Can someone explain how deflation wouldn't negatively effect productivity?

[thinkloop]

Investing in a deflationary commodity is different from adopting it as national currency. Bitcoin as a commodity it is cool. Bitcoin as a currency would be bad.

I don't think that is true, Bitcoin being adopted and rejected as a national currency by various countries through time will only increase and reduce demand for it. It won't change the nature of it. When it comes to finance, everything of value is treated as an asset class with its own unique properties that must be analysed - it doesn't matter if it is a national currency or pork bellies.

[1713572174]

1713572174

[Lloydie]

The two prerequisites for loan are not existing in bitcoin world:
1. you need loan to expand the production capacity, but now it is over production in major developed countries

If this were true, it would still have nothing to do with Bitcoin, and loans should cease today.

2. you need loan to issue fiat money into existence, but no loan is needed to issue bitcoin

That is one reason loans are issued, not every reason, there are still other incentives for loans to exist.

It's all very simple, I'm not sure what the confusion is. If we assume that Bitcoin will appreciate at X% per year, and a class of people with good credit are willing to borrow Bitcoin for X+5%, then a lot of people who own Bitcoin will seek the higher returns and execute those loans. At what point does Bitcoin make people completely irrational?

To create a real example of this, let's say someone came up to you in 2004 with this thing called an "iPhone" (and let's say Bitcoin was the currency). He says he needs to borrow some cash to develop it, and is willing to return 20% interest on what he borrows. Are you saying that no-one would lend this guy money and instead everyone would choose to keep earning a much lower interest?

The other thing to consider is that there already exists tonnes of deflationary asset classes. Almost every asset besides fiat is deflationary. People who have any amount of real money have never kept their wealth in fiat. This is known as a dumb investment. Fiat is only used for transactions, while wealth is stored in any number of currently available deflationary assets: commodities, stocks, etc. Bitcoin will simply be another choice of investment. Very little will change from today.

Loans should cease today but central banks are not letting it happen. Central banks are suppressing long term interest rates to spur more loans, which is driving up speculative activity. Real productivity is lagging due to overcapacity and flagging consumer demand.

Yes, loans will probably still happen in bitcoin but whilst the user base is expanding at a rate of 30% per month, why borrow in bitcoins for fiat businesses? Much better to borrow fiat and invest in bitcoins.

Yes, you are correct about fiat being inflationary and that other assets are deflationary, and that bitcoin is another one of these options. The difference with bitcoin is that the bitcoin economy is expanding very rapidly. It is an extremely deflationary asset in the short run. A growth rate of 50 times in one year would only reach about 1% of the population from current user levels.

At some point bitcoin will hit terminal value. Debt based strategies in bitcoin for fiat businesses may work but I suspect not. The reason is that fiat will always be inflated up whilst bitcoin has a fixed supply and bitcoins are being lost all the time.

[thinkloop]

The two prerequisites for loan are not existing in bitcoin world:
1. you need loan to expand the production capacity, but now it is over production in major developed countries

If this were true, it would still have nothing to do with Bitcoin, and loans should cease today.

2. you need loan to issue fiat money into existence, but no loan is needed to issue bitcoin

That is one reason loans are issued, not every reason, there are still other incentives for loans to exist.

It's all very simple, I'm not sure what the confusion is. If we assume that Bitcoin will appreciate at X% per year, and a class of people with good credit are willing to borrow Bitcoin for X+5%, then a lot of people who own Bitcoin will seek the higher returns and execute those loans. At what point does Bitcoin make people completely irrational?

To create a real example of this, let's say someone came up to you in 2004 with this thing called an "iPhone" (and let's say Bitcoin was the currency). He says he needs to borrow some cash to develop it, and is willing to return 20% interest on what he borrows. Are you saying that no-one would lend this guy money and instead everyone would choose to keep earning a much lower interest?

The other thing to consider is that there already exists tonnes of deflationary asset classes. Almost every asset besides fiat is deflationary. People who have any amount of real money have never kept their wealth in fiat. This is known as a dumb investment. Fiat is only used for transactions, while wealth is stored in any number of currently available deflationary assets: commodities, stocks, etc. Bitcoin will simply be another choice of investment. Very little will change from today.

