Bitcoin Forum

From what I understand (correct me if I am wrong), it is impossible to have usury (interest or compound interest) with bitcoin. From my understanding, they are mutually exclusive OR usury would destroy bitcoin. Please let me explain.

Time and amounts are too important as I'm more interested in the long term consequences, so I'll just pull numbers out of my butt --- I promise they'll smell like roses! :)

Suppose that I have 1,000,000 BTC and begin lending it out at 10% compound interest per year, compounded monthly.

Further suppose that I am able to lend out the entire amount 100% of the time. (Just like in physics, assuming ideal conditions and no friction. :) )

So...

A = P (1 + r/n)^nt

Let's let the number of years (t) be 30.571904 or 23.611591...

A = 1,000,000 × (1 + (0.1÷12))^(12×30.571904) = 21,000,000 (100%)
A = 1,000,000 × (1 + (0.1÷12))^(12×23.611591) = 10,500,000 (50%)

So, in about 30.5 years, I would own 100% of all BTC (or have a claim on 100%).

In about 23.6 years, I'd have over half, or a claim to over half. (Having and claiming are NOT the same.)

This seems insane to me. With the limited supply of bitcoins, i.e. less than 21 million after people lose some, it is impossible to have 21,000,000 bitcoins.

That is, compounded interest leads to an absurdity.

The implication, as I take it, is that if there is to be any kind of usury, then usury must be charged in a fiat currency that has an unlimited supply, e.g. the USD, CAD, KRW, JPY, AUD, EUR, etc. That would avoid the absurdity. i.e. Usury on BTC would have to be charged in a fiat currency, e.g. If the rate is USD $100 per BTC, then 10% is USD $10 per BTC per year, compounded. That would not create more than one claim per BTC, though it would necessitate a fiat currency to deal in for usury.

Please don't jump on me for advocating a fiat currency - that is NOT my intent and I am NOT advocating either a fiat currency or usury. I merely mean to point out the absurdity of usury with BTC.

My guess is that the money-junkies at the banks would want to charge interest if they dealt with BTC at all, and I am guessing that they would prefer to intentionally attempt to break the system so that they could return to their current system of simply printing money out of thin air.

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Am I correct in my assumptions and analysis there?

Is it absurd to charge interest? (I take it that interest creates money out of thin air rather than through mining BTC.)

Thanks in advance for any input.

I think its wrong assumption. You are trying to put interest to deflactionary currency. To me loans should be just like this: borrow 1btc, repay 1btc no need to complicate things and you will have back 1btc that is more valuable than before. Person who borrowed and spent 1btc have to work more to get back 1btc because its value is higher meantime. and i dont know if borrowing 1btc and getting back 0.999 wont be still profitable if prices dropped even more.

I totally understand your thinking, and believe you are a bit off the mark on a few points.

The fiat system has been around for probably most of your life, and has distorted the way you think about money.

Interest can probably exist with BTC, but it would be nowhere near 10% pa  due to the reason that you described.

Losses due to bad investments (ie defaults) would also be a lot higher than in the current system.

Therefore, due to risk of loss and the low return, one would never be willing to lead out ALL of his/her BTC as the risk / return ratio would be too high.

Also as there is no inflation in a totally BTC world, a return of 1% might be the norm.

First of all, such interest would be completely unafordable. You'll never see anyone take out a $100,000,000 loan (which is the equivalent to BTC1,000,000) at 10% interest for such a long time, it's just a horrible financial decision... and no bank would approve it either. Secondly, interest in fiat currencies at least partially takes account of inflation (unless the fed messes with rates, as it usually does), Bitcoin conversely, should take account of deflation. So I would expect lower interest. This particular loan would just have to default, but interest is not impossible by any means.

I disagree, a loan should still charge interest. After all, the creditor could benefit from holding the coins just as much as loaning them, and holding them involves less risk and more flexibility. Interest could be lower though.

Bitcoins loans already exist and therefore BTC interest exists, it's just there's no common rate or method of documenting/settling.

Any asset that can be lent can have an interest rate. The rate will be determined by what lenders/borrowers are willing accept, based on the credit risk of the borrower and the amount of borrowers vs lenders.

Rates will not be low due to the difficulties of establishing the ability and intention of the borrower to repay, given so many people and firms that have been involved in BTC so far have been scammers or financially incompetent.

funny thing, I was thinking about this myself too..

Problem, atm, as well, there is no btc credit scoring system, and no tie from such a system to real life debt recovery firms...
If this could be done, you might see "btc visa" etc starting up

On the contrary.

Usury is impossible under Freicoin, because only demurrage cancels the liquidity premium of money.  A load under FRC will be zero (before accounting for risk) and the lenders will benefit by not having to pay demurrage for the duration of the loan, hence they achieve by investing what other in standard currency get by mere mattress stuffing.

Meanwhile the borrower will pay demurrage (if he just holds the coins) and need to be acquiring more coins to pay back the loan but the loan will not increase in cost and if they can produce 1 coin worth of salable products from 1 coin of capital goods they will be able to repay the loan (this assumes the borrower immediately converts all the borrowed money into capital goods which in essence passes demurrage on yet again).

Under BTC Usury is inevitable because under deflation the principle of any loan (even one with zero interest) in increasing and putting the borrower deeper into debt.  Only the most obscenely profitable endeavors are worth investing in and these are rarely of much redeeming social value (drugs and gambling) or really create anything (spending BTC to buy more computers to mine more BTC (what a circle-jerk)).

Obviously the borrower gets shafted under BTC, while under FRC the borrower would be better off then in our current Fiat system.

Do you have data on those being the most profitable industries?

Thanks for the responses.

However, I think we have some misunderstandings.

First, the numbers are irrelevant. Whether the interest rate is 1% or 10% or 1000% is completely irrelevant. The point of the exercise is to illustrate that compounded interest is a mathematically deterministic formula and will overcome the entire system at *some* point, be that 30 years or 300 years.

So let's not focus on the specific numbers. The important thing is that the system is deterministic and exponential in nature.


I think that's an excellent point. The "interest" is merely paid back through deflation. i.e. I borrow 1 BTC today, and tomorrow it has less purchasing power, so I effectively put in more effort to pay back that 1 BTC.

I think you've nailed a very important point there.


Understood, but I still don't see how I'm off the mark if the system deterministically creates more BTC than is possible in reality.

This creates an absurdity, and it needs to be addressed if I'm wrong in assuming that compound interest deterministically overcomes the entire system.


Yes, I know my numbers aren't realistic. The point was to have nice easy round numbers to illustrate the determinism.

Are you suggesting a negative interest rate? e.g. -0.5% when the deflation is 1%, for example only.

No, not negative interest, because the benefits of such a loan would be less beneficial to the creditor than just holding the currency. However, say that the interest rate in dollars is 3.5% and (this would be in the future with hopefully slower deflation) 1% deflation, the BTC interest rate might be 2.5% because of the deflationary advantage to the creditor.

I'm reading that now... But need more time. It's a fascinating concept.

I'm not sure that I understand what you're saying.

If, for example, deflation is 1%, then if I loan out BTC to you at -0.5% interest, I am up 0.5% on that loan when you pay me back because I've recouped 0.5% of the 1% deflation. But as you've pointed out, it's still better for me to hold on to the money and gain the deflation rate instead...

Are you agreeing with me in that BTC interest requires another fiat currency to deal with interest? I'm fuzzy there.

No one loans money like BTC or dollars at negative interest because you would always have been better off just holding he money.

Example I loan 1000 BTCs at -5% interest and get back 950 coins, deflation of 10% means the 950 coins have a value equivalent to 1045 of my original coins, so yes I'm richer then when I started yes.  But if I had just pocketed my 1000 coins I'd have 1000 nominal coins and a 1100 value measured in original coins.  Thus I'm richer-er by just not making that loan.

This is why demurrage works, you can't just sit on coins and retain value because theirs a nominal coin loss irrespective of inflation or deflation.  Now the same scenario with 5% demurrage, you loan 1000 coins at 0%, and get back 1000, if you had held the coins you would have 950 so the loan is worth more and is worth more regardless of inflation or deflation and you can actually charge negative interest up to the level of demurrage and still come out even, though in practice this is not expected.

The most likely results of this scenario is that some of your loans end in default. There is no contradiction in contractual claims for repayment in BTC to exceed actual BTC; it just means that some of those claims may not be fulfilled. However, even that isn't actually inevitable; whenever you receive a payment, you're sending that BTC back out again as another loan. Thus, it becomes available to make another payment. As long as we're assuming ideal conditions, there is no limit on how much people can owe you, provided the rate of reinvestment is at least equal to the rate of repayment.

There are other problems with your assumptions. The first is that the supply of people willing to take out loans at 10% interest (or any interest) is not inexhaustible. The more money you inject in to the economy, the less demand there is relative to the supply, and the less interest people are willing to pay. The second problem is that your own needs and wants are not insignificant (and the wants become more significant, in relative terms, as the interest decreases). Money which you spend on your own needs and wants becomes available to others to repay their loans.

Not exactly, but let's say after Bitcoin is more mainstream you can pay for a $100,000 house in USD or BTC and the bank will finance either way. You could borrow (assuming $100/BTC for simplicity sake) $100,000 or BTC100 to pay for the house. Now if the bank was to charge 7% on the loan (using more normal rates) either way, the bank would make much more on the BTC loan than on the USD loan because of the inflation on the USD and deflation on the BTC side.

If USD inflation was 3% (it's probably higher but let's pretend the CPI is not BS), and BTC deflation 3%, the bank would have to charge 6% higher on the USD loan to make as much on it as they would on the BTC loan. This is because when the USD loan is paid back after the term, say 10 years, it would only be worth $73,742 (today's dollars, ignoring interest) whereas the BTC loan ignoring interest would be worth $134,391 (today's dollars, ignoring interest). That's a difference of $62,000.

