Topic: Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable? - page 2. (Read 14626 times)

Ahhh, good point. That was sort of in the back of my mind as I wrote that. It's not that new money can be printed into existence. It's that it's printed and loaned into existence at an interest rate determined by a central authority. So if we got rid of the central bank, and the government instead simply printed new money into existence to fully or partially fund itself, what effect, if any, would that have on prevailing interest rates? More thoughts later. Thanks!

Because assuming the supply is expanding because there is more demand for the currency (and not because of reduced cost of producing the currency due to hardware efficiency gains or whatnot), rewarding people for trading incentivizes them to trade in it, not just hoard it. As in, legitimate existing businesses will want to take the currency, and people will want to spend it. It means you don't have to be digital-currency-wealthy to benefit from using it when the market expands. It's also "free" money that gets its value from reducing the value of fiat rather than paying for it in excessive hardware and electricity costs. It changes the objective from "buy and hold until a good fiat exchange opportunity arises" to "buy and use".


No... artificially low interest rates are due to the central bank issuing new money to banks at low interest rates. It has everything to do with a centrally planned economy and nothing whatsoever to do with the money supply being unbound. It is fake market vs. free market, not inflation vs. deflation. There is little that is sound about bitcoin, and I have no idea why you think interest rates would rise in a deflationary economy, except for the incredibly unsound idea that no one will want to lend at negative interest so long-term interest instruments will be excessively scarce. You say "of course" yet this thread is 12 pages of people arguing about how long-term interest bearing instruments may or may not be viable. Again, you can't just add 3% on to the real interest rate and expect businesses to just hum along as if nothing has changed.

And 3% is only the best-case scenario where a large portion of the world has adopted bitcoin. Prior to that, deflation periods will be much, much heavier as the only way to expand the market is to increase the amount of deflation. Businesses who take loans in BTC will be punished for doing so because they expand the market and the demand for money making it much harder to repay the loan. But taking loans in BTC is the best way to get businesses to want BTC in exchange so that they can pay those loans back! It is a catch-22.

There is nothing in that equation about printing money. It compares the demand for money to the price level. It applies to stable, inflationary, and deflationary economies.


Stable prices do not favor creditors (deflationary does) nor debtors (inflationary does--to the extent inflation goes beyond the baked in rate). Stable prices do not favor those who hold wealth in real assets (inflationary does) nor money (deflationary does). Assuming stable prices are achieved, that means the the supply of money isn't being manipulated by central bank inflation or those who control vast amounts of wealth (see panic of 1907 and how handsomely JP Morgan profited off of others' misery--and odds are good he caused it). Stable prices do not encourage over-investment to recoup inflationary losses nor under-investment because holding currency is the safest bet. It reduces or eliminates menu costs and the money illusion.


Money demand doesn't assume anything, it allows you to solve for one of the variables if you have the others or it allows you to predict what the change might be if one or more of those variables change. Just like the equation of exchange (MV = PQ).


Ahh the meaningless "gotcha!" moment. How do I lower prices from when bitcoin was at its $32 high? The simple answer is: I don't. No currency is immune to a loss of faith or demand. But, when you're in the unique situation where everyone has a good idea of how much it costs to produce new currency, and the currency is obviously undervalued, it opens up the opportunity for arbitrage. People will buy it just like any other asset they believe is undervalued. There are ways of making it return to stability quicker such as destroying transaction fees, but all this does is punish the people who still use the currency even more.


Each individual ware does not change in price all the time. This is known as sticky prices, and it causes problems up and down the economy when the value of the currency does not remain stable. But it's OK for each individual commodity to fluctuate because that is simply supply and demand, the basis for all pricing. Stable, inflationary, or deflationary doesn't change that. If technology and productivity increases allow for a reduction in price (the common computer hardware example), everyone's purchasing power increases and is wealthier as a result.


"Hey, I knows a guy! He can hook you up real good" said the spider to the fly. Don't forget that high interest rates are bad for business and therefore bad for economic growth. Future productive opportunities for your money are diminished. Also, "1-3.5" real interest equates to "-2 to 0.5" nominal interest in a deflationary economy at 3%.


It just tells you that a central bank is controlling the interest rate rather than the free market. "Force" more debt on people and businesses and hope it fixes the problem.

