Topic: Deflation and Bitcoin, the last word on this forum - page 10. (Read 135972 times)

The storage of value is the goods the currency didn't buy. If I buy a can of beans and eat it, that can of beans is gone. If I instead save my money, that can of beans is still there.

When you do work, you are paying into the economy, providing goods and services for everyone else. When you spend your money, you are taking out of the economy, cashing out the value you deposited. When you hoard money, the economy has the benefit of the goods and services you provided to get that money but hasn't had to pay you out. You have invested in the economy as a whole at that point as your goods and services provide benefits to others that grows the economy as a whole. At some point, you spend that money and cash out the investment of the goods and service you provided.

Under ordinary circumstances, deflation reflects a healthy economy. You invested goods and services into the economy and then deferred withdrawal, earning interest because your contribution to the economy continues to make possible other economic growth.

The myth is that spending grows the economy. In fact, spending withdraws value from the economy. There is no difference between your buying a banana to eat it and your buying a banana to destroy it. That consumption grows the economy is our old friend the broken window fallacy. It is production that grows the economy.

In an economy that isn't manipulated by people with guns, deflation reflects the return on investment of deferred consumption -- providing value and then not taking one's compensation until later.

What I want is to either demonstrate or refute Gesell's theory on interest using praxeology. To refute it is necessary to demonstrate that a fixed money supply without demurrage can't produce monetary cycles.


But austrians (if they did somewhere, I think they didn't studied it because they assumed that was equivalent to "keynes-money") refuted Gesell's freigeld by assuming that, being fiat, the government would abuse it. They didn't attacked an public money with fixed supply and demurrage. That abuse can't happen with freicoin. So using praxeology, what's wrong with demurrage?


But it is logical for borrowers to prefer freicoin, as they will get lower interest rates. And there's also logical for merchants to accept them, they can use them for their next expenditures and get an insignificant lost.
Frecioins could have a lower price but still conduct more trade by circulating faster.


Nothing wrong with hoarding real stuff. From the financial point of view I was counting those as spending (like investments with non-loaned money). From the saver's perspective they can be considering savings and an insurance.
But saving money doesn't prepare society better for a rainy day. A society that hoards 40% of its monetary base is not better prepared for a rainy day than one which hoards 5% of its money supply.
Think of an island of farmers that hoards money during good times. When a disaster happens all habitants take their money out to buy food but there isn't. Where's the storage of value here?

No, money is not a commodity. Cash is just like indirected credit. You have provided wares to society and society as a whole owes you.
But hoarding money (despite not being an insurance for society as a whole) is an insurance to uncertainty for the money hoarder. And he gets that insurance for free (no significant storage costs) so that's clearly an externality. Money is information about who have produced and consumed what. And cash-money (as opposed to credit-money) is just an implicit agreement among all its users, that will keep on accepting it. That agreement has been broken a lot of times in history and could be broken (demonetization) for gold just like has been broken for silver or fiat (usually through hyperinflation).
The point is that the agreement (be it enforced [fiat] or voluntary) is flawed if it presents unfair externalities, springs economic rents and causes monetary cycles. If the material upon which that agreement is made does not present a compulsion to circulate (for example, gold), the agreement will suffer from those diseases.
I'm not against the free market, what I want is to make those voluntary agreements more efficient within the free market.

I doubt it, but one productive example of interest free savings is as a form of insurance.  For example, certain religious groups believe that they are commanded to prepare for foreseeable events.  The bible mentions famines, fires, etc.  So these denominations might expect each family to "stock up" on consumables, or an entire church might stock a food bank.  Cash can be horded for similar effect.  Not for the goal of investment at all, but "saving for a rainy day".  This kind of saving is self-insurance against whatever future losses that might present themselves.  Individuals do this, so do corporations.  Both do it using many methods; individuals could do it by stuffing cash into a mattress, buying gold or silver rounds, or a large pantry stocked with non-perishable.  Corporations could do it by warehousing materials needed for manufacturing inputs, such as steel or plastics; by speculating on the futures markets for same, or by hoarding cash, quite literally in a 'cash-on-hand' account; or by buying gold.  Governments do the same thing, usually by hording resources such as oil.

