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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 505186 times)
indiangrad
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October 20, 2014, 06:53:16 PM
 #341

If deflation transfers value from owners of assets to owners of money, that would mean it disinventivizes people owning assets and incentivizes people holding money. That would result in people hoarding money instead of investing and that would be negative for the growth of the economy (GDP), possibly resulting in negative GDP. Is that sustainable?


Khan Academy video is a thesys non a demonstration.
Mild inflation transfer wealth from creditors to debtors and from owner of money to owners of assets (land, shares, gold)
Mild deflation transfer wealth from debtors to creditors and from owners of assets to owners of money.

I would like no transfer at all and zero inflation or deflation.

The difference is deflation is self correcting, because people dislike to not consume, where inflation is not self correcting, because people like to consume.
Even mild inflation penalize savers and reduce the quantity of savings available in a system.
Less savings are there less resilient is the system to black swans.
If there are no savings or debts start to pile up, even white swans with a small spot are enough to collapse the economy.



Another fundamental difference: Deflation transfers value from debtors to creditors and from owners of assets to owners of money, and these transfers apply to the wide economy. Inflation transfers value to the money creators, then the banks, then the privileged corporations, then everybody else. Inflation is continuous, enforcing and widening the wealth inequality.

Deflation corrects misallocations of capital, inflation destroys the capital structure.


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October 20, 2014, 07:45:30 PM
 #342

If deflation transfers value from owners of assets to owners of money, that would mean it disincentivizes people owning assets and incentivizes people holding money. That would result in people hoarding money instead of investing and that would be negative for the growth of the economy (GDP), possibly resulting in negative GDP. Is that sustainable?

You can not stop consuming (neither can the wealthy men).
So deflation have some lower limit (you must pay for food, water, clothes, shelter, drugs (in you get sick), etc.)
Wealthier you are more you consume in absolute even if it is not in proportion compared to poor people (this is the purpose to be wealthy).

The main reason deflation self correct is it discourage investments and favor savings.
Savings =  seeds in storage (less risky or no risk at all)
Investments = seeds in the soil to become more seeds (more risky)

The value of money depend on the quantity of goods available: if they increase, the value of money increase. If they decrease, the value of money decrease.
If the value of money increase 3% per year, the economy increase 3% per year. Investments promising more than 3% will be funded (in not too risky), investment promising 3% or less will not be funded.
If the value of money increase 2% per year, the economy will increase 2% per year. Investment promising more than 2% will be funded, promising 2% or less will be not.

Now, if we suppose a 3x risk premium, if the riskless increase in the value of money is 3% and someone promise >10% return for a reasonable risk, these projects will be funded.
If these projects are successful, the overall economic return will be 3%. The economy it is now larger, the investors get 4-5-6% per year (after profits and losses) instead of 3%.
If there are not projects able to return 10%, the growth will fall to 2%. People will increase their savings (they produce more than they consume) until they have enough and a 2% return will start to appear interesting. Then they will start to fund risky projects returning 6% (3 times 2%).

They can take risks because they have other savings. Even if their investments are wiped out, their savings are not and they are able to continue to consume as before.

In an inflationary environment, you are forced to have less saving (because they lose value) and more risky investments. And, because the good investments with good returning are not infinite, you end with lossy investments.


indiangrad
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October 20, 2014, 08:32:06 PM
 #343

If deflation transfers value from owners of assets to owners of money, that would mean it disincentivizes people owning assets and incentivizes people holding money. That would result in people hoarding money instead of investing and that would be negative for the growth of the economy (GDP), possibly resulting in negative GDP. Is that sustainable?

You can not stop consuming (neither can the wealthy men).
So deflation have some lower limit (you must pay for food, water, clothes, shelter, drugs (in you get sick), etc.)
Wealthier you are more you consume in absolute even if it is not in proportion compared to poor people (this is the purpose to be wealthy).

