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Author Topic: Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable?  (Read 14436 times)
Roger_Murdock
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September 28, 2012, 11:24:31 PM
 #241

Society is not gaining anything from you hoarding than they would not have otherwise gained from you saving.

Ok, but are you saying that "hoarding" (saving without direct lending) provides NO value to society or only that it provides LESS value than saving + direct lending? Because I would tend to (sort of) agree with the latter position.  But that's also the reason that sticking your money in a safe earns a smaller return than lending it out.  Again, sticking money in a safe is a very low risk loan that gives you maximum flexibility.  The price for those features is the opportunity cost of foregoing a nominal return on top of the increased purchasing power resulting from deflation. If people willingly forgo "saving" in a bank (which is actually LENDING to a bank), it's because they place a higher subjective value on those features than they do on whatever additional return the bank is offering.  

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"Saving" in a bank causes neither deflation nor inflation because the money is still in circulation. "Hoarding" in a digital wallet causes deflation and then inflation. If the ratio your amount of money to the total supply of money does not change, there is no possible way that it can not have this effect.

I think that's basically right, but isn't the bank just a middleman for lending?  To make it simpler, imagine that instead of putting your $100 in the bank, you lend it directly to Bob.  You forgo $100 worth of consumption, and Bob gets to enjoy an additional $100 worth of purchasing power.  There's still the same amount of stuff in the world as there was before you made the loan.  And there's still the same amount of money in circulation.  So yeah, it seems like that shouldn't cause either inflation or deflation. In contrast, when you stick your money in a safe, that will tend to cause a drop in prices.  And when you later spend that money or otherwise put it in circulation, that should cause a rise in prices. But again, that's just a different mechanism for the transfer of purchasing power from one party to another.  In the example with Bob, you give 100 bucks of purchasing power to him when you make the loan, and he gives you a hundred bucks of purchasing power (plus interest) when he repays the loan.  In the "hoarding" example, you transfer a 100 units of purchasing power to everyone who holds that currency (and I'm assuming now that we're talking about a deflationary currency).  When you later spend the money (following deflation due to economic growth), everyone who holds  that currency gives you a 100+ units worth of purchasing power. Of course, the deflation and inflation caused by hoarding and then spending are occurring at the margins.  You're always going to have some people withdrawing money from circulation (to stick in the safe) and other people beginning to spend previously-saved money.


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And you, the hoarder, benefit far more handsomely off of hoarding than you would off of saving even though the net gain over saving to the economy is zero. The net gain to your wealth is substantially greater than zero. The only possibility to explain this is that it comes at a cost from everyone else. There is no miraculous new value created via hoarding that will be created above and beyond saving. Instead, it is just a transfer of wealth created via economic upset.

How could the profit from hoarding be MORE than the profit from lending? If you stick 100 units of a deflating currency in the safe for a year, at the end of the year you'll have... 100 units. Sure they'll be worth more than they were previously, but you'd still have been better off if you'd lent them out at interest.  As I pointed out in another thread, a deflationary "currency" already (sort of) exists.  Isn't that basically what gold represents? But most people don't just horde gold because traditionally that wasn't a great investment.  Of course, it's turned into a great investment in recent years but only because our fiat-based system has gotten so screwed up.
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Etlase2
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September 29, 2012, 01:25:42 AM
 #242

Ok, but are you saying that "hoarding" (saving without direct lending) provides NO value to society or only that it provides LESS value than saving + direct lending?

Consumption growth is the eventual result of non-consumption (investment) growth. It's all about time-preference (according to Austrians). And realize "consumption" doesn't necessarily mean destroying something or using something up, so I'd like to keep any negative connotation with it out of the discussion--which I don't think you've done, but other people have and I just want to clarify that.

What money, lending, and interest should provide is a balance between consumption and investment, depending on what the free market desires. If, for example, in a perfect market, too many people are looking for non-consumption growth (their time preference is to the future), but the free market is not currently providing enough avenue for this growth (for whatever perfect market reason--likely because too many people have a low time preference), interest rates and prices will fall naturally. This is "good" deflation. This spurs people to consume, and in return restores a natural balance based on what the market needs.

By removing your currency from circulation, you are moving the force of money out of balance with lending and interest. With less money available to lend, the only thing interest rates can do is rise while almost paradoxically prices must still fall. While in the first scenario, lower interest rates means profit margins on lower prices are relatively unaffected. In the second scenario, borrowing money becomes much more difficult as banks get scared and a credit crisis will probably emerge. This is "bad" deflation. "Money" becomes more valuable than "capital". This can lead to the so-called deflationary spiral. While this is unlikely to ever happen in Bitcoin, the only reason is because it is a free market currency and the free market will switch to something else (inflation!!!), so the effect can't really spiral out of control.

So the question isn't about what provides more or less value to the economy. One scenario promotes a well-functioning free market while the other causes an imbalance in the economy. Money is the lubricant that allows economies to function. Remove some of that lubricant and things start to break down. This will be extremely exacerbated by the fact that bitcoin is attempting to bring existing value in from an exogenous economy.