Loans should cease today but central banks are not letting it happen. Central banks are suppressing long term interest rates to spur more loans, which is driving up speculative activity. Real productivity is lagging due to overcapacity and flagging consumer demand.

Yes, loans will probably still happen in bitcoin but whilst the user base is expanding at a rate of 30% per month, why borrow in bitcoins for fiat businesses? Much better to borrow fiat and invest in bitcoins.

Yes, you are correct about fiat being inflationary and that other assets are deflationary, and that bitcoin is another one of these options. The difference with bitcoin is that the bitcoin economy is expanding very rapidly. It is an extremely deflationary asset in the short run. A growth rate of 50 times in one year would only reach about 1% of the population from current user levels.

At some point bitcoin will hit terminal value. Debt based strategies in bitcoin for fiat businesses may work but I suspect not. The reason is that fiat will always be inflated up whilst bitcoin has a fixed supply and bitcoins are being lost all the time.

Now I mostly agree with you! Quantitative easing definitely artificially inflates the amount and size of loans, but the nuance there is that it "inflates" them, it doesn't outright bring them into existence when otherwise they would not have been. I also agree that with 30% monthly expansion in Bitcoin, it is currently difficult to compete with Bitcoin as a speculative investment, but I was talking about the end-game, when "terminal value" is reached, and value appreciation stabilizes at about 2-3-4% per year. The current phase of hyper-growth will be short-lived in the grand scheme of things.

[Erdogan]

Among them the most important one is 0 incentive to invest.

This is completely false. At a minimum, even if Bitcoin were the greatest store of wealth ever known, it would still be irresponsible to keep all your money in there, just for safety reasons. Same if you thought GOOG was the best stock ever, you still wouldn't (or shouldn't) risk all your money it. People will have to invest in other assets just to keep their money safe.

Secondly, the returns on Bitcoin appreciation are going to be far from the highest yielding returns. Bitcoin will only appreciate at about 2-3% per year in the long term, making a wide variety of stocks, bonds, loans, commodities, much more attractive investments to include in your portfolio.

Finally, today we have savings accounts. Recently interest rates have been at historical lows, but generally you could earn 2-3% interest on your fiat. This applies similar pressure to the economy as Bitcoin will apply in the future.

There will definitely be some adjustments here and there, but I don't think the situation will be as different as people are making it out to be.

I may have written it incorrectly. I was referring to any deflationary currency and how it would provide 0 incentive to invest as a consequence of being deflationary. I agree with your post except for the first sentence.

Let's see what is happening where we have inflation and zero interest rate. Example 10 % reduction in buying power per year. This is for all prices especially capital goods prices. In this situation, 10 % nominal profit means zero profit. It is possible to get loans for 0 %, that means you can start a business that yields 10 % real loss and still break even nominally. You could start a business that yields a real profit, but you could also start a safe business that yields 1 % nominal gain and increase you nominal fiat. In stead of going the risky way, you could multiply the 1% business, remember, the supply of loans is endless. But this is a loss in real terms anyway, it is just a bigger volume of the real loss. This drains real capital from the total economy and leads to slowly decreasing productivity. Then there is the fact that it is the banks and some privileged industries that gets all the loans. A regular joe that wants to start a shop does not get that kind of loan.

If you have a situation with decreasing prices of say 3%, a new venture would have to yield more than 3% to make a gain compared to holding. This is totally sound, it means that all investments yield real profit, businesses yielding loss will be disbanded, and the capital will be employed in profit-making. This means higher productivity and rising abundance for all.

So we have two problems: Inflation, which in itself is not a problem because you can use your skill in calculus to see through it, the problem is that the new money is not spread around to everybody, artificially creating winners and losers, not based on merit. The second problem is the zero interest rate, which allows negative yielding businesses to exist, draining the economy of capital.

The zero interest rate is the main problem, it makes everybody poorer. But the two is of course connected. Easy money means low interest rate.

