If you are being paid interest on your money, why would you spend it?

[wolverine.ks]

I'm getting tired of having to argue with people about this now.

so don't. ... It's okay to see something you disagree with and then not do anything about it. especially if it doesn't benefit you at all.  Do what makes you happy. even if that means letting other people think differently than you.

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[ISAWHIM]

Because INTEREST = +1.5% and INFLATION = -8.5% thus LOSSES = 7.0% by keeping money in SAVINGS.

Taxes = 6% thus... you save another 1% by spending what you earn, ASAP.

Reality... Everything in CC sales = 16% to 35% losses... Thus... Bank-lenders rob you twice... once lending, and again when saving. They do NOT have that much overhead.

Bitcoins... FTW, what's mine, is mine... Earnings... 100%

[Stephen Gornick]

Guys, calm down, Elwar is being sarcastic, he's obviously playing on the whole "Deflationary currencies are doomed because no one spends money that will be worth more in the future" concept by applying it to fiat money and showing how it doesn't hold water.

I'm not sure it is a good comparison.   If you are lending your money the borrower generally isn't putting it under the mattress but instead is spending the funds and economic activity results.   So lending is essentially the same as spending.

Now there are differing beliefs as to which is better ... spending today by the borrower versus later spending that would occur by you (from your bitcoins kept "under the mattress").  Let's say the borrower uses the funds to buy a car for commuting to work, whereas your later spending might be used to import some expensive bottles of wine to add to your collection in your wine cellar, let's say.   For the economy as a whole that money might be more useful going to the car today rather than to the wine for the cellar later.    And thus you lending out the money is better than you buying gold with it and sticking it in the ground, for instance -- at least that's the argument as I understand it.

However, the problem is that the lending isn't just going for the cars for commuters and other productive uses but instead it goes for overpaying for goods and services and for speculation on commodities such as crude oil which raises the street price for all.   So there's good lending (investment) and bad lending (resulting in malinvestment).   Evidence of systemic malinvestment might look like this

Unemployment worsening in much of Europe:
 - http://www.cbc.ca/news/interactives/map-europe-unemployment/

while at the exact same time a designer handbag manufacturer sees sales in Europe double for the quarter:
 - http://www.foxbusiness.com/industries/2013/05/29/michael-kors-net-income-doubles-in-4q

i.e., lots of money sloshing around, going to consumption spending instead of to uses that increase productivity, or to factories, etc.   If there's more profit from creating designer handbags than, let's say, designing and improving water purification technology, then that's where human talent will focus their efforts.   If markets are left alone they are pretty good about figuring out the where and when investment should occur.

But there are those who think the central bank is smarter than you as far as what you should be doing with your money, and monetary policy is used to persuade you to behave in a certain way.  Like spending it now (to cause economic activity) versus seeing it lose value (as the result of currency inflation).

[Elwar]

Now there are differing beliefs as to which is better ... spending today by the borrower versus later spending that would occur by you (from your bitcoins kept "under the mattress").  Let's say the borrower uses the funds to buy a car for commuting to work, whereas your later spending might be used to import some expensive bottles of wine to add to your collection in your wine cellar, let's say.   For the economy as a whole that money might be more useful going to the car today rather than to the wine for the cellar later.    And thus you lending out the money is better than you buying gold with it and sticking it in the ground, for instance -- at least that's the argument as I understand it.

What if someone uses a credit card to import some expensive bottles of wine for their wine collection and someone else holds onto a few bitcoin until the value is high enough to where they can buy a car for commuting to work?

Buying a car now or buying a car in a year will eventually even out as far as the economy is concerned. The fact is, not everyone is switching over from fiat to bitcoin all at once, so the guy who may have purchased something with a credit card now will instead buy that same thing in a year with bitcoin.

The key is, the credit card company will not get 17% of the value of the purchase just for making the purchase more convenient. 17% worth of productivity spent on some people working in an office moving numbers that could otherwise be adding to the economy in a more productive way.


