Deflation and Bitcoin, the last word on this forum

[jtimon]

First of all, sorry for taking so long to respond you.
Also sorry to all the people who can't unsuscribe to this thread, but that's not my fault.

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.

Capital yields tend to equal the real interest rate. Just like production costs tend to equal prices. This is central to most of my arguments.
Anyway, I'm glad you admit deflation can be a problem at least in this case.
What I want to prove is that deflation can be a problem, deny the "deflation is not bad under any circumstances" and of course the "deflation is good" statements.
"Deflation is dangerous" is not a myth.
My goal is not to prove that an inelastic money supply is bad. In fact, I advocate a fixed supply for freicoin too.

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.

I agree that government interference in money is the main problem we have today. I just want to point out that gold had other problems too (of course not as bad).
For some people the only problem with gold is that it cannot be sent through the internet.
I haven't read Greco, do you have a link to a book? I haven't read E.C. Riegel neither but I feel I'm going to like it a lot.
I came from Gesell and found mutual credit systems very interesting.

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.

As said, what I'm taking as true is that capital yields tend to equal real interest rates.
Tell me if you disagree on this because it is very important point.

I would say that the return has to be 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.

I been thinking a lot about it and I think I now understand what you mean.
I say nominal interest = real interest - price inflation
What I think you're saying is that monetary inflation pushes down interest rates (both nominal and real).
I say it depends. If inflation is created like today (money is lend into existence) then yes.
But if money is spend into existence (say by the government or by miners) the effect is in fact the opposite.
Lenders will want to get the average capital yields plus inflation.
Anyway, the difference here is we're talking about price and monetary inflation.
 

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.

In perfect competition, they tend to be the same thing. My point is that the minimum profitable capital yield rises because of deflation, less real investments will be made.

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.

Here we reach a point of major disagreement because of our different theories on interest.
According to the free-money theory of interest, the real interest rate being over zero in perfect competition is a proof that all demands aren't being satisfied and that some resources are being under-used.
http://www.community-exchange.org/docs/Gesell/en/neo/part5/4.htm

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.

I know the theory, I just don't accept it as true.
Not sure, but I would say that Boehm-Bawerk would classify it under the "abstinence theories" category.

Do you know any Austrian book that criticizes Gesell's theory of interest?
I'm very interested in such a writing.

[MoonShadow]

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[MimiTheKid]

One thing is true - Bitcoin is the world's FIRST truly deflationary currency and it is an social experiment I'm very excited to have the opportunity to participate in - although I might not ever live long enough to see how it turns out.

There are more than one causes for inflation/deflation.
http://en.wikipedia.org/wiki/Inflation#Causes

Inflation/deflation always depends on the prices/size of an economy. So (hyper)inflation can happen in an bitcoin-economy too.
The only reason, why deflation in a bitcoin-economy is more likely, is: In the end the amount of coins is fixed.

However: If prices are rising (because of bad weather, bankruptcy of an imporant manufacturer, ...), you will see inflation, with or without more fiat-money.

[jtimon]

One thing is true - Bitcoin is the world's FIRST truly deflationary currency and it is an social experiment I'm very excited to have the opportunity to participate in - although I might not ever live long enough to see how it turns out.

There are more than one causes for inflation/deflation.
http://en.wikipedia.org/wiki/Inflation#Causes

Inflation/deflation always depends on the prices/size of an economy. So (hyper)inflation can happen in an bitcoin-economy too.

I think he means monetary deflation rather than price deflation.

[MimiTheKid]

I think he means monetary deflation rather than price deflation.

Wikipedia (once again):
"In economics, deflation is a decrease in the general price level of goods and services." http://en.wikipedia.org/wiki/Deflation
It's about the price, means: How many coins for a good? It's always about buying goods.

There are several causes for the changes. Most of them are because of the "economy" and not because of "printing money".
Printing money is one of the most obvious, but in a developed economy wages, technology-changes, velocity of money and prices of resources are much more important.

[lonelyminer (Peter Šurda)]

Hi jtimon

Capital yields tend to equal the real interest rate.

You're just introducing new terms.

Anyway, I'm glad you admit deflation can be a problem at least in this case.

However, it still could be that there are other factors that would prevent this situation from occurring.

As said, what I'm taking as true is that capital yields tend to equal real interest rates.

It's just a new term that does not clarify anything.

Here we reach a point of major disagreement because of our different theories on interest.
According to the free-money theory of interest, the real interest rate being over zero in perfect competition is a proof that all demands aren't being satisfied and that some resources are being under-used.

