Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable?

[Dalkore]

I just wanted to point out as "food for thought" that Bitcoins are a fixed issue currency.   This means is can not be expanded at this point beyond the initial 21 million projected coins.   I believe we have some people that have not really applied this to how they think about Bitcoins.   It is very interesting to see any long-term interest bearing arrangements that are marketed.   

If I agree to accept your coins and pay you an interest, that means regardless if my business idea I use creditors funds for is profitable, I still need to continually go into the market to not only cover principle but also the interest.  This becomes increasingly difficult with Bitcoins.  Like the title says, its a zero-sum game, to get Bitcoins, someone needs to sell Bitcoins.   As the supply gets more and more concentrated that will cause the nominal price of a Bitcoin to increase.    Even through Bitcoins are a useful exchange unit, I believe more people are actually "saving" Bitcoins as a store of wealth.   

This is why I question any long-term interest bearing arrangement or instrument that is not paying out in USD (or other currency) with the OPTION to get paid in BTC at the current spot price to remove the exchange risk from the person running the investment operations. 


What do you think about this perspective?


 

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[Vandroiy]

If you mean that trading BTC futures is risky, then I agree. We all know price might suddenly go to 100$ or 1$, and one side of the deal is screwed.

Calling it a zero-sum-game is misleading though. That's like saying a market is a zero-sum-game, which it isn't. Trade is an important part of various forms of productivity, so if someone makes money by trading things around, it's a strange thing to say that someone else must have lost the same amount.

What kind of "long term bearish arrangements" are you talking about?

[SgtSpike]

I had similar thoughts when I initially learned about Bitcoin.  Deflation is going to kill the economy, etc etc.  But then, some people pointed out to me, perhaps inflation is artificially inflating the economy by encouraging bad investments and increasing debt-based ventures?

To me, the ideal currency would have a supply that inflates exactly according to GDP growth.  Thus, it would neither inflate nor deflate pricing, and wouldn't over-encourage bad investments or too much saving.  There's no perfect way to achieve such a system though.  Bitcoin is interesting too, and would only result in effective deflation equal to the increase in GDP growth + deflation due to lost coins.

*shrug*

It definitely discourages investments, but it certainly won't stop investments entirely.  People will just start weighing the opportunity cost of holding BTC vs other investments.

[Dalkore]

If you mean that trading BTC futures is risky, then I agree. We all know price might suddenly go to 100$ or 1$, and one side of the deal is screwed.

Calling it a zero-sum-game is misleading though. That's like saying a market is a zero-sum-game, which it isn't. Trade is an important part of various forms of productivity, so if someone makes money by trading things around, it's a strange thing to say that someone else must have lost the same amount.

What kind of "long term bearish arrangements" are you talking about?

It is zero sum because there is no built in inflation past the known issuance of 21 million coins.   Coins don't just come out of no where.   Its not a perfect analogy but I hope you see the part I am trying to apply to Bitcoin for this discussion?


"Interest bearing" not "bearish".   Basically anything arrangements that pay out an interest rate over time, not a one-off deal.

[justusranvier]

It means that loans will be rare in a Bitcoin economy. Growth will come from savings (capital formation).

Instead of being able to borrow money to buy a car and a flatscreen TV you'll need to save the money first.

[dissipate]

It means that loans will be rare in a Bitcoin economy. Growth will come from savings (capital formation).

Instead of being able to borrow money to buy a car and a flatscreen TV you'll need to save the money first.

Why would loans be rare? All you do is adjust the interest rate for the expected amount of deflation.

[evoorhees]

Bitcoin is an asset with a limited supply. Thus, it is like almost every normal asset out there - lumber, corn, gold, oil, etc.  None of these things can be "printed" out of thin air. They are scarce by their natural properties.

A monetary system could work with any of these commodities - markets will figure out how to price the borrowing of money. The idea that a money must be, by its nature, unlimited in supply, is a sophism (and a very dangerous one).

[SgtSpike]

It means that loans will be rare in a Bitcoin economy. Growth will come from savings (capital formation).

Instead of being able to borrow money to buy a car and a flatscreen TV you'll need to save the money first.

Why would loans be rare? All you do is adjust the interest rate for the expected amount of deflation.

Yes, but keep in mind, the interest rate on a loan can't go lower than 0% (and really, why would anyone want to give out 0% loans anyway?), but if deflation beyond 6% hits, most people are going to stop taking out loans to buy houses.  If deflation beyond 10% hits, people probably aren't going to take out loans for cars.  If deflation beyond 20% hits, people are probably going to avoid taking out any sort of loans altogether.

However, I don't see this as a bad thing... people borrow too much money, and it is, in large part, due to inflation being present in the money we use.  Inflation encourages overspending and too much debt.  Deflation encourages saving and too little debt. Maybe it is time we bring deflation into our lives and see what happens?

[evoorhees]

I had similar thoughts when I initially learned about Bitcoin.  Deflation is going to kill the economy, etc etc.  But then, some people pointed out to me, perhaps inflation is artificially inflating the economy by encouraging bad investments and increasing debt-based ventures?

To me, the ideal currency would have a supply that inflates exactly according to GDP growth.  Thus, it would neither inflate nor deflate pricing, and wouldn't over-encourage bad investments or too much saving.  There's no perfect way to achieve such a system though.  Bitcoin is interesting too, and would only result in effective deflation equal to the increase in GDP growth + deflation due to lost coins.

*shrug*

It definitely discourages investments, but it certainly won't stop investments entirely.  People will just start weighing the opportunity cost of holding BTC vs other investments.

People should not be so scared of prices that change. From where did this notion that prices must be flat come from? Who suggested such a thing? Is it so hard to imagine that a world can work in harmony with prices which generally fall, instead of generally rise, over time? Is it so hard to imagine a world where an employee doesn't get wealthier over time by a nominal increase in his wage, but by a nominal fall in his costs? Indeed, such a world is different than what we know, as we all grew up in a highly inflationary world, but this is no reason to assume it ought to be so.

It is okay for prices to fall. Do not be afraid. The more constant a money supply, the better, for it is by the stability of money which market participants navigate. There is no reason to think money supply must increase with GDP - instead of seeking stable prices (which runs counter to how markets operate), merely seek stable money, and you will find a happy economy.

[Adrian-x]

Adam Smith: Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver (or Bitcoin), but by labour, that all wealth of the world was originally purchased.

Interest is an agreement to share the efforts of your labour.
The laws of supply and demand dictate:
All free markets will tend to optimise to the maximum benefit for the lowest cost.

Capital will only have value if the economy is shrinking while there is capacity to grow.
If the Economy is stable or rescaling capital will bear no interest.
  
As the value of Bitcoin goes up your purchasing power increases, or if the economy grows, price deflation is experienced.
As a result there should be little demand for interest bearing loans in BTC while the economy grows.
The increase in value offsets the need for interest.  

[evoorhees]

Inflation encourages overspending and too much debt.  Deflation encourages saving and too little debt.

One encourages saving, or the abstinence of consumption.

The other encourages spending, or the abstinence of capital formation.

If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

[SgtSpike]

Inflation encourages overspending and too much debt.  Deflation encourages saving and too little debt.

One encourages saving, or the abstinence of consumption.

The other encourages spending, or the abstinence of capital formation.

If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

[Adrian-x]

...If deflation beyond 20% hits, people are probably going to avoid taking out any sort of loans altogether.
...However, I don't see this as a bad thing... people borrow too much money, and it is, in large part, due to inflation being present in the money we use.

When you save you are contributing more than you consume. = wealth building
When you borrow you are consuming more than you contribute. = wealth erosion

When people stop taking loans to consume, consumption shrinks to that of supply, this will also have a profoundly positive effect on the ecological environment. 

[Dalkore]

Very nice opinions so far.  

I want to be clear I am not making a value judgement in interest itself.  I study economic history on my off-hours and this occurred to me when I was thinking about Bitcoins and what examples we have to draw from.  Obviously after reading all the comments after the Pirate collapse and then looking at all the other deals out there, I wondered if it was really viable in Bitcoin.

This is why I made a point to talk about long-term arrangements over a single deal where I am repaying by my creditor.  I see transactions more like reshuffling a 21 million coin deck each time.   Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.

[Melbustus]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

[2_Thumbs_Up]

It means that loans will be rare in a Bitcoin economy. Growth will come from savings (capital formation).

Instead of being able to borrow money to buy a car and a flatscreen TV you'll need to save the money first.

Why would loans be rare? All you do is adjust the interest rate for the expected amount of deflation.

Yes, but keep in mind, the interest rate on a loan can't go lower than 0% (and really, why would anyone want to give out 0% loans anyway?), but if deflation beyond 6% hits, most people are going to stop taking out loans to buy houses.  If deflation beyond 10% hits, people probably aren't going to take out loans for cars.  If deflation beyond 20% hits, people are probably going to avoid taking out any sort of loans altogether.

If.. if.. if.. My question to you is why? why? Why do we have (price) deflation in an economy with a constant money supply? The answer is because we have the same amount of money chasing more stuff. There is an implicit premise here that we actually have an increase in the amount of stuff to sell i.e. economic growth. The argument that a constant money supply prohibits economic growth is a contradiction, since price deflation caused by a constant money supply requires economic growth to even happen in the first place. A means not A.

So, with a constant money supply, deflation is the direct effect of economic growth. If we have 10% deflation it's because we've simultaneously had a 10% increase in the amount of goods and services (i.e. the same money supply chasing 10% more stuff). Without the growth, the deflation will not take place at all (same money supply chasing the same amount of stuff).

So your scenario with 20% deflation builds on a premise of 20% economic growth in the first place. That seems like a pretty unreasonable scenario to me, but if it isn't, that would be even better. 20% economic growth is far better than any country manages to do today.

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

The only way to achieve that is without a money supply. Changes in the money supply affects the interest rate, and the interest rate affects peoples decision to save or spend. A better goal for the money supply would be one where the interest rate reflects the time preference of market participants as closely as possible.

The general goal of a price is not to be high or low, but to be true.

[evoorhees]

  Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

[Dalkore]

  Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

Yes and where did these profits come from? (agreeing with you).    The extra 1 BTC you earned by getting my to see value in your service and price.   

[SgtSpike]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

[2_Thumbs_Up]

By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.

In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.

[Melbustus]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

Your fixed investment is gaining nominal value, but that nominal money that your investment is earning is also gaining purchasing power. In your example, you're comparing nominal percentage growth for the investment scenario with purchasing power growth in the non-investment scenario. The investment scenario needs to also include purchasing power growth in order to compare...

I think the math gets complicated (and probably has to include assumptions about investment distribution details, etc), hence my textual assertion rather than some simple calcs...

[edited for clarity]

[2_Thumbs_Up]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

But again, the question is why prices even drop in the first place? It's because we have economic growth (same money supply chasing more stuff), so obviously someone is making a profit.

Higher deflation implies higher economic growth, which implies there are lots of people actually capable of making profits in the current economy. If you can't make a profit because of deflation, it's because someone else is doing a better job than you. If they weren't, there wouldn't be any deflation to stop you.

[Adrian-x]

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

The argument has been answered.

Capital will only have value if the economy is shrinking while there is capacity to grow.
If the Economy is stable or rescaling capital will bear no interest.
  
As the value of Bitcoin goes up your purchasing power increases, or if the economy grows, price deflation is experienced.
As a result there should be little demand for interest bearing loans in BTC while the economy grows.
The increase in value offsets the need for interest.  

In today's economy interest is real money to the person paying it, but it is new money being created for the bank or the person loaning it. The interest paid ads to the web, of inflation.

In your scenario there is little room for growth as the economy is growing. When there is inflation, (economy shrinking in a fixed money supply) lending money out with interest is encouraged this will stabilise the economy.

An inflationary - economy shrinking  - scenario also provides incentives to entrepreneurs to seek the loans to take advantage of increasing prices.  Fixed money supply allows the market to manage the economy.

[ffe]

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

But there is a requirement that the money not be worth a lot more in the future. "Terms are you pay back 11 btc in a year." would never be acceptable to a borrower if bitcoin is increasing 20% a year in value. The borrower would have to make a 30% return just  to break even.

On the other hand "Terms are you pay back 9 btc in a year." would be unacceptable to a lender, even if 9 btc in a year is 10% more than 10 btc today. Fact is, the lender knows he can keep his coins and do better.

Loans would never happen and capital would be miss allocated. In general the holder of a lot of bitcoin is not necessarily the generator of great investment ideas.

By the way. "Savings is good" is only true when savings are invested. Holding on to non-productive bitcoin is hoarding, and is not saving directed to investment in the bitcoin world. There are few things more useless to the economy than a man hoarding 100,000 bitcoins.

[2_Thumbs_Up]

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

But there is a requirement that the money not be worth a lot more in the future. "Terms are you pay back 11 btc in a year." would never be acceptable to a borrower if bitcoin is increasing 20% a year in value. The borrower would have to make a 30% return just  to break even.

Yes. And if you want to invest in a car factory there is a requirement that cars are not worth 99% less in a year. You can't just make up scenarios with crazy premises without regard to how likely they are or what they imply. An economy in equilibrium with a constant money supply that increases 20% in value on a yearly basis over the long run implies that we have a 20% increase in goods and services every year. That is an extremely good scenario.

[ffe]

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

But there is a requirement that the money not be worth a lot more in the future. "Terms are you pay back 11 btc in a year." would never be acceptable to a borrower if bitcoin is increasing 20% a year in value. The borrower would have to make a 30% return just  to break even.

Yes. And if you want to invest in a car factory there is a requirement that cars are not worth 99% less in a year. You can't just make up scenarios with crazy premises without regard to how likely they are or what they imply. An economy in equilibrium with a constant money supply that increases 20% in value on a yearly basis over the long run implies that we have a 20% increase in goods and services every year. That is an extremely good scenario.

We aren't in equilibrium. We never will get to an equilibrium with bitcoin as the only nominal money for valuing contracts. The premises I gave are reasonable today and for the foreseeable future. For the foreseeable future most contracts will never be valued in bitcoin for the reasons I gave.

[Adrian-x]

Loans would never happen and capital would be miss allocated. In general the holder of a lot of bitcoin is not necessarily the generator of great investment ideas.

Re read the post above the post from witch I extracted your quote.
In a fixed currency system, when the economy is shrinking (inflation) there is an economic incentive to loan money, when the economy is growing (deflation) there is no economic incentive to loan money.
This ensures the appropriate allocation of capital.    

[Dalkore]

I am glad to read all these responses.  With this information, it will allow us to analysis business propositions in a more astute manner.   People who are trying to offer gains in only Bitcoins on an ongoing basis that are not based on another currency to fix the value should be scrutinized much harder for the fact we are dealing in a fixed asset. 

[Adrian-x]

@ Dalkore
To date the only investments I have see value in, in the Bitcoin economy, are a mining investment.
And even then the rate of return is dismal compared to investing in GPU's for an old PC and running it yourself.

Keep in mind the money supply is not yet fixed so even though there is money inflation, the economy is growing so there is price deflation (meaning Bitcoin increasing in value)

[evoorhees]

  Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

Yes and where did these profits come from? (agreeing with you).    The extra 1 BTC you earned by getting my to see value in your service and price.   

You forget the element of time.  Imagine I owe a debt of 100 bitcoins, but there are only 50 bitcoins in the whole world. Can I pay off that debt? Yes. I just have to produce, earn bitcoins, and pay off over time. Each single coin can pay off n amount of coin debt over time.  Money moves around, it circulates.

[evoorhees]

But there is a requirement that the money not be worth a lot more in the future. "Terms are you pay back 11 btc in a year." would never be acceptable to a borrower if bitcoin is increasing 20% a year in value. The borrower would have to make a 30% return just  to break even.

If a mutually-agreed interest rate cannot be determined, then a loan will not happen. That's okay. Debt is not a prerequisite for growth and development (sometimes it can help, when used wisely, but it is not a prerequisite).

There are few things more useless to the economy than a man hoarding 100,000 bitcoins.

You are ignoring all the work that man did to acquire those coins. You're looking only at a slice of time and saying he is being a bad economic participant. Plug time into the equation, and you discover the benefit he created happened in the past, and that must be factored into your equation of whether he is "useless". His holding of 100,000 BTC represents the amount of production he provided to the world in the days prior. You should thank him, not scorn him.

And indeed, if he starts spending it, it will drive up prices, making goods more scarce and more difficult (costly) for others to acquire.

So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.  

[dissipate]

By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.

In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.

That is the same as moving the decimal place. That does absolutely nothing except for perhaps arcane psychological effects.

[Adrian-x]

So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that...

+1

[dissipate]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

HuH? A business making 2% a year is fine, because that would be 2% a year in a currency that is appreciating in value 3% a year. I invest 100 BTC and I make 2 BTC the first year. Let's say the interest doesn't compound so I make 2 BTC again the next year. That 2 BTC will be worth 3% more than the 2 BTC I made the year before. I don't see the problem.

[justusranvier]

So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.

The people who oppose savings will never respect that man, because they want to dictate who benefits from his deferred consumption instead of letting him decide based on who he freely chooses to trade with.

[Adrian-x]

So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.

The people who oppose savings will never respect that man, because they want to dictate who benefits from his deferred consumption instead of letting him decide based on who he freely chooses to trade with.

If he dies with his brain wallet, benefit goes to everyone.

[SgtSpike]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

HuH? A business making 2% a year is fine, because that would be 2% a year in a currency that is appreciating in value 3% a year. I invest 100 BTC and I make 2 BTC the first year. Let's say the interest doesn't compound so I make 2 BTC again the next year. That 2 BTC will be worth 3% more than the 2 BTC I made the year before. I don't see the problem.

That's only true if the company itself is also growing its productivity at a rate of 3%/year.

For example, assume the company sells 10,000 widgets in year 1 at 1 BTC each, thus generating 10,000 BTC in revenues, and assume my payout of that is 2 BTC.  The next year, assume that the same company sells the same 10,000 widgets in year 2, but this time, because the purchasing power of BTC went up, buyers are only willing to pay 0.97 BTC per widget (i.e., 3% less than they did the year before, due to the 3% rise in purchasing power).  Now, the company only generates 9,700 BTC in revenues, and my payout is reduced to 1.94 BTC.

If the company sold 10,300 widgets (an increase of 3%), then they could "keep up" with the deflation and still meet the requisite 10,000 BTC in revenues.

Of course, this is a very simplistic example with many factors left out, but it should give you an idea of what I mean...

[Adrian-x]

....Of course, this is a very simplistic example with many factors left out, but it should give you an idea of what I mean...

Yes you are correct, but keep in mind there will be no deflation if there is no increase in production.  so it looks like a Zero-Sum Game - investment is still only viable if there is inflation - a shrinking in the economy.

[Dalkore]

  Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

Yes and where did these profits come from? (agreeing with you).    The extra 1 BTC you earned by getting my to see value in your service and price.   

You forget the element of time.  Imagine I owe a debt of 100 bitcoins, but there are only 50 bitcoins in the whole world. Can I pay off that debt? Yes. I just have to produce, earn bitcoins, and pay off over time. Each single coin can pay off n amount of coin debt over time.  Money moves around, it circulates.

This is true.   The other factor to keep in our thoughts the that Bitcoins are similar to gold in this regard, they are both wealth reserve assets.  Bitcoins being even more so because you can find more gold in the ground but not more BTC.  

This makes it well suited as a stateless savings vehicle which lends itself to more saving (hoarding) that you would see other instruments like currencies which have inflation baked in so you need to put the money to work or have its value eroded over time.  

[Adrian-x]

...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?

[ffe]

You are ignoring all the work that man did to acquire those coins. You're looking only at a slice of time and saying he is being a bad economic participant. Plug time into the equation, and you discover the benefit he created happened in the past, and that must be factored into your equation of whether he is "useless". His holding of 100,000 BTC represents the amount of production he provided to the world in the days prior. You should thank him, not scorn him.

And indeed, if he starts spending it, it will drive up prices, making goods more scarce and more difficult (costly) for others to acquire.

So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.  

Owning a fixed fraction of all coins -> his "reward" for the production he provided in the past will continue to grow as the economy grows. I guess here is where I differ in valuing what he did in the past. I think if he produced 10,000 pairs of shoes for those 100,000 coins, then, if he holds them for 10 years, he should only be able to buy 10,000 shoes with them.

You feel that if the economy grows, then in 10 years he should be able to buy 20,000 shoes - even though he never contributed an iota to the growth over the last 10 years.

[dissipate]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

HuH? A business making 2% a year is fine, because that would be 2% a year in a currency that is appreciating in value 3% a year. I invest 100 BTC and I make 2 BTC the first year. Let's say the interest doesn't compound so I make 2 BTC again the next year. That 2 BTC will be worth 3% more than the 2 BTC I made the year before. I don't see the problem.

That's only true if the company itself is also growing its productivity at a rate of 3%/year.

For example, assume the company sells 10,000 widgets in year 1 at 1 BTC each, thus generating 10,000 BTC in revenues, and assume my payout of that is 2 BTC.  The next year, assume that the same company sells the same 10,000 widgets in year 2, but this time, because the purchasing power of BTC went up, buyers are only willing to pay 0.97 BTC per widget (i.e., 3% less than they did the year before, due to the 3% rise in purchasing power).  Now, the company only generates 9,700 BTC in revenues, and my payout is reduced to 1.94 BTC.

If the company sold 10,300 widgets (an increase of 3%), then they could "keep up" with the deflation and still meet the requisite 10,000 BTC in revenues.

Of course, this is a very simplistic example with many factors left out, but it should give you an idea of what I mean...

I see what you are saying. In reality, however, only investments that were 'guaranteed' and paid out less than 3% would go out of business. Any business that could potentially reap returns above the 3% savings rate would still get investment, even if in some years it didn't have a 3% return. The reason of course is because of lack of information. Who knows which businesses will have above average returns and which ones will have below average returns?

[dissipate]

You are ignoring all the work that man did to acquire those coins. You're looking only at a slice of time and saying he is being a bad economic participant. Plug time into the equation, and you discover the benefit he created happened in the past, and that must be factored into your equation of whether he is "useless". His holding of 100,000 BTC represents the amount of production he provided to the world in the days prior. You should thank him, not scorn him.

And indeed, if he starts spending it, it will drive up prices, making goods more scarce and more difficult (costly) for others to acquire.

So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.  

Owning a fixed fraction of all coins -> his "reward" for the production he provided in the past will continue to grow as the economy grows. I guess here is where I differ in valuing what he did in the past. I think if he produced 10,000 pairs of shoes for those 100,000 coins, then, if he holds them for 10 years, he should only be able to buy 10,000 shoes with them.

You feel that if the economy grows, then in 10 years he should be able to buy 20,000 shoes - even though he never contributed an iota to the growth over the last 10 years.

He did contribute to the growth over the last 10 years though, by not pulling goods and services out of the economy. He earns a general interest rate of return. All those shoes he produced are in the economy, creating even more growth. Hence, by not spending his coins he is investing in the general economy.

[SgtSpike]

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

HuH? A business making 2% a year is fine, because that would be 2% a year in a currency that is appreciating in value 3% a year. I invest 100 BTC and I make 2 BTC the first year. Let's say the interest doesn't compound so I make 2 BTC again the next year. That 2 BTC will be worth 3% more than the 2 BTC I made the year before. I don't see the problem.

That's only true if the company itself is also growing its productivity at a rate of 3%/year.

For example, assume the company sells 10,000 widgets in year 1 at 1 BTC each, thus generating 10,000 BTC in revenues, and assume my payout of that is 2 BTC.  The next year, assume that the same company sells the same 10,000 widgets in year 2, but this time, because the purchasing power of BTC went up, buyers are only willing to pay 0.97 BTC per widget (i.e., 3% less than they did the year before, due to the 3% rise in purchasing power).  Now, the company only generates 9,700 BTC in revenues, and my payout is reduced to 1.94 BTC.

If the company sold 10,300 widgets (an increase of 3%), then they could "keep up" with the deflation and still meet the requisite 10,000 BTC in revenues.

Of course, this is a very simplistic example with many factors left out, but it should give you an idea of what I mean...

I see what you are saying. In reality, however, only investments that were 'guaranteed' and paid out less than 3% would go out of business. Any business that could potentially reap returns above the 3% savings rate would still get investment, even if in some years it didn't have a 3% return. The reason of course is because of lack of information. Who knows which businesses will have above average returns and which ones will have below average returns?

But every business investment is a risk.  No business investment can be truly guaranteed - only treasury bonds hold that status, and who knows how much longer that will be.

Bitcoins in the pocket, however, are risk free, as long as you can keep them safe.

My point is, there WILL BE less investment whenever purchasing power is increasing, however you look at it.  Even when looking at higher-yield investments, the potential earnings of those investments would have to be discounted by 3% (or whatever the deflationary rate is), then reevaluated vs the potential risk.  An investment with a potential to default of 50%, but potential earnings of 53% might be a good investment in inflationary USD, but a bad investment in deflationary BTC.  As the deflationary rate increases, the number of potentially good investments decreases, and the number of investments made decreases as a result.

[dissipate]

But every business investment is a risk.  No business investment can be truly guaranteed - only treasury bonds hold that status, and who knows how much longer that will be.

Bitcoins in the pocket, however, are risk free, as long as you can keep them safe.

My point is, there WILL BE less investment whenever purchasing power is increasing, however you look at it.  Even when looking at higher-yield investments, the potential earnings of those investments would have to be discounted by 3% (or whatever the deflationary rate is), then reevaluated vs the potential risk.  An investment with a potential to default of 50%, but potential earnings of 53% might be a good investment in inflationary USD, but a bad investment in deflationary BTC.  As the deflationary rate increases, the number of potentially good investments decreases, and the number of investments made decreases as a result.

It depends on what you call an 'investment'. In a deflationary economy with a fixed money supply, you are making an investment even if you are just saving your coins. Why? Because you are just investing in the general economy! Whatever you produced to earn the coins is out there creating more gains in the economy and you earn interest on that. So by saving you are just saying you want to make the average return. Many people might go for the average return, but many would want more than that, so they would invest in individual companies.  

[justusranvier]

What people who are worried deflation really want is passive income. The idea that they will have to work to earn all the value themselves just doesn't compute.

[Adrian-x]

...  As the deflationary rate increases, the number of potentially good investments decreases, and the number of investments made decreases as a result.

Correct, once the economy has reached it's optimal size, only new innovation causes price deflation (or economic growth)  the effect you describe ensures the economy scales appropriately to prevent boom bust bubbles. 

[2_Thumbs_Up]

By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.

In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.

That is the same as moving the decimal place. That does absolutely nothing except for perhaps arcane psychological effects.

Exactly. So why do people still believe that absolute prices are so important? If bitcoin grows to the rate where price decreases is predictable we could easily counter this by agreeing on a rate of inflation in the UI (moving the decimal). But as you notice, this is completely meaningless. Only relative prices matter. And that is why our current monetary inflation is bad. Newly created money is spent into the economy and changes some prices before others. In our current monetary system it changes interest rates first, and then house prices and other assets you can easily borrow against etc. It is this disruption that comes from an uneven change in prices that is bad and causes misallocation of resources. Evenly distributed inflation does nothing.

[Adrian-x]

What people who are worried deflation really want is passive income. The idea that they will have to work to earn all the value themselves just doesn't compute.