[Erdogan]

I have to add: Why would somebody engage in a business with only nominal gain and real loss? Here is how. You have a capital of 10K. You you get a loan of 9.99 million. Now you engage in a business yielding 1 % nominal. A very safe business could get you such a loan, if you have the right friends. Now you earn 1% of that which is 10K. That is 100% nominal on your original 10 K.

[Lloydie]

Loans should cease today but central banks are not letting it happen. Central banks are suppressing long term interest rates to spur more loans, which is driving up speculative activity. Real productivity is lagging due to overcapacity and flagging consumer demand.

Yes, loans will probably still happen in bitcoin but whilst the user base is expanding at a rate of 30% per month, why borrow in bitcoins for fiat businesses? Much better to borrow fiat and invest in bitcoins.

Yes, you are correct about fiat being inflationary and that other assets are deflationary, and that bitcoin is another one of these options. The difference with bitcoin is that the bitcoin economy is expanding very rapidly. It is an extremely deflationary asset in the short run. A growth rate of 50 times in one year would only reach about 1% of the population from current user levels.

At some point bitcoin will hit terminal value. Debt based strategies in bitcoin for fiat businesses may work but I suspect not. The reason is that fiat will always be inflated up whilst bitcoin has a fixed supply and bitcoins are being lost all the time.

Now I mostly agree with you! Quantitative easing definitely artificially inflates the amount and size of loans, but the nuance there is that it "inflates" them, it doesn't outright bring them into existence when otherwise they would not have been. I also agree that with 30% monthly expansion in Bitcoin, it is currently difficult to compete with Bitcoin as a speculative investment, but I was talking about the end-game, when "terminal value" is reached, and value appreciation stabilizes at about 2-3-4% per year. The current phase of hyper-growth will be short-lived in the grand scheme of things.

Via long term interest rate suppression, I assure you total US and global debt growth is rising once again.

Re the terminal value of bitcoins. The natural deflationary rate of bitcoins, in terms of fiat dollars, will be greater than 4%, probably.

Here is why: population growth rate (say 2%) + productivity rate (2% constant over past 100 years) + bitcoin loss rate + fiat inflation (say 2% also) = at least 6% per year.

Also, the current phase of hyper growth can run a few more decades, though at slower adoption rates over time.

[Inedible]

I can't remember the thread I read it in (it was very recent) but someone explained how deflation would reduce productivity because only businesses that could generate extremely large returns could ever afford a loan to get started.

The only way I could see a deflationary currency working is in the very long term.

Let's imagine Bitcoin is eventually the only currency in use and after some time, 1 yottaBitcoin is worth 1USD in today's money.

At this point I see deflation being close to 0% - people can now freely spend their Bitcoin because there's little value in hoarding and waiting for increased future spending potential.

Now people can take out affordable loans.

At what point in time can we see Bitcoin loans being affordable? 10 years? 100?

Deflation would reduce consumption and encourage saving as you say.
This is desirable as we are destroying the world through artificially pumped consumption, and failing to save for our long lives. Thus deflation would incentivise us to lead a life reflecting the underlying fundamentals of our world, not the fundamentals that suit the political and bankster masters.

But how would we manage that transition? Just let half the world starve to death so that the ones that have been sensible with their spending can live on?

Sounds like a plan. Choices have consequences. Even the founding fathers were not nearly as naive as a lot of people here.

Would you be ok if society put in place financial policies that meant you would starve?

[Inedible]

Less inflationary is good. Deflationary is bad. The reasons are many and very obvious. Among them the most important one is 0 incentive to invest. People who use computer equipment purchases as an example (I bought a cpu last year that costs 1/4 today) don't make the connection between buying computer equipment and an expense. Expenses are investments that expect negative value returns. Investors will not invest if they expect negative returns. Entrepreneurs will quickly disappear if their best effort leads to ever negative returns. Good luck trying to get either the average bitfan or the average joe to see this.

Deflationary isn't necessarily bad. I see a small amount of deflation being no worse than a small amount of inflation.

