Economic Devastation

[VectorChief]

The argument that purchasing power of money increases in the case of economic growth and zero debasement cannot be viewed so negatively as it works equally well for all participants. The economic growth in this case simply translates into higher standard of living instead of being eaten by debasement. In fact poor will enjoy the increasing purchasing power of money much more than the rich ever would, because it makes a bigger difference for them.

Your analysis is short-sighted. With 0% debasement, the rich can loan money at the rate of growth of the economy and parasite the economic growth from the masses in the form of interest payments. With higher levels of debasement, the banksters can't make a positive real (real = inflation adjusted) return whereas the nimble smaller entrepreneur or investor can generate ROI that exceeds the broad level of economic growth and can thus make real gains.

The point of higher debasement is it rewards hands-on knowledge and penalizes parasitic usury.

But in the case of zero debasement, economic grows does not translate into increasing monetary base, that in turn prevents getting interest on the loans.

  There is no real economic growth now for example in Europe, yet the banks and bond holders still collect interest payments.

That's because we are still using inflationary fiat system, and taking loans is the only way to get money in circulation and pay back old debts. On the other hand, it makes money much more available than in case of any rigidly pre-programmed system. So fiat might be a better system for "developing countries" in general as they experience a lot of growth and need money readily available to make their economy fluid. However for stabilized "developed countries" something like Bitcoin will be more suitable as the need for economic growth isn't as acute.

So, I agree, that there might not be economic growth in the case of zero debasement money system (not that it needs any), but that is only true if the only incentive is profit, which is not always the case.

[iamback]

Any way the entire discussion about debasement is irrelevant, because there will be competing crypto-currencies and the one that wins will be the one that the most users want to use as a currency and/or store-of-value.

I believe the winner be the one that most users want to use as a currency, because I believe even Bitcoin is a not a store-of-value, rather it is a speculation and also will be any altcoin that aspires to be more used as a currency.

So I think the 0% debasement debate is really delusional noise.

So that shows how having a delusional goldbug demographic causes Bitcoin to pitch features which are really irrelevant. Thus it shows that if you want to do something big with an altcoin, you need to change the demographic you are targeting.

And thus I think I will stop this discussion and focus on things which really matter.

[VectorChief]

Any way the entire discussion about debasement is irrelevant, because there will be competing crypto-currencies and the one that wins will be the one that the most users want to use as a currency and/or store-of-value.

I believe the winner be the one that most users want to use as a currency, because I believe even Bitcoin is a not a store-of-value, rather it is a speculation and also will be any altcoin that aspires to be more used as a currency.

So I think the 0% debasement debate is really noise.

And thus I think I will stop this discussion and focus on things which really matter.

Yes, as I have pointed out some debasement might occur through the addition of competing crypto-currencies.

...
Perhaps your point is that in a debt-based economy where all activity is debt-financed then to pay compounded interest, the supply of money must also have compounded growth. While that is true, then lender makes no inflation-adjusted gains.

And if the debasement is decentralized in crypto-currency, then the banksters in theory can't capture it as they do now.

Whereas if you try to limit the debasement to 0, then the banksters will still make their loans and when the economy collapses because the interest payment can't be paid, then they get bailed out by the government, because otherwise no loans means the economy dies.

Also the "economy dying without loans" is an exaggeration, as crowd-funding is likely to replace the old coercive form of financing. So instead of taking a loan and then getting punished for not being able to repay it, companies will turn to the internet crowd with their prospects and business plans, and then decentralized community will assess the risks and proceed with funding. How to handle failure to deliver and various scams is still an open question though.

[iamback]

...
Whereas if you try to limit the debasement to 0, then the banksters will still make their loans and when the economy collapses because the interest payment can't be paid, then they get bailed out by the government, because otherwise no loans means the economy dies.

Also the "economy dying without loans" is an exaggeration, as crowd-funding is likely to replace the old coercive form of financing.

I meant "because otherwise no loans means the economy dies" is the political justification for bailing the banks out. I wasn't saying it is the truth. Politics is almost never about the truth.

[VectorChief]

...
Whereas if you try to limit the debasement to 0, then the banksters will still make their loans and when the economy collapses because the interest payment can't be paid, then they get bailed out by the government, because otherwise no loans means the economy dies.