+1

Inflation is a transfer of wealth to spenders of new inflated money. (Producers/ entrepreneurs  lose - capitalists / bankers win) - you need constant growth to maintain equilibrium on a finite planet.
By contrast, deflation is providing direct benefit to the producers who invest in building wealth in the economy. (Producers/ entrepreneurs win - capitalists / bankers win) equilibrium is restored on a finite planet

[dissipate]

By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.

In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.

That is the same as moving the decimal place. That does absolutely nothing except for perhaps arcane psychological effects.

Exactly. So why do people still believe that absolute prices are so important? If bitcoin grows to the rate where price decreases is predictable we could easily counter this by agreeing on a rate of inflation in the UI (moving the decimal). But as you notice, this is completely meaningless. Only relative prices matter. And that is why our current monetary inflation is bad. Newly created money is spent into the economy and changes some prices before others. In our current monetary system it changes interest rates first, and then house prices and other assets you can easily borrow against etc. It is this disruption that comes from an uneven change in prices that is bad and causes misallocation of resources. Evenly distributed inflation does nothing.

That is true, to some extent the Bitcoin protocol punishes savers because it allows for inflation. If I save my BTC, I have to suffer from the inflation that is caused by the miners' block rewards. Others who spend Bitcoin a lot benefit more because they don't have to pay transaction fees, or the fees are lower due to the block reward subsidy. However, these effects are relatively negligible compared to other currencies. Also, this problem pales in comparison to the irregularities caused by Bitcoin's lack of liquidity and volatility.  

[Realpra]

What do you think about this perspective?

I guess what is important is the actual deflation rate and how long you can keep your dividends above that - it needs to be long enough to pay back your investment.

The funny thing is that deflation increases with sound investments in a BTC economy: If tomorrow we had twice the BTC economy, services would all earn half the amount of BTC, though those BTC would be worth twice as much also.

As a BTC investment though these services would likely loose though - basically deflating currency punishes over-spending/-investment by an economy as a whole.

(This is all assuming a somewhat constant average speed of money, which may not be correct - still looking at blockchain.info it seems to be)


An alternative I have been thinking about is if the deflating currency is unstable, in that case people might choose to panic hold a long term asset and later buy back into BTC. This would lessen their loss or increase their gain compared to dollars no matter what.

Of course that leaves a big question as to what happens when the currency is stable, but still growing at 4% in value per year.


Honestly BTC might be bad for investors in some ways, but lets see - if BTC is going crazy I guess people can still invest fiat, time and resources to get BTC.
This would spread BTC to more "needing hands" which would lower the rate once they traded for food or other essentials.

[SgtSpike]

...  As the deflationary rate increases, the number of potentially good investments decreases, and the number of investments made decreases as a result.

Correct, once the economy has reached it's optimal size, only new innovation causes price deflation (or economic growth)  the effect you describe ensures the economy scales appropriately to prevent boom bust bubbles. 

And I would argue that the economy hasn't reached its optimal size in that case - it is undersized, because of the deflationary nature of the currency discouraging investment to the point where it never reaches that optimal size.

[evoorhees]

...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?

Not sure what you mean. The value of the Bitcoin economy is created by the usefulness of the technology.

[evoorhees]

  Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

Yes and where did these profits come from? (agreeing with you).    The extra 1 BTC you earned by getting my to see value in your service and price.   

You forget the element of time.  Imagine I owe a debt of 100 bitcoins, but there are only 50 bitcoins in the whole world. Can I pay off that debt? Yes. I just have to produce, earn bitcoins, and pay off over time. Each single coin can pay off n amount of coin debt over time.  Money moves around, it circulates.

This is true.   The other factor to keep in our thoughts the that Bitcoins are similar to gold in this regard, they are both wealth reserve assets.  Bitcoins being even more so because you can find more gold in the ground but not more BTC.  

Ehhh it's probably more accurate to consider Bitcoin the same as gold in this regard. There is a set amount of gold on the earth, and there is a set amount of Bitcoins on the earth. Miners mine both of them, and it gets harder and harder to do.  Until humanity figures out at way to create new gold cost effectively, it is the same as Bitcoin in its supply and production characteristics.

The one difference between them is that the supply is Bitcoin is perfectly predictable, whereas the supply of gold varies somewhat year to year.

[evoorhees]

You are ignoring all the work that man did to acquire those coins. You're looking only at a slice of time and saying he is being a bad economic participant. Plug time into the equation, and you discover the benefit he created happened in the past, and that must be factored into your equation of whether he is "useless". His holding of 100,000 BTC represents the amount of production he provided to the world in the days prior. You should thank him, not scorn him.

And indeed, if he starts spending it, it will drive up prices, making goods more scarce and more difficult (costly) for others to acquire.

So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.  

Owning a fixed fraction of all coins -> his "reward" for the production he provided in the past will continue to grow as the economy grows. I guess here is where I differ in valuing what he did in the past. I think if he produced 10,000 pairs of shoes for those 100,000 coins, then, if he holds them for 10 years, he should only be able to buy 10,000 shoes with them.

You feel that if the economy grows, then in 10 years he should be able to buy 20,000 shoes - even though he never contributed an iota to the growth over the last 10 years.

Aha, but again you are ignoring the time-value of money. The producer produced in the past, and deferred his consumption. It is from his delay of consumption that he "earns" more consumption over time. By not consuming something on each day, he enables that thing to be consumed by another market participant - by opting out of consumption, he enables others to opt-in for that same consumption at that price. If he consumed, then he'd be "taking" resources from others (by bidding up the price of those resources upon his consumption of them).

Also remember that by saving that money, he is not taking one iota of wealth from anybody else. Further, everyone has the exact same opportunity to enjoy the benefits of the appreciating money. Anyone who defers his consumption will be rewarded in the exact same way, in proportion to the consumption deferred. There is no special privilege, other than the skills, work, and talents of the individual producer - and these things are bestowed by nature. If you're upset about the unfairness of nature, then take it up with nature  

[Roger_Murdock]

When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases.  That price change conveys information about, e.g., the growth rate of the overall economy.  In contrast, when you allow a central bank or other authority to set "stable prices" as a goal by printing money to counteract the natural process of deflation, you've effectively introduced price controls on money. Those price controls (like all price controls) interfere with the signalling and rationing functions that prices are supposed to perform.  Because printing money keeps the "price" of money artificially low, the effect is to encourage money's overconsumption and thus overconsumption in general. 

[Etlase2]

However, I don't see this as a bad thing... people borrow too much money, and it is, in large part, due to inflation being present in the money we use.  Inflation encourages overspending and too much debt.  Deflation encourages saving and too little debt. Maybe it is time we bring deflation into our lives and see what happens?

People borrow too much money because the real wage-earners have been titanically screwed in favor of the financiers for the last 3 decades or so. Unsurprisingly, this came about the same time that money became unbound from gold, and banks were allowed to print as much as they wanted from thin air. Saving money is punished when the banks don't need your money and just print their own. It isn't inflation that encourages overspending and too much debt, it is the central banking system that is designed to separate the classes even further that does so.

[Etlase2]

He did contribute to the growth over the last 10 years though, by not pulling goods and services out of the economy. He earns a general interest rate of return. All those shoes he produced are in the economy, creating even more growth. Hence, by not spending his coins he is investing in the general economy.

If anyone can actually link me to a non-bitcoinomist that has ever said anything remotely close to this, I will give them a cookie.

[evoorhees]

When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases.  That price change conveys information about, e.g., the growth rate of the overall economy.  In contrast, when you allow a central bank or other authority to set "stable prices" as a goal by printing money to counteract the natural process of deflation, you've effectively introduced price controls on money. Those price controls (like all price controls) interfere with the signalling and rationing functions that prices are supposed to perform.  Because printing money keeps the "price" of money artificially low, the effect is to encourage money's overconsumption and thus overconsumption in general. 

Beautifully said.  +1

[Adrian-x]

...  As the deflationary rate increases, the number of potentially good investments decreases, and the number of investments made decreases as a result.

Correct, once the economy has reached it's optimal size, only new innovation causes price deflation (or economic growth)  the effect you describe ensures the economy scales appropriately to prevent boom bust bubbles. 

And I would argue that the economy hasn't reached its optimal size in that case - it is undersized, because of the deflationary nature of the currency discouraging investment to the point where it never reaches that optimal size.

Not so, price deflation can only occur if the economy is growing, the cost of goods and services decrease because of over supply. Investment is not needed to stimulate more growth.

Conversely price inflation occurs when there is more demand than supply. In this case the economy needs to grow to satisfy demand. Saving is not rewarded and investment is rewarded - growth is encouraged.

(No central planing - only market driven auto-correction) 

[Realpra]

You know talking about economy I realized that deflating currencies might actually be more Keynesian than Keynesian policies today:

If the entire economy starts shrinking due to a massive crisis the normally deflating currency would either deflate less or even loose value. This would then create a system-wide incentive to invest in solving the crisis, leading to a wave of capital!

[Adrian-x]

...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?

Not sure what you mean. The value of the Bitcoin economy is created by the usefulness of the technology.

The size of the Bitcoin economy is small in comparison to the total value of all the Bitcoins.
IE. The total value of all goods and services in an economy = all the money  in the economy.
Now I have the current value of all the Bitcoins in circulation.

But if I convert all the Bitcoins to USD I could possibly buy more than 50 times the total goods and services in the Bitcoin economy.

Yes Bitcoin has a huge value - it is potential value.

It is the demand (current consumption) that is driving up the price of Bitcoin. (Causing price deflation in the Bitcoin economy)
Not the productivity of the economy that is causing price deflation in the Bitcoin economy at the moment.

At this point in time it looks to me that the wealth in the Bitcoin economy is created by "consumption" of Bitcoins , not the "production" of them.

If Bitcoin is the currency, the inherent deflation in the Bitcoin economy is sending the wrong signals to stimulate growth.

[annette786]

I just wanted to point out as "food for thought" that Bitcoins are a fixed issue currency.   This means is can not be expanded at this point beyond the initial 21 million projected coins.   I believe we have some people that have not really applied this to how they think about Bitcoins.   It is very interesting to see any long-term interest bearing arrangements that are marketed.   

If I agree to accept your coins and pay you an interest, that means regardless if my business idea I use creditors funds for is profitable, I still need to continually go into the market to not only cover principle but also the interest.  This becomes increasingly difficult with Bitcoins.  Like the title says, its a zero-sum game, to get Bitcoins, someone needs to sell Bitcoins.   As the supply gets more and more concentrated that will cause the nominal price of a Bitcoin to increase.    Even through Bitcoins are a useful exchange unit, I believe more people are actually "saving" Bitcoins as a store of wealth.   

This is why I question any long-term interest bearing arrangement or instrument that is not paying out in USD (or other currency) with the OPTION to get paid in BTC at the current spot price to remove the exchange risk from the person running the investment operations. 


What do you think about this perspective?
 

OP-- Haven't read all the posts... but you are simply referring to the time value of money.  Economics 101.  Bitcoin, cash, pez dispensers... it doesn't matter.  In BTCs case, if the exchange liquidity is tight, it might drive up interest rate.  The market will sort that out soon enough.

[justusranvier]

At the moment the act of lending is heavily subsidized by central banks. The mechanisms for doing that don't exist in Bitcoin so the subsidies also will not exist, so lending will be less common even without taking the deflation into account.

[Adrian-x]

When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases.  That price change conveys information about, e.g., the growth rate of the overall economy.  In contrast, when you allow a central bank or other authority to set "stable prices" as a goal by printing money to counteract the natural process of deflation, you've effectively introduced price controls on money. Those price controls (like all price controls) interfere with the signalling and rationing functions that prices are supposed to perform.  Because printing money keeps the "price" of money artificially low, the effect is to encourage money's overconsumption and thus overconsumption in general. 

Beautifully said.  +1

I agree with the sentiments expressed this is why I love the idea of a Bitcoin economy.
Please help me digest the paradox I see in the Bitcoin ecosystem:

When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases. 

The goods and services that must be exchanged to "buy" a particular amount of "Bitcoin" has increased about 100% in 3 months (by definition, deflation has occurred) 

That price change conveys information about, e.g., the growth rate of the overall economy.

The price change would signal that the Bitcoin economy has grown over 100% in 3 months.
* the Bitcoin economy by the definition of economy has not grown that much. (can't give evidence just a hunch I imagine Silk Road is over 50% of the economy)
** the cost of money by definition has increases.   

 The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.

The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.

As we have a functioning market I conclude the current cost of Bitcoin's is unsustainable and we should see inflation (or a big correction down) in the cost of Bitcoin's, a market reaction to the growth rate of the overall economy.

[Etlase2]

The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.

The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.

This is the nature of a currency-like commodity. The commodity is always going to interfere with the function of the currency.

[Dalkore]

The demand is mostly from people wanting a savings medium that isn't being debased and speculation of price appreciation based on other people realizing this and wanting to get in now to enjoy the speculation.   The more people save in Bitcoins, the tighter the supply becomes and the drives prices even more.  It is self-supporting, you will see sell-offs when people want to "lock-in" gains at certain prices points.  Most likely they will reinvest them later on once the corrections is completed and that will start the cycle again.  

Mining was the best investment initially because it gave you the lowest cost of acquiring Bitcoins.  With ASICs coming online, that will not be the case unless you took the gains from your previous mining investment and upgrade to keep up with the innovation of technology.  Now trading the markets or creating attractive businesses for people to invest in will be the next step in the cycle.

[Adrian-x]

The demand is mostly from people wanting a savings medium that isn't being debased and speculation of price appreciation based on other people realizing this and wanting to get in now to enjoy the speculation.   The more people save in Bitcoins, the tighter the supply becomes and the drives prices even more.  It is self-supporting, you will see sell-offs when people want to "lock-in" gains at certain prices points.  Most likely they will reinvest them later on once the corrections is completed and that will start the cycle again.

I Agree this is what is happening.[/quote]  

Mining was the best investment initially because it gave you the lowest cost of acquiring Bitcoins.  With ASICs coming online, that will not be the case unless you took the gains from your previous mining investment and upgrade to keep up with the innovation of technology.  Now trading the markets or creating attractive businesses for people to invest in will be the next step in the cycle.

Now trading the markets is all good and well if there is an economic base, if you are just trading up all the time demand will catch up with you and you will be holding a bunch of nothing if there is no economy to support it.

My concern is "creating attractive businesses for people to invest in will be the next step in the cycle" is discouraged by the nature of deflation. (you get your benefit by saving during deflation not investing) 


But what are people saving for is there is nothing in the economy to spend it on except the demand created by the traders who are always trading up.

[justusranvier]

But what are people saving for is there is nothing in the economy to spend it on except the demand created by the traders who are always trading up.

Traders don't care about economics or long-term viability - they just care about not being the last bagholder.

[Adrian-x]

The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.

The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.

This is the nature of a currency-like commodity. The commodity is always going to interfere with the function of the currency.

Sure if I use a commodity money eg. rice as money, it has 2 functions 1 as food (a comodity) and 2 as money easily traded for anything I want because of its inherent value.

The value of rice as money is somewhat susceptible to drought, the resulting supply and demand I understand ( and agree with you) will interfere with the function as a currency.(I see how this problem is managed by the market)  

the question is Bitcoin a commodity based money?

LOL....
Ok here is one way to resolve the problem.  The commodity that backs Bitcoin is the idea that a free market, frictionless, fixed currency economy is possible.

No that brings me back to a real commodity, can eat rise, I can only use Bitcoin to trade, and I can't trade without an economy. The result inflation to encourage investment.  

[Adrian-x]

But what are people saving for is there is nothing in the economy to spend it on except the demand created by the traders who are always trading up.

Traders don't care about economics or long-term viability - they just care about not being the last bagholder.

That is what I think too this is probably the bases for the ponzi criticisms that Bitcoin some times receives

[Etlase2]

I did say commodity-like, and gold is often considered a commodity, though it has very little practical use. The commodity of bitcoin is how much value can I make by not using it? Rather silly, if you ask me.

[Adrian-x]

I did say commodity-like, and gold is often considered a commodity, though it has very little practical use. The commodity of bitcoin is how much value can I make by not using it? Rather silly, if you ask me.

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 
Gold is a bit odd agreed, but if you make something out of gold it will never erode or tarnish there is value when you amortise the usefulness of a gold cup over eternity.

[justusranvier]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

[Dalkore]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

Absolutely speculative but here is the rub, they are right.  A non-debased savings medium (wealth reserve asset) is in high demand with all the quantitative easing (money printing) and now actual debasing (tungsten filled gold bars).  People are desperately trying to hold on to value.  They tried real estate, we saw how that turned out.   Tried food and energy futures, no one like $4 a loaf bread & gas.  This might be the next place where we see serious money enter the market and calculate the the Bitcoin is highly undervalued and not leveraged.

[bitcoinbear]

...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?

Bitcoins are not consumed, they are just traded form one person to another. The value of the bitcoin economy lies in the ability of the bitcoins to be transfered in trade for other goods or services.

[Adrian-x]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence.

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

Absolutely speculative but here is the rub, they are right.  A non-debased savings medium (wealth reserve asset) is in high demand with all the quantitative easing (money printing) and now actual debasing (tungsten filled gold bars).  People are desperately trying to hold on to value.  They tried real estate, we saw how that turned out.   Tried food and energy futures, no one like $4 a loaf bread & gas.  This might be the next place where we see serious money enter the market and calculate the the Bitcoin is highly undervalued and not leveraged.

Yes your are describing the benefits, the end goal, but without the economy base there is nothing to trade, just like I can't eat gold, I can't eat Bitcoin.

[Adrian-x]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

So is it correct to assume that if the speculative aspect grows disproportionately to the economy, the market will correct, or else it will fail to grow (as a result of deflation)?

[justusranvier]

So is it correct to assume that if the speculative aspect grows disproportionately to the economy, the market will correct, or else it will fail to grow (as a result of deflation)?

It's not really possible to predict one way or the other.

A dislocation somewhere in the non-Bitcoin economy could cause money to come flooding in (or out...) of Bitcoin. It's also possible for BitPay to sign up enough merchants and get sufficient trade flowing to backfill the missing commerce before there's a correction.

[finkleshnorts]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

[SgtSpike]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

I have 200 BTC to invest.  I have the option of holding on to it and gaining 3% in value each year, or the option of investing in another company and making 2% per year.

So, first year:
Holding: 200 BTC = 206 BTC (effective purchasing power compared to initial investment)
Investing: 4 BTC dividend

Second year:
Holding: 206 BTC = 212.18 BTC
Investing: 4 BTC dividend + 0.12 BTC effective purchasing power increase on prior balance + 4 BTC prior balance = 8.12 BTC

Third year:
Holding: 218.55 BTC
Investing: 4 BTC dividend + 0.24 BTC effective purchasing power increase on prior balance + 8.12 BTC prior balance = 12.36 BTC

So, you see how it never "catches up" compared to just holding the money?  Or, maybe it eventually will LONG into the future, as long as the dividends are saved and you let the purchasing power continuously compound on itself.

Now, if you don't like seeing the purchasing power increase in BTC (because your BTC balance doesn't increase, just the purchasing power of your BTC balance increases), then I'll format it differently to what would actually happen:

First year:
Holding: 200 BTC
Investing: 3.88 BTC

Second year:
Holding: 200 BTC
Investing: 3.88 BTC prior balance + 3.77 BTC new dividend = 7.65 BTC

Third year:
Holding: 200 BTC
Investing: 7.65 BTC prior balance + 3.66 BTC new dividend = 11.31 BTC

And the investment dividends would keep decreasing (the investment wouldn't make more money just because the purchasing power of the currency used increases), making it a LONG time before that 200 BTC was ever recovered.  Actually, doing a quick calculation, you'd never recover more than 133.33 BTC, making it a bad investment vs the 3%.  Which, I suppose that makes sense, given that 200 BTC * 2% / 3% = 133.33 BTC.

[Dalkore]

Very interesting.  I actually have a business I have been holding off launching because of the exchange rate fluctuations and at this point it has been more profitable to just sit on my reserves then expose myself to the exchange risks.   Nice points Sgt. Spike.

[Etlase2]

The malady of investing in Bitcoin is compounded by the fact that investing lowers the price of money. If more money is available, interest rates go down (and likely exchange rates), at least in a free market that isn't dominated by a central authority's funds. I have a thread sitting in this forum with 1 anecdotal reply and zero discussion on what Austrians actually think of this situation. Apparently head-in-sand bitcoinomics is much more comforting.

[SgtSpike]

The malady of investing in Bitcoin is compounded by the fact that investing lowers the price of money. If more money is available, interest rates go down (and likely exchange rates), at least in a free market that isn't dominated by a central authority's funds. I have a thread sitting in this forum with 1 anecdotal reply and zero discussion on what Austrians actually think of this situation. Apparently head-in-sand bitcoinomics is much more comforting.

Right, I agree.

I think where many people disagree is what the appropriate amount of investment is.  Obviously, investment based on inflation (at least the rate of inflation in the US) is bad, as it encourages too much debt.  When that debt-based bubble pops, it wrecks all kinds of havoc.  But I think investment based on deflation is bad as well - too few investments will be made, and not enough innovation or production to "keep up" in a global economy.  Sure, we'd still survive, but we wouldn't be as productive or innovative as we could be, and the economy would not be optimized because of it.  Lower monetary velocity and lower paychecks for, well, everyone would ultimately be the end result.

That said, I think Bitcoin (and thus, a deflationary currency) could still be the lesser of the two evils.  And since a perfectly stable currency is still impossible to create, perhaps the best solution to be found for now.

[Etlase2]

But inflation is an effect, not a cause. I mentioned somewhere else that it isn't very fair to compare bitcoin to fiat because bitcoin is free market and fiat is not. Fiat encourages too much debt as a matter of policy--new money goes to banks, and inexplicably governments take on debt. A free market currency with an unfixed supply would do no such thing. You are aware, Spike, that I've spent a lot of time trying to figure out how to do that.

[Roger_Murdock]

You have to keep in mind that the Bitcoin economy exists alongside (and is positively dwarfed by) the "regular" fiat-based economy.  If your concern is that a deflationary currency will result in "too little" investment, it doesn't seem fair to point to the relative lack of Bitcoin loans for investment as evidence to support your argument.  The purchasing power of bitcoins has increased enormously in the last four years.  And I expect that trend to continue because I expect (hope) that the currency will be massively successful.  That long-term increase in purchasing power has also coincided with very high volatility.  This is all to be expected.  Naturally bitcoins were worth essentially nothing when the system was new and untested.  And naturally they'll be worth a huge amount if and when Bitcoin becomes massively successful.  That implies some "growing pains" (although I haven't personally found the experience to be too painful).  So of course people are reluctant to borrow bitcoins for investment purposes.  Of course it makes more sense to borrow fiat and buy bitcoins if you're trying to raise capital for a new business that requires a bitcoin bankroll.  (The principal reason for borrowing BTC over fiat that I can see is if you want to short bitcoins.)  Again, the regular inflationary economy is the dominant economic force, and it's still encouraging too much investment and consumption.  Bitcoin is currently acting as a (still very tiny) safety valve that's encouraging some actual SAVINGS to partially offset the fiat economy's destructive tendencies.  I don't know about you, but I'm excited as hell about the deferred purchasing power I'm holding in my bitcoin wallet.  But if and when bitcoin becomes the dominant currency, it won't need to operate as a "safety valve" anymore.  The volatility and deflation (in terms of purchasing power) will be much slower and more predictable.  The real question is whether THAT economy will encourage the "correct" level of investment / savings.  I think it might.  But I don't have an economics degree. (I do, however, dabble in bitcoinomics.)

[justusranvier]

The real question is whether THAT economy will encourage the "correct" level of investment / savings.

The correct level of investment is the level which people choose in the absence of coercion.

[Roger_Murdock]

The real question is whether THAT economy will encourage the "correct" level of investment / savings.

The correct level of investment is the level which people choose in the absence of coercion.

No argument here. And I believe that in the absence of coercion people would choose a deflationary currency.  But it's still useful to show why that doesn't lead to "too little" investment from a market efficiency perspective.

[justusranvier]

But it's still useful to show why that doesn't lead to "too little" investment from a market efficiency perspective.

It's not possible to do that due to the economic calculation problem among other reasons.

"Efficient" can't stand alone as an adjective here. It must be defined with regards to a goal. If the goal is anything other than a free market then it's likely Bitcoin isn't the most efficient tool. It's probably not the most efficient system if the goal is a centrally-planned economy that efficiently funnels wealth to the central planners and their cronies.

This is why arguing about economic efficiency is a tar pit. Two people who don't agree on the destination will argue in circles forever about how to get there.

[Roger_Murdock]

But it's still useful to show why that doesn't lead to "too little" investment from a market efficiency perspective.

It's not possible to do that due to the economic calculation problem among other reasons.

"Efficient" can't stand alone as an adjective here. It must be defined with regards to a goal. If the goal is anything other than a free market then it's likely Bitcoin isn't the most efficient tool. It's probably not the most efficient system if the goal is a centrally-planned economy that efficiently funnels wealth to the central planners and their cronies.

This is why arguing about economic efficiency is a tar pit. Two people who don't agree on the destination will argue in circles forever about how to get there.

Really? I get that people have to agree on definitions, and that sometimes what you really have is a normative disagreement over goals. But I'm not sure that we have that problem here (although I'm honestly not sure). It sounds like some people think that a deflationary currency limits the economy's ability to grow. I think that's wrong, and that it actually maximizes long-term growth.

[szuetam]

But it's still useful to show why that doesn't lead to "too little" investment from a market efficiency perspective.

It's not possible to do that due to the economic calculation problem among other reasons.

"Efficient" can't stand alone as an adjective here. It must be defined with regards to a goal. If the goal is anything other than a free market then it's likely Bitcoin isn't the most efficient tool. It's probably not the most efficient system if the goal is a centrally-planned economy that efficiently funnels wealth to the central planners and their cronies.

This is why arguing about economic efficiency is a tar pit. Two people who don't agree on the destination will argue in circles forever about how to get there.

Really? I get that people have to agree on definitions, and that sometimes what you really have is a normative disagreement over goals. But I'm not sure that we have that problem here (although I'm honestly not sure). It sounds like some people think that a deflationary currency limits the economy's ability to grow. I think that's wrong, and that it actually maximizes long-term growth.

But why, could you explain?
I believe it, in my opinion it is caused by long term stabilization by not forcing people to spend money.

[SgtSpike]

The real question is whether THAT economy will encourage the "correct" level of investment / savings.

The correct level of investment is the level which people choose in the absence of coercion.

Yes, but a deflationary currency biases the users' choices.

Let's take it to the extreme.  Say that bitcoin deflates at a rate of 50%/year.  Now say that someone wants a loan.  Who is going to loan to them?  Anyone?  What would the interest rate of said loan be?  Why?

Similarly, say that USD inflates at a rate of 100%/year.  Now answer the same questions above.

Does that help you understand my position on this?  I completely agree, the correct level of investment is the level which people choose in the absence of coercion.  But currency inflation/deflation is also a form of coercion, in that it biases the users' decisions.

[Roger_Murdock]

Let's take it to the extreme.  Say that bitcoin deflates at a rate of 50%/year.  Now say that someone wants a loan.  Who is going to loan to them?  Anyone?  What would the interest rate of said loan be?  Why?

