Keynesian Vs. Austrian Economics. Bitcoin, and The Velocity of Money.

[Gambit]

Yeah, I know, another Bitcoin thread, but it DID get you to click

Anyways, I wanna be careful about how I word this. I know a bit about Keynesian and Austrian economics. Enough to have a decent grasp of the the framework.

But I know there are some smart and passionate people in here (i.e. guerrilla, lukep) that know quite a bit more than me, so this is more to learn (and hopefully help other's gain perspective).

I was looking through the other threads on here about Bitcoin and AE, but didn't really see the answer I was looking for.

The Velocity of Money.

When there is inflation, there is incentive for individuals to spend their money. Now, I dunno what the future is of the USD, so I'm gonna step back from analyzing what's going on with it.

But the area where I see the Velocity of Money is important, is in Bitcoin/Cryptocurrencies.

In order for a new currency to gain traction and mass adoption, the Velocity of Money seems to be very important.

The problem I see with Bitcoin, is that it is a finite amount. only 21 million coins will ever be made.

For Bitcoin to be mass adopted, the value would have to skyrocket (to the point where we are paying for most things in Satoshis [bitcoin to the 8th decimal place] instead of Bitcoin).

The problem is, this creates a paradox.

1. If Bitcoin is going to gain mass adoption, the value needs to raise at least 100-1000x to be a ubiquitous currency.

2. If most Bitcoin users believe the value is going to increase, acting out of rational self interest, they will not spend them.

3. However, this hinders the mass adoption and acceptance of Bitcoin. If Bitcoin users aren't spending their money when new merchants enter the space, there is no incentive for future merchants to follow suit.

Now, ideally we would see people encouraging businesses to adopt Bitcoin payments, and Bitcoin users reward them by voting with their dollars (err, Bitcoin).

Unfortunately, if we look at the psychology of this, what is more likely to result is The Tragedy of the Commons

The fact that Bitcoin is being used more as a storage of wealth, than as a transactional currency, makes me wary of the sustainability of Bitcoin (but bullish on cryptocurrencies as a whole).

TL;DR: Bitcoin potentially has a Velocity of Money problem that will likely hurt its chances at mass adoption.

 

[User9364]

Keynesian and Austrian economics

They're tools. Although, Keynesian is more of a philosophy instead of a tool.

Too many people pit those two against each other, but they are not combatants.

 

[Gambit]

They're tools. Although, Keynesian is more of a philosophy instead of a tool.

Too many people pit those two against each other, but they are not combatants.

Yeah, I had more written about both, but I decided to crop it out, because I realized that wasn't my main point.

I suppose it was more about the Velocity of Money (which I thought was a Keynesian philosophy, but looking more into it, Keynes seemed to be more skeptical of it than I thought.)

 

[stockfire]

This won't answer your question but I think before people start believing the US needs a new currency they should try and understand some basics.

Watch this:

[ame=http://www.youtube.com/watch?v=PHe0bXAIuk0]How The Economic Machine Works by Ray Dalio - YouTube[/ame]

And if you're still interested you can read his book by the same name.

Dalio's logical argument is essentially that all this money printing didn't create hyperinflation like the dooms-dayers predict because it merely served to replace the credit that was shrinking in the economy.

i.e. Credit is the same as money. Credit shrunk, so Bernanke printed to replace the lost spending power and avoid deflation (what he calls a "beautiful deleveraging").

Here's another thing to watch:

[ame=http://www.youtube.com/watch?v=E3fFg8XIS0k]Chairman Bernanke's College Lecture Series: The Federal Reserve and the Financial Crisis, Part 1 - YouTube[/ame]

(Bernanke giving lectures at George Washington)

 

[charlie.simm]

Dalio's logical argument is essentially that all this money printing didn't create hyperinflation like the dooms-dayers predict because it merely served to replace the credit that was shrinking in the economy.

THIS

Another factor that needs to be taken into consideration is that after the 2007-2008 crisis, people flocked to the dollar due to its safe haven status. The result? More demand for the dollar, which once again offset the inflationary implications of QE.

That's just the way it is, the dollar is the currency people flock to when they want safety. Will that change in the future? Probably, all paper currencies ended up ultimately disappearing, so I doubt the USD, EUR or JPY will represent an exception. Right now however, the dollar is the world's #1 safe haven currency and that's unlikely to change anytime soon.