Also the "economy dying without loans" is an exaggeration, as crowd-funding is likely to replace the old coercive form of financing.

I meant "because otherwise no loans means the economy dies" is the political justification for bailing the banks out. I wasn't saying it is the truth. Politics is almost never about the truth.

Ok, got it.

[CoinCube]

The equilibrium point between these competing inefficiencies is a debasement rate that equals the rate of economic growth.

"The rate of economic growth" does not exist. There is no way to calculate it. It is a relative thing that varies for each person and each weighting basket.

Agreed it varies for each individual. That does not mean an overall aggregate does not exist. I do not see why it would be impossible to estimate said aggregate.

Money is claims on real capital. If claims on real capital are withheld from the market when money is stored rather than invested/spent, then some real capital has been delayed. If that delay was wise, then society benefits, but if it was mistaken then society suffers. But no one can know a priori (in advance) the outcome of decision to delay.

If long term isthe debasement exceeds the rate of economic growth it will introduce inefficiencies into economic decision making. Claims on real capital that optimally should have been delayed will instead be invested/spent.

There is no one level where that happens in all cases. It is ladder. The higher you climb, the more higher ROI activities get prioritized and lower ROI get discouraged, but indiscriminate spending also has some effects which are not all positive. I would need to think about how to model this mathematically.

So we must ask what level of debasement best serves society as a whole. Lets look at this from the prospective of the individual who wants to own apples. Assume an economy is growing at 5% and by random chance the efficiency of apple production also happens to exactly match that 5% growth.  

Examine the game theory behind an individual's decision to buy an apple now or later if debasement is equal to growth:

If he chooses to buy an apple now he gets 1 apple.

If he waits and chooses to buy an apple next year he still gets 1 apple.
(The individual does not lose his apple for failing to consume immediately. This limits the incentive for sub-optimal and indiscriminate consumption. Money maintains its purchasing power relative to the time it was saved and thus functions as an acceptable store of value.)

If he invests the money for a year and manages to match the rate of economic growth he gets 1.05 apples.
(The individual gets to partake in the efficiency gain in the overall economy which is fair because he participated in said growth).

In a real economy things are obviously more complex and an investor who chooses to defer claims on real capital now will likely lose purchasing power in some areas and gain it in others. However, if the debasement of the currency matches the overall aggregate economic growth then purchasing power will be protected relative to the time it was earned. By this I mean that a saver will be able to purchase a basket of goods and services that is comparable in quality and quantity to what he could have purchased when he deferred his initial claim. Money serves both as an acceptable store of value and the incentive remains to invest and not horde.

I am presenting logic for why currency debasement greater than the average aggregate growth rate is not optimal for it encourages excess spending/investment. Above I presented logic for why currency debasement less then the average aggregate growth rate is not optimal for it encourages excess savings/divestiture.

I maintain my claim that the equilibrium point between the competing inefficiencies is a debasement rate that equals the rate of aggregate economic growth. This is the level that provides the optimal incentives for society.

[VectorChief]

There are two different types of incentives in the economy.

1st is to minimize fear of ending up homeless on the street without food - the survival mode.
2nd is to maximize joy by creating more ways to generate knowledge (VR, video games, space exploration) - entertainment.

I'm sure that the Knowledge Age can only begin when the survival mode is mostly over and some basic human needs can be fulfilled on the uncoditional basis. Basically a small shelter and some form of syntethic food produced by machines with minimal resources would suffice to end poverty and violence. Anything better than that needs to be earned by developing skills and creating knowledge and fun. But maybe this view is somewhat utopian and the traditional ways of incentivizing people through having to compete for survival works better? Time will tell.

Just noticed, that there is another 40-page-long thread on the topic of "technological unemployement":
https://bitcointalk.org/index.php?topic=318001.0
So I have some more catching up to do .

[CoinCube]

There are two different types of incentives in the economy.

1st is to minimize fear of ending up homeless on the street without food - the survival mode.
2nd is to maximize joy by creating more ways to generate knowledge (VR, video games, space exploration) - entertainment.

