>The net transaction is $0 (an exchange of currency for T-bills of equal value), but the market now contains more paper money.
Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply.
>If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world.
It'll be interesting to see how the state tackles this. It'll be easy to drive it underground, but preventing its use will be another matter. Bitcoin transactions through a VPN seem hard to prevent.
Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply.
As they should be, given that populations increase.
Anyway, even if Bitcoins go underground, they'd have to be priced such that they'd be cheaper than other money laundering channels. Due to their finite supply, though, money laundering through Bitcoins will get very expensive. So their utility re: taxes will be squashed by either the government or the black market.
I think this is a very important thing that people don't understand. Static money supply in a world where as you point it out population increases means deflation. And increasing popluation is only one example of the need for inflation. We create wealth all the time, people in other countries are buying their first car etc... the more goods are purchases and sold the more money you need. At least that's what I understand from my couple Economics classes.
> As they should be, given that populations increase.
Is the U.S. Population increasing like this? [1] That's what the U.S. monetary supply looks like.
More correctly, fiat money supply should ideally match total economic output, not population. But the GDP graph also doesn't look anything like that monetary supply graph.
Given this, the BitCoin phenomenon is understandable: savers are looking for a currency that's not subject to manipulation and is most of all predictable in terms of supply. Whether or not it succeeds, I'm glad there's the pressure of a competing, not-centrally-manipulated currency.
Milton Friedman disagrees and measures inflation relative to output in his book on monetary phenomena [1]. Since you're an economist (right?) I'd be interested in why you think he's got the wrong measure.
Read the sentence "Prices might even fall gradually as higher incomes led people to want to hold a large fraction of their wealth in the form of money." Inflation is a Money Supply / Money Demand phenomenon. In the long term, Money Demand tracks real output, but in the short term (such as the recession we're currently in) you can see major swings in demand that counteract what would normally be a quite inflationary money printing exercise.
So you agree that in the long term, money supply should closely follow real output. It's only in the short term that the Fed is allowed to untether them for the purposes of intervention. Let's not forget that the Fed's monetary policy in the 2000's helped create this situation: economic intervention necessitates further economic interventions. It's no wonder people are heading for the exits via BitCoin.
Compare those two graphs from say 2006 on. I am mystified that you would look at a graph with a giant, dominant spike, and conclude my point was about the shape before the spike.
Edits: To make it clear I'm not arguing with the statement that money supply has tracked GDP fairly well until recently. Or that GDP has trended up exponentially.
Oh I get it: this is one of those "man, the Fed is messing up" rants!
Yeah, I won't take part except to say (a) you're sampling 4 years of incredibly volatile economic activity, and (b) the other, uh, 96 years exhibit a pretty strong exponential trend.
Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply.
>If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world.
It'll be interesting to see how the state tackles this. It'll be easy to drive it underground, but preventing its use will be another matter. Bitcoin transactions through a VPN seem hard to prevent.