Interest rates in a deflationary currency

[miln40]

Hi,

I have searched the forums and haven't found a satisfactory discussion, please correct me if I'm wrong.

Question:How do banks get more coins to pay interest rates if no new money is produced?

Further explanation:
Let's say we have 21M bitcoins and a free-market economy based on them. Everyone has some of those bitcoins and are exchanging them with each other for services and goods. Now, if I am a bank, how do I get more money to pay my lenders? I understand that the things you can buy with your coins grows overtime, but how do you get more money itself? If everyone lends to everyone (like kind of what happens today), then we would want the number of coins to grow, or someone would not be able to get enough to pay back, despite being able to purchase more stuff (his intrinsic wealth growing). On a further note, even a 1% interest would be actually compounded by the deflationary trend, making it quite lucrative. Is it possible that negative or zero interest would be lucrative (just to keep your money safe?)

Perhaps my questions are simplistic, but then again so is my knowledge in economics.

Thanks for reading

[1714203736]

1714203736

[1714203736]

1714203736

[aaaxn]

If you have deflation lenders can adjust nominal interest and maintain steady real interest. Problem arises when such adjustment would bring nominal interest below zero. It would cause lending to stop, because one have no interest in borrowing for zero or less than zero. One can just hold currency without any risk. This is one of the reasons why deflation is considered bad.

[Stampbit]

Basically what he said above, there's no way to have a growing economy and a fixed volume of currency, bitcoin was flawed by design to get people to adopt it, it was never meant to be a real currency.

[ruletheworld]

Credit is a hard concept in the Bitcoin economy. That being said, lending isn't that terrible. Go back to the basics -

If a bank uses only Bitcoin, then this is how it will make money: through a spread between savers and lenders. That's how traditional banks are supposed to make money too. People deposit their Bitcoins in the bank for safekeeping and they get some rate of interest. If you're borrowing Bitcoin from the bank to start a business, say, then you need to pay back a higher number of Bitcoins. The bank keeps the difference for taking that risk. Same concept as traditional economy.

Remember currency is just the medium of exchange. The total wealth of the world can keep increasing irrespective of the currency.

[malditonuke]

Credit is a hard concept in the Bitcoin economy. That being said, lending isn't that terrible. Go back to the basics -

If a bank uses only Bitcoin, then this is how it will make money: through a spread between savers and lenders. That's how traditional banks are supposed to make money too. People deposit their Bitcoins in the bank for safekeeping and they get some rate of interest. If you're borrowing Bitcoin from the bank to start a business, say, then you need to pay back a higher number of Bitcoins. The bank keeps the difference for taking that risk. Same concept as traditional economy.

Remember currency is just the medium of exchange. The total wealth of the world can keep increasing irrespective of the currency.

Also the banks can become more profitable through expansion, which may justify borrowing on the part of the bank.

[malditonuke]

... [bitcoin] was never meant to be a real currency.

Stampbit was never meant to be taken seriously.

[aaaxn]

Credit is a hard concept in the Bitcoin economy. That being said, lending isn't that terrible. Go back to the basics -

If a bank uses only Bitcoin, then this is how it will make money: through a spread between savers and lenders. That's how traditional banks are supposed to make money too. People deposit their Bitcoins in the bank for safekeeping and they get some rate of interest. If you're borrowing Bitcoin from the bank to start a business, say, then you need to pay back a higher number of Bitcoins. The bank keeps the difference for taking that risk. Same concept as traditional economy.

Remember currency is just the medium of exchange. The total wealth of the world can keep increasing irrespective of the currency.

You did not understand the problem. If deflation is 20% a year you cannot lend from bank for anything under 20% in real terms. Such high interest would cause demand for credit to be very small and without demand there is now way bank can profit from lending.

[Impaler]

In a hard money loans are repaid with interest, given enough time and a stable monetary base and economy this will result in only two possible outcomes.  The lenders gradually gain a larger and larger share of all currency (assuming they don't spend it back into the economy), or borrowers default at a rate equal to the interest rate to bring the lenders profit down to zero.

Growing the economy is one possible escape as it allows most or all loans to re repaid, monetary velocity will now be higher and the loan interest will be a smaller portion of the whole economy.  Alternatively growing the money supply (without growing the economy) has the effect of making money soft and lowering interest rates, if interest rates are lowered to equal the growth in money supply then lenders will not grow their share of total currency and borrowers will repay loans with the expanded supply, but it is the borrower who must receive the new money for this to work.