 

[Kiopa_Matt]

Estimates are all over the map, but a common one is 170,000,000kgs of gold exist in the world. Does that stop gold from being a valued commodity? Who gives a shit if it's 21 million bitcoins or 21 trillion?

Then your reality on Bitcoin adoption is simply wrong. I can't remember, but I think Overstock did over $2 million in Bitcoin transactions during their first day?

 

[erect]

That's like saying the $100 bill is worthless because we like counting by millions (trillions).

I think you're confusing terms inside the OP. There's 2 kinds of "velocity" you make reference to

incoming velocity: money printing, fractional lending

spending velocity: people actually using the currency

They are not inter-changeable.

The incoming velocity of money really only matters significantly in a debt based society whereas the system is set up so that we have to have more money in circulation next year than this or else the whole thing implodes (interest payments are mathematically impossible to meet without more monies coming into being).

Incoming currency velocity is not important to you and I in a truly free market. Deflation isn't a bad thing as long as credit doesn't dry up for building businesses. When currencies deflate, they're worth more of other commodities. So in our current setup, a loaf of bread costs $1 this year, next it would be $1.10. If deflationary incoming velocity, then next year the bread would cost $0.90. If your income stays flat, you get an annual compounding lifestyle upgrade instead of just a bigger number on a piece of paper.

Bitcoin is by it's very nature deflationary because people lose wallets and there's a fixed amount of coins to be in circulation. This isn't bad, the fiat amount of BTC goes up so less bitcoins buys the same amount of products. Again, not bad because they're highly divisible .. we're not going to run out of them.

You do have a point about the savers (hoarders) of bitcoins, A reluctancy to spend (decreased spending velocity) will cause the coin to grow slower than it could. It's hard to blame the greedy bastards though ... could be $100k/coin in the near future. But honestly, isn't that a breath of fresh air that someone is saving something (anything) again. Private investments are important for a thriving economy (keeps market interest rates in check). Bottom line, expect bitcoin hoarders to turn into investors in the near future. That's just as good as spending them for the btc ecosystem, except it doesn't happen now.

 

[Gambit]

I think you're confusing terms inside the OP. There's 2 kinds of "velocity" you make reference to

incoming velocity: money printing, fractional lending

spending velocity: people actually using the currency

They are not inter-changeable.

I am referring to the "spending velocity" kind.

From Wikipedia:

The velocity of money (also called velocity of circulation of money and, much earlier, currency) is the frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Although once thought to be constant, it is now understood that the velocity of money changes over time and is influenced by a variety of factors.

Velocity of money - Wikipedia, the free encyclopedia

You do have a point about the savers (hoarders) of bitcoins, A reluctancy to spend (decreased spending velocity) will cause the coin to grow slower than it could. It's hard to blame the greedy bastards though ... could be $100k/coin in the near future. But honestly, isn't that a breath of fresh air that someone is saving something (anything) again. Private investments are important for a thriving economy (keeps market interest rates in check). Bottom line, expect bitcoin hoarders to turn into investors in the near future. That's just as good as spending them for the btc ecosystem, except it doesn't happen now.

This is my point in how it relates to the Velocity of Money. People tend to hoard if they think the purchasing power is going to increase. People tend to spend/invest if they think the purchasing power is going to decrease. Since no new coins will be made after the 21 million, it is nearly a sure bet that the purchasing power of Bitcoin will consistently increase, which leads to saving/hoarding.

I feel like this is a major concern for the success of the currency, and one that doesn't get discussed enough from what I've read.

Hoarders becoming Investors is an interesting point. I suppose there would be some interesting talks about BTC owners wanting their BTC investments to be worth something like 10x of current value though. It seems hard to structure a deal that makes sense for both sides IMO.

I'm definitely interested to see how this all shakes out in the future. It will become a good case study in experimental economics.

 

[Gambit]

Estimates are all over the map, but a common one is 170,000,000kgs of gold exist in the world. Does that stop gold from being a valued commodity? Who gives a shit if it's 21 million bitcoins or 21 trillion?

Then your reality on Bitcoin adoption is simply wrong. I can't remember, but I think Overstock did over $2 million in Bitcoin transactions during their first day?

Overstock did $130k in their first day. Which is decentt, but nothing incredible. It was mostly a PR/Marketing play for Overstock and Tiger Direct IMO.

