Topic: Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable? - page 8. (Read 14623 times)

SgtSpike, I'm in a bit of a hurry. I have one more point to make at mind right now but it will be at a later time. But I believe my last post adresses some of the things you took up though even if it's not a direct response.

Why is this a bad investment?

If the currency is gaining purchasing power over time this means the cost of aluminium is going down, the cost of labor (overhead) is going down and the price you can charge is also going down. You won't be able to charge as much for it next year but your costs will be lower and you'll still make the same amount of profit.

No, it's the complete opposite. The point of interest rates according to austrians is not only to allocate resources to profitable investments, but to the most profitable investments.

The reason interest rates (and loans) even arise in an economy is becuase different people have different abilities and different opportunities for profits.

Lets say you and I are working in different sectors of the economy and earn different rates of returns on our invested capital. You make 5% returns on your investment and I make a 3% return. Rather than to keep this status quo we would both be better of if I simply lent you money for an interest rate between 3-5%. The interest rate would reasonably be in the 4% range.

From my perspective, my original investment is not actually a profit, it's an opportunity cost, and the same applies to the society as a whole. I'm allocating my resources in a suboptimal way and unless I can reallocate them to compete with you, the optimal thing to do is to simply hand them over to you (or your competitor).

If I lend you the money, then you can expand your output, which will drive down the price of the goods you produce and lower your profit margin. At the same time the output of the goods I was producing will decrease, which will raise the price for my competitors and their profit margin. The end result will be that the profit of both your and mine sector of the economy will get closer and closer to the interest rate i.e. 4%.

Banking according to austrian theory is simply an arbitrage business. They solve the case where lender and borrower of funds don't know each other. They give me the opportunity to lend you funds even though I don't know you so I can stop hogging resources that I employ in a suboptimal way. The rate of return where all investments even out is what austrians refer to as the "natural rate of interest". No investments below this should take place in an optimal economy (and though we never reach this point we should strive to get as close as possible).

Main point is, resources are limited. All value improvements cannot take place at the same time. This means that resources cannot simply be allocated to all profitable investments, but rather need to be rationed to only the most profitable investments. The purpose of the interest rate is to solve this rationing process as good as possible.

I'm not talking specifically about holding resources.  I am talking about every investment (besides loans) that a person could make.

What if I can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC, but my overhead is 9.5 BTC?  I'd be only make 0.5 BTC/bicycle.  Then I'd only have a 2.5% net profit margin, which would be fine in an economy neither inflating or deflating, but a bad investment in an economy deflating at a rate of 3%.

Your post proves my point (unless I am missing something, which very well could be the case, as I am rather hurriedly looking over these posts).  The green widget is not produced or purchased, the green widget worker is not paid, and thus, less economic activity has been created.  This is the nature of a deflationary economy.

SgtSpike, I'd be interested to hear your reaction to my previous comment.

But really, what good do you do to society by simply buying and holding assets (which is deteriorating by time btw)?

When austrians speak of investments they generally speak of value improvement. That is, you buy resources for X amount of bitcoins and then transform it into a more valuable form and sell it for Y amount of bitcoins. If you can buy aluminum for 20 BTC and turn it into a bicycle worth 30 BTC then that's an investment. If you simply buy aluminum in the hopes of an increase in price you are speculating (which is totally fine sometimes, but that is the exception rather than the norm).

Simply holding resources will generally be a bad investment in a deflationary economy. And that is a good scenario. It means the resource hoarders will stay away from the market, and the price will keep going down to the point where those who actually see a way to improve on the resource find a viable way to do so. In your scenario where the rent is worth 200 BTC the price of the building simply wont be 10.000 BTC. Rational market agents will see that as a losing investment and stay away from the market. That means the price will go down to the point where it actually becomes viable to buy it and rent it out for 200 BTC (and most likely add some value by improvements to the asset).

The price of resources will go down by time in a deflationary economy. That means you actually need to improve on it if you want to profit. If you don't have an idea on how to do that you should stay out of the market rather than keeping other people out of it.

Sorry, yes, that is true.  Then though, the effective loan rate would be 5% for the loanee, which means, he may decide not to take it because the interest is too high.  This would result in lower amounts of lending than would be seen with a currency that doesn't deflate.

I am glad we finally agree that no one would make an investment made to return 2% in an economy where the currency is deflating at a rate of 3%.

However, it's not a straw man at all.

