Topic: Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable? - page 12. (Read 14623 times)

Re read the post above the post from witch I extracted your quote.
In a fixed currency system, when the economy is shrinking (inflation) there is an economic incentive to loan money, when the economy is growing (deflation) there is no economic incentive to loan money.
This ensures the appropriate allocation of capital.    

We aren't in equilibrium. We never will get to an equilibrium with bitcoin as the only nominal money for valuing contracts. The premises I gave are reasonable today and for the foreseeable future. For the foreseeable future most contracts will never be valued in bitcoin for the reasons I gave.

Yes. And if you want to invest in a car factory there is a requirement that cars are not worth 99% less in a year. You can't just make up scenarios with crazy premises without regard to how likely they are or what they imply. An economy in equilibrium with a constant money supply that increases 20% in value on a yearly basis over the long run implies that we have a 20% increase in goods and services every year. That is an extremely good scenario.

But there is a requirement that the money not be worth a lot more in the future. "Terms are you pay back 11 btc in a year." would never be acceptable to a borrower if bitcoin is increasing 20% a year in value. The borrower would have to make a 30% return just  to break even.

On the other hand "Terms are you pay back 9 btc in a year." would be unacceptable to a lender, even if 9 btc in a year is 10% more than 10 btc today. Fact is, the lender knows he can keep his coins and do better.

Loans would never happen and capital would be miss allocated. In general the holder of a lot of bitcoin is not necessarily the generator of great investment ideas.

By the way. "Savings is good" is only true when savings are invested. Holding on to non-productive bitcoin is hoarding, and is not saving directed to investment in the bitcoin world. There are few things more useless to the economy than a man hoarding 100,000 bitcoins.

The argument has been answered.


In today's economy interest is real money to the person paying it, but it is new money being created for the bank or the person loaning it. The interest paid ads to the web, of inflation.

In your scenario there is little room for growth as the economy is growing. When there is inflation, (economy shrinking in a fixed money supply) lending money out with interest is encouraged this will stabilise the economy.

An inflationary - economy shrinking  - scenario also provides incentives to entrepreneurs to seek the loans to take advantage of increasing prices.  Fixed money supply allows the market to manage the economy.

But again, the question is why prices even drop in the first place? It's because we have economic growth (same money supply chasing more stuff), so obviously someone is making a profit.

Higher deflation implies higher economic growth, which implies there are lots of people actually capable of making profits in the current economy. If you can't make a profit because of deflation, it's because someone else is doing a better job than you. If they weren't, there wouldn't be any deflation to stop you.

Your fixed investment is gaining nominal value, but that nominal money that your investment is earning is also gaining purchasing power. In your example, you're comparing nominal percentage growth for the investment scenario with purchasing power growth in the non-investment scenario. The investment scenario needs to also include purchasing power growth in order to compare...

I think the math gets complicated (and probably has to include assumptions about investment distribution details, etc), hence my textual assertion rather than some simple calcs...

[edited for clarity]

By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.

In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.

Let's continue with the maths then.

Say I am looking at a potential investment in a company that has a 95% chance of succeeding, and if it does succeed, it'll grow my investment at an average rate of 7% per year, but if it doesn't succeed, then I lose everything.  I might value that investment as a potential 2% growth on my money.

Now, say that I know that prices are dropping at a rate of 3% per year (purchasing price increasing, due to deflation in the monetary supply).

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

I can know everything about the specifics of the money supply, but that wouldn't change the fact that 3% > 2%, and thus saving instead of investing is the wiser business decision.

The question I cannot answer is whether the expected 7% return would have been greater in the inflationary economy vs in the deflationary economy.  If that is the case, then perhaps my argument would be nullified.

Yes and where did these profits come from? (agreeing with you).    The extra 1 BTC you earned by getting my to see value in your service and price.   

In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.

1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.

There is no requirement for the money supply to be perpetually increasing for this to work.

If.. if.. if.. My question to you is why? why? Why do we have (price) deflation in an economy with a constant money supply? The answer is because we have the same amount of money chasing more stuff. There is an implicit premise here that we actually have an increase in the amount of stuff to sell i.e. economic growth. The argument that a constant money supply prohibits economic growth is a contradiction, since price deflation caused by a constant money supply requires economic growth to even happen in the first place. A means not A.

