Bitcoin Forum

Unless some legal regulation is set in place, i see this as a disastrous thing to happen with bitcoin: bitcoin banking (loans)

Hey how cool is that! We can lend money without interest! 0%!!

Really?! Assuming the value of btc will steadily grow over time, this gives the incentive and in fact interest, that companies are after.

You may lend 1000 bitcoins right now, at 0% rate. Buy something nice with it, you can pay back in a year. So currently that's worth like 7k USD, nice starter car.

In a year, if nothing bad has happened to bitcoin, you still have to pay back that 1000 bitcoins, but it's value is likely to have doubled (or trippled or.. lots more)
You have to pay back 1000 bitcoins, 14k USD in wealth now! Since there aren't gonna be more bitcoins, your ass is now pwned by company X who gave you the loan.

And ofcourse a 7k loan is really small compared to loans people get these days.

In december 2010 i got 500 btc from a friend to play with (he mined that in like a week), i messed around with them, gave them away, sold @ 1.7 USD.
I don't even want to start thinking of the situation where this was a loan, how the heck am i gonna pay back 500 btc at current value?

People will need to learn how to handle real money again i'm afraid, but before this happens it might be way too late.

If you look at actual activity on the lending sub forum you will see what has developed:  very short term loans at very high interest rates.  That is exactly what you would expect.

if you have contracts that pay specific amounts of bitcoins then you aren't exposed to the risk of a rising exchange rate.  we don't have such an economy yet so borrowing (and lending) bitcoins is a risky business.

But the borrower is exposed to the risk.  Seeing as how they are borrowing the money, who do you can think can afford the risk more?  The borrowers will be forced to default when their debt doubles and the lenders will eventually have to have much higher interest rates, or shorter term loans, or go bankrupt.

Bitcoins are still useful for lending.

I can lend $1000 usd anonymously anywhere in the world and get solid returns.

Bitcoins at this point in time are risky to even own.  They swing wildly from day to day.  I could lend 5btc and in return get 4btc back if btc raises in value.  I still do get a healthy return.

You would be dumb to accept a loan at 0% rate if the likelihood of the value doubling was high. Why do we need legal regulation to stop people from being dumb?

the Islamic bank of bitcoin does it. what's the problem?

Problems? Dunno.

What about take the money and run away?

In a sense debt is a threat to Bitcoin.

Bitcoin is supposed to be free from the debt system. If it's like gold then you have the value in your hand.

Fiat is debt based in that someone 'promises to pay the bearer'

By lending Bitcoin you are replacing your BTC with a promise to repay. Further, you are probably doing it as % interest, something that is strongly advised against by every religion I can think of, and for good reason:

 if the person runs off with your money, you might want to track them down and make them pay.
That thought of expecting them to pay IS the debt system.

 When you lend or borrow Bitcoin you are undermining it and replacing it with a competing system. In many cases it could be the PGP irc WOB system. That then could lead to corruption in that system. This is the kind of thing you were trying to avoid with Bitcoin.

 By all means lend to people you love and trust. Invest in business to make an impact in the world.

But lending simply for the return without looking at what your money is doing is inadvisable...

 Bitcoin fixes some major shortfalls of money but it's no panacea. There are plenty of other problems and debt is a big one

Just as fyi, I was trying to tackle this problem from a financial/lender point of view last summer, trying to figure out how loans and interest can even be calculated in a deflationary economy. The solution we came up with is a formula similar to the current Present Value of Annuity formula (example of it switched to calculate payments here http://www.financeformulas.net/Loan_Payment_Formula.html) that all lenders use to calculate term/interest/payment amounts, though a bit more complex. In summary, instead of you paying the same amount every month as you do with mortgages and car loans now, your payments would be heavily frontloaded, with the first payment being rather large, and each month's consecutive payment decreasing until the final comparably tiny payment. From the perspective of the lender, they get back the same amount of value they would get had they invested the bitcoin at the same interest they lent it out at, plus the deflationary value growth of bitcoin. From the borrower point of view, even though each month's payment is a different number, after bitcoin deflation is taken into account, the actual value of the payment remains the same.
Hope that made sense.

