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Author Topic: Negative interest loans is foolishness.  (Read 3668 times)
metamantis
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May 29, 2011, 11:45:10 PM
 #1

I understand that if you add enough decimal places the amount of usable units becomes infinite.

I understand as the population grows and more users are purchasing more goods that the value of the pool of Bit Coins rises as the pool of products rises despite the quantity of Bit Coins remaining the same. This means prices in Bit Coins would decrease as the relative value of the Bit Coin rises.

This means that the growth in the value of savings in Bit Coins equals the value of deflation. While the value of earnings and property remains constant due to supply and demand.

Making a loan is taking a risk that the person will not pay you back counteracted by the reward of a profit for the loan. A person loaning money will loan it for the most reward he can within his acceptable level of risk. A person borrowing money will borrow money for the lowest he can get. This is called supply and demand.

In the inflationary situation of the US Dollar, I take a loan out to purchase a house I pay back a greater number of units of currency with less valuable currency that is projected for me to pay back the value of the home(the rate of inflation) plus some reward for the risk taken by the lender(interest and fees).

On the other side of the desk if the lender does not loan out his money he will be losing value over time(The holder of dollars is punished for doing so). So he chooses to risk his money so his money will buy the same or more when he needs to use it. This is the same formula the makes fractional reserve profitable for the banks.

Bit Coin makes people with money not want to loan it out. If I am going to lose value if I hold onto it I will take a risk to maintain or grow my money. If my money grows in value I am not tempted to loan it out.

If I can hold onto my money and it grows in value naturally without risk, then any action I take with risk will require a greater profit. that means a lender is never going to make a loan for "negative interest" because he could just hold onto his money and get better returns for less risk. This means that the amount repaid in units would never be less than the amount in units of the loan. This means that you would be paying back the loan in Bit Coins worth more than the Bit Coins you borrowed. It also means your home cannot stand as collateral for the loan as the homes value remains the same while the value of the Bit Coin increases. So your home mortgage if there is not inflation in the housing market is the same as a car loan today relative to a deflating currency (underwater from day one).

Who then is going to loan a stable value for the purchase of a decreasing value only to be paid back less value than he would have if he hadn't made the loan.

This will also decrease entrepreneurship without a large profit margin as the return on investment must be larger than the rate of deflation to justify the risk taken by the venture and the difficulty of obtaining more start up capital. 

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bittrader
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May 29, 2011, 11:56:21 PM
 #2

Who then is going to loan a stable value for the purchase of a decreasing value only to be paid back less value than he would have if he hadn't made the loan.

I'm afraid I don't follow. If I loan out 10,000 BTC for one year at 10% annual interest compounded annually, then the buyer will pay me back 11,000 BTC after the year is up.

The non-inflationary nature of BTC means that the future Bitcoins will probably be worth more then than current Bitcoins are worth now. Let's say the value of BTC in USD goes up 5% per year. So a year from now, after the borrower pays, I will have 11,000 BTC, which is worth 11,550 in present-day BTC.

If I hadn't made the loan, my 10,000 BTC would be worth 5% more in a year (i.e., they'd be worth 10,500 BTC).

Where in this process am I being paid back less than if I hadn't made the loan?
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May 30, 2011, 12:26:26 AM
 #3

Who then is going to loan a stable value for the purchase of a decreasing value only to be paid back less value than he would have if he hadn't made the loan.

I'm afraid I don't follow. If I loan out 10,000 BTC for one year at 10% annual interest compounded annually, then the buyer will pay me back 11,000 BTC after the year is up.

The non-inflationary nature of BTC means that the future Bitcoins will probably be worth more then than current Bitcoins are worth now. Let's say the value of BTC in USD goes up 5% per year. So a year from now, after the borrower pays, I will have 11,000 BTC, which is worth 11,550 in present-day BTC.

If I hadn't made the loan, my 10,000 BTC would be worth 5% more in a year (i.e., they'd be worth 10,500 BTC).

Where in this process am I being paid back less than if I hadn't made the loan?

He's using arbitrary weights to argue that the increased circulation will increase the value of the loan even if the currency unit decreases.
It won't. And it's purely based on rhetorical analysis (technical fundamentalism) and "psychological economics".
It's a game of musical chairs for people who aren't gambling to begin with. HELL NO.

This is a better option: https://forum.bitcoin.org/index.php?topic=10538.0.