I believe there's as much incentive to invest in a deflationary environment as there is in an inflationary one. I just believe the conditions for investment aren't right yet and will only be suitable a long time away. In the meantime, Bitcoin is at risk of failing.

My example is once deflation stabilises to the growth of the economy, deflation will match that rate. Your investments just have to outperform the current deflation.

What this means is that it's automatically regulates economic growth because when economic conditions are good, investments will slow down (harder to outperform economic growth during these periods) and when economic conditions are bad, it will be a good time to invest (as it's easier to outperform economic growth).

I actually agree with the first sentence but later when you use the word automatic it makes me nervous. Do you mean automatic as in programmed variables working their way through the world or in a mystical invisible hand way? If the first then "Deflationary isn't necessarily bad. I see a small amount of deflation being no worse than a small amount of inflation." becomes possible.

I mean it's a negative feedback loop. Nothing to get nervous about. Negative feedback loops exist everywhere, even in your own body. It's not some pre-programmed condition in Bitcoin.

Where do you stand on NXT then?

NXT? The Bitcoin variant?

[Inedible]

To create a real example of this, let's say someone came up to you in 2004 with this thing called an "iPhone" (and let's say Bitcoin was the currency). He says he needs to borrow some cash to develop it, and is willing to return 20% interest on what he borrows. Are you saying that no-one would lend this guy money and instead everyone would choose to keep earning a much lower interest?

I think the problem is mainly on the side of the borrower.

Let's say he needs 10 Bitcoin. He needs to return 12. As the currency deflates, he's going to have a harder and harder time accruing 12 Bitcoins as over time, it's value is going up.

Sure, it's great for the investor.

How I think it will work out is, during periods of massive inflation (like now), no-one will take out loans.

Once deflation stabilises to the rate of population growth, then loans will be taken out but at something like 0%.

In real terms, that's still a 3% return because the currency is deflating.

I just don't see how we get to that point.

[Kungfucheez]

To create a real example of this, let's say someone came up to you in 2004 with this thing called an "iPhone" (and let's say Bitcoin was the currency). He says he needs to borrow some cash to develop it, and is willing to return 20% interest on what he borrows. Are you saying that no-one would lend this guy money and instead everyone would choose to keep earning a much lower interest?

I think the problem is mainly on the side of the borrower.

Let's say he needs 10 Bitcoin. He needs to return 12. As the currency deflates, he's going to have a harder and harder time accruing 12 Bitcoins as over time, it's value is going up.

Sure, it's great for the investor.

How I think it will work out is, during periods of massive inflation (like now), no-one will take out loans.

Once deflation stabilises to the rate of population growth, then loans will be taken out but at something like 0%.

In real terms, that's still a 3% return because the currency is deflating.

I just don't see how we get to that point.

I think there might be some confusion as to who's talking about "deflation" or "disinflation" and I think you're referring to disinflation in that scenario. Not to be picky or anything 

[Ibian]

I can't remember the thread I read it in (it was very recent) but someone explained how deflation would reduce productivity because only businesses that could generate extremely large returns could ever afford a loan to get started.

The only way I could see a deflationary currency working is in the very long term.

Let's imagine Bitcoin is eventually the only currency in use and after some time, 1 yottaBitcoin is worth 1USD in today's money.

At this point I see deflation being close to 0% - people can now freely spend their Bitcoin because there's little value in hoarding and waiting for increased future spending potential.

Now people can take out affordable loans.

At what point in time can we see Bitcoin loans being affordable? 10 years? 100?

Deflation would reduce consumption and encourage saving as you say.
This is desirable as we are destroying the world through artificially pumped consumption, and failing to save for our long lives. Thus deflation would incentivise us to lead a life reflecting the underlying fundamentals of our world, not the fundamentals that suit the political and bankster masters.

But how would we manage that transition? Just let half the world starve to death so that the ones that have been sensible with their spending can live on?

Sounds like a plan. Choices have consequences. Even the founding fathers were not nearly as naive as a lot of people here.

Would you be ok if society put in place financial policies that meant you would starve?

More specifically?

This part is important. Always be specific.

