Topic: Can someone explain how deflation wouldn't negatively effect productivity? (Read 4014 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

It will be fine. We will have robust equity investments in bitcoin. There will be less debt based investments. For the foreseeable future, the bitcoin economy will be expanding at a much greater pace than the global economy. In this environment, debt based bitcoin investments won't make much sense. Hopefully, we forget about debt based investments altogether. Hopefully, we understand the destabilising effects of debt after the Great Depression, the tech bubble of 2000 and the Great Recession of 2008. That is my great hope.

Wait, I am saying that there is still a lot of incentive to invest a deflationary currency - for safety reasons and higher returns. I believe you are saying that there is zero incentive and that everyone would hoard Bitcoin, and comapnies cannot get funded, loans cannot be made out, etc. Where am I mis-understanding you?

Where do you stand on NXT then?

I may have written it incorrectly. I was referring to any deflationary currency and how it would provide 0 incentive to invest as a consequence of being deflationary. I agree with your post except for the first sentence.

I mean it's a negative feedback loop. Nothing to get nervous about. Negative feedback loops exist everywhere, even in your own body. It's not some pre-programmed condition in Bitcoin.

This is completely false. At a minimum, even if Bitcoin were the greatest store of wealth ever known, it would still be irresponsible to keep all your money in there, just for safety reasons. Same if you thought GOOG was the best stock ever, you still wouldn't (or shouldn't) risk all your money it. People will have to invest in other assets just to keep their money safe.

Secondly, the returns on Bitcoin appreciation are going to be far from the highest yielding returns. Bitcoin will only appreciate at about 2-3% per year in the long term, making a wide variety of stocks, bonds, loans, commodities, much more attractive investments to include in your portfolio.

Finally, today we have savings accounts. Recently interest rates have been at historical lows, but generally you could earn 2-3% interest on your fiat. This applies similar pressure to the economy as Bitcoin will apply in the future.

There will definitely be some adjustments here and there, but I don't think the situation will be as different as people are making it out to be.

Deflation will reduce consumption of luxury goods at the outset but at some point, people will still want those goods and those purchases will be made.

Bitcoin isn't inherently inflationary/deflationary. It's demand/supply that determines that.

So long as demand is higher than supply it will be deflationary. During times where supply is higher than demand, it inflates.

I actually agree with the first sentence but later when you use the word automatic it makes me nervous. Do you mean automatic as in programmed variables working their way through the world or in a mystical invisible hand way? If the first then "Deflationary isn't necessarily bad. I see a small amount of deflation being no worse than a small amount of inflation." becomes possible.

Deflationary isn't necessarily bad. I see a small amount of deflation being no worse than a small amount of inflation.

I believe there's as much incentive to invest in a deflationary environment as there is in an inflationary one. I just believe the conditions for investment aren't right yet and will only be suitable a long time away. In the meantime, Bitcoin is at risk of failing.

My example is once deflation stabilises to the growth of the economy, deflation will match that rate. Your investments just have to outperform the current deflation.

What this means is that it's automatically regulates economic growth because when economic conditions are good, investments will slow down (harder to outperform economic growth during these periods) and when economic conditions are bad, it will be a good time to invest (as it's easier to outperform economic growth).

Deflation does not reduce consumption if you have enough money. Deflation gradually reduces consumers by centralizing more and more of the money. An example everyone knows is the purchase of technology. Everyone knows that ipad will have a better screen in 2 years for the same price. Is anyone who has enough waiting to buy it?

Also, bitcoin is inflationary as thousands of coins are being created daily. This won't happen forever and then it will become deflationary. that will be as nice as the current inflation is. Bitcoin is great as itself but when applied to national currencies it just won't cut it. Look at NXT if that is what you are looking for.

When there is a need that people will pay for that need will be filled. Doesn't matter what kind of economic model is in use, it is going to happen. It may simply be that it doesn't happen through investment as we now know it.