The main reason deflation self correct is it discourage investments and favor savings.
Savings =  seeds in storage (less risky or no risk at all)
Investments = seeds in the soil to become more seeds (more risky)

The value of money depend on the quantity of goods available: if they increase, the value of money increase. If they decrease, the value of money decrease.
If the value of money increase 3% per year, the economy increase 3% per year. Investments promising more than 3% will be funded (in not too risky), investment promising 3% or less will not be funded.
If the value of money increase 2% per year, the economy will increase 2% per year. Investment promising more than 2% will be funded, promising 2% or less will be not.

Now, if we suppose a 3x risk premium, if the riskless increase in the value of money is 3% and someone promise >10% return for a reasonable risk, these projects will be funded.
If these projects are successful, the overall economic return will be 3%. The economy it is now larger, the investors get 4-5-6% per year (after profits and losses) instead of 3%.
If there are not projects able to return 10%, the growth will fall to 2%. People will increase their savings (they produce more than they consume) until they have enough and a 2% return will start to appear interesting. Then they will start to fund risky projects returning 6% (3 times 2%).

They can take risks because they have other savings. Even if their investments are wiped out, their savings are not and they are able to continue to consume as before.

In an inflationary environment, you are forced to have less saving (because they lose value) and more risky investments. And, because the good investments with good returning are not infinite, you end with lossy investments.




Ok. Let's take the lending - borrowing side of things.
Assume I lend 100 BTC @ 10% interest.
If apart from me and the borrower, the entire economy remains constant, then where will that extra 10% BTC come from? That can happen only when someone looses that 10% equivalent BTC. So it will become a system where someone will have to lose for other to win and it can never be a win-win. Which means that all people can't live happily in such a system
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October 20, 2014, 08:44:54 PM
 #344

If deflation transfers value from owners of assets to owners of money, that would mean it disincentivizes people owning assets and incentivizes people holding money. That would result in people hoarding money instead of investing and that would be negative for the growth of the economy (GDP), possibly resulting in negative GDP. Is that sustainable?

You can not stop consuming (neither can the wealthy men).
So deflation have some lower limit (you must pay for food, water, clothes, shelter, drugs (in you get sick), etc.)
Wealthier you are more you consume in absolute even if it is not in proportion compared to poor people (this is the purpose to be wealthy).

The main reason deflation self correct is it discourage investments and favor savings.
Savings =  seeds in storage (less risky or no risk at all)
Investments = seeds in the soil to become more seeds (more risky)

The value of money depend on the quantity of goods available: if they increase, the value of money increase. If they decrease, the value of money decrease.
If the value of money increase 3% per year, the economy increase 3% per year. Investments promising more than 3% will be funded (in not too risky), investment promising 3% or less will not be funded.
If the value of money increase 2% per year, the economy will increase 2% per year. Investment promising more than 2% will be funded, promising 2% or less will be not.

Now, if we suppose a 3x risk premium, if the riskless increase in the value of money is 3% and someone promise >10% return for a reasonable risk, these projects will be funded.
If these projects are successful, the overall economic return will be 3%. The economy it is now larger, the investors get 4-5-6% per year (after profits and losses) instead of 3%.
If there are not projects able to return 10%, the growth will fall to 2%. People will increase their savings (they produce more than they consume) until they have enough and a 2% return will start to appear interesting. Then they will start to fund risky projects returning 6% (3 times 2%).

They can take risks because they have other savings. Even if their investments are wiped out, their savings are not and they are able to continue to consume as before.

In an inflationary environment, you are forced to have less saving (because they lose value) and more risky investments. And, because the good investments with good returning are not infinite, you end with lossy investments.




Ok. Let's take the lending - borrowing side of things.
Assume I lend 100 BTC @ 10% interest.
If apart from me and the borrower, the entire economy remains constant, then where will that extra 10% BTC come from? That can happen only when someone looses that 10% equivalent BTC. So it will become a system where someone will have to lose for other to win and it can never be a win-win. Which means that all people can't live happily in such a system

Money value up means less investments, which is ok sometimes, frenetic investment of all sorts of value destructing ventures is not always what the world needs.

indiangrad
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October 20, 2014, 08:52:53 PM
 #345

If deflation transfers value from owners of assets to owners of money, that would mean it disincentivizes people owning assets and incentivizes people holding money. That would result in people hoarding money instead of investing and that would be negative for the growth of the economy (GDP), possibly resulting in negative GDP. Is that sustainable?