You can also denominate the loan in another currency/commodity, using Bitcoin only as the transfer mechanism. Nothing new about Bitcoin causes people to make foolish choices, so I wouldn't call a few people dumb enough to take out huge loans in a volatile commodity "disastrous". Since no court in the world has actually upheld any of these agreements, and many borrowers are anonymous, much of the actual risk is on the lender.

Not to mention the practical difficulties in trying to regulate cryptocurrency.

well, the problem isnt bitcoin itsself, its the fact that people got used to and even addicted to getting loans.

Bitcoin loans as you describe in the OP are unfeasable and non-existent (AFAIK) because, as others said, Bitcoin exchange rate is waaaaaay too volatile. I've heard it proposed a few times that loans be taken out (even at 10% MPR) as a bet for BTC price inflating. If someone takes out a 100BTC loan for one month, and the price of BTC increases from $1/BTC at date of lending to $10/BTC at date due, the person owes 10BTC more, but has effectively profited $890. This is not too unreasonable a scenario.

As such, there is a much greater risk in lending BTC, which is the exchange rate of BTC fluctuating wildly week-to-week. I can loan 100BTC to someone, and on top of the risk of that person not paying the loan back, there's the additional risk of BTC dropping 40%. At the end of that month, I end up losing 30% of the money I have tied up in loans. Additionally, with money tied up, my ability to react to market shifts is crippled. I could have 200BTC out for 3 months, and in that time, it's not unreasonable for BTC to go from.... Idunno.... $5/BTC to $30/BTC, then down to $12/BTC by the time the loan's up.

The point is: Bitcoin has proven it doesn't steadily increase with time. From mid-June, 2011, it could be much easier said the value of Bitcoin rapidly declines with time.

Another point I'd like to make is that interest isn't necessarily detrimental. When a person or organization is able to increase rate of production to equal demand, the economy becomes more efficient. I admire that people are out there making no-interest loans, and I've pledged to donate a portion of my "profits" to IBB, but without charging interest, there simply wouldn't be enough lenders to maximize market efficiency. I want to see the Bitcoin community grow, I want to see it more production-oriented, and I want to see a greater spread of wealth, which won't happen as quickly if loans aren't out there to be made.

Edit: after doing lending a bit more and learning default rates from other lenders, I'll note my opinion has shifted, both as to the long-term value of BTC, and why interest rates should be so high. When I first started lending, I assumed the high rates were due to the volatility in the USD/BTC exchange rate, but I doubt the validity of that anymore, because most lenders are long-term lenders. They've been here for a good while and show no signs of going away. As such, day-to-day, week-to-week, and even month-to-month fluctuations aren't very relevant, as it's assumed the value of BTC will clumsily increase long-term. According to an established lender I trust, default rates are @ ~10%. I have not done enough loans to have any type of accurate number to give (fwiw, I have not yet experienced a lendee default). MPR on interest rates are... guess! - typically a bit over 10% MPR. Very short-term loans are subject to dramatically higher interest rates because the risk is almost entirely that the lendee defaults and because of the default risk, we still have to check them extremely thoroughly.

Its not just loans. Think if your salary was denominated in BTC. You might make $3K the first month and $30K/month.. or $300 a year later. You can see thats just as impossible. As long as btc remains this volatile, it can not be used for things like denominating salaries or non trivial mid or long term loans. And vice versa, as long as bread, oil and salaries are never denominated in BTC, its not going to be stable. Catch 22 which I think btc will never get out of. BUt it doesnt have to, you can denominate loans, salaries and barrels of oil in anything else, and still use BTC to do the transactions.

^^ This
People that lend money take the risk that the person will not pay it back. If you loan someone $30 and the next day their debt is $300 and they are able to pay it back, then you win.

id advice regulation to avoid people running away with a loan.
But if someone works in BTC and needs to buy something and gets a loan @ 0% interest, then its the persons responsibility to repay the loan, it was their choice to get the loan or not as long as the risk are explain clearly then there is no moral issue.

