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Comment by wmf | Hacker News Reader

Another thing cryptocurrency people get wrong: Referring to an eventual fixed supply (e.g. 21M BTC) as "deflationary" and an eventual unlimited supply as "inflationary".

In reality, deflation means demand is increasing faster than supply and inflation means supply is increasing faster than demand. A cryptocurrency with open-loop monetary policy may be both deflationary and inflationary at different times. Bitcoin and Dogecoin are no different in this respect; they both use open-loop policies that lead to massive volatility. Real-world currencies use closed-loop monetary policy to consistently target a particular level of inlation/deflation, but this is too "boring" for cryptocurrency.

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Thank you for referencing economic policy as a feedback loop. Once you take that concept for granted, it's much easier to analyze what exactly is wrong with the Federal Reserve's policy (of which Bitcoin et al are a direct reaction to).

In a technological economy, we would expect to see prices for real goods continually dropping, as decreasing prices are the expected result of market optimization. However, the Federal Reserve closes the feedback loop for consumers but injecting money into the financial sector. Thus to make the CPI constantly rise, everything that is tied to the financial sector (housing, cars, healthcare) shoots through the roof. And this isn't even just a direct handout to consumers looking to spend, but a bigger debt ballchain that they're expected to pay interest on!

I wouldn't just blame the Fed. There are multiple feedback loops currently concentrating funds in the financial sector. The US monetary system is one of the fairly stable ones - it has a remarkably constant monetary expansion rate at around 2x/ decade (compare and contrast with Russia which is up there at 20x decade).

Correct for the monetary expansion rate, rather than CPI, and you can get a reasonable idea of how the prices of real goods are actually dropping over time, as are the majority of people's salaries, as money gets sucked into the financial sector primarily as a side effect of loan securitisation, and crony taxation policies.

>they both use open-loop policies that lead to massive volatility

Is that really the (only) reason that there is a massive volatility? Why isn't gold more volatile than it is then?

I'd say that another reason for massive volatility is the newness of everything and the consequent lack of confidence that something about the system (technical or otherwise) won't break down in time.

Wouldn't implementing that mean giving control to a specific party, as opposed to the level of inflation/deflation? How could the system determine it automatically?

It can't. For example if you target a certain level of money velocity people could just spam large fake transactions and cause inflation.

Bitcoin does enable some interesting monetary ideas like demurrage, or constant recycling of the money supply. It also runs "open loop". This is implemented in some super small cryptocoins like Freicoin.

https://en.m.wikipedia.org/wiki/Demurrage_(currency)

Some economists have argued for replacing central banker judgment with a fixed function as a way to bring clarity to policy and make the rules fairer. Something like the Taylor rule perhaps:

https://en.wikipedia.org/wiki/Taylor_rule

Decentralized closed-loop monetary policy is an unsolved problem but almost no one is working on it because there's no reward for solving it. There has been some initial work such as https://blog.ethereum.org/2014/11/11/search-stable-cryptocur...

Maker has been working on this problem for close to two years. https://github.com/makerdao/wiki/wiki

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