I'm sure that the Knowledge Age can only begin when the survival mode is mostly over and some basic human needs can be fulfilled on the uncoditional basis. Basically a small shelter and some form of syntethic food produced by machines with minimal resources would suffice...

Actually rather then being utopian I believe that something like this is the only way to optimize long term adaptability and growth. A basic social safety net smooths the fitness curve and thus facilitates long term long term optimization and adaptation. Such a safety net helps ensure trailblazers survive long enough to eliminate economic frictions.

https://bitcointalk.org/index.php?topic=365141.msg4916516#msg4916516

The challenges is how to fund it and most critically how to ensure the curve is only smoothed never inverted.

[iamback]

Examine the game theory behind an individual's decision to buy an apple now or later if debasement is equal to growth:

If he chooses to buy an apple now he gets 1 apple.

If he waits and chooses to buy an apple next year he still gets 1 apple...

If he invests the money for a year and manages to match the rate of economic growth he gets 1.05 apples...

I am presenting logic for why currency debasement greater than the average aggregate growth rate is not optimal for it encourages excess spending/investment.

I don't think the game theory works that way in reality.

Savings is power law distributed.

Non-bond investors don't change their timing based on the ratio of debasement to average economic growth rate. They are targeting investments with much greater ROI, so that ratio is much less relevant than the timing of their investment.

[CoinCube]

I don't think the game theory works that way in reality.

Savings is power law distributed.

Non-bond investors don't change their timing based on the ratio of debasement to average economic growth rate. They are targeting investments with much greater ROI, so that ratio is much less relevant than the timing of their investment.

Yes savings is power law distributed but that does not alter the game theory. All investors must include the debasement of the currency into their calculations even those targeting high ROI investments.

This becomes more clear with an example. Lets examine an economy that is growing at 5%.
In this environment compare two investors 1) a manual laborer capable of obtaining a 1% ROI on his investment, and 2) an IT worker who is capable of a 20% ROI.

If the currency is debased at 5% per year both the laborer and the IT worker have a positive incentive to invest as they will achieve a return that is better than immediate consumption. However, if the debasement is raised to 10% the laborer no longer has an incentive to invest nor does he have any incentive to defer immediate consumption/spending as each day his purchasing power declines.

You can make the case that the wealthy in a knowledge age are capable of higher ROI investments and we should push debasement up in this way because it will cause wealth to further accumulate in the hands of those who can achieve a higher ROI with it. However, this is a very dangerous argument because you are essentially arguing that we should create an economic system that does not provide optimal incentives for the majority of humanity in the hopes that the gains created by the upper crust will offset whatever damage is done to the lower classes. To do so implies a great social debt to those on the tail end of the pareto distribution as they are essentially being thrown under the bus in the name of growth. That is the path to socialism and redistribution.
 
Edit: By growth of 5% above I mean the aggregate growth in the value of the goods, services, and knowledge produced by the economy.

[iamback]

Nobody earns 1% on an investment that isn't usury. Investments have a high fail risk, thus no one attempts an investment with such low potential ROI, because the ROI has to compensate for the failure risk.

We need to end all this usury (bonds, banksters) crap. That precisely is the drag on the economy and the corruption of the Iron Law of Political Economics. I had explained upthread why guaranteed ROI is the antithesis of development, i.e. it is anti-development and megadeath directed. Evidence the coming global Sovereign Debt collapse. So just forget saving money in a bank with a fixed rate of ROI. That is part of the problem of society, not a solution to any thing.

Any way, holding a basket of stock invesments has always delivered much higher average ROI over the long-term. That is Warren Buffett's main point.

And yes humanity needs to transition to the Knowledge Age, because automation will replace all the other jobs. Evolution at work. Sorry.

I don't know what is the correct level of debasement. But I doubt it is 2 - 3%. It is probably 5+%, which btw is the historical level of debasement of the dollar. That will provide much funding for mining security. Also you assume the GDP growth rate drives the optimum rate, but it may be synergistic where the rate of debasement drives the GDP growth rate.

The key improvement of crypto-currency is that the debasement in theory doesn't end up in the hands of the banksters, which they can then use to capture the government.

Also I have an idea of how it doesn't end up in the hands of a few rich ASIC owners too. That is one of my altcoin design secrets.