Therefore, the bank could charge 7% interest on USD and 1% on BTC. 3% of the USD interest would cover inflation and 4% would be profit. On the BTC loan, there isn't any inflation to deal with and the bank can get some of that 4% profit from deflation, and just charge 1% interest.

Now this wouldn't work quite the same in an economy where BTC is the main currency, but you get the point. Hopefully I didn't make this too convoluted.

My 5 cents - it is all a matter of how fast bitcoin is growing. If growing. When growth is fast and strong - yeah, it is better to just keep your coins and do not risk lending them. The default probability is never zero like in OP's frictionless world. But when bitcoin adoption platoes it may still make sense to lend bitcoins to someone who know a shortcut in the economy and can make money grow faster than they do so naturally.

Why not?

I think this interest thing is always a bit of a red herring.

The problem we have today is more succinctly described as socialism for the rich, and capitalism (without real capital) for the masses.

Interest the way it is often described in posts like this doesn't really exist. If anyone tells you money magically multiplies in your savings account, they are lying. They are hiding the real mechanics how things work: where value is created and where it’s sucked up. Today inflation alone outruns most grannys' savings accounts anyway.

If we have soft money (like credits or promises for future services), then we don’t need interest, because money supply can always be expanded on-the-fly by people on the spot. There is no counterparty risk. This is how it works in most LETSs (local exchange and trading systems). There’d at most be reputation loss.

If we have a hard currency (i.e. debt-free, think gold and silver or bitcoins), and I lend someone money, I carry the risk that they won’t pay back. So I charge interest. This way I can hedge against the risk of other debtors going bankrupt. Also without interest I wouldn't have any incentive to lend anyone any money in the first place.

Again, *I* carry the risk. If the debtor goes bankrupt, there’s basically nothing I can do.

The debtor is mostly a business. This means I’d basically have a share of that business. They need to produce the interest that I charge. This is also called dividends. So interest would always be backed by dividends. Interest and dividends are essentially the same.

The business can also make a loss. So I’d have negative earnings, negative interest in that month.

Yes, interest could also be negative. So you see, in an honest and not corrupted economy, everything is a transparent zero sum game. No magically multiplying money. The problem today is that banks do not have to take on such losses. They get the benefits of their investments without the risk. That’s why we have socialism for the rich.

Compound interest: another fallacy that’s often purported. If I have a share of a company, and I get dividends, and I reinvest them into the same share, what happens? The price of the share rises. Eventually it will be overvalued, and the price of the share will drop again: I will have made loss. Again, everything is correct, a zero sum game.

There was a phase of free banking in the US when things worked like that. Banking as a service mediating between lenders and debtors. If I get more and more debtors than savers, I can lower the rates for debtors and rise the rates I pay out to savers. If I get more and more savers, then I must lower the rates I pay them out. If savers compound, I must lower the rates as well. That way I’d always keep balances in check if my bank wants to stay alive.

Turns out the problem wasn't usury in this era: many banks went bankrupt. People demanded more stability, and the FED was introduced. The rest is history. Since then, the FED dictates interest rates: it’s a command economy that dictates growth without substance, mindless consumption and runaway inflation.

We now have the worst of both worlds (soft and hard currency): Money backed by nothing, it is debt (or promises, we’re held as collateral for public debt), but they charge interest on it nevertheless.

About deflation, I already wrote elsewhere:

This terminology comes from the "central bank" thinking.

Bitcoin is not "deflationary", because it is not an enforced monopoly money. It is just an asset. It follows supply and demand. So you could ask even today, why should I lend someone my dollars, if I can buy bitcoins instead? Simply because bitcoins exist, you would therefore want to charge high interest even on dollar loans. Or would you? No, because, as we see, the value of Bitcoin fluctuates; it is therefore not deflationary. And even in an economy that is dominated by the Bitcoin currency, it will have to compete with other assets that may promise higher return. So the average interest rate in an economy that is not dominated by a central bank would have nothing to do with the mainly used currency. It will rather be the median of any assets out there.

OP is wrong and does not understand the movement of money. A loan of 21 million bitcoins or more seems like it would be impossible to pay back, but then you have to remember that bitcoins circulate. After paying a portion of the loan, the bitcoins circle back through the economy and another portion of the loan can be payed.

I disagree with him, but an idiot? Really? He put a lot of thought, overall good thought into it and just arrives at the wrong conclusion. You do make a good point, but no need to be a jerk. If you want to be rude, go find a member of the Federal Reserve Board  ;).

That isn't going to happen on a large scale, because you'd be throwing money away due to defaults.

Perhaps I've framed the question wrong...

If there is interest, it will create more "claims" on bitcoins than there are bitcoins that exist. This is deterministically true and the simple math is above to illustrate it.

So, we have two things:

1) Bitcoins (created through mining)
2) Claims on bitcoins (created through usury)

The two are NOT the same.

So, at some point in the (distant?) future, we will have a situation where there are 21 million bitcoins, and claims against 210 million bitcoins.

That is, when people suddenly start calling in claims on bitcoins, the debt system begins to rapidly unwind, as in a "run on the 'system'". That system MUST be outside of the bitcoin system though because it's not a part of the protocol, i.e. that's trivially true.

THE QUESTION REFRAMED FROM THE ABOVE:

Is this problematic that there will be more claims on bitcoins than there will be bitcoins in existence?

My gut reaction is that usury, with respect to bitcoin, it nothing more than counterfeiting fake bitcoins and convincing people that they are real, which we know is false, i.e. a claim on a thing is not the thing. The implication then is that usury will create inflation for a currency that is inherently deflationary (if nobody objects to framing the terminology like that).

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Not quite. In my original post I thought I was pretty clear that I wanted to frame the question in  'frictionless universe'. The question isn't about practicality, it's theoretical.

I understand the velocity of money and how that affects systems, but I think you might have missed the point above where I glossed over the velocity and assumed a near infinite velocity (zero friction).


Since the system is deterministic, it's only a matter of time before claims on bitcoins eclipse the number of bitcoins in existence. Any talk about the velocity of money is just arguing about "when" the claims eclipse the real thing. I am not worried about "when". I'm interested in the implications of that eclipse.

Right now we have central banks printing fiat money out of thin air, and it seems to me that usury is not significantly different. I'm merely framing that issue in terms of how usury is compatible with bitcoin as bitcoin has a hard limit on the amount that can exist.


Another way to look at it is how JP Morgan, Goldman Sachs, and now the Fed have been shorting silver and gold - paper silver & gold. By manufacturing imaginary silver & gold, they've managed to manipulate the market and crash the prices.

In terms of bitcoin, the imaginary bitcoins (claims on bitcoins) created through usury seem to lead to the same problem.

I just don't see how usury is compatible with bitcoin unless we want to go down that same road that we see with other fiat currencies and paper silver/gold.

Not necessarily, because you're ignoring the time dimension.

The claims are not for X number of BTC right now, but rather for X BTC/day for Y days. The total number of BTC/day available for buying goods and services as well as paying off loans depends on monetary velocity and is not strictly limited to the number of BTC in circulation.

Your use of the term "usury" implies a negative view of interest. Interest is simply the cost of money. Now, having that money, as money, at a later date may well be more profitable than using it immediately to buy something physical, in the bitcoin economy. So interest rates can be expected to be low, as there is less incentive for the lender to convert the currency to hard assets than in an inflationary economy, which is what, essentially you are paying for: the ability to use money which might otherwise be used for some other endeavor by the lender.

But that is not to say that interest is impossible. Even an interest debt which totals (after compounding and such) more than 21 million coins can still be paid off. You are, after all, paying in installments, and the lender isn't simply holding onto the coins after you pay him. He's making other loans, purchasing capital, expending it on resources such as food and shelter, etc. Just because your heart pumps 191,625,000 gallons of blood over the course of your lifetime doesn't mean that you have to have that much at all times in your body.

Ah, I see your point, he is right though, over the course of a 10 year loan for example, there would in effect be 630,000,000 BTC because each coin can be spent more than once. The reality is, in this universe  ;), Bitcoin works the same way as cash (except better).

-Interest works fine.
-Money can be taxed.
-Fractional reserve banking works.
-Businesses can run.

The ideas circulating that Bitcoin will somehow prevent certain aspects of the financial system (referring to honest business, not government money printing) are generally untrue.

Still it's an interesting thing to think about, so thanks for posting it.

It seems to me that the time dimension is simply not important. But, let's run with it...

Inside of the velocity of money, it seems that you are assuming that a sort of equilibrium will be reached where money moves fast enough through the economy and that the lenders (those charging interest) will continue to move money.

This seems to ignore the possibility (probability?) that all money must move through the lenders eventually, and that they will never call in loans ahead of schedule. We know that this doesn't happen in reality - banks call in loans and ruin people's lives.

I'm skeptical that there would be an equilibrium there. It seems to me that the fabrication of claims on bitcoins would result in the lenders eventually taking all wealth the way it happens in the current system.


Yes - I absolutely have a negative view of usury/interest.


The heart and blood analogy somewhat distorted. It's always the same amount moving through your body, just as the amount of bitcoin would always be the same moving through the economy. We don't count every transaction towards the total number of bitcoins in existence, just as we don't count each contraction of the heart muscle as creating new blood.



Well, I guess I understand how people view bitcoin better now.

It just seems more to me now that the only real advantage is that it cannot be directly controlled by central banks, which is an advantage that I think could disappear very quickly once it gains broader acceptance.

