Bitcoin Forum

Hi,

I have searched the forums and haven't found a satisfactory discussion, please correct me if I'm wrong.

Question:How do banks get more coins to pay interest rates if no new money is produced?

Further explanation:
Let's say we have 21M bitcoins and a free-market economy based on them. Everyone has some of those bitcoins and are exchanging them with each other for services and goods. Now, if I am a bank, how do I get more money to pay my lenders? I understand that the things you can buy with your coins grows overtime, but how do you get more money itself? If everyone lends to everyone (like kind of what happens today), then we would want the number of coins to grow, or someone would not be able to get enough to pay back, despite being able to purchase more stuff (his intrinsic wealth growing). On a further note, even a 1% interest would be actually compounded by the deflationary trend, making it quite lucrative. Is it possible that negative or zero interest would be lucrative (just to keep your money safe?)

Perhaps my questions are simplistic, but then again so is my knowledge in economics.

Thanks for reading

If you have deflation lenders can adjust nominal interest and maintain steady real interest. Problem arises when such adjustment would bring nominal interest below zero. It would cause lending to stop, because one have no interest in borrowing for zero or less than zero. One can just hold currency without any risk. This is one of the reasons why deflation is considered bad.

Basically what he said above, there's no way to have a growing economy and a fixed volume of currency, bitcoin was flawed by design to get people to adopt it, it was never meant to be a real currency.

Credit is a hard concept in the Bitcoin economy. That being said, lending isn't that terrible. Go back to the basics -

If a bank uses only Bitcoin, then this is how it will make money: through a spread between savers and lenders. That's how traditional banks are supposed to make money too. People deposit their Bitcoins in the bank for safekeeping and they get some rate of interest. If you're borrowing Bitcoin from the bank to start a business, say, then you need to pay back a higher number of Bitcoins. The bank keeps the difference for taking that risk. Same concept as traditional economy.

Remember currency is just the medium of exchange. The total wealth of the world can keep increasing irrespective of the currency.

Also the banks can become more profitable through expansion, which may justify borrowing on the part of the bank.

Stampbit was never meant to be taken seriously.

You did not understand the problem. If deflation is 20% a year you cannot lend from bank for anything under 20% in real terms. Such high interest would cause demand for credit to be very small and without demand there is now way bank can profit from lending.

In a hard money loans are repaid with interest, given enough time and a stable monetary base and economy this will result in only two possible outcomes.  The lenders gradually gain a larger and larger share of all currency (assuming they don't spend it back into the economy), or borrowers default at a rate equal to the interest rate to bring the lenders profit down to zero.

Growing the economy is one possible escape as it allows most or all loans to re repaid, monetary velocity will now be higher and the loan interest will be a smaller portion of the whole economy.  Alternatively growing the money supply (without growing the economy) has the effect of making money soft and lowering interest rates, if interest rates are lowered to equal the growth in money supply then lenders will not grow their share of total currency and borrowers will repay loans with the expanded supply, but it is the borrower who must receive the new money for this to work.

You have to get out of the frame of thought of banks producing money by using means such as interest bearing accounts. The bitcoin economy truly does reward those who save. At a 0% interest rate, your money will naturally appreciate over time whilst prices depreciate. It is the prices constantly depreciating that your 'savings' are delivered. This is what's nicknamed as a deflationary economy.

I believe the real world tries to model its economies to grow at 2% fixed rate, as psychologically it cons the population into thinking that each payrise they get every year is progression.

Some would argue that it's better if economy reward those who invest than those who just sit on cash doing nothing and risking nothing.

Banks would need to take control of the 51% hashing power and propose to move decimal places from 8 to 9 (or so). But to understand what I've just said requires that you change your thinking from deflationary bitcoins to inflationary satoshies.

It is irrelevant to interest rates in deflation problem. If you borrow 1 BTC you have to give back 1 BTC no matter how many decimal places were added to protocol in meantime.

Not if you borrow satoshies in the first place.

No one is going to lend you in such potentially moving satoshies, because he risk getting only 10% or 1% of principal back.

It was a good answer to the original poster's question: 'How do banks pay their lenders?'  The OP seemed to be under the mistaken impression that a specific business (a bank) needs to increase the stock of money to to pay the interest off loans.  The truth is that profit can pay the interest.

Also, if the currency is increasing in value 20% per year, think about why that is.  It's because of economic growth.  If you can't have economic growth with the currency appreciating that much, then the growth slows, and the currency increases in value at a lower rate.

Yes, I reread thread and I agree.

Economic growth is only one of reasons that can cause deflation. It can also be caused by shrinking money supply (eg. credit bubble pops) or by increase of money demand (all people at once are worried and starts to accumulate savings in money) and whatever the reason economy as you said will adjusts growth lower. But why accept slower growth just because of certain monetary system?

The only growth your seeing in the BTC economy is the growth in demand to speculate.  Actual goods and services transacted in BTC are flat or barely rising, and even that is mostly commerce that would otherwise have occurred in USD even without BTC existing.

My suspicion is that miners are hoarding most coins right now because they can cover their energy costs selling just a few.  We will see difficulty increase until it becomes self limiting and once all miners are forced to liquidate to pay for electric costs the price will crash as their is no way that people will put a half million dollars a day into buying newly minted BTC, the amount necessary to sustain the current price.

Well-said, well-said... This goes to show that miners don't really have an incentive to hoard bitcoins beyond the GOLD 2.0 era we are currently in. If only we had figured out how to make the best use of that era in creating a bitcoin economy that doesn't have to rely on fiat currencies for commerce transactions?

Yeah, that's exactly what I wanted to say. If you say that the units of currency are fixed, then with economic growth, the value of each of these unit will increase proportionally. The reason that doesn't happen with fiat currency is essentially inflation (inflation defined in terms of increasing the supply of currency, not CPI based inflation). In a Bitcoin economy, the value of 1 Bitcoin will be 1/21 millionth of the size of the economy. The economy grows irrespective of the currency units.

If you are lending Bitcoin, you charge interest in Bitcoins.
There is no problem provided the lender is making sound judgement in assessing risk.

Perhaps you are considering the foolish bank which might lend Bitcoins and charge interest in fiat currency.  Don't deposit or buy shares in that bank.

The question is If bitcoin is the only currency in the world (as most of you expect), How the Economy will grow if the interest rate is not stable and is very high?

If the economy is growing, one bitcoin has bigger buying power, then why do not the bitcoin owner hoard the money rather than send it to the bank? You can say the bank will pay for the interest. So the lending cost will be the interest + economic growth rate.

How can economy grow? By investing and developing new things/methods to satisfy human needs. No lending, no investing and as a result, no economic growth (even there is economic growth, this kinds of growth will centralize bitcoin to big monopoly enterprises). The ROI(return on investment) must be bigger than the lending cost. Which means the ROIs must exceed the economic growth rate.

Let's assume there is only one project for the whole world with an ROI 10%. Then if the project can be done by its own money, the ROI of the world will be 10% and so the economy growth will be 10%. So where is the interest?

If there are two projects for the whole world with the same size and ROI 15% 5% each. then the economy growth rate will be 10%. People will expect the 5% project can not pay back the interest and will stop investing in it. as a result, the economy growth rate will be 15%/2=7.5%.

If people are expecting economic growth too high, the required ROI will be too high and few projects can achieve that, which will lead to a frozen in the lending market. A frozen market will lead to the withdraw of industry and is harmful to the society.

So here is the conclusion, fixed money amount is not a good choice.

This is not accurate, as you are discounting the existence of credit-money, which is the essence of the question posed here.
Lenders / Banks which own Bitcoins may lend the right to them out as credit-money, letters of credit, or other instruments useful in trade.  The bank may charge some interest on this credit-money.  This is what happens today with fiat currencies.  It is the same mechanism.  It doesn't matter that the quantity of Bitcoin is fixed to an absolute number at any given moment.  Credit-money may expand the amount of circulating money beyond that fixed amount.

