Bitcoin Forum

In a thread in the general discussion forum (http://bitcointalk.org/index.php?topic=617.msg6771#msg6771) bytemaster made what I think is an awesome post. Unfortunately the thread then wandered in a different direction, but I thought the post merited further discussion, and this was the best place for it.


Discuss.

Red did have a question about it which I've tried to answer myself:

If everyone just hoards the economy stagnates. By lending out bitcoins it is possible to stimulate growth in the economy.

As a simple example:

Say 1 bitcoin buys you 1 loaf of bread, and the entire economy is based on comparisons to loaves of bread.

Scenario 1:
At the start of the year I have 1000 bitcoins, I lend out 100 for 1 year at -50% interest.
This stimulates the economy to grow 100%
At the end of the year, I will have 950 bitcoins, but they are worth 1900 loaves of bread.

Scenario 2:
1000 bitcoins, I lend out 0.
The economy doesn't grow at all,
At the end of the year, I will have 1000 bitcoins, but they are still only worth 1000 loaves of bread.

There is a lot more math you can do to cover more complex scenarios and make more acurate estimates of growth, but I think this illustrates the general principle.

I think I'll just restate what I said in the post he was responding to.

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This logic is mathematically flawed. People don't realize it because they have never seen it.

If external value starts to flock to bitcoin, than the external value to trade increases, while the number of coins to trade stays the same. That means if the value of external commodities traded doubles overall, than the value of each bitcoin doubles as well.

Example: If there were 100 loaves of bread a day and 100 bitcoins the mean value of bread is 1 BTC. If you want to trade an additional 100 loaves a day, you either have to double the velocity of the coins, or trade in 1/2 BTC coins at the same velocity.

That's the easy part! What is counter intuitive is the dynamic vs lending.

In this situation your argument says that people would start lending their excess bitcoins (at interest I'm presuming). So what would the interest rate be in this situation? So if we presume that the amount of value people want to trade using bitcoins will double this year (not unlikely) what is a reasonable interest rate? Well, just putting them in my mattress will give me 100% interest in commodity value with 0% risk.

However, if I want to borrow the money to start a business manufacturing some commodity widgets, the if I borrow the equivalent of 100 widgets today in BTC, then I need to pay the BTC back with the equivalent value of >200 widgets in a year. So if my widget business is growing at 50% growth a year, I'm screwed.

Deflation make lending very expensive, and very risky. That is why there is minimal lending now, EVEN THOUGH the government is giving away free money for banks to lend.

People are not used to this in their regular life because they are used to price inflation.

Inflation means that money in your mattress is worth less to you (in commodities) next year than it is worth today. That encourages you to LOAN your money to a bank in hopes that they will pay you at least as much interest to make up the difference. A little extra is even better!

This makes lending cheap for new businesses and much less risky for lenders. Business need a much smaller growth rate and profit margin to succeed. Including the bank to whom you lent your money.

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In my follow up to his reply (which you used to begin this thread) I said


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And he replied


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So generally I think the negative interest rate argument is bunk.

Expanding upon "bunk"


Lending 100 BTC and having it double the economy is an example equivalent to saying, "And then monkeys fly out of my butt..."

So here's more monkeys!

Scenario 1:

YOU:
At the start of the year you have 1000 bitcoins, you lend out 100 for 1 year at -50% interest.
This stimulates the economy to grow 100%
At the end of the year, you will have 950 bitcoins, but they are worth 1900 loaves of bread.

ME:
At the start of the same year I have 1000 bitcoins. I lend out 0.
You stimulate the economy to grow 100%
At the end of the year, I will have 1000 bitcoins, but they are worth 2000 loaves of bread.

I win!

Scenario 2:
Neither of us loans coins.
The economy increases
We tie in value.

Or the economy is stimulated less than usual, and you end up with less total wealth growth between the two of you.

By the way, I made the "monkey" crack before I saw the thread on monkey economics. It is worth watching the video.

People do tend to make decisions in relative terms rather than absolute ones.

But notice he could have also said, I loaned out all 1000 BTC at -50% interest and get back 500 BTC which is worth the same, but I've done a wonderful thing for society and it cost me nothing.

Or I loaned out all 1000 BTC at -35%(ish) and ended up with 650 BTC worth 1,300 loaves of bread. whether or not it is a good argument depends on the random absolute numbers you pull out of your but with the flying monkeys.

But in the end, humans don't tend to make decisions this way. We say minimize risk if we expect to be gaining value. Gamble overly optimistically if we think the trend is down, but there is a chance we might be saved from loses. Las Vegas was built on this principle. Ask the monkeys.

Perhaps you did not notice my later post where I realized that:

1) Red was right, lending at negative interest rates will make a real return, but not as big of real return as not lending at all!

So, think about what this means:

1) Supply of goods is constantly increasing as people keep going to work and becoming more creative.
2) Supply of money is relatively fixed.
3) Value of money increases as a result. (your % of total economic output remains fixed)
4) The "interest on savings" realized as increased purchasing power is equal to average productivity of society
5) Lending money only makes sense for ventures that are more productive than average.
6) 0 risk "investment" is possible! 

