I loved the article but seriously, every bitcoiner needs to take a public speaking class or something.

Read the thread I linked to. I'm not entirely sure on what can and can't be done, and I may very well have misunderstood or missed something important.

As I understand it, what can be done according to that thread is this. An issuer could make some information public so that anyone could create bitcoin tokens for the issuer. So by using this public information I could create an encrypted private key that not even I can access (only said issuer could by using a passphrase he kept secret). I can also derive the corresponding bitcoin adress without decrypting the data and obviously fund said bitcoin adress. I could also proove to someone else that this token contains a private key for an adress with bitcoins in it (and who the issuer with the passphrase needed for decryption is).

If such tokens were traded using an OT-server, I believe the trust needed in issuers could be reduced dramatically. I may very well have missed something so someone with better math skills should check it out.

But as far as I understand it, in the current implementation you need to trust the issuer. What I'm proposing would mean that not even the issuer has access to your coins. The issuer would be the only entity that can decrypt the bitcoin private key in the token. But they don't have acces to the tokens except when someone wants it redeemed.

Say Bob creates an enrypted bitcoin adress. But rather than sending this to Alice he sends the data to Charlie. I assume there is a trivial way for Bob to proove to Charlie what the adress is, right? I'm asking cause I believe this could have big implications for various digital cash systems.

See:
https://bitcointalk.org/index.php?topic=129594.msg1388631#msg1388631

I love the work you guys are doing with Open-Transactions. Keep it up.

I have a potential idea in regards to bitcoin implementation. In BIP38 casascius describes a way in which someone can create and fund an encrypted key that not even they could use. I believe this could be used in order to remove some of the trust currently needed in issuers. Users (or an OT-server) should be able to create and fund their own anonymous cash tokens. Then they could exchange them freely using a OT-server and at no point could anyone run away with the money. Rather than keeping the coins, an issuers only job would be to decrypt them upon request and proof of ownership.

One weakness I see is that the issuer could try to take part in the economy and save copies of the cash tokens, spend them, then decrypt the private key and spend the actual bitcoins. But this would still require far less trust than what is currently needed, since the issuer could only steal coins from tokens they have had in their possession.

There are potentially more use-cases for this but digital cash was the first that entered my mind. Issuers not having access to coins is a big deal I think.

This is the thread with the BIP38 discussion.
https://bitcointalk.org/index.php?topic=129317.0

You should switch, if only for the chance to send MediaTemple an email telling them about the reason you're leaving them.

It's possible to do something really similar using bitcoins in a decentralized manner.

https://bitcointalk.org/index.php?topic=55934.0

I kind of forgot about that, but the "containers" as described in that thread could make bitcoin transactions possible for both email and sms (for sms it would require the containers being in clear text rather than a file).

Actually they can't do that. If you are not forced to use their currency for at least some transactions (such as for tax payments) there is no incentive to use their currency at all. Such printing can only exist when the threat of violence forces you to aquire dollars for tax day, or noone would demand dollars at all.

Read my post again, because that is EXACTLY what I said. And it's not the same, because in the case of IRS it's not about using their currency or not getting the service, it's about using their service or go to jail. At the end of the year you need dollars, or you will go to jail. That creates demand. The "not going to jail"-property of dollars is valuable.

The difference between IRS and any other merchant is the use of force. While you have the choice of paying any other merchant in their prefered currency, you are forced to pay IRS in their choice of currency. That is the essence of the "backed by taxation"-argument. It's an answer to why inferior fiat money is being used when there are superior alternatives. Dollars do not have any inherent properties that make them good as money, but their government enforced "not going to jail"-properties are valueable to most people. So just like people are prepared to pay for the "get out of jail free"-card in monopoly, they are prepared to use dollars for regular transactions because they know they will face the ultimate choice of paying dollars to IRS or go to jail.

"I am assuming real growth causes deflation"

Exactly!

And what is the cause of economic growth? Profitable investments. You are basically saying that the existence of profitable investments makes profitable investments impossible. It's circular and a contradiction. So one step in your chain of thought must be wrong. I'd say it's the step where you assume that growth-induced deflation hinders growth (as opposed to deflation caused by a credit contraction which I see problems with as well).

Really? I'd say that by definition, about half the investors should expect to earn a higher profit than the average market, since the market is never in complete equilibrium. This is the reason the interest rate should be around the average expected return, since it allocates resourcers from below-average investors to above average investors.

If noone could get a higher than average share of profits, loans wouldn't even be neccessary. People could just invest the capital they own in whatever they want and recieve their average return. Why should I lend money to you if I can expect an average return on any investment I make?

