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Author Topic: Deflation and Bitcoin, the last word on this forum  (Read 128438 times)
jtimon
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September 28, 2011, 07:27:20 AM
 #281

Well, maybe I could have said it better. The only reason to save money is for spending it at later date. So for every 10 (20) hoarders who do not spend right now, there's an ex-hoarder who just now spending, spending, spending.  Then he will start "hoarding" again, and someone else will spend. That is what I had in mind when speaking about a "constant rate of hoarding".
I see. And I realise I must correct myself. Hoarding doesn't cause deflation, an increase in the hoarded money pool does. A decrease causes inflation.
The more constant that pool is, the more stable V and P.

Quote
No. I mean the price of the capital is being reduced and also its nominal yields (assuming the percentual capital yield remains constant).

And the problem is? While it may be only half of the old price but every coin can buy now twice as much.

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Yes, in my example, the baker will buy his supplies cheaper and could also maintain his standart of living with a lower wage, but the interest he's paying for the loan stays the same. Also, if for years he only pays the interest and then sells his capital to pay the principal of the loan, his nominally devalued bakery won't pay the principal of the loan.

I'd say you should qualify your "Deflation is bad". Namely, deflation is bad for entrepreneurs/investors who heavily rely on loans,  and especially those cannot learn neither from thought experiments nor experience. Also if everybody expects price deflation even a lower percent become more attractive for lenders. Especially if those are long-time savers.

Call me an optimist, but I really do think that people will learn. If a project is worth starting purely from investor savings then there is a loan percent at which it worth starting from loans. And only foolish investors... but that's obvious.
There should be no difference between investors that rely on loans and investors that doesn't. The self-financing entrepeneurs should think that they're lending to themselves. All borrowers and money holders investors are competing in the same market, the money holder must account the costs of capital-money even if he doesn't have to borrow it.
Yes deflation can lower interest rates (negative inflation premium) but it cannot lower the interest to zero.
A more extremist example:
Stable prices, 5% interest rates and capital yields. The entrepreneur should get at least a 5% profit/yield in his investment.
10% deflation, interest rates (and therefore minimum capital yields) drop to 0.1%, the entrepreneur should get a 10.1% profit yield in his investment.
So effectively the minimum capital yields become the interest rate + deflation instead of only the interest rate.
From my point of view, to meet demand, the minimum yield of the means of production should be 0. When that yield is reached, as much capital of the same type (which competes with itself) has been created. Other profits tend to zero by competition, capital yields don't. But this is another topic.

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So if I hoard 200,000 bricks in my house that's going to investment?

Now, that was funny. No, that's not investment. But if you sell the bricks and keep the money, the price of bricks will go down and investors needing bricks will get them cheaper and this way you'll have more investments.
My point that an increase in the hoarding pool doesn't lead necessarily to more investments. You assume that someone will buy the bricks, but they can stay in the stock of the producer. Or the deflation can force him to sell them at a lost, which will cause is bankrupt. Wasn't his business profitable? It was without deflation, but not with it.

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1) Not all what is saved is invested.
2) Deflation makes money-capital more desirable in relation to real capital, but money-capital doesn't produce anything if it isn't invested/lent.

1) And there's no need for it. Saving (as in "hoarding") can pull out of circulation a certain amount of money, but it will not pull out of circulation the produced goods. The one which were already sold by savers.
2) No money-capital doesn't produce anything. But... Money hold as capital (uninvested), lowers the prices of goods for money which is invested and makes the investment money more productive.
This may be the central point of our disagreements. You say that money can't yield on its own, it needs profitable investments.
But money performs services on its own and "it can charge" for those services.
Money is by definition the more liquid asset. That represents an insurance against uncertainty that the money holder gets for free. The rest of the money users are paying indirectly for that insurance.
Also, money is needed for trade, even when there's no profitable potential investments nor growth. And "the wares pay" for that reallocating service. The basic interest is included in the final selling price of every product. The merchant not only collects his wage from the final selling price, but also the interest on the liquidity he needs in his operations. Again, if the merchant have the money, it should consider that he's lending to himself, because he's competing with other merchants that operate with borrowed money.
In this sense, capital-money is the only authentic capital (here I define capital as something that has sustained yields rather than means of production) and the interest rate is what protect the means of production (that need financing to come into existence, not simple nets) yields. Capital that won't yield as much as money does is simply not financed, and that prevents further competition within a certain type of capital.

