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Author Topic: Negative interest loans is foolishness.  (Read 3672 times)
SgtSpike
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May 30, 2011, 04:38:25 AM
 #21

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).
But if house prices are lower, then not as many will be built.  Which will drive the prices higher.  Or lead to a permanent deficiency in supply.

On the note of houses though, if bitcoins became the only currency that was used in the US, you could buy a house for what, 0.10BTC?  Tongue


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.

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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?

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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.
I doubt you would find anyone willing to give you interest on a deflationary currency that they can't loan out in the first place.

I wasn't talking about miners - I was talking about real-world businesses.  There will come a point when miners will not generate enough bitcoins to put any real liquidity into the market.
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Steve
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May 30, 2011, 05:30:45 AM
 #22

Btw, the inflation rate of bitcoins is ~41% at this very moment (and people think the inflation rate of the US dollar is bad!!!).  Deflation is not something anyone has to worry about for a long time.  Speculation on the other hand is something to keep an eye on...there could very well be an irrational exuberance about the future of bitcoin that is driving up the value of a bitcoin.

Some people in this thread are speaking as if bitcoin is going to be the only currency and that everyone would forgo everything about diversification that's been drilled into their heads.  Even if I expect bitcoin to substantially increase in value, I wouldn't want to put everything I own into it.  So, yes, I would want to hold other things of value (debt, investment, metals).  As well as trade my bitcoins for things I need and want (I mean, you can only save so much until the harsh realities of life force you to trade some of it for food).  If bitcoins are appreciating in value, it either means there's a lot of irrational saving (i.e. a bubble that will burst and correct itself...in which case, you would be wise not to be a hoarder at that moment and the whole deflation argument is moot (because prices in bitcoin terms will rise, not fall)), or it means the bitcoin economy is expanding and is prosperous (in which case, saving is effectively like investing in a broad index fund tracking the overall bitcoin economy).

Right now, it's hard to say whether there is a lot of irrational saving of bitcoins, or whether the market is accurately pricing in a bright future for bitcoin.

Edit: one other point...bitcoin might be a good tool for saving and exchange, but might not be so good for pricing and lending.  There's nothing that says you couldn't lend in dollar terms and repay with bitcoins (based on exchanges rates at the time of repayment)...or better yet, lend in terms of some price index (i.e. a basket of staples).

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May 30, 2011, 06:28:02 AM
 #23

Right now, it's hard to say whether there is a lot of irrational saving of bitcoins, or whether the market is accurately pricing in a bright future for bitcoin.

Edit: one other point...bitcoin might be a good tool for saving and exchange, but might not be so good for pricing and lending.  There's nothing that says you couldn't lend in dollar terms and repay with bitcoins (based on exchanges rates at the time of repayment)...or better yet, lend in terms of some price index (i.e. a basket of staples).

Exactly. Every currency is a dead end if you only price in that highly arbitrary set of conditions. The basket seems to make the most sense. If you're borrowing for using BTCs in the physical market, why not hedge the loan against the physical market?

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
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NicholasBell
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May 30, 2011, 07:10:43 AM
 #24

Well I thought the OP was stating something obvious until I saw people disagreeing.

Consider a scenario where someone from not even a year ago took on a BTC loan to buy a new computer valued at $800 USD. Each bitcoin was about 0.4 cents each then, so they would need to borrow 200000 BTC. At a conservative 2% interest rate to offset risk, that's 204000 BTC.

Fast-forward to today and the loan is due. Each BTC is ~$8.50 right now, so the borrower needs to get $1,734,000 of value in order to pay for an $800 computer from last year.

Do you think someone who didn't even have $800 of purchasing power a year ago would have $1.7 million now?  Granted, I don't think bitcoin will increase in value so exponentially in the long run as it has in the last year, but the point will still stand regardless if you are placing a naturally deflationary currency against an inflationary one. Maybe lending might make more sense if there is equilibrium, but as long at the BTC economy grows and each bitcoin needs to account for more value, then that isn't going to happen.

EDIT: (This was similarly demonstrated in post 8, but didn't seem to be argued against sufficiently. Then again, I hadn't read all the replies in this topic yet. I was just posting in my few minute break here.)

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hazek
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May 30, 2011, 11:46:34 AM
 #25

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?

I think this post deserves a standing ovation!!  Cool

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hazek
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May 30, 2011, 11:55:27 AM
 #26

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.

You are asking the wrong question. You should be asking why I should risk lending money to you if I can save at no risk instead. And if you can't answer that question, there are others out there who will and will get the loan instead of you.

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hazek
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May 30, 2011, 12:11:34 PM
 #27

Consider a scenario where someone from not even a year ago took on a BTC loan to buy a new computer valued at $800 USD. Each bitcoin was about 0.4 cents each then, so they would need to borrow 200000 BTC. At a conservative 2% interest rate to offset risk, that's 204000 BTC.

Fast-forward to today and the loan is due. Each BTC is ~$8.50 right now, so the borrower needs to get $1,734,000 of value in order to pay for an $800 computer from last year.

Do you think someone who didn't even have $800 of purchasing power a year ago would have $1.7 million now?

So wait, the only two options with lending are you either pay back or you don't borrow? Have you heard of defaulting yet?

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metamantis
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May 30, 2011, 05:32:01 PM
 #28

My point was not to praise the virtues of debt or the need to borrow money. I just think it's only fair while commenting on the system that the future of this system not be misrepresented. The cost of borrowing money  being similar to the current systems, a lender charging negative interest rates, ease of borrowing start  up /operating capital, or ease of making a profit greater than the rate of deflation: are all misconceptions I'd rather avoid.

The need for the government to borrow money it hasn't saved for things such as wars and infrastructure is the reason even the Roman Empire practiced inflation back when America was still using the barter system.

1. So this system will never "replace" the various national currencies as no government will completely surrender this power, though it makes a good currency of exchange for those who choose to accept it.

2. Sales tax on any purchase made using Bit coins will be owed to the authority using the same conversion method used for calculating a purchase made with a foreign currency, paid in the Local currency (in my case US$) unless your government chooses to accept Bit coins.

3. Income for a business must be reported in a value for the local currency based on laws for income in a foreign currency. Any taxes on that income must be paid in the local currency (in my case US$) unless your government chooses to accept Bit coins.

4. Until Bit coins trade at a value that establishes Trillions of dollars of value available, Bit coin itself could never be the worlds reserve currency.

One strength however of Bit Coin is it already on its way to scaling well for VERY large purchases.

Last I checked there was 6,383,550 BTC in circulation, at the current exchange rate of US$8.75/1BTC is worth US$55,856,062.50 .
That means even now in theory with 20% of the currency you could make a $10 Million purchase. In fact yesterday over $5,000,000. poured through Mt Gox. With So few people with 10 Million or more in assets, it doesn't much matter at the moment for the currency.

Metamantis
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