This is the same way that the amount of printed serial numbered paper dollars is different from the amount of "money" being used in commerce.  Much of it is a secondary ledger held in a bank accounting system and not physical paper fiat currency.

This is not a real problem, or rather it was a problem solved several thousand years ago, and really very well re-solved by Italian Banking to end the "dark ages".
The world was using gold and silver, also a fairly fixed quantity, with only tiny amounts of inflation/mining/discovery.  As well as plenty of losses in shipwrecks and such.

The only reason this is even a question is because folks have become so accustomed to inflationary fiat currency that doing without them is outside imagination.  But we used to all do without them very nicely.

To be more accurate HARD money is not a good choice, money can be made soft by inflation OR by demurrage as in Freicoin.  Both have the effect of lowering interest rates and breaking the cycle you describe.  But we feel demurrage is superior for several reasons, first it is universal and constant on every coins and everyone that holds coins, where as inflation must ripple through the economy as prices rise from people bidding them up, a messy process that an easily overshoot.  I like to say demurrage moves at the speed of light while inflation moves at the speed of sound. 

Second demurrage eliminates the first-spender problem under inflation, when new money comes into existence the first person to spend it enjoys the still low prices before his own activity increases prices.  This is even the case if the new money is borrowed as most new money is under our current system, the borrower gets to spend high value money and repay with lower value money.  Under demurrage new money is typically given to pensioners or other charitable causes or used to pay for the system overhead costs.  Currently Freicoin directs demurrage to mining but we have plans for a PoS based voting system that will direct those funds in the future.

Actually, I think demurrage is a very interesting idea. However, firstly, is it legal or moral to deprive money from its owners?  secondly, how to set up the demurrage rate? The rate should be able to push users to spend their money and not push to hard. thirdly, even with the demurrage thing, economy has to develop, as a result, some new products will enter the world and they need money too. If the total amount is fixed, then some other products must lower its value. This will also cause deflation. Imaging you produce A @ 1000BTC in year1 and you produce all of them into your inventory. Then as the shortage of money supply, you have to lower its price to 900BTC in year2. However, your COGM (cost of goods manufactured) is 950BTC in year1. Your inventory price is also 950BTC. So in Year1 you can gain 50BTC revenue but in year2 you will loss 50BTC. This happens to all manufaturing business as they have to buy raw-material first and then produce the product. If the production time is too long, it will be not profitable. The business operators will lose confidence in the production.

Well, setting aside that nobody with a lick of sense thinks bitcoin will be the only currency in the world (or even that cryptocurrencies will be the only thing used as money), the simple answer is that it won't. Which is why the interest rate will be low, and fairly stable.

For the record, I personally don't believe that bitcoin (or any other crypto-currency) will be the only currency in the world.  I suspect that most bitcoin supporters believe it will become a world currency but not the only world currency.

For the purpose of discussing bitcoin interest rates, I am also ignoring interest rate manipulation by central banks.



Well, I would wager that some form of banking will persist.  Regular people may use banks to safely store their bitcoin and for easy lending.  Plus banks may offer some other bitcoin-centric services.

But even if the traditional bank went the way of the dodo, lending could continue.  Using the internet, it's actually much easier to find borrowers today then it was 10 years ago, and it will probably become easier still.  I mean, using the internet these days I can loan money to farmers in Africa if I wanted.



If people are expecting higher economic growth, other things being equal, then they will probably want to save (invest) in order to buy more goods for less money.  In fact, one of the arguments against a fixed money supply is that the value of the money goes up so quickly that nobody wants to spend.  I say that it's unlikely but not impossible.

If phenomenal growth is already locked in and businesses don't want any more investors (0% interest rates), then people will either hold on to their money (because they are perfectly content) or spend some money on things that they want now.

There is nothing inherently wrong with slowing investment when growth is high.  When people don't want any more investment, more investment is bad.  It sounds like you are worried that lending will stop when it is too high.  Of course!

anaikh:  We get asked this question frequently

We believe that no one should be deprived of the VALUE of their money by the monetary system, but neither should money earn interest that gives one more value, demurrage in our view a means to make money held by a person completely constant in value once the wider economy is factored in.  All money has by necessity of being money high liquidity (indeed an accurate definition OF money is what ever thing in society has highest liquidity).  That liquidity has a value over time which gives rise to interest and which someone with money can gain more value from without engaging in any risk.  Gaining without risk is considered usury.

The ideal rate of demurrage is the rate that matches and counter-acts the liquidity premium.  We used a 5% per year rate in Freicoin as this is the figure Gesell's believed (siting earlier research) was a long term historical rate and we do not believe it will be significantly different now, a floating rate was considered but no technical solution was evident so a fixed rate was employed.  Rates of demurrage intentionally set far above the liquidity premium would be unfair by this standard.

A person stuffing money under a mattress would indeed lose 5% a year to demurrage, but that person would be very liquid and enjoy the safety that liquidity provides.  On the other hand someone placing money in a long term savings account with a bank would be giving up most of their liquidity and the bank would pay a rate to him that effectively lowers their demurrage loss.  The more liquidity one gives up the less demurrage one should pay, the longest term lending should be very nearly at par.

Your also naturally correct about money supply needs to be managed to keep valuation constant, this is another area ware FRC developers acknowledge a potential flaw in the economics of the coin as-launched but hope that the core demurrage concept will prove itself to be useful regardless and that improvements can be made by future hard-forks.  My personal opinion is that an internal futures market could regulate the quantity of coins such that they keep a deflation rate sufficiently low as to avoid hoarding.

http://coinlenders.com/

Hope So  ;)

I don't know whether 5% is responsible or not. But your coin's foundation is hoarding coins for the first 3 years...I do not like that.

Question on demurrage:
What do you do with those lost coins? If they are annihilated than it just changes amount of money without affecting value. If it is distributed to everyone then nothing changes. I guess it is being distributed to miners so it is effectively exactly same as just giving miners new money. Miners simply increase their share of currency vs everybody else. Old school inflation have one big advantage of being compatible with human psychology. No one wants to see his account shrinking in real-time.

But that is exactly what is happening with old school inflation.... but most people are unaware.  At least with demurrage, it is an honest shrinking of your purchasing power rather than a sneaky one.

Demurrage does have that going for it, But it's still a drain on purchasing power, and a currency with demurrage will never survive next to one that doesn't in a competitive market.

I agree.  I'm no fan of demurrage.  I just see it as slightly more honest than willful inflation.

Oh, it's much more honest. I mean, when your money has an expiration date, any fool knows not to hang on to it lest he get stuck holding the bag.

Inflation isn't the only component in interest rates.  Take a CC for example it is 20%+ even in an economy where inflation is ~3%.  Even a mortgage generally run 1% or so higher than the 10 year treasury bond (which rarely current QE fun aside) has negative real interest rates.

The issue would be that Bitcoin is currently experience very high deflation relative to the dollar and other major currencies.  However that trend will not hold forever.  I mean at only 24% USD:BTC growth we would be looking at the Bitcoin money supply worth  ~2T in a decade, then what 20T by the next decade, 300T by the decade after that.  

As the Bitcoin economy gets larger its growth rate will slow.  Bitcoin will not have extreme price deflation.  Under a scenario where the purchasing power of a Bitcoin is increasing by say 1% a year I would expect interest rates to be very similar to inflationary interest rates but 2% to 4% lower because the inflation component has been replaced with a deflation component.

You mean the price pf Bitcoin is rising？What does your money supply mean?

Inflation is not at all a component of REAL interest which is what were really concerned with, real interest arises purely from liquidity premium, aka the value of liquidity.  The only argument among economists is to what the source of that liquidity value is.  The general Austrian answer (which myrkul endorsed last time we debated) was a time-preference in which most people wants to engage in shortsighted consumption in the present.  Thus the 'good' savers who resist the temptations of immediate gratification are entitled to extract interest from the shortsighted gluttons, basically a kind of sick morality play designed to justify usury upon ones fellow man.