You can not stop consuming (neither can the wealthy men).
So deflation have some lower limit (you must pay for food, water, clothes, shelter, drugs (in you get sick), etc.)
Wealthier you are more you consume in absolute even if it is not in proportion compared to poor people (this is the purpose to be wealthy).

The main reason deflation self correct is it discourage investments and favor savings.
Savings =  seeds in storage (less risky or no risk at all)
Investments = seeds in the soil to become more seeds (more risky)

The value of money depend on the quantity of goods available: if they increase, the value of money increase. If they decrease, the value of money decrease.
If the value of money increase 3% per year, the economy increase 3% per year. Investments promising more than 3% will be funded (in not too risky), investment promising 3% or less will not be funded.
If the value of money increase 2% per year, the economy will increase 2% per year. Investment promising more than 2% will be funded, promising 2% or less will be not.

Now, if we suppose a 3x risk premium, if the riskless increase in the value of money is 3% and someone promise >10% return for a reasonable risk, these projects will be funded.
If these projects are successful, the overall economic return will be 3%. The economy it is now larger, the investors get 4-5-6% per year (after profits and losses) instead of 3%.
If there are not projects able to return 10%, the growth will fall to 2%. People will increase their savings (they produce more than they consume) until they have enough and a 2% return will start to appear interesting. Then they will start to fund risky projects returning 6% (3 times 2%).

They can take risks because they have other savings. Even if their investments are wiped out, their savings are not and they are able to continue to consume as before.

In an inflationary environment, you are forced to have less saving (because they lose value) and more risky investments. And, because the good investments with good returning are not infinite, you end with lossy investments.




Ok. Let's take the lending - borrowing side of things.
Assume I lend 100 BTC @ 10% interest.
If apart from me and the borrower, the entire economy remains constant, then where will that extra 10% BTC come from? That can happen only when someone looses that 10% equivalent BTC. So it will become a system where someone will have to lose for other to win and it can never be a win-win. Which means that all people can't live happily in such a system

Money value up means less investments, which is ok sometimes, frenetic investment of all sorts of value destructing ventures is not always what the world needs.



My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?
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October 20, 2014, 09:27:18 PM
 #346

My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

The velocity of money comes into play. Assuming at some point you spend some of your interest received, you can be paid back again with the same money.

e.g. month 1 borrower pays lender 50BTC, lender buys stuff for 25BTC, now 25BTC is back in the economy and can be used to help make the next 50BTC payment, and so on. While it is very difficult to measure the velocity of money, I think I remember reading that real world currencies typically have a velocity of around 1 - for each dollar/euro/etc. that exists, it gets spent once per year on average. That doesn't mean that it can't be spent twice a year if the incentive to spend money is high. However, as BTC has some extreme deflationary characteristics, it is highly unlikely that BTC's velocity will be higher than fiat - the incentive to spend is low. A velocity of less than 1 will make it very difficult to pay back loans.

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October 20, 2014, 11:16:57 PM
 #347

If deflation transfers value from owners of assets to owners of money, that would mean it disincentivizes people owning assets and incentivizes people holding money. That would result in people hoarding money instead of investing and that would be negative for the growth of the economy (GDP), possibly resulting in negative GDP. Is that sustainable?

You can not stop consuming (neither can the wealthy men).
So deflation have some lower limit (you must pay for food, water, clothes, shelter, drugs (in you get sick), etc.)
Wealthier you are more you consume in absolute even if it is not in proportion compared to poor people (this is the purpose to be wealthy).

The main reason deflation self correct is it discourage investments and favor savings.
Savings =  seeds in storage (less risky or no risk at all)
Investments = seeds in the soil to become more seeds (more risky)

The value of money depend on the quantity of goods available: if they increase, the value of money increase. If they decrease, the value of money decrease.
If the value of money increase 3% per year, the economy increase 3% per year. Investments promising more than 3% will be funded (in not too risky), investment promising 3% or less will not be funded.
If the value of money increase 2% per year, the economy will increase 2% per year. Investment promising more than 2% will be funded, promising 2% or less will be not.