Here's a thought experiment I've used in the past that might be helpful.  Let's say you want to sell some widgets, i.e., buy some money with them.  You have two potential buyers.  A has 10 gold pieces he's willing to exchange for widgets.  B has 10 identical gold pieces, but B's gold comes with a catch.  If you don't spend (or lend or invest) B's gold pieces and instead just keep them in the safe, he gets to take 1 one of them back every year they're not spent.  Now you might be willing to trade with both A and B, but you'll probably be willing to give A more widgets in exchange for his gold.  That difference in the "price" (in widgets) of A's money vs. B's money is the price you pay for the additional usefulness of A's gold.  So it's NOT "free." It's a bargained-for benefit of A's gold that he gives up and you acquire when the exchange takes place. Putting your money in the safe (and earning a real return in a deflationary currency) is simply one of the things you can do with it.  So you MUST have paid for that value in the initial exchange.

But isn't trade (like virtue) its own reward? Voluntary exchanges occur when both parties perceive themselves as benefiting from the exchange. That's why you can be reasonably confident that a voluntary exchange is in fact creating new value.  So, why do you need to artificially incentivize more trades via inflation?


But aren't artificially-low interest rates one of the main objections to an inflationary currency?  If we switched to a sound currency like Bitcoin, of course interest rates would rise. But they'd rise to their correct level, i.e. the level that reflects the voluntary preferences of market participants.

Okay so basically its fancy talk for the money printing required to keep prices stable in a growing economy.

Lets go one level deeper: Why are stable prices good? What is the facts and basis behind this premise?

Money "demand" assumes that stable prices is a good thing, but that seems very loaded/biased to me.

Say it IS a good thing, how do you LOWER prices again if the economy contracts?

If stable=good, why is it okay for each individual commodity to fluctuate in price and what is the point of average stable prices if each individual ware changes in price all the time?

I know of very secure investments which pay 1-3.5% in REAL interest rates for something that "lasts forever". A bigger and more informed investor with the right "ins" may well know of something even better.

The fact that many interest rates today are negative in real terms should tell you that its fucked up in real terms.

I suspect Keynes would have rectified the problem he was creating was it not for his premature death; I scorn all his blind Keynesian followers alive today. 

I have never used nor implied any "running out" of loans etc. only that a deflationary currency makes loaning a dangerous affair for both parties. So, paradoxically, a deflationary currency might make for high-interest and presumably short-term only loans. Not the type of loan you can do capital investment with--more akin to loan sharking.

I will, against all better judgment, assume that your question is genuine and your insulting strawman was a misunderstanding.

https://en.wikipedia.org/wiki/Demand_for_money - The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits.



where M^d is the nominal amount of money demanded, P is the price level, R is the nominal interest rate, Y is real output, and L(.) is real money demand.

L(R,Y) is called liquidity preference which is a Keynesian idea, but Austrians have time preference which can be substituted and the situation works out roughly the same.

Keeping a stable price level P means that whenever output is increased, the demand for money M^d will increase in the same fashion, or prices will not be stable--they will have to decrease. Because the money supply is so restricted in bitcoin, this will generally be the case. When the central bank increases the supply of money, P rises then M^d rises. They can't happen at the same time because the money supply is narrowly focused to private banks. This is where the "theft" comes in because the prices increase before any of us have any say in the matter or see any benefit to new money. When the supply of money can meet new demand quickly, prices do not decrease. When money is not given to sacrosanct institutions first, but equitably across the economy, M^d and P can move at the same rate, if necessary (or L() can cancel it out).


It is not, because you have forgotten the cost factor to mining. Miners are held in check by the potential of inflating prices by overproducing and making mining unprofitable. "Cash-hoarders" are held in check by miners because miners create new money that will presumably put to use, stifling deflation. If the demand for money gets too high, interest rates should increase as well, also prompting cash-hoarders to stop hoarding and invest at interest. It is a balance from all angles that can't be manipulated. There is also, at least in my proposal, a large chunk of the new money that goes straight to trade, which is why I chose my words carefully and said "equitably" instead of "equally". Trade is where new value is realized and it should be rewarded in kind.


The fees aren't there to control price levels.


The miners don't have anything to do with the fees. Mining isn't required at all. When the demand for money is in line with the supply, mining stops. No electricity usage at all.


