Topic: Bitcoin Loans and Lending; The Weakness in The Bitcoin Economy (Read 17658 times)

Without electricity there wouldn't be internet, web will go off then. So.. Without this, we can't access or use any of our crypto. And trading also wouldn't be possible

I do understand how borrowing now with the expectation of earning more later from the loan than you will pay in interest is of value to both parties.  I really do.  The current Federal debt of $14.58 trillion when we only created new value (GDP) last year of $14.53 trillion dollars strongly suggests to me that this whole spend now what you have not yet earned model should be once again relegated to a last resort, not a standard business practice, and certainly not a model for a nation.  Or an individual.  Or a state.  All I'm sayin'.  As an aside, those that cater to the desperate on a small scale are mostly either charities or drug-dealers.  As above, so below.

Assuming a 3% demurrage rate.
1 frc will still be 0.97^5 = 0.858734026 frc in 5 years.

Why if 1 frc is at $0.001 today 0.858734026 frc must worth $0.000 in a short while in 5 years?

Sorry, I was specifically asking why people would start. When Bitcoin was worth $0.001 penny, you could buy thousands of it, hold onto it, and watch it eventually become $0.01, then $1, then $10. Why would people buy $0.001 freicoins if they know that thanks to demurage it'll be worth $0.000 in a short while?

I don't care about the word. The difference between hoarding money or hoarding other goods is that when you hoard money you're making the whole society wait for your decision on how do you want to be compensated for the services you've already provided. That is important and affects other people's decisions.


But is not about morals, is about what lenders can ask. Is how markets work.
If you introduce a regulation that makes starting a new bakery very complicated an expensive, bakers can and will rise their prices because of the artificial lack of competition. There's nothing wrong about it (well, yes, the regulation).
While lenders can claim the interest they will do it. The "regulation" here is the money system people chose to use.


They made something of value at some point. But if they decide to never redeem that value and lend it at interest, the value to be redeemed will grow until its growth unsustainable. It's just how exponential growth works.
If you were immortal, you could save one coin once, keep on working and consuming your whole wage until the initial loan grows big enough through compound interest, and live on the interest of the big sum forever.
An ounce of gold lent at 5 % interest looks like this in 300 years: 1.05^300 = 2 273 996.13
This of course is unsustainable and that's what business cycles are about.

@ viperjbm

1) The lack of divisibility problem.

I didn't look for the thread for you to read, but modify bitcoin divisibility would be easy.
If a satoshi is worth too much, the code will be changed to accept smaller denominations.

2) The lost wallets problem.

I'm not very concerned about this problem, but freicoin solves it. The lost wallets will be reintroduced in the system by demurrage.

3) Non compound inflation.

That's not possible or I don't understand you.
0.1% monetary inflation + 1% wallets losses = 0.9% monetary deflation. What am I missing?
Anyway, if your concern with deflation is its effects on the financial market, freicoin has a better effect than expocoin, right? It also lowers interest.
If you want the inflation to make transaction fees cheaper (or increase security), freicoin is equivalent to expocoin.
I will be happy to discuss anything related with creating monetary inflation in the proposed chains thread.
I think the main topic here is "Does predictable modest deflation has any effect on the financial market?".

@ everybody
Since predictable modest inflation (created without lending) doesn't have any real effect on the financial market because it only rises the nominal interest rate, some people think that the same must be true for deflation, but interest rates cannot be negative.
Even if all capital yields were negative at the same time, people would prefer to keep their money. With demurrage, they would prefer to put it in a secure store of value or buy consuming goods in advance.

Real capital yields 5% and 10% inflation = 15% nominal interest = 5% real interest
Real capital yields 5% and 10% deflation = I don't know, but not -5% (2% nominal interest ??, then  = 12% real interest) = lend and hoard are both better than invest = nobody borrows and there's no new investments

What am I missing there?

You currently make $11/hour working as a cashier, which you hate. You got a job as a pizza delivery driver that pays $19/hour, which you would love, but you need a car to accept that job. You don't have enough money to buy a car, but you could borrow $2,220 at interest to buy a car.

You designed a cash-for-bitcoins terminal. You can buy the hardware for $1,900 and sell them for $2,400. You only have about $5,000 cash. You just signed a contract for 1,200 terminals, but you need to provide them all within three months. You don't have the $2.3 million you need to order 1,200 terminals, but if you borrowed it with interest, you could pocket $350,000 in profit.

Sometimes it is most efficient to produce value before you consume it. But it is also sometimes much more efficient to consume value prior to producing it, such that the amount ultimately produced is much greater. Interest consist of two people sharing this benefit because they both made it possible.

