May 23, 2015

in la serenissima, inflation prices you in

Filed under: Uncategorized — @ 12:00 a.m.
in la serenissima, inflation prices you in

The formula for Bitcoin inflation can be written as such:

Idt = Mdt / _M3 +C%dt

(Mircea Popescu)

And in English:

Bitcoin inflation over an interval equals the mined coins over that interval divided by the average monetary mass during that interval plus the percent change over that interval.


And to further paraphrase, Bitcoin inflation is zero not because the mining rate is known in advance and priced in, but…

"Because it prices you in."


The mental change is a subtle perspective shift in theory but a distressingly large gap for the fiat mind to jump.

interlude. stare off into space and listen to some Sinatra.

Fiat economists have a terrific problem in the fiat state's stranglehold over the issuance of money and storage of gold. It is literally impossible for anyone to know how much money there is today, much less how much money there will be tomorrow. The trend, of course, only goes one way - once the government decides that it'll finance its operations by printing more money it cannot do anything else. Printing is vastly easier than actually collecting taxes, and what socialist organ is going to deliberately do the hard but correct thing in place of the easy thing?

Their contortions produce such amusing bits of pseudoscience as the "natural interest rate":

This natural rate refers to the real interest rate consistent with full employment of labor and capital resources. More specifically, it can be viewed as the rate of interest that would obtain if all prices and wages had adjusted so as to bring the level of economic activity to its full-employment level. The natural rate of interest can vary substantially over time, as it is driven by numerous factors such as the long-run potential growth rate of the economy, demographic composition of the population, desirability of saving on the part of households, perceived profitability of investment opportunities, government spending, and taxes.

(Negro, Giannoni, Cocci, Shahanaghi, Smith: "Why Are Interest Rates So Low?")

The frantic activity rests sneakily on a particular bad assumption: that all labor and capital should be fully employed. This assumption sits on a particularly bad foundation: that full employment of the labor market is either possible or desireable; and betrays the underlying fiat thinking: that capital should be "fully employed" seeking a return at all times.

The bad assumption comes from growing up inundated with a world's worth of socialist propaganda: "everyone is a special snowflake, deserving of food and water and internet access!" From experience, I must tell you that the sliver of useful activity floating atop the sea of everyone cannot possibly employ everyone. I'll readily grant that the world needs an infinity of floor sweepers and knob polishers, but as there is a practical infinity of those people already, their wages must of necessity approach zero.

On to the "full employment" of capital. This is related to the circular logic people employed by people who're entirely happy to slave under the USG 4's insane currency system: "inflation's fine ad expected - you just put your money into the market and then your dollars inflate along with everything else!" The reasoning misses entirely the largely ignored cognitive tax imposed by inflationary systems. Not that the world is or should be an easy place to exist, but scraping up food credits is difficult enough without having to worry that they're optimally allocated to the inflation-tracking buckets - or, as I said to a friend the other day: "It would be nice if once I extraced a dollar from the world, I didn't have to worry about it withering in my fist."

Putting capital to work is a damn difficult thing to pull off in the best of times. The adage holds that there can be no reward without risk and while that is assuredly true at least in the sense of managing opportunity cost when determining where to deploy cycles, but that's no justification for forcing everyone everywhere at all times to be constantly working to adjust their exposure to the interest rate in all of the myriad ways it crops up in a world where every producer must squeeze supplier costs down and eke prices up in order to simply outperform the returns they could procure indexing the market.

interlude, more Sinatra

Bitcoin cannot be inflated with any of the tools that the Great Satan is wont to use in its normal course of business. Should Lizard Hitler or Gila Stalin put the printing presses into fifth gear in hopes of getting their hands on as many coins as possible, they've but two options: make purchases directly or purchase and operate mining equipment.

In the first scenario, every successive purchase will push the price per Bitcoin up further and further, requiring that LH and GS print ever more fiat currencies to keep playing. Pursued recklessly, this will lead directly and inevitably to an inflationary spiral in their currency, and do precisely nothing to Bitcoin but make its holders fantastically wealthy (in fiat denominations).

In the second scenario, every successive round of hashpower deployed will slightly increase the speed at which coins can be milked from the system (in the short term), followed by a network-self-correction in the form of a difficulty increase making it more challenging to milk coins from the system. Furthermore, should one state engage in this behavior, they're all extremely likely to (rumor has it that this race is already on) as the dynamics of "sound money" are such that whoever's left holding the fiat bag after the land grab is going to have a hard time keeping their water mains running, much less their army in shoes.

Happily, in all imagineable scenarios, "Bitcoin prices you in". Sleep well, socialist state.

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