Ok, but now we're talking about the scenario where Bitcoin has become the dominant currency and is no longer acting as a "safety valve" to encourage savings. (BTW, did that analogy / explanation make sense?) If and when we get to that point, it's extremely unlikely that Bitcoin will still be experiencing that level of price deflation.  But if it did, that tells me the economy is growing extremely fast.  There MUST be some individual businesses and investments that are growing at an above-average rate.  It will still make sense to lend them money.  Here's a thought experiment I came up with a while back:

Imagine that it's Jan. 1, 2020, and you're an investor in an economy where the currency is deflating 10% a year.  You're considering making an investment in a programmable widget-maker.  The widget-maker costs 100 BTC (naturally everyone uses Bitcoins in 2020).  To simplify things, assume that the widget maker is disposable and can only be used once, after which it has zero value.  Also assume that all you have to do to use the widget maker is to input two choices, e.g. color and shape, and then wait exactly one year.  Let's say that you know that you can make a green circle widget that will be worth 105 BTC in present 2020 BTC.  So it sounds like a smart (and wealth-creating) investment, right? Except there's a problem. You also know that when you can actually sell the widget on Jan. 1, 2021, it will only sell for 94.5 BTC as a result of deflation. So you're better off just sitting on your 100 BTC, and you certainly won't borrow money to make the investment.  Is that a bad result for society? I don't think so.  First, it should be noted that if the widget maker were only capable of making green circle widgets, it wouldn't sell for 100 BTC because no one would pay that much (everyone else would make the same calculation you did). In that case, the price would be adjusted downwards until it made economic sense.  But if it DOES sell for 100 BTC, what does that tell us? It tells us that there's someone else (who's presumably also aware of deflation) who knows that they can make, e.g., a yellow square widget worth at least 111.11 BTC in 2020 BTC (meaning it will sell for at least 100 BTC in 2021).  So there's no problem.  The asset goes to its most productive user and doesn't just sit on a shelf.

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital.  

Krugman makes it sound like it's a bad thing that "just sitting on cash becomes an investment with a positive real yield." But I don't think that it is. And again, the only reason that sitting on cash can produce a positive real yield for some people is that many other people AREN'T just sitting on their cash.  There MUST be even higher-return investments occurring.  And it seems to me that "just sitting on cash" SHOULD return a positive real yield.  Deferring consumption is not something people typically like to do.  And people who do make that sacrifice ARE providing something of value to society by doing so.  By sitting on their cash, that cash is temporarily not competing with other cash for goods and services, thus keeping prices low for everyone else, including investors.

Now let's look at an inflation scenario.  Assume that it's Jan. 1, 2000 and the inflation rate is 10% (you're stuck using inflationary U.S. fiat because Bitcoin hasn't been invented). You're looking at a widget maker that costs 100 USD, but this widget maker is not programmable.  It only makes orange triangle widgets and once again, it takes a year to do so.  But these orange triangle widgets can only be sold for 95 bucks (in 2000 dollars).  But that means that on Jan. 1, 2001, when you can actually sell the widget, you'll be able to get $104.50 for it.  So buying the widget maker with your 100 bucks makes more sense than just sitting on the cash despite the fact that it's a wealth-destroying investment.  That seems bad.  Basically, it seems like inflation causes people to treat cash like a hot potato which will sometimes lead to economically-wasteful transactions.

[szuetam]

Imagine that it's Jan. 1, 2020, and you're an investor in an economy where the currency is deflating 10% a year.  You're considering making an investment in a programmable widget-maker.  The widget-maker costs 100 BTC (naturally everyone uses Bitcoins in 2020).  To simplify things, assume that the widget maker is disposable and can only be used once, after which it has zero value.  Also assume that all you have to do to use the widget maker is to input two choices, e.g. color and shape, and then wait exactly one year.  Let's say that you know that you can make a green circle widget that will be worth 105 BTC in present 2020 BTC.  So it sounds like a smart (and wealth-creating) investment, right? Except there's a problem. You also know that when you can actually sell the widget on Jan. 1, 2021, it will only sell for 94.5 BTC as a result of deflation. So you're better off just sitting on your 100 BTC, and you certainly won't borrow money to make the investment.  Is that a bad result for society? I don't think so.  First, it should be noted that if the widget maker were only capable of making green circle widgets, it wouldn't sell for 100 BTC because no one would pay that much (everyone else would make the same calculation you did). In that case, the price would be adjusted downwards until it made economic sense.  But if it DOES sell for 100 BTC, what does that tell us? It tells us that there's someone else (who's presumably also aware of deflation) who knows that they can make, e.g., a yellow square widget worth at least 111.11 BTC in 2020 BTC (meaning it will sell for at least 100 BTC in 2021).  So there's no problem.  The asset goes to its most productive user and doesn't just sit on a shelf.

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital.  

Krugman makes it sound like it's a bad thing that "just sitting on cash becomes an investment with a positive real yield." But I don't think that it is. And again, the only reason that sitting on cash can produce a positive real yield for some people is that many other people AREN'T just sitting on their cash.  There MUST be even higher-return investments occurring.  And it seems to me that "just sitting on cash" SHOULD return a positive real yield.  Deferring consumption is not something people typically like to do.  And people who do make that sacrifice ARE providing something of value to society by doing so.  By sitting on their cash, that cash is temporarily not competing with other cash for goods and services, thus keeping prices low for everyone else, including investors.

Now let's look at an inflation scenario.  Assume that it's Jan. 1, 2000 and the inflation rate is 10% (you're stuck using inflationary U.S. fiat because Bitcoin hasn't been invented). You're looking at a widget maker that costs 100 USD, but this widget maker is not programmable.  It only makes orange triangle widgets and once again, it takes a year to do so.  But these orange triangle widgets can only be sold for 95 bucks (in 2000 dollars).  But that means that on Jan. 1, 2001, when you can actually sell the widget, you'll be able to get $104.50 for it.  So buying the widget maker with your 100 bucks makes more sense than just sitting on the cash despite the fact that it's a wealth-destroying investment.  That seems bad.  Basically, it seems like inflation causes people to treat cash like a hot potato which will sometimes lead to economically-wasteful transactions.

Wow!
It's great explanation of what I was thinking even before I had touched with BTC or even before it was created.

I have only one thing to add.

Technology is making things easier and simpler so price should show that.
Producing single loaf of bread is much cheaper now than 10 years ago, but wait a moment why price is increasing?
Do you understand what I mean?

[kjj]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

[bitcoinbear]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

The big question here is wether the investment goes up in value or not. Say you loan btc out at 2%, then your math is correct, the investment income is added onto the btc value increase. But if the investment is in a physical good then the currency gain is not added into the investment gain. Whoever came up withthe scenario needs to be a bit more specific.

I know this is a slightly different situation than investing in a company, but consider the following: You have the opportunity to invest in gold using your bitcoins. Let's say you did some analysis and decided the price of bitcoins (in dollars) would go up 3%, and the price of gold (in dollars) would go up 2%. If you invest your bitcoins in gold, after a year the value in bitcoins would have gone down, since bitcoins were rising faster than gold.

The big problem with all this analysis is that the market will react. If the price of bitcoins is going to rise in the future that will get priced in, the more sure people are the price will rise then the faster it wil jump now. I just don't think we will ever have a steady, large deflation; there will always be some risk to holding onto the coins hoping the price will go up,  and so at some point even with deflation there will still be a higher net present value for investing than just holding the coins.

[SgtSpike]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

Ah, I was afraid I wasn't explaining it well enough.

To put it simply, the investment value does NOT rise with the 3% purchasing power increase.

If I buy a building for 10,000 BTC, and deflation hits at a rate of 3%/year, then my building is only worth 9,700 BTC the next year (and maybe the rental income was the 2%, so I'd have 9,900 BTC instead).  If I had held that BTC instead, I'd still have 10,000 BTC.

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

[Dalkore]

The malady of investing in Bitcoin is compounded by the fact that investing lowers the price of money. If more money is available, interest rates go down (and likely exchange rates), at least in a free market that isn't dominated by a central authority's funds. I have a thread sitting in this forum with 1 anecdotal reply and zero discussion on what Austrians actually think of this situation. Apparently head-in-sand bitcoinomics is much more comforting.

Actually investing by purchase in a fixed asset, increases its value based on the fact you have limited the supply if you intend to hold the asset as savings.

[bitcoinbear]

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

I just gave you an example in the post above. Give a loan, get back a larger amount of currency at the end of the loan.

[kjj]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

Ah, I was afraid I wasn't explaining it well enough.

To put it simply, the investment value does NOT rise with the 3% purchasing power increase.

If I buy a building for 10,000 BTC, and deflation hits at a rate of 3%/year, then my building is only worth 9,700 BTC the next year (and maybe the rental income was the 2%, so I'd have 9,900 BTC instead).  If I had held that BTC instead, I'd still have 10,000 BTC.

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

Ahh, ok.  You are saying that you'd end up with X*1.02³*0.97³, which is of course lower.  And no one would do that.

But that seems to be a straw man.  The numbers 2% and 3% aren't dictated by the market, you just made them up.  Saying that 2% < 3% is hardly controversial.  What you need to do is show that the market causes x% to be necessarily less than y%, where x% is the market rate of return on investments (beta) and y% is the rate of deflation.

No one would make the purchase that you are using as an example.  They would either purchase things with a yield higher than the deflation rate, or they would make loans where they get interest in addition to the return of the principle.  Or they would do nothing.

[SgtSpike]

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

I just gave you an example in the post above. Give a loan, get back a larger amount of currency at the end of the loan.

Sorry, yes, that is true.  Then though, the effective loan rate would be 5% for the loanee, which means, he may decide not to take it because the interest is too high.  This would result in lower amounts of lending than would be seen with a currency that doesn't deflate.

Ahh, ok.  You are saying that you'd end up with X*1.02³*0.97³, which is of course lower.  And no one would do that.

But that seems to be a straw man.  The numbers 2% and 3% aren't dictated by the market, you just made them up.  Saying that 2% < 3% is hardly controversial.  What you need to do is show that the market causes x% to be necessarily less than y%, where x% is the market rate of return on investments (beta) and y% is the rate of deflation.

No one would make the purchase that you are using as an example.  They would either purchase things with a yield higher than the deflation rate, or they would make loans where they get interest in addition to the return of the principle.  Or they would do nothing.

I am glad we finally agree that no one would make an investment made to return 2% in an economy where the currency is deflating at a rate of 3%.

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

[2_Thumbs_Up]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

Ah, I was afraid I wasn't explaining it well enough.

To put it simply, the investment value does NOT rise with the 3% purchasing power increase.

If I buy a building for 10,000 BTC, and deflation hits at a rate of 3%/year, then my building is only worth 9,700 BTC the next year (and maybe the rental income was the 2%, so I'd have 9,900 BTC instead).  If I had held that BTC instead, I'd still have 10,000 BTC.

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

But really, what good do you do to society by simply buying and holding assets (which is deteriorating by time btw)?

When austrians speak of investments they generally speak of value improvement. That is, you buy resources for X amount of bitcoins and then transform it into a more valuable form and sell it for Y amount of bitcoins. If you can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC then that's an investment. If you simply buy aluminum in the hopes of an increase in price you are speculating (which is totally fine sometimes, but that is the exception rather than the norm).

Simply holding resources will generally be a bad investment in a deflationary economy. And that is a good scenario. It means the resource hoarders will stay away from the market, and the price will keep going down to the point where those who actually see a way to improve on the resource find a viable way to do so. In your scenario where the rent is worth 200 BTC the price of the building simply wont be 10.000 BTC. Rational market agents will see that as a losing investment and stay away from the market. That means the price will go down to the point where it actually becomes viable to buy it and rent it out for 200 BTC (and most likely add some value by improvements to the asset).

The price of resources will go down by time in a deflationary economy. That means you actually need to improve on it if you want to profit. If you don't have an idea on how to do that you should stay out of the market rather than keeping other people out of it.

[Roger_Murdock]

SgtSpike, I'd be interested to hear your reaction to my previous comment.

[SgtSpike]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

Ah, I was afraid I wasn't explaining it well enough.

To put it simply, the investment value does NOT rise with the 3% purchasing power increase.

If I buy a building for 10,000 BTC, and deflation hits at a rate of 3%/year, then my building is only worth 9,700 BTC the next year (and maybe the rental income was the 2%, so I'd have 9,900 BTC instead).  If I had held that BTC instead, I'd still have 10,000 BTC.

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

But really, what good do you do to society by simply buying and holding assets (which is deteriorating by time btw)?

When austrians speak of investments they generally speak of value improvement. That is, you buy resources for X amount of bitcoins and then transform it into a more valuable form and sell it for Y amount of bitcoins. If you can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC then that's an investment. If you simply buy aluminum in the hopes of an increase in price you are speculating (which is totally fine sometimes, but that is the exception rather than the norm).

Simply holding resources will generally be a bad investment in a deflationary economy. And that is a good scenario. It means the resource hoarders will stay away from the market, and the price will keep going down to the point where those who actually see a way to improve on the resource find a viable way to do so. In your scenario where the rent is worth 200 BTC the price of the building simply wont be 10.000 BTC. Rational market agents will see that as a losing investment and stay away from the market. That means the price will go down to the point where it actually becomes viable to buy it and rent it out for 200 BTC (and most likely add some value by improvements to the asset).

The price of resources will go down by time in a deflationary economy. That means you actually need to improve on it if you want to profit. If you don't have an idea on how to do that you should stay out of the market rather than keeping other people out of it.

I'm not talking specifically about holding resources.  I am talking about every investment (besides loans) that a person could make.

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

SgtSpike, I'd be interested to hear your reaction to my previous comment.

Your post proves my point (unless I am missing something, which very well could be the case, as I am rather hurriedly looking over these posts).  The green widget is not produced or purchased, the green widget worker is not paid, and thus, less economic activity has been created.  This is the nature of a deflationary economy.

[2_Thumbs_Up]

Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

No, it's the complete opposite. The point of interest rates according to austrians is not only to allocate resources to profitable investments, but to the most profitable investments.

The reason interest rates (and loans) even arise in an economy is becuase different people have different abilities and different opportunities for profits.

Lets say you and I are working in different sectors of the economy and earn different rates of returns on our invested capital. You make 5% returns on your investment and I make a 3% return. Rather than to keep this status quo we would both be better of if I simply lent you money for an interest rate between 3-5%. The interest rate would reasonably be in the 4% range.

From my perspective, my original investment is not actually a profit, it's an opportunity cost, and the same applies to the society as a whole. I'm allocating my resources in a suboptimal way and unless I can reallocate them to compete with you, the optimal thing to do is to simply hand them over to you (or your competitor).

If I lend you the money, then you can expand your output, which will drive down the price of the goods you produce and lower your profit margin. At the same time the output of the goods I was producing will decrease, which will raise the price for my competitors and their profit margin. The end result will be that the profit of both your and mine sector of the economy will get closer and closer to the interest rate i.e. 4%.

Banking according to austrian theory is simply an arbitrage business. They solve the case where lender and borrower of funds don't know each other. They give me the opportunity to lend you funds even though I don't know you so I can stop hogging resources that I employ in a suboptimal way. The rate of return where all investments even out is what austrians refer to as the "natural rate of interest". No investments below this should take place in an optimal economy (and though we never reach this point we should strive to get as close as possible).

Main point is, resources are limited. All value improvements cannot take place at the same time. This means that resources cannot simply be allocated to all profitable investments, but rather need to be rationed to only the most profitable investments. The purpose of the interest rate is to solve this rationing process as good as possible.

[justusranvier]

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

Why is this a bad investment?

If the currency is gaining purchasing power over time this means the cost of aluminium is going down, the cost of labor (overhead) is going down and the price you can charge is also going down. You won't be able to charge as much for it next year but your costs will be lower and you'll still make the same amount of profit.

[2_Thumbs_Up]

SgtSpike, I'm in a bit of a hurry. I have one more point to make at mind right now but it will be at a later time. But I believe my last post adresses some of the things you took up though even if it's not a direct response.

[SgtSpike]

@Thumbs - I am certain I am no expect in economics, much less those of the Austrian variety.  But while I certainly agree that resources should be allocated to the most valuable investments, are you saying that investments with a risk-adjusted return of 3% would receive no funding?  And this should be normal?

It seems to me that, regardless of how you reallocate monies according to the valuation of various investments, it still does not answer the question of, what happens to those who choose to save instead of invest as a result of "gaining" 3% on just holding their money instead of investing it?  That's still a reduction in the overall investment pool, no matter how you divvy up the investments themselves.  Lower overall investment = lower economic activity.

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

Why is this a bad investment?

If the currency is gaining purchasing power over time this means the cost of aluminium is going down, the cost of labor (overhead) is going down and the price you can charge is also going down. You won't be able to charge as much for it next year but your costs will be lower and you'll still make the same amount of profit.

It's a bad investment because of the maths I wrote out before.  I could, at maximum, only recover 83.33% (2.5/3) of my original investment if the net profit margin stayed at 2.5%.  Yes, the expenses and revenues are going down, but I would NOT make the same amount of profit.  2.5% of 19.42 is less than 2.5% of 20.00, and it would keep going down each year.  I'd only ever make back 83.33% of my original investment at that rate.

[Adrian-x]

The correct level of investment is the level which people choose in the absence of coercion.

It is so refreshing to read some facts distilled down to their essence.

I would like to comment, inflation in the economy is a lack of investment by the members in that economy. This is a result of one's actions and the encouraged behaviour is causal not coercion, and likewise deflation in a free market is the result of oversupply the encouraged behaviour causal not coercion.

In contrast inflation as a result of a centrally controlled bank is coercion. 

[SgtSpike]

The correct level of investment is the level which people choose in the absence of coercion.

It is so refreshing to read some facts distilled down to their essence.

I would like to comment, inflation in the economy is a lack of investment by the members in that economy. This is a result of one's actions and the encouraged behaviour is causal not coercion, and likewise deflation in a free market is the result of oversupply the encouraged behaviour causal not coercion.

In contrast inflation as a result of a centrally controlled bank is coercion. 

Yes, I agree with you, but inflation or deflation of currency supply per capita artificially encourages or discourages the free market choices.

[kjj]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

[SgtSpike]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

[kjj]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

[Dalkore]

Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

No, it's the complete opposite. The point of interest rates according to austrians is not only to allocate resources to profitable investments, but to the most profitable investments.

The reason interest rates (and loans) even arise in an economy is becuase different people have different abilities and different opportunities for profits.

Lets say you and I are working in different sectors of the economy and earn different rates of returns on our invested capital. You make 5% returns on your investment and I make a 3% return. Rather than to keep this status quo we would both be better of if I simply lent you money for an interest rate between 3-5%. The interest rate would reasonably be in the 4% range.

From my perspective, my original investment is not actually a profit, it's an opportunity cost, and the same applies to the society as a whole. I'm allocating my resources in a suboptimal way and unless I can reallocate them to compete with you, the optimal thing to do is to simply hand them over to you (or your competitor).

If I lend you the money, then you can expand your output, which will drive down the price of the goods you produce and lower your profit margin. At the same time the output of the goods I was producing will decrease, which will raise the price for my competitors and their profit margin. The end result will be that the profit of both your and mine sector of the economy will get closer and closer to the interest rate i.e. 4%.

Banking according to austrian theory is simply an arbitrage business. They solve the case where lender and borrower of funds don't know each other. They give me the opportunity to lend you funds even though I don't know you so I can stop hogging resources that I employ in a suboptimal way. The rate of return where all investments even out is what austrians refer to as the "natural rate of interest". No investments below this should take place in an optimal economy (and though we never reach this point we should strive to get as close as possible).

Main point is, resources are limited. All value improvements cannot take place at the same time. This means that resources cannot simply be allocated to all profitable investments, but rather need to be rationed to only the most profitable investments. The purpose of the interest rate is to solve this rationing process as good as possible.

Are we debating ideologies (Austrian theory) or actualities?   I am trying to figure out if we are dancing around this distinction?

[Adrian-x]

The correct level of investment is the level which people choose in the absence of coercion.

It is so refreshing to read some facts distilled down to their essence.

I would like to comment, inflation in the economy is a lack of investment by the members in that economy. This is a result of one's actions and the encouraged behaviour is causal not coercion, and likewise deflation in a free market is the result of oversupply the encouraged behaviour causal not coercion.

In contrast inflation as a result of a centrally controlled bank is coercion. 

Yes, I agree with you, but inflation or deflation of currency supply per capita artificially encourages or discourages the free market choices.

Yes I agree here too, and paradoxically even limiting the supply to 21M sometime in the future seems to have a coercive effect in free market choices.

[SgtSpike]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

Well, my argument is that the optimal amount of investment is made at the point where a currency neither deflates nor inflates.  An inflationary currency encourages too much investment - that is, investment in opportunities that lose money.  Over spending/over lending is also a problem, and ends up causing the sort of economic trouble that we see in the world economy today.

I am adding real and nominal interest rates together because both of them need to be considered from an investor standpoint.  Please provide more specific direction if you still believe I am confusing the two.  Show the maths. 

[kjj]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

Well, my argument is that the optimal amount of investment is made at the point where a currency neither deflates nor inflates.  An inflationary currency encourages too much investment - that is, investment in opportunities that lose money.  Over spending/over lending is also a problem, and ends up causing the sort of economic trouble that we see in the world economy today.

I am adding real and nominal interest rates together because both of them need to be considered from an investor standpoint.  Please provide more specific direction if you still believe I am confusing the two.  Show the maths. 

What math?  Just ignore the nominal return and concentrate on the real return.

[SgtSpike]

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

You are confusing the real return with the nominal return.

To see it, just continue your idea.  If 3% deflation means that investments with a nominal return of less than 3% are pointless, and 0% inflation/deflation means that any nominal return is good, then in 3% inflation, any investment with a nominal loss of less than 3% is good, right?  Didn't Zimbabwe recently inflate itself into prosperity by inflating enough to include these otherwise unprofitable activities in their economy?

Yes - it would be better to invest in something that loses 2%/year than to hold fiat that inflates at 3% per year.  I do not see how this conflicts with my idea.  But it does go to prove my point that an inflationary currency can encourage bad investments.

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Worked for Zimbabwe, right?

P.S.  You are still confusing real and nominal.

Well, my argument is that the optimal amount of investment is made at the point where a currency neither deflates nor inflates.  An inflationary currency encourages too much investment - that is, investment in opportunities that lose money.  Over spending/over lending is also a problem, and ends up causing the sort of economic trouble that we see in the world economy today.

I am adding real and nominal interest rates together because both of them need to be considered from an investor standpoint.  Please provide more specific direction if you still believe I am confusing the two.  Show the maths. 

What math?  Just ignore the nominal return and concentrate on the real return.

Why?  The investor needs to take both returns into account to make a proper investment decision.  And when we're talking about economic growth, a large part of it is reliant on how investors invest.  Both rates are completely relevant to this discussion.

[Roger_Murdock]

SgtSpike, I'd be interested to hear your reaction to my previous comment.

Your post proves my point (unless I am missing something, which very well could be the case, as I am rather hurriedly looking over these posts).  The green widget is not produced or purchased, the green widget worker is not paid, and thus, less economic activity has been created.  This is the nature of a deflationary economy.

I think it proves the opposite point.  Take another look at the first hypothetical:

Imagine that it's Jan. 1, 2020, and you're an investor in an economy where the currency is deflating 10% a year.  You're considering making an investment in a programmable widget-maker.  The widget-maker costs 100 BTC (naturally everyone uses Bitcoins in 2020).  To simplify things, assume that the widget maker is disposable and can only be used once, after which it has zero value.  Also assume that all you have to do to use the widget maker is to input two choices, e.g. color and shape, and then wait exactly one year.  Let's say that you know that you can make a green circle widget that will be worth 105 BTC in present 2020 BTC.  So it sounds like a smart (and wealth-creating) investment, right? Except there's a problem. You also know that when you can actually sell the widget on Jan. 1, 2021, it will only sell for 94.5 BTC as a result of deflation. So you're better off just sitting on your 100 BTC, and you certainly won't borrow money to make the investment.  Is that a bad result for society? I don't think so.  First, it should be noted that if the widget maker were only capable of making green circle widgets, it wouldn't sell for 100 BTC because no one would pay that much (everyone else would make the same calculation you did). In that case, the price would be adjusted downwards until it made economic sense.  But if it DOES sell for 100 BTC, what does that tell us? It tells us that there's someone else (who's presumably also aware of deflation) who knows that they can make, e.g., a yellow square widget worth at least 111.11 BTC in 2020 BTC (meaning it will sell for at least 100 BTC in 2021).  So there's no problem.  The asset goes to its most productive user and doesn't just sit on a shelf.

So either the green circle widget DOES get made (because the price of the widget maker is adjusted) or an even more valuable yellow square widget gets made instead.  Now, it might be objected that my hypothetical assumes that the widget maker already exists.  And so you might ask, well what if it costs 100 BTC to build a green circle widget maker?  Wouldn't the widget maker not get made in that case, and wouldn't that be bad?  I don't think so.  To make things simple, assume that a widget maker can be built by buying two components, A and B, and fitting them together.  (And that this only takes two seconds such that there are no real labor costs.)  Assume that each of those components cost 50 BTC.  If we use the same assumptions as before about the deflation rate, the year-long manufacturing time, and the present value of a green circle widget, that investment will not make sense.  But I still don't see a problem, and the analysis seems pretty similar to the previous one.  If the prices of components A and B are set at 50 BTC and the market will bear that price, there MUST be some other more valuable use to which they can be put (e.g., maybe they can also be used as inputs in a yellow square widget maker).  If making a green circle widget maker is their highest use, the market won't bear the 50 BTC price, and it would have to be adjusted accordingly.  So the bottom line is I'm just not seeing how deflation interferes with an efficient allocation of capital and other resources.  

On the other hand, when you simply print new money and distribute it unevenly (certain people get it first), those people are able to consume real additional resources without having produced anything of value. THAT seems like something that would limit economic growth. And that's true even if you're only printing enough new money to offset the natural process of deflation and maintain "stable prices."

[SgtSpike]

If making a green circle widget maker is their highest use, the market won't bear the 50 BTC price, and it would have to be adjusted accordingly.  So the bottom line is I'm just not seeing how deflation interferes with an efficient allocation of capital and other resources. 

You're only looking at a single point in time though, that's the problem.  Investments are weighed in how long they take to pay off - the Return On Investment.  Your example is bad, because there IS no long term investment.  All a person is doing is assembling two parts, and then immediately selling it.  There's no overhead, no buildings to purchase and depreciate, no tools needed to manufacture these items, nothing.  So if he buys the parts for 99.5 BTC, puts them together on his kitchen counter, and resells the completed version for 100 BTC, he'll still turn a profit every time.

Now, say I want to invest in a company that creates green widgets.  I want to buy a building for 100,000 BTC, and install an assembly line for 10,000, buying 100 of the green-widget-making-machine.  My overall capital investment is then 110,000 BTC.

Assume the deflation rate is 5%.

Assume my return on investment after depreciation of my building and manufacturing equipment is 3%.

When will I recover the 110,000 BTC I invested?

I NEVER would.  I would only recover 3/5 of it, maxing out at 69,300 BTC return on my investment.

