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

[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.

[1714863671]

1714863671

[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)