FWIW - I don't think fractional reserve banking works, except for the banks. Here's a series of articles on the topic:

Part 1 - The Mechanics of Fractional Reserve Banking (http://cynic.me/2012/05/28/frackin-reserve-the-mechanics-of-fractional-reserve-banking-1-6)
Part 2 - What is money? (http://cynic.me/2012/05/28/frackin-reserve-what-is-money-2-6)
Part 3 - "How" Fractional Reserve Banking Creates Money and "Why" it is Fraudulent (http://cynic.me/2012/05/28/frackin-reserve-how-fractional-reserve-banking-creates-money-and-why-it-is-fraudulent-3-6)
Part 4 - Run on the Banks? Or Run on the People?  (http://cynic.me/2012/05/28/frackin-reserve-run-on-the-banks-or-run-on-the-people-4-6)
Part 5 - Compound Interest as Invisible Slavery  (http://cynic.me/2012/05/28/frackin-reserve-compound-interest-as-invisible-slavery-5-6)
Part 6 - Summary & Additional Resources  (http://cynic.me/2012/05/28/frackin-reserve-summary-and-additional-resources-6-6)

Fractional reserve banking relies on float time, which if you or I use, we go to prison. It's just fraud. The articles above explain that in depth.

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Anyways, I was looking to see what the general outlook on the topic there was from other people. Thanks for everyone chipping in with their 2 satoshi! :)

A fine argument to keep the bankers out of the halls of government, I agree. Andrew Jackson knew this, too.


But it is important to remember that men naturally do what is beneficial to them, and given a tool such as the hammer of State, no man is immune to seeing his problems as nails.

Moneylending is a business like any other, and so long as it is constrained by the market - that is to say, it has no power to enforce a higher interest rate than is acceptable to those who would borrow - it is a very respectable one.

So, what's wrong with my analogy, then, if it's perfectly analogous?

Hmmm... Not so sure... I've only ever seen the kind of system we have now, and calling it criminal would be an understatement. I'm having a hard time imagining how it can ever be anything except predatory.

It seems that money is heroin for bankers - they're junkies perpetually jonesing for another fix, and they'll do anything to get it, no matter the consequences for them or anyone else.

Well, Bitcoin is a fine solution to that, as well.... Any sound currency is, for that matter. Sound money tends to appreciate in value. Even if it is merely stable, it encourages saving. Bitcoin will most likely be slowly deflationary, which will further encourage saving. Saving is the counterpoint to lending. If a person can more profitably save their money instead of taking out a loan to purchase the house, then they will, so lenders would need to price their interest so as to attract customers.

Small wonder, then, that as soon as banks gain control of a state, they work to inflate the currency, since a currency worth less tomorrow than it is today discourages saving, and especially private (kept at home) saving. Money is no good to a banker, if it's not in his bank.

Renegade Mind:  If you truly hate Usury then you should read Gesells book, he explains how usury is the inevitable result of hard money.  Once money is no longer hard usury will vanish because it is a 'rent' that the holder of money extracts because of the unnatural store of value hard money represents.  BTC, gold and other hard money solutions can never eliminate usury because they are the source of it.  Fractional reserve banking is largely a red herring in that what ever abuses may be involved it is not the root of usury, and if anything it is likely a stealthy argument by gold-bugs to limit credit expansion and make Fiat behave more 'tightly' and to raise interest rates as a result.

Here is The Natural Economic Order it's written in a very plain manor without complex economic terms or equations (Gesell predates all that).  The parts on land reform can be skipped as it's not relevant to our debate.  It is quite ironic that Gesell was one of the fiercest opponents of Karl Marx, but he was also an opponents of capitalists aka supporters of usury.  Gesell properly distinguishes between the free market (which he supports) and usury (which he opposed).  Marx failed to make that distinction.  Unfortunately Gesell's ideas were forgotten in the titanic capitalist-communist struggles of the 20th century.

https://www.community-exchange.org/docs/Gesell/en/neo/index.htm

To wrap your head around paying interest with bitcoins, it might be beneficial to look into ripple and think about how the two systems can be used together.

Basiacally, when you agree to pay interest you indeed make a promise to pay more btc than you currently have (like giving an IOU on ripple, it creates money). You do whatever economic activity, maybe you sell something and earn bitcoins. You then pay back the bitcoins plus interest, thus negating the IOU and the amount of money returns back to its initial state.

I must be missing something really obvious ..

The way I see interest and lending re: bitcoin -

1. Mr A asks me "Can I borrow 100 bitcoins?"

I say "Sure, if you want it over 10 weeks, then 10% interest for a total of 110 bitcoins, which you'll have to pay back 11 btc each week. Deal?"

2. Or.. if you're talking about interest from banks.. e.g. I store 1000 btc, and expect xxx% interest after 1 year. I've always seen this as a con tbh, it used to be a way to get you to give them your money "hide you money with me, and after 1 year i'll add on xxx% called 'interest'." (whilst really stealing your money for gambling and investing in dodgy deals, or just stealing).

But I also understand it that banks simply don't need to offer any kind of 'competitive' interest anymore, seeing as almost everything is tied into them anyway regardless of interest.

Interest could still work in case no 2, if the 'bank/institute' you were giving your money to was gambling ('investments') etc, and made enough profit with your money to cover your interest (with the usual thought that people generally never take 100% of their wealth out). So, ye, can work..

Though point 2 kinda beats a huge point of bitcoin, but ye, its a safer storage I guess for people who need it.

Interest / usury is a subject that easily twists your head more than required. It gets quite straightforward when you understand that interest can be effectively eliminated by work (or other activity providing future value). Thus it doesn't matter if there are more liabilities than current tokens of value - the difference can be paid by production. Ever heard that "you are a creator"? It applies in this field too - you can create value, exchange that to tokens of value, and pay off your debt previously accrued by interest. Simple.

Interest isn't much root of the problem; its big brother debt is.

The key to stability is moderation. With the human nature being what it is, it's too easy to promise something that you can not fulfill, ie. more future value than what you are capable of producing. At that point things start to spiral out of control and the system is in serious trouble, if not doomed.

Excellent points.

This is essentially what I was referring to when I said that the assumption of an infinite supply of people willing to borrow at interest was unrealistic. If you drop the assumption of infinite velocity of money--which would otherwise allow the situation to continue indefinitely--you will eventually approach a point where people realize that they've already signed away most of their future productivity, and consequently stop taking out additional loans. As long as the money continues to circulate, the existing loans can still be repayed, even if they exceed the total BTC in circulation. However, the total debt will stabilize, not spiral out of control.

Of course it's possible to 'work your way out of debt' but that in no more excuses usury then saying that in the pre-Civilwar South slaves could work and earn enough to buy themselves out of slaver.  The question is if the taking of interest is justified in the first place, irrespective of the debtors ability to pay it.

This is so ironic, aren't you libertarians the ones that say taxes are theft and denounce those greedy liberals that say that the rich should be taxed because the can afford it?  Now the same sloppy logic can be used to justify interest simply because the debtor is being productive and producing surplus value and can afford to pay interest.  What claim dose the lender have to the surplus value of others?  I say he has claim to get back the value he lent and no more.

What claim does the borrower have to the surplus value of the lender?

Show me someone who borrows at negative interest and I'll show you a borrower who is taking value from the lender.  At zero interest the lender gets back what he lent 1:1, at a positive rate of interest he takes more then he lends and thus takes a surplus from the borrower.  If you still subscribe to the theory that merely holding currency tokens is creating surplus value then why must the lender lend out the money to someone else to realize it?

I think people have this all wrong.

There isn't any Bitcoin 'bank.' Normal people won't deposit their bitcoins into any institution by default like they do with currency because otherwise the bank would have to provide negative interest which doesn't make any sense.

That doesn't mean there won't be loans, however. But it will work more like venture capital, with only certain people doing it and subjecting themselves to considerable risk. For loans such as those associated with housing, I suspect it will end up working sort of like car dealerships. The seller of the house (or an agency the seller uses) will provide an interest-free loan to the buyer not to profit from the loan, but to profit from the sale of the house, likely with a large down payment required. Most for-interest loans would go to businesses.

What does this mean? A much safer financial climate all around.

You're neglecting the value of time.

well you're assuming bitcoin is deflationary - I see it stabilising at some point with only population change and lost coins affecting its value.

I expect a downturn in population eventually given the trend of birth rates falling below population replacement levels in developed countries and of course it will happen a lot soon if people like Bill Gates have their way.

I also wonder whether lost coins may be taken care of in the way that inactive fiat accounts are handled now only re-mined instead of handed to the government after a period of time.  The Australian government only recently changed this from 7 years to 3 years btw.

Inactive wallets are not re-minable. It's just not possible. Lost coins are, barring an astronomically rare private key collision, lost for good.

So unless population levels drop faster than coins get lost, Bitcoin will be deflationary. Mildly, because since lost coins are functionally the same as hoarded, you can never be sure when they'll come back on the market, and so you must assume that they will at some point, but deflationary all the same.

Ah we arrive at the crux of the issue, to whom dose the time-value of money come FROM and to whom dose it GO.  The time value of money is entirely from the markets willingness to accept it as a medium of exchange.  If money ceases to be liquid it immediately ceases to have any time value.  Even a commodity like gold coins, when they are not the universally accepted payment and are thus not liquid cease to have time value, I can not loan gold or any commodity at interest.

Society as a whole in it's collective decision to elevate something as 'money' gives time value to that money independent of any intrinsic value it might have had or any increase in exchange value society puts on the money, commodity money at face value would still gain time value.  Thus we can see quite clearly it is not the saver who is creating time value, thus they can make no claim to receiving it.  In fact it is the saver who should be paying for time value, which is what demurrage dose.

No?

Seems to be a booming industry on just exactly that in India.

And it's not the "time value of money." It's the "value of time." Specifically, the time during which which you are holding the lender's assets. Interest is no different from rent on land or equipment, or even the price of a hotel room for the night. You're using someone else's capital, and that means that for that time, they cannot. That's what you're paying for.