Turning it around, if I had bought the building and equipment for $1.1M, and assumed an inflationary rate of 5%, when would I recover what I had invested?

I would recover it after just over 20 years.

So, if I had the option of investing in a green widget manufacturing facility expected to generate a 3% ROI in a 5% deflationary economy, I absolutely wouldn't do it.  If I had the same investment option in a 5% inflationary economy, I absolutely would do it.

I feel like I am just repeating myself here, but I'm not sure what else to do.  You aren't separating capital investments from variable costs in your analysis.  Your take on variable costs is exactly right - variable costs will change with the economic environment.  But capital expenditures, spent with the expectation of recovering those costs down the road, is where a deflationary or inflationary economy will affect investment decisions.

[Grinder]

You say that an economy based on a deflating currency necessarily rejects some investments, and is thus less productive.  An economy that is neither inflating nor deflating is also rejecting some investments, those with a negative nominal return that would be possible under inflation.  And an inflating economy is smaller than one that is inflating a lot.  And so on.  Clearly, we need an infinite rate of inflation to allow the maximum possible range of economic activities.

Hyperinflation causes a lot of problems which are basically not there with a low inflation of 2-3%. With hyperinflation you are losing value extremely fast, so buying basically anything is better than holding on to them. With normal inflation the maximum loss you can get by spending more time on decisions is much lower, and you can usually get interest by putting the money in a bank. This reduces the loss or even gives a small profit. This doesn't work in hyperinflation, because the uncertainty and loss of confidence in the currency it creates means the banks can't get a good enough interest rate on their loans.

[Roger_Murdock]

You're only looking at a single point in time though, that's the problem.  Investments are weighed in how long they take to pay off - the Return On Investment.  Your example is bad, because there IS no long term investment.  All a person is doing is assembling two parts, and then immediately selling it.  There's no overhead, no buildings to purchase and depreciate, no tools needed to manufacture these items, nothing.  So if he buys the parts for 99.5 BTC, puts them together on his kitchen counter, and resells the completed version for 100 BTC, he'll still turn a profit every time.

Now, say I want to invest in a company that creates green widgets.  I want to buy a building for 100,000 BTC, and install an assembly line for 10,000, buying 100 of the green-widget-making-machine.  My overall capital investment is then 110,000 BTC.

Assume the deflation rate is 5%.

Assume my return on investment after depreciation of my building and manufacturing equipment is 3%.

When will I recover the 110,000 BTC I invested?

I NEVER would.  I would only recover 3/5 of it, maxing out at 69,300 BTC return on my investment.

Well, my example was certainly simple, but I don't see why switching to a longer-term investment changes anything.  But sure, replace the single-use widget maker with a green circle widget-making factory that can produce X units every year for Y years.  Would someone invest the resources required to build that factory in a deflationary economy? Only if it would make a profit after factoring in deflation, and if it wouldn't make a profit after factoring in deflation, that tells me that there's an even better investment (yellow square widget factory?) where those resources should go instead. Otherwise, those resources would not be bid up to their current prices.  What am I missing?

You're concerned that it doesn't make sense to make an investment that earns a 3% return when deflation is 5%.  But why doesn't the following answer that objection?

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital.  

I'd also be curious to hear what you thought of the following:

 
On the other hand, when you simply print new money and distribute it unevenly (certain people get it first), those people are able to consume real additional resources without having produced anything of value. THAT seems like something that would limit economic growth. And that's true even if you're only printing enough new money to offset the natural process of deflation and maintain "stable prices."

Thanks!

[2_Thumbs_Up]

@Thumbs - I am certain I am no expect in economics, much less those of the Austrian variety.  But while I certainly agree that resources should be allocated to the most valuable investments, are you saying that investments with a risk-adjusted return of 3% would receive no funding?  And this should be normal?

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.

It seems to me that, regardless of how you reallocate monies according to the valuation of various investments, it still does not answer the question of, what happens to those who choose to save instead of invest as a result of "gaining" 3% on just holding their money instead of investing it?  That's still a reduction in the overall investment pool, no matter how you divvy up the investments themselves.  Lower overall investment = lower economic activity.

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.

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

Why is this a bad investment?

If the currency is gaining purchasing power over time this means the cost of aluminium is going down, the cost of labor (overhead) is going down and the price you can charge is also going down. You won't be able to charge as much for it next year but your costs will be lower and you'll still make the same amount of profit.

It's a bad investment because of the maths I wrote out before.  I could, at maximum, only recover 83.33% (2.5/3) of my original investment if the net profit margin stayed at 2.5%.  Yes, the expenses and revenues are going down, but I would NOT make the same amount of profit.  2.5% of 19.42 is less than 2.5% of 20.00, and it would keep going down each year.  I'd only ever make back 83.33% of my original investment at that rate.

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.

You're only looking at a single point in time though, that's the problem.  Investments are weighed in how long they take to pay off - the Return On Investment.  Your example is bad, because there IS no long term investment.  All a person is doing is assembling two parts, and then immediately selling it.  There's no overhead, no buildings to purchase and depreciate, no tools needed to manufacture these items, nothing.  So if he buys the parts for 99.5 BTC, puts them together on his kitchen counter, and resells the completed version for 100 BTC, he'll still turn a profit every time.

Now, say I want to invest in a company that creates green widgets.  I want to buy a building for 100,000 BTC, and install an assembly line for 10,000, buying 100 of the green-widget-making-machine.  My overall capital investment is then 110,000 BTC.

Assume the deflation rate is 5%.

Assume my return on investment after depreciation of my building and manufacturing equipment is 3%.

When will I recover the 110,000 BTC I invested?

I NEVER would.  I would only recover 3/5 of it, maxing out at 69,300 BTC return on my investment.

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.

Are we debating ideologies (Austrian theory) or actualities?   I am trying to figure out if we are dancing around this distinction?

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

[Realpra]

Now, say I want to invest in a company that creates green widgets.  I want to buy a building for 100,000 BTC, and install an assembly line for 10,000, buying 100 of the green-widget-making-machine.  My overall capital investment is then 110,000 BTC.

Assume the deflation rate is 5%.

The world real GDP is 3.6% right now:
http://www.indexmundi.com/world/gdp_real_growth_rate.html

I think a mature Bitcoin economy would be deflating about the same on average. 5% may happen, but not sustained over longer time I think.

Assume my return on investment after depreciation of my building and manufacturing equipment is 3%.

In real terms: about 33 years to pay back the investment. (1/0.03)

Considering you are dealing with machines and buildings they will probably not last longer than 20-30 years without heavy NEW investment.

Once the 33 years were over you would only be back at square one and it would take another 33 years to double your funds.

Considering that you would either be dead of age or your machines broken down from wear and tear your investment would quite simply be a bad one in terms of helping you/the economy/the world in REAL terms.

Turning it around, if I had bought the building and equipment for $1.1M, and assumed an inflationary rate of 5%, when would I recover what I had invested?

I would recover it after just over 20 years.

Actually your products would be priced at the rate of inflation, so you should make 5% inflation + 3% = 8%.

Your investment would be "paid back" in just 12.5 years and you would make profit from there.

However you only made money from the factory as an inflation hedge and society lost valuable resources due to this inflation induced over consumption.
This is why inflation is dangerous.

So, if I had the option of investing in a green widget manufacturing facility expected to generate a 3% ROI in a 5% deflationary economy, I absolutely wouldn't do it.  If I had the same investment option in a 5% inflationary economy, I absolutely would do it.

A valid concern. Lets assume the closer to real life 3.6% deflation. As we agree deflation slows the economy a bit by killing at least bad investments so make that 3%. (while saving important natural resources mind you)

What would it take to make something viable?
Well in simple terms it would have to be better than the world average, which kind of makes sense.

After all machine/building replacement costs, running costs and other costs the investment should make about 4% at very low risk in real terms. Its slightly high I will admit that, but it can be done.

[Grinder]

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital.  

Can you really not see the problem in an economy where, if you can't invest in a way that beats the average productivity, you are better off not investing (and thus not producing anything) at all?

[Realpra]

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital.  

Can you really not see the problem in an economy where, if you can't invest in a way that beats the average productivity, you are better off not investing (and thus not producing anything) at all?

It's self-correcting:

1. Deflation is high at ~3%.
2. Nobody invests, but sit on their money.
3. Economy shrinks,  deflation goes down or becomes negative.
4. Everybody invests.
5. Economy shoots back to ~3%.

(A fun thing here is that investing in step 2 when your money is valuable and collecting returns when money is cheap in step 3/4 would be very profitable )

And repeat. Net world growth becomes ~1.5% or more, which I actually think is close to the average over the human race's history.

The true mystery is why anyone would spend or sell their BTC today!

[Grinder]

It's self-correcting:

You are still ignoring the fact that at any point in time, anyone who can't beat the average would be better off not investing. Your cycle would only work if nobody else was smart enough to predict point 5 after point 4, but really, it's not hard at all. Thus, those not expecting to beat the average that occurs at point 5 would not invest at point 4, but just wait and benefit from the deflation other people's investments would cause. This makes deflation a tax which the people who invest have to pay to those who don't invest, in just the same way as inflation is a tax on those who have money to those who loan money.

[2_Thumbs_Up]

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital.  

Can you really not see the problem in an economy where, if you can't invest in a way that beats the average productivity, you are better off not investing (and thus not producing anything) at all?

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?

[Grinder]

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?

Sorry, I thought it was common knowledge. The problem with this is, it's not possible for everybody to do better than average. Also, the alternative is not to lend money to others, but to just keep them in the safe or whatever.

[Realpra]

Thus, those not expecting to beat the average that occurs at point 5 would not invest at point 4, but just wait and benefit from the deflation other people's investments would cause.

Yeah its not entirely fair, but on average the economy as a whole would be self correcting.

Some might benefit unjustly, but the economy would be less wasteful than today and would still invest in viable things.

We deflationists never said it was going to be the perfect market, just no "death spirals". Perfect money would likely be money with constant value, but there is no way to achieve that. Sure you could "move the comma" for all bitcoins, but it wouldn't do anything.

As I see it inflation is a tax on the productive while deflation is a reward to producers that then save - that saves natural resources.
Deflation can't be a tax on investors because they can simply hold their money or invest in something better.

If an investor makes a mistake in an deflationary economy and makes 2% instead of the target 3%, he is still 2% richer in real terms. Why not see deflation as a buffer?

[Grinder]

As I see it inflation is a tax on the productive while deflation is a reward to producers that then save - that saves natural resources.
Deflation can't be a tax on investors because they can simply hold their money or invest in something better.

Well, unfortunately it is, for the reasons I explained.

If an investor makes a mistake in an deflationary economy and makes 2% instead of the target 3%, he is still 2% richer in real terms. Why not see deflation as a buffer?

Because it's not. As soon as your money value is no longer in the currency, the deflation does not protect you from loss.

[2_Thumbs_Up]

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?

Sorry, I thought it was common knowledge. The problem with this is, it's not possible for everybody to do better than average.

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:

Also, the alternative is not to lend money to others, but to just keep them in the safe or whatever.

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.

[Roger_Murdock]

More generally, what does a 10% deflation rate tell us assuming a constant money supply?  I'm perhaps oversimplifying, but basically it tells us that the economy is growing at around 11.11% a year (with 10% deflation, the purchasing power of every BTC increases 11.11% each year).  So you now have the same amount of money chasing more goods.  If the economy is growing that rapidly, that tells you that there must be lots of investment opportunities with a return of at least 11.11%.  Basically, that's the number to beat.  If you're looking at an investment opportunity with a measly 5% return, deflation is telling you not to waste your time because there are higher and better uses of that capital.  

Can you really not see the problem in an economy where, if you can't invest in a way that beats the average productivity, you are better off not investing (and thus not producing anything) at all?

Not really. If you build a green circle widget factory, those resources can no longer be used to build a yellow square widget factory.  That investment should be disincentivized by losing money.  And you're right, not everyone can do better than average.  Investors who continually make below-average investments will lose money.  But that's a good thing, because they've shown that they're not very good at allocating capital.  And they can always just save their money, which is effectively a can't-lose (low risk but relatively low reward) investment in the overall economy.  

[Grinder]

If I make 2% in my business and your 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.

But then this is not the issue. I don't need your money for my 5% business, and you don't need to lend them to me to profit from the deflation my production causes. The only effect of you stopping production is that you earn slightly more, but because I did some business directly or indirectly with you, I will earn slightly less, and nobody will benefit from the production you used to have. Total production is reduced, society loses.

[2_Thumbs_Up]

If I make 2% in my business and your 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.

But then this is not the issue. I don't need your money for my 5% business, and you don't need to lend them to me to profit from the deflation my production causes. The only effect of you stopping production is that you earn slightly more, but because I did some business directly or indirectly with you, I will earn slightly less, and nobody will benefit from the production you used to have. Total production is reduced, society loses.

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.

Also, the alternative is not to lend money to others, but to just keep them in the safe or whatever.

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.

[Grinder]

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.

Microsoft is usually above average, but more money would not give nearly the same profit margin, and maybe even a loss. This is the case with mosts mature businesses.

So please explain why the above loan of 3.5% is impossible.

I don't know why you think I've said it's impossible. It's just not necessary to lend the money to anyone to get the profit, so it's better to not lending them away and that way avoid the risk of not getting them back.

[Etlase2]

I don't know why you think I've said it's impossible. It's just not necessary to lend the money to anyone to get the profit, so it's better to not lending them away and that way avoid the risk of not getting them back.

Not to mention the risk goes up year after year whereas the opposite is the case in an inflationary economy. Or otherwise the loan has to be very front-loaded, in which case there is very little benefit to taking a loan at all.

[2_Thumbs_Up]

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.

Microsoft is usually above average, but more money would not give nearly the same profit margin, and maybe even a loss. This is the case with mosts mature businesses.

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?

So please explain why the above loan of 3.5% is impossible.

I don't know why you think I've said it's impossible. It's just not necessary to lend the money to anyone to get the profit, so it's better to not lending them away and that way avoid the risk of not getting them back.

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.

[Etlase2]

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),

whoa whoa whoa, aren't we discussing real returns here? Because if deflation is assumed to be 3%, I assume interest rates are actually 0.5%. This I think was what Spike was also referring to with interest @ 2% is worse than deflation @ 3%. There is not going to be anywhere NEAR 3.5% in a 3% deflation economy. Fuck, you'd be hard pressed get that in an inflationary economy!

[2_Thumbs_Up]

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),

whoa whoa whoa, aren't we discussing real returns here? Because if deflation is assumed to be 3%, I assume interest rates are actually 0.5%. This I think was what Spike was also referring to with interest @ 2% is worse than deflation @ 3%. There is not going to be anywhere NEAR 3.5% ROIs in a 3% deflation economy. Fuck, you'd be hard pressed get that in an inflationary economy!

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.

[Etlase2]

But we can't assume whatever rates we want. It seems so simple to throw out figures like "this business earns 5%" or whatever, but the reality is not so simple in nominal terms.

If deflation acts faster than the interest rate, businesses are prone to go bankrupt, and you are prone to make more money by hoarding. Real growth in the economy as a whole when businesses borrow money makes businesses prone to go bankrupt. In real terms, loans get harder and harder to pay back.

Front-heavy loans don't do businesses any favors. They need time to go through the stages of production. The amount of super-credit-worthy people/businesses is not infinite, and it will be very difficult for banks to find people that are low-risk in a deflationary economy. Risk-adjusted means you just aren't going to find any decent positive returns, regardless of what numbers you plug in that don't fit in reality. You might be looking at 0.1% instead of 0.5%. Is 0.1% worth the risk of your non-FDIC backed bank going bankrupt? Is 0.5% even? 140 years to double your nominal investment?

God forbid the deflation rate go above the "expected" 3% or whatever making it even harder for businesses to pay back their loans and making it more likely that you lose all your money rather than just some of the real value of your money in the case of higher-than-expected inflation.

[justusranvier]

But we can't assume whatever rates we want. It seems so simple to throw out figures like "this business earns 5%" or whatever, but the reality is not so simple in nominal terms.

If deflation acts faster than the interest rate, businesses are prone to go bankrupt, and you are prone to make more money by hoarding. Real growth in the economy as a whole when businesses borrow money makes businesses prone to go bankrupt. In real terms, loans get harder and harder to pay back.

Front-heavy loans don't do businesses any favors. They need time to go through the stages of production. The amount of super-credit-worthy people/businesses is not infinite, and it will be very difficult for banks to find people that are low-risk in a deflationary economy. Risk-adjusted means you just aren't going to find any decent positive returns, regardless of what numbers you plug in that don't fit in reality. You might be looking at 0.1% instead of 0.5%. Is 0.1% worth the risk of your non-FDIC backed bank going bankrupt? Is 0.5% even? 140 years to double your nominal investment?

God forbid the deflation rate go above the "expected" 3% or whatever making it even harder for businesses to pay back their loans and making it more likely that you lose all your money rather than just some of the real value of your money in the case of higher-than-expected inflation.

Businesses don't inherently need loans to function. A profitable business can fund expansion via its profits and avoid getting into this trap in the first place.

Right now businesses take loans for a lot of reasons, not the least of which is that government and fed policies heavily subsidize lending and have turned the entire financial system into a giant ponzi scheme.

The problems you are describing would be real if a businesses in a Bitcoin-based economy behaved like they do in a dollar economy. It's false to assume that the way things work now is the way things will always work after a paragidm shift.

[2_Thumbs_Up]

But we can't assume whatever rates we want. It seems so simple to throw out figures like "this business earns 5%" or whatever, but the reality is not so simple in nominal terms.

If deflation acts faster than the interest rate, businesses are prone to go bankrupt, and you are prone to make more money by hoarding. Real growth in the economy as a whole when businesses borrow money makes businesses prone to go bankrupt. In real terms, loans get harder and harder to pay back.

Front-heavy loans don't do businesses any favors. They need time to go through the stages of production. The amount of super-credit-worthy people/businesses is not infinite, and it will be very difficult for banks to find people that are low-risk in a deflationary economy. Risk-adjusted means you just aren't going to find any decent positive returns, regardless of what numbers you plug in that don't fit in reality. You might be looking at 0.1% instead of 0.5%. Is 0.1% worth the risk of your non-FDIC backed bank going bankrupt? Is 0.5% even? 140 years to double your nominal investment?

God forbid the deflation rate go above the "expected" 3% or whatever making it even harder for businesses to pay back their loans and making it more likely that you lose all your money rather than just some of the real value of your money in the case of higher-than-expected inflation.

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.

[Grinder]

Microsoft is usually above average, but more money would not give nearly the same profit margin, and maybe even a loss. This is the case with mosts mature businesses.

It seems like you are just rationalizing now.

No, it's the reason why your rationalization that you can just keep putting more money into the best businesses instead of starting something that has a high risk of not beat the average profitability is wrong.

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.

You're a true genious, why didn't anyone think of that when the money were pouring in for Microsoft in the nineties? Anyone could just have started another software company and taken half the market and profits!

What's the purpose of interest rates according to you?

The interest rate has no purpose of it's own, it's just the price markets put on money.

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 10% would be even better, but coming up with artificial numbers that would be completely wrong if you translate them into the real economy proves nothing.

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.

Anyone would take a free bonus on a deflationary currency, but as people are starting to realize in the lending sections of this forum, there is no such thing.

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.

I already answered this, so I don't know why you're just repeating it.

[2_Thumbs_Up]

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.

You're a true genious, why didn't anyone think of that when the money were pouring in for Microsoft in the nineties? Anyone could just have started another software company and taken half the market and profits!

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.

What's the purpose of interest rates according to you?

The interest rate has no purpose of it's own, it's just the price markets put on money.

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 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 10% would be even better, but coming up with artificial numbers that would be completely wrong if you translate them into the real economy proves nothing.

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

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.

I already answered this, so I don't know why you're just repeating it.

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.

[Grinder]

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.

You clearly have never done any real investing or business. You can never expect to earn a higher profit that the average market. Index funds will for instance on average give you a higher profit than trying to pick a managed fund, and only because the costs are lower.

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

You just don't get how investing works. You don't fund something you expect not to return a profit, but often it won't. The interest rate will usually be somewhat lower than the expected average profit, but picking a number that always works is not possible.

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

"Resources" can't just be moved around like that. Motorola can't close down the mobile business, get the invested money refunded, and put them into Apple.

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

No, I didn't. Not even close.

[Etlase2]

Businesses don't inherently need loans to function. A profitable business can fund expansion via its profits and avoid getting into this trap in the first place.

Right now businesses take loans for a lot of reasons, not the least of which is that government and fed policies heavily subsidize lending and have turned the entire financial system into a giant ponzi scheme.

The problems you are describing would be real if a businesses in a Bitcoin-based economy behaved like they do in a dollar economy. It's false to assume that the way things work now is the way things will always work after a paragidm shift.

Oh enough with the bullshit. You are wrong. You either have no concept whatsoever of how the economy works, or you are just purposely turning on the blinders so that you can find some rationalization for bitcoin's economy. "LOL THERE'S NO NEED FOR LENDING LOL LET'S KEEP SOCIETY AS IMMOBILE AS POSSIBLE!" What you want is feudalism. AIN'T GONNA HAPPEN. The economy would grind to a total halt without lending. Lending is beneficial to both parties; people have money that is idle and want to increase it, other people have ideas to create or expand the economy and need money. You. Are. Wrong. Totally. Absolutely. Wrong.

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%.

I am trying to make a basis in reality whereas you want to pretend that there will be 3%+ interest rates in a deflationary economy. Yes, inflation encourages investment, and likely over-investment, but you are trying to argue that there will be at least "enough" investment to encourage growth by assuming that there will be a positive nominal interest rate that can be had for low risk in a deflationary economy. Except that there are big issues with that that you want to ignore.

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.

Uhh, I did no such thing. "Real growth in the economy as a whole when businesses borrow money makes businesses prone to go bankrupt. In real terms, loans get harder and harder to pay back." I am assuming real growth causes deflation, thus making it harder to pay back loans. Where is the contradiction? Oh, doesn't exist. The problem is that deflation will stunt growth, and yes, there may be no deflation at all because nobody wants to risk borrowing bitcoins and thus no growth. The point I was trying to make.

[2_Thumbs_Up]

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.

You clearly have never done any real investing or business. You can never expect to earn a higher profit that the average market. Index funds will for instance on average give you a higher profit than trying to pick a managed fund, and only because the costs are lower.

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?

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

You just don't get how investing works. You don't fund something you expect not to return a profit, but often it won't. The interest rate will usually be somewhat lower than the expected average profit, but picking a number that always works is not possible.

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.

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

"Resources" can't just be moved around like that. Motorola can't close down the mobile business, get the invested money refunded, and put them into Apple.

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.

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

No, I didn't. Not even close.

Post #136.

[justusranvier]

Oh enough with the bullshit. You are wrong. You either have no concept whatsoever of how the economy works, or you are just purposely turning on the blinders so that you can find some rationalization for bitcoin's economy. "LOL THERE'S NO NEED FOR LENDING LOL LET'S KEEP SOCIETY AS IMMOBILE AS POSSIBLE!" What you want is feudalism. AIN'T GONNA HAPPEN. The economy would grind to a total halt without lending. Lending is beneficial to both parties; people have money that is idle and want to increase it, other people have ideas to create or expand the economy and need money. You. Are. Wrong. Totally. Absolutely. Wrong.

I assume you have proof for all that and we don't just have to take your word for it.

On the other hand there are successful businessmen, with records of running profitable companies, who emphatically disagree with you:

http://market-ticker.org/akcs-www?singlepost=2830302

[lebing]

Bitcoin is an asset with a limited supply. Thus, it is like almost every normal asset out there - lumber, corn, gold, oil, etc.  None of these things can be "printed" out of thin air. They are scarce by their natural properties.

A monetary system could work with any of these commodities - markets will figure out how to price the borrowing of money. The idea that a money must be, by its nature, unlimited in supply, is a sophism (and a very dangerous one).

Except that services are potentially unlimited...
There will NOT be one currency to rule them all. Bitcoin has it's function and there will be other complementary currencies working in conjunction that will provide the abundance necessary. Scarcity is a myth (albeit a well embedded one in our society).

[Grinder]

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.

Unfortunately, it's not possible to know who it will be. To the degree that it is possible to know in advance which companies will earn more, that will already be priced into the shares.

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.

Which is why index funds are so popular.

Again, I'm talking risk-adjusted returns.

When you put money into a business the risk adjusted return is always about the same. When existing businesses print more shares there is competition to buy them. That means that if the average return of businesses are 3%, that's what you can expect from your investment, even if the current owners are earning 5% on the investments they have done earlier. If you insist on paying less for the shares, other people will outbid you because it would be a better investment than the 3% they can expect elsewhere.

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.

No, it doesn't. The people buying it could put money in Apple just as easily as you could, so they would only buy it if they can get it at a price where they would end up with the same profit. That means you will not benefit from switching.

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.

So why aren't they? Your theory implies they must be stupid to continue doing business when others are earning more.

Post #136.

Se above.

[Grinder]

On the other hand there are successful businessmen, with records of running profitable companies, who emphatically disagree with you:

You think that someone who got into problems because they could no longer get credit would agree that lending is not necessary for the economy? I continue to be baffled by what some people thinks makes sense in this forum.

[Etlase2]

On the other hand there are successful businessmen, with records of running profitable companies, who emphatically disagree with you:

The proof? Every economist who has ever lived! Austrian, Keynesian, or otherwise. You do NOT have any clue of what you're talking about.

http://market-ticker.org/akcs-www?singlepost=2830302

LOL because lines of credit are anywhere near the same thing.

Stop trying to machinate bullshit to fit your view. It's wrong.

"Doing so on credit is a gamble and you're gambling with other people's money."

Whose money?

"That risk belonged properly to the shareholders"

Oh the shareholders? You mean, the people who invested in the business? As in, lending money to produce growth and ergo more money? And he says he's the majority shareholder, which is money he got one of two ways 1) a prior business that had profitable return on investment or 2) family wealth. If we only allow situation 2) we're at feudalism.

You are an economic dunce.

[FreeMoney]

On the other hand there are successful businessmen, with records of running profitable companies, who emphatically disagree with you:

You think that someone who got into problems because they could no longer get credit would agree that lending is not necessary for the economy? I continue to be baffled by what some people thinks makes sense in this forum.

That person/people with problems don't equal the economy. The stuff they don't get goes to someone else who on average can use it better.

[Grinder]

That person/people with problems don't equal the economy. The stuff they don't get goes to someone else who on average can use it better.

Your answer makes no sense in this context. Did you read the link?

[Dalkore]

ATTENTION DEBATERS:  I know everyone is getting a little heated.  Let's all stop the name calling and start addressing real questions or opinions.    This discussion is really insightful and I want to continue reading the discourse.


What I would add to maybe get us back on track.   Realize we are dealing with a monetary system  that is fixed and not debt based other than the energy you put into it for the coins you acquire.  Just like mining any commodity.  What I see are a number of models being imposed that come from a fiat/debt perspective.  They are not wrong in the fact that applied to the right situation, they are actually correct.  


What are are trying to address ------- are these concepts fully comparable when operating in a Bitcoin economy?   This is the debate I put forth.