The alternative
1) Supply of goods is constantly increasing as people keep going to work and becoming more creative.
2) Supply of money "grows" to keep up, but new money is distributed differently from old money (borrowers, bit coin miners, etc)
3) Value of money stays flat or decreases (your % of total economic output shrinks, unless you get the new money)
4) Saving results in your share of the economic pie shrinking
5) You are now forced to find *SOME PLACE* to invest your money to compensate for the debasement
6) 0 risk "investment" IMPOSSIBLE

Thanks for your well thought out replies guys.


I do not agree that this is necessarily true.

It probably doesn't matter if no-one lends anyway. We'll just end up with the anti-Tragedy of the commons (http://en.wikipedia.org/wiki/Tragedy_of_the_commons) where it gets overgrown because no-one is going to let their cows out onto it.

People in general are REALLY bad at observing the negative effects of things that do not happen.

Imagine all the various possible lenders and their risk/reward desires and imagine all the potential borrowers with their various expected returns and risks. How do you decide which projects get the funds and which lenders lend?

It's just like any other market fundamentally! If no one else is lending then you get to choose the absolute best project and get to charge as high a rate as the project can bear. You will make huge profits if there is even one single excellent project out there because it's all yours. You could even take the seven best projects! Of course this isn't going to last, these huge profits are going to entice other potential lenders. They may not want to take the 8th best project, they may offer a lower rate than you did so that they can get the most reliable project. You can move down to a less good project, or you can compete on the rate.

This market will tend toward clearing where all the best X projects being charged roughly according to their riskiness and the Y most willing lenders having bid each other down on rates getting paid according to their risk appetites. This will leave projects in the wings waiting for someone to be willing to take a tad more risk, and investors in the wings waiting for someone to come up with a tad better project.

To address the "growing the economy" points. If a project returns less than it takes in then it is not growing the economy. The way we know someone is doing something productive is if there exist people for whom the outputs of the project are more valuable than the inputs were to anyone else. If people value the ingredients of an apple pie more highly before they are put together then it is wrong to say you are growing the economy by baking pies. You might as well be damaging apples with a fork and reselling them. You are making resources less valuable if you are not turning a profit.

Exactly!

But the premise of the thread was that in a highly deflationary period, people would be naturally incentivized to lend money at low (even negative rates) because the additional commodity growth would accelerate deflation fast enough to make up the difference. The now even greater deflation would then compound the incentive to lend.

That argument is bunk.

In every marketplace, incentives to lend increase with inflation and they decrease sharply with deflation. Furthermore, the higher inflation is the lower the relative delta between inflation and interest rates.

For example in an economy with 1% inflation you could easily lend at 5% interest (5x inflation).
However, with 10% inflation while you could likely get 15% interest (1/2 x inflation), you certainly couldn't get 50% interest (5x inflation).

As inflation goes up, the relative risk of lending goes down. If you are already going to lose 10% of your value in a year, a 3.5% gain starts to look really good.

Remember we are comparing lending vs not lending.
HOLD: 100 btc present value = 90 btc present value after 1 year of 10% inflation. 
LEND: 100 btc present value @15% = 103.5 btc present value after 1 year of 10% inflation. 

On a one year loan, that is a 13.5 btc delta over NOT lending. However, the borrower only has to create 3.5% gain in commodity value to pay back the 15% interest. That makes the venture LOW risk.

Deflation plays on the same spectrum. Not an inverted one.

HOLD: 100 btc present value = 110 btc present value after 1 year of 10% deflation. 
LEND: 100 btc present value @15% = 126.5 btc present value after 1 year of 10% deflation.

On a one year loan, that is a 16.5 btc delta over NOT lending. However, the borrower has to create 26.5% gain in commodity value to pay back the 15% interest. That makes the venture HIGH risk.

So do we NEED an inflationary economy for anyone to actually do anything other than sit at home on their pile of bitcoins  with a shotgun?

No.

But in periods of increasing bitcoin popularity with an influx of commodities and high deflation rates, expect little lending.

As people begin to get frustrated that the bitcoin rich are getting richer under deflation, while doing zero work, they will begin to take their commodities and sell their bitcoins. Thereby reducing deflation rates, perhaps even causing momentary inflation.

It is during these times that lending will start to look like a good idea. If the loans drive the creation of new commodities traded in bitcoins, the deflation will resume and the frustration cycle will start again.


But take the case of the very early adopters as an example. The system started with coin generation and zero commodities to trade the coins for. The very early adopters were awarded coins easily and for nearly free since block generation was low.

Now compare the case of those who sold their early generated coins to knightmb and those who continue to hoard their coins. The sellers were bearish on bitcoin. The hoarders are bullish on bitcoin's success.

Knightmb is bullish on bitcoin. Otherwise he would be trying to borrow coins rather than buying them outright.

If the commodities that want to trade in bitcoin increase the early adopters who hoard (bullish) are proven correct. They indeed get more for nothing than the early sellers. If bitcoin is abandoned, those who sold (bearish) are proven correct because they at least got something for nothing.

But in general, deflation steals from the cash poor and gives to the cash rich.
Inflation steals from the cash rich and gives to the cash poor.
That is why deflation causes uprisings but inflation causes malaise.

Ok, STOP throwing around the words inflation and deflation without identifying whether you are talking about monetary or price *flation.

First of all, to steal implies that something was taken from you or a fraud was committed.  There is NO THEFT in price *flation.   

Printing money from nothing transfers wealth from those who hold the "money" to those who just created it.