Proposal: http://forum.bitcoin.org/index.php?topic=11541.msg162881#msg162881
Inception: https://github.com/bitcoin/bitcoin/issues/296
Goal: http://forum.bitcoin.org/index.php?topic=12536.0
Means: Code, donations, and brutal criticism. I've got a thick skin. 1Gc3xCHAzwvTDnyMW3evBBr5qNRDN3DRpq
metamantis
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May 30, 2011, 02:18:50 AM
 #4

What I'm saying is other people argue that it doesn't matter if the farmer makes less for his produce than it cost him to buy. As long as his money has the same value.

It does matter if he needs to borrow money to purchase the seeds.

So if he borrows 20 Bit coins to plant the seeds and makes 15 Bit coins for his harvest he still owes 20 Bit Coins plus interest, which is much more value now than it was when he borrowed the money.

Let me put this another way. If people argue that you can still give me a 30 year loan with compound interest at 5% interest, think about how much more punitive that is in a deflationary economy.

If I borrow 60,000 Bit Coins to buy a house, then I am paying back the loan for a house that is decreasing in price with a job that pays less money year after year.

If you need me to be clearer I'll make a chart for the 30 year loan showing the value.

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May 30, 2011, 02:27:24 AM
 #5

You should not borrow if your productivity is less than the average actor in the economy. If you do you will pay the difference; your lender will pay if you default.

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rezin777
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May 30, 2011, 02:48:36 AM
 #6

What I'm saying is other people argue that it doesn't matter if the farmer makes less for his produce than it cost him to buy. As long as his money has the same value.

It does matter if he needs to borrow money to purchase the seeds.

So if he borrows 20 Bit coins to plant the seeds and makes 15 Bit coins for his harvest he still owes 20 Bit Coins plus interest, which is much more value now than it was when he borrowed the money.

Let me put this another way. If people argue that you can still give me a 30 year loan with compound interest at 5% interest, think about how much more punitive that is in a deflationary economy.

If I borrow 60,000 Bit Coins to buy a house, then I am paying back the loan for a house that is decreasing in price with a job that pays less money year after year.

If you need me to be clearer I'll make a chart for the 30 year loan showing the value.

Maybe people won't need to take as many loans when savings actually mean something. Maybe people won't buy houses that they can't use or afford. Maybe they will buy more efficient vehicles instead of having 3 brand new SUVs in every garage. Maybe the farmer will be able to afford seeds from his profits that he saved from last year. Maybe the economy won't work the same way when the money is real and credit isn't easy. Maybe goods and services will cost much less. Maybe people will learn to save when their savings might go up in value on its own. Maybe we won't have to pay as much in taxes to bail out banks and corporations that are too big to fail. Maybe people will learn fiscal responsibility. Maybe we wont see as many malinvestments. Maybe people will loan at zero interest just to improve their community. Maybe they will loan at zero interest and get a share of the project. Maybe people will have to convince lenders that their idea is worth more than the next guys idea and we will have fewer high quality projects instead of more low quality projects. Maybe you can create a block chain with properties you like and let it compete with the current block chain?
billyjoeallen
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May 30, 2011, 03:17:33 AM
 #7

This critique is um, shall we say...retarded?  lender's won't lend? of course they will, just at the hughest possible marginal interest rates that credit-worthy borrowers will accept. To the degree this punishes borrowers (bad thing) it rewards savers and capital formation (good thing). The argument betrays a fundamental misunderstanding of finance. It's as if you are worried that you will go hungry if you only cut your pizza into eight slices rather than twelve.

Lenders take into account the expected rate of inflation. If BTC appreciate, then you can lend at a lower nominal rate and get the same real return as a higher rate in an inflating currency. Lending rates are also determined by how risky the loan is. if you are judged not to be a reliable borrower, then expect to pay more. if you don't like it, shop for a loan elsewhere. If you can't find another lender with a better deal, then obviously you're not as good of a credit risk as you think you are. competition between lenders drives rates down to reasonable lenders and competition between borrowers drives them up. this is basic supply and demand economics. Griping about it makes as much sense as complaining that gravity is too strong.

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metamantis
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May 30, 2011, 03:43:37 AM
 #8

Ok fine out with the chart as to why this argument that people will still be able to borrow money is insane.
Since the actual value is relative let's use an easy example.
40,000 units on a 30 year note at 5% interest if the value of money stayed steady.

In the end costs the borrower without any additional fees in units the same value as the first year,
77,301.68 units

Current inflation on average is 5% for the US $ so let's assume 5% deflation for the counter example.


40,000 units on a 30 year note at 5% interest if the value of money deflated by 5% a year.