So, with a constant money supply, deflation is the direct effect of economic growth. If we have 10% deflation it's because we've simultaneously had a 10% increase in the amount of goods and services (i.e. the same money supply chasing 10% more stuff). Without the growth, the deflation will not take place at all (same money supply chasing the same amount of stuff).

So your scenario with 20% deflation builds on a premise of 20% economic growth in the first place. That seems like a pretty unreasonable scenario to me, but if it isn't, that would be even better. 20% economic growth is far better than any country manages to do today.

The only way to achieve that is without a money supply. Changes in the money supply affects the interest rate, and the interest rate affects peoples decision to save or spend. A better goal for the money supply would be one where the interest rate reflects the time preference of market participants as closely as possible.

The general goal of a price is not to be high or low, but to be true.

But would an economy in which the money supply dynamics are fully defined and well known with perfect information for all participants affect someone's willingness to invest negatively? Wouldn't the known money supply dynamic just become the backdrop on which people still evaluate whether they can put capital and labor together to yield more than the sum of those costs?

Sure, savings would grow purchasing power over time, but investing would bring in profits that also grow purchasing power over time... Doesn't this even out?

It seems to me that the key is perfect money supply information. People are exceptionally conditioned to a generally inflating (at variable rates) money supply right now, so if we get brief periods of deflation (or deflation expectations), of course people hoard because they know the supply is just going to inflate again soon. But again, if the supply dynamics are perfectly well known to everyone, it should just come back to sound business decisions without any of the macro-forecasting shenanigans that pervert investment incentives.

Bitcoin is the first feasible monetary system ever proposed that credibly offers perfect information to all participants. That changes (purifies) the calculus quite a bit.

Very nice opinions so far.  

I want to be clear I am not making a value judgement in interest itself.  I study economic history on my off-hours and this occurred to me when I was thinking about Bitcoins and what examples we have to draw from.  Obviously after reading all the comments after the Pirate collapse and then looking at all the other deals out there, I wondered if it was really viable in Bitcoin.

This is why I made a point to talk about long-term arrangements over a single deal where I am repaying by my creditor.  I see transactions more like reshuffling a 21 million coin deck each time.   Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.

When you save you are contributing more than you consume. = wealth building
When you borrow you are consuming more than you contribute. = wealth erosion

When people stop taking loans to consume, consumption shrinks to that of supply, this will also have a profoundly positive effect on the ecological environment. 

Interesting argument, I'll have to take that into consideration.  I'm no economist by any means, but it just makes sense to me that the optimal economy would be one in which the money supply does not affect the decision to spend or save (or take on debt).

One encourages saving, or the abstinence of consumption.

The other encourages spending, or the abstinence of capital formation.

If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

Interest is an agreement to share the efforts of your labour.
The laws of supply and demand dictate:
All free markets will tend to optimise to the maximum benefit for the lowest cost.

Capital will only have value if the economy is shrinking while there is capacity to grow.
If the Economy is stable or rescaling capital will bear no interest.
  
As the value of Bitcoin goes up your purchasing power increases, or if the economy grows, price deflation is experienced.
As a result there should be little demand for interest bearing loans in BTC while the economy grows.
The increase in value offsets the need for interest.  

People should not be so scared of prices that change. From where did this notion that prices must be flat come from? Who suggested such a thing? Is it so hard to imagine that a world can work in harmony with prices which generally fall, instead of generally rise, over time? Is it so hard to imagine a world where an employee doesn't get wealthier over time by a nominal increase in his wage, but by a nominal fall in his costs? Indeed, such a world is different than what we know, as we all grew up in a highly inflationary world, but this is no reason to assume it ought to be so.

It is okay for prices to fall. Do not be afraid. The more constant a money supply, the better, for it is by the stability of money which market participants navigate. There is no reason to think money supply must increase with GDP - instead of seeking stable prices (which runs counter to how markets operate), merely seek stable money, and you will find a happy economy.

Yes, but keep in mind, the interest rate on a loan can't go lower than 0% (and really, why would anyone want to give out 0% loans anyway?), but if deflation beyond 6% hits, most people are going to stop taking out loans to buy houses.  If deflation beyond 10% hits, people probably aren't going to take out loans for cars.  If deflation beyond 20% hits, people are probably going to avoid taking out any sort of loans altogether.

However, I don't see this as a bad thing... people borrow too much money, and it is, in large part, due to inflation being present in the money we use.  Inflation encourages overspending and too much debt.  Deflation encourages saving and too little debt. Maybe it is time we bring deflation into our lives and see what happens?