Quote from: Vladimir on March 26, 2013, 03:53:24 AM

Quote from: Dr.Steve on March 26, 2013, 03:35:41 AM

One would be Gresham's Law where "Bad money drives out good", in that all the world's fiat (the bad money) drives the good money into hiding.

I am not an economist or philosopher but I will be bold enough to disagree with Gresham on this one. If the above postulate was indeed true then we all would be using Zimbabwe dollars and I would be filthy reach because I have 100 000 000 000 000 Zimbabwe dollar bank note pinned on my cork board.

If I am mistaken and misunderstand things, please explain how.

Nobody would want to hold the hyperinflating Zimbabwe dollars because they are dropping in value so fast. People who have no choice but to be paid in them will spend them as quickly as physically possible. But all that means is that hyperinflation is bad, not that all inflation is bad or all deflation is good.

My understanding has been that, in order to have a stable economy, you must have small but positive inflation at all times, no matter what the economy is doing. Because the economy is pretty much always growing, this means that you must increase the money supply at a controlled pace, meaning that some entity must be able to increase the money supply at a variable rate depending on what the economy is doing. In other words, Government-controlled fiat currency, which every nation in the world currently uses.

Small but positive inflation means that simply holding onto money long-term is not to your advantage. You have to either spend it, or invest it in something. Inflating faster than any business can profit or any real good can increase in value is bad, because nobody will want to invest when they can spend instead and get real goods that don't inflate. Deflating is bad because everybody will hold their currency instead of investing it unless they believe that the company they are investing in will profit enough to overwhelm the inflation.

Just purchasing daily necessities is not enough. How many people here work in a business that creates something that is strictly necessary? Probably almost nobody. You need investment at all levels for the economy to work. How much investment is there with Bitcoins? Would you invest a large sum in BTC in a company with a good business plan? Probably not, because they couldn't return more than you would earn by just holding the BTC.

This is what I believe will ultimately limit the growth of Bitcoin. It's useful and interesting, and all sorts of good products will probably be created using it, but I don't believe that it will ever take over the world, replace any national currencies, destroy governments, or otherwise become the primary currency for a large section of the economy. I do hold some bitcoin, and I would be interested in being proven wrong, but that's the way that I see it right now.