[iamback]

Reminder for readers to digest the entire thread and the essays in the OP.

Particularly remember to go back to the following point in the thread and re-read:

https://bitcointalk.org/index.php?topic=355212.msg10017628#msg10017628

[VectorChief]

There are two different types of incentives in the economy.

1st is to minimize fear of ending up homeless on the street without food - the survival mode.
2nd is to maximize joy by creating more ways to generate knowledge (VR, video games, space exploration) - entertainment.

I'm sure that the Knowledge Age can only begin when the survival mode is mostly over and some basic human needs can be fulfilled on the uncoditional basis. Basically a small shelter and some form of syntethic food produced by machines with minimal resources would suffice...

Actually rather then being utopian I believe that something like this is the only way to optimize long term adaptability and growth. A basic social safety net smooths the fitness curve and thus facilitates long term long term optimization and adaptation. Such a safety net helps ensure trailblazers survive long enough to eliminate economic frictions.

https://bitcointalk.org/index.php?topic=365141.msg4916516#msg4916516

The challenges is how to fund it and most critically how to ensure the curve is only smoothed never inverted.

Very good analysis, thanks!

To the question of who is going to provide the safety net, I guess some form of government or big businesses, which think that it's simply the "right thing to do", like Google . But the minimum provided should be barely comfortable, otherwise people will just get lazy.

[VectorChief]

Nobody earns 1% on an investment that isn't usury. Investments have a high fail risk, thus no one attempts an investment with such low potential ROI, because the ROI has to compensate for the failure risk.

We need to end all this usury (bonds, banksters) crap. That precisely is the drag on the economy and the corruption of the Iron Law of Political Economics. I had explained upthread why guaranteed ROI is the antithesis of development, i.e. it is anti-development and megadeath directed. Evidence the coming global Sovereign Debt collapse. So just forget saving money in a bank with a fixed rate of ROI. That is part of the problem of society, not a solution to any thing.

Any way, holding a basket of stock invesments has always delivered much higher average ROI over the long-term. That is Warren Buffett's main point.

And yes humanity needs to transition to the Knowledge Age, because automation will replace all the other jobs. Evolution at work. Sorry.

I don't know what is the correct level of debasement. But I doubt it is 2 - 3%. It is probably 5+%, which btw is the historical level of debasement of the dollar. That will provide much funding for mining security. Also you assume the GDP growth rate drives the optimum rate, but it may be synergistic where the rate of debasement drives the GDP growth rate.

The key improvement of crypto-currency is that the debasement in theory doesn't end up in the hands of the banksters, which they can then use to capture the government.

Also I have an idea of how it doesn't end up in the hands of a few rich ASIC owners too. That is one of my altcoin design secrets.

Good points all around!

I wonder if a decentralized fiat system can serve as a complementary form of money in the future.
In current fiat system money is created out of thin air, but only a few have the right to do it. What would be the decentralized version of it? Well, I guess, "likes" on popular social networks is a good example. People create their "likes" out of thin air, but you can only "like" a particular thing once from a verified account. I wonder if this would help to coordinate knowledge creation in the future. There is no debt involved, and there is no repercussions in case of failure.

[iamback]

I wonder if a decentralized fiat system can serve as a complementary form of money in the future.
In current fiat system money is created out of thin air, but only a few have the right to do it. What would be the decentralized version of it?

Nation-states. Been there, tried that.

Ah you mean private fiats? The private banks writing fractional reserve receipts for gold in the 1800s. Been there, tried that.

Many of us suggest we move to PoW decentralized crypto-currency, where in theory no one controls the debasement.

My thesis is those who can't catch up with the Knowledge Age are going to join the 666 one world fiat that is coming. That will be a slavery, eugenics system, because by definition (see the "Rise of Knowledge" essay in the OP about the economics) it will be falling further and further behind economically, i.e. it will be inherently bankrupt, thus it must fund itself from the blood of its constituents. I noted years ago that 666 could be the number of man in that it is the approximate mean wavelength of red blood. Not that is causal evidence. Just saying.

https://www.youtube.com/watch?v=Adgx9wt63NY

The roof, the roof, the roof is on fire,
The roof, the roof, the roof is on fire,
The roof, the roof, the roof is on fire,
We don't need no water let the motherfucker burn,
Burn motherfucker burn.