Again, I'm talking risk-adjusted returns. An investment that often returns no profit and often loses means a negative expected return. I'm asking you how will investments of very small expected returns take place if the interest rate is above 0%? Your argument seem to imply that 0% is the optimal if you want as many investments as possible.

You seem to misunderstand me on purpose, which is often a sign of a losing position.

Resources are not homogenous no. And it takes time to reallocate them yes. But if Motorola sells its capital it certainly gets back the market worth of its capital. And all of its resources can be used by other companies. The energy, labor, competence, raw material and knowledge etc that Motorola currently posses could be used for other purposes. If other entities could use these resources in a more productive way then they are the ones who should optimally be in control of these resources, not Motorola. The interest rate is the price that helps market agents determine wether or not they employ their resources in a way that's productive enough.

Post #136.

You are still ignoring the point. The argument is that 2 million invested at a 5% return is better for society than 1 million invested at 5% and 1 million at 2%. The function of an interest rate is to make the former situation possible in cases where the capital is in the hands of the investor with the lesser return.

So 0% would be optimal? How else would those investments of ininitesimal profitability make any funding?

My answer is that the function of interest is to allocate resources from lesser investments to better investments.


You can change the numbers however you like to make them seem more realistic to you. The principle remains the same with any rates. If I had the capability to make 0.1% and you made 0.2% we would still both be better of if I lent you my funds at an interest of something in between. As would society

Because your answer was a straw man. You said it was better to not take the risk when my argument was about already risk-adjusted returns.

But I'm not the one who is making the assumptions. The rates I've chosen in my examples are just for illustrative purposes. I'm saying that the principle stays the same regardless of what the actual rates end up being. You are the one that are making a lot of assumptions of which rates are viable and not, while my position doesn't rest on any such assumption. The underlaying principle stays the same at 20%, 3% or 0.1%.

The contradiction here is that you assume deflation and no growth at the same time. But with a constant money supply, (price) deflation is the direct consequence of economic growth (an increase in the supply of goods and services). You can't assume deflation and not implicitly assume that the economy actually is growing.

The big irony is that a deflation rate of 3% actually implicitly assumes economic growth that is higher than what we have today. And this should somehow convince people that deflation is bad?

Another implicit assumption (and common misconception) seem to be that price deflation (and inflation) is completely neutral. It's not. When you understand the cause of it you understand that it affects different goods to different extents. We could have an economy with a relatively constant supply of food (no growth) and big increase in the supply of mobile phones (massive growth). Ceterus paribis, this would cause the price of mobile phones to decrease drastically from the increased supply while the price of food remain roughly the same. Nothing hinders investments in the food industry here if they see a profitable avenue, even if the economy as an aggregate is deflating.

The choice to invest or not to invest is certainly determined by nominal rates, not real rates. It doesn't matter if you have a real positive return if you lose nominally since you always have the option to do nothing at all. So whenever I don't specifically say something else I'm talking nominally.

But you can assume whatever rates you want. 0.5% risk-adjusted returns is certainly better than 0% risk-adjusted returns as well. The principle stays the same regardless of the rate. A 0.5% interest rate would reallocate resources from sub-0.5% returning investments to above-0.5% returning investments, and make all investments tend towards the 0.5% range as competition for the higher returns increases.

It seems like you are just rationalizing now.

The money could obviously just as well be lent to a competitor to Microsoft if they won't borrow. The point still stands. Anytime we have a difference in profits between entities or sectors of the economy it constitutes a misallocation of resources. Even if one entity is unwilling to eliminate this misallocation interest rates is a tool to do so, and it should be used when possible. If you artificially lower the interest rate you destroy this tool. If the interest rate is lowered to 1% my 2% investment becomes a better option than lending to another company's 10% investement.

I don't think you even have a clear picture of what you think the interest rate should do. Is a 0% interest rate optimal since it's the only rate that allows investments with 0.000000000001% returns? What's the purpose of interest rates according to you?

You said it wasn't an alternative, which it certainly is. Getting an interest rate of 3.5% percent (lending) is certainly better than getting an interest rate of 0% (hoarding), regardless of how the purchasing power changes. And if someone against all odds would refuse that 3.5% interest rate on a loan he would most likely not invest his money for 2% either. So the unlikely worst case scenario stays the same while the more likely scenario means higher returns for all investors and society.

And it was certainly obvious enough that the risks of both my 2% investment and your 5% investment where equal, which would make the loan just as risky. but I'll make it even clearer for you.