Funds used in this manner are sometimes put into low risk investment methods, such as a money market account, but the general idea is that those funds should not be put at risk of loss, because they are insurance not investments.

If we did, we would all be austrians.  Praxeology (which includes logic, so that statement is redundant) is uniquely related to Austrian Economic theory.  It's not much of a stretch to say that Praxeology is Austrian Economic theory as applied to all of human intereactions, and not just value exchanges.

I teach Praxeology to middle shool aged homeschoolers at a local coop, and from what I've read of your arguments (admittedly, less than before when we had our debates a few months ago) I question your understanding of Praxeology.  I question mine as well, as it applies to Bitcoin.  I don't think that there is enough available data to make any judgements.  The great risk is letting your own prefrences color your conclusions.  just because you (or I) might consider one perspective the logical reaction, does not necessarily make it so.


Take this statement for example.  You misrepresent the Austrian persepctive, likely because you don't understand it; which implies that you don't understand the praxeological argument behind it.  Austrians don't oppose all things public, nor do we oppose public monetary systems because they are public.  Simply put, we oppose central banking because it's an affront to the free market system.  When a central bank sets intrest rates, it's engaging in price controls of half of nearly every private exchange.  Gold is favored by Austrians because it's historically money, not because it is perfect.



You still havn't shown how to do that without breaking autonomy, as far as I know.  Also, the praxeological argument trips up the idea of demurrage.  Demurrage is a forced loss, but Bitcoin exists.  So there is no logical reason (that I can see) that such a cyrptocurrency with demurrage would be favored by savers.  Like it or not 'hoarders' contribute to the value of the currency.

Don't worry, I'm not in a hurry. Just answer when you have time.
I appreciate your attitude, too.

No, I don't see hoarding as productive savings. Can you explain me how it works?


Why do we need to rely on faith? Why can't we discuss it using logic and praxeology. I think that austrians are very accurate in a lot of things, but their prejudices against everything public don't allow them to see anything negative in gold as money, because that could lead to the need of public money. Fortunately bitcoin technology makes free market money compatible with demurrage today.


I'll do that.

jtimon, I currently don't have much time, so regrettably I need to postpone my reactions. However let me say that I appreciate how you're keeping the debate professional.

And you don't see anything other than lending as productive savings.  This is far from the case.  The truth is that no matter what we say or argue about it all, it's too complex for any of us to summarize completely.  Trained professionals have been arguing these points for decades.  Since the topic is too complex for any of us to completely understand, we must all simplify it in our heads.  Create our own economic worldview, so to speak.  Ultimately, it comes down to belief; which economic theory do each of use consider to be most accurate?  I believe Austrian Economic theory to be most accurate in a great many ways.  IMHO, this is how one can tell which economists to listen to...

Which ones make a significant majority of their personal income from their personal investments?  Peter Thiel is an Austrian, and kicks Krugman's ass; but doesn't offer advice publicly.  Mish is an Austrian as well as Schiff, both offer advice; both appear to do better on their personal investments than Krugman.  Krugman does better on his public appearances and writing royalties, much better. 

In the long run, our opinions matter very little.  Create your alt-coin jtimon, and let the market decide.

No.
You assume that an increase in hoarding must come from an increase in savings but my sequence of events assumes precisely the opposite. You see the "spend vs save" but you don't subdivide savings into "hoard vs lend".
It is not a decrease in the time preference what causes the drop in interest rates. It is continued prosperity and capital accumulation what make capital yields (or RoI, if you prefer) drop.
With low interests, there's a self-accelerating move from lending to hoarding. Because hoarding causes deflation and deflation makes hoarding more attractive. Deflation also invalidates the plans of some business so they can't pay their loans. Bankrupts and capital destruction (maybe just through lack of maintenance) will continue until interests rates rise again and the money gets enough incentive to circulate again. Money needs an inherent incentive to circulate or it will demand it elsewhere. It demands it from high capital yields and interests and if he doesn't get it, it has the ability to "reset the market" in order to accomplish it. That's capitalism, the demand for real capital can't never be fully satisfied because capital yields can't drop under certain levels because capital-money prevents that from happening when capital-money considers that there's to much prosperity for it to keep on profiting. Capital-money forces society to save more than it needs but without investing. That's the "lack of demand". It is not caused by a lack of quantity of money, it is caused by a reduction in its velocity. When the process stops, the smart ones buy the cheapest real assets and an inflationary period starts because money goes back to the market, to more sustainable hoarding levels but this time with higher interest rates again.
Thus monetary cycles existed before elastic cash. FRB and keynesianism are failed attempts to fix capital-money, but monetary cycles predated them.