In the end costs the borrower without any additional fees in units the same value as the first year,
171,192.35 units

40,000 units on a 30 year note at 0% interest if the value of money deflated by 5% a year.

In the end costs the borrower without any additional fees in units the same value as the first year,
88,584.91 units

That's not even as good as a 5% loan under no inflation and that is pretty much as good as it gets. If a person can save money at no risk why would they loan it at a negative interest rate. A 0% rate is still more expensive in value than the 5% loan in a non-changing economy.

So how can a family pay for medical care in an emergency? If they borrow the money you can see how even an interest free loan is worse than a 5% mortgage with their income decreasing at a regular pace if they wouldn't normally get a 5% wage increase in an inflation economy.

How would you react if your employer where negotiating the percentage of your annual pay cut? Don't worry you can still buy more loaves of bread just not as many as if you had that great wage you had 5 years ago.

markm
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May 30, 2011, 03:48:54 AM
 #9

Does this means there was no loaning back in the days of pounds sterling and other metal-backed currencies due to metal going up in value?

-MarkM-

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May 30, 2011, 03:54:23 AM
 #10

Does this means there was no loaning back in the days of pounds sterling and other metal-backed currencies due to metal going up in value?

-MarkM-


The inflationary proposal has to borrow context from elsewhere. A miniature Enroning creates a system with 7 unknown variables for which we will be offered 3 known variables controlled by a "professional".

No thank you.

Proposal: http://forum.bitcoin.org/index.php?topic=11541.msg162881#msg162881
Inception: https://github.com/bitcoin/bitcoin/issues/296
Goal: http://forum.bitcoin.org/index.php?topic=12536.0
Means: Code, donations, and brutal criticism. I've got a thick skin. 1Gc3xCHAzwvTDnyMW3evBBr5qNRDN3DRpq
billyjoeallen
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May 30, 2011, 04:00:14 AM
 #11


That's not even as good as a 5% loan under no inflation and that is pretty much as good as it gets. If a person can save money at no risk why would they loan it at a negative interest rate. A 0% rate is still more expensive in value than the 5% loan in a non-changing economy.

So how can a family pay for medical care in an emergency? If they borrow the money you can see how even an interest free loan is worse than a 5% mortgage with their income decreasing at a regular pace if they wouldn't normally get a 5% wage increase in an inflation economy.

How would you react if your employer where negotiating the percentage of your annual pay cut? Don't worry you can still buy more loaves of bread just not as many as if you had that great wage you had 5 years ago.


There is way too much fail in this post to respond to briefly.  A lender lends when he believes that a borrower can both utilize the capital more productively that he can himself with an equal or lower risk than himself AND he believes the borrower will pay it back with interest. That is the only reason ever to rationally lend.

If you have a family emergency (I sympathize), use your savings. no savings? sell assets? no assets? solicit charity? no one wants to help? borrow at usurious rates like every patron of payday lenders do today.  Life sucks sometimes. That's not the fault of Bitcoin. The good news is that people like me will hopefully be in a position to be more charitable (because we will be very very rich!)

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billyjoeallen
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May 30, 2011, 04:04:58 AM
 #12

How would you react if your employer where negotiating the percentage of your annual pay cut? Don't worry you can still buy more loaves of bread just not as many as if you had that great wage you had 5 years ago.

huh? in a deflationary environment, you will be able to buy MORE loaves of bread for the same # of BTC. You could actually get a nominal pay cut and increase your purchasing power simultaneously. 

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May 30, 2011, 04:09:27 AM
 #13

I agree with the OP.

A deflationary currency would result in very little loaning and lots of hoarding.  It remains to be seen whether an economy could actually survive in such an environment.  Yes, it would be great if everyone saved more.  But saving more also means spending less, which means fewer people buying the farmer's goods, or the clothes that you make, or whatever else.  This, in turn, forces business owners to raise prices to stay in business, which ultimately means you will get less for your bitcoins.

The more times money can exchange hands in a given time period, the better.  It drives prices down and helps make things affordable for everyone.  Deflation means that money will exchange hands much less than in our current economy, and that COULD have dire consequences on the economy.  Lots of lost jobs, etc.  But we'll just have to see what happens when we get there, if we get there.
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May 30, 2011, 04:11:18 AM
 #14

Does this means there was no loaning back in the days of pounds sterling and other metal-backed currencies due to metal going up in value?