Enough, I think. The other points are either minor disagreements, or, IMHO, will add little.

In fact there's a source of major disagreement that you missed there:
Quote
The posibility of hoarding for free, that free insurance (a service that the rest of society provides) is what causes interest.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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September 28, 2011, 01:31:26 PM
 #282

vrotaru gave some interesting thoughts!

I think hoarding(or saving in general) do not necessary translate into a future spending, they could be spent at many years later as pension, or not at all (I could die with 1 billion saving, giving I have enjoyed my life fully). There are always huge amount of saving which never get spent, but loaned out by banks to business as an investment

When it comes to investment, every kind of investment is a risk taking game, it is impossible to say a certain investment will be successful or not, and there is no sure thing like "profitable investment", even if you buy government bonds, you risk a default

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September 28, 2011, 04:54:43 PM
 #283

vrotaru gave some interesting thoughts!

I think hoarding(or saving in general) do not necessary translate into a future spending, they could be spent at many years later as pension, or not at all (I could die with 1 billion saving, giving I have enjoyed my life fully). There are always huge amount of saving which never get spent, but loaned out by banks to business as an investment
Well, if it is loaned, it is invested and therefore spent. In terms of money circulation, it is the same.

When it comes to investment, every kind of investment is a risk taking game, it is impossible to say a certain investment will be successful or not, and there is no sure thing like "profitable investment", even if you buy government bonds, you risk a default

I think you mean there's no secure investments. But that's why we should separate the risk premium from the basic interest. It is dificult to do it in real life but investors should at least try it and it is very useful for abstract discussions like ours.
If you could knew without a doubt the risk of each investment, you could calculate the risk premium, make an insurance to cover you and earn only the basic interest (and inflation premium) from your now really secure loan.
When you buy government bonds your only risk is not default but also monetary inflation that the government can create to avoid the default.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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September 28, 2011, 10:01:42 PM
 #284

I see. And I realise I must correct myself. Hoarding doesn't cause deflation, an increase in the hoarded money pool does. A decrease causes inflation.
The more constant that pool is, the more stable V and P.

Yes, the technical term for it is demand for money. A rather unfortunate one, since simple souls (and most of the economists) take it rather literally. As demand for nominal money, little peaces of paper with portraits of dead leaders or their electronic equivalents. It's a related topic, that's why I mention it here, but.. just mention. FTM.

There should be no difference between investors that rely on loans and investors that doesn't. The self-financing entrepeneurs should think that they're lending to themselves. All borrowers and money holders investors are competing in the same market, the money holder must account the costs of capital-money even if he doesn't have to borrow it.
Yes deflation can lower interest rates (negative inflation premium) but it cannot lower the interest to zero.

Well, the world just doesn't work this way, and there's a difference between investors which rely on loans and those who do not. The loan market is an attribute of a rather developed and sophisticated economy and you can have (and there are) investments even without loans markets. Robinson Crusoe Examples to Rescue!

And when looking at the relation between investments and loans, I insist in treating the investment as the more fundamental.. eh... whatever. If you have an investment project and you think it will be profitable then there is also an opportunity for a loan. Rate negotiable, but greater than zero and lower than the expected rate of profit.

So, in order to prove (credible claim) that price deflation (in the conditions of stable money supply and increasing technological productivity) will kill the loan market you have to prove that such conditions will turn all investments projects into unprofitable one. Now.. are you accepting the challenge?

My point that an increase in the hoarding pool doesn't lead necessarily to more investments. You assume that someone will buy the bricks, but they can stay in the stock of the producer. Or the deflation can force him to sell them at a lost, which will cause is bankrupt. Wasn't his business profitable? It was without deflation, but not with it.

Business plans going bad? Happens all the time. People learn and try to be wiser next time. But, I have to say that you are saying here is slightly different from your original position (as I understood it). Namely that saving can lead to losses for the society as a whole, not that saving is inherently harmful.


This may be the central point of our disagreements. You say that money can't yield on its own, it needs profitable investments.
But money performs services on its own and "it can charge" for those services.

Well, I guess that exactly for that "services of its own" that markets choose a commodity to serve as money, medium of exchange. Also it is  "it can charge" or "it can't charge" If the second that's part of the appeal for holding money.

Money is by definition the more liquid asset. That represents an insurance against uncertainty that the money holder gets for free. The rest of the money users are paying indirectly for that insurance.