The savings rate is all about the time-preference of money.  How badly do you want that new computer?  If you hold out you can get 2x the computer for the same price in a year.   Yet people keep buying computers even though they are a VERY deflationary price environment.

When you choose to "hoard" you do not get "something for nothing" you are forgoing present consumption for future consumption.   Having something now is always worth more than having it later.

So everyone should *thank* the savers because their act of saving reduces prices for todays spenders.   EVERYONE benefits and no fraud or theft occurs.

It is the printing press, the passing of of IOU gold as if they were warehouse receipts, etc that is fraud and steals from the whole to give to those who got something for nothing.

Most of this post is just mantra with very little attempt at understanding what I posted.

I always talk about price inflation and deflation. Central banks increase or decrease the money supply to effect monetary policy. It is only coincidence that increase and inflate are synonyms. This site is the only place I've ever been to where people try to confuse dissimilar concepts.

For the record, bitcoin has a fixed monetary policy. There are 21,000,000 bitcoins by definition. That number is constant for all time. Some coins circulate some are being hoarded. Most are in a logical sense being hoarded in a roughly 17,500,000 coin central reserve to enter circulation with predictable timing based upon a fixed central policy.

No coins can be destroyed, beyond the known 21,000,00 none can be created. Therefore there is zero monetary inflation or deflation in bitcoin. Get over it! Coins can only circulate or be hoarded purposefully or accidentally.

Printing money does squat. The US is printing money at a huge rate at the moment and prices are still deflating. Or I could be lying and the government could be burning money at a huge clip. You can't know and you don't have to care.

Printing money "transfers" nothing! The money just sits in a vault until some bank borrows it at interest. The interest is determined by the goals of monetary policy. Which is to deal with PRICE inflation or deflation!

Ask the people in zimbabwe if printing money does "squat". 

I could print 1 zillion dollars and it would do squat until I tried to spend it.   If I print money and hold it my "supply and demand" cancel out.   If I print money and "spend it" then my demand for money I just printed is low and thus the supply of money chasing other goods increases.  Thus, there is no point to printing money *unless* you are spending or lending it.   In the current system they printed up a ton of money to cancel out losses and maintain their theoretical reserve requirements.   The only reason the banks are holding the money is because they are being PAID to hold it and not spend it/lend it.  It is a TIME BOMB.

I make a big attempt to understand every argument people put out.   And to be fair, almost EVERY FORUM I ever visit is full of people who do not understand money, inflation, deflation, or anything other than repeating the lies, half truths, and fallacies promoted by the government economists.

The #1 requirement for stable money is predictability.  The #2 requirement is that resources to not get reallocated by political clout.   

In the bit coin world, resources cannot be reallocated by endlessly printing money.  The vast majority of the bit coins are allocated to future block generation which was a choice made by the original owner of all bit coins, the creator.   He could have just as easily "auctioned" the coins into existence. 

My only point is that inflation/deflation need not be "managed" by a central authority and that the market automatically adjusts the relative price of all goods and services according to the law of supply and demand.  There are no "economic paradoxes" that require "intervention" to solve.  Money is just another commodity that is subject to the rules of supply and demand.  It just happens to have the quality of universal demand, divisibility, and uniformity making a convenient asset to barter for/with. 

So as long as we prevent fraud (Bit coin does this), then the system is good.  As soon as we start introducing fiat and resource reallocation in the name of economic stability we have a problem.   

One last note, the laws of economics are not suspended by the government actions, people still make free decisions.  The only thing that changes is the price of goods in the black... err.. free market to compensate for the increased risk caused by the bully government.  In many cases the black market prices / risks are too high and the result is a shortage, or loss of quality. 

Bitcoin does not prevent fraud. It simply isn't a fraud itself. You can still lie and be lied to, tricked into payment for bad service, no service, etc.

"But in general, deflation steals from the cash poor and gives to the cash rich.
Inflation steals from the cash rich and gives to the cash poor.
That is why deflation causes uprisings but inflation causes malaise."

This is an invalid argument if applied to price inflation/deflation. Those phenomena are caused by supply and demand and have nothing to do with theft or fraud, unless you are implying that it is somehow theft if I buy 1000 shares of Apple and the price goes up as a result.

The money supply is actually decreasing, in spite of fed actions. The next step will probably be to directly buy treasuries to spur on inflation.


This is an untrue statement. Money spent into existence alters the price structure into something different than what it would be if that money had not been created. The people whom receive the new money first benefit the most, as they can still take advantage of lower prices in the market. By the time the money filters through the economy and raises the general level of prices due to more money chasing the same amount of goods, the non-recipients of this new money are left with less purchasing power than before.

This is always true, unless the following conditions hold:

* Everyone's cash balances and debts are simultaneously and synchronously increased by exactly the same proportion.
* The newly created money is never spent and never entered into circulation.

Bad government is bad government. But I'm sure you'll find that zimbabwe was trying to redistribute the wealth. They did that by printing money to cause inflation. They could have burned the fields and cities, the prices would have spiked just as fast.

As I pointed out, inflation steals (in commodity value) from the cash rich, and gives to the cash poor.

In a related note, bad banking is bad banking. The US and Europe showed that lots of their bankers can suck too.


While I agree with lots of what you said, I think this statement is unsupported.

If you could point to any recent example of a group of people trading with an absolutely fixed fiat commodity it might help. However, I can't point to any government anywhere trying to preserve a monotonically deflationary environment.