[painlord2k]

But that's not economically feasible in a growing society.

Sustainable like the current system?

[Impaler]

To create a real example of this, let's say someone came up to you in 2004 with this thing called an "iPhone" (and let's say Bitcoin was the currency). He says he needs to borrow some cash to develop it, and is willing to return 20% interest on what he borrows. Are you saying that no-one would lend this guy money and instead everyone would choose to keep earning a much lower interest?

I think the problem is mainly on the side of the borrower.

Let's say he needs 10 Bitcoin. He needs to return 12. As the currency deflates, he's going to have a harder and harder time accruing 12 Bitcoins as over time, it's value is going up.

Sure, it's great for the investor.

How I think it will work out is, during periods of massive inflation (like now), no-one will take out loans.

Once deflation stabilises to the rate of population growth, then loans will be taken out but at something like 0%.

In real terms, that's still a 3% return because the currency is deflating.

I just don't see how we get to that point.

There's no reason to expect interest rates to fall to 0% in even a mildly deflationary environment, and historically interest rates have never been that low under deflationary currency even in the very lowest points, it has generally been much higher.

At 0% the lender has no incentive to loan a Hard form of money at 0% he might as well have kept it in a vault.  Lenders will always demand some positive number in interest to give them a profit if their risk-free alternative is 100% return by just holding the money.  In addition lenders are very likely to have a value on liquidity, the value they put on having instant access to their money, they give this up when they lend so in reality several percent are usually necessary.  So we would expect borrowers to be hit twice by deflation AND interest rates. 

Your clearly able to understand how borrowing actually works and see the massive flaws in deflationary finance.  The people telling you otherwise have emotionally decided that THEY like holding deflationary assets so they are simply attempting to justify their greed by any half-baked economics they can lay their hands on.  A whole industry exists to furnish gold-bugs and their ilk with these kinds of rhetorical 'thought shields' which is why the same debunked arguments are repeated over and over again on these forums.

The solution is to make money soft by demurrage, so holding currency doesn't return 100%, then loaning at 0% or less will still be desirable to a lender.  On top of that manage money supply to target 0% inflation and the economy has full ability to grow via credit and lending without incurring a parasitic interest payment, and no debt would not grow to infinity, people still need to repay principle which would limit indebtedness the same way that current borrowing limits are based on ones ability to make payments.

[Lloydie]

Pffft, demurrage! You mean use your demurrage coin and watch its value diminish over time versus use Bitcoins where its value increases over time? I rest my case.

[johnyj]

The two prerequisites for loan are not existing in bitcoin world:
1. you need loan to expand the production capacity, but now it is over production in major developed countries

If this were true, it would still have nothing to do with Bitcoin, and loans should cease today.

It is true and loans are ceasing now, FED printed 4x more dollar since 2008 but most of them went back into their account as reserve, because most of these money can not be loaned out due to extremely weak investment demand. Please give me an example of some investments that can bring you very high return that you need large amount of loan? (except bitcoin)

To create a real example of this, let's say someone came up to you in 2004 with this thing called an "iPhone" (and let's say Bitcoin was the currency). He says he needs to borrow some cash to develop it, and is willing to return 20% interest on what he borrows. Are you saying that no-one would lend this guy money and instead everyone would choose to keep earning a much lower interest?

This is time travel trading, Apple is one out of hundreds investments that really succeeded, most of the investments I know just threw money into the river and never saw any return. Comparing a possible return of a future investment or a possible super return of bitcoin's appreciation, no one will lend out bitcoins. Loan is like a stimulus injection that motivate people to work, but to know who will buy their product is just like lottery

The other thing to consider is that there already exists tonnes of deflationary asset classes. Almost every asset besides fiat is deflationary. People who have any amount of real money have never kept their wealth in fiat. This is known as a dumb investment. Fiat is only used for transactions, while wealth is stored in any number of currently available deflationary assets: commodities, stocks, etc. Bitcoin will simply be another choice of investment. Very little will change from today.

None of those assets can be moved cross the globe in an hour. Bitcoin is to make these assets virtualized and eliminate the cost of ownership