The reality is that liquidity is in the nature of money and it has value because liquidity is insurance against any possible calamity as well as a ticket to any opportunity that may arise.  And their is nothing wrong with people acting on the real opportunities or calamities that may be occurring, it is not a moral failing on their part to seek liquidity, but it is an impediment to the economy when they are forced to pay for it.  For liquidity is not created by the money holder, it is created by the marketplaces willingness to accept money and thus give it liquidity, a publicly created good like liquidity should not be monopolized but instead it should be available to all but it should cost you what it's worth. 

Getting something for nothing is never fair, as they say their is no such thing as a free lunch and liquidity under a hard currency is a glaring example.  How ever free the lunch might seem someone else always bears the cost and no self-respecting believer in fairness should endorse such a thing.

I like to add to the discussion that even in a deflationary currency negative interest rates occur. Germany had them last year on their bond offerings.

Borrowers earn coins by providing goods and services to the lenders, which is paid from the interest received.  This happens until the debt is fully repaid or partially canceled.

Note that a short squeeze can be applied onto the borrower if the lender keeps hold of the interest.  The result is that the borrower must scramble to make a repayment or default, in a secured or unsecured way.

Wow, talk about distorting a viewpoint to suit one's own needs. If you were anyone else, I'd call that out as a textbook strawman.

No, my friend. Time preference is merely that: a preference. Austrians make no moral judgment as to whether or not savings is good and borrowing bad in a personal finance situation. It is what it is. Time preference is the value a person places on having money now as opposed to waiting. No more, no less, and no more "good" or "bad" than sexual preference.

The borrower and the lender come to an agreement that satisfies both the borrower's preference to have money now, and the lender's preference to have money later. As long as everybody's happy, there's no need to put any moral judgments on either side of the equation.

It was only 'slightly' negative. Nominal interest cannot go much below zero, because you can do arbitrage by just holding cash. Holding cash incur some small cost too and that is why you can get 'slightly' negative nominal rates.

Of course you are right. There is also risk of borrower default and it must be factored into interest rate. If you lend to 100 different people and expect 10% to default you need to charge ~10% interest just to cover that loss. That lower bound interest is not affected by inflation/deflation rate (you can't go with interest below expected default rate). What is tricky is that in deflation you actually have more chance for default, because borrower nominal income falls over time.

Their is an unabashed moralistic tone on these forums that praise savings as virtuous and noble and thus entitled to great personal gain, the only distinction is most of BTCs windfall is deflationary rather then from interest.  But the same general tone is present when ever I've discussed interest.  Naturally such moralizing dose not appear in dry academic papers that constitute the academic Austrian school core (or at least its subtle), but no one can seriously deny that this belief is rampant amongst the wider non academic Austrian populous.

Your confusing risk premium in an individual loan with core interest rates, risk-free loans such as government bonds still carry interest.

Were Greece bonds risk-free? Yes they were until they weren't ;)
But serious: interest of individual loans and 'risk free' government bonds are not independent variables. You have opportunity cost for eg. If private sectors are wiling to pay more for capital it also increases government bonds interest.
Anyway I don't see how it is relevant to my post. I was talking about problems of commercial lending market under high deflation.

If there is deflation, the cost of interest will be bigger as time passes.
Risk-free loans are backed up by the gov which is considered with the lowest possibility to default.
The gov will repay the old loans by issuing new loans.
In the time of inflation, the cost new loans will be lower if the normial interest rates are the same between old loans and new loans. In the time of deflation, the cost will be higher.

PS: When you thinking about the United States fiscal cliff, you will find the gov's credit is not so good. Without the back up of inflation, I have strong doubt that the gov can pay back the loans in time. Which means, there will be no risk-free loans.

Throwing in a few cents,

The real Question is more, how equity increases in bitcoin will affect the currency over deflationary effects although I agree that deflation through lost wallets is a big question mark in bitcoin over time :) And will definitely affect interest rates
Also may settle an Austrian Economics Vs Keynesian Economic question once and for all (Can Dream XD)
As long as we live though bitcoin will be inflationary
https://en.bitcoin.it/wiki/Controlled_supply


Using the graph chart we can illustrate that
Block   Reward Era    BTC/block    Year    Start BTC    BTC Added    End BTC    BTC Increase    End BTC % of Limit
0   1   50.00   2009   0   2625000   2625000   infinite   12.500%
52500   1   50.00   2010   2625000   2625000   5250000   100.00%   25.000%
105000   1   50.00   2011   5250000   2625000   7875000   50.00%   37.500%
157500   1   50.00   2012   7875000   2625000   10500000   33.33%   50.000%
210000   2   25.00   2013   10500000   1312500   11812500   12.50%   56.250%
262500   2   25.00   2014   11812500   1312500   13125000   11.11%   62.500%
315000   2   25.00   2015   13125000   1312500   14437500   10.00%   68.750%
367500   2   25.00   2016   14437500   1312500   15750000   9.09%   75.000%
420000   3   12.50   2017   15750000   656250   16406250   4.17%   78.125%
472500   3   12.50   2018   16406250   656250   17062500   4.00%   81.250%
525000   3   12.50   2019   17062500   656250   17718750   3.85%   84.375%
577500   3   12.50   2020   17718750   656250   18375000   3.70%   87.500%
630000   4   6.25   2021   18375000   328125   18703125   1.79%   89.063%
682500   4   6.25   2022   18703125   328125   19031250   1.75%   90.625%
735000   4   6.25   2023   19031250   328125   19359375   1.72%   92.188%
787500   4   6.25   2024   19359375   328125   19687500   1.69%   93.750%

Because the monetary base of bitcoins cannot be expanded, the currency would be subject to severe deflation if it becomes widely used. Keynesian economists argue that deflation is bad for an economy because it incentivises individuals and businesses to save money rather than invest in businesses and create jobs. The Austrian school of thought counters this criticism, claiming that as deflation occurs in all stages of production, entrepreneurs who invest benefit from it. As a result, profit ratios tend to stay the same and only their magnitudes change. In other words, in a deflationary environment, goods and services decrease in price, but at the same time the cost for the production of these goods and services tend to decrease proportionally, effectively not affecting profits. Price deflation encourages an increase in hoarding — hence savings — which in turn tends to lower interest rates and increase the incentive for entrepreneurs to invest in projects of longer term.

Well on this thread you're the one banging on the pulpit.

I never said I wasn't, it's myrkul who needs to defend this absurd claim that the rest of 'you' and 'Austrians' broadly are not operating out of a moralistic framework that rationalizes usury by defining the lender as morally virtuous and the borrower as morally flawed.

govt. bonds are not risk free, there is tail risk

And BTC basically proves the Austrians wrong, the velocity of BTC is terribly low, the interest rates are high, investment is low (the only investment is in more mining equipment) and hoarding is rampant.  If not for the fact that BTC is using USD as a unit of account for virtually every transaction and it's commerce base is largely black-market activity benefiting from the pseudo-anonymous nature of the coin their would be virtually no commerce what so ever.

Why do you think the monetary base of bitcoin cannot be expanded?  The protocol may change one day.  Also IOUs in bitcoin off-chain would increase the money supply.

It's not about inflative or deflative, it's about honest money (generated by today's work) or debt money (generated by future's work, e.g. debt)

Using a honest money, the economy do not necessary need to expand, only when there is a demand. All the investment is using saved money, no debt

Using a debt money, the economy must expand at an exponential rate, all the investment is borrowed from future, that's not sustainable on the physical planet ( might be sustainable in a virtual world)

Bitcoin can also become inflative if all the miners agree to a protocol change, for example, supply increase 3% per year. But even so, it is still very different from fiat money, since fiat money is created without any work, and by only one single entity, and the ownership of those created fiat money belongs to FED

Just like gold mining, create money should be no different than any other type of work. When it is too easy to create money, more people will quit the job and to create money, so that money created by each person will be reduced due to higher competition

Economics is value-free.  Borrowers are not "bad" and savers are not "good".  If you want to argue about "usury", do it in the religious section.