Please continue  

[justusranvier]

The proof? Every economist who has ever lived! Austrian, Keynesian, or otherwise. You do NOT have any clue of what you're talking about.

That was cool. You managed to combine an appeal to authority fallacy with an ad hominem fallacy in the same (non) rebuttal.

LOL because lines of credit are anywhere near the same thing.

Stop trying to machinate bullshit to fit your view. It's wrong.

"Doing so on credit is a gamble and you're gambling with other people's money."

Whose money?

"That risk belonged properly to the shareholders"

Oh the shareholders? You mean, the people who invested in the business? As in, lending money to produce growth and ergo more money? And he says he's the majority shareholder, which is money he got one of two ways 1) a prior business that had profitable return on investment or 2) family wealth. If we only allow situation 2) we're at feudalism.

You are an economic dunce.

Don't argue with me - take it up with Denninger on his Monday BlogTalk show. Maybe you can trade stories about your vast experience in building businesses from the ground up and explain where he's wrong with evidence instead of name-calling. I'm very interested to hear how you explain the correlation between the increased credit emissions since 2008 and the flatlining employment rate of the population.

BTW, what's the "we allow" business? Surely you don't think you or anyone else is entitled to make those kinds of decisions for other people?

[Realpra]

Microsoft is usually above average, but more money would not give nearly the same profit margin, and maybe even a loss. This is the case with mosts mature businesses.

But not all: If you have two wind turbines or two solar panels you will earn twice as much as if you only have one.

This is because A the potential is largely untapped and B more energy will not lower energy prices in the long run because more energy means more economy and more demand also.

(like more food means more people = same price for the additional food after a while)

[Etlase2]

That was cool. You managed to combine an appeal to authority fallacy with an ad hominem fallacy in the same (non) rebuttal.

Whoa AbelsFire, be careful when you throw around more things you don't understand.

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

"Although certain classes of argument from authority can constitute strong inductive arguments, the appeal to authority usually is applied fallaciously, either the Authority is not a subject-matter expert, or there is no consensus among experts in the subject matter, or both."

Precisely the opposite of the case.

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

"is an attempt to negate the truth of a claim by pointing out a negative characteristic or unrelated belief of the person supporting it."

Saying you don't know what you're talking about is not an ad hominem. It's pure fact.

[justusranvier]

You've got a lot to say but none of it is logic or evidence. All you have to fall back on is angry insults and appeals to the credibility of a profession whose actual achievements, especially in the last four years, don't live up to its pretensions.

If you've something worth saying you can back it up with more than, "the people who I agree with also agree with me therefore we're right".

If you don't have anything worth saying you'll just fall back to more insults.

[ffe]

You've got a lot to say but none of it is logic or evidence. All you have to fall back on is angry insults and appeals to the credibility of a profession whose actual achievements, especially in the last four years, don't live up to its pretensions.

If you've something worth saying you can back it up with more than, "the people who I agree with also agree with me therefore we're right".

If you don't have anything worth saying you'll just fall back to more insults.

I'm not sure what you want as evidence. A basic course in macroeconomics?

One thing we can see as non-economists is that economic takeoff associated with the industrialization never happened in any country that didn't have the financial structure in place to fuel it through loans. Growth in most countries takes off after liberalizing their financial sector. This is pretty basic.

Saying you don't need loans to succeed may be true for individual examples of companies but ignores the fact your overall growth rate will be very low if few people can find loans. You see recognition of this in all those schemes to foster growth in third world countries through micro-loans.

[Grinder]

Microsoft is usually above average, but more money would not give nearly the same profit margin, and maybe even a loss. This is the case with mosts mature businesses.

But not all: If you have two wind turbines or two solar panels you will earn twice as much as if you only have one.

Yes, all. One wind turbine is not really a good example because you also need infrastructure so you may even earn more from the second turbine. On the other hand running a business like this on such a scale is not competitive. If it's a large company which for instance 25% of the market it can't just double the production to earn twice as much. Some reasons:

- Increase in power supply means lower prices
- The best spots will have been used for the first turbines, so the additional ones will need to be put in areas that are more expensive or generate less power
- It will need to hire more people, and the best ones will already have been hired, so the new employees will be less qualified or demand a higher salary
- Increased demand for wind turbines may mean higher prices

(like more food means more people = same price for the additional food after a while)

Food is not currently a limiting factor. It probably will be if the global population continues to increase, though.

[Adrian-x]

I would like to throw in a blood soaked rag from the bench.
The economy is a result of the efforts of the participants, the size and growth rate are a result of trade.  To force people to behave or trade in a certain way will harbor resentment and cause conflict, people choose to trade for mutual benefit. While we very much live in a world filled with Keynesian dogma, forced trade (or investment) to ensure economic growth does not ensure mutual benefit, just  more growth. I have seen no evidence to justify manipulation of market forces.

Bitcoin offers for the first time ever a paradigm shift that will prove the free  market is better than a centrally planned one.  
So emotional opinions fortunately don't count.

But the fact a free market Bitcoin economy may fail is not routed in any defects in Austrian principles, but largely I the  lack of basic goods and service originating from inside the Bitcoin economy.  

[Grinder]

The economy is a result of the efforts of the participants, the size and growth rate are a result of trade.  To force people to behave or trade in a certain way will harbor resentment and cause conflict, people choose to trade for mutual benefit. While we very much live in a world filled with Keynesian dogma, forced trade (or investment) to ensure economic growth does not ensure mutual benefit, just more growth. I have seen no evidence to justify manipulation of market forces.

People will adapt to any system, whether it has an inflationary or deflationary currency. If you want to call that being forced for one system it's hypocritical to say you are not being forced by the other one.

[Realpra]

But not all: If you have two wind turbines or two solar panels you will earn twice as much as if you only have one.

Yes, all. One wind turbine is not really a good example because you also need infrastructure so you may even earn more from the second turbine. On the other hand running a business like this on such a scale is not competitive. If it's a large company which for instance 25% of the market it can't just double the production to earn twice as much. Some reasons:

Yes they can, that's my whole point. I will go over your arguements below.

- Increase in power supply means lower prices

Which will very quickly lead to economic growth, higher demand and thus normal prices.

In simple terms: If electricity prices are 0 I will build a factory taking advantage of that and grow the economy.
If energy prices are normal or high my additional factory would increase energy prices beyond the breaking point and I or another factory would fail.

- The best spots will have been used for the first turbines, so the additional ones will need to be put in areas that are more expensive or generate less power

The area of a medium sized country would be generating enough wind energy to satisfy world energy usage. There may be a time in the far future where the potential is used up, but we are not there yet. This goes for quite a few industries.

Wind turbine "spots" are as cheap today as farmland or Manhattan property in the stone age.

- It will need to hire more people, and the best ones will already have been hired, so the new employees will be less qualified or demand a higher salary

With the many unemployed people today this is hardly an issue

- Increased demand for wind turbines may mean higher prices

None of the materials are particularly rare.

China tried to make "rare earths" rare, but the truth is that there are potential mining sites for the stuff all over the world and they are booting up now due to China's shenanigans and increased demand.

Again not there yet.

Food is not currently a limiting factor. It probably will be if the global population continues to increase, though.

No, not if westerners ate less meat and didn't feed their cars anyway, but it is a good example of how increased energy/resource supply leads directly to growth.
100 years ago I think world population was what 1 billion? Both that and the 7 billion today happened because of modern agriculture revolutions - any temporary over-supply was eaten up so to speak.

People will adapt to any system, whether it has an inflationary or deflationary currency.

Yes, but the inflation is not neutral, it benefits some group which is almost ALWAYS a misallocation of human time and resources - there is absolutely no way to adapt to that. Wasted resources or their potential is gone.
This is because inflation usually occurs at one focal point - otherwise you are just moving commas and there's no point.

Deflation on the other hand happens system wide which is much much more neutral - whether its non-neutral effects are good or bad they are smaller!

Take the mining reward; if that continued forever and scaled up too there would be huge waste in computer cards doing unnecessary over-security at high cost.

[Grinder]

If you can't see how bad your last counter arguments are I see no point in using more time on explaining how the real economy works.

[makomk]

Simply holding resources will generally be a bad investment in a deflationary economy. And that is a good scenario. It means the resource hoarders will stay away from the market, and the price will keep going down to the point where those who actually see a way to improve on the resource find a viable way to do so. In your scenario where the rent is worth 200 BTC the price of the building simply wont be 10.000 BTC. Rational market agents will see that as a losing investment and stay away from the market. That means the price will go down to the point where it actually becomes viable to buy it and rent it out for 200 BTC (and most likely add some value by improvements to the asset).

Oh dear. I think we have a slight problem here.

A number of people have argued that, by incentivising people to just sit on their money, deflation rewards people who abstain from consuming resources. That may be true; unfortunately it doesn't reward anyone for conserving the resources the eager savers haven't used. In fact, it's probably best for anyone holding them to do something with them quickly, before deflation eats into their value too much. So a few years down the line, when people start trying to exchange their paper profits from deflation for actual things, the resources simply won't be there to do it at any reasonable price. Suddenly we've got price inflation in a system designed to be deflationary, except that the size of the total money supply hasn't changed... I'm pretty sure that can't be good.

Which will very quickly lead to economic growth, higher demand and thus normal prices.

In simple terms: If electricity prices are 0 I will build a factory taking advantage of that and grow the economy.
If energy prices are normal or high my additional factory would increase energy prices beyond the breaking point and I or another factory would fail.

There are of course additional costs associated with building and operating a factory - if it didn't make sense with existing electricity prices, chances are it doesn't make sense at prices near zero. In practice, what actually happens in cases of oversupply is that some of the suppliers go bankrupt and lose their investors' money, reducing the overall profit from the industry.

[Roger_Murdock]

Simply holding resources will generally be a bad investment in a deflationary economy. And that is a good scenario. It means the resource hoarders will stay away from the market, and the price will keep going down to the point where those who actually see a way to improve on the resource find a viable way to do so. In your scenario where the rent is worth 200 BTC the price of the building simply wont be 10.000 BTC. Rational market agents will see that as a losing investment and stay away from the market. That means the price will go down to the point where it actually becomes viable to buy it and rent it out for 200 BTC (and most likely add some value by improvements to the asset).

Oh dear. I think we have a slight problem here.

A number of people have argued that, by incentivising people to just sit on their money, deflation rewards people who abstain from consuming resources. That may be true; unfortunately it doesn't reward anyone for conserving the resources the eager savers haven't used. In fact, it's probably best for anyone holding them to do something with them quickly, before deflation eats into their value too much. So a few years down the line, when people start trying to exchange their paper profits from deflation for actual things, the resources simply won't be there to do it at any reasonable price. Suddenly we've got price inflation in a system designed to be deflationary, except that the size of the total money supply hasn't changed... I'm pretty sure that can't be good.

I don't think that's right. You can't say that deflation encourages people to abstain from consuming money but not real resources.  After all, money is simply a claim on those real resources. But sure, if you're the one holding a particular resource whose value is declining over time due to deflation, your incentive is not to just sit on it.  (You'd rather sell it quickly and then sit on money which is increasing in value.)  Of course, everyone else makes that same calculation.  So the buyer must be someone who has a way to take that resource and use it to produce something of greater value.  So there's no reason to expect real resources to disappear!  People don't have an incentive to waste real resources in a deflationary economy. In fact, they have the exact opposite incentive.  The use of real resources to produce greater value is why the economy is growing, which is the reason that prices are deflating in the first place.  And this also answers the objection about "people just sitting on their money" in a deflationary economy and thus (allegedly) "not producing anything of value."  Money is not a productive real resource.  Again, it's a claim on real resources. Who cares if it "sits in somebody's safe" if the effect is, as shown above, to encourage the productive use of real resources?

[Adrian-x]

It's self-correcting:

You are still ignoring the fact that at any point in time, anyone who can't beat the average would be better off not investing. Your cycle would only work if nobody else was smart enough to predict point 5 after point 4, but really, it's not hard at all. Thus, those not expecting to beat the average that occurs at point 5 would not invest at point 4, but just wait and benefit from the deflation other people's investments would cause. This makes deflation a tax which the people who invest have to pay to those who don't invest, in just the same way as inflation is a tax on those who have money to those who loan money.

You have overlooked the fact that if those smart enough to wait and benefit from deflation could and would, they are only benefiting form a previous investment in the economy, that afforded growth (the cause of deflation) in the first place. It is not a tax but a resulting benefit. If the economy stops growing there investment has eroded, if they do not reinvest inflation happens, and if they remain among the majority who choose not to invest at point 4 there will be no point 5 and inflation will increase until such time as it is viable (and the  saved money will justly lose value.)  

In contrast induced inflation is a tax on the productive, it also has the negative effect of displacing wealth through the Cantillon effect.

    People will adapt to any system, whether it has an inflationary or deflationary currency. If you want to call that being forced for one system it's hypocritical to say you are not being forced by the other one.

yes people adapt  by growing the economy and eroding there wealth, the planets natural capital and become more dependent on credit.

Trade is still the source of benefits, growth induced by inflation remains just a misapplication of capital and resources.

[2_Thumbs_Up]

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.

Uhh, I did no such thing. "Real growth in the economy as a whole when businesses borrow money makes businesses prone to go bankrupt. In real terms, loans get harder and harder to pay back." I am assuming real growth causes deflation, thus making it harder to pay back loans. Where is the contradiction? Oh, doesn't exist. The problem is that deflation will stunt growth, and yes, there may be no deflation at all because nobody wants to risk borrowing bitcoins and thus no growth. The point I was trying to make.

"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).

[Dalkore]

I'm not sure what you want as evidence. A basic course in macroeconomics?

One thing we can see as non-economists is that economic takeoff associated with the industrialization never happened in any country that didn't have the financial structure in place to fuel it through loans. Growth in most countries takes off after liberalizing their financial sector. This is pretty basic.

Saying you don't need loans to succeed may be true for individual examples of companies but ignores the fact your overall growth rate will be very low if few people can find loans. You see recognition of this in all those schemes to foster growth in third world countries through micro-loans.

Are we using industrialization as the gold standard to measure economic prosperity of a country? 

If so then, yes lending is involved in all cases.   If we use a different standards then I may have other examples.

[Roger_Murdock]

Here's a thought: it's impossible to save money without lending it. Imagine that you take a $100 bill and stick it in your safe for a year.  It's true that when you do so, you're not lending that money to a specific person, but you are lending the purchasing power of that money to the overall economy.  (And lending the purchasing power of money is the equivalent of lending money itself. After all, that's the point.) Think about what that $100 bill represents. It represents your right to claim $100 worth of stuff in the real world.  When you don't redeem that claim immediately, that stuff is available to be used by others.  You've effectively loaned it to them.  And that's why you are rewarded with increased purchasing power over time in an economy that uses a sound currency (i.e., the kind of currency that people would choose in the absence of government coercion). Of course, the loan you've made is a very low risk loan. (But it's not a zero risk loan. While there's no risk of default, it's possible that the economy will contract leading to price inflation rather than the expected deflation.) The loan you've made is also one that can be recalled at any time. (You can change your mind and decide to spend that money.)  And that's why the return on that loan will be smaller than the return you could earn on a loan of money to a specific individual or business.  But it makes no sense to complain about "greedy hoarders who refuse to lend." They are lending, and they're providing value by doing so.  

[justusranvier]

One thing we can see as non-economists is that economic takeoff associated with the industrialization never happened in any country that didn't have the financial structure in place to fuel it through loans. Growth in most countries takes off after liberalizing their financial sector. This is pretty basic.

Saying you don't need loans to succeed may be true for individual examples of companies but ignores the fact your overall growth rate will be very low if few people can find loans. You see recognition of this in all those schemes to foster growth in third world countries through micro-loans.

Have you accounted for other factors which typically correspond to a liberalized financial sector, like increased recognition of property rights and fewer restrictions on entrepreneurship in general, which could potentially affect the correlation/causation relationship?

Here's a thought: it's impossible to save money without lending it. Imagine that you take a $100 bill and stick it in your safe for a year.  It's true that when you do so, you're not lending that money to a specific person, but you are lending the purchasing power of that money to the overall economy.

That's exactly right. All currency can be modeled as a series of informal loans, which means every transaction involving any type of currency requires a lender and a borrower.

Factory workers loan their labor to their employed and don't truly get paid for it until they consume products and services with their paycheck. Their production happens before the corresponding consumption which makes them lenders.

The factory itself  consumes the productivity of its employees first before producting a valuable product and getting paid by its customers. In this case the factory is the first in a series of borrowers that correspond to the workers' loan of productivity. The debt flows through the economy via the transfer of currency and is extinguished when the workers finally spend their paychecks (or is defaulted on in the case of inflation).

Note this form of informal, decentralized debt has only a superficial resemblence to "long-term interest bearing instruments".

[kjj]

Here's a thought: it's impossible to save money without lending it. Imagine that you take a $100 bill and stick it in your safe for a year.  It's true that when you do so, you're not lending that money to a specific person, but you are lending the purchasing power of that money to the overall economy.

That's exactly right. All currency can be modeled as a series of informal loans, which means every transaction involving any type of currency requires a lender and a borrower.

Factory workers loan their labor to their employed and don't truly get paid for it until they consume products and services with their paycheck. Their production happens before the corresponding consumption which makes them lenders.

The factory itself  consumes the productivity of its employees first before producting a valuable product and getting paid by its customers. In this case the factory is the first in a series of borrowers that correspond to the workers' loan of productivity. The debt flows through the economy via the transfer of currency and is extinguished when the workers finally spend their paychecks (or is defaulted on in the case of inflation).

Note this form of informal, decentralized debt has only a superficial resemblence to "long-term interest bearing instruments".

For more on this topic, take a listen at What is Money by Frederick Bastiat, as hosted by Cypherpunkd.

[Grinder]

Here's a thought: it's impossible to save money without lending it. Imagine that you take a $100 bill and stick it in your safe for a year.  It's true that when you do so, you're not lending that money to a specific person, but you are lending the purchasing power of that money to the overall economy.

So, what how do I go about spending my share of the money people have in their safes?

[Roger_Murdock]

Here's a thought: it's impossible to save money without lending it. Imagine that you take a $100 bill and stick it in your safe for a year.  It's true that when you do so, you're not lending that money to a specific person, but you are lending the purchasing power of that money to the overall economy.

So, what how do I go about spending my share of the money people have in their safes?

You spend it by spending the money in your pocket on goods and services.  Your money will now go further because the money in other people's safes is not chasing after those same goods and services.

[Realpra]

If you can't see how bad your last counter arguments are I see no point in using more time on explaining how the real economy works.

50-100 years ago there was 1 million goat herders in Saudi Arabia, today they are 30+ million people, many of which live in huge buildings and drive golden cars.
This was caused by ONE thing: Energy, oil - prices didn't drop, rather today they are higher than ever along with demand.

Unless they do something radical 20-29 million of those people will likely die when they run out.

The problem with you inflationists is that you assume 10 second timeframes and perfect information. But demand follows real worlds supply of goods no matter where it goes after 5-10 years and people don't know shit - that is precisely why they need non-manipulated money and prices to go by.


As I see it, the ball is in yours, Etlase's and other inflationist's court:

1. BTC value is climbing, unless free markets are entirely devoid of any logic or reason, there must be a good reason for it. Why is NONE of the inflating crypto-currencies valued at all?
2. If deflating economies self-destruct then why are we seeing a sea of BTC-related businesses spring up?
3. If investments are impaired in deflationary economies why is GLBSE seeing any business? Why do people start BTC businesses instead of straight up buying BTC?
4. Central banks still hold gold despite it being "horrible"/"evil" money.
5. People let Pirate owe 500.000 BTC in debt before it fell apart - that's a lot of loaning right there.

But you CAN'T explain that so you do ad hominem attacks, use fancy words that mean squad, appeal to economist "expert" authority that can't predict anything, pretend WE are missing something or straight up incorrectly accuse us of using logical fallacies.

The way I see it even if you are in a generally deflationary economy there is no way to tell whether the next year it will be inflationary or if the currency is just presently overvalued and will crash some and so, humans being careful, hedge with real world investment even if on paper perhaps its not perfect given perfect information or constant dependable deflation - the world keeps spinning as they say.

You also assume all-or-nothing; what if people keep 90% of their wealth in deflationary BTC and invest 10% like there's no tomorrow? That would mean a constant ongoing investment stream in society. As long as there is A flow there would be resource allocation.

Do you guys even have ONE inflationary scheme you agree on? No, it's all "MY personal client idea or inflation model is better!".

[Grinder]

You spend it by spending the money in your pocket on goods and services.  Your money will now go further because the money in other people's safes is not chasing after those same goods and services.

So if everybody puts all their money in the safe the economy will be booming from all the money it's borrowing, right...? This theory is obviously just more rationalization from deflationists.

[Roger_Murdock]

You spend it by spending the money in your pocket on goods and services.  Your money will now go further because the money in other people's safes is not chasing after those same goods and services.

So if everybody puts all their money in the safe the economy will be booming from all the money it's borrowing, right...? This theory is obviously just more rationalization from deflationists.

No, obviously everyone should spend all of their money as fast as possible Brewster's Millons-style. Think of all the jobs that would be created! But seriously, the point of saving money is not to never spend it.  It's to spend it later. And no one saves all their money because most people prefer to not be homeless or starve to death.  And again, no one said that putting your money in the safe is the best investment. It's not.  It's just the safest. Of course, depending on your situation and risk preference, it will generally make more sense to lend or invest some of that money to earn a real return.  The question is what currency will optimize the balance between present consumption versus savings / investment.  I think it's a deflationary one for the reasons I've argued.

[Dalkore]

Here's a thought: it's impossible to save money without lending it. Imagine that you take a $100 bill and stick it in your safe for a year.  It's true that when you do so, you're not lending that money to a specific person, but you are lending the purchasing power of that money to the overall economy.

So, what how do I go about spending my share of the money people have in their safes?

You spend it by spending the money in your pocket on goods and services.  Your money will now go further because the money in other people's safes is not chasing after those same goods and services.

This is correct,  that is how you spend that saved money each day.  If everyone took their money and chased all the goods with it, prices would rise according to the items most useful or in demand.

[Etlase2]

"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.

No, I'm not. Instead I'm saying the business cycle will continue in a different form.

As I see it, the ball is in yours, Etlase's and other inflationist's court:

Why do you absolutely have to resort to some fallacious argument or another? I am not an "inflationist". You saying so does not make it true. Nor does making inflation a bad word prove that deflation is the answer.

1. BTC value is climbing, unless free markets are entirely devoid of any logic or reason, there must be a good reason for it.

Looks like BTC has fallen over 200% to me.

2. If deflating economies self-destruct then why are we seeing a sea of BTC-related businesses spring up?

Yes, BTC-related as in "only does business in exchanging BTC to fiat".

3. If investments are impaired in deflationary economies why is GLBSE seeing any business? Why do people start BTC businesses instead of straight up buying BTC?

Because impaired implies there will be no investment? Oh wait, it doesn't.

But you CAN'T explain that so you do ad hominem attacks,

Not like you would listen or ever accept that you are the one full of fallacies.

[justusranvier]

The question is what currency will optimize the balance between present consumption versus savings / investment.  I think it's a deflationary one for the reasons I've argued.

The most optimum currency can only be determined by examining what people choose when they are free to decide.

What we can observe is that people act in ways to preserve the purchasing power of their deferred consumption. Based on their risk profile they choose to store their savings in ways that maximise future purchasing power.

Currency devaluation can only be imposed on a population by force, because individuals are constantly trying to flee from it.

That tells you all you need to know about inflationary vs deflationary currency. Anything that must be imposed by force is only optimum for those holding the guns and suboptimal for everyone else.

[Adrian-x]

Here's a thought: it's impossible to save money without lending it. Imagine that you take a $100 bill and stick it in your safe for a year.  It's true that when you do so, you're not lending that money to a specific person, but you are lending the purchasing power of that money to the overall economy.

So, what how do I go about spending my share of the money people have in their safes?

Leverage the declaration - this would encourage a boom in creativity.   

[Roger_Murdock]

The question is what currency will optimize the balance between present consumption versus savings / investment.  I think it's a deflationary one for the reasons I've argued.

The most optimum currency can only be determined by examining what people choose when they are free to decide.

What we can observe is that people act in ways to preserve the purchasing power of their deferred consumption. Based on their risk profile they choose to store their savings in ways that maximise future purchasing power.

Currency devaluation can only be imposed on a population by force, because individuals are constantly trying to flee from it.

That tells you all you need to know about inflationary vs deflationary currency. Anything that must be imposed by force is only optimum for those holding the guns and suboptimal for everyone else.

I agree with almost everything you said.  But what if someone argued that a deflationary currency represented a kind of prisoner's dilemma? Maybe an inflationary currency would be better for everyone, but it would never get off the ground because individuals would tend to defect and store their savings in an alternative deflationary currency? (Note I don't think this is the case!) But my point is that the question of whether a market failure exists is a completely separate question from whether state coercion is an effective (or legitimate) response.

[justusranvier]

But my point is that the question of whether a market failure exists is a completely separate question from whether state coercion is an effective (or legitimate) response.

Are we assuming a priori that "market failure" is a valid concept?

[Adrian-x]

You spend it by spending the money in your pocket on goods and services.  Your money will now go further because the money in other people's safes is not chasing after those same goods and services.

So if everybody puts all their money in the safe the economy will be booming from all the money it's borrowing, right...? This theory is obviously just more rationalization from deflationists.

Deflation leverages the creative class they can do more with less - programmers - designers all are now free to create,  in an inflation economy designers and programmers don't borrow because there outcome has no guarantee. But when free to do R&D  ( leveraging deflation) the ones who innovate, now have a tool to solicit investment, and we get quantum leaps in progress.

[Roger_Murdock]

But my point is that the question of whether a market failure exists is a completely separate question from whether state coercion is an effective (or legitimate) response.

Are we assuming a priori that "market failure" is a valid concept?

I don't think so. I think you can argue that regardless of whether you believe that market failures exist the voluntary adoption of a fixed supply currency is not a market failure. Sort of like how you could argue that a particular horse is not a unicorn by pointing out that he doesn't have a horn. The question of whether unicorns exist (they do) is separate.

[justusranvier]

I don't think so. I think you can argue that regardless of whether you believe that market failures exist the voluntary adoption of a fixed supply currency is not a market failure.

I can't argue that because I don't know what a "market failure" is until the term has been adequately defined.

[Adrian-x]

2. If deflating economies self-destruct then why are we seeing a sea of BTC-related businesses spring up?

Yes, BTC-related as in "only does business in exchanging BTC to fiat".

On this point I agree with you there is an abnormality. Bitcoin is experiencing hyper-deflation. This is new to the field of social science in economics and I am not sure how it evolves. My thoughts expressed elsewhere.  

[Grinder]

No, obviously everyone should spend all of their money as fast as possible Brewster's Millons-style. Think of all the jobs that would be created!

The amount of trade that is happening is what defines the size of the economy. When you trade away your money you have to do something to get new money, and this is what adds to the economy. Lots of people stacking almost all the money in a safe for later does not. Every day you don't trade anything is another day you haven't added anything to the economy. That does not mean that that every trade that is possible to do is smart to do, but with no trade there is no economy, and with little trade you have a little economy. Lots of trade means a big economy.

