Re: Proposal from a macroeconomist for an optimal crypto-currency
Doesn't this depend on whether having a positive inflation rate encourages investment, and whether encouraging more investment than is ideal in the 0 inflation case has positive externalities for society?
Speaking of encouraging vs. discouraging investment, a lot of people here will argue that people hoarding bitcoins rather than investing them doesn't actually lead to more idling of productive resources, because it just increases the value of non-hoarded bitcoins, so whenever any non-hoarded bitcoins are invested, their value will be high enough to compensate for the hoarded bitcoins. What are your thoughts on that?
Except Bitcoins are fungible so the rise in value of Bitcoins is shared between the hoarders of bitcoins and the invested Bitcoins, so yes there will be some compensation, but this is still less than ideal. Also the rate of price increase is entirely dependent on how many goods are being traded with that currency, so in the short-run it may fluctuate wildly, but there is nothing you can do about that. Furthermore, GDP does not contain total wealth of an economy, just what has been produced during the year, so the rate that will keep a currency at 0% price inflation is equal to the rate at which total wealth increases, not GDP. Speaking of encouraging vs. discouraging investment, a lot of people here will argue that people hoarding bitcoins rather than investing them doesn't actually lead to more idling of productive resources, because it just increases the value of non-hoarded bitcoins, so whenever any non-hoarded bitcoins are invested, their value will be high enough to compensate for the hoarded bitcoins. What are your thoughts on that?
Think of it this way, say the total wealth of an economy grows at 3%. Any business that grows at less than 3%, will be experiencing a monetary loss when calculated in terms of Bitcoin. Furthermore, hoarding Bitcoins has become profitable thus increasing the opportunity costs of all productive activities further dropping production levels. This is hugely significant because the majority of wealth is owned by business owners, who want the best return on investment, so if they would see higher returns on a coin with stable price levels you can bet your ass they are going to use it instead.
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Is the idea that the stability would come from less people wanting to hold the currency for speculation/investment, because they would know there would be expected 4% inflation?
Btw, my idea for solving the price stability problem is to simply have the government or some trusted private institution publish a price index, which could be NGDP-targeted. All prices, wages, and contracts could refer to units of this index (maybe the government would give favorable tax treatment to businesses which do this). So even though the underlying value of Bitcoin might be fluctuating wildly, people can get stability of they want it. Banks can offer checking accounts denominated in this new unit, giving less risk to the consumer in exchange for keeping the bulk of the value gained from the expected deflation.
Btw, my idea for solving the price stability problem is to simply have the government or some trusted private institution publish a price index, which could be NGDP-targeted. All prices, wages, and contracts could refer to units of this index (maybe the government would give favorable tax treatment to businesses which do this). So even though the underlying value of Bitcoin might be fluctuating wildly, people can get stability of they want it. Banks can offer checking accounts denominated in this new unit, giving less risk to the consumer in exchange for keeping the bulk of the value gained from the expected deflation.
Value and inter-good price levels can't be measured in a scientific sense, although you can make basic observations about them. All prices are ratios, for example you may go to a McDonald's and see that the prices of $1 per McDouble and $3 per Big Mac. If you try adding ratios they must have common denominators meaning in order to add these you must go through the following process ($1/McDouble)+($3/Big Mac) = ($1/McDouble)*(Big Mac/Big Mac) + ($3/Big Mac) *(McDouble/McDouble) = ($1*Big Mac + $3*McDouble)/(McDouble*Big Mac) =
?? Also your scheme doesn't seem to fit into Bitcoin's architecture, as it creates a new currency which is kind of redundant given that Bitcoin, or any other crypto-currency, can already function as a unit of account.