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

[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.

[1714853256]

1714853256

[1714853256]

1714853256

[1714853256]

1714853256

[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.