This thread is to highlight the argument by keynsians that if you have a deflationary currency, you would never spend it because if you spend it, you lose on the gain in value you could have had from holding it. The same thing with compound interest (as Einstein said, the greatest force in nature is compound interest). The argument falls flat on its face if your savings is paying out 4% and there is only 1% inflation. Why spend when your money is gaining value? As we can see from history, spending was quite common in years with high interest savings.

"when people expect falling prices, they become less willing to spend, and in particular less willing to borrow" -Paul Krugman

[bitzox]

My favorite anecdote to counter the silly Keynesians is any kind of computing/smart phone/ electronic technology. Everyone knows that if you wait 12-18 months you can get exactly the same thing for less money. By that argument no one would ever buy electronics because they can get a better deal by waiting a few months when prices are better. I haven't done the math but I'm pretty sure that the increased buying power you get in terms of bang for your buck by waiting is still outpacing inflation by a long shot.

The problem really lies at the end of Krguman's quote. Our economy and its exponential growth relies on an unsustainable amount of borrowing. If you buy into the idea that no amount of debt is ever to high for a government to incur, then bitcoin might not be right for you  But the travesty is that our current economic system is predicated on astronomic debt levels and massive borrowing. We cant continue to grow as we have in the past without a populace that is massively indebted, and companies that are outrageously indebted. If you want to return to the post WWII boom years where the economy is growing at 5-6% you need high levels of debt. If you accept the new reality and are comfortable with an economy that only grows at the rate of population growth (the only long term sustainable solution) then high levels of debt and borrowing are unnecessary and a currency that is deflating is actually a good thing.

[Stampbit]

I wouldnt spend it, id hoard it and then jump on the forums to tell everyone how rich ill be meanwhile causing the market to swing because i contributed to its heart condition.

[padalin]

Fiat put into a savings account, in theory is invested (The banks should be using this money to make loans to others). 

[jml]

Fiat put into a savings account, in theory is invested (The banks should be using this money to make loans to others). 

That is what most people think and this is not what happens when people save money; see Fractional Reserve Banking.

http://en.wikipedia.org/wiki/Fractional_reserve_banking

[BitPappa]

Fiat put into a savings account, in theory is invested (The banks should be using this money to make loans to others).  

That is what most people think and this is not what happens when people save money; see Fractional Reserve Banking.

http://en.wikipedia.org/wiki/Fractional_reserve_banking

To me, this doesn't contradict the lending theory, it means your dollar in a bank is loaned several times over (what could possibly go wrong?).

Not that this affects anyone's answer to the original question.

[Lethn]

I'm getting tired of having to argue with people about this now.

so don't. ... It's okay to see something you disagree with and then not do anything about it. especially if it doesn't benefit you at all.  Do what makes you happy. even if that means letting other people think differently than you.

Normally I do, but what I find particularly vile are people who go around actually trying to make people believe in what they say when it's completely wrong, like religious preaching, I just hope the people reading this stuff research and form their own opinions even if it's something I disagree with.

[jml]

Fiat put into a savings account, in theory is invested (The banks should be using this money to make loans to others).  

That is what most people think and this is not what happens when people save money; see Fractional Reserve Banking.

http://en.wikipedia.org/wiki/Fractional_reserve_banking

To me, this doesn't contradict the lending theory, it means your dollar in a bank is loaned several times over (what could possibly go wrong?).

Not that this affects anyone's answer to the original question.

FRB just makes bankers more rich. From what I understand of fractional reserve banking, the bank does not loan your money to other borrowers as many people view. The bank borrows from the central bank and pays it as a loan - in the UK, there was not long ago the LIBOR scandal and banks fixed their rates between other banks. The money passed on to the borrower has thus an added interest fee plus the effect of inflation which is viewed as a hidden tax; i.e. your money is worth less over time.

The problem with FRB is that if there was a bank run, the banks would have a very short supply of notes as these are no longer backed by gold or silver. It is just a very good scheme to make paper (the IOU known as greenbacks during the american civil war) as valuable as gold. Now in the advent of electronic entries, it can create another problem that the figures that is represented on your bank statement is not even backed by paper.

Going back on the OP, I would spend the interest because interest rates are too low to save and I have no confidence in the banking system to keep most of my money stored in banks.