Now that's a good analogy! No need to obfuscate the issue behind difficult concepts.

Denying the right to charge rent, ie. cost for lending your money, or lending anything else, or providing any other service would eventually imply denying the right to charge for production of any service.

That would work only in an altruistic-communistic utopia (which no doubt is coming, but not anytime soon). It means getting rid of business altogether.

Besides morally, the right to do something or not [charge interest] is born from the mutual agreement of the two parties involved, and generally it is not beneficial to apply authoritative supervision to the validity of such agreements. Cases of deception can be found in usury, like any interaction between humans.

It is right (but unpractical) to try to apply supervision in order to prevent deception. What [level of interest] constitutes deception, is difficult to measure, and changes case by case. It depends on the situation of the borrower as well as the lender, the capabilities of the borrower for future work, the intellectual capacity and education of the borrower etc... impossible to evaluate. So restrict it all or give full responsibility to the parties of agreements? I say the latter, because restriction leads to the slippery slope of having to restrict all business -> TYRANNY.

"I would rather be exposed to the inconveniences attending too much liberty than to those attending too small a degree of it." - Thomas Jefferson

http://en.wikipedia.org/wiki/Economic_rent

Are you guys even aware that 'economic rent' means a price in excess of the fair market value that a asset holder extracts because of of holding a monopoly position?  Yes I deny the right to collect rent for anything, only a competitive market produces fair values.  The layman term 'rent' is used to describe any usage fee without regard to it's fairness.

Hotel rooms and capital goods are degraded by usage, the 'rent' we pay for these things just reflects a breaking up of their total usable life-spans into smaller chunks and selling those in chunks to different people, competition brings the rent on these things down to parity with the cost to make them.

Money when your done renting it is identical to what was lent out, the lender has lost nothing so you can not claim he has sold anything but the time-value of money.  This can not be equated with the rent on a real asset which asset which will eventually decay away, money is immortal.  If you rent someones physical assets you can never give it back as it was and rents are thus justified. 

But money is a social construct, a mere accounting tool of exchange, if I borrow the number Pi from you I don't consume it, degrade it, or makes it less able to calculate the circumference of a circle.  So why should anyone be paid a time based usage fee on something that can't be used up?  The only reason is if the lender is simply exploiting a monopolistic position by withholding money from its intended purpose of circulation and wont release the hostage without a ransom.

Yes he has "lost" something else as well: time-value of his personal life, the effort he has exerted to make the money available for the borrower. Some could even argue it's not only the time value of the act of making the money available, but the value of creating the value for himself in the first place.

You are omitting the parallel of renting money to providing a service. The lender provides a service of lending money (which necessarily involves work ie. value) and thus is well justified to charge a price for this service.

Again, if you prefer it this way: the price is not paid for the degradation of the borrowed thing, but for the service of borrowing it.

Thanks for the link BTW, I wasn't aware of the term. Monopolistic abuse is a different matter altogether and should be combat it at all possible, without falling into the way of tyranny and escalation of the same monopoly to harsher levels as a consequence.

If your referring to the work to earn the money that's being lent it's fairly obvious this is not lost, rather it is returned exactly as it was.  Lend a dollar, be re-payed a dollar, nothing lost but the time-value of having a dollar for a period of time.  Lending involves virtually no labor what so ever even in the most hands on situations, no economist has ever been under the illusion that interest derived from this source.

Today most lenders simply deposit their money at a lending institute which performs all the work of finding, interviewing, validating the borrower and policing the repayment.  All such labor is part of the cost of the institute and yet the original lender will still be payed interest by the institute for the use of his money despite not lifting a finger in the laborious process.

Furthermore if the lender surplus derived from the source you describe then interest would not be a time based fee on money.  It would be like the closing cost on a house charged by a retailer, a percentage perhaps, but not one that varied based on the length of time money is borrowed.  But everywhere that interest exists and everything which is described as usury in the bible and koran is clearly defined as a time based charge, not a labor based one.

Bible and Koran? Ok, but I wouldn't think for the sake of this discussion it to be constructive to refer to some authority that tells us what to do or what not, or how to specify usury.

Plus of course the depreciated value of unsound money like dollar, if you're paid back unit for unit regardless of time borrowed. But that's a minor issue.

The time-value of having [and being able to spend] one's own money is important. Consider an example where the lender has a mental condition where he's seriously disturbed by every day he does not have his dollars available for spending. He can offset this disturbance by agreeing to receive a compensation - interest - from the borrower causing this inconvenience, for every day that the situation continues.

Not many lenders are necessarily disturbed that way, but who can say how much they value having full control of their money. Or are you saying that there is some external authority who states that full control of your money should not be valued at all, and it would be the right thing to obey and not charge interest without questioning that?

You have a point. But I don't see why it couldn't be a time based fee, if both parties consider that all right in full understanding.

Since no one else has mentioned it yet, I'll just note that Steve Keen has demonstrated pretty conclusively that interest is totally compatible with a fixed or declining hard money supply.

Typically, these questions come from people that confuse money with wealth, and/or disregard the passage of time.

Money is a tool to facilitate exchanges of wealth.  A loan is, disregarding the bookkeeping done in money terms, an exchange of X wealth today in return for X+Y wealth in the future.  The ratio of money to wealth at various points during the loan are not really important to the loan itself, they are only a factor in the decision to borrow or lend or not, and the terms.

I'm going to step out on a limb here, but...

I've not read Steve Keen, and have no intention of it.

What I am interested in there is if you can quickly answer 1 simple question...

Does he talk only about interest, or does he mix it with fractional reserve banking?

From the above exchanges, I can see how pure interest can make sense. It is merely an exchange of X BTC for X BTC plus some amount of productivity, be that in BTC or fish or grain or whatever. That is one thing.

Enter fractional reserve banking... The entire scenario changes. Banks print money out of thin air then charge interest on it.

This is fraud.

Pure fraud.

Nothing but fraud.

It is a criminal abuse of float time, and it would land you or me in prison if we did it.

Here's a better explanation of that:

http://cynic.me/2012/05/28/frackin-reserve-how-fractional-reserve-banking-creates-money-and-why-it-is-fraudulent-3-6/

Our current system has fractional reserves as low as 0%.

I do not think that interest and FRB are reconcilable in any remotely ethical system. I would like to think that with BTC having a hard limit, that it would be pure insanity to allow FRB with it.

Does that make sense to anyone?

Except the value of having that money to use during the time it was lent out. Which is what you're compensating him for, at a rate that is worth the value (to you) of you having it to use during the time it was lent out.

You might want to actually read some of his papers or books, particularly the ones on this topic.  Or, you could just watch videos of his lectures.

Please note that I said "a fixed or declining hard money supply", which automatically precludes inflation, whether by fractional reserve or other means.

You state that as if I was not the one to bring that point into the the discussion just a few posts ago.  I've said repeatedly that interest is a renting out of the time-value of money.  If you agree to this then the debate can proceed further and we can discuses if this is legitimate or not.  If you feel it is legitimate you must explain how the lender created time value and would then be justifiably selling the fruits of his own labor.  I have show how time value is created by the marketplaces conferring of liquidity onto money, indeed the very term 'money' meaning a universally acceptable extinguisher of all debt is by that very definition maximally 'liquid' so money and liquidity are always synonymous.  I contend that a lender is illegitimately selling that which is created by the public at large and this is an unearned income, the flawed nature of hard money makes this illegitimate sale possible and even inevitable thus hard money should be abolished and replaced with demurrage.

I am not relying on any moral authority from these sources, the OP is the one who began discussion of Usury and it has already been mentioned several times.  I am pointing out that Usury is just a synonym for interest and has always been understood to mean interest from the oldest writings and usage of the word and both just mean a time based charge on lent money.   People have said they find 'usury' conveys a 'negative connotation on interest' which is hardly surprising because is just a a pejorative label.  Those preferring the term interest prefer it for exactly the opposite reason, they are rejecting the pejorative view of the same action.

My intent here is to dispel your absurd attempt to redefined interest as a labor cost, a redefinition that flies in thousands of years of common word usage and understanding as well as the existence in the financial industry of separate and distinct terms that DO refer to the labor costs involved in creating a loan such as 'closing costs' or 'origination fee'.

Again, it's not the time-vaue of money. it's the value of time. You have his capital. He does not. You are compensating him for that lost time.

Your distinction is a meaningless Semantic flippancy, no one can exchange time itself so time can not have a value.  Only goods can be exchanged and in this case money is the good exchanged.  The rent is of the usage of money over time, thus we call it the time-value of money. 

This is not a term I created its a bed-rock term in financial theory that's centuries old

http://en.wikipedia.org/wiki/Time_value_of_money

Regardless if we agree that having money for a period of time is of value and that value can be denominated in the same money then we can express it as a percentage, typically around 5% per year and then try to answer the question of what gives rise to that value.

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

Suppose not everyone turns out to have the ability to pay me back.  Some percentage of the people I loan to will fail to pay me back.  My expected rate of return, E, is then E=P(1-x) where x is the ratio of people who will default and P is my principle. In this case I the lender do not get back what I lent out.

If I were to charge interest such that r = [1/(1-x)  - 1] my expected rate of return would then in fact be what I had lent out.  P = p(1-x)(1+[1/(1-x)-1])

Would it be fair for me to charge this rate of interest?

As to the original question of the thread, I would point out that as the amount of money you lend out increases your rate of interest must also decline as you saturate the demand for loanable funds.  Eventually the rate would fall below [1/(1-x)  - 1] and your expected rate of return would be below your principle, and your scheme would have reached its limit.

Missed this the first time. Exchanging your time in return for money or other consideration is exactly what you do when you accept hourly pay or salary. Time most definitely has a value. Ever heard the phrase, "Time is money?"

