This got me to thinking. I could give my couple of cents worth of information and opinions on the subject and include deflation/inflation, money supply and the like too.
The article referenced above goes in to the idea of production and money supply. It talks about how creating money that is pumped into the supply can effect things. I naturally agree that when things become unbalanced you will have problems sooner then later.
We should all know about the simple principle of supply and demand from the economics classes we took back in high school or college. It's on most required classes lists for general education.
As the diagram shows as the demand for a product goes up the price has to go up if the supply does not match the increased demand. Conversely, as the supply raises with little or no change in the demand the price is going to have to go down (this can be seen as dumping product; more on this later).
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| http://www.english-online.at/economy/capitalism/capitalism-market-economy.htm |
Basically the price is effected by the amount of demand and supply. The recent decline in gas prices can be seen as a good example of this in the real world. The supply of gas/oil continued to increase while the demand for the product (gas/oil) stayed more or less flat. With the glut on the market people begin to sell the product for less hoping to move their inventory quicker then the competition. This can create a price war, much as what happens at an auction when 2 people get into a bidding war.
Now you might ask why did I title this "Bitcoin, Inflation, Deflation and Extraneous subjects" if I'm talking a lot about supply and demand. It all plays together like one big merry-go-round.
You see nothing lives in a vacuum. When the price of gas and oil plummeted in some peoples views their outlook on the economy was effected. Also you have companies that have to decide if they can break even with the new prices going into effect. A $10-$20 drop in the price of oil might not rise to many eyebrows if the price is $150 a barrel. It sure turns heads if it is sitting around $50.
Now we need to talk about modern economies and the money supply. As of right now we pay for things in a couple of ways. Most places will take some government backed paper money or coin. Many places in the modern age will also take an electronic payment or check relating to a bank or credit card company. Someone (financial institution) backs the transaction and they are backed by the government sponsored money on deposit. In some areas around the world (usually rural) people may still be doing barter. I'll give you my 12 eggs for say 9 cups of your wheat. There is a recognized value of the one good being traded for the other. People realize that a cow or pig has more value then a single egg due to the fact it takes more to produce one over the other.
We technically do the same thing every time we go to the store. If you have the exact same T-shirt available at say Target, Wal-Mart and Macy's and each charges a different prices where will you buy that shirt? If Wal-Mart is cheaper you'd go there, unless you want to brag about how much you paid even if it is $5 more for the exact same thing. Some times the difference is not enough to make it worth our time to go out of our way for just one item. We decide that the amount of money we spend is an acceptable value for what we are getting in return. If we don't think the value is acceptable for what they want to charge we don't buy. When we find out they are the only one in town with the item we need we then go pay the price or reevaluated if we need the item in the first place. Though others might get into the market seeing a profit can be made and over time effect the supply. As specified above the change maybe gradual or fairly quick.
Ever wonder why they have a clearance section? It's a bunch of items that people did not have enough interest in at the price attached. As the price is reduced more and more of the items are sold. The consumer begins to see value at the new price.
Paper or Plastic? Understanding Money (audio presentation on money)
Now let us begin talking about the money supply. Remember how I specified the Government backed paper or coins. Well what does that really mean. If your using US Dollars you have a piece of paper with an attached value, and the government is the one that prints the money or mints the coins. They have a recognized value by people around the world as having value per the good faith of the United States Government. The same holds true for locations like Brazil. The government is behind the real. Those colorful notes in all shades of the rainbow. They control the printing and destruction of old and new notes. John Doe is not involved in determining the total amounts of notes in circulation and the like. For a period of time following the conversion of the Brazilian Cruzeiros Reais to the new Reais in the mid 1990's till around say 2005 each Real was backed by a US Dollar in the bank. If they had 25 Billion in circulation they had $25 billion US in the bank. This provided confidence in the money. As of right now I don't think they have a 1 for 1 ratio of Dollars in the bank.
One way or the other the basis for most of the currency in the world today is in some form related to a government that is in charge of the creation of the money. Changes in government can at times have a major effect on the money. Very rarely is the money backed by anything more then good faith, let alone a commodity.
In the case of the Brazilian Real. What would have happened in 1996 if the US government was overthrown by some right wing extremist or an Islamic backed group. The full faith and trust of the government no longer applies. Thus the value will decline in short order. Some people will stop accepting the "Money" and things will begin to go into disarray. This ripple throughout the world economy as various currencies are back by that of another admired or respected stable government.
Having an actual commodity backing the "Money" can help to retain perceived value.
In the past the most common method to back currency was Gold (or another precious metal). Gold has had a fairly stable value over time and is perceived as safe. However, it becomes hard to increase the money supply when you have to acquire some more gold to make more "Money". Thus governments went on to create "Fiat Money". This is money that derives it value from governmental intervention, law etc. Thus it is not money that has a commodity backing it. It is laissez faire money.... money that is just out there. People assign their own value or worth to it. It becomes just a common form of exchange. Not something you can go to the government and ask for your 9 oz of oil in exchange. They don't have a repository for exchange of that type; either at the local bank or governmental office. This can over time allow the government to manipulate the supply or quantity of money. They can simple create money where none previously existed by printing more.
It's easy to see how the government by overzealous intervention or printing of money can turn the "Money" into "toilet paper money" as Nick Jones calls it in his article Fiat Currency: Using the Past to See into the Future. Sometimes the government simply prints more money to help cover expenses. This pumps money into the supply and then causes havoc in the long term. More money with no increase in supply or demand throws things out of balance. This tends to cause inflation. So the governments task their treasury department that prints the money to help make sure they don't over load the money supply so much that inflation gets out of control while at the same time spurring on growth.