Now if you work to get paid in BTC then getting a 0% interest loan just makes sense. Cause your getting paid in BTC already so you can repay at the currency and invest the loan (someone elses money) into a venture. If it fails the impact of repaying wont be as hard as if it where your own money.

I don't grasp the concept of getting a loan with interest being immoral.
If its against religion, then would reselling a good for gain be immoral also.
Buy a car for 7k and resell for 8k (lol) your gaining 1k... that is a gain, so is that not immoral also?

That's pretty much how they do it there. Charging interest is a sin, so they use the same interest formulas to figure out how much the loan is worth, and charge a one time fee instead. So a $100 10% interest loan just becomes a $100 loan with a $10 fee. Same for houses; instead of giving you a $100,000 %5 loan and collecting $193,000 over the years, they just give you a $100,000 loan and expect you to pay back a loan fee of $93,000, or sell a $100,000 house for $193,000. By calling it a fee instead of interest they get around the issue, with the exact same end result. Religion is funny that way sometimes.

Hope this isn't getting too offtopic.

Not particularly religious because I find it often corrupt, but I don't throw the baby out with the bathwater because of that. For me religion is humanities wisdom from thousands of years ago. Why throw it out? Analyse it, see if it makes sense and use it. Don't let current trend encourage you to throw it out like the missionaries did with all that other knowledge we had before. Look at the 12th Planet book. I'm not saying I go in for that theory but it was able to exist because our history wasn't completely erased.

So every religion's got something to say on money.
Here's a starting point on the major ones from a guy who lives without money (I'm not advocating this but I'm open to the idea after reading responses to my thoughts on why surely that can't work if everyone did it):
http://sites.google.com/site/livingwithoutmoney/Home/all-the-world-s-religions-agree-on-this-one-thing
No witch, Satanism, pagism and naturalistic style opinion there but Taoism is there. Some of this stuff is being backed up by science now. Got any references for me?

One thing common to a lot of the religions is usury. Now this is a thing I had no idea existed until I was like in my 20's! What happened there?? Until the catholic church came down everybody was being advised not to lend money and charge interest... what the heck happened? I find it a bit wierd that I was taught about this in school history, or theology and I notice I've never seen it in churches.
On every UK bank note it has "Promise to pay the bearer" well, that is exactly what it says in both Islam and Christianity as a sin. They specifically advise against fiat! And we have it written on every note in the place and we never notice... wtf? Even if you've never met anyone who goes to Church you'd think someone would notice right?

I think the problem with charging interest is that it's a compounded calculation - it snowballs. The human mind doesn't calculate that. It also doesn't calculate all the possibilities. Then also there's the addictive drug like effect. Hedge fund megastars will always have a lot to say about psychology... and often it's about using artificial means to enforce disipline... something people didn't have much of years ago.

A set fee for a set time seems fairer. Perhaps there should also be a schedule for what happens if you can't pay - what exactly you will and won't lose. Lose your home? Donate a kidney? - if it's written down at the start at least everybody's clear on it.
Are the Islamic banks actually doing this though or are the customers actually ignorant to what they're agreeing to?

[quote author=jago25_98 link=topic=58890.msg709096#msg709096

I think the problem with charging interest is that it's a compounded calculation - it snowballs. The human mind doesn't calculate that. It also doesn't calculate all the possibilities. Then also there's the addictive drug like effect. Hedge fund megastars will always have a lot to say about psychology... and often it's about using artificial means to enforce disipline... something people didn't have much of years ago.

A set fee for a set time seems fairer. Perhaps there should also be a schedule for what happens if you can't pay - what exactly you will and won't lose. Lose your home? Donate a kidney? - if it's written down at the start at least everybody's clear on it.
Are the Islamic banks actually doing this though or are the customers actually ignorant to what they're agreeing to?
[/quote]

I think borrowing is almost always a bad idea.

But not because human brains can't handle repeated multiplication by a decimal number.

There isn't any particular reason that money borrowed to pay interest ought be lent interest free itself. If this was prohibited or something all it would mean is that you'd have to go to another lender and pay them interest because it would be a new fresh loan.