This.

Such a change to the protocol would require a quorum of the community and could not be initiated without their agreement, that said it is possible
Such an example would be known as a Fork an example did occur recently
http://bitcoin.org/chainfork.html
https://en.bitcoin.it/wiki/Myths



It's still too soon to prove that the Keynesians were right in regards to that point, velocity is much higher than what it was even a year ago, and the currency and economy is still developing.
An increase in investment's has caused the currency to keep appreciating even as more units are being created.
Interest rates are high as the growth of the money supply is still 10% a year as explained in the chart.
This question will become more interesting once interest rates stabilize at lower rates.
Hoarding is rampant but increasingly less prevalent we can find proof of this is in bitcoin days destroyed and you can see that the currency is increasingly being spent as more time passes.
Furthermore it is stabalizing big block sales similar to what happened in GOX would have lowered the price by 70% a year ago and increasingly affects it less as more time passes
https://en.bitcoin.it/wiki/Bitcoin_Days_Destroyed
USD is not what bitcoin is backed behind it is in it's own right a globally convertible currency so considering this point incorrect.
Point about commerce being primarily Silk Road is outdated please update your references :)
https://en.bitcoin.it/wiki/Trade


Inflation is simply a rise of prices over time, which is generally the result of the devaluing of a currency. This is a function of supply and demand. Given the fact that the supply of bitcoins is fixed at a certain amount, unlike fiat money, the only way for inflation to get out of control is for demand to disappear. Temporary inflation is possible with a rapid adoption of Fractional Reserve Banking but will stabilize once a substantial number of the 21 million "hard" bitcoins are stored as reserves by banks.
Given the fact that Bitcoin is a distributed system of currency, if demand were to decrease to almost nothing, the currency would be doomed anyway.
The key point here is that Bitcoin as a currency can't be inflated by any single person or entity, like a government, as there's no way to increase supply past a certain amount.
Indeed, the most likely scenario, as Bitcoin becomes more popular and demand increases, is for the currency to increase in value, or deflate, until demand stabilizes.
To surmise would not say the Austrians are out of this argument by far yet.

Politics would be another appropriate area for debating usury.  Most of the Austrians that he refers to are probably also libertarians, which would justify his confusion.

I could totally see libertarians arguing that saving is good (especially when the discussion involves government).

You can't send robots to Mars by basing your endeavor on Ptolemaic model of the universe. You can't use decentralized, limited-supply currency based on archaic concepts of debt money and interest. With the help of Ripple, maybe.

This should not be such a scary thought. Finite, mathematically defined and scheduled supply of currency.

You need money - go earn it. You need something - spend it.

You want to sit on your ass and do nothing, while charging others the interest - go fuck yourself.

You don't want to spend your coins today on something you need, because you expect tomorrow you'll be able to buy more - fine, die an old, poor, sorry idiot with pockets full of coins and empty, shallow, wasted life.

The economy grows - the value of everybody's coins has increased. Perhaps people with archaic btains start spending less, hoping for even more increase in value. The economy shrinks - the value has decreased.  Archaic brains panic spend. It all self adjusts. Those who understand don't care - they live their lives, and use Bitcoin. Everybody in the same boat, plain and fair.

Yeah, he's getting a little mixed up. Personal finance is not national monetary policy. Personal finance, borrowing/saving dichotomy is no big thing. National monetary policy, borrowing/saving becomes a big thing.


You know, they charged interest on loans denominated in gold, too. "Debt money" is a relatively new concept.

Anyone claiming that their ideology is value free is either ignorant or ashamed of the values it actually carries.  Nothing made by man is free of value judgments, especially economics.  You would have to be the most blindly obtuse person ever born to think that Marx-vs-Adam Smith or hard-vs-soft money or the Keynes-vs-Hayek debates are value-free, it is saturated with value judgments.  These are indeed some of the most pivotal value debates that have existed in the last century.

You're projecting, my friend. Your use of the word "usury" indicates that you make a value judgment on interest, and because Austrian theory provides a valid explanation for why interest happens, you assume that we take the opposite position, and are defending interest. That's absurd. We are explaining it, as a natural part of the economy, the price of money. But because you view it as bad, we who do not agree with you must therefore view it as good. It's not bad, it's not good. It just is.

Now, the interest rate can tell us a great deal about the underlying economy, but only if it is left, like other prices, to float in the marketplace.

Again I do not claim to lack values, I do use the term usury as a pejorative and I like the company that I'm keeping on this side of the issue.  Accusing me of something I'm openly claiming and doing is not much of an accusation, your simply trying to divert attention from YOUR 'Austrian' values, they don't call it 'supply side' economics for nothing, Austrian theory puts savings first and gives it prime power to create everything else.  Saying that you have not put a value on that is like saying you believe a god has created the universe but you don't put any moral value on said god, it's just an absurd claim.

Your Austrian explanation for interest is subsumed by Gesell's theory because he looks INTO the money paradigm.  Austrian theory basically starts with hard money as a given then finds the obvious liquidity premium and under hard money you will inevitably get interest as a kind of waste byproduct of the mismatch of the two, with hard money as an axiom interest is an inevitable conclusion.  But Gesell shows that the same liquidity always exists and money can just be made to counter it rather then creating an unnecessary and unearned flow of funds called interest.  Now in all likelihood the rate of demurrage would need be be variable and market based to give a stable economic output, this is something we have thought about and may try as a future innovation if we can figure out how to structure the market (some kind of illiquid bond with no counter party probably).

Your views color your perception of the world, Impaler. By looking at interest with a bias, you seek evermore complex "solutions" to a problem that isn't there.

You are like the early astronomers who, because a biased view that Earth was the center of the universe, had to concoct elaborate schemes to explain the motion of the planets, when a simpler, heliocentric model would explain it all, without planets having to do loop-die-loops in the sky.

Interest is not bad, it is not good, no more than the price of grain is good or bad. Interest is simply the price of money.

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

Interest in itself is not usury (in most cultures, there are exceptions).  Usury is more generally accepted as earning interest higher than what is normal for the level of risk taken.

And who is best suited to determining the level of risk? The lender? Or a bureaucrat with no knowledge of the borrower at all? Legal definitions of usury are necessarily arbitrary price ceilings. And price ceilings, when they do anything, cause shortages.

I think the whole point of limiting interest is to cause shortage of lending with interest higher than cap. You seem to agree it works.

Of course it works, but the point is, why do it? Why intentionally cause a shortage of money?

I agree.  Only the market can properly determine risk, and only when it is not interfered with.

Economics is not an ideology; it is a science.  Like other sciences, to properly study economics you must be able to remove your ideological hats.  I know that it's hard and that many people fail.

Banks don't pay interest rates. They are just (taken we're talking about classic "depository & loans" operations) intermediaries.

Borrowers pay interest rates. They can pay them because they make a good business with the capital and come out on top (investment).

There's also the possibility of default, that's why money doesn't concentrate in a single point in the long run.

There ever exists only 2 types of investments. I being investments and R being next period returns and currency being capped:

1) I<R. More people make this investment and crowding decreases the return until I=R and people stop investing. This is what is happening with asic investments right now.

2) I>R. Keeping the money makes more sense then investing. So these investments are never made.

The problem with a capped currency is almost all investments fall into category 2 and therefore a bitcoin only world would stifle investment.

Read more: https://bitcointalk.org/index.php?topic=213860.0

You are right about the premises but not the conclusion, because your economic thinking is wrong.