So if man is five and the devil is six than that must make me seven,
This honkey's gone to heaven,
But if I go to hell then I hope I burn well,
I'll spend my days with J.F.K., Marvin Gaye, Martha Raye, and Lawrence Welk,
And Kurt Cobain, Kojak, Mark Twain and Jimi Hendrix's poltergeist,
And Webster yeah Emmanuel Lewis cause he's the anti-christ

But I can take the heat cause I'm the other white meat known as 'Kid Funky Fried',
Yeah I'm hung like planet Pluto hard to see with the naked eye,
But if I crashed into Uranus I would stick it where the sun don't shine,
Cause I'm kind of like Han Solo always stroking my own wookie,
I'm the root of all that's evil yeah but you can call me cookie

We don't need no water let the motherfucker burn,
Burn motherfucker burn

Haha, joke.

[VectorChief]

^ haha

I was thinking of money in terms of "permission" to act.

From that perspective the developing countries have a lot of infrastructure to build, thus they need a system where money are easily created out of thin air, because there is so much to do. Once infrastructure is built and major supply chains are established, using the money system which requires further growth is counter-productive, thus migration to a rigidly programmed crypto is currently underway.

But my point is the following.
Once society is able to fulfill its basic survival needs in a sustainable way, and is ready to move to the Knowledge Age, then the incentive structure changes quite drastically. The idea of scarce money might no longer apply, because failure to produce knowledge or fun is no longer punishable, as it's not part of the survival anymore. I mean if someone screws up with the infrastructure or supply chain, then society will suffer from inefficiencies and hunger, but if I've created some IP that isn't of much interest or otherwise funny, then nobody cares. I also do not need the "permission" (aka money) to create knowledge, as long as food and shelter are provided.

That's why I was thinking about some sort of social network capital in a form of "likes" or "dislikes" for knowledge creation and evaluation. The deeper question might then be - do we really need money as we know it in the Knowledge Age if the basic needs (food and shelter) are provided unconditionally? Do we really need the "permission" to create knowledge?

[CoinCube]

The key improvement of crypto-currency is that the debasement in theory doesn't end up in the hands of the banksters, which they can then use to capture the government.

I00% agreement here this represents the revolutionary potential of cryptocurrency .

Nobody earns 1% on an investment that isn't usury. Investments have a high fail risk, thus no one attempts an investment with such low potential ROI, because the ROI has to compensate for the failure risk.

Weak argument I see no reason why a knowledge age would lack low risk low reward activities. The only requirement of a knowledge age is that such low ROI activities not be guaranteed or collectivized. Even if that were true (doubtful) you will still have a subgroup of bad investors (individuals who would like higher returns but on average achieve 1% returns over time).

I don't know what is the correct level of debasement. But I doubt it is 2 - 3%. It is probably 5+%, which btw is the historical level of debasement of the dollar. That will provide much funding for mining security. Also you assume the GDP growth rate drives the optimum rate, but it may be synergistic where the rate of debasement drives the GDP growth rate.

Here you fall prey to your own logic upthread. You arbitrarily pick 5+% debasement out if a hat and declare it optimum, but you have presented no logic to support that arbitrary selection. Whereas, I am presenting logic for why a debasement rate greater then the aggregate economic growth is not optimum, for it encourages excess consumption and investment.

[iamback]

Nobody earns 1% on an investment that isn't usury. Investments have a high fail risk, thus no one attempts an investment with such low potential ROI, because the ROI has to compensate for the failure risk.

Weak argument I see no reason why a knowledge age would lack low risk low reward activities. The only requirement of a knowledge age is that such low ROI activities not be guaranteed or collectivized. Even if that were true (doubtful) you will still have a subgroup of bad investors (individuals who would like higher returns but on average achieve 1% returns over time).

The game theory involves what investors think is important. I assure you there are no investors (except bond and savings deposits) who are targeting 1% ROI. That doesn't even cover the variance in the business. No investor would target an ROI with that low of a margin for error. Note that the lack of guarantee on the ROI (unlike bonds and savings deposits), means that the margin of error needs to be much higher. This is yet another mathematical reason that usury (banks and bankster) guaranteed ROI crap is guaranteed failure.