[Seal]

You have to get out of the frame of thought of banks producing money by using means such as interest bearing accounts. The bitcoin economy truly does reward those who save. At a 0% interest rate, your money will naturally appreciate over time whilst prices depreciate. It is the prices constantly depreciating that your 'savings' are delivered. This is what's nicknamed as a deflationary economy.

I believe the real world tries to model its economies to grow at 2% fixed rate, as psychologically it cons the population into thinking that each payrise they get every year is progression.

[aaaxn]

You have to get out of the frame of thought of banks producing money by using means such as interest bearing accounts. The bitcoin economy truly does reward those who save. At a 0% interest rate, your money will naturally appreciate over time whilst prices depreciate. It is the prices constantly depreciating that your 'savings' are delivered. This is what's nicknamed as a deflationary economy.

I believe the real world tries to model its economies to grow at 2% fixed rate, as psychologically it cons the population into thinking that each payrise they get every year is progression.

Some would argue that it's better if economy reward those who invest than those who just sit on cash doing nothing and risking nothing.

[BTConomist]

Let's say we have 21M bitcoins and a free-market economy based on them. Everyone has some of those bitcoins and are exchanging them with each other for services and goods. Now, if I am a bank, how do I get more money to pay my lenders? I understand that the things you can buy with your coins grows overtime, but how do you get more money itself?

Banks would need to take control of the 51% hashing power and propose to move decimal places from 8 to 9 (or so). But to understand what I've just said requires that you change your thinking from deflationary bitcoins to inflationary satoshies.

[aaaxn]

Banks would need to take control of the 51% hashing power and propose to move decimal places from 8 to 9 (or so). But to understand what I've just said requires that you change your thinking from deflationary bitcoins to inflationary satoshies.

It is irrelevant to interest rates in deflation problem. If you borrow 1 BTC you have to give back 1 BTC no matter how many decimal places were added to protocol in meantime.

[BTConomist]

Banks would need to take control of the 51% hashing power and propose to move decimal places from 8 to 9 (or so). But to understand what I've just said requires that you change your thinking from deflationary bitcoins to inflationary satoshies.

It is irrelevant to interest rates in deflation problem. If you borrow 1 BTC you have to give back 1 BTC no matter how many decimal places were added to protocol in meantime.

Not if you borrow satoshies in the first place.

[aaaxn]

Not if you borrow satoshies in the first place.

No one is going to lend you in such potentially moving satoshies, because he risk getting only 10% or 1% of principal back.

[malditonuke]

Credit is a hard concept in the Bitcoin economy. That being said, lending isn't that terrible. Go back to the basics -

If a bank uses only Bitcoin, then this is how it will make money: through a spread between savers and lenders. That's how traditional banks are supposed to make money too. People deposit their Bitcoins in the bank for safekeeping and they get some rate of interest. If you're borrowing Bitcoin from the bank to start a business, say, then you need to pay back a higher number of Bitcoins. The bank keeps the difference for taking that risk. Same concept as traditional economy.

Remember currency is just the medium of exchange. The total wealth of the world can keep increasing irrespective of the currency.

You did not understand the problem. If deflation is 20% a year you cannot lend from bank for anything under 20% in real terms. Such high interest would cause demand for credit to be very small and without demand there is now way bank can profit from lending.

It was a good answer to the original poster's question: 'How do banks pay their lenders?'  The OP seemed to be under the mistaken impression that a specific business (a bank) needs to increase the stock of money to to pay the interest off loans.  The truth is that profit can pay the interest.

Also, if the currency is increasing in value 20% per year, think about why that is.  It's because of economic growth.  If you can't have economic growth with the currency appreciating that much, then the growth slows, and the currency increases in value at a lower rate.

[aaaxn]

It was a good answer to the original poster's question: 'How do banks pay their lenders?'  The OP seemed to be under the mistaken impression that a specific business (a bank) needs to increase the stock of money to to pay the interest off loans.  The truth is that profit can pay the interest.

Yes, I reread thread and I agree.