OK, someone gets something for free. Relatively speaking. So much I get. How is this a big deal? Where's and who's the victim?

Also, money is needed for trade, even when there's no profitable potential investments nor growth. And "the wares pay" for that reallocating service. The basic interest is included in the final selling price of every product. The merchant not only collects his wage from the final selling price, but also the interest on the liquidity he needs in his operations. Again, if the merchant have the money, it should consider that he's lending to himself, because he's competing with other merchants that operate with borrowed money.
In this sense, capital-money is the only authentic capital (here I define capital as something that has sustained yields rather than means of production) and the interest rate is what protect the means of production (that need financing to come into existence, not simple nets) yields. Capital that won't yield as much as money does is simply not financed, and that prevents further competition within a certain type of capital.

Market prices, market prices, market prices.. For goods and interest rates. Also there is no such thing as basic interest and hold money does not yield (monetary) interest.

Your theory of value seem to be a variant of cost theory of value where as a fixed cost into the price of every good enter the (a fixed?) interest rate on the price of loaned (own) capital. But that's backwards! First it is from the prices of goods that prices of inputs are inferred, and second interest is also a market price set by supply and demand.

Well that's about it. Also about that "free insurance" that you seem to hate so much. Like it or not, but there is a demand for safe, long term storage of value. And if money cannot server as such a storage people will start looking for substitutes.

Do you really think that it is better for people to save in paintings, old violins, even gold? Shotguns and canned beans?
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September 30, 2011, 07:19:30 PM
 #285

I see. And I realise I must correct myself. Hoarding doesn't cause deflation, an increase in the hoarded money pool does. A decrease causes inflation.
The more constant that pool is, the more stable V and P.

Yes, the technical term for it is demand for money. A rather unfortunate one, since simple souls (and most of the economists) take it rather literally. As demand for nominal money, little peaces of paper with portraits of dead leaders or their electronic equivalents. It's a related topic, that's why I mention it here, but.. just mention. FTM.
Let me call it then, demand for saving, because what it is demanded here is the quality of storage of value, not the medium of exchange one.
An increase in the demand for saving causes price deflation (always assuming a constant monetary base).

There should be no difference between investors that rely on loans and investors that doesn't. The self-financing entrepeneurs should think that they're lending to themselves. All borrowers and money holders investors are competing in the same market, the money holder must account the costs of capital-money even if he doesn't have to borrow it.
Yes deflation can lower interest rates (negative inflation premium) but it cannot lower the interest to zero.

Well, the world just doesn't work this way, and there's a difference between investors which rely on loans and those who do not. The loan market is an attribute of a rather developed and sophisticated economy and you can have (and there are) investments even without loans markets. Robinson Crusoe Examples to Rescue!

I suppose we should separate investments that need money from investments that don't. You can build your own net today and it would be a means of production, but nothing warranties a capital yield for it, because money is not needed to build another one. Anyone with or without money can build one, so by competition with other nets, the profit tends to zero. The cost of production of the net tends to equal the utility extracted from it in the fishing market.

And when looking at the relation between investments and loans, I insist in treating the investment as the more fundamental.. eh... whatever. If you have an investment project and you think it will be profitable then there is also an opportunity for a loan. Rate negotiable, but greater than zero and lower than the expected rate of profit.

Ok, with every loan there's an investment (let's exclude consumption loans for simplicity). And there's a part of the yield of the investment that goes to the investor, let's call it profit; a part that goes to the lender, let's call it basic interest and a part that goes to the insurance company that warranties the loan for the lender, let's call it risk premium. For our analisys, we don't care if the lender takes the risk to take the risk premium himself or if the investor and the lender are the same person and therefore takes all the yield of the investment.

So, in order to prove (credible claim) that price deflation (in the conditions of stable money supply and increasing technological productivity) will kill the loan market you have to prove that such conditions will turn all investments projects into unprofitable one. Now.. are you accepting the challenge?
Well, you're assuming that the deflation only comes from growth, but as we've seen the deflation can also come from an increase in the demand for savings.
Deflation comes also during the liquidation phase of economic cycles. A claim that you will probably harder to believe is that basic interest as defined above is the cause of economic cycles. But you're asking me to prove that less profitable investments will be made with deflation.
We must agree that the primary force that drives investments is profit and not the basic interest.  
Then in my bakery example I show how with each iteration, deflation reduces the profit of the investor both nominally and in real terms, because the interest of the lender stays nominally stable and grows in real terms.
Also, the principal to be paid back stays fixed but the price of the real capital acquired by the investor shrinks, so if he consumed the profit, payed the interest and risk premium, and relays on selling the capital to repay the principal after the operation, his business becomes insolvent through deflation.
You can say: "The financial market will make the basic interest drop as less investors will be willing to borrow and the investors can refinance his loan". That's true. Deflation acts on gross interest as a negative inflation premium.
But there's a minimum basic interest that is over zero.
Here you can say "When the investor and the lender are the same person, a zero basic interest rate loan makes sense, because he can still make profit".
So I still must prove that money can always yield over zero, even with no investments.  

