Quote from: HappyFunnyFoo on April 30, 2012, 10:53:13 PM

Want to see bitcoin traded for goods instead of hoarded? The currency needs to be fundamentally inflationary in nature. \

Economists and others stuck on this deflationary spiral never consider transaction costs in their arguments.

Why not?

When I spend a $100 on something and pay using a payment card, the person I'm making the purchase from gets $97. So the price of the good is raised 3% more than it needs to be. When I spend using bitcoin, that transaction cost -- even when exchanging to and from fiat on both ends is a fraction of that level.

So with USD you have a currency that inflates at 1.5% per year but has transaction costs of 3% for each time the funds are turned over. With Bitcoin you have a currency that will (eventually) inflate at a much lower level but whose transaction costs are just 1% or less, for example, with each turn of the money.

So at the market, the customer is asked to choose:

Option A.) For about $103 USD using your payment card you get $100 worth of goods.

Option B.) Optionally, you can pay using bitcoins, first convert $101 of your USDs to get $100 worth of Bitcoins and then with that you are able to purchase $100 worth of goods.

Which option will the consumer choose?

And thus, even with an expected increase in the value of bitcoin, using Bitcoins will continue to be the choice made when making payments.

-----

Faced with competition at the point of sale, an argument would be that the payment card transaction will drop to a more competitive level. A 2% or so difference is enough of an incentive to switch for many consumers. 1% ... not so much.

What might happen though is normal payment flow will move over to bitcoin to take advantage of the discount, but the payments occurring from fraud can't (or at least if it does those losses won't be borne by the banks or the issuer) and as a result that 3% truly might be the actual floor that payment cards can still function at profitably.

Incidentally, Bitcoin's currency inflation rate just dropped below 30% per annum and slowing each and every day. When the block reward drops in half around December, its currency inflation rate will drop from about 25% to just 12.5% per annum. So Bitcoin still is at a rapid inflationary level yet hoarding also is happening at the same time.