Now, if we suppose a 3x risk premium, if the riskless increase in the value of money is 3% and someone promise >10% return for a reasonable risk, these projects will be funded.
If these projects are successful, the overall economic return will be 3%. The economy it is now larger, the investors get 4-5-6% per year (after profits and losses) instead of 3%.
If there are not projects able to return 10%, the growth will fall to 2%. People will increase their savings (they produce more than they consume) until they have enough and a 2% return will start to appear interesting. Then they will start to fund risky projects returning 6% (3 times 2%).

They can take risks because they have other savings. Even if their investments are wiped out, their savings are not and they are able to continue to consume as before.

In an inflationary environment, you are forced to have less saving (because they lose value) and more risky investments. And, because the good investments with good returning are not infinite, you end with lossy investments.




Ok. Let's take the lending - borrowing side of things.
Assume I lend 100 BTC @ 10% interest.
If apart from me and the borrower, the entire economy remains constant, then where will that extra 10% BTC come from? That can happen only when someone looses that 10% equivalent BTC. So it will become a system where someone will have to lose for other to win and it can never be a win-win. Which means that all people can't live happily in such a system

Money value up means less investments, which is ok sometimes, frenetic investment of all sorts of value destructing ventures is not always what the world needs.



My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

Interest is paid by the borrower to the lender. They don't have to magically spring into existence. It is just like another trade.

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October 20, 2014, 11:46:05 PM
 #348


Ok. Let's take the lending - borrowing side of things.
Assume I lend 100 BTC @ 10% interest.
If apart from me and the borrower, the entire economy remains constant, then where will that extra 10% BTC come from? That can happen only when someone looses that 10% equivalent BTC. So it will become a system where someone will have to lose for other to win and it can never be a win-win. Which means that all people can't live happily in such a system

You lend because you want more, in the future, to spend or save.
You save because you value consuming now less than you value consuming later.
You save because of uncertain, so you want to have a cushion against uncertain.
But, everything, must abide to the law of marginal utility: any unit of goods you acquire satisfy a less important/urgent need or want.
The first scoop of ice cream will take care of your hunger (you need energy to live), the second scoop of your palate (you like the taste and the texture), and so on.
More money you have, less utility have the last unit acquired.
If you acquire enough bitcoins the utility to own another bitcoin will decrease. Maybe it would become more useful to buy a new house, or a new car, a new computer, pay for a surgery, give to a charity, etc.

If you have 1000 BTC and lend 100 BTC, the 10 BTC of interest will come from other people owning BTC spending them because they derive more utility from the service or the goods they acquired from the takers.
Remember, also, the 100 BTC are not a sure thing. They are a risky thing. You could strip bare naked the taker and end owning his car, his home and his business, but never recover the BTCs you lent him.
Like a bank making a loan, they could get the home but never get enough value from it to cover the loss.

If you continue to lend and just hoard BTC, the value of every BTC raise as well, so people, on a side, are wealthier (because their BTC grow in value), but you are no benefitting from this raise in value as you are not spending them. As you try to benefit, the value will stop to raise and  probably will start to fall.


indiangrad
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October 21, 2014, 08:10:56 PM
 #349


Ok. Let's take the lending - borrowing side of things.
Assume I lend 100 BTC @ 10% interest.
If apart from me and the borrower, the entire economy remains constant, then where will that extra 10% BTC come from? That can happen only when someone looses that 10% equivalent BTC. So it will become a system where someone will have to lose for other to win and it can never be a win-win. Which means that all people can't live happily in such a system

You lend because you want more, in the future, to spend or save.
You save because you value consuming now less than you value consuming later.
You save because of uncertain, so you want to have a cushion against uncertain.
But, everything, must abide to the law of marginal utility: any unit of goods you acquire satisfy a less important/urgent need or want.
The first scoop of ice cream will take care of your hunger (you need energy to live), the second scoop of your palate (you like the taste and the texture), and so on.
More money you have, less utility have the last unit acquired.
If you acquire enough bitcoins the utility to own another bitcoin will decrease. Maybe it would become more useful to buy a new house, or a new car, a new computer, pay for a surgery, give to a charity, etc.

