Topic: Can someone explain how deflation wouldn't negatively effect productivity? (Read 4010 times)

It is true and loans are ceasing now, FED printed 4x more dollar since 2008 but most of them went back into their account as reserve, because most of these money can not be loaned out due to extremely weak investment demand. Please give me an example of some investments that can bring you very high return that you need large amount of loan? (except bitcoin)


This is time travel trading, Apple is one out of hundreds investments that really succeeded, most of the investments I know just threw money into the river and never saw any return. Comparing a possible return of a future investment or a possible super return of bitcoin's appreciation, no one will lend out bitcoins. Loan is like a stimulus injection that motivate people to work, but to know who will buy their product is just like lottery


None of those assets can be moved cross the globe in an hour. Bitcoin is to make these assets virtualized and eliminate the cost of ownership

Pffft, demurrage! You mean use your demurrage coin and watch its value diminish over time versus use Bitcoins where its value increases over time? I rest my case.

There's no reason to expect interest rates to fall to 0% in even a mildly deflationary environment, and historically interest rates have never been that low under deflationary currency even in the very lowest points, it has generally been much higher.

At 0% the lender has no incentive to loan a Hard form of money at 0% he might as well have kept it in a vault.  Lenders will always demand some positive number in interest to give them a profit if their risk-free alternative is 100% return by just holding the money.  In addition lenders are very likely to have a value on liquidity, the value they put on having instant access to their money, they give this up when they lend so in reality several percent are usually necessary.  So we would expect borrowers to be hit twice by deflation AND interest rates. 

Your clearly able to understand how borrowing actually works and see the massive flaws in deflationary finance.  The people telling you otherwise have emotionally decided that THEY like holding deflationary assets so they are simply attempting to justify their greed by any half-baked economics they can lay their hands on.  A whole industry exists to furnish gold-bugs and their ilk with these kinds of rhetorical 'thought shields' which is why the same debunked arguments are repeated over and over again on these forums.

The solution is to make money soft by demurrage, so holding currency doesn't return 100%, then loaning at 0% or less will still be desirable to a lender.  On top of that manage money supply to target 0% inflation and the economy has full ability to grow via credit and lending without incurring a parasitic interest payment, and no debt would not grow to infinity, people still need to repay principle which would limit indebtedness the same way that current borrowing limits are based on ones ability to make payments.

Sustainable like the current system?

More specifically?

This part is important. Always be specific.

I think there might be some confusion as to who's talking about "deflation" or "disinflation" and I think you're referring to disinflation in that scenario. Not to be picky or anything 

I think the problem is mainly on the side of the borrower.

Let's say he needs 10 Bitcoin. He needs to return 12. As the currency deflates, he's going to have a harder and harder time accruing 12 Bitcoins as over time, it's value is going up.

Sure, it's great for the investor.

How I think it will work out is, during periods of massive inflation (like now), no-one will take out loans.

Once deflation stabilises to the rate of population growth, then loans will be taken out but at something like 0%.

In real terms, that's still a 3% return because the currency is deflating.

I just don't see how we get to that point.

NXT? The Bitcoin variant?

Would you be ok if society put in place financial policies that meant you would starve?

Via long term interest rate suppression, I assure you total US and global debt growth is rising once again.

Re the terminal value of bitcoins. The natural deflationary rate of bitcoins, in terms of fiat dollars, will be greater than 4%, probably.

Here is why: population growth rate (say 2%) + productivity rate (2% constant over past 100 years) + bitcoin loss rate + fiat inflation (say 2% also) = at least 6% per year.

Also, the current phase of hyper growth can run a few more decades, though at slower adoption rates over time.

I have to add: Why would somebody engage in a business with only nominal gain and real loss? Here is how. You have a capital of 10K. You you get a loan of 9.99 million. Now you engage in a business yielding 1 % nominal. A very safe business could get you such a loan, if you have the right friends. Now you earn 1% of that which is 10K. That is 100% nominal on your original 10 K.

Let's see what is happening where we have inflation and zero interest rate. Example 10 % reduction in buying power per year. This is for all prices especially capital goods prices. In this situation, 10 % nominal profit means zero profit. It is possible to get loans for 0 %, that means you can start a business that yields 10 % real loss and still break even nominally. You could start a business that yields a real profit, but you could also start a safe business that yields 1 % nominal gain and increase you nominal fiat. In stead of going the risky way, you could multiply the 1% business, remember, the supply of loans is endless. But this is a loss in real terms anyway, it is just a bigger volume of the real loss. This drains real capital from the total economy and leads to slowly decreasing productivity. Then there is the fact that it is the banks and some privileged industries that gets all the loans. A regular joe that wants to start a shop does not get that kind of loan.

