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Think of the BitCoins as something like gold - gold is also a finite resource and gets incrementally more difficult to mine, yet no deflationary spiral has set in (afaik). You can also trade gold and cash in dark channels and evade taxes, but you don't have to.

> yet no deflationary spiral has set in (afaik)

Gold isn't currently the currency (in most places), so I'm not sure what you mean here. If you listen to the podcast, the right-leaning (but generally fair) host makes a convincing explanation why there would be deflation under bitcoin. Also, gold and deflation are part of a popular story for explaining the great depression. I say all of this not to debate any of these points, but to point out that there is a case to be made that bitcoin would deflate over time and that it might have negative consequences.

I think bitcoin is somewhat different than gold because it is more decentralized (in practice) than having a national currency backed by gold. For example, it may scale more cleanly than gold and cash for corrupt uses, since bank accounts and the sources of money can be more readily hidden. I'm skeptical that this is a good thing.

During all 19th century gold and silver were the main currency. Economy was on the rise (industrial revolution) but there wasn't any problem with deflation nature of gold.

The link below suggests that you're right---the price of gold was remarkably steady for at least the second half of the 1800s.

http://www.nma.org/pdf/gold/his_gold_prices.pdf

Why would the price have been so steady? Was the supply of gold increasing at just the right rate to keep it steady (unlikely) or was the economy so much less efficient at the time that prices didn't tend to fluctuate as they should (my guess). Perhaps the government played a role by owning a massive amount of gold? I don't think any of these explanations would apply to bitcoin (or gold, now).

Is there a better explanation? (and does it also apply to bitcoin?)

From Gregory Clark's _Farewell to Alms_:

> However, in preindustrial England, and indeed in many preindustrial economies, inflation rates were low by modern standards. Figure 8.7 shows the English inflation rate from 1200 to 2000 over successive forty-year intervals. Before 1914 inflation rates rarely exceeded 2 percent per year, even in the period known as the Price Revolution, when the influx of silver from the New World helped drive up prices. In a country such as England, which had a highly regarded currency in the preindustrial era, the crown did not avail itself of the inflation tax, despite the close restrictions Parliament placed on its other tax revenues. Only in the twentieth century did significant inflation appear in England. By the late twentieth century annual inflation averaged 4–8 percent per year. Thus there has been a decline, not an improvement, in the quality of monetary management in England since the Industrial Revolution. > > ...Thus in Roman Egypt wheat prices roughly doubled between the beginning of the first century AD and the middle of the third.[12] But that reflects an inflation rate of less than 0.3 percent per year.

I submit that it is unlikely that any of your explanations would operate over most of England's post-Invasion history and also in Roman Egypt a millennium before.

I couldn't find the data right now, but if i'm not mistaken, long term there was deflation, not inflation (though there were fluctuation due to wars and influx of precious metals from New World).

E.g. compare 1800 with 1900 with the help of CPI: http://www.measuringworth.com/calculators/ppowerus/

You are looking on the wrong numbers, dollar was fixed to gold, so no surprise, that its price is stable.

You should measure how many services and products 1kg of gold can buy you.

Wasn't the (or a) problem with the great depression that they started to decouple money from gold? Although I guess there is any number of theories about what caused the great depression.

In a bitcoin system, fractional reserve banking flat out will NOT work so you can completely forget about all of macroeconomics done in the last 300 years.

Instead it works like an economy that is not merely a gold standard but an economy where gold tokens are actually traded physically and are the only currency that is permitted. An example of this would be the economy of the Byzantine empire which was very stable and lasted over 1000 years. It was constructed in such a way as a reaction in part to the relentless debasement of the western roman empire's currency, which many believed was a central cause of its decline.

Fractional reserve banking works, up to a certain multiplier (you can loan out every bitcoin you take in; if you can find people willing to accept "certificates valid for 1 bitcoin", you can loan out as many as you want).

Certificates valid for one bitcoin are not bitcoins though. There is no reason to keep your money with a bank for safekeeping as their is for physical gold which is how the whole fractional reserve system got started. The goldsmith would give you receipts valid for your gold so you could safekeep it with him. Also, there is no government to print up fiat to bail out the banking system, so when loans default investors lose their money permanently.

People forget that there was deflation during the Roaring Twenties, and several economic booms before that.

I think there are two kinds of deflation. One is just the currency getting more valuable. The other is deflation due to everyone having to stop and pay down their debts. The latter is horrible because the deflation makes the debt harder to pay off. The former is no big deal.

Some economists talk about the "spiral" caused by people putting off purchases, since they can get more for their money later. Those economists have yet to explain why people keep buying so many computers, cellphones, and flat screen TVs. If people don't actually put off their purchases in the expectation of lower prices, the spiral argument fails.

Finally, it's important to remember that bitcoins are not legal tender, and quite likely never will be. Deflation of one currency in the context of multiple competing currencies is going to have much less of an overall economic effect.

Point one:

> I also think taxes are needed.

The cypherpunks would tend to disagree with you. Remember, taxes aren't inherent to any system of monetary value, they're just laws that say "pay us x or go to jail".

Point two:

"During the financial crisis, many on the left expressed concern about a deflationary spiral. I don't claim any economic expertise, but the concern seemed valid."

Deflationary spirals are an economic theory, and have never yet been seen in the wild.

The only "problems caused by extreme economic freedom" are the groans and reactions of centralized monetary control as liberty is restored to the people.

I'm aware that people hold your views. I was more curious whether I am right that bitcoin is mostly incompatible with mine.

> I also think taxes are needed. I think a bitcoin-driven economy is one that is hard to tax because it's hard to prove that person X has, or has received, some amount of money. Even sales tax seems difficult to collect. Is there some form of tax that would still work?

Real estate still works well.