Bitcoin Forum

Hi Guys, I just read this article (http://www.businessweek.com/articles/2013-12-12/the-bitcoin-consumer-price-index-shows-massive-deflation) and I have a question for you, brighter minds.

If Bitcoin is going to be mainstream and we imagine a world where salaries are commonly paid in XBT, goods are bought through XBT and loans are issued in XBT, how would it work in your opinion. The article suggests an interesting situation: the natural deflation of bitcoins, will eventually slowly shrink salaries and prices. But if I have a debt with you because two years ago you lent me 100 XBT, I am still paying it back, and in the meanwhile my salary went down 10% (as well as the price of goods), will I ever be able to pay my debt back? Technically, if I pay back my debt at the same pace as deflation, I will never be able to do so.

Can you please explain to me why He is (and I am) wrong in this? 

The answer is simple, if you can't afford it, don't buy it :) Most of the worlds problems is because people get way out of touch with their debt and affordability.

Bitcoin will go mainstream without ever "taking over" from national currencies. That is my prediction. Countries just won't allow their  sovereignty to disappear. Bitcoin will be a complementary currency and do many things better than traditional fiat, but it won't replace fiat, not in our lifetime.

Even if Bitcoin is not replacing other currencies, the example is still valid: I lent you 1000 bitcoins in year X and you pay me back 100 each year. Maybe after 5 years the value has gone up by 100x. How can I possibly pay back my debt?

This is simply impossible if Bitcoin is really going "mainstream" at any significant level. When you pay in Bitcoin or receive payment in Bitcoin, you leave behind inflation in the fiat currency which you would otherwise use for transactions. Why would governments want that at all?

Nothing would be much different from what is now in this aspect. You pay debt from your earnings. If you take too much debt on yourself and are unable to pay out, you default and your property is sold out to repay the debt. If you don't have property or it cannot be used as a collateral, then you get off cheaply, and your debt is written off...

In your example, why are the bitcoins being borrowed? 

In a XBT-only economy there will not be any 100x gains to be had. Once market saturation is reached (whatever that may be: bitcoin/fiat mix, bitcoin/altcoin mix) then bitcoin value via-a-vis products will be much more stable. Debts will still be taken out, but for production rather than consumption. Interest flows to lenders are offset by cash flow into the economy due to bankruptcies. Only successful borrowers prosper as bailouts end.

The real question is "How can debt work in a fiat system where ZIRP, TBTF, CB printing, bank bailouts, 30x bank leverage, are rampant cancers?"

Negative interest rates. The deflationary nature of the currency will mean that rates will have to be negative in order for people to see a return if borrowing in bitcoin.

More likely in a bitcoin based economy people do not take on debt - which has massive implications for the global economy.
One of the primary problems of any deflationary currency is how to get people to spend them.

In a world where bitcoin is the only currency unit.
If the World's Total GDP grows -> Value of a Bitcoin grows.
So why would I spend a bitcoin if next year I can buy more with it? (the price of that new Ferrari in BTC will have fallen)  This leads to no discretionary spending - people buy food and power and not much else. This leads to contractions in GDP - and prices rise.
The Equilibrium of this system then becomes no growth - World GDP static, because the incentive to invest and spend and develop is removed from the equation.

You can see this in the trading behaviour on the speculation forum, epitomised by the want moar coinz attitude of many of the traders.
If bitcoin does "win" eventually then owning 1 coin is enough to ensure that you and your successors will never want for anything.
These traders acquire/hoard coins never spending them always looking to acquire/hoard more. They are not investing BTC to make more BTC they are attempting to use fluctuations in the BTC/USD to acquire more BTC.
This attitude towards acquiring more coins is detrimental to the health of the bitcoin economy the interests of which are best served by a large well diversified group of coin holders, who actively use their coins to acquire goods rather than hoard them.
It is different to acquiring more fiat because we must contiually acquire more fiat to maintain purchasing power, with BTC to maintain purchasing power we must continually dispose of BTC.

Usury is a sin. Bitcoin and interest just doesn't mix well.

Ok, let's put it this way.. imagine that last May I wanted to buy 10 Trezor (I imagine you're familiar with it and I don't need to explain), their price was (??) 1 BTC each, therefore I needed 10 BTC which I didn't have. So I ask my friend Bob to lend me 10 BTC, with the agreement I will give him back 1BTC per month. Please note that when we did the agreement 1BTC=100USD (total debt 10BTC equivalent to 1000USD). Now, we are in December, I still owe my friend 4 BTC, but those 4 BTC equal almost 4000USD. Since I am buying those bitcoins each month when i receive my salary (if I had all the money at the beginning I wouldn't have ask my friend) my residual debt is now 4000USD, 4x my initial debt.

This is just in a short period, imagine this in 2 years time, with a longer time involved to pay back and a bigger amount involved. Solutions? :)

Don't take a loan. It's really not needed, even for businesses they can get investors instead. This is also only a problem in bitcoins massive growth period, once it slows down, it will be less punishing to borrow btc.

You can't get investors to invest into your working capital (funds needed to carry out day to day operations and pay for raw materials). That's why businesses take loans, i.e. to finance their working capital. It becomes profitable if the margin they procure is higher than the interest they pay...

Nobody will lend/borrow bitcoins because its deflationary nature. At least until it's completely adopted and used by everyone on the Earth.

But imagine what would happen if everybody start borrowing fiat to buy bitcoins :D

How so? I don't see how it would be much different from depreciating fiat currency. In the case with bitcoins, the lender would just be happy to issue loans in the appreciating bitcoins, provided there is enough collateral to cover possible losses due to borrower's default. Actually, it is just a matter of interest rates, they would simply be lower than for fiat currency denominated debts...

I calculate my fiat debt in bitcoins.

Right now I'm 11 bitcoins away from being debt free... I am saving bitcoins as fast as possible until I can pay it off all at once.  Current projection is it will take me about 2 years from now AT THIS PRICE. 

So the cool thing is that if the price goes up, my timeline goes down! 

I can almost taste it! no more owing doctor bills!

You are right though... If you were to owe somebody in BTC and the price jumped, it would be tough/impossible to pay it back...... however, due to volatility, the price could crash and you could pay it off sooner, right?

this, and also, don't buy what you can't afford.

bitfinex.com has a whole service of lending / borrowing bitcoins. Of course people will loan out bitcoins if you pay interest on it.

Lots of people have borrowed fiat to buy bitcoins. Its called "maxing out your credit card"  :)