If you have a situation with decreasing prices of say 3%, a new venture would have to yield more than 3% to make a gain compared to holding. This is totally sound, it means that all investments yield real profit, businesses yielding loss will be disbanded, and the capital will be employed in profit-making. This means higher productivity and rising abundance for all.

So we have two problems: Inflation, which in itself is not a problem because you can use your skill in calculus to see through it, the problem is that the new money is not spread around to everybody, artificially creating winners and losers, not based on merit. The second problem is the zero interest rate, which allows negative yielding businesses to exist, draining the economy of capital.

The zero interest rate is the main problem, it makes everybody poorer. But the two is of course connected. Easy money means low interest rate.

Now I mostly agree with you! Quantitative easing definitely artificially inflates the amount and size of loans, but the nuance there is that it "inflates" them, it doesn't outright bring them into existence when otherwise they would not have been. I also agree that with 30% monthly expansion in Bitcoin, it is currently difficult to compete with Bitcoin as a speculative investment, but I was talking about the end-game, when "terminal value" is reached, and value appreciation stabilizes at about 2-3-4% per year. The current phase of hyper-growth will be short-lived in the grand scheme of things.

Loans should cease today but central banks are not letting it happen. Central banks are suppressing long term interest rates to spur more loans, which is driving up speculative activity. Real productivity is lagging due to overcapacity and flagging consumer demand.

Yes, loans will probably still happen in bitcoin but whilst the user base is expanding at a rate of 30% per month, why borrow in bitcoins for fiat businesses? Much better to borrow fiat and invest in bitcoins.

Yes, you are correct about fiat being inflationary and that other assets are deflationary, and that bitcoin is another one of these options. The difference with bitcoin is that the bitcoin economy is expanding very rapidly. It is an extremely deflationary asset in the short run. A growth rate of 50 times in one year would only reach about 1% of the population from current user levels.

At some point bitcoin will hit terminal value. Debt based strategies in bitcoin for fiat businesses may work but I suspect not. The reason is that fiat will always be inflated up whilst bitcoin has a fixed supply and bitcoins are being lost all the time.

I don't think that is true, Bitcoin being adopted and rejected as a national currency by various countries through time will only increase and reduce demand for it. It won't change the nature of it. When it comes to finance, everything of value is treated as an asset class with its own unique properties that must be analysed - it doesn't matter if it is a national currency or pork bellies.

If this were true, it would still have nothing to do with Bitcoin, and loans should cease today.


That is one reason loans are issued, not every reason, there are still other incentives for loans to exist.

It's all very simple, I'm not sure what the confusion is. If we assume that Bitcoin will appreciate at X% per year, and a class of people with good credit are willing to borrow Bitcoin for X+5%, then a lot of people who own Bitcoin will seek the higher returns and execute those loans. At what point does Bitcoin make people completely irrational?

To create a real example of this, let's say someone came up to you in 2004 with this thing called an "iPhone" (and let's say Bitcoin was the currency). He says he needs to borrow some cash to develop it, and is willing to return 20% interest on what he borrows. Are you saying that no-one would lend this guy money and instead everyone would choose to keep earning a much lower interest?

The other thing to consider is that there already exists tonnes of deflationary asset classes. Almost every asset besides fiat is deflationary. People who have any amount of real money have never kept their wealth in fiat. This is known as a dumb investment. Fiat is only used for transactions, while wealth is stored in any number of currently available deflationary assets: commodities, stocks, etc. Bitcoin will simply be another choice of investment. Very little will change from today.

Unfortunately, the human track record isn't great. After the Great Depression, laws were enacted to control debt; separation of investment and savings bank, reserve requirements etc...

One by one, all these laws were repealed by people who wanted more debt to create ever inflating assets. Some were driven by greed, some by ignorance of the consequences and others by cruel design to maintain power.

Bitcoin challenges this economic paradigm. We now have the option to renew the monetary system and replace it with something less manipulatable, and with less debts. I hope that people will come to realise that equity investments can work just as well as debt based investments.

The bolded text = very wise assessment.

Regarding debt based investments, hopefully we will not forget about them altogether. Debt is good. Unlimited debt is death. The events you point out were fueled by people who were offered and pursued unlimited debt.

Investing in a deflationary commodity is different from adopting it as national currency. Bitcoin as a commodity it is cool. Bitcoin as a currency would be bad.

The two prerequisites for loan are not existing in bitcoin world:

1. you need loan to expand the production capacity, but now it is over production in major developed countries

2. you need loan to issue fiat money into existence, but no loan is needed to issue bitcoin

Of course people can take a fiat loan to purchase bitcoin, which will give them the highest return possible. So bitcoin will co-exist with fiat-loan based model and become the new driven power of economy