Right now Bitcoin is appreciating at a furious rate because it is sucking value from other asset classes (primarily fiat holdings). This year it went from $14 to $1000, which is a 7,100% appreciation in value, causing a 7,100% *deflation* in prices. Eventually people will have accumulated enough Bitcoin, that value appreciation (or price deflation), will no longer come from easy conversion of wealth between assets. The value of Bitcoin will come purely from demand to own it and exchange it (and speculation). If the world economy magically remains static after Bitcoin takes over, and the number of transaction do not change, or the wealth transferred between individuals remains equal every year, then Bitcoin's value will also be static - you will be able to purchase the same basket of goods for the same amount of Bitcoin forever. Unfortunately, this is unlikely to happen for the simple reason that historically human populations grow, and along with it so does the size of the economy and therefore the demand for Bitcoin. If only we had a measure of how much exactly the economy grows every year... Oh yeah we do! It's called GDP - and it measures total economic output. Here is the chart of the last 10 years: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries?display=graph

Once Bitcoin becomes saturated, broad economic growth will be the primary driver of its value. Typically the world economy grows at about 2-3-4% per year, but sometimes it doesn't, like in 2009 when it shrunk by 2% (see linked chart). If Bitcoin were the world currency in 2009 there would have been price *inflation* that year, not deflation.

Less inflationary is good. Deflationary is bad. The reasons are many and very obvious. Among them the most important one is 0 incentive to invest. People who use computer equipment purchases as an example (I bought a cpu last year that costs 1/4 today) don't make the connection between buying computer equipment and an expense. Expenses are investments that expect negative value returns. Investors will not invest if they expect negative returns. Entrepreneurs will quickly disappear if their best effort leads to ever negative returns. Good luck trying to get either the average bitfan or the average joe to see this.

Sounds like a plan. Choices have consequences. Even the founding fathers were not nearly as naive as a lot of people here.

But how would we manage that transition? Just let half the world starve to death so that the ones that have been sensible with their spending can live on?

Deflation would reduce consumption and encourage saving as you say.
This is desirable as we are destroying the world through artificially pumped consumption, and failing to save for our long lives. Thus deflation would incentivise us to lead a life reflecting the underlying fundamentals of our world, not the fundamentals that suit the political and bankster masters.

I agree, but what about in the long term, that is when (if) bitcoin reaches global acceptance? Then, no more users are joining and inflation is presumably not controlled by a central agency. (Also in a longer term, there will be a point when the population is no longer growing either due to lack of space or resources or naturally, for whatever reason, as is occurring today in Japan and many European countries.)

What happens if there is no growth because Bitcoin never gets to that stage due to its deflationary nature?

By assuming 3% growth (in your example) you've assumed we overcome the initial stages of Bitcoin adoption which may never happen due to it's deflationary nature.

This we already understand but once the world has stabilised on Bitcoin and the economy is growing at 3% (this is an unfounded assumption), it'll be possible to make loans at say, 0%. This would be the equivalent of a 3% loan.

As has been repeated a million times before, even in a deflationary world, you'll have to buy food. You'll have to buy a car for work so you're still going to spend what you have to to survive.

What's 'dead money'? Do you mean lost Bitcoins?

The day you can do that is the day you can take anybody's/everybody's Bitcoins.

That's the end game I hope for.

Can you explain more about how those investments would work in a 3% deflationary world?

I can see Bitcoin co-existing with fiat. In that world, I don't see the world changing much though.

The same things that happen today will also happen in that world but they might be on a smaller magnitude.

Are they advanced or do they live in underdeveloped areas?

Let's imagine Bitcoin takes over the world today and it's the only available currency.

Are you saying it's a better world where we have people who can't afford to buy houses?

A better world where if I have a fantastic business idea I shouldn't be allowed to build that business until I've gathered all the resources required first?

I can see an option to approach the rich to fund my idea but this seems to me that all the worlds finance would eventually concentrate at the top because they're the only ones that can afford to build big projects.