Clearly this is wrong. The reason why it's wrong is that it's not really money that is being consumed, rather it's the scarce resources you buy with it. The decrease of the interest rate does not create new resources, it just creates a disequillibrium. With a lower interest rate than the market rate, you do not only allow new projects to be invested into, because this needs to be offset by other projects not being able to be constructed, while tricking people into thinking it can. This often only becomes apparent after time has passed, and leads to boom&bust cycles.

If we have, let's say, 10 apples and two different cooks that bid for them. One is willing to accept a credit at 5%, and the other at 10%. Both of them would, say, bake apple pies. Allowing both cooks, instead of just one, to take the credit, does not allow them cumulatively to create more apple pies, it would just allow the less efficient cooks (lower productivity) to use resources that would otherwise be used by cooks with higher efficiency.

Sorry I did not reply to everything, maybe some other time.

[molecular]

Hey guys,

I'm currently reading Deltlev Schlichter - Paper Money Collapse.

He offers an interesting definition of interest I never heard before and I thought I could drop it in here.

He defines "interest" as the ratio between the subjective value assigned to some good in the present to the subjective value assigned to the same good in the future.

He uses this definition to explain how consumers shift between spending money now (consumption) and saving it (thus making it available to others for investment) in order to spend it later. When interest is high, consumers demand goods rather ealier than later, when it's low, demand for purchasing goods today is lower and people put more of their available money into savings, therefore making capital available for investment into capital goods, like machinery, more productivity etc. This will in turn lower the amount of consumer goods being produced and therefore raise their prices (if demand remains the same), which in turn triggers the consumer having to divert more funds back from their savings into direct consumption. Thus we have this business cycle that nicely regulates capital allocation according to consumer demands.

It makes perfect sense to me and I can see how this works out nicely and resources are allocated efficiently. I think this theory comes from the Austrian school of economics and was developed during times when we had gold-backed inelastic money.

Enter fully elastic paper money (essentially by Nixon 1971) and the constant injections of it driven by the FED and other central banks, mainly via the loan market, driving down interest rates, discouraging saving, encouraging (over-)consumption, generally distorting the marketplace and price signals and generating enourmous bubbles all over the place as we can observe. According to Schlichter, money injections will increase GDP momentarily only (all politicians look at this crude value and aim to increase it). The misallocations will have to be balanced back out (recession). It's inevitable and ever more money has to be injected into the system to avoid sliding into a recession (causing even more misallocations of capital and even more stupid things to be done that the consumer did not actually demand) making things even worse in the end.

Money printed and injected into an economy has different effects than money saved and made available as loans to others, because money being saved is at the same time money not being spent on consumption, which is not true for freshly printed money. Both mechanisms send the same signal to the economy, though: execute more projects that where not profitable before at the higher interest rates and lower direct goods production. In the first case (money injection), this signal is false and will lead to price inflation, because consumer demand did not change (as opposed to in the second case). So in the second case (saving), price inflation will not occur.

I can recommend the book. I've not reached the last chapter "the endgame" yet, but looking forward to it. I'm assuming Schlichter will offer different ways shit could hit the fan but judge a complete currency collapse to be the most likely outcome.

[MoonShadow]

Hey guys,

I'm currently reading Deltlev Schlichter - Paper Money Collapse.

He offers an interesting definition of interest I never heard before and I thought I could drop it in here.

He defines "interest" as the ratio between the subjective value assigned to some good in the present to the subjective value assigned to the same good in the future.

That's called the 'time preference' of money, and is uniquely Austrian.

[molecular]

Hey guys,

I'm currently reading Deltlev Schlichter - Paper Money Collapse.

He offers an interesting definition of interest I never heard before and I thought I could drop it in here.

He defines "interest" as the ratio between the subjective value assigned to some good in the present to the subjective value assigned to the same good in the future.

That's called the 'time preference' of money, and is uniquely Austrian.

Thanks for the info, I might've read this wrongly, will check.

[lonelyminer (Peter Šurda)]

BTW Detlev is really cool, he knows his stuff, I emailed with him several times in addition to talking to him at the conference.

[molecular]

BTW Detlev is really cool, he knows his stuff, I emailed with him several times in addition to talking to him at the conference.

Detlev indeed is awesome. I now finished his book and it turns out he's quite a "revolutionary guy" if I may say so.

The contrast between his appearance/way to talk/rigorous analyzing and the content of what he's actually saying (fuck the state, free market economy for the win, commodity money is great, etc...) is refreshing.


