How Does Saving Bitcoin Lead to Capital Formation?

[caveden]

No, it gets harder and harder, the interest rate decreases until the point it's not worth lending any more.

Lots of savings allow easier consumption. People will stop saving so much and consume/invest more.

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[davout]

Could you elaborate on the "interest rate decreases" part ?

[hugolp]

I tend to think that interest rates with a fixed will eventually lead to all the money being held by the bank, assuming it's profitable.

Ok look at it this way :
 - 21 billion BTC circulating,
 - Bank makes a 100k BTC loan,
 - Bank eventually gets 105k BTC back,
 - Bank pays its expenses, it's left with 102k BTC ,
[...]
 - Repeat ten times, bank took 20k BTC out of circulation.

Lending with interest works, it doesn't really seem that sustainable to me on the long term, I guess it'll probably all boil down to "hey, let's try and see what happens!"

?? This is wrong. Lets check again:

- Bank makes a 100k BTC loan.
- Bank introduces 100k BTC into circulation.
- Bank eventually gets 105k BTC.
- Bank has removed 105k BTC from circulation.
- Bank pays expenses of 3k BTC.
- Bank introduces 3k BTC into circulation.
- Bank loans 100k BTC.
- Bank introduces 100k BTC into circulation

....

In your example, the bank is just adding and removing 100k BTC from circulation (In real life it will be a more smooth and continuos thing). The 2k BTC that gets as benefits will be supposedly spent to buy things the owners need (food, energuy, etc...).

[davout]

The 2k BTC that gets as benefits will be supposedly spent to buy things the owners need (food, energuy, etc...).

Only part of it, the rest being invested either as capital or lent for... interest

[hugolp]

The 2k BTC that gets as benefits will be supposedly spent to buy things the owners need (food, energuy, etc...).

Only part of it, the rest being invested either as capital or lent for... interest

Ok. So we have settle that repeating the action does not produce the removal of all bitcoins. Now the issue is with the benefits a bank may have.

This is not really an issue only for banks. It really is a issue for any business. You could say the same with a factory owner that earns 2K BTC. ¿What if he does not spend it? ¿What if he/she uses them to create new business and try to monopolize the economy? Thats really the question you are making, independent of being a bank or not.

The issue is that monopolies are impossible in a free market. Monopolies only happen because of government regulations. If someone is making money in one area (absent of government regulations, like copyright laws or "anti"-trust laws) more competitors are going to enter into the area of business attracted by the benefits. That is why it has been seen empirically that in a free market prices tend to aproach production and labor costs. Also, as the original company gets bigger it gets to a point where it becomes less efficient and the smaller ones can outcompete it.

[davout]

Ok. So we have settle that repeating the action does not produce the removal of all bitcoins. Now the issue is with the benefits a bank may have.

Not really, my point was basically that by repeating the action an infinite amount of times you end up with all the money owned by the bank.

The issue is that monopolies are impossible in a free market. Monopolies only happen because of government regulations. If someone is making money in one area (absent of government regulations, like copyright laws or "anti"-trust laws) more competitors are going to enter into the area of business attracted by the benefits. That is why it has been seen empirically that in a free market prices tend to aproach production and labor costs. Also, as the original company gets bigger it gets to a point where it becomes less efficient and the smaller ones can outcompete it.

Yes, that makes sense, guess the thought experiment is valid only with a single bank.

[da2ce7]

If you can aquire all 21 million bitcoins or find any takers at 50% interest then you might have a point.  Such as it is, you don't, and I think that you already know that.

I tend to think that interest rates with a fixed will eventually lead to all the money being held by the bank, assuming it's profitable.

Ok look at it this way :
 - 21 billion BTC circulating,
 - Bank makes a 100k BTC loan,
 - Bank eventually gets 105k BTC back,
 - Bank pays its expenses, it's left with 102k BTC ,
[...]
 - Repeat ten times, bank took 20k BTC out of circulation.

Lending with interest works, it doesn't really seem that sustainable to me on the long term, I guess it'll probably all boil down to "hey, let's try and see what happens!"

