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

[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.

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[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.