Topic: Bitcoin Loans and Lending; The Weakness in The Bitcoin Economy - page 3. (Read 17603 times)

This is self-evidently false. The value of deflation can be built into the price and it's obviously finite.

The problem is, you're starting with the assumption that deflation is not built into the price and then showing that it cannot be built into the price. Of course if it is not built into the price, it cannot be built into the price. You do this by saying "The value is X today, but it also has additional value because it will deflate. Let us calculate that additional value." The X already includes the deflation value, just as the future X's also include the predicted future deflation value past that point. There is nothing else to add.

If you want to say "The value is X today, but it has additional value because it will deflate", your X must be the current value less the deflation value. And the future values you calculate the present value of must also be exclusive of the deflation value. If the deflation value is actually infinite, then the present value less the deflation value is infinitesimal, and the future values less their deflation values that you are adding to the present value are also infinitesimal, so you have a sum of an infinite number of infinitesimals which can be, and in this case must be, finite. This is especially so because a time frame of over, say, 1,000 years is self-evidently absurd. Nobody can be confident something will deflate for that long. Heck, we may not have physical bodies in 1,000 years.

Exactly. This argument doesn't work for inflation because you can invest the money now in something that will hopefully give you good returns, so it doesn't matter that it would eventually be worth nothing if you just sat on it. The problem with deflation is that just sitting on your money is actually a realistic scenario.

Except that the problem is that if we had price deflation, no one will be able to charge $120 to buy the product in a year's time, because the money would be worth more by then and that'll force prices down, not up.

Ironically, the thing you're not quite grasping here is the time value of money. Receiving 995 BTC now is worth more than receiving 995 BTC in two months time, because having it now encompasses both the possibility of having it in two months' time and the possibility of spending it in the meantime. This is still true if deflation means that 995 BTC is worth more in two months' time, because you can take advantage of this even if you're paid it now. So if you're willing to sell delivery of some good now in return for 995 BTC later, you should be even more happy to do it for 995 BTC right now.

No. My point is that predictable deflation cannot be built into the price, because the only rational price would be infinite (at least in this oversimplified scenario). More interestingly, look at what happens when everyone's only mostly certain about future deflation: the effects of predictable deflation on the price cancel out and price deflation occurs at exactly the same rate as it would have anyway. (This is again slightly oversimplified: in practice future expectations should help smooth out the rate of price deflation, but over the long term it has no effect.)

I don't think I ever claimed that I would refuse to sell, now or later. If it seemed like that, you may have misunderstood. At most, I may not be able to sell it at 9.95 BTC without taking a loss, since I may have spent 10 BTC producing the product, but that just means that my business structure is weak, and likely someone is able to out-compete against me. I'm not looking at it as a single merchant with a single changing price point, I'm looking at it as a flow of goods within a distributed production system a constantly downward price pressure.
As for accepting that many worth of dollars now, I would if I had a guarantee that I could swap them for BTC instantly. If the dollar transfer took 2 months, accepting 9.95 BTC worth of dollars now would cost me the 0.5% in dollar deprecation, and wll make it more difficult to buy products needed to continue my business 2 month from now.
Feel free to substitute your own formulas if you can use them to explain things better.

But the problem with your example isn't that you can't sell it for 10 BTC now, it's that you refuse to sell it for 9.95 BTC now. You are saying that they can't get it for that price unless they wait 2 months. Your formula breaks down if you accept 9.95 now instead of in 2 months, because then you should also accept 9.95 worth of dollars now.

Am I? I thought I was saying that the product produced by bitcoin may suffer depreciation? It's perfectly fine for the product to still be worth way more than the bitcoin used to produce it though.
Regarding the original comment about selling for less being like lending, I would ask, with an inflationary dollar, why would I sell you a product for $97 now when I can just sit on that product and sell it to you for $100 in a year?

So you're saying bitcoins suffer from some magical equivalent of physical depreciation and obsolescence?

...

I think you're the one not realizing that whatever it is that I give them is NOT increasing in price itself. If I invest in a box paper, my return on that paper will be 0%. Obviously I would prefer to sell that paper NOW and get the whole 10BTC, but if I can't sell it, and say a year down the road someone produces paper and pays their employees and sources deflation-adjusted costs, they'll be able to sell it at deflation adjusted prices, undercutting me.

Look at it from the inflation side. Why is it that I can't sell a box of printer paper for $100 today, and can only sell for $97? And if I want to sell for $100, I have to wait until the end of the year? And if I do sell the paper for $97, am I lending that buyer $97?
Yes, I do understand that there is a deflationary value/earning involved. But in a competitive market, the prices will still trend down.

As I said, it doesn't matter. You have given them 10 BTC worth of something, and you are saying that if they wait 2 months they only have to pay 9.95 BTC. I suppose this is something your brain just filters out for you because it creates cognitive dissonance when combined with what you obviously want to believe, but it is no less true.