I have a few suggestions. Maybe it could solve a few of the problems you mentioned. It's not particularly "implementation-accurate" and I most likely have missed a few things, but it's a start. I'm looking for feedback. I think stability is a serious issue that warrants consideration. My proposal could address that.

https://bitcointalk.org/index.php?topic=58102.msg709070#msg709070 (https://bitcointalk.org/index.php?topic=58102.msg709070#msg709070)

^^^^

"I made up this currency which I'm calling 'stable'. My friends and I are selling it for $21,000,000USD. Anyone interested in buying it? We take whatever currency our method you'll offer, as long as you give us $21,000,000 for it. We also need some other people to keep hashing blocks to secure it for us, and can't guarantee that it will be secure until enough people are hashing. Now, I know we said we have $21,000,000 worth of it that we are selling, and it's only only worth that much because we say so, but please don't all rush in to buy it all at once. There's plenty for everyone."

The human mind is what came up with the precise mathematical calculations to calculate interest with all the possibilities. I'll grant you, the average person who doesn't understand money likely won't know the calculations, and the interest will seem confusing and scary to them, but really just means more people should take time to learn it. It's their money after all.


That's exactly what interest calculations tell in extremely precise detail: your set fee for every set period of time, based on how much you have borrowed, and how much of a risk you are to the person lending you the money (determined by interest rate). With some religions, the only difference seems to be that they charge you the interest all at once, and call it something else.

People already do this with what's called bailment. I set up a vault. You put gold in it. I give you a certificate for redemption. If you put a lot of gold in there, it could be worth $21 million dollars. I promise to secure it and insure it against theft. The fees I collect protect your investment. When you come a callin' I give you your gold for the certificate.

My case is only slightly different. I pre-mine the coin but they don't go into circulation until an equivalent $1 token certificate is supplied. The more I store fiat in the vault, the more bitcoin is used in circulation. There is no volatility until I run out of tokens (more fiat than bitcoin tokens), at which point the bitcoin tokens float against the major world currencies. Fees pay the "miners" or "transaction handlers" to secure the digital bitcoin tokens. This is where the deflationary effect of the bitcoin tokens takes effect.

The market is likely to handle bitcoin/fiat token certificate fluctuations a little smoother when there is a lot of volume sitting in the vault as opposed to bootstrapping the currency to an exchange market to begin with. Valuation of bitcoin was %1000+ in the last year and half alone. Not the kind of currency most people are familiar with.

Can't wait to get paid to work in Bitcoins, then I can get a "great deal" on a payday loan !

Frederic -

What you're looking to do would be easily facilitated by Open Transactions. You can create anonymous digital cash backed by your private reserve. You're never going to escape centralization, so at least offer features which Bitcoin cannot.

That actually sounds like a great way to handle interest payments in a deflationary currency.

Of course, it'll probably take a while before it needs to be implemented, considering the current volatility.

Religions against borrowing money?  I will add that to my list of reasons why I should become a lender.

Bitcoin is about taking the monetary power away from governments influenced by tyrannical despots, oligarchs, philosopher kings, or ignorant mobs.  I do not see it as a vehicle to remove profit motive or to destroy lending institutions.  In fact I see the future of bitcoin use not by humans but by bots, automated machines, and AI for an intermediate between fiat currencies and quick and cheap electronic way to allocate resources based on a machine's digital ecological value.

That was what I was hoping to achieve. Basically it's a hybrid between the decentralization of bitcoin and the facilitation of the Open Transaction account capability to effectuate a mass exodus from government fiat to a pseudo-anonymous alt-currency (bitcoin or equivalent). You need 2 systems: a bitcoin currency and a open source exchange service cryptographically tied together in a loosely federated trust network.

The idea is to maintain a 1:1 purchase parity with your digital currency until such time as it matches your fiat reserve by some relatively large quantity (i.e. 21 billion dollars of BTC equivalence, or some such large amount), then you float. This should make the market less volatile as the influx or outgo of USD by any one participant, at any one point in time, should cause less volatility. The price averages out quickly.