When Bitcoin is saved and used for B2B transactions, as well as paying wages, then things will get very interesting.

Overstock.com reports $130K in Bitcoin sales in 24 hours | SiliconBeat

As far as the gold comparison:

Gold has no maintenance costs. All it needs is some secure storage.

Once Bitcoin is fully mined, people will still need to keep rigs running to facilitate transactions. These transactions have to be profitable enough for people to have the incentive to keep the network running.

An interesting potential problem is the chance of a 51% attack on Bitcoin. If one mining pool controls 51% of the network, they have the ability to prevent transactions, or cancel trades midway through.

(Learn Cryptography — 51% Attack)

If mining or transaction fees are not high enough in the future. It could lead to the potential for an affordable coordinated 51% attack on Bitcoin, which would ruin the integrity of the whole currency.

 

[mailing]

OP, you are thinking too much about it. Way too much.
No matter if the Bitcoin Bulls or Bears are going to be right in the end, I assure you that both will be right/wrong for the wrong reasons anyway.
Those are things that just aren't predictable. Maybe tomorrow a revolutionizing consumer product like Facebook comes along that's based on Bitcoin.

Just invest a reasonable amount into it that you can afford to lose and shut the fuck up.

 

[StraightUp]

 

[erect]

When there is inflation, there is incentive for individuals to spend their money.

That is where I saw the confusion. Inflation is always supply of bucks going up.

And hoarders are savers. If they're hoarding it's likely because the price is going to go up and they know it. If the price goes up, they can spend fractions for the same goods ... which is kind of the point. Transactions > 1BTC might be very, very rare in the future.

 

[Gambit]

OP, you are thinking too much about it. Way too much.
No matter if the Bitcoin Bulls or Bears are going to be right in the end, I assure you that both will be right/wrong for the wrong reasons anyway.
Those are things that just aren't predictable. Maybe tomorrow a revolutionizing consumer product like Facebook comes along that's based on Bitcoin.

Just invest a reasonable amount into it that you can afford to lose and shut the fuck up.

First, who the fuck are you?

Second, thinking about things and staying informed leads to better understanding.

Which leads to smarter decisions in investment and business.

I suggest you try it sometime

 

[Gambit]

That is where I saw the confusion. Inflation is always supply of bucks going up.

And hoarders are savers. If they're hoarding it's likely because the price is going to go up and they know it. If the price goes up, they can spend fractions for the same goods ... which is kind of the point. Transactions > 1BTC might be very, very rare in the future.

Ahh yeah, I cropped a couple paragraphs out of my post, but leaving that line in there made my point jumbled.

Anyways, yeah, it's gonna be interesting to see how it all shakes out.

I can possibly see maybe 4-5 major cryptocurrencies winning out, each with their own little advantages (storage of value, lightning quick transactions, micropayments (low fees), recurring payment options (acting like a checking account/CC) )

 

[mailing]

recurring payment options (acting like a checking account/CC) )

is there such altcoin already?

Second, thinking about things and staying informed leads to better understanding.

Should I have mentioned that my answer was in the context of the thread?

 

[slayerment]

First of all, we don't need inflation to spend. We spend because we need things, not because we have inflation.

Saying that people won't spend their Bitcoin if it goes up in value is simply incorrect. All you have to do is look at the data: https://blockchain.info/charts/n-tr...ageString=1&show_header=true&scale=0&address= As the price of Bitcoin has gone up the number of transactions has also increased.

Even without the data it still doesn't make sense. You could say the same thing about computer hardware. If people know that their next computer or iPhone is going to be better in 1 year then they will just hold their currency and wait for the new one. But they don't. People still buy because they want something now. Some people value having something now greater than having something later and so they forfeit their possible future gains to have what they want right now.

Bitcoin currently supports 8 decimal places as you said. We have around 11 million mined so far so we're at around 1,100,000,000,000,000 total currency units. How many dollars are currently in existence? We don't even know because the government stopped telling us. Let's say around 100 trillion. Okay so with 2 decimals that gives us 10,000,000,000,000,000. Roughly 10 times more units than Bitcoin can currently support. But understanding what 100 trillion dollars even means or represents is another story since it is a government fiction loaned into existence.

Either way the finite amount of Bitcoin is irrelevant because it can be divided infinitely. The Bitcoin protocol can easily be changed from 8 decimals to N decimals to support whatever number of units of currency is necessary.