The global economy is growing due to population growth plus productivity growth plus inflation.

The bitcoin economy is growing as more users join the bitcoin monetary system, at roughly 30% per month.

Both growth rates far outstrip bitcoin's issue rate. Therefore, bitcoin is deflationary even before hitting max caps.

As far as I understand, bitcoin doesn't eliminate the ability to use debt.

What I don't understand is why bitcoin is inherently deflationary. Wouldn't it depends on the economy / GDP? If the economy is growing, bitcoin acts in a deflationary manner, but if the economy shrinks, bitcoin will be inflationary. Right?

Is there an assumption that the economy will always grow, or always be desired to grow? More of a philosophical question, but is a continuously growing economy feasible (or desirable) in the long run on a planet with finite resources?

I'm not sure about this.  Certainly, restricted access to deflationary assets will push more savings into investments.  However, greater investment doesn't necessarily lead to greater productivity.  Bad investments squander resources, resources which would otherwise have been put to more productive use.  In such an environment, we incentivise bad investments so long as they are not as bad as holding money directly.

In a world where anyone could trade fiat for bitcoin quickly and cheaply, a loan in fiat would be just as impractical/expensive as a loan in bitcoin.  The interest rates would be different but the expected values of repayments would be the same.

Deflation is bad for productivity because there's less incentive to invest.  My money today will be worth more tomorrow, so why spend or invest them in anything other than that which is absolutely necessary.  I can buy the same tomorrow for less money.  Some would argue this is a good thing, and it isn't with out merit, but you'd see a poorer productivity as a result.

My prophecy states that at the time the world's currency runs on satoshiBTCs there will be a technology to resurrect dead money, which renders this whole "deflationary economy thought-experiment" academic. Yet, I'm aware my prophecies are worth less than 2 cents.

World GDP grows at about 3% per year. When Bitcoin becomes pervasive and stabilizes, its value will increase by about that amount every year. That means that by simply holding Bitcoin, one would make the equivalent of about 3% interest on their money yearly. It also means that one would be motivated to seek out investments that yield higher returns. I can think of many possible loan scenarios that fit that criteria, not to mention stock investments, realestate, bonds, commodities, etc. These will all continue to be actively invested in and speculated on. If Bitcoin wins all it's battles, it will still just be another asset class that a responsible investor can put a portion of their wealth in.

If bitcoin continues its rise it will exist alongside fiat currencies. I highly doubt we'll have an deflationary economy because dollars will still be loaned out, I can safely say, for the next 50 years at least. A world in which bitcoin takes over, all fiat currencies die, and our economy is deflationary will never happen.

People who live beyond the state and beyond debt (in a community with humans instead of a society with citizens) do have neither an economy nor productivity rise. They are self-sufficient and do not need to grow rampant. They live nearly the same way as thousands of years ago.
A growing economy is the result of debt, and debt is the result of the tax (tribute), which had been institutionalized about 10'000 years ago.

Ftfy

So we need to add debt, so people can buy houses? Well, where are all those extra houses coming from? Was there extra land?

If debt solved the problem then how come houses are so unaffordable nowadays? So now we have the same land scarcity but now houses are even more expensive because debt has driven up prices.

Now you create even more inequality. You have people who own houses with rising asset prices doing nothing but sit on rising asset prices. You have the poor who are even more marginalised. You create cost push inflation because rents must go up to support the interest on debt. This hurts the poor even more.

The 99% most of whom are not on the asset ladder are forever oppressed. That is a good thing to generate "economic activity"? When ordinary people can work a whole day and not earn as much as one hour's worth of capital gains? No, fuck that.

Compared to all that I'll take a temporary slowdown in spending anytime.

But that's not economically feasible in a growing society.

And it's this sort of effect that will slow down the economy.

Maybe.