What evidence is there that such an environment is one that wouldn't turn into Feudalism?

This of course was a metaphor, but if you are having trouble getting it, how about an example.

Suppose on average it take 100 BTC a year for a person to buy all the necessities of life for a year. Food, rent, minimal stuff.

Now we have two people doing the same job, one rich in cash, say because he happened to discover bitcoin four years before the other guy. The second person just discovered bitcoin today. So they start in the same job at the same wage (100 BTC) with the same needs (100 BTC). However, 4 years ago the rich guy traded a stack of old porn for 1000 BTC and then hoarded them. Say it was worth $5 at the time.

Now say it is a really good year for bitcoin adoption. The "demand" for bitcoins doubles and the prices of necessities falls by half. Now let's say salaries fall to match. Now both guys make 50 BTC and spend 50 BTC. So who cares?

Well the rich guy went from having a 10 year reserve of BTC to having a 20 year reserve of BTC. The other still has no reserve.
The rich guy did no more work than the poor guy. AND!!! This is the important part!!!  His hoard of 1000 BTC added no more value to the overall economy than the poor guys 0 BTC hoard. In productivity value, all hoards are equal.

Hence the over all transfer of wealth to the rich. You might not consider it "stealing" however certainly both people and their stashes benefited the economy equally, one got disproportunate reward.

If you think about it, this is how Feudal systems work. However the important commodity is land rather than BTC.


Now inflation should be self explainatory. If prices doubled, the rich guy went from a 10 year reserve to a 5 year reserve. Which is still a huge benefit from a stack of porn. It is in his best advantage to spend the money right away before it goes from a 5 year reserve to a 2 year reserve.

The problem with your argument is that you failed to consider "who gets the new money".   Surely when the money supply was "inflated" it did not go to some poor guy.   In most cases money goes to those with the means and connections to take out HUGE loans, the rich. 

Money never does anything PRODUCTIVE.  Lending money does not create "production" any more than "hoarding" it does.   People produce because the value of the thing produce is greater than the sum of the parts.   In fact, lending money "out of nothing" causes *consumption* of goods today by taking value from the money in everyones "savings". 

Take Joe the Plumber who works 40 years and saves 50% of everything he earns.  Thus, if his income was 100BTC and his expenses were 50BTC then he would have 40 years of retirement saved up.  This retirement fund represents forgone consumption.  Namely, he didn't consume resources in the first 40 years so other people could.  But his labor entitled him to not just 40 years of living expenses, but 40 years plus the time value of money.   

Under inflation, wealth is transfered from his hard work to people who borrow money to consume today what they did not save for.  Under federal reserve price fixing in an attempt to only print enough money to keep prices "stable" you steal the time-value of money (all of the increases in production) from the savers and re-allocate that to the borrowers.

So the rich control the banking and government and get the vast majority of newly "loaned" money which they get to spend before prices have a chance to adjust to the new supply.  The poor guy on the street does not see any of that new money until after all prices have risen. 

If the American people ever allow private banks
to control the issue of their money,
first by inflation and then by deflation,
the banks and corporations that will
grow up around them (around the banks),
will deprive the people of their property
until their children will wake up homeless
on the continent their fathers conquered.

The issue is not who gets what as no one is entitled to anything.  The issue is who lies, cheats, and steals to get what they want.  If Joe was smart enough to trade porn to invest in BTC then he deserves any reward for his speculation.   

This represents a complete and closed world view that cannot be argued with.

It is unfounded enough to dismiss out of hand.

You claim it is an unfounded world view, but it is nothing but Austrian economic theory as supported by mises.org, lewrockwell, ron paul, and many other scholars. 

It was an invalid metaphor.


The so-called "rich guy" traded in his present consumption for future consumption by saving his bitcoins instead of spending them right away. He made a calculation that future Bitcoin use would be higher. He had to trade something to get those Bitcoins in the first place; this is not "doing nothing"! There is no reason that he remains the "rich guy"; Bitcoins could very well fade away and be replaced by something else, in which case your rich guy winds up flat out broke.

He did in fact add to the economy: By hoarding Bitcoins, he is signalling that he believes Bitcoins to be more valuable in the future. He also takes on very real risk by doing so. If you believe he is wrong, you can short Bitcoins by borrowing them and then return them when their value has dropped.

Without these early adopters, there is no way that Bitcoin could ever get off the ground. I would say that they are performing an extremely valuable service by driving adoption of the currency. They are also taking on significant risk by doing so, as they could easily end up with worthless Bitcoins. Are you saying that people should take on risk without getting anything in return?


This is no more a transfer of wealth than it is a transfer of wealth that a lot of people at Apple are probably very wealthy now due to stock options, the same as people at Google. Demand for their stocks increased, thus rewarding the guys who got in earlier. This is not a transfer of wealth because it is entirely voluntary; it is "risk & reward". People deserve to be compensated for risk, and their compensation is entirely through the voluntary actions of others. There is no coercion here. There was always the risk that Google/Apple would fail and those stock options would be worthless, as with countless other companies whose names you don't even know about because they did fail.


Feudal systems were built upon slavery and the idea that some classes of people were better than others.

I noticed you only responded to the first half of my post and completely ignored this, Red.