Ugh, what drivel, that's LABOR that is sold, its value is derived from the necessity to use it as an input to producing a good or service.  The employer doesn't want the workers TIME they want only the product creation process completed and if anything they want it done in as LITTLE time as possible.  The use of time as a convenient measuring unit for labor (typically the menial kind) dose not mean time is what is being exchanged, the existence of contract work in which your paid to 'do the job' and not by the time involved shows this clearly.

When I say you can't exchange time I mean it in the sense that you can't have 9 women produce a baby in 1 month.  I can't buy it as a input to use in the production process even when it's essential to the process, say I am a vintner and someone places an order for wine and wants it delivered in a week, I can not go out and buy grape juice and buy some 'time' and combine them to make 3 year aged fine vintage wine for my customer.  I can get all the time I want but only by waiting, if I buy some vintage wine from someone else I'm buying a good, NOT time.

Then why do you get paid by the hour, week or year?

Labor might be what's being bought, but it's not what you're giving up in exchange (selling) for the pay. That's time. Time in which you could be doing something more enjoyable, or directly beneficial. That time has a value to you, and they ask you to value it on the application: "What is the minimum amount of pay you would be willing to accept per <hour/yr>?"

If time had no value, then all work would be piecework, where you are paid per unit of labor.

And no, time is not fungible. 9 months from one woman cannot be replaced by 1 month each from 9 women. That doesn't mean it doesn't have value. Waiting doesn't get you time, you're actually spending it. Hopefully to good purpose (if you expect to get a reward at the end of the wait, for instance). Likewise with the vintage wine, you're buying a good made more valuable by the time spent aging.

enter`name`here:  Risk premium, a well understood concept that is NOT interest and has been recognized for millennium to be distinct, in the Islamic tradition it is explicitly recognized to be legitimate and not usury.  I've ignored it up till now as I'd assumed all the parties involved in the thread knew the basic definition of interest.

myrkul:  Ah looks like your following the standard Austrian playbook and have sheltered behind the last and admittedly best bulwark available.  But it will not hold, first off time preference is on its face tautological, every borrower and lender are by engaging the act are showing a preference for money in the present rather then the future.  The borrower values the present money more then the future money given up, and the lender values the future gained money more then the present money.  Both are undervaluing the future to some degree, and thus time preference is a description of what's happening.

So for this term to have any explanatory power is must actually be describing an innate factor in human psychology which gives rise to interest.  A factor that broad and all encompassing would be described as part of 'human nature'.  We would expect it to be highly resistant to rational thought as it is essentially the lust for immediate gratification, something every society in history has condemned as a moral failing.  This alone would abolish any possible foundation for justifying interest as 'good' or 'right' because both lender and borrower are exercising basic human drives and the lender is profiting not from his own work but from a privileged position in an irrational behavior.  

Why then should money be hard simply to support an irrational behavior?  We know that behavior CAN be modified profoundly by changing the rate of interest in our present monetary system.  Lowering rates promotes consumption, higher rates promote savings.  So a thumb can be put on the scale to change behavior.  If people have an irrational under-valuation of the future then designing a money system that forces up that future valuation will correct the broad undervaluation, demurrage has exactly this effect on the net-present-value of future wealth or income streams.  When the future valuation is corrected we should see interest eliminated as the borrower is willing the receive back 1 for 1 each dollar lent because they defer demurrage costs, the time preferences still exist underneath their decision but is cancelled out.

Logical error: Assumption of demurrage as accepted practice.

Are you arguing that the effect of interest elimination will not occur unless demurrage becomes 'accepted practice' as in wide scale implementation?  Or you you simply going headlong into the logical fallacy of saying my argument is wrong because you (or presumably a majority disagree) with it and find it "unacceptable" thus preventing it's implementation?

Did you or did you not say:


That statement (with the word "because") requires demurrage in order to eliminate interest. Unless, you're using a non-standard definition of "because"?

Yes am saying "the future valuation is corrected" BY implementation of demurrage.  The preceding sentence provided all the context necessary to understand this but you seem to have uncanny powers of quote selection to try to extract misinterpretations from what ever I say.

Thus making the logical error of assuming demurrage as accepted practice.

How much clearer can I make this for you, I am describing the effect that a change in the monetary system will have.

If the monetary system is CHANGED to a one which implements demurrage, THEN in that changed system their future valuations (not our present valuation of the future) will BE CORRECT because demurrage increases future valuations.  The correct future valuation will THEN cancel out interest per your own argument that interest is caused by a low valuation on the future.  Nothing changes for anyone until demurrage is implemented.

I think the misunderstanding here is that they should not be distinct, most of the the Austrian School explicitly say that. Time preference also derives from that.

You may define "usury" as "socialism for the rich": If they don't have to take on the appropriate risk for their investments, you have to look at how they're doing it. Mostly the construct is political.

I see. I agree exploiting detrimental human drives, such as the desire for instant gratification, or the will to benefit over greater expense for others,  is not "right" or "good" in the larger scheme of things.

However, there are several points where your claims for the necessity of forcing near future cessation of charging interest (as I understand your intention) fail:

1.) The degradatory issues in charging interest are not separate from the shortcomings in all aspects of business. Business, and life in general, is based on the goal of making personal profit, and unfortunately still at this point in time commonly regardless of the harm caused to others. People put price for everything: health, love, children, basic needs etc. They exploit their privileged position.

2.) You don't approve my attempts to define interest by whatever means making it understandable to you, that charging interest essentially can not be separated from any other activity of charging a price. Fine, let us try ways based on your definition of "good" and "moral".

By prohibiting interest you can not logically let other forms of business continue. Paying interest is an agreement where a more privileged party exploits the counterparty who doesn't have what he needs [money], thus to get what he wants he needs to pay. The same applies when you go to the grocery store, living far away from another one. You pay a price the shopkeeper wants, because you don't have another way to get what you immediately need, such as food. You are being exploited and immediate gratification is encouraged for both parties? Yes.

Like mentioned previously, not having these shortcomings of human nature would require an idealistic-altruistic society where all people realize that contributing towards common good is for the best of themselves. This comes at its own pace, it can not be forced.

3.) Work can not be separated from time, time is required for work. When you sell work, you sell part of your time on earth. It is physics, the law of this universe. Work in physics:


What are you wanting to say here? 5% per year, what's that?

Currencies based on demurrage are very idealistically appealing. I would like to see them taken into wide acceptance eventually.

Let me fall into hypocrisy: If I had all the power I would as the first thing ban compound interest worldwide. Half of the problem solved, with tolerable compromise to the structural bases of global business. Separate balance for capital and interest, why not. RenegadeMind said it; interest and fractional banking combined is great evil.

Secondly, I would enforce usage of demurraged currencies only. Just to test how things would work out :P

But I don't have the power, so on my bold moments I seek ways to encourage slow transfer away from compound interest and maybe into demurraged currencies if they prove their worth in improving the goodness of the world (which I think nearly any monetary system different to the current one would do).

Meanwhile, I submit to the allure of personal profit through compound interest.

In practice however 'risk premium' is indistinguishable from the 'usery' part of the interest rate.


I would argue that the uncertainty of the future is what gave rise the the psychology of 'time preference'.  Human beings have an innate desire to control and understand our surroundings, this stems from our nature of the 'rational animal'. Different people have different tolerances for risk, which would also explain why we have different time preferences.  Perhaps there were once homo sapiens who did not value present consumption more then future consumption, they would have been out competed by us modern humans who, with our psychology of time preference, had better luck controlling our situation and putting our ideas into practice. 

You can argue all you want that people shouldn't value present over future consumption, but so long as they do then present consumption will always command a premium, and loans will always be usurious.

Yes, and thereby assuming that the change will be made. Please keep in mind we are talking about "Interest and Bitcoin," not "Interest and Freicoin."

Let's put this discussing into terms simple enough that even Impaler can understand them.

I have $1000. I have the choice of buying a capital good for $1000 that will return 5% ROI over the next year, or lending the $1000 to someone for a year. If I choose to make the loan, I'm giving up not just $1000 now, but $1050 a year from now. It would be irrational, all else being equal, to make such a loan for less than 5% interest.

Time preference and the general "risk-free" rate of interest are just the aggregate effects of these sorts of opportunity-cost considerations being made by all the holders of currency in the market. Most of the time the ROI is more subjective than the fixed 5% return in the example, but it is no less real for that. No one is taking advantage of anyone else; lending at interest is nothing more or less than redistributing ready capital and future income to where they are each most valuable, which is fundamentally the basis for any economic activity.

Ahh, but you are indeed taking advantage of the unfortunate.  Fans of demurrage allege that it is unfair that you have a future time preference while someone else has a now time preference.  Because you are capable of planning for the future, you must be punished with a currency that loses value over time, so that you can be encouraged to be as wasteful as everyone else.

I'm paraphrasing slightly, of course.  But that is the essence of Impaler's argument.

Summed up nicely.

While this does seem to be what they have in mind, I really don't see how demurrage changes anything with regards to interest. As I understand the concept, demurrage means that you lose actual currency over time, as opposed to inflation, where the amount of currency remains the same but the value decreases. In my example, however, no one was actually holding currency for any significant length of time. Either I spent it immediately on capital, or I lent it to someone else who would in all likelihood spend it immediately on a different sort of capital. Either way, neither of us is affected by the demurrage.

Demurrage and inflation both have the effect of driving people to get rid of the affected currency as quickly as possible in favor of more stable assets. The advantage of demurrage, to the extent there is one, is that it is neutral with respect to things like interest rates--it doesn't create the same calculation problems as forced inflation. However, Impaler seems to be claiming exactly the opposite. If you want to make people overvalue future goods relative to present goods (i.e. eliminate interest), inflation is a much more effective tool.

As for time preference being "irrational", I would like to see Impaler put off all consumption for a year (or even a week!) and report back on whether future goods are just as valuable as present goods.