I found the quote that led me to confuse interest with time preference:

Interest is, first and foremost, simply the ratio of the value assigned to present goods over future goods. We can think of the interest rate as the discount rate at which the two values would be equal. Interest is therefore a ratio of prices, not a price in itself.⁵

5 is: Ludwig von Mises, Human Action, p. 526.

slightly earlier he talks about time preference:

Because even in such a society every person would certainly value the same good or service differently depending on whether it were available today or only at a later point in time. This is called time preference and is an essential component of any act of valuation.

I'm still a little confused, I'd say that time preference means the fact that someone values something higher at an earlier point in time and interest is the ratio of the two valuations (now and later).

[lonelyminer (Peter Šurda)]

I'm still a little confused, I'd say that time preference means the fact that someone values something higher at an earlier point in time and interest is the ratio of the two valuations (now and later).

The way I see it, the interest rate is the consequence of time preference, same way as any price is a result of people's preferences. Interest rate is a type of price.

[MoonShadow]

I'm still a little confused, I'd say that time preference means the fact that someone values something higher at an earlier point in time and interest is the ratio of the two valuations (now and later).

The way I see it, the interest rate is the consequence of time preference, same way as any price is a result of people's preferences. Interest rate is a type of price.

'

Both perspectives are correct in their own way.

[jtimon]

Capital yields tend to equal the real interest rate.

You're just introducing new terms.

Sorry, I should have make this clear from the beginning. Do you agree with the sentence?

Anyway, I'm glad you admit deflation can be a problem at least in this case.

However, it still could be that there are other factors that would prevent this situation from occurring.

Sure, you could say that such a deflation would only appear after a boom caused by printing or fractional reserve.
But there was economic cycles with gold too.

Here we reach a point of major disagreement because of our different theories on interest.
According to the free-money theory of interest, the real interest rate being over zero in perfect competition is a proof that all demands aren't being satisfied and that some resources are being under-used.

Clearly this is wrong. The reason why it's wrong is that it's not really money that is being consumed, rather it's the scarce resources you buy with it. The decrease of the interest rate does not create new resources, it just creates a disequillibrium. With a lower interest rate than the market rate, you do not only allow new projects to be invested into, because this needs to be offset by other projects not being able to be constructed, while tricking people into thinking it can. This often only becomes apparent after time has passed, and leads to boom&bust cycles.

If we have, let's say, 10 apples and two different cooks that bid for them. One is willing to accept a credit at 5%, and the other at 10%. Both of them would, say, bake apple pies. Allowing both cooks, instead of just one, to take the credit, does not allow them cumulatively to create more apple pies, it would just allow the less efficient cooks (lower productivity) to use resources that would otherwise be used by cooks with higher efficiency.

I don't propose to lower interests by printing. I advocate for a money with demurrage and market rates.
In this case, the borrowers also compete for the credit, but the lenders could accept rationally a zero interest rate.
My point is:

1) Within perfect competition, profits tend to be zero.
2) The profit generated by producing goods are capital yields. When more producing goods are created of the same type, their yield drops because they compete with each other.
3) Capital yields don't tend to zero under perfect competition, because they tend to the real interest rates, which are always (with money-capital) positive.

Therefore, capital-money prevents competition between real capitals. If there were produced as much real capitals of a certain type as demanded, their yields would be zero.

He offers an interesting definition of interest I never heard before and I thought I could drop it in here.

He defines "interest" as the ratio between the subjective value assigned to some good in the present to the subjective value assigned to the same good in the future.

You can see it the other way around. Interest determines the ratio between the subjective value assigned to all goods in the present to all goods in the future.
This is an argument Bernard Lietaer uses to prove that "money is not value neutral".
For example, you plant a tree today. In 10 years its market value is $100 and in 100 years $1000.
The discounted value from present (how much do you need today to have $100 in ten years or $1000 in 100 years) depends on the monetary system. From one of his presentations:

[lonelyminer (Peter Šurda)]

I don't propose to lower interests by printing. I advocate for a money with demurrage and market rates.

That has no effect on my claim and that's the point. The amount of resources is not influenced by the amount of money. The only thing you influence is their distribution. Merely because you're using a different number of units to evaluate, in my example, the value of an apple and a pie, does not mean that there are more apples or more pies.

The whole problem becomes more apparent when you completely ignore that there is money. If you take some apples from a cook that is more productive, and give them to a cook that is less productive, then you'll end up with less pies. Changing the characteristics of money cannot revert this, it can only trick you into thinking that pies are worth more than they would have been in a different situation.