Lowering the level of investment is not wrong if the level of investment is too high.
There is a healthy level of investment (E.G. between 10 and 20% of your net worth) and there is unhealthy levels (E.G. less than 10% and more than 20%).
In the case of not enough investment, the society (or individual) is not able to rebuild the capital consumed in production (E.G. substituting a milling machine with another milling machine when the first become obsolete or break down)
In the case of too much investment, the society (or individual) is investing in something unable to return enough to justify the investment (and associated risks). In short, the investment is at a loss.

With a fixed money supply it is impossible for the government (for anyone) to manipulate the currency so to cause booms and the correlated busts. It can not push people to invest just because it drugged and doped the markets with unlimited cash injections.

As too much money is spent in investment or consumption, the prices spike and people is forced to slow down investment and consumption.

As consumption is lower and only high yields investments are allowed by the markets (compared with inflating fiat), people is able to continuously accumulate real capital (stuff) to use to increase production, make it more efficient, and so on. Capital accumulation is fundamental, because productivity is linked to the capital available:
a man with a shovel is a lot less efficient than a man with a caterpillar, but the latter need a lot more capital.
The work done by the first is one or two orders of magnitude lower than the work done by the latter, but the capital needed is much lower.
The first could be able to earn 5$/hours where the latter could earn 20$ (after the costs are deducted) but one need just 10$ of capital where the latter need 10K $ of capital.
The first could save 1$ at hour of work where the latter could save 12 $.

With a depreciating currency like the US$, with an inflation of 5% (if it was so low) a men would need 500 hours of work (around 6 months of work) just to keep the value of his saving constant at 10.000$ (and be able to move from a hand shovel to a mechanic one).
First year he would be able to save 2800 $, but the price of the MS would be 10.500.
In the second year, he would reach 5600+140 (he also raised his earning of 5% - if he is lucky), but now the caterpillar price is 11.250 $.
In the third year he reach 8827 US$ and the price would go to 11812 $.
In the fourth year he reach 12.068  US$ and the price move up to 12155 $.

If the currency kept his value (so prices are stable) he  would be able to buy a mechanical shovel in 3 years and half, where with a 5% depreciating currency he would be able to buy it in just more than four years.
This guy would delay the ability to go from 5$/h to 20$/h for more than 6 months (months he would just work, eat and sleep to save as much as possible).
Due the additional six months, he would not be able to earn 42.000 additional $.

The difference between the two scenarios are staggering: the US paper $ (with 5% inflations) guy lost 6 months and 42.000$ (in constant purchasing power) compared to the gold $ guy.
These 42K$ and six months are available to consume and invest more and earlier.

In the inflating scenario, the people increasing their purchasing power faster are the people able to obtain newly printed $ before all other at low interest, buy stuff and resell it later at higher prices (aka carry trade). They do not benefit society with more good and services, just suck wealth from it.

And how the price of money is valued can only be a function of the market, free of manipulation and distortion.

 In an economy, where you manipulate the money supply to encourage growth you have to invest to maintain your value resulting in perpetual growth ( ie. the economics today - it is unsustainable for scientific reasons, and is immoral as the new money creates poverty as a result of the Cantillon Effect )

In an economy, where you have a fixed money supply growth or lack thereof is a result of corporative trade, if the economy is growing, you have price deflation, investing and borrowing are naturally unfavorable, and saving with 0% interest is beneficial. (Perpetual deflation reflects prosperity)   

When the economy is shrinking you have price inflation (a lack of goods and services), higher prises provides opportunities for entrepreneurs and innovators, investing and borrowing are the way entrepreneurs get capital to grow the economy. Saving with 0% interest while experiencing inflation is unwise as the saved value is eroded, lending is naturally encouraged. (inflation reflects a need to fulfill wants in society)   

In a fixed currency model like the Bit-economics - both saving and lending is reworded according to the needs of the economy - economy being defined as the level of cooperation in trade between individuals and businesses to sustain maximum prosperity.)

So to derive ways to encourage lending and pay interest in a deflating economy is unnecessary and wrong as it sends the incorrect signal to the free market. 

Everything's fine except that you are missing that constrained base money does not mean that money supply is constant. Money supply is affected by credit creation and result is that there are  periods monetary inflation and deflation even if base money is constant.

I was going to add something to address your point, but I thought it was a little deep until I read your reply, what I have come to understand is the money supply should be restricted by the base money supply to degree the free market allows. Free Market Banking money theorists presumed, money creation is a function of the free market, and it shouldn't be. (Although fractional reserve banking in Bitcoin is viable, the valid response should be but why do it! you don't own your Bitcoin's unless you own your Bitcoin's.)  

When banks make money or fractional reserves credit, they are pre-empting or overcompensating for the natural economic correction, this will eventually result in the Boom Bust cycles the Keynesians, set out to eliminate.  Keynesians and Monetarists, ironically try and manage the situation but can only make the cycles bigger and more damaging as they are working of the same incorrect premise.

Hayek, and Mises, on the other hand have taught me that having a fixed money supply free of fractional reserves credit creation will provide maximum prosperity in the economy, and the risk of lending will be driven purely by market forces, and not banking interests.

So the periods of monetary inflation and deflation if base money is constant, should be avoided if the goal is to maximise prosperity in the economy, that is why the Bitcoin experiment is so great, it will allow this idea to be tested despite it flying in the face of "contemporary conventional wisdom".

The problem with a fixed money supply is that if the economy grows too fast, it won't grow very fast. Because interest rates.

That's not a problem that's amazing, it automatically adjust. Consequently it will cool off and stop growing and the balance of maximum prosperity will be kept in equilibrium.

Credit creation is very basic. All you need is to generate some promises to repay (IOU) and if you have enough credibility people can start to accept this IOUs as good as money. There is absolutely no magic in a way bank works. How do you suppose to forbid this? You can however limit to what extend it happens through careful regulation (limit single entity size, limit size of multilateral guarantees, etc), but austrian economists wouldn't be happy with that?
Another approach is to guarantee system solvency at central level (it is quite opposite of limiting regulation) by introducing central banks, but austrian economists are not happy with it too?

There is no need to forbid credit creation if the credit is not forced on unwilling people.
If people give credit, they do it at their own risk.

With a fixed supply of money, the government can not create "insurances" like FDIC (because they can not print money), so people would be picky about giving credit to a bank or any other entity.
This would avoid the problem of bankers giving credit to any bum they find just to inflate their ratings and be given bonuses and leaving the mess to someone else a few years later.
People would not bank with a bank with less than 20% of reserve and they would probably prefer bank with much higher reserves.

Banks would specialize in money services (payments, holding, transmitting) or in loaning services (obtain loans/capital from investors, giving loans to dependable people under decent conditions like "50% down to buy the first home and we will finance the other 50% at 5%-10% year).
This would have the advantage money would not be jeopardized without the explicit and informed consent of the owner.

painloard2k, I loved your real-world explanation of austrian school thinking above (https://bitcointalk.org/index.php?topic=222845.msg2475176#msg2475176)


This hits to the heart of the more general problem we have: people being coerced to do involuntary (or mislead to do unprofitable) transactions.

Regarding other parts of the discussion above: I agree a fixed money supply is a good thing and I think the world would run much more efficiently and general prosperity would be much higher than with the elastic ("managed") supply we currently use that in addition unfairly favors certain groups of people.

The argument that an inflexible money can't support growth of an economy is simply false. Prices can adjust. You could run the world economy on one Bitcoin without a problem. There are some political and psychological problems ("price stickiness") that will have to be overcome, though.

Another argument that is being made against a fixed global money supply is that this would result in the inability of nationstates (or other smaller/bigger economic regions) to adjust the value of their currency in order to "regulate" their local economies import/export ratio. I'm unsure about wether or not I like the idea of local elastic-supply currencies in addition to a global fixed one with exchange markets in between.

The situation in Europe seems to suggest that the common currency will in effect enable a move toward more central policy control and it can be argued that this was the goal of the Euro all along: a centralizing "coup d'etat" from above, essentially a power grab.

Maybe local currencies are a way to decentralize (policy) control?