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But that's also the reason that sticking your money in a safe earns a smaller return than lending it out.  Again, sticking money in a safe is a very low risk loan that gives you maximum flexibility.  The price for those features is the opportunity cost of foregoing a nominal return on top of the increased purchasing power resulting from deflation.

But you are thinking in nominal terms which is not at all the whole story. Real returns are what matter. A real return is interest + deflation. If you can cause extra deflation by not loaning money so that it creates a better real return than the real return you would have gotten by loaning, you have created a very dangerous imbalance in the economy. You are not letting the free market do its job.

This is compounded in bitcoin by the fact that 1) a perfect market doesn't really exist, mistakes are always made because all information can not be known; 2) bitcoin has an absolutely fixed supply unlike gold, where at least the rising value of gold would cause more effort in producing more gold--in bitcoin more effort goes into producing the same amount of bitcoins; 3) bitcoin has to expand into a huge world economy and the distribution of currency will provide countless opportunities to make hoarding provide a much better real return than lending. This would be the case even with the gaussian distribution that Adrian-x thinks will be better.

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... When you later spend the money (following deflation due to economic growth), everyone who holds that currency gives you a 100+ units worth of purchasing power. Of course, the deflation and inflation caused by hoarding and then spending are occurring at the margins.

Again in an almost paradoxic way, lending may actually cost you value (at least in opportunity cost) because you are lubricating the economy and keeping deflation low. If everyone truly cared about their fellow man this system might work. But we know that isn't the case, and we know financial minds will find any avenue to abuse a monetary system to their advantage. And causing extra deflation only to return it via future inflation does nothing but upset the economy. It would likely come and go in cycles, just like the business cycles observed in fiat. You can't really be sure that your money will retain its value let alone increase in value over any period of time.

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You're always going to have some people withdrawing money from circulation (to stick in the safe) and other people beginning to spend previously-saved money.

But you can't really predict what people are going to do. Mises is quite famous for basing his economic theory around that. Bitcoin is a free market currency as well as an alternative. The economics will be far different than fiat on that case alone. No one has to consume with bitcoins at all. And there is no real advantage to do so. Want to send money over the internet? Buy some bitcoins with fiat and let the other person cash out. This isn't economic growth. Nor is speculation.

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How could the profit from hoarding be MORE than the profit from lending? If you stick 100 units of a deflating currency in the safe for a year, at the end of the year you'll have... 100 units. Sure they'll be worth more than they were previously, but you'd still have been better off if you'd lent them out at interest.  As I pointed out in another thread, a deflationary "currency" already (sort of) exists.  Isn't that basically what gold represents? But most people don't just horde gold because traditionally that wasn't a great investment.  Of course, it's turned into a great investment in recent years but only because our fiat-based system has gotten so screwed up.

It's about the real interest you earn, not the nominal interest.

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October 01, 2012, 01:18:56 AM
 #243

I'm late the game, so I hope I'm not repeating something that has already been discussed to death...

Anyway, here's what I think: Bitcoin is a "zero sum game" only if you exclude everything else. The "zero sum game" scenario assumes that 100% of the BTC in the world is sitting in bank accounts collecting interest. That is not possible, of course. As the OP has probably pointed out, if all the BTC in the world is just being used to collect interest, then there is no way to pay interest. Also, in this scenario, BTC has no value since it is not being exchanged.

The real story is that BTC is used to exchange assets. If the total value of assets in the world increases, then there is no problem with interest -- interest effectively means that one asset is exchanged later for another asset of higher value.

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YokoToriyama
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October 01, 2012, 10:26:32 PM
 #244

no idea
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October 01, 2012, 11:19:37 PM
 #245

I'm late the game, so I hope I'm not repeating something that has already been discussed to death...
In short? Etlase is getting/got his head bashed in by people taking turn arguing with/getting tired of him.

I wonder if he ever gets tired of being wrong so much.

I mean "loans are not for consumption"... that's like the whole point of loans! To buy a machine, food or whatever, so you can be more productive the next day.

Stupidest thing I ever fucking heard.

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October 09, 2012, 07:31:15 PM
 #246

I'm late the game, so I hope I'm not repeating something that has already been discussed to death...

Anyway, here's what I think: Bitcoin is a "zero sum game" only if you exclude everything else. The "zero sum game" scenario assumes that 100% of the BTC in the world is sitting in bank accounts collecting interest. That is not possible, of course. As the OP has probably pointed out, if all the BTC in the world is just being used to collect interest, then there is no way to pay interest. Also, in this scenario, BTC has no value since it is not being exchanged.

The real story is that BTC is used to exchange assets. If the total value of assets in the world increases, then there is no problem with interest -- interest effectively means that one asset is exchanged later for another asset of higher value.


It is a zero-sum game in the fact that it is a fixed asset.   A known and fixed quantity is known to participates in advance to any investment activity.  Yes people can assign a high value for a BTC in the open market by bidding up the price until someone accepts your offer but someone needs to sell BTC for anyone to get BTC.   That is also why I see Bitcoin as more of a "wealth reserve assets" ie real savings more than an actually currency even though it can act as both at the same time.

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May 04, 2018, 12:36:45 PM
 #247

I do not understand how besides those people who are putting too much effort into studying crypto currencies and doing all they can via hypothesis that looks irrelevant.

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