[ExI] [mta] Long Term Bitcoin Catastrophe?

Mirco Romanato painlord2k at libero.it
Sun Jun 2 20:02:39 UTC 2013

Il 01/06/2013 21:43, Brent Allsop ha scritto:
> Future Theoreticians,
> Multiple thoughts have been percolating in my mind that has further
> falsified my fears of a Bitcoin Deflationary Catastrophe.  Help me see
> if I'm making any mistakes with this line of reasoning.
> Currently, economies have a general instability in them, causing
> destructive boom and bust cycles.  During the boom, everyone is spending
> all their cash, to get into the stock market.

During the boom, people consume more, invest more, save less, produce
less, because the cost of money (interest rates) is lower than the
market would support.

This happen because the quantity of money circulation is increased by
the central bank (another reason is if they looted someone from his
money - E.G. the spaniards looted the gold and silver from america and
spent it in Europe; for Europe, essentially the monetary mass of gold
and silver increased).

> This tends to cause 
> currency to become worth less, or inflation, since everybody is getting
> rid of it, to purchase stocks.

It is the other way around.
The quantity of money increase (usually faster than the economy can
grow), some people spend more (the ones with more money), then the
prices start increase (for all).
In essence people recognize they have too much money and not enough
stuff, time, services. So they swap money for them. As people have too
much money, a lot more is available to be loaned and interest rates go
down (interest rates are the price of money)

> But when the herd goes to far in this direction it creates a bubble.

But the herd go there because it was pushed there.
It is not the fault of the herd, it is the fault of the herder.
The herd, must be recognized, reacted to price signals in the expected
way. But the signals were false.
Then people see something going up and start speculation it will
continue to go up. They get in debt to buy and resell later. The first
speculator get out and the suckers get in.

> When a pull back starts the 'bubble' pops. 

At some point, people get too much indebted, someone become unable to
pay, then they must sell their properties to payback the debts. But
there is so much people in the same situation, there are not enough
people to buy what is offered and then the market in the bubble must
correct the evaluations down to more realistic levels. Usually the
excess of stuff produced drive the prices down the equilibrium point,
until the excess supply is cleared.

In the great majority of these cases, a lot of capital is destroyed,
because a house built can not be returned to its components without
large losses. Labor done, time is lost, the timber is largely lost, and
so on.

> This is compounded as people want to sell stocks (or not buy
> them), but instead put the capital into something like Cash. reversing
> everything in a compounding the problem unstable way.

This is the effect of understanding the problem, correcting the
evaluations done, and acting on them.

> All this causes people to reduce spending and investing, which causes
> jobs to be lost, real estate values, where most wealth is, crash, the
> stock market crashes, and governments attempt to counteract this cycle
> buy pumping more money into the system.  They attempt to stop the
> deflation, and further drive down interest rates, hoping to motivate
> people to move money back into the stock market and real estate.

They try to re-inflate the last bubble or another; every actions put
them in a smaller, nastier, corner.

People reduce spending and investment because the previous level are
unsustainable. If I have not enough money to eat properly, I can not
invest in life extension.

> What scared me was thinking of a fixed size inflexible currency, like
> Bitcion, if it was prevalent enough, it would really compound these
> unstable cycles.  I believe when the next recession hits, it will really
> drive up Bitcoin valuations, and no government will be able to
> counteract this flow of capital out of everything else into rapidly
> increasing in value Bitcoins.

What a currency like Bitcoin (or gold and silver) would do is to make
evident many more wrong allocations of capital and force the market to
correct them, the governments be damned.
It will be a huge, rapid, shock, but after it is absorbed (and it would
be absorbed very rapidly) would be very difficult for any bubble to be
inflated again, because the government need the printing presses to be
able to print money and create the conditions for mis-allocation of
capitals and the creations of bubbles. And Bitcoin take away the power
of the monetary presses from the government.

> But what I realized was that this would make at least some people
> significantly more wealthy, and make them want to spend that much more
> money.  In other words, instead of the government being the only one
> spending and putting people to work, Bitcoin holders would likely fill
> this responsibility.

Better again, Bitcoin holders would be, increasingly, people working and
producing something useful (as decided by the market) and the government
could not as easily impoverish them as it does now.
And we could suppose, if the power of spend stay in the hand of people
producing useful things, they will continue to produce useful things.
And more useful things they produce, more they would be rewarded by the
market. And they would request, from the market, useful things.

> The one problem would be, like most things, it makes the rich or those
> holding the most Bitcoins richer, making everyone else poorer.  Where as
> governments tend to spend money to help the poor, the rich would spend
> money on what they want, helping the poor the way they wanted, after
> funding themselves.

I would reconsider the part "as governments tend to spend money to help
the poor". Because these last few years show the governments spend money
to help the rich and connected people at the expense of the poor and
unconnected people. Everywhere, every time.

If a wealthy person use his wealth to help a poor person, he will make
sure the wealth is well used to this purpose. Because it is his purpose
and he want the most satisfaction from the least sum.
A bureaucrat or a politician, instead will try to spend all the sum
available, because his success is measured more in how much they spend
and not in how much the effectively helped people.

And this also is true everywhere, every time.

> Also, when the rich really do get richer, eventually the people at the
> bottom, revolt, taking all the wealth away from the wealthy, as has
> occurred in so many revolutions in the past.  But Bitcoins would make
> this impossible.  As no government can steal a Bitcion from anyone, like
> they can a factory or farm.

If you look at these revolutions you will see a big government and
wealthy people using the government to preserve their position at the
expenses of the poor. The difference are minimal between the Czarist
Russia and the USSR.

> So, what does everyone think?  Would Bitcion becoming the dominant
> currency increase or decrease boom bust cycles in the economy, and by
> how much?

As with gold and without the bank fractional reserve, with Bitcoin,
people would be unable to spend and loan money they have not earned first.
This would prevent the formation of bubbles or, anyway, the bubbles
would be smaller and they would pop much more faster.
Why? Because if the money supply is fixed an unchangeable, the price
signals immediately start to work.
There could not be a house bubble, because there would not be enough
money to be loaned to start it. Without these large mis-allocation of
capital there would be, in the medium long term, a lot more capital
Without a bubble, houses would have a lower prices and would be more
affordable, not less. People would be required to pay higher interest on
their mortage, but the mortage would be way smaller. And they would be
required to have 30-50% money down before buying the house, but as they
save, they would be paid a decent interest.

Higher interest rates would prevent too much investment, but would
support investment in higher yield investments. It is easy to be wrong
if an investment with a 3% year return in started, because it require 35
years to pay it back, and if conditions change, the return could easily
become 2%, 1% o nil or negative. But if the investment must yield 20%
yearly, you pay it back in five years, and obtain a profit much more
faster so the risk and uncertain are reduced.


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