The question is how to prove your private fiat reserve is not being arbitrarily manipulated by the author/originator of the account? Can you make your account accessible by multiple traders so that they can guarantee the introduction of fiat in reserve is both auditable and grows in exact proportion to the digital coin you introduce into circulation?

To wit, can I create a smart contract that permits the release into circulation of exactly one, and only one, equivalent certificate of redemption (digital token coin) for every fiat dollar in reserve in an automated fashion and independent of the account holder?

I believe so. I haven't done it myself, but in a video FellowTraveler shows how one creates digital cash. It's issued independently of the federated servers, so you shouldn't even need to keep it all running yourself - we just have to trust that you have the physical cash. The whole thing is based on smart contracts.

What I'm not clear about is how the floating phase works. Are the coins then backed by proof of work, a commodity/currency, or some combination?

The BCT coins are always backed by a proof of work just as they are in the bitcoin network. You need this to prohibit (or at least make very difficult) the >51% double spending situation of the coin between BCT account holders. It is still needed so that the security of the network is maintained. You want to trust several individuals to manage the same pool of BCT coin when executing a BCT issuance. An example would be that any 90 of 100 account comptrollers would release a BCT coin into circulation whilst simultaneously auditing/verifying the vault has the equivalent fiat in reserve.

It's the fiat reserve that needs a similar paper trail blockchain functionality because they are the primary issuers of the pre-mined BCT coins, and you don't want them putting BCT into circulation without an equivalent fiat dollar stored in the vault. It's an issuance issue that would probably be handled by the Open Transactions server/client software. It's a hybrid smart property contract arrangement. To wit, all of the exchangers and BCT holders have a stake in both the issuance of the asset BCTs and the intra-account trading of the circulating BCT.

I've seen the Open Transactions video and that's why I find this idea plausible in the first place. I truly believe we need a federated trust interfacing system (automated auditing) between exchangers and also BCT-to-BCT interactions. There needs to be more fiat/BCT integration with the outside world. You would just prefer a large pool of fiat to deposit and withdraw from when the float happens.

The floating merely means that there are more fiat dollars in the vault than BCT coins to back them. You just convert to the foreign exchange format we use today and abandon the 1:1 redemption bailment methodology. Most of the fiat will likely remain in the vault. This is done completely in the open, and the event will be known and agreed upon by all of the participants. I truly believe that a deflationary currency is preferable because in real life all things are finite and in scarce supply. Physical reality should be emulated.

It's merely more preferable to absorb the rise and fall of fiat reserves from a large pool than a small one. It's sheer size (critical mass analogy) merely acts as a supply/demand shock absorber.

The difference is that gold is already worth something. A closer analogy would be you setting up a vault and filling it with worthless mud bricks, which you then try to sell off for a total of $21million, by promising to hold on to the money people give you, should they want it back, in exchange for those bricks. Considering you'll be the central mud brick issuing authority, it would be no different from trying to establish fiat currency. Even if you can prove that you are not inflating your mud brick supply, the issues remaining are how will you prevent counterfeiting (who will do the hash mining for you?), and who will buy the these worthless mud bricks from you in the first place, especially since you'll be the ultimate "early adopter." Personally, if someone created something for nothing, and tried to pawn it off on other people for $21m, my first instinct would be to call them a scammer.

Oh, another issue is that when bitcoin gets issued and exchanged for fiat, you have one person holding bitcoin, and one holding fiat, both free to spend their money however they want. In your case, the fiat backing your mud bricks is tied up in the vault, required to back the bricks should anyone want to exchange it back, and being used to support the brick's value. Should the fiat in your vault start to severely inflate, the drop in value will translate to the bricks as well.

We all created digital bitcoins out of thin air haven't we? What happens to bitcoin when all of the bitcoins are mined? What will secure the network then? I would assume that to be via the processing power dedicated to the transaction fees. Bailment services aren't worthless (the do require a certain amount of trust however). They've been done for 100's of years (without computers for the most part). I just want a hybrid open source federated trust fiat/bitcoin exchange system. Then everybody can verify where their money is (both reserve fiat and token BCT coins).