If you have 1000 BTC and lend 100 BTC, the 10 BTC of interest will come from other people owning BTC spending them because they derive more utility from the service or the goods they acquired from the takers.
Remember, also, the 100 BTC are not a sure thing. They are a risky thing. You could strip bare naked the taker and end owning his car, his home and his business, but never recover the BTCs you lent him.
Like a bank making a loan, they could get the home but never get enough value from it to cover the loss.

If you continue to lend and just hoard BTC, the value of every BTC raise as well, so people, on a side, are wealthier (because their BTC grow in value), but you are no benefitting from this raise in value as you are not spending them. As you try to benefit, the value will stop to raise and  probably will start to fall.





This is treating BTC like an asset, not a monetary unit. There is a difference. Monetary unit is supposed to act as grease in economy, not make people hoard it by behaving like an asset.
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October 21, 2014, 08:27:00 PM
 #350

My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

The velocity of money comes into play. Assuming at some point you spend some of your interest received, you can be paid back again with the same money.

e.g. month 1 borrower pays lender 50BTC, lender buys stuff for 25BTC, now 25BTC is back in the economy and can be used to help make the next 50BTC payment, and so on. While it is very difficult to measure the velocity of money, I think I remember reading that real world currencies typically have a velocity of around 1 - for each dollar/euro/etc. that exists, it gets spent once per year on average. That doesn't mean that it can't be spent twice a year if the incentive to spend money is high. However, as BTC has some extreme deflationary characteristics, it is highly unlikely that BTC's velocity will be higher than fiat - the incentive to spend is low. A velocity of less than 1 will make it very difficult to pay back loans.

Does that mean that if I don't spend, pari passu, I won't get my money back?
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October 22, 2014, 12:39:49 PM
 #351

Quote
My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

I think you did this on purpose, but the 500 BTC loan when there is only 1000 BTC available seems pretty contrived. It then becomes very difficult to come up with a way for him to make enough profit while justifying borrowing @10%.

However, this could be seen not as a loss for another but rather just a need based expenditure. Maybe he was catering necessities to people and they just had to buy food/water/shelter.

You also don't need to spend to get your money back, if there was a high enough velocity of money in the remaining 500 bitcoins in the money supply. Also, you would have to spend for things like food/water/shelter and wouldn't begrudge that.
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October 23, 2014, 02:56:17 AM
 #352

the japanese are old and the prductive generation is shrinking.

if i shoot you in the head and your heart stops, you did not die of heart failure.


Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
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October 23, 2014, 03:11:16 PM
 #353

My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

There is no loss. Profit is mutual and it is "born" from human work and creativity.
That person who is borrowing 500 BTC from you probably has some investment in mind. For example he uses this 500 BTC to build experimental spaceship that allows people to visit orbit. (Not a realistic option for 500 BTC, but let's stay with this example.) He spends this 500 BTC to buy material, to pay the scientists and technicians, to make some advertising, to pay for fuel etc. And he succeeds.
He sells tickets into orbit for 6 BTC and manages to sell 100 of them.
You get your 550 BTC back, he has 50 BTC extra and working business.

Your extra 50 BTC (interest) in fact comes from the "poor orbital travelers" who "lost" their BTC. But... they gained wonderful experience that was worth (more than) it.

If the orbital experience is not worth 6 BTC then customers made a miscalculation in their expectations. If the person who is borrowing 500 BTC is unable to make a profit (or even to build a spaceship or to sell any tickets) then he miscalculated his business plan and your (deserved) profit is his (deserved) loss.
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October 23, 2014, 04:53:17 PM
 #354

My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

There is no loss. Profit is mutual and it is "born" from human work and creativity.
That person who is borrowing 500 BTC from you probably has some investment in mind. For example he uses this 500 BTC to build experimental spaceship that allows people to visit orbit. (Not a realistic option for 500 BTC, but let's stay with this example.) He spends this 500 BTC to buy material, to pay the scientists and technicians, to make some advertising, to pay for fuel etc. And he succeeds.
He sells tickets into orbit for 6 BTC and manages to sell 100 of them.
You get your 550 BTC back, he has 50 BTC extra and working business.