Also, if the currency is increasing in value 20% per year, think about why that is.  It's because of economic growth.  If you can't have economic growth with the currency appreciating that much, then the growth slows, and the currency increases in value at a lower rate.

Economic growth is only one of reasons that can cause deflation. It can also be caused by shrinking money supply (eg. credit bubble pops) or by increase of money demand (all people at once are worried and starts to accumulate savings in money) and whatever the reason economy as you said will adjusts growth lower. But why accept slower growth just because of certain monetary system?

[Impaler]

The only growth your seeing in the BTC economy is the growth in demand to speculate.  Actual goods and services transacted in BTC are flat or barely rising, and even that is mostly commerce that would otherwise have occurred in USD even without BTC existing.

My suspicion is that miners are hoarding most coins right now because they can cover their energy costs selling just a few.  We will see difficulty increase until it becomes self limiting and once all miners are forced to liquidate to pay for electric costs the price will crash as their is no way that people will put a half million dollars a day into buying newly minted BTC, the amount necessary to sustain the current price.

[BTConomist]

My suspicion is that miners are hoarding most coins right now because they can cover their energy costs selling just a few.  We will see difficulty increase until it becomes self limiting and once all miners are forced to liquidate to pay for electric costs the price will crash as their is no way that people will put a half million dollars a day into buying newly minted BTC, the amount necessary to sustain the current price.

Well-said, well-said... This goes to show that miners don't really have an incentive to hoard bitcoins beyond the GOLD 2.0 era we are currently in. If only we had figured out how to make the best use of that era in creating a bitcoin economy that doesn't have to rely on fiat currencies for commerce transactions?

[ruletheworld]

Credit is a hard concept in the Bitcoin economy. That being said, lending isn't that terrible. Go back to the basics -

If a bank uses only Bitcoin, then this is how it will make money: through a spread between savers and lenders. That's how traditional banks are supposed to make money too. People deposit their Bitcoins in the bank for safekeeping and they get some rate of interest. If you're borrowing Bitcoin from the bank to start a business, say, then you need to pay back a higher number of Bitcoins. The bank keeps the difference for taking that risk. Same concept as traditional economy.

Remember currency is just the medium of exchange. The total wealth of the world can keep increasing irrespective of the currency.

You did not understand the problem. If deflation is 20% a year you cannot lend from bank for anything under 20% in real terms. Such high interest would cause demand for credit to be very small and without demand there is now way bank can profit from lending.

It was a good answer to the original poster's question: 'How do banks pay their lenders?'  The OP seemed to be under the mistaken impression that a specific business (a bank) needs to increase the stock of money to to pay the interest off loans.  The truth is that profit can pay the interest.

Also, if the currency is increasing in value 20% per year, think about why that is.  It's because of economic growth.  If you can't have economic growth with the currency appreciating that much, then the growth slows, and the currency increases in value at a lower rate.

Yeah, that's exactly what I wanted to say. If you say that the units of currency are fixed, then with economic growth, the value of each of these unit will increase proportionally. The reason that doesn't happen with fiat currency is essentially inflation (inflation defined in terms of increasing the supply of currency, not CPI based inflation). In a Bitcoin economy, the value of 1 Bitcoin will be 1/21 millionth of the size of the economy. The economy grows irrespective of the currency units.

[NewLiberty]

Credit is a hard concept in the Bitcoin economy. That being said, lending isn't that terrible. Go back to the basics -

If a bank uses only Bitcoin, then this is how it will make money: through a spread between savers and lenders. That's how traditional banks are supposed to make money too. People deposit their Bitcoins in the bank for safekeeping and they get some rate of interest. If you're borrowing Bitcoin from the bank to start a business, say, then you need to pay back a higher number of Bitcoins. The bank keeps the difference for taking that risk. Same concept as traditional economy.

Remember currency is just the medium of exchange. The total wealth of the world can keep increasing irrespective of the currency.

You did not understand the problem. If deflation is 20% a year you cannot lend from bank for anything under 20% in real terms. Such high interest would cause demand for credit to be very small and without demand there is now way bank can profit from lending.

If you are lending Bitcoin, you charge interest in Bitcoins.
There is no problem provided the lender is making sound judgement in assessing risk.

Perhaps you are considering the foolish bank which might lend Bitcoins and charge interest in fiat currency.  Don't deposit or buy shares in that bank.