Nice summary. Worth discussing but I'm still not buying it.

As an aside, I think there are a lot of mixed metaphors and final paragraph doesn't follow in anyway from the previous paragraphs.

Note: I think it is 21,000,000. But agreed, there is a virtual account which the blocks are being debited from.

However for your metaphor, who is this very rich man? Why is he the ONLY one with money when we start the system? Why does this guy get to decide what the price for OUR services are? That doesn't seem very market based to me?

My metaphor twist is important because I want to show that the way blocks are trickled out is really a sociological trick.

If you believe in a fixed currency, the trickle out system should really bother you. It is by definition and design "monetary inflation". Obviously, the first person who received 50 BTC had all the value. That made him the second very rich man. However, according to your rules, if the second block was generated by someone else, 1/2 of the second rich mans values was taken away and given to a third now rich man.

By your very own terms, who is this very rich man, that he can choose to reallocate shares of wealth arbitrarily?

The only rational way to answer this question is to say, he's the very rich man! He gets to make the rules of his game. If you don't like the rules of his game you don't have to play with him. Therefore, by common agreement among all who choose to play the very rich mans game, there exists at least one moral reason for an individual or group to reassign other people's wealth. So you have given a first affirmative answer to your #1 question. I'll suppose you are asserting that there exist no OTHER moral reason.

Now, let's look at a different but more consistent metaphor that could have been used to boot the system, if you were a real austrian purest.

Suppose the rich man said, I'm dying. You 21 closest friends of mine get all my BTC. Take care of it and trade it with the world. He then gave each person 1,000,000 BTC.

Now you have the same logical stable state as you will have in "100 years" in your given example. It just gets here sooner. But the benefit is, you don't have to compromise on your most important value. Now there exists no group or individual who can reassign other people's wealth. Ideologically it is a perfect system.


I think you can give me a dozen reasons why my pure system will fail. I'll give only one to advance the argument.

1) Why on earth outside of the initial 21 now very rich men, would anyone else choose to use the system? Who are those 21 guys to make all the rules for all time? Why do they get to be the initial rich people and not me? What did they contribute that I am not contributing?

This inductive logic holds for any fixed commodity fiat money system.

I would guess there are roughly 21,000,000 motown records which were pressed in 1966. Why not use them as your fixed commodity? They are already "fairly distributed" among the initial population.

Or perhaps you could use the roughly 21,000,000 Playboy magazines that were printed in 1957. Those are "fairly distributed" as well. Well if you decide men should be most of the initial rich people.

In that case we could all decide that if you happen to have a 1966 motown record or a 1957 Playboy, you get a starting bitcoin.

After that every bit of your logic still holds. They don't even have to all be redeemed at once. You could redeem them for bitcoins as you stumbled across them (like finding gold!)


This is where the sociological trick comes in. Everyone here who is normally an austrian but tolerates the trickle in system does so for one reason. They want to be one of the initial rich people. To get something for nothing is very motivating.


So the #1 question I have for you is, as the chances of being awarded blocks goes down. Why on earth is anyone going to want to play the silly game invented by you people who happened to stumble upon easy BTC first?

After all, Knightmb has 10% of all the exiting BTC. He probably bought and generated them for less than $1,000 at the time. If I decide to trade some commodity worth $10,000 I would likely end up with less than half of his stash.

He put in $1,000 and I put in $10,000 a couple of months later. He is more than twice as rich as me. If someone tries to trade $100,000 worth of commodities for BTC a few months after me, is he going to be half as rich as me and a quarter as rich as knightmb?

That seems like a poor game for him to play.

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

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

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

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

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

====

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

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

====

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

That makes a lousy business model for a bank.

Woot!  LOL!  :-)

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

It is enough to say that I concur.

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

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

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Criticism of the Austrian School

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

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

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


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


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

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

I think what people fail to consider is that US silver and gold certificates were always denominated in DOLLARS not ounces. See for yourself.

http://dollardaze.org/blog/posts/2006/November/12/1/usdollarcomparison.jpg

A one dollar silver certificate is worth exactly the same amount of silver or gold as a one dollar federal reserve note. Always has been. Always will be.

By the way which weighs more a pound of lead or a pound of feathers? 

There were silver dollars made from silver, also some dimes and quarters. And $50 gold pieces made from gold. You can still buy some gold and silver commemorative coins. They are still denominated in dollars but cost more than their gold value. Those are what you want.