Well there you go! There was some heated discussion a year or so ago on how deflation might somehow be prone to negative interest rates. CD rates nowadays are around 1%. Admittedly, that is with central bank theft of interest rates, but even when they were not manipulating as much, the best, safe interest rate in a typical 2-3% inflationary economy is going to be 2-3%. Riskier investments can lead to around a solid 5%, but they tank when the economy as a whole tanks (see everybody's IRAs, 401ks, etc. over the last few years). If deflation is 3%, 3% must be taken off of the interest rate. CDs can't pay you 1% if deflation is 3%, that would be a real 4% interest rate. Right now you're looking at -2% with inflation on a real return from a CD, how do we get from real -2% to real +4% just by using deflation? Magic? 6% better interest doesn't just come out of nowhere.

And this is assuming a nice, gradual, 3% year after year, with no one but the wealthy bitcoin holders who may or may not be manipulating the supply to keep that stability. If one year happens to be 6%, do you realize what that means to a business's profit margins? Bankruptcy. Many businesses run on very tight margins of only a few percent. An unexpected upswing in the deflation rate will simply bankrupt them. This is why economists are afraid of deflation.

I don't know if any economist has tried to define what a "good" (real) interest rate is in a stable economy, but it's gotta be somewhere in the range of 0.5-2%. If it goes higher than that, that's a sign that there isn't enough money to meet the demand for money, and economic progress will be retarded because businesses can't afford loans (which are going to be at a higher rate because of the bank's cut, of course). The higher the REAL interest rate, the worse it is for business. This is why the central bank tries to manipulate this situation by lowering interest rates to bring us out of a recession. The problem is, since the consumer level doesn't see any new money and is in fact penalized for this by reduced value in savings, there is less incentive to save and less purchasing power for a given amount of money. It doesn't fix the root of the problem and just puts everyone in greater debt. It is idiocy based on Keynes and it doesn't work.

It seems like the disagreement boils down to what we each think about the following two groups of people:

1) people who save money in a deflationary currency (but don't lend it directly to others or otherwise "invest" it); and
2) people who enjoy a government-granted monopoly on printing new fiat currency in an inflationary economy.

You think that the first group is "getting something for nothing" but not the second group. I think the exact opposite. My position with respect to group one is based on the idea that by deferring consumption, savers are effectively lending the purchasing power of the saved money to all other currency holders, and that this is why they receive (and why they deserve to receive) a (relatively-modest) reward in the form of increased purchasing power over time.  My position with respect to group two is that the recipients of the new money gain real purchasing power in exchange for the equivalent of executing a copy-and-paste command. Honestly, that seems pretty intuitive to me. Your position, on the other hand, seems extremely counter-intuitive.  That doesn't mean you're wrong.  But when you say that your position is not only correct, but so obviously correct that the only reason people like me can't grasp it is because we're blinded by ideology, well, I find that REALLY hard to grasp.  

I'd also note that group two requires coercion backed by the threat of violence to receive the benefit they do whereas group one does not.  The state requires you to pay taxes in their fiat currency.  If you don't comply, they'll forcibly steal your stuff and/or arrest you and lock you in a cage.  Similarly, if YOU try to get in on the action and print your own "Federal Reserve Notes," they'll send you to prison for counterfeiting (and this is true even if your motivations were completely pure and you were just trying to "stimulate the economy.") In contrast, the use of a deflationary currency does not depend on state violence.  People were using precious metals as money long before the state got involved. People will voluntarily adopt and use a deflationary currency. They must be compelled to use inflationary fiat. (And that coercion backed by violence is the reason I think that the word "theft" can be accurately applied to group two but not to group one.) And if you don't think that's the case, then there shouldn't be a problem.  Start a new blockchain with a different reward scheme and watch as everyone abandons Bitcoin in favor of "Inflate-o-Coin."

Yeah we're just brainwashed and emotionally ideological, there's some neat ad hominem.

Let me explain it to you:

1. 3 peps are on a deserted island with NOTHING there except some def. money that THEY hold.
2. YOU plant some crops, harvest and sell it for their worthless currency - lets say because you don't like to see people starve.
3. Now you do nothing and sit on your new money.
4. Because they are now well-fed and more energized they now plant two fields MORE with leftover seeds or with seeds from where you also found them.
5. There is now twice the amount of food on the island as when you finished harvesting.
6. NOW you spend your money for twice its previous value when you got it.
7. The value was "stolen" from people you helped earlier, from an economy that would not be where it was without your prior work.