The problem with demurrage, as I see it, is that people are less motivated to hold such a currency, and therefore on a free market, it would be outcompeted by other money, as well as other forms of the same money (if the system permits this). For example, if you have demurrage on bank notes, people would tend to switch to specie, and that makes the whole system counterproductive. It is somewhat funny that it looks like Keynesians and Austrians agree that the lack of motivation to hold it would be the result.

[jtimon]

That has no effect on my claim and that's the point. The amount of resources is not influenced by the amount of money. The only thing you influence is their distribution. Merely because you're using a different number of units to evaluate, in my example, the value of an apple and a pie, does not mean that there are more apples or more pies.

The whole problem becomes more apparent when you completely ignore that there is money. If you take some apples from a cook that is more productive, and give them to a cook that is less productive, then you'll end up with less pies. Changing the characteristics of money cannot revert this, it can only trick you into thinking that pies are worth more than they would have been in a different situation.

Exactly, the resources are the same. But money is not just "another good". What I claim is that capital-money by presenting basic interest (apart from the inflation and risk premiums) prevents all resources from being efficiently used.
That we would have more factories and less unemployed people (with the same resources) if there wasn't for that characteristic that not all forms of money present.

The problem with demurrage, as I see it, is that people are less motivated to hold such a currency, and therefore on a free market, it would be outcompeted by other money, as well as other forms of the same money (if the system permits this). For example, if you have demurrage on bank notes, people would tend to switch to specie, and that makes the whole system counterproductive. It is somewhat funny that it looks like Keynesians and Austrians agree that the lack of motivation to hold it would be the result.

I'm not a Keynesian, I don't believe in government spending and I think Keynes didn't understood Gesell.
Actually I feel closer to the austrian school than to Keynes.
Back to your point, yes, people would be reluctant to hold it, but not to receive it.
The fact that the value of such a money depends solely on its virtues as a medium of exchange and not that much in as a storage of value would make it more stable since the changes in the "demand for savings"  would be lower. In fact almost null, since the people would prefer to store value in other goods, even zero interest loans. Maybe when there's free money, gold great capacity of storing value reveals as an illusion, based on a non explicit agreement that can be broke.
I think free money could compete (and win), but the important thing is that we agree is the free market and not us to decide.

[molecular]

I think free money could compete (and win), but the important thing is that we agree is the free market and not us to decide.

I, for one, agree.

[Retard]

I think free money could compete (and win), but the important thing is that we agree is the free market and not us to decide.

I, for one, agree.

+1

[99Percent]

There is nothing inherently wrong in holding money instead of spending. Money held in the long term could accumulate to the point of reaching capital value (like mortgage payments on a hous). Deflation will be bad if people held money because there is just no way to spend it in a "worthwhile" way. But bitcoins have the wonderful characteristic that it is very divisible. So there will always be just something even very diminute where people would be willing to "let go" of some of their hard earned bitcoins. This cannot happen with fiat currency where the coarseness of money is defined by the government (cents?).

[jtimon]

There is nothing inherently wrong in holding money instead of spending.

I'm not saying it is immoral or anything like that. If there's deflation there's an incentive to spend. I'm not judging anyone for playing by the rules. The set of rules that define different monies is what interest me and want to discuss.

Money held in the long term could accumulate to the point of reaching capital value (like mortgage payments on a hous). Deflation will be bad if people held money because there is just no way to spend it in a "worthwhile" way. But bitcoins have the wonderful characteristic that it is very divisible. So there will always be just something even very diminute where people would be willing to "let go" of some of their hard earned bitcoins.

I understand that we're not going to "run out of bitcoins" or anything similar. But deflation increases the costs of commerce and discourages investments. While trying to stop it by inflation can only postpone the problem and make it worse, deflation damages markets. Its effects, and what causes big deflations are different matters, of course.

Going back to the question of the "store of value"...
With barter, costs of commerce are so high that no substantial specialization can be achieved. Money lowers the costs of commerce enabling division of labor, efficiency and prosperity. So the criterion for the optimization of money should be to minimize commerce costs rather than optimizing its ability to retain value.
Being mostly a symbolic tool (like languages), it can even be disputed that any form of money can firmly retain its exchange value at all, despite the cultural changes. Gold will always have some value as a commodity, but its monetary value (derived from being a standard medium of exchange) can disappear all of a sudden just like the value of any paper currency. It happens more often with fiat because the monopolizers tend always to abuse their power, but silver, for example, has been demonetized many times in different places.