I'm not talking about two competing currencies, but rather parallel universes with or without deflation.


It is obvious that the relation is not linear because despite nominal interest = real interest + inflation premium, nominal interest can't be negative with capital-money. I was just guessing some numbers for the loans of the entrepreneurs.
Nominal rates of 8% for the inflationary folk and 1% for the deflationary one seem reasonable for me.
What numbers did you use?


Exactly, and not the time preference. Capital yields determine the interest rate and capital accumulation pushes yields down. And monetary cycles prevent them from dropping near zero as we would expect in perfect competition.


Thank you, that will be interesting.


Thank you again.


No. It doesn't motivate them to spend more, only to hoard less. The only option available for savers is to lend. Well, they can also buy things they know they will need. Yes, there would be more stocks at consumer's houses and less in merchant's shops, but that reduces the cost of commerce, that's what money is meant to do. That's good. Lowering the costs of commerce should be a criterion of quality on money.
Back to its effects on interest rates...It is now rational to lend at 0% instead of hoarding, that cannot happen with capital money. It does not merely changes the nominal interest rate, it DOES AFFECT THE REAL INTEREST RATE.


I think that even being predicted, deflation makes loans less attractive and maybe unsustainable. The entrepreneur in your example is loaning money knowing that there would be 50% deflation?
His idea must be really innovative to take those risks.


So you have 1000 freicoins and 1000 bitcoins, you're losing 5% from demurrage from the freicoins, nothing from the bitcoins and you ask the same interest rate for your fcn than for your btc?
You want to make a loan and offer the same interest rate for freicoins than for bitcoins?
Really?

No. The time preference does depend on the form of money. The real interest rate does it too.
The time preference is not what causes interest but the other way around.

But an increase in hoarding means a decrease in the time preference. The decrease of the interest rate is a move of the economy towards an equilibrium, reflecting the choices of the consumers.

As I wrote already, merely because there is a falling price level, people do not magically turn into misers. Just like people do not magically buy less electronics if they get cheaper. It's the same reason why now, in an economy with a rising price level the seller not postpone sales merely because they might get more expensive in the future. It simply makes no sense.

It would, because the interest rates would equilibrate at a level where the currency choice was irrelevant.

Here's the problem. The relationship is not linear. I did not understand that myself until I did my simulation.

That the relationship between real interest rate and price level changes is not linear (i.e. changes in the nominal interest rate). The theory did not explain this sufficiently well for me to grasp, but once I did the simulation it became obvious.

I was surprised, but in retrospect it should be clear. As long as the difference between revenue and costs is positive, there must be a positive RoI as well. And the average RoI on the market is the interest rate.

The data is in a google docs, which I'll make public once the paper is published (I hope this happens over the summer). So you can look at the formulas and adapt the variables to see how it changes.

But again, an increase in hoarding reflects a change in the consumer preferences. A drop in the interest rate is the correct reaction.

I think the author of the paper about LETS velocity is Dr. Hugo Godschalk, I don't remember if it's in English or German, I only looked at it briefly, I don't even have it in my bibliography. You can google for it if you want.

But that's exactly where the misconception is. If a consumer does not perceive a "shortage of money", then where's then macro problem? There is none.

But as I explain above, for a consumer, velocity is a meaningless concept. Demurrage, in my opinion, merely motivates people to spend more. But it's merely a trick to confuse their economic calculation. Assuming people do not fall for the trick and there are other liquid assets, absent transaction costs, again the effect should be nullified.