With inflation? They print more money and buy your second harvest too without doing work, YOU have to keep working to keep "your value" on the island - who's brainwashed NOW?

If it is so obvious, why can't you offer a more convincing argument than merely saying it?

Also, please read or listen to Bastiat's What is Money?.

But sure if it makes you happy I will call you a monetary inflationist instead of inflationist 

You are the one constantly talking about the market running out of loans, credit, investment or money.

"Demand for money" - what does that even mean... no SERIOUSLY; explain it to me, I don't get it.

It's very simple logic. Value doesn't come from nowhere, so when you get value even though you just keep the money in the safe you must be getting it from someone who has created it. If this wasn't an ideological question for so many of you it would be much easier for you to see. Unfortunately it's like telling a communist that communism in reality undermines the welfare of the people. It is obvious if you don't desperately need to deny it for your ideology to make sense.

Actually, it is exactly what I said.  I'll bold it for you.

No, it does not.

http://en.wikipedia.org/wiki/Inflation - In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time
http://www.thefreedictionary.com/inflation - 2.  A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
https://en.wikipedia.org/wiki/Austrian_School#Inflation - Mises argues that inflation only results when the supply of money outpaces demand for money

Mises may have waxed poetic about how calling rising prices inflation confuses the issue with monetary supply increases, but AFAIK he is the only austrian that gave a shit about the distinction. For everyone else in the world, the meaning is clear: rising prices associated with an increase in the supply of money beyond the available goods and services or whatever exact definition you want to pick.


Oh hey look, you putting ideas in my mouth that never fucking came out of it. The very definition of strawman and intelligence insulting. "OHH U THINK HERP A DERP BITCOINS WILL RUN OUT AND IT WILL FAIL"

FUCK OFF

No, this is what your saying now, it is not what your original reply said.

Inflation usually refers to an inflation in the money supply. Prices in said economy are irrelevant to the concept of monetary inflation.
ALL inflationists usually justify their inflation with "stable prices" - and that's FINE, stable prices would be neat - but you're still an inflationist.

I think this is your problem right here; you think money is a necessary commodity or something that society can somehow "run out of". This is simply not the case, its a system of IOUs and there can NEVER be scarcity because you can always "rip an IOU in two" so you have twice the amount of tokens to go around.
This ESPECIALLY goes for Bitcoin which is digital and infinitely divisible.

A "credit crunch" is not a bad thing; its just the market figuring out that some or many main activities it was undertaking were stupid and so everything slows down until the market finds something NEW and more SENSIBLE to invest in.
Forcing the market to invest will just lead to bad investments as I see it.

Because distributing the new money equally is the same as moving the comma, think about it. Give everyone 10 times as much money and its exactly the same as moving the comma once to the left.
Mentioning banks is just appeal to emotion btw

Well Bitcoin needs those fees for a reason and not to control price levels or something.

Anyway if you pay 0.01 as fee and on average win the same all you are doing is subsidizing miners and allowing them to charger higher fees perpetually. This would either lead to a NEW wasteful banker-class or over consumption of CPU time.

I am assuming that A people prefer good investments and that B if they are investing in bad things they are also investing in good things to similar extent.

Businesses can operate on emotion, low pay and volunteer work. Many "human aid" orgs are nothing but money machines today.

0.1-0.5% is a horrible investment, no one should accept that. But moving on with 1-20% in mind (low to very high risk).
I think people would take normal investments because there would be less risk compared to ponzi operations.

Why would anyone invest with 3% deflation?
1. Well for starters deflationary currencies may well be less stable so it could be to hedge or profit from temporary drops in BTC price.
2. Many valid investments can pay more than 3%.
3. Deflationary currencies may have years of little or negative growth where real-returns would be great.

No, no, no.  I'm saying that you can't just assert your position and expect us to accept it.  You need to demonstrate it.  That the majority of us won't buy it when you say "I'm right" doesn't mean that I'm arguing from popularity, it means that you are begging the question.

Like providing links and information to basic economic theory will do anything to change your minds. Bitcoinomics is rampant around here and it is pretty obvious that people will believe whatever they want to believe as long as they think it's good for them and someone smarter than they can come up with some perfume-laden shit as ammo to repeat. It smells an awful lot like political positions.

You can call the argument whatever you like, saying it's wrong solely because most people don't believe it is the very definition of an argumentum ad populum.