We should perhaps let Impaler respond, but I feel compelled to comment on this;

I guess that could be put more nicely. The bottom line there likely is not to promote wastefulness, but progress, growth, evolution and all the good stuff.

The idea of accelerating progress through enhancing flow of value is starting to reveal upon me. Saving is stagnation. In nature, saving achieves little as compared to swift exchange of value. Keeping things stationary - whether material or immaterial - is subject to heavy corrosion. In all things, time eventually eats your value through entropy if you don't use it.

As long as a human monetary system obeys the laws of nature, the same would apply there. It's not difficult to imagine how keeping money off circulation (saving) does discourage initiative and achievement => increasing entropy (= what we generally consider the opposite of "good").

I'm not versed enough yet on demurrage to conclude whether that would be the holy grail. The issue of wastefulness as a side effect of quicker value flow is the flip side, but how serious.

So, saving to buy a car is less productive than going into debt for that car?

It certainly is. Spending as soon as possible opens up the need and opportunity for more production than would saving for years before spending. That's what we as consumers have been told for decades, and considering the advances made within that time, it's true.

... yet look at the price of it; the miserable condition the western economies are in. Yes, spending by debt obviously does not work when done excessively. Maybe it is possible to craft a system to encourage spending with no or with controllable debt (discard compound interest, anyone?).

Saving is deferred consumption, yes. But how do you get the funds to save, hmm? You produce more than you consume.

Consumption implies wastefulness, which we need to minimize. There are numerous vectors of value dynamics in between black-white saving-consumption.

Ideally, in a demurrage system "spending" from the spender's viewpoint would mean investment into more stable assets, like nybble41 said. Not consumption.

There's also a significant difference between debt and idle money [from work already done]. All debt systems are like playing with fire, someone will fail future production eventually even in the perfect setup of all good intentions. Maybe we should just focus on exchanging value already produced. And as importantly minimize idle value, subject to corrosion.

So, in an ideal world, people will only buy real estate and other strong long-term investments, and rather than eating, live off love?

That's an interesting idea. How do you suggest we build an economy with neither savings nor debt?

Come on, I didn't say all spending. It's useful to not think black and white, either-or.

I haven't gone that far in my plans, but if you ask then I would say that in principle by just doing. Savings or debt do not build anything. Productive activity does.

Again, moderation is the key to stable progress. We cannot have utopia all at once (!) A lot of compromises are required.

Consumption is a vital economic activity. Not just eating, but cars, household goods, anything that either loses value over time, or is consumed by use. People need these things, and you can't just eliminate it, or even really discourage it very much without hurting the economy. Now, certainly we shouldn't encourage oerconsumption, which is what inflation does, by making less durable goods better investments than just holding on to your money. Demurrage would do the same thing, but to a lesser degree because of it's relative stability and predictability. Certainly it would discourage saving, since that's it's intended purpose.

Sure, but how do you propose I buy a car with productive activity?

Your arguing that interest derives from Productivity of capital goods, so you and myrkul need to have a debate on what the true source is interest is because your presenting an incompatible argument to his.  I find your productivity argument weak because the Return on Investment of capital goods can and dose become negative when their is an excess of capitol, something that frequently occurs when entrepreneurs pile on to a profitable sector of the economy and saturate it.  Eventually enough unprofitable businesses go bankrupt to restore the returns to at least a break-even level.

With sufficient competition the return on all capital goods should fall to zero and stay their, to what ever degree that ROI is above zero must derive from something that prevents it from dropping.  And that is clearly money interest, once the capitol ROI is driven down too or below that of money then lending for additional business expansion in that sector stops.  Thus the rate of money interest acts as a 'floor' to ROI of capitol goods.  Your explanation is thus backwards, money interest creates capitol ROI not the other way around.

Yes, what's wrong with less durable goods as long as they're based on sustainability of the whole (which they currently aren't)?

You're right in that practically no value can be exchanged instantaneously. A medium of exchange, and necessarily storage of value is required. However, usually as soon as you store the value, it starts to erode (not talking only about money, but anything, because of entropy).

When you transfer value, its erosion is mitigated and - because of the dynamics and novelty (another basic property of life) that the value encounters instead of stagnation - it may be implicitly replenished (causing lessening of entropy within the system).

When applying this to your example of buying a car, maybe the excess value you produce daily / monthly that you intend to use to buy the car, should go to the car dealer immediately. Forward part-payments. You can be compensated in the total price for doing that. I don't know, just off my mind.

Well, that's just the problem. Inflation and demurrage both encourage buying cheaper, disposable items, rather than saving up for one that will last longer. They encourage needless consumption.

Then why do some things appreciate in value over time? Why is a bottle of wine that is 50 years old more valuable than one that is 5?
That is the car dealership acting as a bank, and managing your savings for you. Try again. How can I make a large purchase without saving or going into debt?

I agree. Maybe there are ways to combat needless consumption and preserve the benefits of quick value transfer. No I can not tell what those would be.

No, in such a system the dealer would need to forward the value himself ASAP. The value would be in perpetual motion and no party would manage it for a length of time.

Barter? Which implies "saving" in a way that has already enabled progress of value, like mentioned previously.

I don't see another logical way. Making forward part-payments means turning the whole chain of future value upside down so that the car dealer owes you his production of the car, I can't quite twist my head through where that would lead.

I would like to take the opportunity to distance myself from this line of reasoning. Investment is not inherently better than consumption, or vice-versa. The sole point of investment, however, is to enable future consumption. Consumption is not waste; it is the whole point of economic activity. There is nothing noble about a currency designed to force its users to abandon it in favor of something more stable; that is just one of the reasons why such a currency will not become widely adopted (at least not voluntarily).

Saving to buy a car is neither more nor less productive than going into debt for that car. In order for you to go into debt, someone else had to save so that they would have the excess resources necessary to make that loan. This is true even if the only two entities involved are you and the maker of the car. Either your savings (loaned to the maker) or the maker's savings are what allow the maker to survive while working on the car rather than gathering necessities. Regardless of whether you saved up for the car, someone had to, so in the broader economic perspective there is no difference.

BTW, introducing a third party (a bank) who makes a "loan" without any actual saving doesn't change that fundamental equation; without the saved surplus, the bank can issue as much money as it wants, but there won't be anything to buy with it. Money has no value without savings.


Yes, and interest can and does become negative in real terms when there is an excess of capital. You see this when the economy is undergoing inflation--people accept below-inflation levels of interest because there is nothing better available to invest in.


If capital goods were superabundant then their marginal ROI would indeed be zero. I assume that was what you meant by "sufficient competition", but it's not a realistic scenario. Capital is scarce, not superabundant. The interest rate reflects the ROI on capital throughout the economy; if the ROI in a given sector falls below the interest rate, that is a signal that there is enough investment in that sector, so in that sense it does act as a "floor" for a particular sector. If the ROI were to fall across all sectors, however, then so would the interest rate "floor". If there was no expectation of return on investment then the interest rate would be zero (or even negative, given inflation), because no one would be interested in taking out loans.

You consistently confuse consumption with investment and in a most biased way.  For you every time something is 'saved' its an investment, and every time something is 'consumed' it's a wasteful act of gluttony and immediate gratification.  But every act of investment IS an act of consumption, something which raises aggregate consumption may be doing it by raising investment, it may even be redirection funds from non-investment consumption (the proverbial hookers and blow) towards productive investments.

I've explained that demurrage corrects and diminishes the incentive for immediate gratification by correcting future valuations.  Under demurrage it is investment that is encouraged, not consumption for immediate gratification.  This has been demonstrated in the few instances ware demurrage has been implemented the populous significantly increased investment activity.

Here is a rather fanciful example of how future valuation under interest is actually causing the kind of waste you seem to abhor.  Say I have a Goose that lays a golden eggs and that it will do so in perpetuity.  Lets say the Golden Eggs are worth $1000 per year and interest rates are 5%.  The Goose is worth $20,000 according to a Net Present Value calculations which is simply per year value divided by interest rates (1000/0.05).  If eating the Goose had a value of >$20,000 dollars then the rational choice is to eat it.

Now as you can see the interest rate as denominator means that lowering interest rates makes the goose more valuable, if interest is brought to zero the goose would actually become theoretically infinite in value, which yes is absurd but a perpetual anything is already an absurd fiction so we should not be surprised that an infinite revenue steam has infinite value.  Rather it's the opposite that should surprise us, that infinite revenue streams have paltry finite values because of interest.

Now lets try a more realistic scenario, growing a tree for lumber.  Trees have finite time to maturity say 100 years and will sell for $1000 dollars.  If have to expend $100 dollars to do the planting after which the tree goes on it's own.  This is thus a good example to demonstrate how interest effect a long time horizon investment activity because it should be fairly obvious that this action IS a productive investment (for your grandchild benefit perhaps), just a slow one and while it certainly wouldn't be the first thing worthy of funding it can't be called a wasteful act.

Under 5% interest this investment returns $-92 dollars, yes it's actually a massive loss you would have been better off putting the money in a bank and just collecting interest (or spend it on the aforementioned hookers and blow).  Why is it so bad?  It's because the $1000 dollar payoff in 100 years is savagely reduced by compound interest to a mere $7 dollars.  Meanwhile your upfront cost is in the present and is not reduced so profit is 100 - 7 = -92.  In fact this investment needs an interest rate less then about 2.5% to just breakeven.  Under 0% interest the profit is a cool $900 dollars as our future value isn't being diminished and someone is actually likely to do it as their is a $9 per year return.

He is "managing" that savings by moving it along so that it does not lose value. Yet, he still keeps track of how much you have paid in, and when the payments equal the value of the car, you get the saved value, which he has been holding for you, in the form of a car.

see: https://en.wikipedia.org/wiki/Layaway


Simple. You don't. You can not make a large purchase without either saving, or going into debt.