Few people that were not born before 1970 will remember the hyper inflation that occurred around the end of the 70's in the United States. Things got really bad.
I was too small to remember the bad times here but, I saw things in Brazil where inflation was 300% or more per year before they changed over to the new currency.
When I first got there a 1.5 litter of Coca Cola cost 50 Cruzeiros Reais. 3 months later it was up to 150 for the same product. Talk about inflation. Unfortunately, some of that inflation was built in. People just got accustom to increasing prices. To counter this the conversion to the new money had a fixed rate that was broadcast for several month on the nightly news. A new set of values was set in the mind of the consumer and common citizen. We ran into a situation where a particular store was increasing the prices about 5% each week after the money conversion went into effect. We gave him some time as we assumed they were working out the new appropriate level to price things. However, after 1 month of consistent increases we stopped going there. The price increases were no long justified.
That leads us to the notion that as inflation sets in things get bad but, what about deflation.
Is it such a bad thing to have prices go down. Is it such a bad thing that the price of a gallon of milk goes down from $3.50 to say $3.00? I guess in the long term this would not be such a good thing.
If a whole sample of items in the economy were to go down together it would be less likely to effect things as much. Just the price of milk going down and everything going up is not good. Over time a free market will correct itself by the laws and principles of supply and demand.
Invariably governments get worried with deflation, not sure exactly why, though if deflation is sustained I guess you could get the depression that occurred in the 1930's. Eventually, this helped start World War II and all of the ramifications that came with it. I'm not saying deflation causes wars but, I guess policy makers see it as a primer to the pump of an already aggravated situation.
The worse part is the way central banks try to correct deflation - "
In a deflationary environment, local demand for goods and services is weak, and prices fall with spending and consumption.
Buying government bonds increases the amount of money circulating in the region. By keeping interest rates low, the ECB hopes to encourage spending and borrowing, instead of saving. Many central banks across the world have also cut rates in the last few months."
Thus the solution is to mess with the money supply. Instead of the market taking care of things and correcting as necessary.... the government or central bank does what they think best. But, is it always the best?
So where does the Bitcoin revolution come in? Imagine a form of currency that is not controlled by a central bank in some country. A currency that can't be created Willy Nilly. That the supplier does not or can not pump up the supply when ever they want. It's like having to transact in gold nuggets. Not some coin that over time might come to be just gold plated, but the actual pure product or commodity.
Only problem is how do you transact with a person in Japan when dealing with something like gold nuggets. Only due to the Internet and our now globally interconnectedness can something like Bitcoin work. It's all digital. Technically, it is all in cyber space. They have no physical commodity at all. The difference is the lack of supply or the control on the supply. The capping of total supply. Now realistically, to get the whole world on bit coin would not work. There is simply not enough in the supply to have that work all that well. Physical commodities have their limits but, it is a local limit. You have to exchange something for that wheat, or shirt and it is usually done in person.
So could bitcoin be the solution to inflation/deflation or at least the unintended manipulation of the money supply. I am firmly of the belief that most of the trouble we get into is from to much or to little intervention from the government. Take the recent housing bubble. The government was promoting giving loans to just about anyone..... they kind of told the bank to make it happen any which way possible. That lead to no verification of income, and other risky practices. Basically, because the central bank backed the bad loans they kept on coming. And what started the whole boom.... easy money after the dot com bust. The central bank dropped the interest rate to next to nothing. That helped grease the wheels of commerce. Then as they saw things heating up a little to much they started to slowly raise the rate. 1/4 percent at a time. The guys on adjustable rate mortgage began to die. A little increase became painful and as this happened 1/4 percent per quarter or half percent per year the pain really set in. Many who had been told oh just refinance every couple of years could not do so as easily. So the sell motivator set in..... or in the long haul foreclosures as people attempted to survive paying at the new higher rate.
You see the consequences of messing with the money supply in the various ways the government does can be horrible. They don't come along very quickly at times. A year or two after something is started the consequences show. Also think of the "to big to fail" problem with the banks. The government say oh if these banks fail we are dust. Even though you helped feed the problem (with our support) we will bail you out.
Do you think many of those bank would have stopped asking for income verification if they had to hold all the risky loans in the bag? I am going to assume not. NO bank wants to take a large gamble and those sub-prime loans became hot potatoes..... they just knew in the back of their minds that some of the hot potatoes would be handled by the government..... so the risk was determined to be less the it really was. No decided to put the breaks on the process...... keep the water flowing, and then the blockage in the line came. All hell broke loose.
So in this case a true laissez faire situation would have helped to limit the issues. I can't say for sure there would not have been a bit of a bubble or price run up if the banks all could have failed and no bail outs were in site.
You see the government made things a little too easy and greased the wheel with low interest rates, pumping of the supply and promotion of lack loan standards. Several years later things over heated and blew up. This type of things have happened in the past. It's happening right now to some level. Maybe not in the loan standards (some are jumping through ridiculous hoops).
One over reaction is followed by another over reaction in the other direction. So if you can cut out the manipulation of the money supply by something like bitcoin. Governments are concerned with things like bitcoin and other cyber or virtual currencies.
"No one knows what will become of bitcoin. It is mostly unregulated, but that could change. Governments are concerned about taxation and their lack of control over the currency."
What is Bitcoin? - CNN Money
That's the part I am worried about. The lack of control the governments worry about is what might make bitcoins so wonderful. It might promote things like money laundering and other illegal activities. It does help cut out the "Middle-Man", the manipulators. I'm not sure how much this will effect the over global economy in say 30 years. Will this cause some revolution? Hard to say.
It will cause people to look at their options and hopefully, cause governments to control more their "Fiat Currency".
Buiadh - NO - Bas
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