With a currency that doesn't inflate or deflate, anything above 0% (after calculating for risk) makes sense as an investment.  With a currency that deflates at 3%/year, the investment has to make more than 3% (after calculating for risk) to be profitable.  Therefore, in a deflationary economy, we lose out on all investments estimated to pay back 0%-3%, after calculating for risk.  This results in a smaller, less productive economy.

Ahh, ok.  You are saying that you'd end up with X*1.02³*0.97³, which is of course lower.  And no one would do that.

But that seems to be a straw man.  The numbers 2% and 3% aren't dictated by the market, you just made them up.  Saying that 2% < 3% is hardly controversial.  What you need to do is show that the market causes x% to be necessarily less than y%, where x% is the market rate of return on investments (beta) and y% is the rate of deflation.

No one would make the purchase that you are using as an example.  They would either purchase things with a yield higher than the deflation rate, or they would make loans where they get interest in addition to the return of the principle.  Or they would do nothing.

I just gave you an example in the post above. Give a loan, get back a larger amount of currency at the end of the loan.

Actually investing by purchase in a fixed asset, increases its value based on the fact you have limited the supply if you intend to hold the asset as savings.

Ah, I was afraid I wasn't explaining it well enough.

To put it simply, the investment value does NOT rise with the 3% purchasing power increase.

If I buy a building for 10,000 BTC, and deflation hits at a rate of 3%/year, then my building is only worth 9,700 BTC the next year (and maybe the rental income was the 2%, so I'd have 9,900 BTC instead).  If I had held that BTC instead, I'd still have 10,000 BTC.

I cannot think of an investment that would also gain value along with value gains of the currency itself.  If you can think of one, please enlighten me.

The big question here is wether the investment goes up in value or not. Say you loan btc out at 2%, then your math is correct, the investment income is added onto the btc value increase. But if the investment is in a physical good then the currency gain is not added into the investment gain. Whoever came up withthe scenario needs to be a bit more specific.

I know this is a slightly different situation than investing in a company, but consider the following: You have the opportunity to invest in gold using your bitcoins. Let's say you did some analysis and decided the price of bitcoins (in dollars) would go up 3%, and the price of gold (in dollars) would go up 2%. If you invest your bitcoins in gold, after a year the value in bitcoins would have gone down, since bitcoins were rising faster than gold.

The big problem with all this analysis is that the market will react. If the price of bitcoins is going to rise in the future that will get priced in, the more sure people are the price will rise then the faster it wil jump now. I just don't think we will ever have a steady, large deflation; there will always be some risk to holding onto the coins hoping the price will go up,  and so at some point even with deflation there will still be a higher net present value for investing than just holding the coins.

Nope.  You need better maths. 

If you have X units of something, and their value is increasing by 3% per year, if you don't invest, then after three years you will have a value of X*1.03³.  However, if you do invest at 2%, after three years, you will have X*1.02³ units, each worth 1.03³, for a total value of X*1.02³*1.03³.

In the investment case, you'll end up with a value of 1.159611, but if you had simply held them, you'd have a value of 1.092727.

Yes, but a deflationary currency biases the users' choices.

Let's take it to the extreme.  Say that bitcoin deflates at a rate of 50%/year.  Now say that someone wants a loan.  Who is going to loan to them?  Anyone?  What would the interest rate of said loan be?  Why?

Similarly, say that USD inflates at a rate of 100%/year.  Now answer the same questions above.

Does that help you understand my position on this?  I completely agree, the correct level of investment is the level which people choose in the absence of coercion.  But currency inflation/deflation is also a form of coercion, in that it biases the users' decisions.

But why, could you explain?
I believe it, in my opinion it is caused by long term stabilization by not forcing people to spend money.

Really? I get that people have to agree on definitions, and that sometimes what you really have is a normative disagreement over goals. But I'm not sure that we have that problem here (although I'm honestly not sure). It sounds like some people think that a deflationary currency limits the economy's ability to grow. I think that's wrong, and that it actually maximizes long-term growth.

It's not possible to do that due to the economic calculation problem among other reasons.

"Efficient" can't stand alone as an adjective here. It must be defined with regards to a goal. If the goal is anything other than a free market then it's likely Bitcoin isn't the most efficient tool. It's probably not the most efficient system if the goal is a centrally-planned economy that efficiently funnels wealth to the central planners and their cronies.

This is why arguing about economic efficiency is a tar pit. Two people who don't agree on the destination will argue in circles forever about how to get there.

No argument here. And I believe that in the absence of coercion people would choose a deflationary currency.  But it's still useful to show why that doesn't lead to "too little" investment from a market efficiency perspective.