I could say the same thing about your worldview. Are you unwilling to continue the discussion because you realize you are standing on a house of cards, or is it simply because it is your own mind that is closed and is unwilling to learn, which is why you simply dismiss ideas that you do not understand?

Bitcoiner: I disagree with your viewpoints but they are worth the discussion value.

My previous comment referred to the prior post by another and related video in another thread. I'm done there. Sometimes not trying to convince people of their ignorance is the most valuable choice.


If I failed to respond to particular points it was because I was replying from a cell phone with limited keyboard. I will reply in depth as I get access to more efficient devices.


In the meantime, why is it called austrian economic theory? Last I checked the austrians were part of the EU common currency? No one claims the euro is a fixed currency system do they?

PS: this is a thread about the likelihood of people, banks or groups lending with negative interest. I think I responded very coherently about that. In this thread please feel free to refute my premise that PRICE inflation encourages lending, and PRICE deflation makes lending much riskier for the lender and more expensive for the borrower. Therefore it is highly unlikely that widespread lending at negative rates will evolve.

Red, considering you have shown your ignorance of the subject of austrian economics by not even knowing its origin I would recommend that you visit mises.org and read Mises on Money (http://mises.org/money.asp)  where you can gain a full understanding of the theory and thus can discuss more in depth.  These are not half-baked ideas thrown out by random bloggers or "conspiracy theorists".   

Most people who know austrian economics also fully understand keysian economics (because we are bombarded with it by the government and banker controlled media and education systems).  However, few people who promote keysian economics can even explain what austiran economics is or the foundational principles upon which it is built.  They hear the conclusions and interpret them through Keysian glasses.

Bottom line is that "conventional economic theory" depends upon and enables big government and the inherit violation of individual liberty.  It also failed to predict the current crisis.  It is because of a need to "rationalize" government power and to "fund" endless government deficits and to justify "spending yourself to prosperity" that mainstream economics is so popular with government and their propaganda outlets (universities, media). 

I was going to summarize my criticisms of your point of view but wikipedia already did it better.

It is enough to say that I concur.

By the way, just because people put extensive thought into something doesn't imply it is correct. The communists had lots of theories about why that model was better. Empirically, they didn't prove out. Many people saw the consequences of communism as mathematically obvious. That did not make them closed minded.

For the record, I'm a pragmatic libertarian. Believe but do your own math. Math works. Empirically validated functions rule. Philosophy is easy to twist to any whim. That is my philosophy! :-)

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Criticism of the Austrian School

Critics have concluded that modern Austrian economics generally lacks scientific rigor,[10][12] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,[107] but by using mainly verbal logic and what proponents claim are self-evident axioms. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events. Economist Bryan Caplan noted that, "what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics."
A related criticism[5][108] is applied to Austrian School leaders; these leaders have advocated a rejection of methods which involve directly using empirical data in the development of (falsifiable) theories; application of empirical data is fundamental to the scientific method.[109] In particular, Austrian School leader, Ludwig von Mises, has been described as the mid-20th century's "archetypal 'unscientific' economist."[110] Mises wrote of his economic methodology that "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts."[111] Murray Rothbard was also an adherent of Mises's methodology, and though Rothbard assigned a quasi-empirical description to it, he comments that "it should be obvious that this type of 'empiricism' is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes".[112] Additionally, the prominent Austrian economist, F. A. Hayek, stated his belief that social science theories can "never be verified or falsified by reference to facts."[113] Such rejections of empirical evidence in economics by Austrian School leaders have led to the school being dismissed within the mainstream.[5]
Another general criticism of the School is that although it claims to highlight shortcomings in traditional methodology, it fails to provide viable alternatives for making positive contributions to economic theory.[114] In his critique of Austrian economics, Caplan stated that Austrian economists have often misunderstood modern economics, causing them to overstate their differences with it. He argued that several of the most important Austrian claims are false or overstated. For example, Austrian economists object to the use of cardinal utility in microeconomic theory; however, microeconomic theorists go to great pains to show that their results hold for all monotonic transformations of utility, and so are true for purely ordinal preferences.[10][23] Caplan has also criticized the school for rejecting on principle the use of mathematics or econometrics.
There are also criticisms of specific Austrian theories. For example, Nobel laureate Milton Friedman, after examining the history of business cycles in the US, concluded that "The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false."[6][103][115] In addition to Milton Friedman's criticism, Nobel laureate and neo-Keynesian economist Paul Krugman argued that Austrian business cycle theory implies that consumption would increase during downturns, and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession.[7]
Economist Jeffrey Sachs has pointed out that when comparing developed free-market economies, those that have high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He asserts that poverty rates are lower, median income is higher, the budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher). He concludes that Friedrich Hayek was wrong when he said that high taxation would be a threat to freedom; but rather, a generous social-welfare state leads to fairness, economic equality, international competitiveness, and strong vibrant democracies.[116] In response to Sachs' article, William Easterly states that Hayek, writing in 1944, correctly recognized the dangers of large-scale state economic planning. He also questions the validity of comparing poverty levels in the Nordic countries and the United States, when the former have been moving away from social planning toward a more market-based economy, and the latter has historically taken in impoverished immigrants. Easterly also argues that laissez-faire countries were the leaders of "the ongoing global industrial revolution" which is responsible for abolishing much of the world's poverty.[117]

Market - not central bank - interest rates will always be positive to reflect risk and the time preference.  Unless the loan is such that it would significantly affect total productivity in the economy surrounding the given currency - very unlikely - then negative interest rates make no sense.