I can also remember my parents being unable to buy a house despite earning good money in the 1980s because home loans were very hard to get.  Houses were more affordable back then but few could pay cash

That is not something we need to worry about. In a debt free society there will be less speculation, which is the activity which is lifting house prices out of the reach of ordinary people. Picture a flatter wealth society. Houses will be much more affordable under such a system because rich people can't afford to hold multiple assets using cheap debt. There will certainly be less empty houses, apartments and buildings in every city.

If no one can get a loan, houses will be cheap because it is debt that is driving up the price of houses. It's a sick system that we currently have.

Even if it does apply a trust is still good for up to 120 years. Which means assholes like me only need to come along every 4th generation or so.  

*edit* to be honest I might have been thinking of introduction of the wait and see rule. Anyway I'm not puttin them into a trust soon.

I am concerned though that a debt free society could actually be worse for those at the bottom who spend their wages on rent, can never get a loan and so can never get ahead. Bitcoin economics do worry me.

It does where I live, which all I care about because it is not part of the hell hole wherever you call home if the rule against perpetuities has been revoked over there.

Anyway, most likely you misinterpreted the statutes repealing the common law rule against perpetuities. The statutes will set their own limits.

Correct it is called the Rule against Perpetuities.  Except that it no longer applies in most jurisdictions.

All trusts in the English speaking world have an end date. It is the law against perpetuity to stop assholes like you from ruining the world for the rest of us once you're dead as a door nail.

So you have something to sell. Good to know how to interpret your posts.

In the medieval era landlords accumulated vast tracks of land.   Didn't make it any cheaper for the peasants.

I already own real estate and rent it out. I'm not intending on selling any of it anytime soon. In fact I might bury it in a trust so my children can't sell it either

Unless no one else has debt also. In which case houses wouldn't be used as speculative assets. Imagine that, affordable houses.

In a free market prices will adjust. Problem is we do not have a free market.

And in no debt land you cannot get a mortgage so don't expect to own a house unless you inherit it.

It's easy. Don't spend money you don't have and this whole problem goes poof. Assuming it is a problem, which I am still collecting data on.

Therefore, you must want to provide loans. Instead, invest your equity.

I'm not looking for a loan.

This is because everything is expensive in the fiat money world because debt has already inflated up asset prices.  Best thing you can do is to buy some bitcoins and store it until it hits x value.

Then convert bitcoins to fiat to start your business.

Alternatively, do a business plan and see if anyone on havelock will invest into it.

I think there will be large numbers of loans - just far off in the future, assuming Bitcoin stabilises.

I don't see divisibility solving the liquidity issue. Divisibility doesn't allow me to start my new business venture.

I'm not sure removing debt instability will improve productivity. Even if it does, I see not being able to start new business ventures as a bigger detriment to the economy than any possible improvements.

It is unlikely there will ever be a large number of bitcoin loans as bitcoin is deflationary. The implied interest is likely over 12% (ok I pulled that figure out of thin air but it's an educated guess).

Instead we will have equity financing. If it works, you're good, if it doesn't you go down with the ship.

If there is no debt, there will be no debt crises. There will be no bank runs. All the bad stuff that has plagued other financial systems in the past can be ended by removing debt from the system.

The problem of inadequate liquidity will instead be handled by infinite divisibility. At the moment, Satoshis as the smallest monetary unit will cover our economic system for the rest of my lifetime.

Real productivity will rise because we won't have to contend with the destabilising forces of debt resulting in financial crises.

I can't remember the thread I read it in (it was very recent) but someone explained how deflation would reduce productivity because only businesses that could generate extremely large returns could ever afford a loan to get started.

The only way I could see a deflationary currency working is in the very long term.

Let's imagine Bitcoin is eventually the only currency in use and after some time, 1 yottaBitcoin is worth 1USD in today's money.

At this point I see deflation being close to 0% - people can now freely spend their Bitcoin because there's little value in hoarding and waiting for increased future spending potential.

Now people can take out affordable loans.

At what point in time can we see Bitcoin loans being affordable? 10 years? 100?