My point that an increase in the hoarding pool doesn't lead necessarily to more investments. You assume that someone will buy the bricks, but they can stay in the stock of the producer. Or the deflation can force him to sell them at a lost, which will cause is bankrupt. Wasn't his business profitable? It was without deflation, but not with it.

Business plans going bad? Happens all the time. People learn and try to be wiser next time. But, I have to say that you are saying here is slightly different from your original position (as I understood it). Namely that saving can lead to losses for the society as a whole, not that saving is inherently harmful.
Yes, hoarding doesn't necessarily causes harm. But the possibility of hoarding disturbs the medium of exchange function of money.
Is not the hoarders the ones we have to blame. Is the agreement that the medium of exchange must also be a storage of value what is wrong.

This may be the central point of our disagreements. You say that money can't yield on its own, it needs profitable investments.
But money performs services on its own and "it can charge" for those services.

Well, I guess that exactly for that "services of its own" that markets choose a commodity to serve as money, medium of exchange. Also it is  "it can charge" or "it can't charge" If the second that's part of the appeal for holding money.
Money can "profit" (not itself, the owner) from those services. But is not the market that chooses what money is, is an agreement between the market participants. That's why it doesn't have to be necessarily a commodity, it can be made out of paper or even bits.  

Money is by definition the more liquid asset. That represents an insurance against uncertainty that the money holder gets for free. The rest of the money users are paying indirectly for that insurance.

OK, someone gets something for free. Relatively speaking. So much I get. How is this a big deal? Where's and who's the victim?
It is an externality. The first thing we must realize is that someone somewhere is paying the costs, there's a victim somewhere.
The first that will pay that cost is the borrower, in form of higher basic interest. It makes better to just hold the money than lending at zero interest.
If interests suddenly dropped 1%, the firsts to take it would be the investors through extra profits. They would compete for that 1% extra profit until the "gain" (the non-loss) would be transferred to the society in form of cheaper products.  
So the whole society is paying for that free privilege in form of higher prices. And the costs are payed not only through financial costs but also through capital yields.
The basic interest prevents the yields of capitals that really need financing from dropping below the basic interest itself. It limits competition between means of production of the same type.
For example, if the basic interest were lower, houses could yield less (in proportion of the costs of production of the house) and still get financed, making rents drop.  

Also, money is needed for trade, even when there's no profitable potential investments nor growth. And "the wares pay" for that reallocating service. The basic interest is included in the final selling price of every product. The merchant not only collects his wage from the final selling price, but also the interest on the liquidity he needs in his operations. Again, if the merchant have the money, it should consider that he's lending to himself, because he's competing with other merchants that operate with borrowed money.
In this sense, capital-money is the only authentic capital (here I define capital as something that has sustained yields rather than means of production) and the interest rate is what protect the means of production (that need financing to come into existence, not simple nets) yields. Capital that won't yield as much as money does is simply not financed, and that prevents further competition within a certain type of capital.

Market prices, market prices, market prices.. For goods and interest rates. Also there is no such thing as basic interest and hold money does not yield (monetary) interest.
Not for holding it. When you hold it, is like if you were spending it in the insurance to uncertainty that a pile of cash represents. To take the basic interest, you need to invest it (or lend it, letting other do the investment).
Another way of taking the basic interest is trading. That's what a merchant does. Even with no investments, merchants need liquidity that will pay for. Again, we don't care if in some cases the lender and the merchant are the same person.
He buys wares at a price and sells them at higher prices his wage and his costs of operation, which include the basic interest on the liquidity they need.
So the basic interest is extracted in first term from the wares.
The consumer also pays more here because of interest. If money wasn't a store of value, people would actually have more to save.
Most people pay more (indirectly) in concept of interest than what they receive from their savings. Even many of the people who doesn't have debts and have lent savings.