Am I missing something?

Just be careful of bad math that cause you to believe in something that isn't true. Your map does not correspond to the territory and all.

You don't want to be like Paul Samuelson with his economic textbook touting the idea that the Soviet economy will surpass the USA's economy. He didn't understand how they work at all.

The Austrian schools merely derive their economic from deductive logics. So there is a way to disprove them. Just explain their logical mistakes.

I don't think so. I think you understand this correctly.

However, let me give it to you as a deductive reasoning chain:

1. You loan 500 BTC to Fred for manufacturing improvements.
2. Manufacturing improvements increase productivity.
3. Increased productivity creates more commodities to trade.
4. More commodities trading compete for a fixed number of bitcoins to trade with.
5. Competition for bitcoins increases their value.
6. Increased value of the repaid coins means commodity value break even is less than the principle of the loan.

Seems perfectly logical via deductive reasoning. You can always finish the chain by saying it is up to the lender how much less he is willing to take.

The problem with all this deductive reasoning is that it is completely pointless. No where did I give you any math that attempted to show how much deflation the given investment would/could cause.

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Thought about more mathematically, a loan with negative interest is equivalent to two separate transactions.
1. The amount of the loan that requires repayment (at zero percent interest).
2. A gift for the rest of the amount.

Deductive logic would say, there might exist cases where I might donate money with the hope of increasing deflation. And if I would give money away for that, then there is no loss in loaning money for that.
Therefore, the proposition is again reasonable.

====

Inductive reasoning however says.
1. Take the loan.
2. Repay the loan.
3. Keep the difference.

That makes a lousy business model for a bank.

Well, your theory that your loan could "increase deflation enough" to make negative interest rates work is clearly unfounded unless your loan represents a majority of the money supply.

You lend 100BTC and cause 10,000BTC worth of goods to enter the economy because your loan was going to cause deflation you "gave" -2% interest and thus lost 2BTC.     The entire BTC economy was worth 23,000,000 BTC before your loan and thus adding 10,000 BTC would cause .0004% price deflation to distribute 23,010,000 worth of goods over 23,000,000 units of exchange.   Clearly there is no way any individual could stimulate enough economic production to generate a profit from the resultant price deflation.  Even if said person had an investment that returned 100x startup costs.

Economics is not about math, it is about HUMAN ACTION.   There is no math that can explain human action because there are too many variables and people do not think like computers.

Besides, if austrian economics was so bad then why have they been predicating this crash while the "scientific economics" were promoting theories that depended upon exponential growth functions to stay solvent.   It is trivial to prove their equations false. 

It is like school kids manipulating algebraic equations to calculate area or volume without knowing what the numbers actually mean.

Communism in theory uses fatally flawed concepts. If ever we are to have communism on this world it will be in the form of vast material wealth that will leave nobody wanting for basic goods. Scarcity (and therefore economics) will always exist up until the point we can create new universes, or something like that. Maybe it will exist even then.
Communism in practice... 'nuff said. In my personal experience, the people I've encountered who support those ideals tend to argue with emotion, dismiss ideas out of hand, and blindly assert facts without backing them up. No wonder the methodology tended to be so violent. Communism is the perverted offspring of folk economics, a dead philosopher's ideals, and the power of the state.


Economics != Philosophy. Austrian economics does not say what ought to be, but it does tell you what happens. Are you a libertarian who's unfamiliar with the Austrian school or were you just joking around? Whether you agree or disagree, I recommend you at least do the research. Go over to the Mises forums, ask your questions there, and then feel free to disagree with the people who respond to you. At least have an open mind about it. Once you read more, you'll also find that there is actually plenty of empirical support for it, as well.


A copy/paste of something refuting something you admittedly are very unfamiliar with does not a valid criticism make ;)

The criticisms there aren't very strong and misunderstand much of the Austrian School's points, like the whole "unscientific" thing. People who claim that don't really understand what it's about, and "a priori" are used in mathematics and geometry as well.


For the record, I agree with that one criticism that states that Austrians overplay their differences. There is nothing strange or unusual about the Austrian school of economics once you learn what it's all about, except perhaps the name.

I met my first Libertarian roughly 35 years ago. But I've been hearing people advocate for going back the the gold standard for longer than that. I agree with the pragmatic nature of Libertarianism that says less government is better. However, often find distasteful many people who call themselves Libertarian but use it as an excuse to argue that police and drug laws are bad. Ones I actually know personally, do this because they use drugs irresponsibly and exhibit anti-social behavior which antagonizes the police. I prefer not to be lumped in with them, even though I have some of them as friends.

While I'm well aware of complaints about inflation and FRN, I had not heard it called Austrian economics. I disagree with the proponents of going back to the gold standard. I also find idiotic those who claim going off the gold standard was some sort of secret conspiracy. (I'm not claiming you are one of these Bitcoiner. I'm not so sure about Bytemaster though.) There were issues with gold backed money. It was publicly discussed, passed by congress and in all the papers. It was no secret. Lots of people didn't like it and many of them were rich. Poor people by definition had nothing to lose in the switch. So unless it was a conspiracy of the poor to steal value from the rich by causing inflation, it doesn't seem plausible.