Your extra 50 BTC (interest) in fact comes from the "poor orbital travelers" who "lost" their BTC. But... they gained wonderful experience that was worth (more than) it.

If the orbital experience is not worth 6 BTC then customers made a miscalculation in their expectations. If the person who is borrowing 500 BTC is unable to make a profit (or even to build a spaceship or to sell any tickets) then he miscalculated his business plan and your (deserved) profit is his (deserved) loss.

Exactly my point. Someone's profit will have to be other person's loss. Someone will have to miscalculate for other to profit. There isn't a scenario wherein all can profit or all can calculate well (You will say that is not practical, but we are talking about an ideal world where everyone is happy. After all, that is the vision of bitcoin as well to some extent)
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October 23, 2014, 05:04:49 PM
 #355

Deflation is worse than inflation. Look at Japan. Deflation decreases money velocity, people tend to hoard instead of spending and spending is crucial to the growth of GDP.

That is just spinning on the current central bank meme. It is wrong.



@Erdogan: What is your argument against this point? It makes sense to me on face value.
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October 23, 2014, 07:54:09 PM
 #356

If the orbital experience is not worth 6 BTC then customers made a miscalculation in their expectations. If the person who is borrowing 500 BTC is unable to make a profit (or even to build a spaceship or to sell any tickets) then he miscalculated his business plan and your (deserved) profit is his (deserved) loss.

Exactly my point. Someone's profit will have to be other person's loss. Someone will have to miscalculate for other to profit. There isn't a scenario wherein all can profit or all can calculate well (You will say that is not practical, but we are talking about an ideal world where everyone is happy. After all, that is the vision of bitcoin as well to some extent)

He misspoke.  Under virtually no circumstances will the lender profit while the borrower loses.  Typically, the failed borrower will ask a court for bankruptcy protection, and the courts will attempt to divide the losses between them the best it can.

Quote
If the person who is borrowing 500 BTC is unable to make a profit (or even to build a spaceship or to sell any tickets) then he miscalculated his business plan and will probably be unable to repay the loan; your (deserved) loss is his (deserved) loss.

On the other hand, he only misspoke in one sentence at the end.  The mistake is blatantly obvious because it reverses the entire meaning of the whole rest of the post.  What's your excuse for ignoring the rest of the post so that you could highlight the one line that agreed with your initial misconception?  Smells a bit trollish from here.

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painlord2k
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October 23, 2014, 08:27:16 PM
 #357

Deflation is worse than inflation. Look at Japan. Deflation decreases money velocity, people tend to hoard instead of spending and spending is crucial to the growth of GDP.

That is just spinning on the current central bank meme. It is wrong.



@Erdogan: What is your argument against this point? It makes sense to me on face value.

The problem is simple: people NEED savings. The need them because they need to eat, drink, get shelter in the future when they can not earn as much money as today (for whatever reason).
Destroying savings force you to hope everything go always right, because if it doesn't, you are fucked up.

If you have no money and no food at home, but your home is worth $ 10M and you have other illiquid assets, you must liquidate them at any price available. Because if you don't eat, you starve.
Inflation destroy the savings (in currency). Depending on the level of inflation, this limit the value of your currency balance compared to your income.
If your balance is limited, you are better off consuming and accumulating stuff. So, there is no overproduction and capital accumulation because, you basically eat everything you produce.
Fundamentally you are forced to consume even if you do not want to do so. And are forced to revert to barter (and any minimally complex economy need money and do not work with barter alone).

Erdogan
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October 24, 2014, 12:56:09 AM
 #358

My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

There is no loss. Profit is mutual and it is "born" from human work and creativity.
That person who is borrowing 500 BTC from you probably has some investment in mind. For example he uses this 500 BTC to build experimental spaceship that allows people to visit orbit. (Not a realistic option for 500 BTC, but let's stay with this example.) He spends this 500 BTC to buy material, to pay the scientists and technicians, to make some advertising, to pay for fuel etc. And he succeeds.
He sells tickets into orbit for 6 BTC and manages to sell 100 of them.
You get your 550 BTC back, he has 50 BTC extra and working business.