(sorry, I went off on a tangent there)

No forbidding necessary we just need to use the same language to ensure we all understand each other. 

Your definition of credit (involving IOU's) is the bases for the system we have today, and it requires unsustainable growth.

Credit also involves the matter of moral principle, and an honest understanding of who can create real credit.
Only the producers in an economy are the ones who create goods and services, and as a result they take the risk by producing (hopefully something other want) and can risk again when lending to others hoping to be repaid with something they want.

Regress to a prehistoric agricultural society, to understand the principle: the producer of the wheat, can create credit by lending the wheat, but if the producer promises to lend the wheat he intends to grow, he has not created credit, but a debt.

As long as credit is created from goods and services that have been produced (or saved), it is honest, and real credit, provided it is given at the discretion of the producer / owner.  But when credit is artificially created, it is a debt, and will ripple through an economy as boom and bust as the system re-balances.

Bitcoin functions on the premise that Bitcoin credit will be created from Bitcoin's already saved, and as a result should only flow at the discretion of the saver.

I don't come to the same conclusion, Cypress by joining the EU and the Euro, is not being controlled but is being freed to interact in trade according to common laws.

They gave up the ability to steel from the people by printing money, and as they did not take fiscal responsibility for there spending, someone had to define another viable solution for them.

Great thread. Thanks.

I think you are making artificial distinctions. If you lend $100 to your friend John you hold his IOU where he promises to return $110 in a year (or $101 in month, or any day on your notice, depends on contract) . John is free to do anything he want with borrowed money. If John is credible you can use his written promise to pay for goods from your other friend Bob. Congratulations you have just increased money supply, because you made transaction with money you don't yet have. It is basis of all credit creation and it does not depend on what John does for living. Substitute John with bank and you have how banking system works.
This is wishful thinking. Bitcoin does not have power to do so.

I didn't come to that conclusion, I merely wanted to discuss this objection against a global hard money because I'm unclear how this argument really works so I cannot answer adequately to it, which I would very much like to be able to do. So I was kind-of playing devils advocate in arguing for local currencies.

Let's look at the argument again how I see it: the idea is that a nation or economic are (which has its own currency) can devalue their currency in order to increase outside demand of their goods (these good will be cheaper for outsiders to be bought) and services (tourists can consume services within the country for cheaper than before). The argument implies this is a good thing because that country can help its economy in this way.

Is this a valid argument?


Like "ok, then you have to sell your gold to the IMF"?

Yes, it's true and I think it's basically the only sensible way to go. People invested in banks, banks failed, people lost money. The way it should be.
Sideonote: The opposite happened with greece: People (institutions mainly) invested in greek bonds, greece failed, european taxpayer bailed them out. Taxpayer insures creditor. Not the way it should be.

Of course there are some problems with this (letting banks fail), namely that people are generally mislead to believe that when they put money into a bank account they still own it (not the case, they borrow the money to the bank and the bank owes them money) and that this deposit is somehow insured (by who? to what extent? obvously it's not really insured as could be witnessed).

Another problem is that it wont work globally because then the whole financial sector fails (as it should) and that's not something the powers that be want to see because then all their funny money power would vanish due to the debt collapse. They'd rather see ww3, a reduction of the population and a scape-goat to blame for the consequences of all the crimes they commited.

(I don't know why, but this thread makes me rant a lot. Dont know wether that's productive)

It is pretty valid argument. Lot of prices in economy are sticky. You can't easily reduce wages or retirement entitlements. It is more efficient to inflate them away.

I was always wondering why all this ranting about what happened in Cyprus among sound money advocates. What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.

The Cyprus issue includes not just what happened, but what was considered and expected for future.
The "bail-in" proposal of deposit tax exchanged for shares of failing banks presents a future model.
Wipe out lenders/bondholders and dilute shareholders by hitting the deposits to cover losses and secured debt and issuing essentially worthless shares to compensate for the deposits seized, and let it keep functioning.  If the bank manages to pull out after that, those shares may someday be worth something, but that would be largely unexpected.

I think a bigger reason for continuing reduction in exchange rate is the fact that miners are currently transferring btc (wealth) to chip makers in a futile attempt to maintain hash rates and those manufacturers are converting those btc into fiat because it's not like the avg Chinese factory worker wants to get paid in btc.  This trend will continue for a while since true asic chip cost is very cheap vs current high exchange rate.  But irregardless of that short term issue all fiat is currently in a race to the bottom anyways so btc future will be fine.  Also nothing wrong with a deflationary currency.  During the entire human existence gold/silver was deflationary vs the entire human population growth rate with maybe a few short term exceptions (bubonic plague, new world ore discoveries) and yet it's still managed to be used as a store of wealth to this day.

I'd agree, it is one of 2 options, I would go further and say when I have invested in something and it has gone bankrupt or delisted, I just lose my money, and so it should be for the lenders who miscalculated and lent to those states.

The new piece is that not just lenders take the loss, but also depositors, who are converted to shareholders in the failing bank.

If you put money to bank you are no longer its owner. You just have bank liability. If bank goes bankrupt you don't get your money (unless you are insured).
There are some distinction between bond holders and depositors but only regarding payout priority. If bank looses enough money (or all) no one gets anything.

I think this is where you and I part ways, I don't see when and how and from what as an artificial distinctions, I see the when and how  and from what credit is created as fundamental to prosperity in the economy.  As I illustrated your definition of credit is dept based (https://bitcointalk.org/index.php?topic=222845.msg2485315#msg2485315), and is controlled by trust - and human preference (and today somewhat by economists and central bankers) - where it shouldn't be fallible to the will of the controller/ creator, but be created by the risk taking of individual members needs in the economy. 

Quote simplified to illustrate based on hard money and to show who is at risk:"you" and "other friend Bob".
I agree with how credit is created, but disagree why it should be, and by inflating the money supply it is but steeling by another name (via the Cantillon Effect). Make it legal and Congratulations you have guaranteed wealth and no liability.

John's ability to repay is dependent on the unpredictable future, the result is John is actually taking the risk, not you or Bob. John now has at his disposal the ability to Malinvest, (simple example - not foreseeing a drought), he will not be able to get the wheat to repay, however he is absolved on the risk and the risk falls to you and Bob. 
   
I don't understand your position, the power to do so, exist inherent in the protocol, by exposing the risk to the lender.  Let me explain, if you are lending your Bitcoin you are not lending an IOU to lend Bitcoin, you are risking your own Bitcoin. I would be more comfortable just giving an IOU or credit to the borrower like the banks do today and if he can't repay, it is just a bad debt not at my expense. 

Let me illustrate by modifying you quote below.
Now that the risk has been exposed, why would anyone invest Bitcoin in a Bank when it's purchasing power is increasing (economic growth = Price deflation)
The result, the viability of credit is based on the ability to get repaid and earn interest, this post dose the basic job of illustrating how this function is a by-product of a free economy: https://bitcointalk.org/index.php?topic=222845.msg2476856#msg2476856 both saving and lending (credit creation) is reworded according to the needs of the economy. Not the ability of the bank to create credit.

the difference between depositor and shareholder is largely that depositor has no vote.

so the purpose of local currencies is to more easily and sneakily be able to screw over workers and retirement savers?


What ranting of sound money advocates? I think that wasn't ranting, that was advertising: "had you used sound money to save instead of bank deposit (aka investment in bank) you would now be better off".

Sorry to quote myself and fly off on a tangent, but: fuck wage negotiations anyways. People should just either get a new job every year (or month/week) or have their own profitable businesses.

@ molecular - all good points,


re aaaxn point about he is correct, that is why we have problems today.

What I have learned from this exercise is that sticky prises are in fact subject to human preference and fall out of the science of economics and into the realm of the social science of economics.

But in my example it was created by risk taking of private individuals? 