Your theory of value seem to be a variant of cost theory of value where as a fixed cost into the price of every good enter the (a fixed?) interest rate on the price of loaned (own) capital. But that's backwards! First it is from the prices of goods that prices of inputs are inferred, and second interest is also a market price set by supply and demand.
No, no. Don't get me wrong. Value is relative. What I'm assuming is that investors know the input before making the investment and selling the products. That's not always the case. But costs (including capital yields) tend to be lower or equal to selling prices by market forces.
Capital tend to yield at least as much as the basic interest, but that's not a universal law of nature and sometimes it doesn't. That's what bubbles are about. People overestimating the yields of the capitals in certain sector.
And there's supply and demand in the financial sector, but there's a minimum basic interest that lack of demand or excess of offer can't beat.

Well that's about it. Also about that "free insurance" that you seem to hate so much. Like it or not, but there is a demand for safe, long term storage of value. And if money cannot server as such a storage people will start looking for substitutes.

Do you really think that it is better for people to save in paintings, old violins, even gold? Shotguns and canned beans?

Let them save whatever they feel they need to save. Gold could act as a parallel "store of value agreement", but the saver would be more exposed to changes in the "demand for savings", because the value derived from the medium of exchange function won't be there anymore.
Yes, I prefer people saving anything but the medium of exchange.
If they want to be sure they can eat tomorrow, let them store food instead of outsourcing their storage needs for free.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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December 04, 2011, 03:19:04 PM
 #286

There is no link between deflation and poor economic conditions. Here is a study of the data for 17 countries over a period of more than a 100 years which concluded: "The data suggest that deflation is not closely related to depression. A broad historical look finds
many more periods of deflation with reasonable growth than with depression and many more periods
of depression with inflation than with deflation. Overall, the data show virtually no link between
deflation and depression."
http://www.minneapolisfed.org/research/sr/sr331.pdf
jtimon
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December 19, 2011, 07:12:11 PM
 #287

Interesting. Specially the datapoint with more than 10% deflation and 5% growth.
It doesn't makes much sense to me, I would say something special was happening in that country.
Still waiting for someone to debunk my reasoning here with logic rather than data. Explaining me what's wrong with my example showing that deflation discourages real capital accumulation (real investments).
Interesting document nonetheless.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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December 20, 2011, 09:36:45 AM
 #288

Still waiting for someone to debunk my reasoning here with logic rather than data. Explaining me what's wrong with my example showing that deflation discourages real capital accumulation (real investments).
I have been thinking about this for a while.

Entrepreneurs invest into projects as long as these two conditions are fulfilled:
  • the project provides a higher nominal return than the rate of interest that occurs at that time on the market
  • the project provides a higher real rate of return than the rate of deflation

Of course, there is an auxiliary condition: the rate of inflation/deflation must be known to the market participants, and current neo-Keynesian system is based on the assumption that the central bank can trick people into believing the inflation is lower than it actually is. With Bitcoin, however, this is not a problem, since the money supply is highly predictable.

Some economists argue that under deflation, this results in a suboptimal growth, because not all projects that are possible are undertaken. This however neglects to take into consideration what interest rate is: it's a reflection of the time preference of the market participants. If money is loaned below this rate, it means that scarce resources are used inefficiently, in a way that does not satisfy the needs of consumers.

While this does not necessarily mean that a deflationary currency is optimal, it means that deflation does not apriori pose a problem, as long as it's lower than the free market interest rate. If this condition is not met, admittedly, I can see how it would cause a problem, because some projects which would satisfy the time preference of consumers would not be undertaken.
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December 20, 2011, 11:57:03 AM
 #289

Entrepreneurs invest into projects as long as these two conditions are fulfilled:
  • the project provides a higher nominal return than the rate of interest that occurs at that time on the market
  • the project provides a higher real rate of return than the rate of deflation

I would say that the return has to big at least as big as the nominal interest + deflation. Greater than the real interest rate.
So I would replace the AND for PLUS.

Of course, there is an auxiliary condition: the rate of inflation/deflation must be known to the market participants, and current neo-Keynesian system is based on the assumption that the central bank can trick people into believing the inflation is lower than it actually is. With Bitcoin, however, this is not a problem, since the money supply is highly predictable.

I think we can agree that we don't like these market manipulations.