It is like calling Obama-care a secret conspiracy. I disagree strongly with that, but it certainly wasn't a secret conspiracy. Yes it benefits some and disadvantages others. Yes, it institutionalizes the concept that there is a service you are entitled to but not responsible for paying for. But it wasn't a secret, and it wasn't a conspiracy of the insurance agencies, hospitals or medical professionals.


I pasted the quote because it was exactly what I was going to write about bytemaster's arguments on this site. Mainly this part:

"generally lacks scientific rigor,... theories are not formulated in formal mathematical form, but by using mainly verbal logic and what [he] claims are self-evident axioms."

also

His explanations are "contradicted by the evidence." At least by my experiences.

Hell, I predicted the crash.

I also listened to mortgage brokers on the phone in California. Realtors and other locals who made huge sums of money before the crash explaining why it could never happen.

"They are not making any more real estate! It is always going to go up in value! Look at the history, it's been up every year since world war 2!"

But the problems weren't caused by monetary inflation. The problems were caused by bad banking. And they weren't caused by creating money. They were caused by taking money from people's retirement accounts and "investing it" in California, Florida, Nevada, and Arizona pooled mortgage funds.

It was simple supply and demand. Investors wanted to buy pooled mortgage funds because they were safe and profitable. (Initially they were.) However, the initial well vetted mortgages got pooled first and sold to the smart guys who invented the concept.

Because of demand to buy these funds, mortgage brokers lowered all the vetting rules, so they could quickly close new mortgages to sell into the pools. A mortgage broker could loan mortgage money in the afternoon, and sell the mortgage into a pool before close of business. The buyers didn't do any checking so who cares if the brokers did any?

They loaned 9X people's annual salary with no money down. Then sold the mortgages as low risk investments. That is where the criminal fraud was. The big fund managers were irresponsible for not checking up on their suppliers. It was "bad banking" pure and simple. No money need be printed to create the inflation. It could have easily happened with a gold backed currency.

How can the total debt of society be greater than the total savings?

Joe deposits $100 bank can lend $90 of it
Bob borrows $90 from the bank and spends it at Jill's store.
Jill deposits $90 bank can lend $81 of it
James borrows $81
..

Eventually you end up with accounts that amount to $100 + 90 + 81 + ... = $1000 from Joes $100 deposit.  At any given point in time there is more money chasing goods than actually exists.   If all depositors attempted to claim the money that is in their checking account (payable on demand) the system crashes.  

When you go to the bank and take out a mortgage the bank does not have enough money from depositors to fund your loan.  When you sign your "loan document" you create an interest bearing asset which they put on their books.  That interest bearing asset serves as the "reserve" used to back the creation of the notes they lend to you.   In effect, the new money is backed only by your promise to pay.  If you do not pay the bank eats the loss as they have a non performing asset on their books.   Thus there is no limit to mortgage money that can be lent, particularly when banks can borrow short term from the Fed in unlimited amounts and then lend long-term (another fraud).

Anyway, the housing bubble was only possible because of more money made available by cheap loans chasing the housing market.  The same thing is going on in education.

Few people actually have "money" in their retirement account.  Instead they hold assets (stocks, bonds, etc) that have a current market value.  This is not money, it is potential money.  If everyone tried to sell their asset and get the money then the demand for money would grow dramatically yet the supply of money would be fixed (for the day everyone tried to sell) and thus the price of assets falls.  So there is a clear difference between "notional value" of a retirement account and actual money.  

The proof that money was created to fund the housing bubble is when you consider that the real price index should include the price of housing as well as the price of stocks and anything else that can be purchased for money.  If something does fall in proportion to the price increases in other areas you have a net "price gain" and thus monetary inflation.  Thus the housing bubble on the scale observed could only happen with monetary inflation.

I just answered this here.

http://bitcointalk.org/index.php?topic=376.msg7621#msg7621


But as for the housing crisis, I didn't mention fractional reserve banking at all. I gave an coherent explanation of how it happened that didn't involve the fed printing money or even the banks making recursive loans.

You ignored that and replied, "it was fractional reserve banking", because you don't like fractional reserve banking. If you want to dispute me. At least show how what I said was not possible or even not probable.

By the way, the last paragraph is gibberish. Or is it just me?

Red, we could debate as I love to debate... but I am going to have to "let it rest" and get back to developing my bitcoin apps.   At least we can agree that bitcoin is a good thing even if we disagree about some economic theory.

I'll answer this, but I think your next post was much more interesting. I'll draw from that here as well.


This is the second time I've seen the line "The people whom receive the new money first benefit the most". I don't know if it was you or bytemaster that said it previously.

Who are these people? I've really never heard of the people who receive the money first.

The BEP makes the money and delivers it to the federal reserve. The federal reserve doesn't "spend it" in the any consumer like sense of those words. They simply keep big piles of it for banks to borrow. Those banks borrow it with interest. Granted, now the interest is very low. It's almost like borrowing it without interest, but it still has to be accounted for and repaid according to the loan terms.

So those would be "the people" who get the money first. But the banks don't take the money unless they can lend it out at a profit. Otherwise, the additional money would just be a liability. Yes, they get a lower interest rate, but interest rates always consider cost & risk. The large banks are *supposed* to be low risk. And the fed is *supposed* to monitor them to make sure they are. Lending only to a few low risk customers keeps costs down for the fed. Banks compete for borrowers but lend to riskier clients than the fed. That comes with additional costs and a higher rate.