A steady, predictable falling price level (first level derivation) would not cause any problems. Only an unpredictable change in price level can cause the problems you are describing. But absent changes in the money supply, this can only be a result of a change on the demand side, in which case it would be a proper response.

The real interest rate would be the same. But as I attempted to explain above, that does not mean that the difference between the two nominal interest rates would be equivalent to the difference in the inflation rates. It's not a linear relationship.

Yes, yes, of course. The deflationary bust starts with an increase in hoarding, not with constant hoarding.
The sequence of events is this:

1) Prosperity and capital accumulation drive capital yields (and thus interest) down.
2) Lower interest make savers stop lending and start hoarding
3) Hoarding causes deflation which causes more hoarding, debt destruction which cause more deflation...
4) A new price equilibrium is reached in which capital yields are high again (some destruction of capital may be needed for that to happen).


I see, you have taken it into account.


My point is that if the business is created with borrowed money and has to service a debt, it won't be profitable.
Say you have real interest 5%, then nominal interests would be...
With inflation 5 + 3 = 8%
With deflation ¿ 5 - 50 ? No, it must be a positive value, ¿1%?


So the problem with my example is...


Probably I didn't express it accurately, I was trying to explain why is wrong. But yes, the problems are only with increases in hoarding.


Thank you for the velocity numbers, really interesting to know that LETS is faster.
It may be irrelevant for the consumer, but it isn't for the financial market and the economy as a whole.


No, no. I want a fixed money supply. But the demurrage will make velocity less variable. I expect it to suppress the monetary cycles that I believe were already common without FRB and gold. FRB and the elastic supply are the wrong fixes, but they were trying to fix something, precisely the cycles.


I don't see how you can conclude that from this sentence.


Are you saying that would ask the same real interest rate for your freicoins that for your bitcoins?
That's a common dogma which comes from the time-preference theory of interest. But it is false, the basic interest is not independent from the type of money.

If the ratio between "hoarding" and spending stays the same, the (real) interest rate stays the same too, irrespective of how exactly the hoarding occurs. The nominal interest rate might change while the hoarding ratio of money shifts, but after the shift is over, it will go back to what it was. The shift must at least stop when people shift all the hoarding from other highly liquid goods to money.

I think you might be mistaking the first and second derivation. It is the second derivation that causes macroeconomic changes, not the first one.

The stock turnover is just a business decision like any other. I used similar numbers that I recall from textbooks during my studies, stock being 1/6th of annual sales. But I admit that might not be reflective of all businesses, my wife told me the company where she works has a stock 6 times the annual sales.

If this was a real economy, then obviously the interest rate of the deflationary currency would be lower, reflecting the business profitability. The business profitability determines the interest rate, because that's when there's a balance between supply and demand.

By the way I wasn't using "stable prices", I compared a "deflationary" (50%) and an "inflationary" (3%) currency.

I wouldn't have understood the issue before either, even though Krupa, deSoto and others described the theory. Only after doing my simulation I understood it. While you are correct that in a scenario with a falling price level the nominal profit is lower, but the real market value of the resulting capital is higher. Absent taxation under legal tender laws (and the business cycle), the interest rate would be expected to reflect that so that the decision for a loan would be indifferent to the currency, but with the combination of those two, I think it would penalise loans in the appreciating currency if it wasn't legal tender.

Again, I believe you are mistaking first and second degree derivations. If the price level changes predictably (e.g. second degree derivation is zero), then there is no shift, i.e. the equilibrium stays the same.

You can define it, that's true, but velocity is not what influences the decisions of people.

Furthermore Bitcoin has a velocity far below normal money. Based on Cumulative Bitcoin Days Destroyed, on average a Bitcoin was spent about 0.8 times, and that does not even adjust for certain forex operations that occur outside of exchanges, and intermediate production stages. I vaguely recall from papers I read that "normal" money has a velocity of between 1-2, while some of the LETS systems have even 40 or 60. Do you see any problems with obtaining Bitcoins, shortages or other signs that there is "not enough of them"? No. Because the price adjusts quickly and there result is a reflection of the consumer demand. There's no problem here.