The coins are no longer made from these metals because the metal value is worth more than the denomination value.

Even pennies are no longer made of copper, because people were melting them for their copper value.

----

You should take this up with the British whose money IS called Pound Sterling!!  Go try changing their coins for a pound if silver.

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

It is unfounded enough to dismiss out of hand.

Watched the silly video. It explains much of the bantering.

I'll leave you to your notions, because if that is your authoritative source there is no further point in discussion.

If you give me 10 coins and I lend out 9 of them, that is a 10% reserve. If you loan out 90 coins that is fraud. Math is important.

Fraud happens when you can't meet your obligations. If you do it doesn't matter what banking magic or collateral swaps you use.


A one dollar silver certificate is worth exactly the same as a one dollar fed reserve note.

A one dollar of lead would be worth just as much. I fail to see any significance.

Hi falkenberg,

I agree with you. If anyone does banking badly they can crash the system.

In the US the banking system did Real Estate really badly. In California the decided it was sensible to lend people 9 times their annual salary with no money down! They also didn't require people to pay even the interest on their loans as part of their regular payment. The excess unpaid interest just rolled into the growing principle.

The could only do this because there was a market of EVEN STUPIDER investors to sell these idiotic loans to.

What happened? Well house prices spiked of course!

BECAUSE, houses don't cost what people can afford. Houses cost what banks will LOAN! That is how supply and demand work in real estate.

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

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

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

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

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

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

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


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

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

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

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


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

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

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

Really now, this is all getting quite silly. Isn't this on wikipedia?

The Bureau of Engraving and Printing makes the bills. The U.S. Mint makes the coins. The Federal Reserve orders the money from the BEP and acts as HOARD. That is why it's called "reserve". The hoard is used to replace worn out money. And more importantly, it serves as a central bank that operates on principles similar to most other banks. It loans money from the hoard at interest to other banks. That is what "the prime rate" and "the fed rate" are all about.

The Fed never prints money and willy nilly sends the money out to citizens, politician or even other banks.

The thing that makes the Fed special and the part that you seem preoccupied is the fact that they The Fed is responsible for setting the interest rates, and rules for other banks.

Feel free to read about it. It's all public information.

If you find an instance of someone who got to benefit first from newly printed money please let me know. I want to go stand next to that guy.

Note that even with "the bank bailout" the Fed didn't just print money and give it to the failing banks. The money was budgeted and loan terms were set by congress. Most of the banks repayed the loans with interest.

I know you really want what you say to be true but it doesn't match with any reality that I know of.

Bitcoin does absolutely nothing to prevent fraud in banking. Any commodity can be stolen with clever fraud.
Bitcoin does absolutely nothing to improve responsible banking. Banking can be done using any commodity.

Banks never create money however, they really do increase the velocity of money. That makes it look like there is more money, but responsible banking backs everything with outside commodities.

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

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

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

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

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

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

No.

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

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

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


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

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

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

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

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

Everything I wrote is accurate whether you do good banking with gold coins, dollars, or BTC. Banks never give you money without borrowing it first. That is called forgery. You don't have to care where the banks borrowed the money from. You don't even have to care if they pay their loans back. The person the bank borrowed from has to care. And in turn the bank has to care whether you pay your debt. Banking is inherently a trust enterprise. Or as Ronald Regan would say, "trust but verify". That is where collateral comes in.

In your example, your "sort of bill of a debt" is actually an interbank loan. When you say "This bill is backed upped by the the loan-certificates it got from borrower mostly" I'm assuming you mean the loan is secured by the property/collateral taken from the consumer borrower. Yes, both of those things are sound rational banking practices.

If the consumer defaults on the debt, the collateral is sold and used to pay back the interbank loan. If the bank didn't hold proper collateral, then they suck at banking and deserve to fail. So does the bank that trusted them with interbank loans.


I disagree about bitcoin monetary policy too, to it is the bitcoin way. The system and policy will likely rise or fall together. Don't expect drastic change unless you start a competing network.

Exactly!

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

That argument is bunk.

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

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

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

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

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

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

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

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

Thanks guys! Sorry to be lazy!

Just because I'm lazy and don't have the code on this machine...

You're saying the hash recorded independently by each node outside the block chain?
Where is the check-point hash stored and how often?