If I make a 2% risk-adjusted return on my business and you make a 5% risk-adjusted return on your investment I'm hogging resources that you are more capable of using. I should quit my business and lend you my capital at a 3.5% risk-adjusted interest instead so you can expand.

If you are above average you should want to expand. Then you do need more capital, and capital is limited. Capital I have is capital you can't have. Resources I use are resources you can't use.

Also, I gave a response to your edit in a edit of my own. I'll put it here as well so you don't miss it.

So please explain why the above loan of 3.5% is impossible. If we don't know eachother it could happen through a bank that gives me a 3.4% return and charges you 3.6%. I gain since my return increases, you gain since capital is freed up for you to expand, society gains since capital is more optimally allocated, and the bank gains since it makes this optimization possible.

How is that even relevant to my question? Of course everyone can't be better than average. But all investments should tend towards the average. If we have a difference in profits we have a suboptimal use of capital for society. If I make 2% in my business and you make 5% I'm hogging resources that you are more capable of using. I should quit my business and lend you my capital for 3.5% instead so you can expand. We both gain. Society gains.

My edit to your edit:
So please explain why the above loan of 3.5% is impossible. If we don't know eachother it could happen through a bank that gives me a 3.4% return and charges you 3.6%. I gain since my return increases, you gain since capital is freed up for you to expand, society gains since capital is more optimally allocated, and the bank gains since it makes this optimization possible.

Do you really think it's optimal that we have below average investments when the money could simply be lent to the above average investors at an interest rate somewhere between their respective returns?

Do you think investments with a risk-adjusted return of  0.000001% should recieve funding? I'm not giving a specific rate but I am saying there exists a nominal rate that determines how high of a return your investment should generate to recieve funding. This rate is refered to as the natural rate of interest. If it is higher than 3% then yes, 3% investments shouldn't recieve funding because they would be diverting resources from higher generating investments.

Any other argument seem to imply that the optimal interest rate would be 0% since anything above this make investments with infinitesimal returns unprofitable.

Note though, that as the economy grows and the supply of capital goods increases more and more investments become viable, and thus the tendency for the natural rate of interest is to go down over time. 0% actually would be the optimal interest rate if it was caused by an infinite supply of capital goods. Since all investments could take place we wouldn't need to ration funding in this scenario.

They will suffer the opportunity cost of their bad decision. If someone somewhere in the economy is making a nominal profit, then the rational thing is to lend him the money you don't want to use in the near future. Yes, you gain purchasing power by simply holding the money, but the goal is to maximize it. All possible interest rates are better than 0%.

The only rational reason not to lend out your money is if you don't see a relatively risk free and effortless avenue to do so. This is currently the case in the Bitcoin economy and it was probably the case in the depression with systematic bank failures and bank runs.

In normal circumstances though, having your money at home is probably riskier than having them at an insured bank, so there really is no reason to not lend it out and get a nominal return on top of your real purchasing power return.

You solve this paradox by realizing the distinction between capital goods and consumption goods and see where their respective values comes from. Consumption goods get their value from their immediate consumption use. The bicycle is worth the same 30 BTC to the consumer regardless of how it's produced. Capital goods derive their value indirectly from the consumption goods that they could be used to produce. The aluminum is only worth 20 BTC as long as someone sees a profitable way to turn it into consumption goods at that price.

So if a 20 BTC aluminum price makes your business plan unprofitable, it simply means someone else is outbidding you in the competition for aluminum. Maybe someone else can produce bicycles with a smaller overhead, or makes bicycles that are considered higher quality, or makes something else entirely such as 40 BTC baseball bats. Prices ration goods to those who can use it most effectively and you are simply on the wrong side of the line here.

On the other hand, if noone could use aluminum profitably at a price of 20 BTC it would simply not cost 20 BTC.
Your calculation is backwards. Prices of capital goods are determined by the value of the consumption goods they can be turned into. If the value of the green widgets is 69.300 BTC then the building and assembly line is obviously worth less than this to you. So you won't offer 110.000 BTC for them, but say 50.000 BTC instead.

This argument goes for the builder as well. If he can only get around 50.000 BTC for the building then that's his cap for all the resources that goes into building it. So that's the amount of money that he will be willing to allocate between all his suppliers. You can continue this chain of thought all the way down to the most basic capital goods such as raw materials and labor.

It seems to me like you are making calculations with inflated prices of capital goods and deflation in consumption goods, when really no capital good can be worth more than the consumption it will ultimately satisfy.

Austrian theory only describe the consequences of different actions and policies. It makes no judgement wether those actions or policies are good or bad.