It's really that easy, and that's why currencies which creates price deflation gives a smaller economy than one which creates inflation. I also know you will never accept this because just like religious people you have decided on what you want to believe first and then make up "facts" which fits your belief.

[Realpra]

Why do you absolutely have to resort to some fallacious argument or another? I am not an "inflationist". You saying so does not make it true. Nor does making inflation a bad word prove that deflation is the answer.

I skimmed YOUR alt currency proposal and it contained the idea of adjusting the block reward at economic down turn or something like that. Here it is:

•   Decrits will work to keep a relatively stable value over time by having an unbounded coin production that is related to the time, hardware, and energy costs required to produce new currency.

"Unbounded" - That's also called inflation.

As for inflation used as a bad word, I am not, it just so happens that you have a link in your signature to an inflationary alt currency and
it just seems clear to me that some here believe in inflation or deflation, so I grouped them.

Looks like BTC has fallen over 200% to me.

That is a local change seen over ~1 year after a huge run-up, how about the more relevant 2-3 year range?

You're looking at a fluctuation trying to refute my argument that the market thinks BTC has real value - who's fallacious now?

"Cherry picking" is that the fallacy you used here?

Yes, BTC-related as in "only does business in exchanging BTC to fiat".

MPEX, GLBSE, Android wallets, Satoshi dice, silk road, armory, coinabul, BTC camgirls, BTC poker and at least one Chinese businessman said he used it with benefit... is wikileaks a business?

That's more than I can count fiat/BTC exchanges btw.
Is ignoring the realities a logical fallacy? I am really not versed in logical fallacies
(Arhhh its ALSO "cherry picking")

There are probably more I don't remember or don't know about.
... and for a start up currency I don't see the problem with a bunch of exchanges. Its just the first needed thing really so your counter-argument makes no sense either way.

Because impaired implies there will be no investment? Oh wait, it doesn't.

But GLBSE is not just seeing a trickle; pirate alone had 500K in debts which is 5% of ALL currently existing BTC and there is a whole BUNCH of other stuff on there that people are investing in.
What percentage of their dollars do people invest, do you even know?

And you just accused me of arguing there would be NO investments when in fact my wording was not near as strong as that - a straw man fallacy.

Do you understand the economic consequences if only very few DID invest in a BTC world? Clearly those few investors would have MUCH more clout as economy is all relative so the net effect is the same.

Not like you would listen or ever accept that you are the one full of fallacies.

Yeah right. These "logical fallacies" can be applied to almost any argument, though of course yours are begging for it.

[Roger_Murdock]

The amount of trade that is happening is what defines the size of the economy. When you trade away your money you have to do something to get new money, and this is what adds to the economy.

Voluntary exchange is what produces growth because both parties benefit -- not just lots of trades.  In contrast, printing new fiat money (aka counterfeiting) is a form of involuntary exchange or theft. I don't buy the argument that the latter is needed to encourage the former.

Lots of people stacking almost all the money in a safe for later does not. Every day you don't trade anything is another day you haven't added anything to the economy.

Again, there's no reason to expect that most people would stack "almost all the money in a safe for later." There's always going to be a balance between present consumption, savings, and investment.  And again, you ARE adding something to the economy when you simply save your money as previously explained.

I also know you will never accept this because just like religious people you have decided on what you want to believe first and then make up "facts" which fits your belief.

Whoah, lighten up, dude. Anytime I'm engaged in a debate about anything, I try to keep in mind two possibilities: (1) I might be wrong; and (2) that might be ok.  I'd encourage you to do the same.

[Grinder]

Voluntary exchange is what produces growth because both parties benefit -- not just lots of trades.  In contrast, printing new fiat money (aka counterfeiting) is a form of involuntary exchange or theft.

As I said, this is just hypocritical. If you call inflation theft then you are inconsistent when you don't call deflation an involuntary theft from those who invest to those who put the money in the safe.

I don't buy the argument that the latter is needed to encourage the former.

You just said that it will, even though you for political reasons call it involuntary to give it a negative spin.

Again, there's no reason to expect that most people would stack "almost all the money in a safe for later."

Let's just ignore the fact that that's exactly what's happening in the Bitcoin economy.

Whoah, lighten up, dude. Anytime I'm engaged in a debate about anything, I try to keep in mind two possibilities: (1) I might be wrong; and (2) that might be ok.  I'd encourage you to do the same.

I most certainly do. While I agree that it's very practical for people like me who like to save to be able to just put all my money in a safe and still reap most the value that other people's trade adds to the economy, that effect is clearly bad for the economy as a whole. I am not going to rationalize that fact away just because it doesn't fit what I ideally would like to be true.

[Roger_Murdock]

Again, there's no reason to expect that most people would stack "almost all the money in a safe for later."

Let's just ignore the fact that that's exactly what's happening in the Bitcoin economy.

I've got to head out in a few minutes so I don't have time to respond to everything right now, but I think I addressed your point above in comment #86 of this thread.

[kjj]

Voluntary exchange is what produces growth because both parties benefit -- not just lots of trades.  In contrast, printing new fiat money (aka counterfeiting) is a form of involuntary exchange or theft.

As I said, this is just hypocritical. If you call inflation theft then you are inconsistent when you don't call deflation an involuntary theft from those who invest to those who put the money in the safe.

No one here believes that but you (and maybe a couple of others).  It is hardly an established fact.  It is, I think, the central question here, and you can't claim it as evidence of it's own truth.  (To do so would be to beg the question.)

[Grinder]

Again, there's no reason to expect that most people would stack "almost all the money in a safe for later."

Let's just ignore the fact that that's exactly what's happening in the Bitcoin economy.

I've got to head out in a few minutes so I don't have time to respond to everything right now, but I think I addressed your point above in comment #86 of this thread.

Not really. If the deflation was lower there would be less incentive to save, but as long as there is deflation the effect would still be there. It would suppress people's wish to trade, just like inflation would encourage it. See, I can used loaded words as well.

[Grinder]

No one here believes that but you (and maybe a couple of others). 

I would expect nothing else on a forum which has a deflationary currency as topic.

[Etlase2]

"Unbounded" - That's also called inflation.

No, it's not. Inflation is a general increase in price levels, whereas the goal of my proposal would be to keep stable price levels. And even if it can't attain that impossible goal, new money is awarded to existing account holders as well as people who transact, not to banks expanding credit--often considered the biggest problem in causing the business cycle and inflationary theft.

"Cherry picking" is that the fallacy you used here?

Takes one to know one.

MPEX, GLBSE, Android wallets, Satoshi dice, silk road, armory, coinabul, BTC camgirls, BTC poker and at least one Chinese businessman said he used it with benefit... is wikileaks a business?

I tried checking out GLBSE to see if there were any non-mining (btc currency creation) or non-ponzi investments, but I couldn't find any and their site is slow. Care to link to any non-BTC non-ponzi businesses? Wallets are not businesses. Armory is an open source client. About the only legitimate business on there that isn't illegal in many countries is camgirls, which I'll give you half a point for. It was an existing site, not one that took any investment in BTC. And really, wikileaks? You think wikileaks is a BTC business let alone a business at all? What's the point in even talking to you?

But GLBSE is not just seeing a trickle; pirate alone had 500K in debts which is 5% of ALL currently existing BTC and there is a whole BUNCH of other stuff on there that people are investing in.
What percentage of their dollars do people invest, do you even know?

Do you really think championing the biggest bitcoin ponzi to date is helpful to your arguments? Or does it make you just look desperate? Hmm. Does it surprise me that the aggregate group surrounding bitcoin which doesn't even understand the definition of inflation gets scammed for 5 million? Not particularly.

[Dalkore]

After reading the last 2 pages I have a thought.


Bitcoin is a currency but it not being used as one at the moment, even though people do trade with it.    It is being a wealth reserve asset and we have only seen a couple items that actually made the cut, ie: gold & silver bullion.  People are purchasing and holding (saving) in Bitcoins because they are more adverse to the current condition of their local currency, being that that are all inflating at amounts that are giving you negative rates of return.   What I think makes Bitcoin more attractive than Gold and Silver is that you "can" trade around with it easier than having to walk to your nearest rare coins dealer and exchange your bullion.  

We can not focus on the "fixed" aspect enough.  Have we really ever had a fixed asset that truly could not be expanded so that is should in theory hold some value permanently?   Remember all the electricity and capital equipment (computers) that it took to get this many coins into circulation.  

On the other had, fiat currencies are not "wealth reserve assets", you can try and call them that but they do not hold value over time and in scenarios where they are holding value, they are in debt instruments which are actually pulling value from the future to maintains its own value.  

With this said, Bitcoins might be on a track to actually have trade continue to decline and only be used for major transfers of value where you need faith in that value or purchasing items where the quasi-anonymous nature lends to these transaction.



Food for thought...

[Realpra]

No, it's not. Inflation is a general increase in price levels, whereas the goal of my proposal would be to keep stable price levels. And even if it can't attain that impossible goal, new money is awarded to existing account holders as well as people who transact, not to banks expanding credit--often considered the biggest problem in causing the business cycle and inflationary theft.

I am not saying it is bad I'm just calling it what it is. You even mention "new money" in your quote above.

More money will always equal higher prices at some point.. unless you also plan to remove credits?

Off topic, but I also don't see how your system avoids being gamed to death: Hold a bunch of coins, send them to your own addresses once in a while - system awards you with new coin due to you being an "account holder that is trading".

If you are truly giving the money to everyone why not just make a Bitcoin client that moves the comma once in a while?

"Cherry picking" is that the fallacy you used here?

Takes one to know one.

I don't do that stuff.

I tried checking out GLBSE to see if there were any non-mining (btc currency creation) or non-ponzi investments, but I couldn't find any and their site is slow. Care to link to any non-BTC non-ponzi businesses?

You never mentioned anything about the investments being GOOD, just investments in general - you're "moving the goal posts". Surely the real world is no less riddled with bad investments and scams.
If something good did come along, and it will I think, people should start to choose that over the scams.

Wallets are not businesses.

Its an app that has a paid version... how is that not a business?

Armory is an open source client

I was talking about the TOR amory site for illegal guns.

About the only legitimate business on there that isn't illegal in many countries is camgirls, which I'll give you half a point for.

Dice and poker is legal in many countries I think.

And really, wikileaks?

News reporting is a business right? Fox news, CNN - all businesses, why not wikileaks?

Alpaca socks are also legal

Here's a list of more businesses: https://en.bitcoin.it/wiki/Trade#Toys.2C_Games_and_Hobbies

Anyway BTC is only a few years old so a "few" businesses is fine for now. I promise you I will be the first to complain if golden opportunities arise and people just sit on their BTC.

Do you really think championing the biggest bitcoin ponzi to date is helpful to your arguments?

When discussing the investor willingness in a deflationary economy; yeah it immensely helps my case that people gave a guy named "pirate" 5% of the entire economy (okay maybe he only got 0.5% for real, who knows).

[Wekkel]

Voluntary exchange is what produces growth because both parties benefit -- not just lots of trades.  In contrast, printing new fiat money (aka counterfeiting) is a form of involuntary exchange or theft.

As I said, this is just hypocritical. If you call inflation theft then you are inconsistent when you don't call deflation an involuntary theft from those who invest to those who put the money in the safe.

Is it wrong if I hld my Fiat-euro's in cash instead of bidding up the price of bread at the supermarket? Am I hurting anyone else if I decide to keep physical money in my pocket instead of lending it out to the bank against interest?

Why would hoarding individuals be thieves if everyone has the exact same opportunity to enjoy the benefits of the appreciating money? It's called a market (which includes ordinary money transactions); a summary of millions of individual transactions between millions of individuals. No more, no less.

If hoarding becomes a problem, it is individuals reacting to bad influences from the outside (usually: government policies).

[kjj]

No one here believes that but you (and maybe a couple of others). 

I would expect nothing else on a forum which has a deflationary currency as topic.

So, make an argument that isn't circular then.

[bitcoinbear]

I tried checking out GLBSE to see if there were any non-mining (btc currency creation) or non-ponzi investments, but I couldn't find any and their site is slow. Care to link to any non-BTC non-ponzi businesses? Wallets are not businesses. Armory is an open source client. About the only legitimate business on there that isn't illegal in many countries is camgirls, which I'll give you half a point for. It was an existing site, not one that took any investment in BTC. And really, wikileaks? You think wikileaks is a BTC business let alone a business at all? What's the point in even talking to you?

Not sure what you mean by "non-BTC", but here are a few to start with:

Check out FeedZeBirds, BitcoinTorrentz, Rugatu, IBB, SatoshiDice, bioethanol, and several assets backed by precious metals

(this list is in no way supposed to be exhastive or reflect advise to buy any of these assets)

[Etlase2]

I am not saying it is bad I'm just calling it what it is. You even mention "new money" in your quote above.

Inflation is an increase in price levels, not an increase in the money supply. Inflation is a result when the money supply is expanded beyond the demand for new money, just like deflation is the result if the money supply is not expanded enough to the demand for new money.

More money will always equal higher prices at some point.. unless you also plan to remove credits?

More money will not always equal higher prices. M(oney supply)*V(elocity of money) = P(rice level)*Q(real expenditures). If real expenditures go up to match the increase in money (or an increase in money goes up to match real expenditures), the price level remains constant. Or a simpler way P = (M*V)/Q.

And higher prices are irrelevant if the new money is distributed equitably rather than as expanding credit only available to banks, a sentence you ignored.

Off topic, but I also don't see how your system avoids being gamed to death: Hold a bunch of coins, send them to your own addresses once in a while - system awards you with new coin due to you being an "account holder that is trading".

It is really rather simple: if you pay a 0.01 fee on a transaction, the odds of you being awarded 1 coin for that transaction is made to be no less than 1 in 101. Transaction fees are required under this model, as they will eventually be under bitcoin.

If you are truly giving the money to everyone why not just make a Bitcoin client that moves the comma once in a while?

Uhh gee I dunno, maybe because this has shit all to do with the actual money supply?

You never mentioned anything about the investments being GOOD, just investments in general - you're "moving the goal posts". Surely the real world is no less riddled with bad investments and scams.
If something good did come along, and it will I think, people should start to choose that over the scams.

I didn't? Besides, are we to assume that an economy can grow on bad investments? I mean, isn't this what causes the business cycle?

News reporting is a business right? Fox news, CNN - all businesses, why not wikileaks?

Do you even know what wikileaks does and why it accepts bitcoin donations?

When discussing the investor willingness in a deflationary economy; yeah it immensely helps my case that people gave a guy named "pirate" 5% of the entire economy (okay maybe he only got 0.5% for real, who knows).

How willing will investors be to fight over 0.1%-0.5% per YEAR rather than 7% per WEEK? How willing will businesses be to take on the risk of a deflationary currency loan? There is a big difference between scam and reality.

[Grinder]

Is it wrong if I hld my Fiat-euro's in cash instead of bidding up the price of bread at the supermarket? Am I hurting anyone else if I decide to keep physical money in my pocket instead of lending it out to the bank against interest?

Kind of, but with all the money printing not enough people will do it to the degree that it stops inflation for very long, so you are mainly hurting yourself.

Why would hoarding individuals be thieves if everyone has the exact same opportunity to enjoy the benefits of the appreciating money?

Just because everyone can steal doesn't mean it's not stealing. I would call it a tax because it would be legal and fairly predictable, but then a lot of people here don't differentiate between taxing and stealing, so stealing it is.

If hoarding becomes a problem, it is individuals reacting to bad influences from the outside (usually: government policies).

Hoarding is will suppress the economy, and I think that's bad. If someone thinks having a deflationary self regulating currency is more important than having an economy that is as strong and flourishing as possible that's an opinion they are entitled to, but I disagree with it.

[Grinder]

No one here believes that but you (and maybe a couple of others). 

I would expect nothing else on a forum which has a deflationary currency as topic.

So, make an argument that isn't circular then.

Pointing out inconsistency in an argument is not being circular, and yours was an argumentum ad populum.

[kjj]

No one here believes that but you (and maybe a couple of others). 

I would expect nothing else on a forum which has a deflationary currency as topic.

So, make an argument that isn't circular then.

Pointing out inconsistency in an argument is not being circular, and yours was an argumentum ad populum.

No it wasn't.  Pointing out that people aren't likely to accept a bland assertion from you on the very point of debate is hardly an appeal to popularity.

[Grinder]

No it wasn't.  Pointing out that people aren't likely to accept a bland assertion from you on the very point of debate is hardly an appeal to popularity.

You can call the argument whatever you like, saying it's wrong solely because most people don't believe it is the very definition of an argumentum ad populum.

[Etlase2]

No it wasn't.  Pointing out that people aren't likely to accept a bland assertion from you on the very point of debate is hardly an appeal to popularity.

Like providing links and information to basic economic theory will do anything to change your minds. Bitcoinomics is rampant around here and it is pretty obvious that people will believe whatever they want to believe as long as they think it's good for them and someone smarter than they can come up with some perfume-laden shit as ammo to repeat. It smells an awful lot like political positions.

[kjj]

No it wasn't.  Pointing out that people aren't likely to accept a bland assertion from you on the very point of debate is hardly an appeal to popularity.

You can call the argument whatever you like, saying it's wrong solely because most people don't believe it is the very definition of an argumentum ad populum.

No, no, no.  I'm saying that you can't just assert your position and expect us to accept it.  You need to demonstrate it.  That the majority of us won't buy it when you say "I'm right" doesn't mean that I'm arguing from popularity, it means that you are begging the question.

[Realpra]

Inflation is an increase in price levels, not an increase in the money supply.

Inflation usually refers to an inflation in the money supply. Prices in said economy are irrelevant to the concept of monetary inflation.
ALL inflationists usually justify their inflation with "stable prices" - and that's FINE, stable prices would be neat - but you're still an inflationist.

Inflation is a result when the money supply is expanded beyond the demand for new money, just like deflation is the result if the money supply is not expanded enough to the demand for new money.

I think this is your problem right here; you think money is a necessary commodity or something that society can somehow "run out of". This is simply not the case, its a system of IOUs and there can NEVER be scarcity because you can always "rip an IOU in two" so you have twice the amount of tokens to go around.
This ESPECIALLY goes for Bitcoin which is digital and infinitely divisible.

A "credit crunch" is not a bad thing; its just the market figuring out that some or many main activities it was undertaking were stupid and so everything slows down until the market finds something NEW and more SENSIBLE to invest in.
Forcing the market to invest will just lead to bad investments as I see it.

And higher prices are irrelevant if the new money is distributed equitably rather than as expanding credit only available to banks, a sentence you ignored.

Because distributing the new money equally is the same as moving the comma, think about it. Give everyone 10 times as much money and its exactly the same as moving the comma once to the left.
Mentioning banks is just appeal to emotion btw

It is really rather simple: if you pay a 0.01 fee on a transaction, the odds of you being awarded 1 coin for that transaction is made to be no less than 1 in 101. Transaction fees are required under this model, as they will eventually be under bitcoin.

Well Bitcoin needs those fees for a reason and not to control price levels or something.

Anyway if you pay 0.01 as fee and on average win the same all you are doing is subsidizing miners and allowing them to charger higher fees perpetually. This would either lead to a NEW wasteful banker-class or over consumption of CPU time.

Besides, are we to assume that an economy can grow on bad investments? I mean, isn't this what causes the business cycle?

I am assuming that A people prefer good investments and that B if they are investing in bad things they are also investing in good things to similar extent.

Do you even know what wikileaks does and why it accepts bitcoin donations?

Businesses can operate on emotion, low pay and volunteer work. Many "human aid" orgs are nothing but money machines today.

How willing will investors be to fight over 0.1%-0.5% per YEAR rather than 7% per WEEK? How willing will businesses be to take on the risk of a deflationary currency loan? There is a big difference between scam and reality.

0.1-0.5% is a horrible investment, no one should accept that. But moving on with 1-20% in mind (low to very high risk).
I think people would take normal investments because there would be less risk compared to ponzi operations.

Why would anyone invest with 3% deflation?
1. Well for starters deflationary currencies may well be less stable so it could be to hedge or profit from temporary drops in BTC price.
2. Many valid investments can pay more than 3%.
3. Deflationary currencies may have years of little or negative growth where real-returns would be great.

[Grinder]

No, no, no.  I'm saying that you can't just assert your position and expect us to accept it.  You need to demonstrate it.  That the majority of us won't buy it when you say "I'm right" doesn't mean that I'm arguing from popularity, it means that you are begging the question.

No, this is what your saying now, it is not what your original reply said.

[Etlase2]

Inflation usually refers to an inflation in the money supply. Prices in said economy are irrelevant to the concept of monetary inflation.

No, it does not.

http://en.wikipedia.org/wiki/Inflation - In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time
http://www.thefreedictionary.com/inflation - 2.  A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
https://en.wikipedia.org/wiki/Austrian_School#Inflation - Mises argues that inflation only results when the supply of money outpaces demand for money

Mises may have waxed poetic about how calling rising prices inflation confuses the issue with monetary supply increases, but AFAIK he is the only austrian that gave a shit about the distinction. For everyone else in the world, the meaning is clear: rising prices associated with an increase in the supply of money beyond the available goods and services or whatever exact definition you want to pick.

I think this is your problem right here; you think money is a necessary commodity or something that society can somehow "run out of". This is simply not the case, its a system of IOUs and there can NEVER be scarcity because you can always "rip an IOU in two" so you have twice the amount of tokens to go around.
This ESPECIALLY goes for Bitcoin which is digital and infinitely divisible.

Oh hey look, you putting ideas in my mouth that never fucking came out of it. The very definition of strawman and intelligence insulting. "OHH U THINK HERP A DERP BITCOINS WILL RUN OUT AND IT WILL FAIL"

FUCK OFF

[kjj]

No, no, no.  I'm saying that you can't just assert your position and expect us to accept it.  You need to demonstrate it.  That the majority of us won't buy it when you say "I'm right" doesn't mean that I'm arguing from popularity, it means that you are begging the question.

No, this is what your saying now, it is not what your original reply said.

Actually, it is exactly what I said.  I'll bold it for you.

Voluntary exchange is what produces growth because both parties benefit -- not just lots of trades.  In contrast, printing new fiat money (aka counterfeiting) is a form of involuntary exchange or theft.

As I said, this is just hypocritical. If you call inflation theft then you are inconsistent when you don't call deflation an involuntary theft from those who invest to those who put the money in the safe.

No one here believes that but you (and maybe a couple of others).  It is hardly an established fact.  It is, I think, the central question here, and you can't claim it as evidence of it's own truth.  (To do so would be to beg the question.)

[Grinder]

No one here believes that but you (and maybe a couple of others).  It is hardly an established fact.  It is, I think, the central question here, and you can't claim it as evidence of it's own truth.  (To do so would be to beg the question.)

It's very simple logic. Value doesn't come from nowhere, so when you get value even though you just keep the money in the safe you must be getting it from someone who has created it. If this wasn't an ideological question for so many of you it would be much easier for you to see. Unfortunately it's like telling a communist that communism in reality undermines the welfare of the people. It is obvious if you don't desperately need to deny it for your ideology to make sense.

[Realpra]

http://en.wikipedia.org/wiki/Inflation - In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time
http://www.thefreedictionary.com/inflation - 2.  A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
https://en.wikipedia.org/wiki/Austrian_School#Inflation - Mises argues that inflation only results when the supply of money outpaces demand for money

But sure if it makes you happy I will call you a monetary inflationist instead of inflationist 

I think this is your problem right here; you think money is a necessary commodity or something that society can somehow "run out of". This is simply not the case, its a system of IOUs and there can NEVER be scarcity because you can always "rip an IOU in two" so you have twice the amount of tokens to go around.
This ESPECIALLY goes for Bitcoin which is digital and infinitely divisible.

Oh hey look, you putting ideas in my mouth that never fucking came out of it. The very definition of strawman and intelligence insulting. "OHH U THINK HERP A DERP BITCOINS WILL RUN OUT AND IT WILL FAIL"
FUCK OFF

You are the one constantly talking about the market running out of loans, credit, investment or money.

"Demand for money" - what does that even mean... no SERIOUSLY; explain it to me, I don't get it.

[kjj]

No one here believes that but you (and maybe a couple of others).  It is hardly an established fact.  It is, I think, the central question here, and you can't claim it as evidence of it's own truth.  (To do so would be to beg the question.)

It's very simple logic. Value doesn't come from nowhere, so when you get value even though you just keep the money in the safe you must be getting it from someone who has created it. If this wasn't an ideological question for so many of you it would be much easier for you to see. Unfortunately it's like telling a communist that communism in reality undermines the welfare of the people. It is obvious if you don't desperately need to deny it for your ideology to make sense.

If it is so obvious, why can't you offer a more convincing argument than merely saying it?

Also, please read or listen to Bastiat's What is Money?.

[Realpra]

It's very simple logic. Value doesn't come from nowhere, so when you get value even though you just keep the money in the safe you must be getting it from someone who has created it. If this wasn't an ideological question for so many of you it would be much easier for you to see. Unfortunately it's like telling a communist that communism in reality undermines the welfare of the people. It is obvious if you don't desperately need to deny it for your ideology to make sense.

Yeah we're just brainwashed and emotionally ideological, there's some neat ad hominem.

Let me explain it to you:

1. 3 peps are on a deserted island with NOTHING there except some def. money that THEY hold.
2. YOU plant some crops, harvest and sell it for their worthless currency - lets say because you don't like to see people starve.
3. Now you do nothing and sit on your new money.
4. Because they are now well-fed and more energized they now plant two fields MORE with leftover seeds or with seeds from where you also found them.
5. There is now twice the amount of food on the island as when you finished harvesting.
6. NOW you spend your money for twice its previous value when you got it.
7. The value was "stolen" from people you helped earlier, from an economy that would not be where it was without your prior work.

With inflation? They print more money and buy your second harvest too without doing work, YOU have to keep working to keep "your value" on the island - who's brainwashed NOW?

[Roger_Murdock]

It's very simple logic. Value doesn't come from nowhere, so when you get value even though you just keep the money in the safe you must be getting it from someone who has created it. If this wasn't an ideological question for so many of you it would be much easier for you to see. Unfortunately it's like telling a communist that communism in reality undermines the welfare of the people. It is obvious if you don't desperately need to deny it for your ideology to make sense.

It seems like the disagreement boils down to what we each think about the following two groups of people:

1) people who save money in a deflationary currency (but don't lend it directly to others or otherwise "invest" it); and
2) people who enjoy a government-granted monopoly on printing new fiat currency in an inflationary economy.

You think that the first group is "getting something for nothing" but not the second group. I think the exact opposite. My position with respect to group one is based on the idea that by deferring consumption, savers are effectively lending the purchasing power of the saved money to all other currency holders, and that this is why they receive (and why they deserve to receive) a (relatively-modest) reward in the form of increased purchasing power over time.  My position with respect to group two is that the recipients of the new money gain real purchasing power in exchange for the equivalent of executing a copy-and-paste command. Honestly, that seems pretty intuitive to me. Your position, on the other hand, seems extremely counter-intuitive.  That doesn't mean you're wrong.  But when you say that your position is not only correct, but so obviously correct that the only reason people like me can't grasp it is because we're blinded by ideology, well, I find that REALLY hard to grasp.  

