank goes then and invest
it. If the investment is a success, the bank pockets the profit and repays the
deposited money back when asked. If the investment fails, government steps in
and repays the deposited money.

How is that system connected with currency, and why should its existence be
critical for society?

------
nine_k
Such posts, and similar sentiments voiced by likes of Paul Krugman, make me
think that Bitcoin is doing the right thing.

------
zby
Money as an abstract 'value store' is not stable. It worked in the past with
gold, because we did not have too many ways to speculate on it and transfer
value from one asset to another. But it stopped working already in the
beginning of the 20th century. This is perhaps a bold claim - but I believe
that stability in money can be only an effect of regulation. This regulation
does not need to be rigid centralized manipulation - but perhaps it can be a
market-driven mechanism ([http://mercatus.org/publication/market-driven-
nominal-gdp-ta...](http://mercatus.org/publication/market-driven-nominal-gdp-
targeting-regime) \- have not yet read this one).

Money as an abstract leads only to bubbles, because personal gains the of
using it as a zero-sum game (outguessing your peers) dwarf gains of every
other human activity.

------
hbbio
There was a time when high-quality articles got upvoted on HN.

------
jnbiche
OP points out the gold standard has disappeared from all modern countries and
that this is a good reason to eschew a similar system in Bitcoin.

But could it be that the reason why the gold standard disappeared was that it
acted as a check on political power? That is, that leaving the gold standard
behind has permitted politicians to consolidate their power to a level
heretofore unseen in "democratic" countries?

Just because a system has been left behind doesn't mean it's a bad system.
Sometimes good systems are abandoned if they challenge/limit the authority of
a powerful actor.

And I'm no gold bug, but I'm not convinced that a monetary standard is an
entirely bad thing. I think there are trade-offs in each direction.

------
josu
>Fact is, without such freedom, banks would not exist.

Ok, if you say so. But wait, this is the next sentence:

>Or their functioning would be severely limited.

Oh, so the fact that banks would not exist is not a fact anymore?

------
josu
>I will assume that we agree on the following statement

>To back this up

If we assume that there is no need to back it up afterwards. Why would you
need to prove an assumption?

------
Stronico
Some general points 1\. Most of human history has been deflationary (either
.8% or 1.8% if I remember my monetary history correctly). That used to be
normal

2\. There are several ways of having a gold standard, namely one where people
use actual gold, one where the exchange rate is set by convention, and one
where the government does sets the exchange rate.

------
jokoon
I think bitcoin is great, but I don't think that making bitcoin a standard
anything is a good thing. It's waaaaay too early.

There also are too many ways to steal one's bitcoin wallet, computer security
is not mature yet.

I can't believe people are still finding ways to talk about bitcoin by
advocating it as a standard.

------
eip
The social welfare program is nothing more than an open-ended credit balance
system which creates a false capital industry to give nonproductive people a
roof over their heads and food in their stomachs. This can be useful, however,
because the recipients become state property in return for the "gift," a
standing army for the elite. For he who pays the piper picks the tune.

Those who get hooked on the economic drug, must go to the elite for a fix. In
this, the method of introducing large amounts of stabilizing capacitance is by
borrowing on the future "credit" of the world. This is a fourth law of motion
- onset, and consists of performing an action and leaving the system before
the reflected reaction returns to the point of action - a delayed reaction.

The means of surviving the reaction is by changing the system before the
reaction can return. By this means, politicians become more popular in their
own time and the public pays later. In fact, the measure of such a politician
is the delay time.

The same thing is achieved by a government by printing money beyond the limit
of the gross national product, and economic process called inflation. This
puts a large quantity of money into the hands of the public and maintains a
balance against their greed, creates a false self-confidence in them and, for
awhile, stays the wolf from the door.

They must eventually resort to war to balance the account, because war
ultimately is merely the act of destroying the creditor, and the politicians
are the publicly hired hit men that justify the act to keep the responsibility
and blood off the public conscience. (See section on consent factors and
social-economic structuring.)

If the people really cared about their fellow man, they would control their
appetites (greed, procreation, etc.) so that they would not have to operate on
a credit or welfare social system which steals from the worker to satisfy the
bum.

Since most of the general public will not exercise restraint, there are only
two alternatives to reduce the economic inductance of the system.

1\. Let the populace bludgeon each other to death in war, which will only
result in a total destruction of the living earth.

2\. Take control of the world by the use of economic "silent weapons" in a
form of "quiet warfare" and reduce the economic inductance of the world to a
safe level by a process of benevolent slavery and genocide.

The latter option has been taken as the obviously better option. At this point
it should be crystal clear to the reader why absolute secrecy about the silent
weapons is necessary. The general public refuses to improve its own mentality
and its faith in its fellow man. It has become a herd of proliferating
barbarians, and, so to speak, a blight upon the face of the earth.

They do not care enough about economic science to learn why they have not been
able to avoid war despite religious morality, and their religious or self-
gratifying refusal to deal with earthly problems renders the solution of the
earthly problem unreachable to them.

It is left to those few who are truly willing to think and survive as the
fittest to survive, to solve the problem for themselves as the few who really
care. Otherwise, exposure of the silent weapon would destroy our only hope of
preserving the seed of the future true humanity.

~~~
slamdesu
You forget that the largest recipient of welfare ('security') has been
corporations, not "bums" as you put it. Despite this, the elitism of society
blames "bums" for our economic problems. It's the corporations who drain the
economy, not individuals - that much is clear.