You may disagree, but this is the way it is. How you are supposed to stop it? Prohibit lending? And it is not stealing. Like any other commodity you have right to your property but you don;t have right to it's value. You don't loose money because some other people starts using money substitutes. You just loose it's purchasing power. It's ok. It is same as you hold your gold/car/home you have right to it, but if other people actions affects it's price you wasn't robbed.

And this risk should fall on me and Bob, because I lent money and accepted risk of potential default. Bob accepted it too when he made transaction with me.

Take example of mtgox. There was mtgox codes back then and was traded for same price as bitcoin and in fact it was only mtgox IOU. When you make deposit to mtgox you no longer have bitcoins but only mtgox promise to repay. Nothing stops mtgox from creating new account contract which allows lending of deposited bitcoins. If user accepts it it will work as good as any normal bank.

One would invest in bank to get interest on top of this appreciation.

Workers and retirement are already screwed. So either you get straight retirement default and workers fired or adjust it more efficiently through exchange rate of domestic currency.

Go for it, lend you Bitcoin's while they are hyper deflating, I'll save my own Bitcoin's and be my own bank, each to their own.

When you see this you Know Bitcoin is something to be loved, it will make bankers honest, or better illuminate banking fraud.

No kidding workers are being screwed, this is a mess and solving it, something has to give.  
Penalising savers through inflation (adjusting exchange rate) flies in the face of what has allowed humans to flourish,  i.e. Penalising the savers of recourses (Differed consumption of others debt in the case of fiat) for unforeseen events.

I am not convinced with " adjust it more efficiently through exchange rate of domestic currency" (ie. The invisible thief) is the most efficient option.

The net result of inflation is investing in future risk taking to maintain value. That investment = Economic growth, or stagnant growth and accelerated consumption. The net result is malinvestment.
I suspect we'd be better off taking the hit hard now and reinvesting finite recourses after the economic corection as opposed to business as usual and malinvestmenting the recourses compromising the future.  

Well I did lend some bitcoins on coinlenders. Are they fraudsters? Or am I?

Well compare how is USA doing with all this "stealing" and how is Spain doing. Spain has over 27% of unemployment and over 50% among youths and it is not temporary but from 3 years and still getting worse. You cannot save work potential for later, if someone is unemployed his output is lost forever.

And saving money is just saving money. It is not automatically investment and/or really saving something valuable (like bushel of wheat or something).

That and Depositors traditionally are entitled to withdraw the deposit.  Shareholders must find the greater fool and sell for what they can get.

Good luck selling the IOU as money. 

To your point, great well done, there is lots of opportunity, I haven't been so lucky, not because it is wrong, just because the price of goods and services are deflating in relation to Bitcoin's value. 

Fortunately not everyone is lending there Bitcoin's out now and trusting they will be repaid when the value is $1000+. If you want to speculate and you think the future value will be $1 then (inflation in goods and services relative to Bitcoin is a good time to lend - it's up to the market to assess the risk, all the power to you, your actions are valued in the free market)

I think you may be missing my point.
I don't think we disagree on anything, other than you believe the IOU you create by lending Bitcoin's is sound money because you are a law abiding and trust worthy citizen, and I believe your IOU's are risky, and it is immoral to argue otherwise.

Or phrased in contemporary banking terms:

I don't think we disagree on anything, other than you believe money created by Banks through fractional managed reserve assets baked by debt is sound money and I believe it distorts the economy and is risky and it is immoral to argue otherwise.

You have highlighted the distortion we now have in the economy, it is about saving something of value - real money to debt money.

Wealth isn't created by overconsumption, but by deferred consumption.  Hard money's value is reflected in the state of the economy, Fiat is reflected by the optimism of central planners, or bankers. Saving hard money is risky in itself but saving fiat is just stupid.  

We should be saving something of value, but instead we are consuming it exponentially, to satisfy the return on investment in recourses extraction ripening through the entire civilisation, in order to stay solvent.

In Fiat terms investing in more efficient oil extraction, is a good investment, simply put in a dynamic situation it will lower the cost of Oil, and the profit to cover the investment will be made on the increase in volume. The input costs in other industries will benefit and they too can lower their production costs, they will make up the investment on the increase in volume. Before you know it you will take what used to be a recycled bottle and be throwing it away, because we have invested in industries that do that more efficiently, while it is progress, it is progress that is a result of malinvestment, ultimately based on avoiding a default in1971. (I am not bitter just grateful it happened now and we didn't have to keep a fractional reserve gold standard going for a few more hundred years of operation.)    

In Fiat terms saving money is deferred consumption, and collectively inflating the value away is theft.
Not so with hard money or a bushel of wheat or something.

The only option now is to invest your way out of the problem, (as saving fiat is for stupid people who want to see their money devalued) but the viable alternate is investments that are more of the same resulting in concern highlighted here: http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/

The old way of doing things is broken, we need to learn to fly, and stop thinking we have launched off a cliff in the 1900 believing we are flying while just a few realise we are falling and can see the ground approaching fast, if you have better ideas or if I am missing something I would like to learn.

I would probably be able to sell my coinlenders account with existing CDs for something like 9x% of its value, so yes it is possible. I succesfully traded mtgox codes for bitcoin or services at it face value so it isn't impossible to use bitcoin IOU as money.

I am lending in bitcoins and will get bitcoins back so I am long bitcoin and if it falls to $1 I will loose 99% of value. $1000 would be good for me.


I am not thinking that IOU is sound money. It is money substitute and it affects value of other money. There is nothing wrong with it, because like anything in free market you have right to your property but don't have right to you property value. It''s up to market.

Yes it is about real saving or investment. What you miss is that no matter what is money saving money is just that - saving money. If money was bitcoin or gold it would still be only saving it and not real saving or investment.

So what you are saying? Investing in more efficient oil mining wouldn't be profitable with sound money? How so? You reduce your costs per barrel so you can keep prices and earn more for every one you sell. Or you lower price a bit and get greater share of market. Same in fiat and same in sound money system.

If you have a deflationary currency I am at a loss to why you would need to pay interest on a loan?

For example lets say today 1 BTC buys 1 pint of milk but as it deflates tomorrow it would 0.8 BTC for the pint of milk.(quite extreme deflation I realise  :) )  So therefore just by repaying the principle you have effectively earned 0.2 BTC because of the increased purchasing power.

Gold is effectively a deflationary currency as its value increases overtime - you give me 1 kilo of gold today I give it back to you in 10 years time and it is worth a great deal more so you have effectively made money.

It is not the same if the measure of success is measured in the units of medium of exchange.

Obviously you have a simplified model in bold for making a business case, that simplified model is what I would call the Austrian model devoid of all human action and dependant on rational facts, so I propose we base the modeling on just rational facts and ignore human action.

The investment should be considered in terms of macro economics, given the scale of the investment and the size of the market.

Starting from the premise oil production is profitable and has been profitable up until the investment was considered, then during times of inflation (shrinking economic prosperity) the investment is more viable.

that is: Save your medium of exchange and you purchasing power decreases - by the inflation rate.  The rational reaction is invest now and get a higher return, that is inflation adjusted in the future and invest before your capital lose value.

V

Starting from the premise oil production is profitable and has been profitable up until the investment was considered, then during times of deflation (increasing economic prosperity) the investment is less viable.

that is: Save your medium of exchange and you purchasing power increase - by the deflation rate.  The rational reaction is save now for a higher rate of return in purchasing power, consider the capital investment will cost less in the future so save until you get the best value when investing.

If the inflation rate is targeted at between 2 and 5% investing is preferred to saving because saving will cost you between 2 and 5%. So the rational thing to do is invest.  
The deferred investing is a free market responding to hard money, and taking risks based on market feedback, the market self regulates in the absent of  the medium of exchange manipulators. It is argued by Keynesians that deferred investment is the cause of Boom Bust cycles and can be eliminated by having constant inflation - the prevailing wisdom by which our economy is organised today.
 