I'd also note that group two requires coercion backed by the threat of violence to receive the benefit they do whereas group one does not.  The state requires you to pay taxes in their fiat currency.  If you don't comply, they'll forcibly steal your stuff and/or arrest you and lock you in a cage.  Similarly, if YOU try to get in on the action and print your own "Federal Reserve Notes," they'll send you to prison for counterfeiting (and this is true even if your motivations were completely pure and you were just trying to "stimulate the economy.") In contrast, the use of a deflationary currency does not depend on state violence.  People were using precious metals as money long before the state got involved. People will voluntarily adopt and use a deflationary currency. They must be compelled to use inflationary fiat. (And that coercion backed by violence is the reason I think that the word "theft" can be accurately applied to group two but not to group one.) And if you don't think that's the case, then there shouldn't be a problem.  Start a new blockchain with a different reward scheme and watch as everyone abandons Bitcoin in favor of "Inflate-o-Coin."

[Etlase2]

You are the one constantly talking about the market running out of loans, credit, investment or money.

"Demand for money" - what does that even mean... no SERIOUSLY; explain it to me, I don't get it.

I have never used nor implied any "running out" of loans etc. only that a deflationary currency makes loaning a dangerous affair for both parties. So, paradoxically, a deflationary currency might make for high-interest and presumably short-term only loans. Not the type of loan you can do capital investment with--more akin to loan sharking.

I will, against all better judgment, assume that your question is genuine and your insulting strawman was a misunderstanding.

https://en.wikipedia.org/wiki/Demand_for_money - The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits.



where M^d is the nominal amount of money demanded, P is the price level, R is the nominal interest rate, Y is real output, and L(.) is real money demand.

L(R,Y) is called liquidity preference which is a Keynesian idea, but Austrians have time preference which can be substituted and the situation works out roughly the same.

Keeping a stable price level P means that whenever output is increased, the demand for money M^d will increase in the same fashion, or prices will not be stable--they will have to decrease. Because the money supply is so restricted in bitcoin, this will generally be the case. When the central bank increases the supply of money, P rises then M^d rises. They can't happen at the same time because the money supply is narrowly focused to private banks. This is where the "theft" comes in because the prices increase before any of us have any say in the matter or see any benefit to new money. When the supply of money can meet new demand quickly, prices do not decrease. When money is not given to sacrosanct institutions first, but equitably across the economy, M^d and P can move at the same rate, if necessary (or L() can cancel it out).

Because distributing the new money equally is the same as moving the comma, think about it. Give everyone 10 times as much money and its exactly the same as moving the comma once to the left.

It is not, because you have forgotten the cost factor to mining. Miners are held in check by the potential of inflating prices by overproducing and making mining unprofitable. "Cash-hoarders" are held in check by miners because miners create new money that will presumably put to use, stifling deflation. If the demand for money gets too high, interest rates should increase as well, also prompting cash-hoarders to stop hoarding and invest at interest. It is a balance from all angles that can't be manipulated. There is also, at least in my proposal, a large chunk of the new money that goes straight to trade, which is why I chose my words carefully and said "equitably" instead of "equally". Trade is where new value is realized and it should be rewarded in kind.

It is really rather simple: if you pay a 0.01 fee on a transaction, the odds of you being awarded 1 coin for that transaction is made to be no less than 1 in 101. Transaction fees are required under this model, as they will eventually be under bitcoin.

Well Bitcoin needs those fees for a reason and not to control price levels or something.

The fees aren't there to control price levels.

Anyway if you pay 0.01 as fee and on average win the same all you are doing is subsidizing miners and allowing them to charger higher fees perpetually. This would either lead to a NEW wasteful banker-class or over consumption of CPU time.

The miners don't have anything to do with the fees. Mining isn't required at all. When the demand for money is in line with the supply, mining stops. No electricity usage at all.

0.1-0.5% is a horrible investment, no one should accept that.

Well there you go! There was some heated discussion a year or so ago on how deflation might somehow be prone to negative interest rates. CD rates nowadays are around 1%. Admittedly, that is with central bank theft of interest rates, but even when they were not manipulating as much, the best, safe interest rate in a typical 2-3% inflationary economy is going to be 2-3%. Riskier investments can lead to around a solid 5%, but they tank when the economy as a whole tanks (see everybody's IRAs, 401ks, etc. over the last few years). If deflation is 3%, 3% must be taken off of the interest rate. CDs can't pay you 1% if deflation is 3%, that would be a real 4% interest rate. Right now you're looking at -2% with inflation on a real return from a CD, how do we get from real -2% to real +4% just by using deflation? Magic? 6% better interest doesn't just come out of nowhere.

And this is assuming a nice, gradual, 3% year after year, with no one but the wealthy bitcoin holders who may or may not be manipulating the supply to keep that stability. If one year happens to be 6%, do you realize what that means to a business's profit margins? Bankruptcy. Many businesses run on very tight margins of only a few percent. An unexpected upswing in the deflation rate will simply bankrupt them. This is why economists are afraid of deflation.

I don't know if any economist has tried to define what a "good" (real) interest rate is in a stable economy, but it's gotta be somewhere in the range of 0.5-2%. If it goes higher than that, that's a sign that there isn't enough money to meet the demand for money, and economic progress will be retarded because businesses can't afford loans (which are going to be at a higher rate because of the bank's cut, of course). The higher the REAL interest rate, the worse it is for business. This is why the central bank tries to manipulate this situation by lowering interest rates to bring us out of a recession. The problem is, since the consumer level doesn't see any new money and is in fact penalized for this by reduced value in savings, there is less incentive to save and less purchasing power for a given amount of money. It doesn't fix the root of the problem and just puts everyone in greater debt. It is idiocy based on Keynes and it doesn't work.

[Adrian-x]

It is idiocy based on Keynes('s ideas) and it doesn't work.

I suspect Keynes would have rectified the problem he was creating was it not for his premature death; I scorn all his blind Keynesian followers alive today. 

[Realpra]

https://en.wikipedia.org/wiki/Demand_for_money - The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits.



where M^d is the nominal amount of money demanded, P is the price level, R is the nominal interest rate, Y is real output, and L(.) is real money demand.

Okay so basically its fancy talk for the money printing required to keep prices stable in a growing economy.

Lets go one level deeper: Why are stable prices good? What is the facts and basis behind this premise?

Money "demand" assumes that stable prices is a good thing, but that seems very loaded/biased to me.

Say it IS a good thing, how do you LOWER prices again if the economy contracts?

If stable=good, why is it okay for each individual commodity to fluctuate in price and what is the point of average stable prices if each individual ware changes in price all the time?

Well there you go! There was some heated discussion a year or so ago on how deflation might somehow be prone to negative interest rates. CD rates nowadays are around 1%. Admittedly, that is with central bank theft of interest rates, but even when they were not manipulating as much, the best, safe interest rate in a typical 2-3% inflationary economy is going to be 2-3%. Riskier investments can lead to around a solid 5%, but they tank when the economy as a whole tanks (see everybody's IRAs, 401ks, etc. over the last few years). If deflation is 3%, 3% must be taken off of the interest rate. CDs can't pay you 1% if deflation is 3%, that would be a real 4% interest rate. Right now you're looking at -2% with inflation on a real return from a CD, how do we get from real -2% to real +4% just by using deflation? Magic? 6% better interest doesn't just come out of nowhere.

I know of very secure investments which pay 1-3.5% in REAL interest rates for something that "lasts forever". A bigger and more informed investor with the right "ins" may well know of something even better.

The fact that many interest rates today are negative in real terms should tell you that its fucked up in real terms.

[Roger_Murdock]

There is also, at least in my proposal, a large chunk of the new money that goes straight to trade, which is why I chose my words carefully and said "equitably" instead of "equally". Trade is where new value is realized and it should be rewarded in kind.

But isn't trade (like virtue) its own reward? Voluntary exchanges occur when both parties perceive themselves as benefiting from the exchange. That's why you can be reasonably confident that a voluntary exchange is in fact creating new value.  So, why do you need to artificially incentivize more trades via inflation?

Well there you go! There was some heated discussion a year or so ago on how deflation might somehow be prone to negative interest rates. CD rates nowadays are around 1%. Admittedly, that is with central bank theft of interest rates, but even when they were not manipulating as much, the best, safe interest rate in a typical 2-3% inflationary economy is going to be 2-3%. Riskier investments can lead to around a solid 5%, but they tank when the economy as a whole tanks (see everybody's IRAs, 401ks, etc. over the last few years). If deflation is 3%, 3% must be taken off of the interest rate. CDs can't pay you 1% if deflation is 3%, that would be a real 4% interest rate. Right now you're looking at -2% with inflation on a real return from a CD, how do we get from real -2% to real +4% just by using deflation? Magic? 6% better interest doesn't just come out of nowhere.

But aren't artificially-low interest rates one of the main objections to an inflationary currency?  If we switched to a sound currency like Bitcoin, of course interest rates would rise. But they'd rise to their correct level, i.e. the level that reflects the voluntary preferences of market participants.

[Roger_Murdock]

It's very simple logic. Value doesn't come from nowhere, so when you get value even though you just keep the money in the safe you must be getting it from someone who has created it. If this wasn't an ideological question for so many of you it would be much easier for you to see. Unfortunately it's like telling a communist that communism in reality undermines the welfare of the people. It is obvious if you don't desperately need to deny it for your ideology to make sense.

Here's a thought experiment I've used in the past that might be helpful.  Let's say you want to sell some widgets, i.e., buy some money with them.  You have two potential buyers.  A has 10 gold pieces he's willing to exchange for widgets.  B has 10 identical gold pieces, but B's gold comes with a catch.  If you don't spend (or lend or invest) B's gold pieces and instead just keep them in the safe, he gets to take 1 one of them back every year they're not spent.  Now you might be willing to trade with both A and B, but you'll probably be willing to give A more widgets in exchange for his gold.  That difference in the "price" (in widgets) of A's money vs. B's money is the price you pay for the additional usefulness of A's gold.  So it's NOT "free." It's a bargained-for benefit of A's gold that he gives up and you acquire when the exchange takes place. Putting your money in the safe (and earning a real return in a deflationary currency) is simply one of the things you can do with it.  So you MUST have paid for that value in the initial exchange.

[Etlase2]

Okay so basically its fancy talk for the money printing required to keep prices stable in a growing economy.

There is nothing in that equation about printing money. It compares the demand for money to the price level. It applies to stable, inflationary, and deflationary economies.

Lets go one level deeper: Why are stable prices good? What is the facts and basis behind this premise?

Stable prices do not favor creditors (deflationary does) nor debtors (inflationary does--to the extent inflation goes beyond the baked in rate). Stable prices do not favor those who hold wealth in real assets (inflationary does) nor money (deflationary does). Assuming stable prices are achieved, that means the the supply of money isn't being manipulated by central bank inflation or those who control vast amounts of wealth (see panic of 1907 and how handsomely JP Morgan profited off of others' misery--and odds are good he caused it). Stable prices do not encourage over-investment to recoup inflationary losses nor under-investment because holding currency is the safest bet. It reduces or eliminates menu costs and the money illusion.

Money "demand" assumes that stable prices is a good thing, but that seems very loaded/biased to me.

Money demand doesn't assume anything, it allows you to solve for one of the variables if you have the others or it allows you to predict what the change might be if one or more of those variables change. Just like the equation of exchange (MV = PQ).

Say it IS a good thing, how do you LOWER prices again if the economy contracts?

Ahh the meaningless "gotcha!" moment. How do I lower prices from when bitcoin was at its $32 high? The simple answer is: I don't. No currency is immune to a loss of faith or demand. But, when you're in the unique situation where everyone has a good idea of how much it costs to produce new currency, and the currency is obviously undervalued, it opens up the opportunity for arbitrage. People will buy it just like any other asset they believe is undervalued. There are ways of making it return to stability quicker such as destroying transaction fees, but all this does is punish the people who still use the currency even more.

If stable=good, why is it okay for each individual commodity to fluctuate in price and what is the point of average stable prices if each individual ware changes in price all the time?

Each individual ware does not change in price all the time. This is known as sticky prices, and it causes problems up and down the economy when the value of the currency does not remain stable. But it's OK for each individual commodity to fluctuate because that is simply supply and demand, the basis for all pricing. Stable, inflationary, or deflationary doesn't change that. If technology and productivity increases allow for a reduction in price (the common computer hardware example), everyone's purchasing power increases and is wealthier as a result.

I know of very secure investments which pay 1-3.5% in REAL interest rates for something that "lasts forever". A bigger and more informed investor with the right "ins" may well know of something even better.

"Hey, I knows a guy! He can hook you up real good" said the spider to the fly. Don't forget that high interest rates are bad for business and therefore bad for economic growth. Future productive opportunities for your money are diminished. Also, "1-3.5" real interest equates to "-2 to 0.5" nominal interest in a deflationary economy at 3%.

The fact that many interest rates today are negative in real terms should tell you that its fucked up in real terms.

It just tells you that a central bank is controlling the interest rate rather than the free market. "Force" more debt on people and businesses and hope it fixes the problem.

[Etlase2]

But isn't trade (like virtue) its own reward? Voluntary exchanges occur when both parties perceive themselves as benefiting from the exchange. That's why you can be reasonably confident that a voluntary exchange is in fact creating new value.  So, why do you need to artificially incentivize more trades via inflation?

Because assuming the supply is expanding because there is more demand for the currency (and not because of reduced cost of producing the currency due to hardware efficiency gains or whatnot), rewarding people for trading incentivizes them to trade in it, not just hoard it. As in, legitimate existing businesses will want to take the currency, and people will want to spend it. It means you don't have to be digital-currency-wealthy to benefit from using it when the market expands. It's also "free" money that gets its value from reducing the value of fiat rather than paying for it in excessive hardware and electricity costs. It changes the objective from "buy and hold until a good fiat exchange opportunity arises" to "buy and use".

But aren't artificially-low interest rates one of the main objections to an inflationary currency?  If we switched to a sound currency like Bitcoin, of course interest rates would rise. But they'd rise to their correct level, i.e. the level that reflects the voluntary preferences of market participants.

No... artificially low interest rates are due to the central bank issuing new money to banks at low interest rates. It has everything to do with a centrally planned economy and nothing whatsoever to do with the money supply being unbound. It is fake market vs. free market, not inflation vs. deflation. There is little that is sound about bitcoin, and I have no idea why you think interest rates would rise in a deflationary economy, except for the incredibly unsound idea that no one will want to lend at negative interest so long-term interest instruments will be excessively scarce. You say "of course" yet this thread is 12 pages of people arguing about how long-term interest bearing instruments may or may not be viable. Again, you can't just add 3% on to the real interest rate and expect businesses to just hum along as if nothing has changed.

And 3% is only the best-case scenario where a large portion of the world has adopted bitcoin. Prior to that, deflation periods will be much, much heavier as the only way to expand the market is to increase the amount of deflation. Businesses who take loans in BTC will be punished for doing so because they expand the market and the demand for money making it much harder to repay the loan. But taking loans in BTC is the best way to get businesses to want BTC in exchange so that they can pay those loans back! It is a catch-22.

[Roger_Murdock]

No... artificially low interest rates are due to the central bank issuing new money to banks at low interest rates. It has everything to do with a centrally planned economy and nothing whatsoever to do with the money supply being unbound. It is fake market vs. free market, not inflation vs. deflation.

Ahhh, good point. That was sort of in the back of my mind as I wrote that. It's not that new money can be printed into existence. It's that it's printed and loaned into existence at an interest rate determined by a central authority. So if we got rid of the central bank, and the government instead simply printed new money into existence to fully or partially fund itself, what effect, if any, would that have on prevailing interest rates? More thoughts later. Thanks!

[Realpra]

Lets go one level deeper: Why are stable prices good? What is the facts and basis behind this premise?

Stable prices do not favor creditors (deflationary does) nor debtors (inflationary does--to the extent inflation goes beyond the baked in rate). Stable prices do not favor those who hold wealth in real assets (inflationary does) nor money (deflationary does).

But creditors are not spending real wealth because they are not buying anything while debtors in general ARE consuming something of value. It would make sense just fine that they are punished unless they are very careful not to waste stuff we all need.

(See my island example.)

This particular part of your counter is an appeal to the emotion of fairness. You are not substantiating it by also explaining why creditors and debtors should be treated equally. (feel free to do so though)

Assuming stable prices are achieved, that means the the supply of money isn't being manipulated by central bank inflation or those who control vast amounts of wealth (see panic of 1907 and how handsomely JP Morgan profited off of others' misery--and odds are good he caused it).

Now I spend a good deal of time reading about the 1907 situation and two things strike me:
1. The economy was in recession for other reasons already when there was a crisis of faith in NYC banks.
2. The whole ordeal sounds like a massive card house/gambling business that SHOULD have been allowed to fail.

It was saved by JP Morgan at A LOSS to him. Likely he did it anyway because the house of cards falling would have cost him MORE.
Now when used as an analogy for a very basic premise (stable = good) it is unfortunate that you have the facts somewhat backward.

The mess was saved due partly also to deregulation pushed by JP, basically a lowering of the bar for the gamblers. I personally speculate the mess came apart in the great depression.

Now both credit holding manipulators actually lost money in your analogy here (the other being a botched copper cornering attempt starting the ordeal) so I don't see it as supporting your case for stable average prices in ANY way.

Stable prices do not encourage over-investment to recoup inflationary losses nor under-investment because holding currency is the safest bet.

This is a new premise to back the other one. Here you are making the premise that stable average prices lead to a perfect level of general investment.
A premise based on the first premise almost.

It reduces or eliminates menu costs

Now that's the first good argument I have heard.

However there is a problem. We both agree that changes to individual ware prices are necessary and unavoidable. This means that there will always be SOME menu costs.

The question then becomes, how great are they?
In a digital age I would say very small. Additionally super markets and in fact ALL salesmen will often change prices beyond need to confuse or attract customers into paying or buying more - this means the cost to doing so can not be all that great.

Another counter is that if menu costs were a serious detriment to anything people would display prices in a third medium - like dollar prices today paid with BTC.

and the money illusion.

The money illusion would arguably be made STRONGER if everything always cost the same. I guess what you mean is that the cost of falling under the money illusion would be smaller.

Under inflation you would be paying too little and under deflation too much if you went by "the usual price".

Again sales people will try to make you pay more in so many ways, this is a bargaining problem that the free market solves nicely through cutthroat competition.

If market competition reduce prices to their correct level there is also no illusion cost so I don't see it supporting your premise.

Say it IS a good thing, how do you LOWER prices again if the economy contracts?

Ahh the meaningless "gotcha!" moment. How do I lower prices from when bitcoin was at its $32 high? The simple answer is: I don't. No currency is immune to a loss of faith or demand.

So your answer is "I don't"? How is BTC crashing from $32 to $2 due to a localized bubble stable?

So you didn't answer my question because bubble collapses are not going to ensure stable prices.

The only sustainable way to lower prices I see is to remove currency from circulation which will require theft, taxes or selling real assets (which central banks don't have enough of to manipulate prices down again).

Could it be that monetary inflationists only care about stable prices when it allows them to GET money and value aaaand... not so much when they theoretically should go out and spend it to lower prices?
That's not ad hominem btw that's occams razor - simplest explanation: "I want free stuff" - like ALL human beings.

[Etlase2]

But creditors are not spending real wealth because they are not buying anything while debtors in general ARE consuming something of value. It would make sense just fine that they are punished unless they are very careful not to waste stuff we all need.

Do you not absorb anything? Are you just going to keep going round and round?

DEBTORS does not equal CONSUMERS. Get it out of your head that this has anything to do with credit cards. This is about economic growth. Not only new growth, but also existing value brought over from fiat.

This particular part of your counter is an appeal to the emotion of fairness. You are not substantiating it by also explaining why creditors and debtors should be treated equally. (feel free to do so though)

If you never try to make up a type of fallacious argument again, the world will be a better place. I also did not say that they should be treated equally, I said ONE IS NOT FAVORED OVER THE OTHER. See the difference? I explained further in the post why deflation is not good for debtors--it will cause them to go bankrupt. This will stunt economic growth as even viable industries will fail. I'm sorry if I don't spell out each and every argument within one sentence. Inflation isn't good for creditors because, presumably in a non-debt based currency/society, most people will be creditors via interest earned on savings. Inflation/central banking steals a good portion of that.

2. The whole ordeal sounds like a massive card house/gambling business that SHOULD have been allowed to fail.

Sure sounds like the current situation on Wall Street today.

It was saved by JP Morgan at A LOSS to him. Likely he did it anyway because the house of cards falling would have cost him MORE.

Where do you see this as a loss? Morgan purchased massive equity in banks and trusts and organized the deflated stock market buy up. Remember when Citigroup shares were $550 a piece and then suddenly $10 a piece a few years ago? These are the times when Morgan propped up the economy. If you're referring to the "$21 million loss" referenced in the wiki article, that is a reference to his existing stock holdings. Did you not read far enough to see this tidbit?

"The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion)."

Now when used as an analogy for a very basic premise (stable = good) it is unfortunate that you have the facts somewhat backward.

It's unfortunate that you claim I have my facts backward when you don't get it.

The mess was saved due partly also to deregulation pushed by JP, basically a lowering of the bar for the gamblers. I personally speculate the mess came apart in the great depression.

<insert lulwut pear> I have no idea what the hell you're talking about.

Now both credit holding manipulators actually lost money in your analogy here (the other being a botched copper cornering attempt starting the ordeal) so I don't see it as supporting your case for stable average prices in ANY way.

I hope you don't play chess. The whole crisis would have never happened if the supply of money was not illiquid. But it was, and people in New York buying food from the fall harvest caused drops in liquidity every year.

This is a new premise to back the other one. Here you are making the premise that stable average prices lead to a perfect level of general investment.
A premise based on the first premise almost.

It is similar, yes. The interest rate will change in a free market to adjust to the need for money, and no other factors need come into play.

Another counter is that if menu costs were a serious detriment to anything people would display prices in a third medium - like dollar prices today paid with BTC.

LOL because BTC is stable.

If market competition reduce prices to their correct level there is also no illusion cost so I don't see it supporting your premise.

"You can lead a horse to water but you can't make it drink."

So your answer is "I don't"? How is BTC crashing from $32 to $2 due to a localized bubble stable?

That's BTC's problem.

So you didn't answer my question because bubble collapses are not going to ensure stable prices.

Make a currency ripe for bubbles and bubbles are what you get. In the Decrits proposal, the more people that mine the more money is created, so any upward pressure on the price will be quickly deflated. Since everybody knows this, it is in the best interests of people holding currency to sell while it is above its cost to produce, further reducing the possibility of a bubble.

The only sustainable way to lower prices I see is to remove currency from circulation which will require theft, taxes or selling real assets (which central banks don't have enough of to manipulate prices down again).

Or you could actually read what I said about arbitration.

Could it be that monetary inflationists only care about stable prices when it allows them to GET money and value aaaand... not so much when they theoretically should go out and spend it to lower prices?
That's not ad hominem btw that's occams razor - simplest explanation: "I want free stuff" - like ALL human beings.

No, it's not an ad hominem, it would be a strawman. Gotta work on that. Ad hominem - attacking the person in lieu of the argument; strawman - attacking an argument that the person did not make in lieu of the actual argument. Anyone who doesn't spend/receive money in an expanding Decrits economy suffers some opportunity cost--they won't receive any of the new money given to transaction activity.

[Etlase2]

Ahhh, good point. That was sort of in the back of my mind as I wrote that. It's not that new money can be printed into existence. It's that it's printed and loaned into existence at an interest rate determined by a central authority. So if we got rid of the central bank, and the government instead simply printed new money into existence to fully or partially fund itself, what effect, if any, would that have on prevailing interest rates? More thoughts later. Thanks!

It depends on the government's policy towards spending into existence more than they bring in in taxes. If they spend more than the increase in demand for new money due to growth, then real interest rates will fall. If they keep extra spending at around the rate of new growth, then interest rates should be mostly determined by the free market. But the goddamn genius part of governments spending new currency into existence is that THEY DON'T HAVE TO PAY INTEREST ON IT. Thus there is no incentive to create more than necessary as they don't need to worry about reducing the effective debt. Well, other than political corruption. But at least in a "democracy" we have some (little) choice in electing people to government, politicians who cause inflation or direct new money to poor causes can be voted out. We have no such choice in electing central bank chairmen.

Imagine how much lower the tax burden could be if, in the US at least, we didn't owe an entire year's worth of GDP in debt! The British empire did this for 700+ years with tally sticks. But then the Rothschilds got ahold of England. It makes so much more sense than the current system you have to wonder how fricken stupid or greedy people were to get us to where we are today.

[Realpra]

If you're referring to the "$21 million loss" referenced in the wiki article, that is a reference to his existing stock holdings. Did you not read far enough to see this tidbit?

"The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion)."

Yeah that's the one. Being on the board of directors is not the same as ownership it only means some influence.
http://en.wikipedia.org/wiki/Board_of_directors

Bank officers could likely have been elected into those boards by stockholders to get better bank deals - but JP could own 0 shares.

The mess was saved due partly also to deregulation pushed by JP, basically a lowering of the bar for the gamblers. I personally speculate the mess came apart in the great depression.

<insert lulwut pear> I have no idea what the hell you're talking about.

Yeah I can tell:

The steel union controlled 60% of the steel industry, but to avoid a major collapse of TC&I and further panic the steel union had to acquire TC&I.

This went straight against Theodore Roosevelt's anti-monopoly regulation spree so JP had him convinced an exception was necessary - hence dereg.

The whole ordeal was still a house of cards as I see it so maybe THAT was what came apart during the great depression. Just speculation that last part though.



I'm putting you back on ignore etlase, you are annoying me, being overly obtuse and talking down to me for no reason.

[Roger_Murdock]

But isn't trade (like virtue) its own reward? Voluntary exchanges occur when both parties perceive themselves as benefiting from the exchange. That's why you can be reasonably confident that a voluntary exchange is in fact creating new value.  So, why do you need to artificially incentivize more trades via inflation?

Because assuming the supply is expanding because there is more demand for the currency (and not because of reduced cost of producing the currency due to hardware efficiency gains or whatnot), rewarding people for trading incentivizes them to trade in it, not just hoard it. As in, legitimate existing businesses will want to take the currency, and people will want to spend it. It means you don't have to be digital-currency-wealthy to benefit from using it when the market expands. It's also "free" money that gets its value from reducing the value of fiat rather than paying for it in excessive hardware and electricity costs. It changes the objective from "buy and hold until a good fiat exchange opportunity arises" to "buy and use".

Sorry, but that doesn't seem to answer my question. Obviously, "rewarding people for trading incentivizes them to trade in it." But again, why isn't mutually beneficial trade its own reward?  Why do you NEED to add an extra incentive to encourage more trades? And won't the extra trades that occur as a result of your incentive be trades that would not otherwise have been considered mutually beneficial? (And doesn't that tell you that those trades were not in fact wealth-creating?) I would think you'd need to argue that "hoarding" creates some kind of negative externality.