Furthermore, since June last year, the CBDD-based velocity has been falling, with a small exception of a period of a couple of weeks in November, and a couple of anomalies randomly occurring and lasting a couple of days. Yet between June and November, the price was falling, and since then it's been growing. There were no supply side shocks. So what happened? Demand side changed, and price reflected it.

For the consumer, velocity is irrelevant, he has no way of making a relationship to that concept.

I agree that decisions should be based on connections between real products. But that does not mean that all businesses should survive. An economy where everything is booming is not necessarily a healthy economy. On the contrary, changes in the money supply alter the ratios between the prices of goods, and distort the price of capital, causing wealth increasing projects to appear unprofitable, and vice versa, wealth decreasing projects profitable.

You're basically arguing for a perpetual boom. But that's not possible, it requires an exponentially expanding money supply. Eventually, it will turn to bust. For example, some sudden event might trigger the reverse, or the capital would run out (and people start starving) or the production costs of money would fall below their market price.

I can only repeat that you're confusing first and second level derivations.

In the absence of taxes and legal tender laws, the decision would be currency-indifferent, it would equilibrate at the same real interest rate.

It's even more specific than that. It happens during unpredictable deflation, for example like the one we're experiencing during a credit contraction.

But it's not like the falling price level of Bitcoin would suddenly appear out of nowhere, without anybody expecting it. Unlike the Spanish Inquisition, an appreciating Bitcoin is expected.

The hoarding rises the interest rate (because is not part on the supply of savings in the financial market) and also makes prices drop.
The more money is hoarded, the less money is left for exchange.


Your merchant must have a small stock to not go bankrupt with 50% deflation. The bigger his stock, the more he losses daily due to the falling prices. And your merchants are not using borrowed money. What interest rate do you use for the stable prices case and what rate for the 50% deflation rate?
What's wrong with my bakery example?


It is a lack of demand caused by money that doesn't move. By hoarding you cause a lack in demand. You gave something but refuse to take something from the supply as compensation, there's lots of wares waiting for you in the market but you make the wares wait and rust. Unemployment is just labor (another ware) perishing in the market. You can define velocity very accurately. I don't get your point about it being an abstract concept. What changes that?


Deflation reinforces itself until it disappears. Changes in demand should be from certain products to other products. Not from certain real products to money, that is, to nothing real. If demand changes from existing to not existing, that lack of demand hurts the economy. If the demand changes from one place to another, it only makes the economy change responding to the new wants as you describe.


If you don't accept that with deflation (without demurrage) there will be less trade and businesses will make few sales paid for in the deflating currency, my question is not that relevant. At least I think you can agree with me that borrowers would prefer a non-deflating currency for their loans, right? Investment can still happen in other currencies giving them a competitive advantage over the deflating money, contributing to the disappearance of that deflation.
The point still is that with a free monetary market deflation is not really dangerous for the economy as a whole. That happens with monopoly money deflation.

Assuming the proportion of your income that you hoard is unchanged, absent transaction costs, the decision on what instrument to use for hoarding is irrelevant from aggregate point of view, as logically that which you do not hoard you need to spend and vice versa.

This is simply wrong. For my paper on Bitcoin economics (to be published soon), I did a simulation of business plan profitability in a falling price level, and even at 50% price deflation (i.e. halving of prices within a year) the simulated merchant was still profitable. While he only had a 0.11% RoI, he obviously had more than double the capital at the end of the year. And this is with legal tender laws being a different currency and after taxation. The other merchant which was using legal trender for trades had higher nominal RoI, but less capital at the end of the year. They both were using the same markup (i.e. selling and buying at the same market price).

As one of the papers I mentioned earlier explains (the one at mises.cz by Krupa), the point is that a businessman's income needs to be higher than his costs. As long as he predicts the price development correctly, he can make a profit irrespective of which direction the prices go.

I disagree again. Velocity is just an abstract concept, from a point of view of an individual, it is unobservable. Either an individual has enough money or doesn't. The "shortage of money" I was referring to is simply a temporary imbalance between demand and supply.