-MarkM-


No because gold production didn't stop.  Botcoin production will stop.  Original poster raises a valid question.  Lending would have to be at very low rates since the currency should theorhetically increase value over time.  If it increases in value over time, there's no reason to lend.  Plus,  there would be no additional bitcoins to pay off debt.  This seems problematic.
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May 30, 2011, 04:12:08 AM
 #15


A deflationary currency would result in very little loaning and lots of hoarding. 

A deflationary currency will result in very little debt and lots of savings and capital formation.

Fixed it for ya.  

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May 30, 2011, 04:17:13 AM
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Bitcoins are more deflationary than commodities like gold or silver since production ceases in bitcoins but silver and gold are still be mined.
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May 30, 2011, 04:23:39 AM
 #17

I'm not even going to quote the fail here.

Bitcoin production will never stop.

The total will never be reached.

And "towncoins" are coming.

Proposal: http://forum.bitcoin.org/index.php?topic=11541.msg162881#msg162881
Inception: https://github.com/bitcoin/bitcoin/issues/296
Goal: http://forum.bitcoin.org/index.php?topic=12536.0
Means: Code, donations, and brutal criticism. I've got a thick skin. 1Gc3xCHAzwvTDnyMW3evBBr5qNRDN3DRpq
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May 30, 2011, 04:24:26 AM
 #18

House prices would be much much lower because they are not going to be based on the price of 'funny money' that is printed out of thin air (Unbaked Fiat Money).

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May 30, 2011, 04:32:04 AM
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How would you react if your employer where negotiating the percentage of your annual pay cut? Don't worry you can still buy more loaves of bread just not as many as if you had that great wage you had 5 years ago.



It's a common enough mis-understanding of what technology driven price-deflation is. It is not a knob which someone, somewhere turns and all prices and wages have to obey. As an aside (just for propaganda reasons) I'd like to call it grass-roots deflations... Well, back to business of explaining . I'll present my arguments as dialogue between Mr. Holmes and  Dr. Watson

Watson: Holmes, have you heard of that new thing called bitcoin?
Holmes: Yes, Watson, I was fortunate to hear about it a earlier stage, so I was able to secure myself  10,000BTC, just in case the whole thing catches on. It's a beautiful concept [... long rant about crypto and proof of work systems ..]
W: But it will never work! Because of deflation!
H: I'm curious Watson, why are you, and a lot of other people scared of stuff getting more plentiful, and therefore cheaper?
W: Because of wages. If there's deflation  wages will have to go down to!
H: Well, let me check out with this standard microeconomics course (takes a book from the shelves). Let's see... Wages, wages, wages.. Well, here: The marginal wage is equal to productivity times price. Which gives constant wages, by the way.
W(angry): Well, but what's that marginal stuff, anyway? Sounds greek to me!
H: Oh, marginalism.. (checks email) It's one of the most established concept of economics... (long pause) But, if you do not mind it, Watson I would propose to postpone that discussion. I have been offered a most, most intriguing case and with a bounty of 1000BTC.
W: Well, I'll certainly hope..

Holmes bows and goes out.
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May 30, 2011, 04:33:46 AM
 #20

I agree with the OP.

A deflationary currency would result in very little loaning and lots of hoarding.  It remains to be seen whether an economy could actually survive in such an environment.  Yes, it would be great if everyone saved more.  But saving more also means spending less, which means fewer people buying the farmer's goods, or the clothes that you make, or whatever else.

Or you could put it in an interest bearing escrow account. It's like saving for necessities and the farmer would be able to borrow against it.

Quote
This, in turn, forces business owners to raise prices to stay in business, which ultimately means you will get less for your bitcoins.

At which point miners sell like rabbits on crack to take advantage of the rise. and suddenly more liquidity is available.

Do people understand the genius behind the difficulty parameter or not?

Quote
The more times money can exchange hands in a given time period, the better.  It drives prices down and helps make things affordable for everyone.  Deflation means that money will exchange hands much less than in our current economy, and that COULD have dire consequences on the economy.  Lots of lost jobs, etc.  But we'll just have to see what happens when we get there, if we get there.

If paypal weren't so paranoid I'd still be doing side market OTC to help others get in.

Proposal: http://forum.bitcoin.org/index.php?topic=11541.msg162881#msg162881
Inception: https://github.com/bitcoin/bitcoin/issues/296
Goal: http://forum.bitcoin.org/index.php?topic=12536.0
Means: Code, donations, and brutal criticism. I've got a thick skin. 1Gc3xCHAzwvTDnyMW3evBBr5qNRDN3DRpq
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