Your extra 50 BTC (interest) in fact comes from the "poor orbital travelers" who "lost" their BTC. But... they gained wonderful experience that was worth (more than) it.

If the orbital experience is not worth 6 BTC then customers made a miscalculation in their expectations. If the person who is borrowing 500 BTC is unable to make a profit (or even to build a spaceship or to sell any tickets) then he miscalculated his business plan and your (deserved) profit is his (deserved) loss.

Exactly my point. Someone's profit will have to be other person's loss. Someone will have to miscalculate for other to profit. There isn't a scenario wherein all can profit or all can calculate well (You will say that is not practical, but we are talking about an ideal world where everyone is happy. After all, that is the vision of bitcoin as well to some extent)

No, it is not a loss for the customer, he has traded his coins for something more valuable, the product. Both parties win in a free trade, it is a positive sum game.

Erdogan
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October 24, 2014, 01:15:27 AM
 #359

Deflation is worse than inflation. Look at Japan. Deflation decreases money velocity, people tend to hoard instead of spending and spending is crucial to the growth of GDP.

That is just spinning on the current central bank meme. It is wrong.



@Erdogan: What is your argument against this point? It makes sense to me on face value.

Basically, the money is only a temporary (short or long time) holder of value, it is not the value itself. Edit: Well it is value, but it is not directly usable. It is neither produced (fixed amount) nor destroyed by consumption. It is always only exchanged for something else. The amount of money in total in the economy is of no special importance, it could be any amount. It should be a fixed amount, to not disturb the prices in the organic economic system, especially, the interest rate, which is the price of moving consumption and investment back and forth on the timeline. The interest rate  should be based on market pricing only.

Here is an analysis of deflation by Salerno. Deflation is good, except if it is a result of confiscation:

https://mises.org/journals/qjae/pdf/qjae6_4_8.pdf

This is the current QE/ZIRP situation uncovered. If it is too long to read, go to the end, search for
"Here's what truth would sound like if I were to re-write Yellen's speech" by Chris Martenson:

http://www.zerohedge.com/news/2014-10-22/how-federal-reserve-purposely-attacking-savers




 

ZephramC
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October 24, 2014, 10:21:47 PM
 #360

My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

There is no loss. Profit is mutual and it is "born" from human work and creativity.
That person who is borrowing 500 BTC from you probably has some investment in mind. For example he uses this 500 BTC to build experimental spaceship that allows people to visit orbit. (Not a realistic option for 500 BTC, but let's stay with this example.) He spends this 500 BTC to buy material, to pay the scientists and technicians, to make some advertising, to pay for fuel etc. And he succeeds.
He sells tickets into orbit for 6 BTC and manages to sell 100 of them.
You get your 550 BTC back, he has 50 BTC extra and working business.

Your extra 50 BTC (interest) in fact comes from the "poor orbital travelers" who "lost" their BTC. But... they gained wonderful experience that was worth (more than) it.

If the orbital experience is not worth 6 BTC then customers made a miscalculation in their expectations. If the person who is borrowing 500 BTC is unable to make a profit (or even to build a spaceship or to sell any tickets) then he miscalculated his business plan and your (deserved) profit is his (deserved) loss.

Exactly my point. Someone's profit will have to be other person's loss. Someone will have to miscalculate for other to profit. There isn't a scenario wherein all can profit or all can calculate well (You will say that is not practical, but we are talking about an ideal world where everyone is happy. After all, that is the vision of bitcoin as well to some extent)

Sorry to disappoint you, but our views are different.
I have put emphasis on my actual point. "poor" (orbital travelers) and "lost" were meant as irony.
Actually I think that most of the scenarios would be like that. In my opinion this is profit for everyone.
I would very much disagree with the world where everyone is happy (without relation to his abilities, effort and achievements) , I do not think this is the vision of Bitcoin and I hope it will never be its goal.


As to the double loss and bankrupcy protection. I am speaking about (other version of) ideal world where borrower would rather honorably die in starvation to repay his debt from his own property than not repay the debt, ask for some protection and break his promise to lender.
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