Some economists argue that under deflation, this results in a suboptimal growth, because not all projects that are possible are undertaken. This however neglects to take into consideration what interest rate is: it's a reflection of the time preference of the market participants.

This is the main source of my disagreements with Austrians. According to Gesell, interest is not caused by real capital returns but the other way around.
"Capital yields tend to equal interest rates" instead of "the interest rates tend to equal capital yields".
Just like "production costs tend to equal market prices" instead of "market prices tend to equal production costs".
Interest would be a purely monetary phenomenon and would explain the almost constant interest rates (around 4%, 5%) of pre-Keynes economic history.

If money is loaned below this rate, it means that scarce resources are used inefficiently, in a way that does not satisfy the needs of consumers.

Although we disagree in our theory of interest, I get this point.

While this does not necessarily mean that a deflationary currency is optimal, it means that deflation does not apriori pose a problem, as long as it's lower than the free market interest rate. If this condition is not met, admittedly, I can see how it would cause a problem, because some projects which would satisfy the time preference of consumers would not be undertaken.

You're assuming the AND in the previous point instead of a PLUS.
Let's explain this with an example.
Say nominal interest rates are at 5% and deflation at 3%.
When you're considering if you want to lend your 10,000 or invest them yourself, you will want your investment to have an 8% return, just as you would have by lending.
Therefore, even with a deflation under the interest rates, less investments would take place than would be made with stable prices.
Here you could say:
"With stable prices, nothing else changing, the interest rates should be at 8% instead of 5%, and therefore the result is the same. Because the real interest rates and not the nominal interest rates are what equal the average capital yields".
Here you're assuming that the deflation can always be factored in the real interest.
Say we have 8% deflation and 5% capital yields. The nominal interest rate would need to be -3% (which is just impossible with most monetary systems).

Mhmmm, I think this is why you're saying that deflation won't be a problem if it's under the capital yields. You expect the nominal interest rate to be reduced linearly with interest with the only lower limit of 0% nominal interest.
But I'm not sure about it. I could even accept that a 1% deflation and 5% capital yields would "produce" a 4% nominal interest instead of moving the minimum profitable capital yield to 6%.
But will 4.5% deflation and 5% capital yields produce a 0.5% nominal rates?
Not sure that relationship is really linear.
Take into account that not all the money must be necessarily spent or invested. It can be hoarded too and in fact deflation is an incentives that. And hoarding is supposed to rise interest rates and make prices drop.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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December 20, 2011, 03:10:02 PM
 #290


Mhmmm, I think this is why you're saying that deflation won't be a problem if it's under the capital yields. You expect the nominal interest rate to be reduced linearly with interest with the only lower limit of 0% nominal interest.
But I'm not sure about it. I could even accept that a 1% deflation and 5% capital yields would "produce" a 4% nominal interest instead of moving the minimum profitable capital yield to 6%.
But will 4.5% deflation and 5% capital yields produce a 0.5% nominal rates?
Not sure that relationship is really linear.
Take into account that not all the money must be necessarily spent or invested. It can be hoarded too and in fact deflation is an incentives that. And hoarding is supposed to rise interest rates and make prices drop.


I think, that deflation never reduces the nominal interest rate, because you don't get the interest rate for investing the money, you are getting them for taking the risk to loose it.
With or without deflation, the risk exists.
In a economy with deflation, keeping your money under your bed is really cool. If an investor asks you for it, it's riskier than keeping it warm and save.
And you know, that there is a risk, for not getting back. The 5% are the "insurance"-fee. So the rates are always summing up.
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December 20, 2011, 08:30:03 PM
 #291

I think, that deflation never reduces the nominal interest rate, because you don't get the interest rate for investing the money, you are getting them for taking the risk to loose it.
With or without deflation, the risk exists.
In a economy with deflation, keeping your money under your bed is really cool. If an investor asks you for it, it's riskier than keeping it warm and save.
And you know, that there is a risk, for not getting back. The 5% are the "insurance"-fee. So the rates are always summing up.

To avoid misunderstandings I'll first define the concepts I'm using more formally.
When I say real interest I mean basic interest + risk premium + inflation.
When I say nominal interest I just mean interest + risk premium.
The risk premium would be the "insurance fee" you're referring to. But even with stable prices and a prefect safe investment you wouldn't lend your money at zero interest, because you would lose the capacity of using it in the meantime. Having that money in your bed is an insurance in certain sense. The basic interest is also referred to as "liquidity premium". And the austrian explanation for the basic interest is, as far as I can tell, the so called "time preference".
On the other hand, according to Gesell comes from the quality of money as exchange facilitator combined with its typical quality of being non perishable and it is also paid several times (from the act of trade itself and from the funding of the capital that produced the ware) in the price of every product.