A LOT of loans exist in business because a lot of businesses operate with very little cash, and there is a delay between obtaining a product and being able to sell it.
In my last company we sold candy. We bought it on credit from the factory, and we sold it for credit to the stores. Stores paid us within 30 days (hopefully), and we paid off the factory, keeping the profit. In the end, we needed very little cash on hand to operate.
Without a loan, we would need to accumulate a few $10k worth of cash before making a purchase (bulk shipping containers). We would then need to sell the candy and get cash right away, to be able to buy the candy again. The main problem with this is that our business is limited by how quickly we get paid, and the business expansion is limited by the amount of extra cash we can get. So the company can only grow either at the speed of the profit, or at the speed we can raise more equity. Loans/investments from venture capitalists means the business can grow big fast, and expand and contract more easilly to adjust for economic situations.

But they are not buying money, they are buying product. If I carve something out of wood, and the cost is just the wood and a knife, I won't care if you pay me less for it a few months from now, if the amount I get has the same value as it did two months ago. That's why my price would decrease.
Now, if I bought that wood with borrowed money and the cost of that wood is tied to the value of the money, then yeah, I'm stuck charging you for whatever I borrowed the money for. Though that just means that to be competitive, I have to sell my stuff as fast as possible, and have the most efficient inventory with the least dependence on loans. Which is kinda what's already happening in our economy, with all loans having interest, and the value of the loan also being "deflationary"

I'm not sure why a new economy would need to be debt-ridden. It's a bit like people telling Henry Ford that they wanted his new technology to be like a faster horse.

In the Bitcoin economy, perhaps investors will buy equity rather than making loans. It could be quite a positive thing, because the investor has a bigger stake in ensuring the profitability of the business in which they are investing.

Also, saving works well using Bitcoin so people with a productive idea for a business can save for a little while, then invest in their own ideas.

I read what patvarilly wrote in his olive branch message to you, you don't look cleaver just by repeating it. This meaning doesn't make sense in the context of the thread, though. I still suggest you read about inflation, you'll learn useful stuff about the relation between money supply, size of economy and inflation.

I suppose I should be surprised that it doesn't take more to obfuscate the transaction for you, but then not many here seem to understand much about economy. This and giving credit for 2 months is exactly the same transaction. You are loaning people money for two months. If you say that the customer can pay 10 BTC now or 9.95 BTC in two months, then you have loaned them 10 BTC and only get 9.95 back. You can pretend it's different because they bought something as well, or because you also give them the option to pay in a currency that devalues, but it's not.

That's a reasonable argument; but it's not deflation.  It's the other way around, instead of people buying because the currency is deflationary, it's the currency becoming more valuable because people are buying.  When the euro devalues against the dollar, we don't talk of the euro deflating -- the size of the euro economy could be the same, and the number of euros could be the same.  We don't speak of oil being "deflationary" when it becomes more expensive do we?

I'm actually not sure that the bitcoin economy is large enough, consistent enough, or varied enough to make terms like "inflation" and "deflation" have any meaning -- they certainly aren't measurable; how are we going to create a "standard basket" for creating a price index in a bitcoin economy?

It's these reasons that make me think that those who say bitcoin is, at present, a commodity rather than a currency are correct.

I'm not arguing the facts of the situation, I'm arguing that this chucking around of the words "deflationary" and "inflationary" to mean increasing and decreasing in value is incorrect.

The number of bitcoin users has recently increased far more quickly than the money supply:

http://forum.bitcoin.org/index.php?topic=29043.0

The argument can make sense if people think that the demand for bitcoins will grow more quickly than their supply, making it a good idea to hoard coins that cost you little to produce eight months ago until the suckers next month beg you to buy them off of you at a much higher price.  This is either because they think they'll be greater fools, or because they think that the bitcoin economy will expand faster than the money supply.  I don't see the latter happening, so I'm going to go with the former.

No it's not, and you can repeat that as much as you like, doesn't change it.

Inflation means, these days, means price inflation.  It can also mean money supply inflation.  Money supply inflation causes price inflation (in the absence of other factors).

Do you dispute the fact that bitcoins are being created?  Do you not think that is money supply inflation?  Given that that is true, how does any argument that says people are hoarding coins now because they are deflationary make any sense?

Whatever the price is, that's the general consensus on its worth. It takes into account whatever affects its worth. There is no difficulty in embedding the expected future value of something into its present value. Everybody does that all the time.

If I was to lend you 1000 Bitcoin today, I would charge you a 3% rate for the deflation, so you'd have to pay me back 1000*(1+0.25%)^2 = 1005.01BTC in two months. That's because BTC itself deflates. If let you borrow a product that doesn't deflate, like a few boxes of copy paper, and you were to pay me back in BTC in two months, I would be fine if you paid me 995BTC for it, since in two months, with BTC deflating, I would be able to buy the same amount of paper for that amount that have to pay 1000BTC for today. So, two months from now, I go out, use your 995BTC to buy the exact same amount of paper, and let you borrow it again, this time you paying me back 991 in two months. That's of course assuming I didn't charge interest.
P.S. Feel free to replace "buy" with "cost to produce in today's dollars/BTC."

As for $10.50, I meant $10.05. I'm a bit lysdexic, but the formulas are still right.

Thank you for keeping up the good fight, Grinder!  I tried my best to get this exact point across earlier and apparently didn't get through.

Sounds like a great business model. You can lend me 1000 BTC today, and I'll give back 996 BTC in two months. That way you'll even earn 1 BTC. 10.50 is obviously wrong, btw. 9.95 isn't exactly right either, but close enough for this.