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Gold standard was bad, but Bitcoin standard is even worse (millionintegrals.com)
39 points by jrx 1376 days ago | hide | past | web | 50 comments | favorite

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.


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.

> 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.

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.

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?

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.

> 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.

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

Nit: if the carry cost of the asset is zero. This is _not_ true for dollars (at least at large corporate/pension fund/hedge fund scale) and various government securities have occasionally sold at negative nominal interest rates.

(It is, essentially, true for BTC, which is why your analysis is largely correct here, but there certainly are cases where one would reasonably lend USD or the like at 0%.)

Then the dealer doesn't value the pot at 1 tomorrows bitcoin today. His willingness to accept payment in the future points at the discount he sees.

I don't have any interest in bitcoin, I'm a spectator. Edit: I realized that's not entirely true, I got 1.5 namecoin from a fountain a couple of years ago.

> 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. [...] expected value (after applying the deflation and factoring in risk of non-payment)

I think the status of that example as an alleged counterexample results from a subtle misuse of words. If the pot dealer's choice were between 1 BTC now and 1 BTC a year from now, the former is still of greater or equal value. If you are able to factor in "risk of non-payment", then you are talking about a decision between "attempting to get you to pay 1 BTC now" and "attempting to get you to pay 1 BTC during the succeeding year", which is by stipulation a materially different choice than "1 BTC now" vs "1 BTC a year from now".

As for the deflation--if the pot dealer believes that the increase in value from deflation is greater than what he could get by investing in his business (or in anything else), then he always has the option of sitting on the BTC for a year. The only reasons I can think of for this not to be the case are (a) if the pot dealer lacks impulse control and would spend it and regret it, or (b) if the pot dealer may be robbed of all his worth during the intervening year [so getting the BTC a year later is essentially a substitute for a safe money-storage service]. Both of these possibilities are generally assumed out of existence in this context, hypothesizing a hardheaded economic actor and a market with well-defended property rights.

> he always has the option of sitting on the BTC for a year.

Eureka! That's also known as bitcoin hoarding. If the value (in dollar terms) of holding on to bitcoin is indeed greater than spending it, people and financial institutions will hold on to it and primarily keep transacting in dollars. Which leads to a nice logical contradiction, since how can a currency be worth anything if no-one wants to spend it?

....that's called a loan.

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.

Great points. What I think would be interesting is if the Treasury did something like create a variety of your "Bit-dolla" crypto-currencies and let the markets/users decide which ones to use for which purposes. Each would have fixed rate of inflation.

$BD0: 0% annual inflation

$BD1: 1% annual inflation

$BD2: 2% annual inflation

$BD3: 3% annual inflation

etc., maybe up to 15%

That way market expectations of inflation and demand for price stability (and maybe actual laws) would dictate the overall usage patterns of the currencies, without the typical psychological risk associate with central banking systems.

Prices of goods would always be expressible be in terms of each currency, and conversion between them at any point in time would be easy and automatic. Prices of things like flash memory would go down in BD0 but would appear stable in BD4.

Just as businesses/industries settle on accounting practices (FIFO, LIFO, etc.) they could choose which currency to pay employees in, which to store cash in, and which to use to track the value of inventory.

The nice thing about this kind of system would be that we'd actually have much more price transparency, since inflation hides information (such as decreasing real wages).

Laws could be made to require pension funds to use BD2, for example, or to require all taxes to be paid in BD4, or student loans to be issued in BD10.

Treasury bills could be sold against each BD type which would add discipline and certainty to that market as well.

I know this is a sort of silly idea but it's fun to think about.

Why, why, would a central bank use the concept of "mining" in a cryptocurrency?

They're a central bank, and they want to be able to control the money supply. All they have to do is generate some suitably strong keys, and use regular PKI infrastructure to verify them and transactions with them.

Which you know, they've done - that's the modern credit card system (though I am open to the idea we could create something at a government level that was lower fee.

Link is returning "page does not exist"

I don't understand why a blockchain completely mined by one entity would be any good. wouldn't a relational database be much better suited for this application, since decentralization is no longer an objective?

I didnt say it be good, I say it probably be implemented since a state (or central bank) controlled crypto-currency could be used to obtain more power over citizenry.

Image the state knowing exactly where you get all your money from and where you spend it (since they would have the blockchain), likes of Revenue/IRS would love it!

It would make it easier to implement welfare and stop tax fraud, this alone could be the argument used to push it thru' (tho I am not sure how politicians would get brown envelopes then) and most people would support it. Just like most people supported current UK censorship creep.

Hell call it "dysto-coin"!

> ...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.

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.

> 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.

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.

There is far from a consensus on the dire consequences of implementing a gold standard. Just as one example: http://mises.org/daily/5379/

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.

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

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)

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

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.

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?

Yeah, every business cycle except the current one, when bitcoin takes over :-)

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.

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.

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.

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/ https://www.youtube.com/watch?v=lrQX4CF6Bxs

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...

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.

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.

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.

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.


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.


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?

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

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... - 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.

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

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.

>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?

>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?

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.

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.

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.

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.

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