The currency is designed to lose nominal value, but if the freicoin economy grows, you can't avoid deflation.


Not exactly. The interest comes from the money not losing value and being necessary for trade. The money holder can exploit that need, but you don't need deflation for that. Our current monetary system has not deflation and has interest (although the system is also designed to cheat small lenders).

Freicoin (like bitcoin) would eventually reach a user base equilibrium and have an increasing value based only based on growth.
But if the deflation rate is lower than the demurrage rate you still have an incentive to spend or lend your money.

In fact I think that bitcoin could have more deflation than freicoin since the deflation comes sometimes from shrinking credit, which you need periodically to mitigate the exponential growth of debt debt, an effect of interest. Yes, I believe that business cycles are based on interest. Central banks and fractional reserve only makes them worse, but they are not the root cause.

I would dearly love to know at what point saving your own excess production for long enough to reinvest it properly became known as "hoarding".  I would also be delighted to have explained to me how borrowing money at interest is EVER in my best interests.  Yes, we do 7 day or 15 day or 30 or even 90 day terms.  But paying a late fee, or interest on it is acceptable only as a punishment for changing a contract after it is accepted.  NOT a sensible part of the original contract.  There is nothing to prevent me from accepting 30 day terms for face value and nothing more. Unless, of course, I was a usurious parasite that fed on interest payments while making nothing else of value but symbols of other peoples' wealth.

You borrowed the right to hold that money as it appreciated, you invested the value of that right, why would paying it back be a problem?

Whether you would prefer decreasing nominal payments or level payments depends on what the borrower plans to do with the money and what the lender wants to get for his money. Some people may prefer one lump payment at the end of the loan term. I think generally borrowers generally prefer increasing real payments, so level nominal payments may be preferred because that implements decreasing real payments. It depends why you're borrowing the money.

For example, if you're borrowing the money to buy a car and you expect your income to be level in the deflationary currency, you would prefer level nominal payments. If your income shrinks because the currency is very deflationary, then you would prefer decreasing nominal payments. If you're investing in a business that won't get off the ground until later in the loan term, you may prefer increasing nominal payments.

A deflating currency will put a preference towards decreasing nominal payments. But that will go into the mix of preferences based on what the lender wants and what the borrower wants.

If I understand it correctly, freicoin will lose value while you hold it, and will provide incentive to give it to someone else (like merchants). Why would speculators, the first people to exchange real money into this experimental money, expect their freicoin to be worth more in the future, if this money is by design supposed to lose value? And isn't them holding currency that appreciates in value the root of your "money interest from holding money" problem?

Not that I'm aware. The RBE people maybe?
Most people I've talk with in the forum think that I want to somehow make interest static, and I don't.
I just want to allow further real capital accumulation. Lower the "tax" (basic interest) that money charges on commerce.
Like inflation, you may not see it, but it's there.


For speculators, almost the same that bitcoin: it's $0 now, but it will be $97 later.
For merchants, accept it because people prefer to spend these.
For entrepreneurs, take cheaper loans in this currency.
Well, that last one would be only after the value of the currency reaches some equilibrium, after the big initial price deflation.

Is there anyone else on this forum besides you that criticizes interest?


How will you convince people to switch from currency that hold value, to currency that is guaranteed to slowly lose it, at the stage where the currency is worth almost $0 to begin with? Bitcoin's sales pitch was that it's $0 now, but put your money into it because it'll be $100's later. What's your sales pitch?

I don't know what you people mean by winning a thread. I share my view and I try to understand other people's view.
If I change my mind the one that gains more its me, not the other person.
I have the intuition that his view is based on dogma, but if I discover that he's only based on true assumptions and logic I have no problem admiting that I was wrong.
In fact I love to change my mind. The feeling that you were blind and now you see is very good.


If you're talking about me, I have much interest in using bitcoin, because it is much better than the monetary system we have now.
I see two main groups within the monetary system critics.
From the austrian school we criticize the central bank role.
Within the local currencies trend, the critique is usually more focused on interest.
I criticize both and that's why I propose freicoin and support ripple (although you can have interest with ripple I think the rate would tend to zero).
I also support bitcoin, many people around me know bitcoin thanks to me. I don't talk about freicoin when I introduced them to the bitcoin concept.
I'm a software engineer (well, I don't have the paper that says so yet, I have to finish the final project, but I'm already working as programmer) and I could develop freicoin if I study the bitcoin code. It's a simple change for someone who already knows the code.
But there's no point in having the code if most people who know the idea don't like it.
Also I don't think I have the experience needed to coordinate a free software project like that.