You're saying that in real life, the risk premium will always be positive and that's pretty reasonable.
But that doesn't imply that deflation can't make the nominal interest lower as I'm proposing.
Just like inflation pushes the nominal interest up (by lowering the real interest), deflation can push nominal interests down.
Although, as I think we all agree, there's some limits, and a zero nominal interest rate is not possible with the variables we're considering.



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December 21, 2011, 11:07:06 AM
 #292

This is by far the longest last word I've ever seen.
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December 21, 2011, 01:38:29 PM
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I would say that the return has to big at least as big as the nominal interest + deflation. Greater than the real interest rate.
So I would replace the AND for PLUS.
The nominal interest rate already reflects inflation.

This is the main source of my disagreements with Austrians. According to Gesell, interest is not caused by real capital returns but the other way around.
People value having things earlier more than having them in future. This is called time preference. If it was not true, people would not tend to consume, i.e. they would be misers. If money exists, time preference results in the formation of the interest rate.

Say nominal interest rates are at 5% and deflation at 3%.
When you're considering if you want to lend your 10,000 or invest them yourself, you will want your investment to have an 8% return, just as you would have by lending.
The productivity increase by your project which needs to be > 8% in real terms. But that's not the same as 8% nominal return.

Therefore, even with a deflation under the interest rates, less investments would take place than would be made with stable prices.
But this does not necessarily mean it's bad. Investments made below the real interest rate are a waste of resources, even if the interest rate is positive.

Say we have 8% deflation and 5% capital yields. The nominal interest rate would need to be -3% (which is just impossible with most monetary systems).
Capital yields is not the real rate of interest, it is merely a factor influencing it. But apart from that, I get your point, yes, this would be a problem.

But I'm not sure about it. I could even accept that a 1% deflation and 5% capital yields would "produce" a 4% nominal interest instead of moving the minimum profitable capital yield to 6%.
But will 4.5% deflation and 5% capital yields produce a 0.5% nominal rates?
I don't necessarily claim that the connection is linear, there are other factors influencing it. I'm talking about real interest rate rather than capital yield.

Take into account that not all the money must be necessarily spent or invested. It can be hoarded too and in fact deflation is an incentives that. And hoarding is supposed to rise interest rates and make prices drop.
The reason hoarding pushes prices up is that the amount of available money drops, not because the productivity increases. This is merely another factor influencing the outcome.

My goal is not to prove that a pure debt-based system like Ripple or LETS is bad (in fact, after reading Greco, your posts and thinking about it, I'm developing some curiosity for them). My goal is merely to show that inelastic money supply / deflationary economy is not, per se, a problem. The main problem is government interference in money.
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December 22, 2011, 11:14:50 AM
 #294

This is by far the longest last word I've ever seen.

Lol. I keep thinking the same thing every time I see the thread.

It's like at a funeral, when the priest just doesn't want to finish. Get him below ground already and let's eat!

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January 07, 2012, 10:27:07 PM
 #295

Why is this stupid tread even pinned?

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January 08, 2012, 02:03:48 AM
 #296

Why is this stupid tread even pinned?

So people stop creating new ones, messing up the forum.

If you read the first post BTW, you wouldn't ask such questions.

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January 08, 2012, 07:24:31 PM
 #297

This kind of information belongs into a wiki or a FAQ if you ask me..

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January 08, 2012, 07:28:00 PM
 #298

This kind of information belongs into a wiki or a FAQ if you ask me..


Assuming anybody actually reads these things.

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January 08, 2012, 07:36:54 PM
 #299

This kind of information belongs into a wiki or a FAQ if you ask me..


Assuming anybody actually reads these things.

I have to because I subscribed 6 months ago. CHRIST HOW DO YOU UNSUBSCRIBE TO THREADS..

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January 08, 2012, 10:53:01 PM
 #300

This kind of information belongs into a wiki or a FAQ if you ask me..


Assuming anybody actually reads these things.

I have to because I subscribed 6 months ago. CHRIST HOW DO YOU UNSUBSCRIBE TO THREADS..

Oh, that's a good one. Don't know the answer to that either.

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