There is a fixed pre-mined limited supply of BCT (deflationary). If the fiat (which is inflationary by government design) in reserve becomes greater than the BCT coins in circulation the BCT value actually goes up not down. They, are for the most part, inversely related, but then you knew that already.

None of this is technically much different than Mt Gox. or PayPal or Dwolla per se.

As mentioned in the other topic, Mt Gox or PayPal or Dwolla are fundamentally different in that they are ONLY transaction facilitators between two other unrelated parties. They don't issue or keep the money, they only let two other people exchange it, holding USD/BTC briefly, and after the transaction is done, have no more obligations to those two people.

From what I understand, and correct me if I'm wrong, your idea would result in an entity that itself creates the BTC, holds it until a buyer comes along, sells it directly to the buyer for USD, and then maintains a long term obligation to that buyer by promising to repurchase their BTC with the same USD they sold for. Am I correct? And can you see the difference? I have to trust Mt Gox, PayPal, and Dwolla for a day or two at most. I have to trust your issuer for as long as I hold your money.

You are under no obligation to permanently park the money in the vault, and are free to withdraw it at any time (i.e. to a bank), but then the vault would have little to no stored fiat value and gain no critical mass (it would probably still have a relatively high money velocity). This is why a shared trust system is critical, otherwise you may remain a bailment service indefinitely. Not really a big deal per se, but you'd rather unpeg sooner than later I'd think. In any case, you are either trusting me (the participating trusted federated exchange servers), the blockchain, another financial service provider, or your bank. You still have to choose. You have to trust somebody, somewhere, eventually.

You want something akin to GoldMoney where they hold an unallocated amount of gold, in the aggregate, within a secured vault and then permit you to trade token quantities between GoldMoney approved accounts. The gold doesn't move much due to it's physical intrinsic nature (taking possession is logistically more difficult), so the trust level must be extremely high, in addition to the fact, they are very centralized. Nevertheless, you can withdraw physical gold specie if you want (for a substantial fee).

I do understand the implications, but they really don't have to represent a long-term relationship or obligation. Also, your money doesn't necessarily make a one-way trip into the vault (although that is preferable, by avoiding intermediary logistics). For example, vault-to-paypal, vault-to-paxum, vault-to-dwolla, vault-to-cheque, vault-to-bankwire, etc.

Notwithstanding, if you sold/traded the BCT back to the exchange pool (as opposed to somebody in the network), which effectively redeems your fiat, it would be removed from circulation by being put back in the primary account (the initial pre-mined origin block) to be recirculated at a future date, thus maintaining the 1:1 ratio as represented by total vaulted fiat reserve. The BCT coins would then be temporarily retired as it were.

Deflation is going to stabilize once bitcoin matures. The nominal interest rate will adjust to take deflation into account.

This.

Today interest rates take into account inflation.

When you get a home loan at say 6% the bank has an inflation expectation, lets say it is 3%.  What the bank is saying is they want a 3% RETURN (actually less once you factor in risk of default but lets assume no risk of default to keep it simple).

So the bank says we are willing to lend at 3% + inflation expectation.  While your nominal interest rate is 6% your paying with inflated dollars (which are worth progressively 3% less each year).  So your carrying cost is a 3%.

Imagine a stabilized Bitcoin where deflation expectation is 3%.  Assumming the same risk above vhe bank would lend you money at 0%.  While your NOMINAL inflation rate is 0% your cost hasn't changed.  Since you are paying the bank back in deflated dollars (worth progressively more each year) you carrying cost is still 3%.

Likewise imagine a future Bitcoin where deflation expectation is 7%.  The bank would lend you money at a NEGATIVE interest rate (yes the amount repaid would be less than amount borrowed).  In the scenario above it would be -4% interest.  It still won't matter as the buying power of Bitcoin will rise by 7% per year your carrying cost is 3%.