I make no such value judgments. In fact, quite the opposite:
At least read the things you quote.

EDIT: You may want to check your math, 100-7 is 93, not -92. (and who the hell charges interest on trees, anyhow?)

Mathematically disprovable, it is fact exactly the opposite from what you propose, interest causes short-term thinking and consumption of disposables.  
Again I'll do a Net present Value calculation using a Hypothetical 'Consumer Joe' who is faced with the choice of buying a cheap disposable product repeatedly or a durable one.  Let's say they can both provide the same utility and the durable version will cost $50 dollars upfront and last 10 years.  The disposable version will cost $6 per year.  Without interest the cost of the durable good simply amortizes out to $5 per year and is thus more cost effective then the disposable.  But under 5% interest future costs are also reduced and a $6 expenditure per year over 10 years actually has Net Present Value or -$46.33 (I complex bit of math that I used this tool for http://www.investopedia.com/calculator/netpresentvalue.aspx) making it cheaper by around $7 over the duration to buy and use disposable products rather then the durable one.

These net present value calculations are all very standard business math that any business person knows and they in no way created by me or demurrage advocates.  They simply show your understanding was completely backwards, the detrimental effects you disdain are actually caused BY interest and the system you purport to endorse.  You have a significant test of your intellectual integrity, do you admit your error and renounce belief that interest is good?

This isn't really surprising at all, if you understand time preference, which obviously you do not. The revenue stream is only infinite if you defer consumption forever, and no mortal being can rationally be willing to wait forever. Eventually you and everyone you have ever cared about will be dead, and beyond caring about any further revenues. Any production past that point might as well not exist.

Consider this: under what circumstances would eating the goose be valued more highly than twenty years worth of golden eggs? Starvation, perhaps? Would it really makes sense to preserve an unending supply of golden eggs at the expense of starving in the present?

Put as simply as I can manage, you aren't qualified to tell anyone how much they should value future goods relative to present goods, any more than you are qualified to dictate any other form of economic preference to others, and yet that is exactly what you are trying to do with demurrage. You yourself act in a manner which is consistent with having a positive time preference--since you haven't starved yet, you clearly do not always choose to defer consumption--and yet you fail to perceive or understand this unchangeable fact of mortal existence and call it "irrational".

And yet, it is a wasteful act, precisely because it isn't the first thing worthy of funding. You are diverting present resources from high-ROI investments to a low-ROI investment. This is wasteful.


Compound interest doesn't reduce your return in the slightest. It just means that there was a better alternative. Put another way, you could have put $7 in the bank at 5% interest (i.e. into other investments earning 5% annual ROI, as opposed to the tree at a mere 2.3%), and gotten the same $1000 in 100 years for your grandchild, and still had $93 left over in the present to spend or invest as you choose.

We pay "rent" or usage fee on hotel room partly to cover the owners costs associated with the deterioration, but part of the hotel fee is also to give the owners a profit. You didn't mention this and it almost seems like you're against profits in general the way you throw around the term "fairness" several times in one post.

Also, how is a lender exploiting a "monopolistic" position? Having savings is monopolistic now? This is almost too ridiculous to take seriously.

Money is a just a representation of goods and services that is much more practical for trading. Why do you think the intended purpose of money is strictly to circulate? Think of money as Apples or something less abstract.  Would I not have a choice to hoard some of my Apple crop to get me through a long hard Winter? Why is it "unfair" for me to accept something like 15% more Apples next season to lend mine out now, when I may in fact need them? This is a risk to myself and my family in several ways and interest MIGHT be an acceptable way to compensate me for it.

When you save, you aren't holding wealth stagnant, you are deferring your claim on that wealth, aka money.

By letting the rest of the world use the wealth that you own (by way of your claim on that wealth, aka your money) until you want to use it, you should be rewarded, not punished.  When you come along later to claim your wealth, the natural progress of technology should have made the things you want somewhat cheaper for the world to produce for you.

Demurrage perverts that process in exactly the same way that inflation does.  Under inflation, the money you hold is worth less wealth when you want to spend it, then when you save it.  Under dumurrage, the money in your pocket literally evaporates, so that you have less of it to redeem when you want to.

Both systems are theft, plain and simple.  The difference is that under demurrage, you may have a hard time figuring out who stole your wealth, while under inflation, everyone already knows.

Naturally would-be thieves prefer the arrangement which provides them with the most job security. Now that the masses are catching on to the inflation game it's time for a new strategy.

You know, impaler, increasingly I get the impression that you are conflating interest with inflation, specifically with credit expansion.

I clearly specified the goose lays eggs in perpetuity, no deferring of consumption is required to enjoy the utility of the eggs which is measured at $1000 dollars a year.  The point about eating the goose is exactly to show that under interest we would be compelled to make choices that curtail future productivity, obvious being under duress such as starvation would compel us to make short-term choices, so interest forces us to act AS IF we were under duress at all times.



You seem to be stuck in this notion that without time-preference we would never act and this comes from our mortal nature and knowledge of that nature.  This ignores the marginal utility of consumption within a time period, we know that the first bit of consumption has the highest utility and the next bit is reduced, so hunger for example is an ongoing need that will arise anew every day even after a high levels of satisfaction the day before.  If I want to maximize my total utility over a finite time period with a finite supply of food I would amortize the consumption over the period to keep my total hunger to a minimum.  I would not need to have any preference for satisfying immediate hunger more then future hunger to do this, just a preference for satisfying hunger generally.  Any ongoing need that people have that relate to comfort or pleasure follow the same pattern, we defer present consumption only if it offers the promise of maximizing total utility over time.

Furthermore I can refute that knowledge of mortality and finite time-horizons give rise to a preference for immediate gratification, exactly the opposite is the pattern we see in real human behavior.  Individuals unaware of their mortality consistently show the greatest desire for immediate gratification such as little children.  As people mature and become more aware of mortality their decision making consistently becomes more focused on the future as they make decisions to maximize utility over the finite remainder of their lives.


Your making the classic Austrian error of assuming that high interest rates cause high productivity investment opportunities to just appear such that all investment flows into productive investments rather then diminishing the total investment activity.  This is patently absurd, interest rates simply cut off the lowest rung of productive investments, it dose not change the material productivity of any activity, only its profitability.  The tree investment indeed did have a 2.3% Internal rate of return but that rate dose not change based on the prevailing interest rate because internal rate of return calculus is explicitly to determine at what interest rate is a venture break-even.  The 5% returning investment still exists when interest is 0% and it still has a 5% internal rate of return, but with 0% interest its very attractive rather then just being barely breaking-even.

Entrepreneurs will always invest from best-to-worst.  The best investments with highest Internal rate of return get funded and then the slightly less savvy entrepreneurs take the next slice and the next and so on until people decide the remaining investment opportunists are unprofitable.  If the investment activity hits the floor created by interest rates it dose not bounce off and go back into the high return investments because they are already funded.  Would be investors simply cease to be investors and are left with no choice but to consume their capitol be it monetary or physical in a non investment activity or watch it decay before their eyes.

I don't buy this. Planting trees is more wasteful than sitting on your money? Not in my world. Ideally I want myself and everyone else to minimize procrastination and do and evolve things, and not sit drooling over increasing numbers on our virtual accounts like a retard until mold has consumed what could have been a beautiful and useful forest.

That is a prime example how a wrong system of tokenized value twists our preferences to a level of perversion and deceitfully discourages growth. Growth of just numbers on your account (heck, "economy"!) is not true growth but delusion.

I like Impaler's explanations. The benefits of demurrage over inflation (interest) are getting clearer. Investing into productive assets becomes the equal of what saving is now. It is saving for the future, discourages sitting on your money and may lessen needless consumption.

Besides, demurrage is a natural phenomenon. If we sit on a truckload of apples to survive the winter, some of them go sour. We'd be better off trading some of the apples in the autumn to a contract that provides fresh food throughout the winter. It is usually good to imitate natural phenomenon, and value transfer system should be no exception.

Well said. See, there are administrative costs (governmental parasites, if you like) to any monetary system. We just have to choose what and how much to feed them.

Also I'm beginning to see how you can enforce a value transfer system to the masses. We're being enforced to use bitcoin within the arbitrary limits built in the system. It takes great effort to get even a chance of circumventing those slightly, and still it's unlikely you can defeat any basic principles Satoshi designed.

All limits need to be built into the technology. The intended effects to society arise covertly from those technological limits. Bitcoin may be a panacea when compared to the old system of money. But a "total freedom" is delusion - there are quite a bit of restrictions in any system that steer the economy to a predefined direction. I have no trouble envisioning the chance for a system with better rules taking over at some point.

Interest is not inflation.

Money is "trading some apples in the autumn to a contract that provides fresh food throughout the winter".

I don't know whats giving you that idea, all my NPV examples lack any adjustment for inflation because both of us agree inflation is bad and no one in this thread is advocating for inflationary money.  Demurrage can and should be implemented alongside policies that target zero long-term inflation.  Your objection to inflation is different or perhaps just more inclusive in that you believe it has a whole slew of negative effects, I believe it destroys price information in the economy and I see no positive effect from it that can not be achieved with demurrage so I reject it on the price information basis alone and do not need to defend it.

Their is also a subtle argument against inflation that I've heard and while open too am not entirely convinced of, that is is by nature non-uniform across the economy.  The new money created either by the printing press or through credit expansion generally get put in the hands of the same people first (entrepreneurs able to get loans or government) and they enjoy the benefits of the preexisting low prices before they are bid up and then simultaneously enjoy paying back their loans with money that has reduced value (unless the lender is wise enough to pad the interest rate to compensate for inflation).  Now this isn't to scapegoat entrepreneurs, governments or banks, the fact is you have new money entering an economy in a non-uniform manor and you would have the same problem if it was all given to the poor or any other select group, every dollar held is not spawning a nickle to making every individual 5% wealthier (nominally).  So it must 'ripple' outwards in waves and cause disruption in prices and possibly creating a significant wealth transfer.  Demurrage because of it's absolute uniformity won't cause that, it's a bit analogous to how the surface of a bath tub remains smooth when you drain water from the bottom, but it is covered in ripples when you fill it from above with the spigot.