Yes banks make profit, so what?  That is the whole point in providing a service: to make a return on investment.  Banks take risk, and have rewards, (or losses).  You are ignoring the other side of the equation, the bank could take that 100BTC and directly invest it in a new company, and make that 2BTC directly.

There is no 'money' coming from nowhere. Unlike the fiat banking system where there is only 'profit' and no chance of loss (until the whole thing comes crashing down).  In the fiat world, banks 'loan' money from nothing through government enforced dilution of the existing currency.

Usury is good, it is the natural way of putting a 'time value' on capital.  Money is better now, than later (you may not be alive to spend it).

[caveden]

Could you elaborate on the "interest rate decreases" part ?

Interest rates are a price. The price for "renting savings". As the price of anything else, it drops when the supply increases, demand being constant.

If lenders keep increasing their savings to lend more and more, they'll be increasing the supply of savings available for lending, thus decreasing the price one has to pay to have access to it.
At an extreme, the interest rates might barely cover the expanses of the lending process itself.

Also, with such low interest rates, consuming/investing becomes so easy, that many will do it. A raise in consumption decreases the savings available... these "forces" push to an equilibrium, that's of course unreachable since the variables of this equation are changing all the time.

[davout]

Yes banks make profit, so what?

I'm discussing the practical side, I don't care about morality.
I would make money from money of I could, but I wonder if such a system would be sustainable in the very long run.

Could you elaborate on the "interest rate decreases" part ?

Interest rates are a price. The price for "renting savings". As the price of anything else, it drops when the supply increases, demand being constant.

If lenders keep increasing their savings to lend more and more, they'll be increasing the supply of savings available for lending, thus decreasing the price one has to pay to have access to it.
At an extreme, the interest rates might barely cover the expanses of the lending process itself.

Also, with such low interest rates, consuming/investing becomes so easy, that many will do it. A raise in consumption decreases the savings available... these "forces" push to an equilibrium, that's of course unreachable since the variables of this equation are changing all the time.

Yup, makes sense

[ColdHardMetal]

The banks profit also eventually get's paid out as dividends of the bank's shareholders and then they spend it, the same as any other company. Corporate profits don't just get absorbed and held onto forever. Corporations exist solely to make a profit and pass that on to their owners so those funds will make a return to circulation eventually.

[The Madhatter]

*cough* *cough* Usury! *cough* *cough*

[Vinnie]

The bank making money off of interest is little different then me making money off of digging ditches. Maybe if I dig enough ditches I will eventually have earned all the BTC in existence?

[MoonShadow]

The banks profit also eventually get's paid out as dividends of the bank's shareholders and then they spend it, the same as any other company.

Well, that's theoretically true.  In practice, fractional reserve banking results in the majority of interest bearing loans granted by banks within the Federal Reserve system are loaning out money that did not exist prior to the issuance of the loan.  Roughly 85% of all interest paid towards loans by banks are kept entirely by the bank due to those loans not being backed by any depositors to be compensated.  That 85% interest is the majority of the driving force of inflation in our modern world, the principal amount ceases to exist as the loan is either repaid, or defaulted upon.  This is part of the reason that banks are constantantly loaning out new funds, otherwise as loans are repaid (or defaulted upon) the currency in circulation would decrease, resulting in an overall deflationary environment.

[Vinnie]

The banks profit also eventually get's paid out as dividends of the bank's shareholders and then they spend it, the same as any other company.

Well, that's theoretically true.  In practice, fractional reserve banking results in the majority of interest bearing loans granted by banks within the Federal Reserve system are loaning out money that did not exist prior to the issuance of the loan.  Roughly 85% of all interest paid towards loans by banks are kept entirely by the bank due to those loans not being backed by any depositors to be compensated.  That 85% interest is the majority of the driving force of inflation in our modern world, the principal amount ceases to exist as the loan is either repaid, or defaulted upon.  This is part of the reason that banks are constantantly loaning out new funds, otherwise as loans are repaid (or defaulted upon) the currency in circulation would decrease, resulting in an overall deflationary environment.

I was speaking of banks operating in a world with a finite money supply, like BTC. Understood about fractional reserve banking.