Why would anyone lend to someone at a negative interest rate given there are still scammers (which, by one established lender's count, accounts for ~10% of all loan requests [ETA: that's all defaulters, not just scammers]) and when they could just hold onto it?

What would really help decrease BTC interest rates is if there were enough BTC users to do loans locally where it's practical to have contracts enforced. Edit: Alternately, having many GLBSE users, where someone could just post transfer ownership of shares as security for the loan, would go a long way toward lowering interest rates.

The risk of default is a whole separate topic.  It doesn't matter if Bitcoin is inflationary, deflationary, or perfectly managed to never have inflation or deflation.

The examples above illustrated an extremely low risk loan (home loan interest rates).

Risk simply raises interest rate independently of inflation/deflation.
If the bank wanted a 5% return, with 3% inflation, and estimated loss rate of 10% then the bank would charge 5% + 3% + 10% = 18%. The "real" (economic term for adjusted for inflation) cost to borrower is 15%.
The "real" return (adjusted for default losses) for lender would be 5%.

In a 4% deflationary environment the bank would charge 5% - 4% + 10% = 11%.
The "real" (economic term for adjusted for inflation) cost to borrower is still 15%.
The "real" return (adjusted for default losses) for lender would be still 5%.


Well spreading risk around doesn't lower risk.  The topic was about the effects of loaning in deflationary environment.  Default risk is a different topic.

Apologies. I re-read what I wrote -- I wasn't trying to veer the thread off-topic and mis-interpreted your post. I assumed you were trying to suggest that, were Bitcoin to steadily increase in price, lenders would begin offering loans at negative interest.

So, this: http://goo.gl/4XmYU

This is the formula to calculate monthly payments in a deflationary currency loan

PMT = ((1-d)^t*P*(d+i))/((d-1)*(-1+(1+i)^(-n)*(1-d)^n))

d = deflation %
n = number of pay periods
t = period for which payment is calculated (t=1 at first payment, t=n for last payment)
i = loan interest
P = principal amount borrowed

Using this formula, each successive payment will be less numerically, but the same in value, so a $600/month payment now will still be the equivalent of $600/month in a few years, making loan repayments easier to manage. At the same time, the lender gets the return on value from both, the deflation interest, and the loan interest.

I wonder what would happen to the world if borrowing currency became illegal. Not just no interest on loans, but no loans on currency to begin with.

That is, you only have what people give you, or you create yourself (through labor) -

Would it improve human relationships?

Would it destroy the idea of raising capital?

Would it kill millions of people?

Doubt it. Instead of people saying "you owe me money for this loan," they would say "you owe me money for this job."People would still have issues to complain about.


Investment capital is at most an unsecured loan (nothing is put up against the loan, like a car or a house, so if it fails, you get nothing).  In this case it would depend on how broadly you define "loan." If unsecured loans with no guarantees of repayments are ok, venture capital will still be ok. However, since credit cards are also unsecured loans...



Only in so much as it will severely stifle and slow down economic and scientific development. People will keep dying because new medicines, and new technologies for water filtration, food, housing, and communication will take longer to get invented, built, and delivered. If I come up with a new water filtration system, and can sell it for a 20% profit, my options are:
Take out a multi million dollar loan to set up a factory to produce them by the thousands, then pay off the loan over five to ten years, keep a few $100k profit for myself, and use that money on some other invention, OR
Not having access to loans, make the filters in mygarage one at a time, save up the %20 profits for many years, and maybe afer many many years be able to afford  a factory to make them, but by then either someone else will have invented a better filter, or the customer base would have died off due to bad water.

Bottom line is, loans are a good thing. Irresponsible people who take out loans they can't afford, and who take on loans without even taking the time to understand finances, is the bad thing.

I think the definition of a "currency" would broaden significantly if this were to happen.

Options are the answer of course.

Like any prohibition of victimless behavior, it would kill a lot of people and create huge problems such as corruption, monopolies, incarceration and all the associated problems.  This is very basic psychology.  Interest rates would go up, but people will not stop lending or borrowing.  Everyone suffers, even the few who get rich with their overpriced black market services.  I was hoping we could move past this kind of idiocy soon.