The effect of inflation is generally included in the Discount rate of a NPV calculation because its one factor that would lead us to discount future money.  But inflation if it is truly a broad and uniform increase in prices and wages then our future cash flows should increases even as our business activity remains consistent.  If we take inflation into account to increase our discount rate then we should also modify the expected future cash flow.

So in our tree example lets add 5% inflation.  Now if the $1000 dollars is what lumber sells for in the present then we can expect that lumber to be selling for $131,500 in 100 years after 100 years of inflation.  The discount rate is now increased to 10% by combining the interest rate and the inflation rate.  The tree is once again worth just a few dollars and the whole venture is unprofitable, effectively inflation is canceling out if it's on both sides of the equation.  If their were no demurrage and no interest at all and we had a discount rate of 5% from inflation alone, and used the expected future inflated price of lumber then this would also cancel out and give a $900 profit.

Only problem is we expect inflation to effect interest rates to some degree.  Maybe the effect is the same as demurrage, maybe not.  As I said I'm not defending inflation and think it has significant downsides that rule it out as a solution when we have demurrage as a better option, so I don't really care to go into it's effects.  But don't think I've confused inflation with interest because I'm counting the interest rate as a discount rate for NPV calculus, if I can put money in a bank and get X% return then any future sum of money needs to be compared to how much money I would need to put in a bank today to get that much.  In the simplest example a dollar one year from now is worth 95 cents today because if I had 95 cents today I could put it in a bank earn interest and have a whole dollar in one year.  Being able to earn interest makes them equivalent and thus discounts the future.

Great, then could you please explain how (and why!) one would charge interest on a plot of trees?

Whether you buy it or not, it's true. Planting trees at a 2.3% return is more wasteful than "sitting on your money" (a.k.a. investing the excess production that money represents) at a 5% return. Remember that the only reason you can get interest (or deflation) and thus gain anything from "sitting on your money" is that your deferred consumption is allowing others to make investments with a return which exceeds the interest/deflation rate. It's not a matter of whether investment happens, just whose investment--yours at 2.3%, or theirs at 5%.

Yeah. And if "they" invest your money to trading fractional banking based financial instruments to get that 5%, it is quite certainly rather wasteful as compared to any productive activity such as planting trees, no matter how low the return % in numbers. See, I don't care what a theory of economics says, productivity in real life can not be measured as increase in numbers of your wealth, because the numbers of your wealth can be skewed to not reflect real value.

And we come back to the great evil, interest and fractional banking combined. It messes up everything, we can not even measure wealth properly or talk about interest without confusion.

If you're getting a 5% real return, then it doesn't matter how much fractional-reserve banking is involved; it's still a waste to put the money into planting trees at 2.3%. Changes in the money supply just make it much more difficult to determine what the real return is; this impacts the estimated return of the tree investment just as much as everything else. That $1000 you're expecting to sell the tree for in 100 years may be worth less than the $100 you're spending now to plant the tree.

Neither interest nor fractional-reserve banking is evil. Fraud is evil, and FRB can be fraudulent (even if it is spelled out in the fine print). However, that is not always the case. It is only when people try to manipulate the interest rates, by whatever means--printing money, lowering FRB reserves, demurrage, fraud--that we are prevented from measuring wealth properly. In this money is no different than any other good whose price is being manipulated, save that money is the one good against which everything else is measured, so when its price is manipulated the effects are felt throughout the economy.

Of course you can lend bitcoin and charge interest. People do it all the time.

Well, there you go. [/thread]

+1

As I said

But don't think I've confused inflation with interest because I'm counting the interest rate as a discount rate for NPV calculus, if I can put money in a bank and get X% return then any future sum of money needs to be compared to how much money I would need to put in a bank today to get that much.  In the simplest example a dollar one year from now is worth 95 cents today because if I had 95 cents today I could put it in a bank earn interest and have a whole dollar in one year.  Being able to earn interest makes them equivalent and thus discounts the future.

In the tree example it's not the tree that's collecting interest, its the 7 dollars today that I could simply put in a bank at 5% and which would become $1000 dollars in 100 years without having to DO any tree planting at all.  This is really very basic NPV math, if you still don't understand then go educate yourself on this concept because it has a huge bearing on what activities the monetary system is encouraging and discouraging.

Ah, thank you, I was confused as to how you got from $900 profit to $93 loss. In that case though, why not just plant $93 worth of trees, and invest the $7 at 5%, and have $1930 at the end of 100 years, plus a plot of land that you can continue to plant trees on?

Assuming, of course, that you can find an investment that will pay out 5% for 100 years.

Your still asserting that interest is caused by the return on investment of capital and thus the interest rate reflects currently available investment opportunities that have that rate of return.  If this was the case why doesn't more money get directed to these investments saturating them and dropping us down to the next tier of investments and a lower rate and eventually to zero?  Clearly their is some floor that gets hit to prevent remaining investments from being funded because their are always a broad spectrum of opportunities available.  myrkul has argued this is due to time-preference in which peoples short time horizons cause them to forgo a longer term investment.


Further more your argument breaks down as soon as investment that is not for the purposes of investment is added to the picture, GC gave some examples which are some what inflammatory and I think distract us by bringing in banking practices that are not necessary.  Lots of lending is to non-investment activity without it being fraudulent.  If a lender can lend to someone in need of some money to cover an immediate expenditure that their savings don't cover (lets say a Root-canal) at 5% then they will do that first.  So these non-investment loans will 'pollute' the pristine investment-as-the-cause-of-interest-rates scenario your presenting.  I maintain that liquidity value of money is going to act as a floor for interest rates and simply cuts off a large chunk of possible investments.

Each dollar put into tree planting returns less then a dollar put in a bank so your most profitable choice is to but the whole $100 in a bank and have $13,150 dollars in 100 years.  Also consider the scenario ware the tree planter wants to borrow the initial $100, they would then owe
$13,150 in 100 years and only have $1000 in revenue to pay it back with making their whole business a massive loss.

This gets back a bit to nybble41's claim that ALL that money in the 5% interest earning bank account is actually going out into productive investments with a 5% return on investment.  I don't think it's at all reasonable to make that kind of leap of faith when we know that LOTS of loans are just for short-term consumer credit.

Assuming, of course, that they had not paid it off long before.

And your example is intentionally distorted. If I said "I plant $100 worth of trees, and in 100 years I get $100,000 from the sale of the trees, at 5% interest, putting that money in a bank would lose me $86,850." My example would be no less valid, but the answer to which project would be more profitable is reversed.

Um, I do not know what conclusions you all have come to on whether or not interest can be made from bitcoin, but I am glad that I can make money on the interest I charge for loaning out my bitcoin.

I am currently getting about 19% interest yearly on 25 BTC compounded daily.

If I payed back a loan that would be with money which would be an additional input into the investment and be part of the NPV calculus.  The tree isn't going to produce any cash flow for 100 years so I can not use it to payback the loan until it is salable.

If the tree sold for 100K then it would have an internal rate of return of ~7.1% which would be higher then 5%, all your showing is that an investment with a higher rate of return is more profitable then putting money in a bank at a lower rate.  Your hypothetical tree of high return and mine of low return just demonstrate that only investments higher then the rate of interest are profitable because profitability is effectively internal rate of return minus interest.  That is why lowering interest rates stimulates investment because it makes all investment more profitable.

Well, except for loans.

You also seem to assume a uniform interest rate, as though it were set by a central bank. I don't think that's a fair assumption in a bitcoin economy.

Its just one misinterpretation after another with you isn't it.  When ANYONE considers investment activity they will need to decide for themselves what they PREDICT the average amortized interest rate to be over the time span of their investment activity.  Central or decentralize control of the rate is irrelevant, the holder of money is going to decide what rate they believe is going to occur so they can weight the investment against the opportunity cost of just letting the money collect interest.

Elwar just stated that he loans at 19%, thus he would logically not lend too (nor would any entrepreneur attempt to borrow for) any investment activity which gets less then 19% internal rate of return.  That's an absurdly high return by modern standards and virtually no investments are available at that kind of return other then speculating and other high risk activities which we know are not the basis for a sound economy.

Well, yes, of course any investor is going to need to weigh the opportunity cost of depositing the money in an interest bearing account against the return expected from the investment. And against every other investment he could make with that money over the period of time that it will be invested. And of course, not all profit is financial. Perhaps an investor is willing to forgo the interest from a bank account or other investment because he likes the view that the copse of trees gives him from his window.

Simple, because money (or rather, the economic surplus it represents) is scarce, and has uses other than investment. This is like asking why more production and competition don't get directed to a particular good and drive its price down to zero. As for why different investments have different rate of return, the answer is uncertainty. An investment with a guaranteed return will tend to reach equilibrium with the interest rate, but a more typical investment involving a degree of risk requires a higher return to compete.

From the depositor's and bank's points of view it makes no difference whether the loan is for investment or consumption. The loan itself is the investment which provides a 5% return. In the case of a business loan the return will generally come out of the proceeds from a capital investment, while the return on a personal loan is typically funded by foregoing future consumption. The former is easier to analyse in terms of accounting, but economically the personal loan is just as productive—it corrects an imbalance involving an excess of future income relative to the desire for present consumption, just as capital investments improve the balance between future supply and present supply when future demand is projected to be higher than present demand. (When future demand is expected to be lower than present demand, capital investments are malinvestments.)