JoelKatz, in simple laymen's explanation terms, if I were to take out a 30 year loan with predictably deflationary Bitcoin, where a level payment will become progressively more painful to pay, would the only option be to use the decreasing nominal payment thing I mentioned/worked out in the other forum? Or is the "pricing in of deflation" going to make level monthly payments somehow manageable? That's the only part I'm somewhat confused on.

Yes, and you might win the lottery tomorrow. Even if the odds of anything other than the expected happening were as slim as you winning the lottery, the tiny sliver of uncertainty should still be enough to cause more deflation to be priced in over time at a very noticable rate, but would you rely on the possibility of winning the lottery to help repay a loan?

There's also a bigger reason why I'm ignoring the possibility the odds could work out in the favour of someone needing to pay back a loan. The reason there's always going to be uncertainty is because of the lingering possibility of some kind of totally unanticipated economic disaster. An economic meltdown is unlikely to be good for your ability to pay back your loan, even if it does reduce the amount you owe in real terms. It's also a bit difficult to plan for due to the whole "unanticipated" part.

Of course it's a manageable risk - but as far as I can see that still doesn't help, because it only protects against unexpected changes in deflation and the problem here is that as a borrower you lose out even if nothing unexpected actually happens.

You can't have it both ways. You can't say that there's uncertainty and therefore more and more deflation will be priced in. If it's uncertain, then deflation might get priced in or might get priced out or might not change at all.

In any event, uncertain deflation (assuming there's not a huge amount of it) is a manageable risk. If you are harmed if deflation increases, you find someone who is harmed if deflation decreases and you hedge with them. We already do precisely this to hedge around uncertain inflation. It works the same way with deflation.

Confirming that JoelKatz has won this thread several times over.

On another note, why do people who have not even the slightest interest in using bitcoins stick around this forum for months and make hundreds of posts? (rhetorical)

It's true even if expected deflation doesn't change and actual deflation matches the predicted deflation well; in fact I was assuming this would probably be the case. The reduction in uncertainty about deflation and other factors over the time period in question is what causes the value of the coins to increase.

It doesn't matter much how predictable the currency is - as long as there's the slightest sliver of uncertainty about the future (and who can really say for sure what will happen in a thousand years or a million?) you will have this reduction in uncertainty over time causing more deflation to be priced in. I don't think the actual level of uncertainty even affects the rate at which deflation will be priced in on average over the long term - only changes to it matter. For example, suppose we have the following incredibly simplified situation where we're at the end of some year y, we know statement S0 is true and are uncertain about the rest of the statements S1, S2, ...

S0: The economy behaved the same in year y as in all previous years, with the same growth rate and the same 5% deflation, and it's 99.99 percent certain that a year later we'll confirm statement S1 is true.
Sn: The economy behaved the same in year y+n as in all previous years, with the same growth rate and the same 5% deflation, and it's 99.99 percent certain that a year later we'll confirm statement S(n+1) is true.

Up until the point one of the statements Sn is discovered to be false - which is by our assumptions impossible to predict in advance - all the years are identical and in every year we have identical expectations for the future, so the effect of expected deflation must necessarily be the same in each year and cancel out, making it impossible for that to compensate for the effect of the deflation on loans at all. This works because as the loan period passes we're more certain about deflation and the economy not just in that year but all the way into the distant future. You can change that 99.99 percent to 99.99999999 percent and the argument still works.

That's not even close to the same statement. There is actually a fairly direct deflationary equivalent of this problem - unexpectedly high rates of price deflation could force you to pay back lots more than you were expecting to - but I'm just talking about the predictable, routine increase in the amount you owe in real terms.

That's true if, and only if, the expected deflation either changes or the actual deflation doesn't well match the predicted deflation. I agree that you can get all kinds of strange and bad results if you try to denominate an agreement in an unstable or unpredictable currency.

Exactly. That's why you don't want to denominate an agreement in a currency that isn't very predictable over the time frame of the agreement. Otherwise, people will become very risk averse and tend to prefer shorter term agreements because it costs money to manage risk. It would be madness to offer or accept a 30 year mortgage denominated in bitcoins today.

An unpredictably inflationary currency, by the way, creates precisely the same issues. This is why we have currency hedge funds, TIPS, adjustable rate mortgages, and so on. These are all ways to manage the risk associated with a currency whose inflation is only somewhat predictable. A currency whose deflation was only somewhat predictable would create the same issues and more or less the same workarounds will reduce their impact.

Here's another example of the same error where it's easier to see: "Who would want to borrow money with an inflationary currency? The mortgage rate would likely have to be adjustable and could climb up really high, forcing you to pay back lots more money."