I don't see much point in arguing that fact, at the end of the day if you can manipulate the economy and steel wealth from the working class, and the political elite have no motivation to change, they won't.
For the first time an alternate option is available and reason and rationality can prove themselves independently of the entrenched system of economic and political structures. And fortunately I don't have to prove anything if our system is working there is no need for a hard currency and Bitcoin will fail, if the Austrians made any sense at all then all you have to do is use Bitcoin, every possible way you can think of. And the more efficient system will win in the long-term.  

A rational market wouldn't.

This changes in times of inflation (economic activity starts to shrink low supply and high demand) then the rational market would be willing to pay interest and borrow with interest.  
Until then, save your cryptos,

I was under the impression inflation is caused by an increase in the money supply (Quantitative easing for example) and as the creation of money is controlled at a sustained rate by the Bitcoin network and has a set upper limit - there should be no inflation?

Interest rate is the added price you have to pay for the pleasure of buying something now, as opposed to later when you have earned it. Inversely, it is the premium you get for postponing consumption now, and then consume it later. It is basically a time market, where prices have a time dimension in addition to the value at present. Lets call this the basic interest rate.

I practice, when loaning, you also have to pay for the expected price inflation, insurance against default and the work spent by the lender.

The current high appreciation of bitcoin is not going to last forever. When bitcoin is implemented in the world, and all coins are created, the appreciation (reduced prices of goods) will come from more users (more people in the world) and lost coins. More users could be a small percent per year, but it could also stabilize, expand faster or even start to go down. Nobody knows. In the meantime, if you need a loan, get it in fiat.

Expected appreciation will have to be subtracted from the interest rate. So, if we have a basic interest rate of 3%pa, appreciation of 2%pa, the resulting nominal interest rate would be 1%pa. Obviously, if the basic interest is lower, or appreciation is higher, the resulting nominal rate could become negative. This would stop lending, because you don't get more than just keeping the bitcoins in the mattress.

A sound business traditionally could loan say half of its capital, representing the safe part, while the owners' equity represented the risky upper part. Loaning for business is not strictly necessary, for instead of loaning, you could summon up more people, and finance your business with only equity. But this does not really solve the problem, as any entrepeneurial effort should have an expected return of the nominal interest rate plus compensation for risk and effort. This means that investing could also stop, except for the ventures with high expected return.

I am not sure if this is healty. Anyway all the low return, high risk projects would have to stop, leaving only safer, high return projects.

At least, this would stop all the malinvestments. Malinvestment today is chinese unused cities, spanish unused airports and so on. May be capital could therefore build up more, giving higher productivity. Not sure here either.

Interest is charged on FIAT currencies because there is an unlimited supply of money.

Take this example - lets just say I have all 21 million bit coins - I then loan them to you at an interest rate of 1% - hey I am a generous guy.

Immediately you can see the problem - how are you going to pay back the additional 300,000 bit coins? They do not exist?

Further to my last post - if you break it down into lots of people loaning other people BTC and charging interest there will be more BTC listed in loan books than there are in circulation and then we will end up in another financial crisis when someone does an audit and realises this.

That's only a problem if everyone tries to pay back their debt. Also: you're forgetting the fact that some borrowers default.

It's not a problem.

This doesn't seem to follow: "bitcoin/fiat has (controlled) inflation => there should be no inflation"

Maybe if you discern "money supply inflation" and "price inflation" you'll get a clearer picture.

If bitcoin was the only money used in a certain growing economy (at a higher than the current bitcoin money supply inflation rate) prices would generally fall.

There is also speculative borrowing.  Its not all consumption based, but the time element is always there in lending.
If I think that the price of a BTC is going to go down, against some other asset class, I can borrow BTC, convert it to the other asset class, and then reverse it in the future to repay the loan.

Folks that borrowed BTC at 120 and repay now may have done well (depending on the conversion asset).

No, basically interest is the price you have to pay if you want to consume (or invest) before you have earned, or the reward the saver gets for postponing his consumption. The interest rate is a market, which depends on the valuation of time on part of the market actors.

Nowadays the central banks tries to affect the interest rate with lending to lower rates (of money they don't have). So nowadays the time market is somewhat crippled.

/\ This FTFY

There is no incentive to loan money in a deflationary currency where the economy is growing.  Why risk not being repaid when the potential lender can just sit on his or her pile of bitcoins and see their value rise (buy more goods per bitcoin) without lifting a single finger?

For those people who think a deflationary currency is impossible , let me ask you one question.

How do you think human society evolved?

Did governments evolve before humans? Was it like this: A government arrived on the planet, before any human beings, and dictated all the rules for society to function. It dictated how much money would be circulating every year, and every year set an interest rate in order to carefully control the money supply. And, thank God it did that, because if it had not set this interest rate and carefully controlled the money supply, there is no way people would have been able to trade. Because people need the government's help for everything. Human beings cannot function without government help. They cannot trade without the help of the government. They cannot use currencies without the government. People need to pay high taxes and have central bankers slowly removing the value they have carefully saved and accumulated during their working life.

Well, let's answer the question. No, it wasn't like this. What actually happened? Human beings evolved first before governments. They traded and did business with each other perfectly fine without ANY government interference for hundreds or thousands of years. Then, around the time of the 20th century, politics began to mix with greed and self-interest, and self-interested politicians began to expand the role of government ever more, into ever more areas of the lives of the citizens, without citizens realizing exactly what was happening - because it happened incrementally.

Eventually politicians , again for their own self-interest, decided to take control of the money supply, and suddenly we are convinced by them and their journalist friends that we need inflation, that society cannot function without governments constantly printing money every year, that the currency needs to be controlled because deflation is a danger.

This is exactly like in my opinion when, hundreds of years ago, the ruling elite convinced everybody that the world was flat, and refused to acknowledge that it could actually be round, despite the logical evidence.

So, human beings have survived fine for thousands of years without inflationary fiat currencies. There is really no need for them today any more than there was 2,000 years ago.

This post by DeathAndTaxes really, in my opinion, answers the questions about deflation. Loans can still be made, sure, because the rate of deflation will be small. Why would it be large? The only flation that is large is inflation, because of governments. Why is it necessary for economies to grow? GDP is defined as the total value of all transactions in an economy. Why is it assumed that GDP always grows year-on-year? Why should people transact more next year than this year?

Correct, if you are rational.

and Economists argument for the current system because they argue market aren't rational

Default risk provides a reason for interest on a loan even in a preemptively deflationary currency.

Yes.
Money supply and inflation are linked but it is not a perfect link, there are other factors, namely demand (for both the money and for the goods).
If there is a scarcity in a particular good, its price will rise against the currency.  For example in a disaster, there may be a great deal of things which are scarce and so there can be external reasons for inflation, not just the rate of money creation.
You've heard the saying "save for a rainy day"?  Its never quoted corollary is "spend on rainy days".

Wrong.
There is no incentive to loan money if the interest rate paid is not high enough.

If the interest rate is 10%/year and the return of keeping the money is 3% increase of purchasing power without risks, someone will loan money at 10% rate, if they had enough money to loan and take risks (if they are able to save). They will accept the risks and will take the gains a year later.

As saving increase the capital available, the utility of saving will reduce.
Then, instead of saving, people will start to loan.
First loans to be done will be the loans able to generate an higher rate of return.
If there is more capital available, other loans with a lower rate of return will be made.

Until we manage to become immortal there will always be interest which is time preference, because things (money, goods, assets, btc) will always be worth more to you the day before you die then the day after.  Everything else is just the market that seeks equilibrium and until we become all knowing gods each one of us will have an imperfect view of such markets and we will therefore be able to make deals with each other because of differing veiws on time preferences.  Also notice how those who cry out that interest is evil usury want to replace the market with a system that benefits them personally even if indirectly much like government operators who draw enourmous salaries and benefits for administering such a system all the while claiming its for all of our benefit.  Therefore it doesn't matter if a currency is deflationary, inflationary or sea shells there will always be interest.