You entirely missed my point. When an investor makes a decision whether to invest now or delay, he is not entertaining any investments with a projected 1% ROI, because that low ROI would not even counteract the risk of variance nor risk of failure for an investment, the latter of which is typically at least 33%. It has nothing to do with the Knowledge Age. This is just the reality of investment.

Sorry you really need to think more holistically on the game theory.

I don't know what is the correct level of debasement. But I doubt it is 2 - 3%. It is probably 5+%, which btw is the historical level of debasement of the dollar. That will provide much funding for mining security. Also you assume the GDP growth rate drives the optimum rate, but it may be synergistic where the rate of debasement drives the GDP growth rate.

Here you fall prey to your own logic upthread. You arbitrarily pick 5+% debasement out if a hat and declare it optimum, but you have presented no logic to support that arbitrary selection...

See the bolded and underlined quote. I did not declare anything as optimum.

[rpietila]

You entirely missed my point. When an investor makes a decision whether to invest now or delay, he is not entertaining any investments with a projected 1% ROI, because that low ROI would not even counteract the risk of variance nor risk of failure for an investment, the latter of which is typically at least 33%. It has nothing to do with the Knowledge Age. This is just the reality of investment.

First it is important to define the principal. Agricultural land can be said to have a stable value. If there is no risk of loss to your land holding, the principal is 100% guaranteed. Anything that it produces, is therefore return.

If land paid back 3% on principal (which it does in some cases), returns invested over 100 year period would lead you to have 19 times more land after as little as 100 years.

The confiscations and other events prevent that from actually happening (to you, the small guy). Absent them, the land values would skyrocket to conform to the reality of limited amount of land that still produces income.

If owning land is too risky, for example 20% yearly chance of losing the principal, the land value plummets. Large capital cannot thus be stored in land, it flocks to gold that can be made to have a very low propensity of confiscation. When this happens, we are descending into abyss because it does not pay to invest in production, only to hoard your gold.

Now it's important to see that gold will almost surely be worth less when you dig it out after the calamity, because the calamity has destroyed the economy, and the amount of gold is intact, hence buys less. Neither it has paid any interest during the time. But it has saved a higher percentage of your purchasing power, with a higher probability, and thus done its job.

[CoinCube]

You entirely missed my point. When an investor makes a decision whether to invest now or delay, he is not entertaining any investments with a projected 1% ROI, because that low ROI would not even counteract the risk of variance nor risk of failure for an investment, the latter of which is typically at least 33%. It has nothing to do with the Knowledge Age. This is just the reality of investment.

Sorry you really need to think more holistically on the game theory.

Ok let’s say for the moment that you are correct and that there are no low risk/low reward investment opportunities in a future knowledge age. To the degree that this is true it only strengthens my overall argument that a debasement rate greater than the rate of aggregate economic growth is detrimental.

In a world without low risk investment options both low productivity individuals and the elderly are excluded from the investment market. Add in a large debasement and these individuals lose the realistic option to ever defer an immediate claim on real capital. Excess consumption results.

A debasement rate that matches the overall aggregate economic growth is the maximum debasement rate at which purchasing power is maintained relative to the time it was earned. At this rate a saver deferring a purchase will still be able to purchase a like basket of goods and services of comparable quality later. If you debase the currency faster than this you are stealing purchasing power from the elderly and the low productivity workers and transferring it to the high productivity workers in the name of growth. You create a system that does not provide optimal incentives for the majority of humanity in the hopes that the economic gains created by the new elite will offset the damage done. That sounds an awful lot like a more robust version of the system we already have.

See the bolded and underlined quote. I did not declare anything as optimum.

Ok in my zeal to copy your prior logic word for word I inadvertently strengthened your statement. You stated that 5%+ debasement was probably correct and admitted uncertainty.

Nevertheless you have presented no logic to support that number that you believe to be probably correct. Whereas, I am presenting logic for why a debasement rate greater then the aggregate economic growth is not optimum.

Thus I maintain that the equilibrium point between the competing inefficiencies is a debasement rate that equals the rate of economic growth.

I am not certain we are moving towards consensus on this issue. Should we agree to disagree?