But if the money supply is inelastic, than the only thing that can cause this are changes in demand. If this has a detrimental effect on some businesses, that's simply an accurate response to the demand of the consumers. It's what the customer's want. That's the purpose of all human action, to satisfy consumption.

I think it is possible that disruptions can increase acceptance of other currencies. I noticed, for example, that various alternative systems, like the Wörgl Schilling, the WIR, the Greek TEM and so on seem to popup during economic crises. However, since I tend towards the Austrian explanation about the sources of crises (elastic money supply), I am not sure this would be the case in a system with an inelastic supply.

I'm mean specifically hoarding the medium of exchange. Hoarding other liquid assets or canned food doesn't hurt the economy in any way.
This kind of price deflation (and credit/debt deflation too, just excluding "growth deflation") hurts the economy because it hurts merchants, investors (well any borrower in general) and destroys the credit/debt, thus destroying the financial market. It destroys businesses that would be profitable otherwise and that springs unemployment no matter how predictable the deflationary bust is. Give me a business plan that takes into accounts for example, 20% predictable price deflation.


It was you who bring the term "shortage of money", not me. That's kind of Keynesian. It's not about quantity, what's important is velocity.
I've agreed that runaway deflation (in abscence of intervention) won't take long to disappear, but that doesn't make it less destructive.
A nuclear explosion is fast too.


So do you agree that businesses would accept other monies to keep on selling?
I'm not against future markets but they're not the panacea. Will they make hyperinflation less harmful too?


Then we must first discuss what is the ideal level of hoarding, because I think that level is zero.
I get your point that deflating money is more attractive for everyone, not just the hoarders, and that makes people more willing give up more real assets for that money but that only accelerates the process. The "hot potato" during deflation are real assets and everybody runs into money.
Savers benefit society when they lend their money for productive enterprises, not just by saving. If you hoard canned food or oil, you're not harming society, you're buying an insurance and you're paying for it in concept of storage expenses. But you cannot lock the medium of exchange because it is harmful and because the medium of exchange is a common.
You have provided something to society and you deserve to get something back, maybe in the future, but you can't lock the medium of exchange. If you want to be compensated in the future lend your savings.
What Keynesians get wrong is that they don't care about where is the demand that they're missing. "There's missing demand, let's just introduce more". But public spending doesn't becomes more legitimized because where on an economic crisis. It does that matter where  that demand comes from (as austrians show us) and it must be from the hoarders. Is the hoarders demand what is missing. You can't just substitute it with newly printed money or public indebtedness.
Offer is composed by all the wares offered in the market. With demurrage money would become materialized demand, which is what it should be.

The problem is that you would get much less hoarding than is ideal, leading to wasteful consumption. A currency with no demurrage provides as close to the optimal balance of saving and spending as we are likely to be smart enough to manage to get. Every factor that increases the value of the currency to the hoarder also increases the value of the currency to those who would try to ply the currency from the hands of the hoarder -- if the currency is worth more, the price will just be lower, but the trade will happen just the same. However, demurrage disrupts this balance by injecting a "hot potato" factor, leading to inefficient spending and discouraging saving.

I humbly disagree. If people want to hoard, they can simply use other liquid assets for this purpose. These assets do not need to be usable as a payment method. Why should a decrease of price level turn people into misers?

What causes disturbances are unpredictable changes, e.g. changes in the changes of the price level (i.e. second level derivative of price). That might, for example, shift the attention of hoarders between money and other liquid assets and disturb some businesses. But eventually, people's expectation of price level changes and the current price of money will equilibrate. Bitcoin is highly resistant to supply side shocks, so mostly only demand side changes affect the price.

I humbly disagree as well. A disruption might cause this when the prices take a while to adapt, and a shortage of money appears. But unless the prices are regulated, this wouldn't take long. After the equilibration, the mismatch between demand and supply decrease, and there will be again less reason for competing currencies.

Here however I can agree. An alternative currency can smoothe the equilibration of the prices, or speed it up. But it's not inevitable. Derivative markets (short selling, margin trading) can have the same effect.