It seems to me that the deflationary nature of Bitcoin IS encouraging people to save it, but I see that as a good thing.  Again, the larger fiat economy is still encouraging too much consumption and too much debt.  Bitcoin is thus helping to offset some of those destructive tendencies.  As I've argued before, Bitcoin is currently operating more as a gold-like store of value.  But unlike gold, Bitcoin has everything it needs to be a successful medium of exchange.  It's just that success as a (direct) medium of exchange is much more reliant on network effects and will thus take longer to achieve.  But I'd note that it's already succeeding as a medium of exchange for certain niche markets (e.g., Silk Road) where its advantages over fiat make it particularly compelling.  

[Etlase2]

Sorry, but that doesn't seem to answer my question. Obviously, "rewarding people for trading incentivizes them to trade in it." But again, why isn't mutually beneficial trade its own reward?  Why do you NEED to add an extra incentive to encourage more trades?

The value of an expanding currency has to go somewhere. In bitcoin, very little of it goes to miners as there is competition to spend more and more money to get a larger piece of the same pie and make the ROI as low as possible. This money that bitcoin mining wastes helps only the electric company, ATI (or ASIC manufs), and people previously holding bitcoin. So only two types of people using the network benefit: 1) miners (barely), 2) existing holders of currency. Under the decrits system, it is: 1) miners (who only mildly compete with each other, spending 5x the money on video cards will not bring 5x the return, it keeps the "hardware tax" low), 2) existing holders of currency (who also receive half of the "free" money based on their holdings), 3) people who trade. This opens up a whole new dimension of who benefits from using the currency while at the same time reducing the amount of hardware/electricity waste. There is no reason that people who do nothing productive in expanding the economy should see all the benefit of expanding the economy. Have you heard of Wall Street? Because that's exactly what they do.

The "meta" of rewarding trade with new currency (and unbounded mining) also counteracts Wall Street-like symptoms. If capital accumulation becomes the goal of the financial market rather than productivity and economic growth, the unbounded supply, a currency that "the people" can create, will devalue the power of that capital accumulation. It will stop greedy people in megacorp banks from causing the business cycle. Because of price stickiness it's very hard to see the effects of a recession, but in gasoline it was obvious in 2008. It dropped dramatically in half in price because the US dollar experienced a big slow in the velocity of money which caused deflation, even though it was not all that evident in most prices. It was certainly evident in unemployment, though. A fun and informative video: http://www.youtube.com/watch?v=qOP2V_np2c0 (note that this video is intentionally from a Marxist perspective on capitalism--I'm not promoting marxism, only stating the obvious that capitalism has no countermeasure for when it gets out of hand, and that this is a problem of the system of money, not so much capitalism itself)

You can call this devaluation theft, but it is the natural order of things when the greed of a few massively outweighs the benefit to society. Play too many games with the financial market, and people just create their own currency on the side anyway, effectively diminishing the power of the existing, forced currency. This happened in hundreds of communities during the great depression. What if the currency could have this property baked in?

And won't the extra trades that occur as a result of your incentive be trades that would not otherwise have been considered mutually beneficial? (And doesn't that tell you that those trades were not in fact wealth-creating?)

As I told Realpra, the answer to this is simple in that the odds of getting free money are not outweighed by the transaction fee. Such as if the transaction fee is 0.01 and the award is 100x the tx fee or 1 coin, then the odds being awarded that coin are 1 in 101 (but really half that as either the sender or receiver may be rewarded, so it's 1 in 101 only if you're trying to game the system and send to yourself). I haven't come up with the exact solution of how to do that, but it will likely have to do with hash comparisons or hamming distances or the like. It's essentially just based on "refunding" tx fees with new money.

I would think you'd need to argue that "hoarding" creates some kind of negative externality.

It does and I have. https://bitcointalk.org/index.php?topic=110708.0. Keynes said "saving causes recession because of lack of growth" hayek says, "you stupid son, saving causes an increase in non-consumption growth because banks use the money to loan." Since nobody needs to put money in bitcoin banks, and indeed it would be silly as there is no way you are getting a return on savings in a deflationary economy, nobody will "save" in the sense that it is used for non-consumption growth. So rather the ONLY kind of bitcoin growth will be when people holding bitcoin fall to the pressures of consumption at reduced prices. That's right, bitcoin can only grow via consumption (or lololol via speculation). If you have a better idea of how the economy works than Hayek's excessively intuitive logic, I'm all ears. But know that I will call you out on any begging the question fallacies.

It seems to me that the deflationary nature of Bitcoin IS encouraging people to save it, but I see that as a good thing.  Again, the larger fiat economy is still encouraging too much consumption and too much debt.

According to Hayek, there is a clear distinction we can make between saving and hoarding, and bitcoin is hoarding. Too much debt in fiat is the nature of a debt-based currency, one which Decrits would not be. "Overconsumption", if we could ever find a way of actually defining that, is probably more of a problem of government policy than the currency itself. Either way, you can't use what happens in fiat as an argument against an unbound free market currency. I can just as easily argue that bitcoin will forever be entrenched in a business cycle of slow recession with periodic economic booms as the deflationary pressure causes a rash of consumption. The money shouldn't be what encourages or discourages anything, it should be as neutral as possible. That's why price stability is important. If people want to consume and your free market currency penalizes consumption, then they will not use your currency.

Bitcoin is thus helping to offset some of those destructive tendencies.

So you say. But I could just as easily argue that bitcoin will always be irrelevant because few, in the grand scheme of things, will use it. Bitcoin doesn't offset anything if people still universally use fiat.

It's just that success as a (direct) medium of exchange is much more reliant on network effects and will thus take longer to achieve.

And it will probably never achieve the network effect because people will get wise to the fact that they're buying into a pyramid. Rant about whether or not it's a pyramid scheme all you want, the fact of it all is that 50% of all the currency to ever be distributed will have been distributed in the next few months, and this may be stunting growth much more than you realize. *I* could sleep soundly at night, in the future, after having released Decrits knowing that there won't be hundreds of videos on Youtube calling it a pyramid or ponzi scheme.

But I'd note that it's already succeeding as a medium of exchange for certain niche markets (e.g., Silk Road) where its advantages over fiat make it particularly compelling.  

A black market being the only real source of growth in an economy is not exactly a ringing endorsement of that economy. It just means the benefits for the black market outweigh the downsides.

[Roger_Murdock]

It does and I have. https://bitcointalk.org/index.php?topic=110708.0. Keynes said "saving causes recession because of lack of growth" hayek says, "you stupid son, saving causes an increase in non-consumption growth because banks use the money to loan." Since nobody needs to put money in bitcoin banks, and indeed it would be silly as there is no way you are getting a return on savings in a deflationary economy, nobody will "save" in the sense that it is used for non-consumption growth. So rather the ONLY kind of bitcoin growth will be when people holding bitcoin fall to the pressures of consumption at reduced prices. That's right, bitcoin can only grow via consumption (or lololol via speculation). If you have a better idea of how the economy works than Hayek's excessively intuitive logic, I'm all ears. But know that I will call you out on any begging the question fallacies.

I guess I come back to my argument that it's impossible to save without lending, which I don't think you've addressed.  By deferring consumption to which you're entitled, you effectively lend those resources to the rest of the economy. Thus, in my view, deflation represents the market-determined interest rate on this extremely low risk loan. Attempting to get rid of this reward for savings seems like it can only introduce distortions into the market.  As far as whether we'll see Bitcoin "banks," I imagine we will eventually.  While you don't need a Bitcoin "bank" for safe storage of your money, "banks" could still act as a middleman between lenders and borrowers. But again, I don't expect many businesses to borrow in Bitcoin for the foreseeable future.  Why would you when the price of borrowing purchasing power in the form of fiat is being kept artificially cheap?

The money shouldn't be what encourages or discourages anything, it should be as neutral as possible. That's why price stability is important. If people want to consume and your free market currency penalizes consumption, then they will not use your currency.

I tend to think that consumption should be "penalized." When you consume in the present, there's an opportunity cost.  Those resources are no longer available to be put toward enabling even greater consumption in the future.  I think deflation is just communicating that underlying reality. "Stable prices" mask it. And just so I understand your position, you expect people to voluntarily abandon Bitcoin in favor of an alternative currency that's designed to maintain "stable prices"? In that case,  I guess it's an empirical question, and we'll see what happens.

*I* could sleep soundly at night, in the future, after having released Decrits knowing that there won't be hundreds of videos on Youtube calling it a pyramid or ponzi scheme.

Yeah, I think it's safe to say that there will NOT be hundreds of videos on YouTube talking about Decrits. (Ok, that was a little obnoxious, but c'mon, you teed that one up for me.)

A black market being the only real source of growth in an economy is not exactly a ringing endorsement of that economy. It just means the benefits for the black market outweigh the downsides.

The black market is the free market. It's also a BIG market.  Personally, I think handling $2 million a month in sales for a single website is pretty good for an experimental currency that's less than 4 years old. Again, I'm not trying to be too much of a jerk here, but let me know when Decrits hits a similar milestone.

[Etlase2]

I guess I come back to my argument that it's impossible to save without lending, which I don't think you've addressed.  By deferring consumption to which you're entitled, you effectively lend those resources to the rest of the economy. Thus, in my view, deflation represents the market-determined interest rate on this extremely low risk loan. Attempting to get rid of this reward for savings seems like it can only introduce distortions into the market.

As I mentioned in the tomato soup thread, the problem with this is the market doesn't know it's getting this "loan". In the mean time, debtors go bankrupt, creditors go bankrupt because debtors go bankrupt, people lose their jobs because no one can afford the products/services of their company any more, THEN the market adjusts to lower prices. This "deferred consumption" doesn't happen in a vacuum and it is only beneficial to the one(s) causing the problem. Everyone else suffers (except other hoarders). And then they suffer again when the hoarder calls in to collect and causes inflation and reduces the value of everyone else's savings.

But again, I don't expect many businesses to borrow in Bitcoin for the foreseeable future.  Why would you when the price of borrowing purchasing power in the form of fiat is being kept artificially cheap?

Why would businesses use bitcoin if they can't run a business with it? What incentive to businessmen have at all to use a volatile, unforgiving currency?

I tend to think that consumption should be "penalized."

Whatever you say, Karl.

When you consume in the present, there's an opportunity cost.  Those resources are no longer available to be put toward enabling even greater consumption in the future.

But yet you argue that deferring consumption merely lends resources to the rest of the economy. That is a net zero, broseph. Your argument has been busted by your own admission. Hayek, on the other hand, says that saving in banks promotes non-consumption growth, exactly what you hope will happen by playing with deflation. If everyone's purchasing power is temporarily increased, you may get some non-consumption growth, but you will also get plenty of consumption. And it's also just a temporary illusion that ignores what happens when there is unexpected deflation. (bankruptcies, job loss, etc. ad nauseum)

I think deflation is just communicating that underlying reality. "Stable prices" mask it. And just so I understand your position, you expect people to voluntarily abandon Bitcoin in favor of an alternative currency that's designed to maintain "stable prices"? In that case,  I guess it's an empirical question, and we'll see what happens.

Deflation is communicating the reality you think you've argued and you think is best but is really just the latest in a string of bitcoinomics rationalizations. Stable prices allow for an economy to actually figure that out for itself. If you ask my opinion, I think the reality of a stable price currency like Decrits would actually make the price of luxury consumption items be much higher. Without the wealth and productivity of the people being dragged up the economy as in fiat or bitcoin, wealth will be more evenly spread throughout the economy, and thus luxury goods must cost more in relation to things like food (supply and demand, of course). But this cost comes at reducing inconsequential things like poverty and hunger. I think I can live with that.

And oh I think people invested in bitcoin will hold on to it for as long as possible. But when something better comes along that actually supports a working economy, the viability of bitcoin will be greatly diminished. If new people aren't rushing to speculate on bitcoin (and it's bad for business), bitcoin's price will not increase. When bitcoin starts stalling, some people are going to rush to cash out. Then all that value goes up in a puff of smoke and the pyramid collapses.

Yeah, I think it's safe to say that there will NOT be hundreds of videos on YouTube talking about Decrits. (Ok, that was a little obnoxious, but c'mon, you teed that one up for me.)

God forbid bitcoin sees a little actual competition other than "i changed 4 lines of code join mah pyramid!!!11" It is folly to assume that the free market will universally choose bitcoin when even you think it sucks for business. Unless you want to fall back to the AbelsFire feudalism argument where "herp a derp nobody needs loans in an economy!!!11"

It's amusing how you didn't respond to my comment about how side currencies popped up all over the place during the great depression. The great thing about a free market is it gets to decide what's best, not what you think is best.

The black market is the free market. It's also a BIG market.  Personally, I think handling $2 million a month in sales for a single website is pretty good for an experimental currency that's less than 4 years old. Again, I'm not trying to be too much of a jerk here, but let me know when Decrits hits a similar milestone.

I'm glad you're impressed. But that does not counter the fact that it is flourishing because of the nature of a cryptocurrency and nothing specific to bitcoin. It's actually sad how even in that economy the volatility of bitcoin means that people have to waste money hedging bitcoin against USD. I don't know what Silk Road charges for the service, but it isn't free and it is another transaction cost that bitcoin imposes due to its poor design.

[VogueBlackheart]

By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.

In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.

Even if newly-created money is distributed in proportion to current money holdings, wealth is transferred to those who spend it first (unless all prices rise in proportion to and at the instant of the money supply increase). Nit-picking perhaps, but it's important to isolate the addition of money itself from the rise in prices as this money starts moving through the economy.

[Roger_Murdock]

But yet you argue that deferring consumption merely lends resources to the rest of the economy. That is a net zero, broseph. Your argument has been busted by your own admission. Hayek, on the other hand, says that saving in banks promotes non-consumption growth, exactly what you hope will happen by playing with deflation. If everyone's purchasing power is temporarily increased, you may get some non-consumption growth, but you will also get plenty of consumption. And it's also just a temporary illusion that ignores what happens when there is unexpected deflation. (bankruptcies, job loss, etc. ad nauseum)

How is a loan a net zero? Some of the people who "take you up on the loan" (by immediately spending their money) will do so for the purposes of present consumption.  But (as you seem to acknowledge) others will do so for the purposes of investment.  Even if the former group dominates, that's not a net zero.  Those consumers had the same opportunity that you did to defer their consumption.  The fact that they chose not to indicates that they placed a higher subjective value on present consumption.  So both parties gain.  And the saver should be compensated.

[Etlase2]

Because saving money in a bank moves the currency through the economy via loans. Almost universally non-consumption growth.

Hoarding money leads to the same effective value being used throughout the economy, for consumption or non-consumption, depending on who is using it, but by acting via deflation instead of a lowering in the interest rate due to there being more money available.

Where is there any net gain here? How does more value magically appear in the economy just because you hoard?

I clearly illustrated in this response to you in the tomato soup thread about how by hoarding, one can earn a much better return than by saving in a fixed supply currency, but at a cost to everyone else. Any time someone defers consumption by hoarding, they are incurring a future inflation (or less deflation than there otherwise would have been). Both when you hoard and when you spend causes economic upset at the benefit to the hoarder and the detriment to the rest of the economy. Saving would incur no penalties in either situation. But it also won't make nearly as much value ("out of thin air").

[Roger_Murdock]

Because saving money in a bank moves the currency through the economy via loans. Almost universally non-consumption growth.

Hoarding money leads to the same effective value being used throughout the economy, for consumption or non-consumption, depending on who is using it, but by acting via deflation instead of a lowering in the interest rate due to there being more money available.

Where is there any net gain here? How does more value magically appear in the economy just because you hoard?

I clearly illustrated in this response to you in the tomato soup thread about how by hoarding, one can earn a much better return than by saving in a fixed supply currency, but at a cost to everyone else. Any time someone defers consumption by hoarding, they are incurring a future inflation (or less deflation than there otherwise would have been). Both when you hoard and when you spend causes economic upset at the benefit to the hoarder and the detriment to the rest of the economy. Saving would incur no penalties in either situation. But it also won't make nearly as much value ("out of thin air").

Bank loans are almost universally for non-consumption growth? Really? So home mortgages and car loans are a trivial fraction of bank loans? And even if the real resources loaned by "hoarding" did go primarily to consumption, why is that a problem? Consumers and investors both have the opportunity to bid on your loan by spending their own money on consumption and investment, respectively. The balance that results will thus reflect the subjective preferences of market participants. And yes savings results in a future inflation. By saving, you've loaned purchasing power. When you eventually spend your money, society pays you back by giving up some of their purchasing power. And to the extent that non-consumption growth has occurred, the economy will be larger than it was previously. So the subsequent inflation caused by your spending will be smaller than the initial deflation caused by your saving.

[Etlase2]

The POINT Roger, as I have been arguing, is that it does not make a difference. Society is not gaining anything from you hoarding than they would not have otherwise gained from you saving. On the contrary, hoarding will lead to a mix of non-consumption and consumption growth, whereas saving will primarily go to non-consumption growth. Non-consumption growth is about time preference--your deferred consumption acts to create the possibility of more, future consumption growth. Consuming may expand the economy here and now (debatable, in reality it likely just delays non-consumption growth which is what leads to a permanently bigger economy), whereas non-consumption expands it amortized over time in the future.

So the subsequent inflation caused by your spending will be smaller than the initial deflation caused by your saving.

This I proved to be incorrect using a simple example with the equation of exchange. "Saving" in a bank causes neither deflation nor inflation because the money is still in circulation. "Hoarding" in a digital wallet causes deflation and then inflation. If the ratio your amount of money to the total supply of money does not change, there is no possible way that it can not have this effect. And you, the hoarder, benefit far more handsomely off of hoarding than you would off of saving even though the net gain over saving to the economy is zero. The net gain to your wealth is substantially greater than zero. The only possibility to explain this is that it comes at a cost from everyone else. There is no miraculous new value created via hoarding that will be created above and beyond saving. Instead, it is just a transfer of wealth created via economic upset.

[Roger_Murdock]

Society is not gaining anything from you hoarding than they would not have otherwise gained from you saving.

Ok, but are you saying that "hoarding" (saving without direct lending) provides NO value to society or only that it provides LESS value than saving + direct lending? Because I would tend to (sort of) agree with the latter position.  But that's also the reason that sticking your money in a safe earns a smaller return than lending it out.  Again, sticking money in a safe is a very low risk loan that gives you maximum flexibility.  The price for those features is the opportunity cost of foregoing a nominal return on top of the increased purchasing power resulting from deflation. If people willingly forgo "saving" in a bank (which is actually LENDING to a bank), it's because they place a higher subjective value on those features than they do on whatever additional return the bank is offering.  

"Saving" in a bank causes neither deflation nor inflation because the money is still in circulation. "Hoarding" in a digital wallet causes deflation and then inflation. If the ratio your amount of money to the total supply of money does not change, there is no possible way that it can not have this effect.

I think that's basically right, but isn't the bank just a middleman for lending?  To make it simpler, imagine that instead of putting your $100 in the bank, you lend it directly to Bob.  You forgo $100 worth of consumption, and Bob gets to enjoy an additional $100 worth of purchasing power.  There's still the same amount of stuff in the world as there was before you made the loan.  And there's still the same amount of money in circulation.  So yeah, it seems like that shouldn't cause either inflation or deflation. In contrast, when you stick your money in a safe, that will tend to cause a drop in prices.  And when you later spend that money or otherwise put it in circulation, that should cause a rise in prices. But again, that's just a different mechanism for the transfer of purchasing power from one party to another.  In the example with Bob, you give 100 bucks of purchasing power to him when you make the loan, and he gives you a hundred bucks of purchasing power (plus interest) when he repays the loan.  In the "hoarding" example, you transfer a 100 units of purchasing power to everyone who holds that currency (and I'm assuming now that we're talking about a deflationary currency).  When you later spend the money (following deflation due to economic growth), everyone who holds  that currency gives you a 100+ units worth of purchasing power. Of course, the deflation and inflation caused by hoarding and then spending are occurring at the margins.  You're always going to have some people withdrawing money from circulation (to stick in the safe) and other people beginning to spend previously-saved money.

And you, the hoarder, benefit far more handsomely off of hoarding than you would off of saving even though the net gain over saving to the economy is zero. The net gain to your wealth is substantially greater than zero. The only possibility to explain this is that it comes at a cost from everyone else. There is no miraculous new value created via hoarding that will be created above and beyond saving. Instead, it is just a transfer of wealth created via economic upset.

How could the profit from hoarding be MORE than the profit from lending? If you stick 100 units of a deflating currency in the safe for a year, at the end of the year you'll have... 100 units. Sure they'll be worth more than they were previously, but you'd still have been better off if you'd lent them out at interest.  As I pointed out in another thread, a deflationary "currency" already (sort of) exists.  Isn't that basically what gold represents? But most people don't just horde gold because traditionally that wasn't a great investment.  Of course, it's turned into a great investment in recent years but only because our fiat-based system has gotten so screwed up.

[Etlase2]

Ok, but are you saying that "hoarding" (saving without direct lending) provides NO value to society or only that it provides LESS value than saving + direct lending?

Consumption growth is the eventual result of non-consumption (investment) growth. It's all about time-preference (according to Austrians). And realize "consumption" doesn't necessarily mean destroying something or using something up, so I'd like to keep any negative connotation with it out of the discussion--which I don't think you've done, but other people have and I just want to clarify that.

What money, lending, and interest should provide is a balance between consumption and investment, depending on what the free market desires. If, for example, in a perfect market, too many people are looking for non-consumption growth (their time preference is to the future), but the free market is not currently providing enough avenue for this growth (for whatever perfect market reason--likely because too many people have a low time preference), interest rates and prices will fall naturally. This is "good" deflation. This spurs people to consume, and in return restores a natural balance based on what the market needs.

By removing your currency from circulation, you are moving the force of money out of balance with lending and interest. With less money available to lend, the only thing interest rates can do is rise while almost paradoxically prices must still fall. While in the first scenario, lower interest rates means profit margins on lower prices are relatively unaffected. In the second scenario, borrowing money becomes much more difficult as banks get scared and a credit crisis will probably emerge. This is "bad" deflation. "Money" becomes more valuable than "capital". This can lead to the so-called deflationary spiral. While this is unlikely to ever happen in Bitcoin, the only reason is because it is a free market currency and the free market will switch to something else (inflation!!!), so the effect can't really spiral out of control.

So the question isn't about what provides more or less value to the economy. One scenario promotes a well-functioning free market while the other causes an imbalance in the economy. Money is the lubricant that allows economies to function. Remove some of that lubricant and things start to break down. This will be extremely exacerbated by the fact that bitcoin is attempting to bring existing value in from an exogenous economy.

But that's also the reason that sticking your money in a safe earns a smaller return than lending it out.  Again, sticking money in a safe is a very low risk loan that gives you maximum flexibility.  The price for those features is the opportunity cost of foregoing a nominal return on top of the increased purchasing power resulting from deflation.

But you are thinking in nominal terms which is not at all the whole story. Real returns are what matter. A real return is interest + deflation. If you can cause extra deflation by not loaning money so that it creates a better real return than the real return you would have gotten by loaning, you have created a very dangerous imbalance in the economy. You are not letting the free market do its job.

This is compounded in bitcoin by the fact that 1) a perfect market doesn't really exist, mistakes are always made because all information can not be known; 2) bitcoin has an absolutely fixed supply unlike gold, where at least the rising value of gold would cause more effort in producing more gold--in bitcoin more effort goes into producing the same amount of bitcoins; 3) bitcoin has to expand into a huge world economy and the distribution of currency will provide countless opportunities to make hoarding provide a much better real return than lending. This would be the case even with the gaussian distribution that Adrian-x thinks will be better.

... When you later spend the money (following deflation due to economic growth), everyone who holds that currency gives you a 100+ units worth of purchasing power. Of course, the deflation and inflation caused by hoarding and then spending are occurring at the margins.

Again in an almost paradoxic way, lending may actually cost you value (at least in opportunity cost) because you are lubricating the economy and keeping deflation low. If everyone truly cared about their fellow man this system might work. But we know that isn't the case, and we know financial minds will find any avenue to abuse a monetary system to their advantage. And causing extra deflation only to return it via future inflation does nothing but upset the economy. It would likely come and go in cycles, just like the business cycles observed in fiat. You can't really be sure that your money will retain its value let alone increase in value over any period of time.

You're always going to have some people withdrawing money from circulation (to stick in the safe) and other people beginning to spend previously-saved money.

But you can't really predict what people are going to do. Mises is quite famous for basing his economic theory around that. Bitcoin is a free market currency as well as an alternative. The economics will be far different than fiat on that case alone. No one has to consume with bitcoins at all. And there is no real advantage to do so. Want to send money over the internet? Buy some bitcoins with fiat and let the other person cash out. This isn't economic growth. Nor is speculation.

How could the profit from hoarding be MORE than the profit from lending? If you stick 100 units of a deflating currency in the safe for a year, at the end of the year you'll have... 100 units. Sure they'll be worth more than they were previously, but you'd still have been better off if you'd lent them out at interest.  As I pointed out in another thread, a deflationary "currency" already (sort of) exists.  Isn't that basically what gold represents? But most people don't just horde gold because traditionally that wasn't a great investment.  Of course, it's turned into a great investment in recent years but only because our fiat-based system has gotten so screwed up.

It's about the real interest you earn, not the nominal interest.

[odolvlobo]

I'm late the game, so I hope I'm not repeating something that has already been discussed to death...

Anyway, here's what I think: Bitcoin is a "zero sum game" only if you exclude everything else. The "zero sum game" scenario assumes that 100% of the BTC in the world is sitting in bank accounts collecting interest. That is not possible, of course. As the OP has probably pointed out, if all the BTC in the world is just being used to collect interest, then there is no way to pay interest. Also, in this scenario, BTC has no value since it is not being exchanged.

The real story is that BTC is used to exchange assets. If the total value of assets in the world increases, then there is no problem with interest -- interest effectively means that one asset is exchanged later for another asset of higher value.

[YokoToriyama]

no idea

[Realpra]

I'm late the game, so I hope I'm not repeating something that has already been discussed to death...

In short? Etlase is getting/got his head bashed in by people taking turn arguing with/getting tired of him.

I wonder if he ever gets tired of being wrong so much.

I mean "loans are not for consumption"... that's like the whole point of loans! To buy a machine, food or whatever, so you can be more productive the next day.

Stupidest thing I ever fucking heard.

[Dalkore]

I'm late the game, so I hope I'm not repeating something that has already been discussed to death...

Anyway, here's what I think: Bitcoin is a "zero sum game" only if you exclude everything else. The "zero sum game" scenario assumes that 100% of the BTC in the world is sitting in bank accounts collecting interest. That is not possible, of course. As the OP has probably pointed out, if all the BTC in the world is just being used to collect interest, then there is no way to pay interest. Also, in this scenario, BTC has no value since it is not being exchanged.

The real story is that BTC is used to exchange assets. If the total value of assets in the world increases, then there is no problem with interest -- interest effectively means that one asset is exchanged later for another asset of higher value.

It is a zero-sum game in the fact that it is a fixed asset.   A known and fixed quantity is known to participates in advance to any investment activity.  Yes people can assign a high value for a BTC in the open market by bidding up the price until someone accepts your offer but someone needs to sell BTC for anyone to get BTC.   That is also why I see Bitcoin as more of a "wealth reserve assets" ie real savings more than an actually currency even though it can act as both at the same time.

[Sword555]

I do not understand how besides those people who are putting too much effort into studying crypto currencies and doing all they can via hypothesis that looks irrelevant.