I'm still not seeing "the evil people" who get an advantage. Unless you consider all banks that deal with the fed as those people. I'm also not seeing how anyone can take advantage of lower prices in the marked. Perhaps I'm dense.

---

"Money spent into existence alters the price structure into something different than what it would be if that money had not been created."

I agree with that statement. After the money has been loaned and it is actually spent, thus entering circulation, then prices are different then if that money was hoarded out of circulation.

"By the time the money filters through the economy and raises the general level of prices due to more money chasing the same amount of goods, the non-recipients of this new money are left with less purchasing power than before."

We are not far apart on this point.

However, if the Fed does its job perfectly (according to its mandate) then the new money entering circulation, keeps the PRICES from deflating and they remain perfectly stable. If there were not ALREADY an increasing amount of goods trading, there would be no need for the fed to encourage more currency to circulate.

So with a perfect fed, existing dollar holders have exactly the same purchasing power as they had before the new money. But you are correct, they would have less purchasing power than they would have had if prices had been allowed to deflate.

And for complete clarity, in my view that is a good thing.

Money, when used in country, should not a commodity to be invested in. Specifically, you should NOT gain value by holding money in your piggybank or your mattress. That doesn't do anyone any good. You shouldn't necessarily lose value either.

I know you disagree, you consider it a benefit of delayed gratification. I read the other post.

But hoarding money OUTSIDE of circulation is fundamentally different than investing money in an interest bearing account. Saving's accounts pays interest because the money is not hoarded. Instead it circulates to people who use to create more commodity or service value. This additional created value IS "the time value" of money. It's the alternative to hoarding that is worth MORE than hoarding.

When money doesn't circulate, it is worth zero to the economy. I've heard the argument that "it's an investment in the economy" but that can't be correct.

If you and I each have $100 dollars and we both put them in our piggybanks we have both helped the economy none at all. Sure we are not competing for goods, so others might buy more with their money than if we competed with them. But "the economy" does not increase in commodity value. And if instead of putting my $100 in my piggybank I decided to burn the bills, I would still have exactly the same effect on the economy as you. Zero. There is no effect until the money starts to circulate again.

If we reward people for having no effect on the economy. Things will go badly. Hoarding money over time has no positive effect on commodity production, so it should not be rewarded by value creation.

The true price inflation rate is the difference between what goods would have costed at time T+1 with new money and a time T+1 without new money.   Thus even with "price stability" you still have a transfer of wealth from the savers (those who chose to hold currency and not spend) to the individual who got a loan and paid interest to the bank which paid interest to the Fed.   Thus the increase of purchasing power was transferred from the saver to the Fed.

While I doubt I would call it "the true price inflation rate", I understand what you mean. I would call it "the change in relative value between two commodities."

And as in my prior post I claim that is "a good thing". Quoting myself below: (yes this is obnoxious, I know. But it was a long previous post)


So back to your points again.


Yes, I completely agree that in this situation the fed creates more competition for HOARDERS. It can out compete you because it is in a very real sense, an endless hoard. This competition drives what you could charge for lending out BTC from your hoard.

In the same very real sense it "steals POWER" from the hoarders. (Meaning those whose BTC is not circulating and thus not affecting the production or consumption of new commodities.) And it gives that power to those who will affect production directly, or influence production through consumption.

I agree, and I make the claim that this is "a good thing".


I disagree with this because by its very nature, the Fed cannot benefit from receiving interest. As discussed above, the Fed represents an infinite hoard. It is of zero benefit if the hoard becomes "infinite+1".

Now if the fed demanded to be paid in corn, or cows then you would have reason to be suspicious. But it sees no benefit from more FRN.

The fed makes a profit for its owners and that profit they can spend on anything they want.

Me hoarding coins does not limit economic production in ANY WAY.  The resources required to produce are still out there and can be bought and used to produce by those with money or something else of value to trade (labor,gold,etc).  The only difference is *who* gets to buy those resources to produce and at what *price* they get to buy them. 

If you let the Fed lend money into existence to someone then that money bids up the price of the goods required to produce and creates an interest burden on the production that is paid to the bankers and the fed.   Thus lending money to produce makes sense for really profitable ventures if the lending comes from someone else's saving and not from the fed printing press, but in a stable economy it should make more sense to first *save* so that you can produce without the interest burden.  Furthermore, the fed and bankers are earning interest on the debasement of the savings of society.

I do not know why our society is so obsessed with the need to "borrow" to produce instead of "save" to produce.  The reason people cannot "save to produce" is because those who borrow money into existence simultaneously debase the savers investment and get to market first.  This "advantage" to the borrower can only exist by fractional reserve lending and the Fed.  Otherwise the saver would be earning interest (via deflation) and the borrower would have to be even more profitable to justify borrowing instead of saving.

You answered yourself as to why society is "obsessed."  Its because fractional reserve banking lowers the cost of borrowing, thereby creating a greater incentive for people to produce, and thereby serving more people and increasing the consumer surplus.

The needs of the society depends on the hand ofbpeople thus have different needs too. The economics status will surely on the top if the status of individual will increasing. If we are going to talk about the banking system it will be greater in borrowing that turns to investment by other people. That is totally true also that it will increase of consumer suply because of high demand.