A crypto currency with managed inflation wouldn't make early adopters as wealthy, but it would be a better medium of exchange.
With central banks, it just became accepted that when dealing with unpredictable economies, the tendency to inflate was less dangerous than the tendency to deflate and thus why most banks will err on that side when making policy decisions. There are some great historical examples where banks organized mass deflation (I can't find one right now, but the one in my mind involved the entire country dropping zeroes from the end of their notes) and by making the change predictable, they were able to avoid many of the harmful effects.
If it were legitimately used in widespread transactions, the currencies market wouldn't impact the valuation as much, and without that turbulance, since BTC's can't "disappear" under your couch, and you have a mathematically fixed growth rate up through 2140, the currency shouldn't deflate. Just as a frequently cited example, the US had a crisis in the 70's not because pegging the dollar to gold was bad, but because the real gold reserves were covering vastly less of the actual dollars in the market drastically due to money printing.
BTC doesn't have those issues - they are fixed in circulation, have a predictable rate of disbursement that will slow to nothing in 2140, and at that point the exchange rates for goods with BTC would only fluctuate its fixed value against other currencies or against goods scarcity. I wouldn't imagine, if it actually became a well grounded currency, significant swathes of the market making a run on it and depreciating its value as badly by that point. It lets you keep currency speculation, though, without the rampant inflationary effects of quantitative easing and money printing at whims.
The problem with a coin like this is initial adoption (which is required to create the network effect that makes the coin useful). Why would anyone put serious money into a currency that is guaranteed to lose value forever through inflation and with no useful network?
The only reason inflation works for a currency like USD is because there are already billions of users locked in by the extremely large network effect, and similar inflation on any viable alternatives like the EUR.
Look at inflating currencies with smaller networks (south america) and how hard it is to keep people from getting rid of that money, usually it requires government (violent) intervention.
Deflation is bad because it makes loan repayment more difficult during both recessions and periods of growth. In the extreme, deflation will worsen recessions and hinder expansions of the economy.
It is easy to think that lending is a bad thing, but let's put it this way: it is because we are able to take out loans (of various kinds) to start businesses that non-wealthy non-aristocrats are able to participate in the market. Too much credit is a bad thing, but too little credit denies capital to anyone who is not already wealthy.
In my view, Bitcoin will ultimately be little more than another way to make electronic payments. Merchants will accept Bitcoin only to immediately trade the Bitcoin units for some fiat currency on a Bitcoin exchange. Bitcoin exchanges will basically be payment processors. This, of course, assumes that technical problems do not destabilize everyone's trust in Bitcoin as a secure payment system (and given that it fails to meet the formal definition of security used by cryptographers, I suspect that this is bound to happen).
By the way I back my ripple credit entirely with bitcoin -- if you can make a payment go through the network to me, you are entitled to it.
The bigger issue we should be focusing on is not deflation or inflation but rather who controls it. If it is controlled by one player (government) then it ultimately decides who benefits and who loses from it. It is a much more honest situation when market controls it. Once there are too many people taking loans and going bankrupt, then investors stop investing until a point is reached at which it is more profitable to invest than to hoard again.
In any case, the extent to which people are denied access to capital is almost exactly the same as the extent to which they benefit from hoarding.The distribution of capital changes, rewarding less opportunistic and more hardworking people during deflation. Ironically, it's exactly the opposite of what governments in almost any country tell people.
Finally, I would like to add that even though capital is important, it is not the only component responsible for creating value and wealth. Thus, economy would reward not only people capable of obtaining capital, but also those who have great ideas and skills to implement those ideas.
If the real rate return of investments over any period of time is on average less than simply hoarding the currency (an inevitable consequence of a permanently deflationary economy) your economy is screwed up.
Arcane hypothetical edge cases are unhelpful for exposition. It's easier to look at the conventional alternative: everybody in the world uses a means of payment which diminishes in value at a slow but stable rate. Now the average person that invests in production gains, and the average person holding cash is incentivised to convert that cash into something they want or funding the production of something others want. Isn't this better?
(1)strictly speaking we're better off looking at money as a flow, in which case the velocity of circulation comes into place, but a fixed money supply certainly wouldn't induce that to increase....
This statement is wrong, because you measure profits in money rather than value. With bitcoin the amount of money in the economy stays the same, true. However the value of each unit grows as soon as you invest and produce something useful that people want. This means, you may receive back even less than you invested in absolute units of money, but more in value.
If I'm misunderstanding, please clarify.
(In the unlikely event that Bitcoins ever became widely popular with speculators, then governments will tax or restrict domestic purchasers or exchanges for Bitcoins (they can't and won't be especially efficient at doing this; the US/EU don't need to be to severely damage the exchange value of a Bitcoin.).
having a secure system with the properties of bitcoin is worth some amount of money compared to money wasted on frictional costs in the current financial system.
If you avoid drinking the kool-aid you don't regard bitcoin as a replacement for current methods of exchange. It only really serves one of the three functions of money very well.
I'm devising a "Friedman Coin" or "Free Coin" to fix these issues. If you're interested, drop me a line.