Topic: Deflation and Bitcoin, the last word on this forum - page 18. (Read 135972 times)

First of all, sorry for taking so long to respond you.
Also sorry to all the people who can't unsuscribe to this thread, but that's not my fault.


Capital yields tend to equal the real interest rate. Just like production costs tend to equal prices. This is central to most of my arguments.
Anyway, I'm glad you admit deflation can be a problem at least in this case.
What I want to prove is that deflation can be a problem, deny the "deflation is not bad under any circumstances" and of course the "deflation is good" statements.
"Deflation is dangerous" is not a myth.
My goal is not to prove that an inelastic money supply is bad. In fact, I advocate a fixed supply for freicoin too.


I agree that government interference in money is the main problem we have today. I just want to point out that gold had other problems too (of course not as bad).
For some people the only problem with gold is that it cannot be sent through the internet.
I haven't read Greco, do you have a link to a book? I haven't read E.C. Riegel neither but I feel I'm going to like it a lot.
I came from Gesell and found mutual credit systems very interesting.


As said, what I'm taking as true is that capital yields tend to equal real interest rates.
Tell me if you disagree on this because it is very important point.


I been thinking a lot about it and I think I now understand what you mean.
I say nominal interest = real interest - price inflation
What I think you're saying is that monetary inflation pushes down interest rates (both nominal and real).
I say it depends. If inflation is created like today (money is lend into existence) then yes.
But if money is spend into existence (say by the government or by miners) the effect is in fact the opposite.
Lenders will want to get the average capital yields plus inflation.
Anyway, the difference here is we're talking about price and monetary inflation.
 

In perfect competition, they tend to be the same thing. My point is that the minimum profitable capital yield rises because of deflation, less real investments will be made.


Here we reach a point of major disagreement because of our different theories on interest.
According to the free-money theory of interest, the real interest rate being over zero in perfect competition is a proof that all demands aren't being satisfied and that some resources are being under-used.
http://www.community-exchange.org/docs/Gesell/en/neo/part5/4.htm


I know the theory, I just don't accept it as true.
Not sure, but I would say that Boehm-Bawerk would classify it under the "abstinence theories" category.

Do you know any Austrian book that criticizes Gesell's theory of interest?
I'm very interested in such a writing.

So so many people in this thread misunderstand what Deflationary means. How can we have a meaningful discussion without a common understanding of what it is?

First, we should all understand that Inflation is an increase in the money supply. The government prints more fiat to spend on its programs. This increase in the circulation of currency devalues everyone else's holding in the currency since there is simply more of them.

The great trick being played on us by all the central banks of the world is not that goods and services get more expensive - but that their shitty fiat currency decreases in value against those goods and services due to their wreckless (and greedy) inflation.

Give that Inflation is the increase in the number of units of a currency, it follows that Deflation is the decrease in the number of units of currency. This results in the currency being worth more against products and services over a period of time.

Before Bitcoin - there has never been a truly deflationary currency. Not even Gold. Gold inflates and deflates all the time due to manufacturing requirements and new mines. Hell, we even created gold in nuclear reactors already.

Bitcoin is currently an inflationary currency  - inflating itself into existence. But it is already being deflated - Remind yourself of the polish exchange that lost 17k BTC. Those Bitcoins, and others already lost to forgotten passwords, failed hard drives with no backup, etc are gone forever, computationally impossible to recover and never to be circulated again. Once the Bitcoin inflation period gets close to the end, we will have already begun an ever increasing deflationary period. We will never quite reach our 21 million mark and ever lose more and more due to people's unfortunate acts of negligence. It's conceivable that only 20 million, or perhaps 19 million bitcoins will ever be in circulation (accessible) before the mining process reaches 0 BTC reward. It just depends on how much bad luck or negligence people experience.

One thing is true - Bitcoin is the world's FIRST truly deflationary currency and it is an social experiment I'm very excited to have the opportunity to participate in - although I might not ever live long enough to see how it turns out.

Oh, that's a good one. Don't know the answer to that either.

I have to because I subscribed 6 months ago. CHRIST HOW DO YOU UNSUBSCRIBE TO THREADS..

Assuming anybody actually reads these things.

This kind of information belongs into a wiki or a FAQ if you ask me..

So people stop creating new ones, messing up the forum.

If you read the first post BTW, you wouldn't ask such questions.

Why is this stupid tread even pinned?

Lol. I keep thinking the same thing every time I see the thread.

It's like at a funeral, when the priest just doesn't want to finish. Get him below ground already and let's eat!

The nominal interest rate already reflects inflation.

People value having things earlier more than having them in future. This is called time preference. If it was not true, people would not tend to consume, i.e. they would be misers. If money exists, time preference results in the formation of the interest rate.

The productivity increase by your project which needs to be > 8% in real terms. But that's not the same as 8% nominal return.

But this does not necessarily mean it's bad. Investments made below the real interest rate are a waste of resources, even if the interest rate is positive.

Capital yields is not the real rate of interest, it is merely a factor influencing it. But apart from that, I get your point, yes, this would be a problem.

I don't necessarily claim that the connection is linear, there are other factors influencing it. I'm talking about real interest rate rather than capital yield.

The reason hoarding pushes prices up is that the amount of available money drops, not because the productivity increases. This is merely another factor influencing the outcome.

My goal is not to prove that a pure debt-based system like Ripple or LETS is bad (in fact, after reading Greco, your posts and thinking about it, I'm developing some curiosity for them). My goal is merely to show that inelastic money supply / deflationary economy is not, per se, a problem. The main problem is government interference in money.

This is by far the longest last word I've ever seen.

To avoid misunderstandings I'll first define the concepts I'm using more formally.
When I say real interest I mean basic interest + risk premium + inflation.
When I say nominal interest I just mean interest + risk premium.
The risk premium would be the "insurance fee" you're referring to. But even with stable prices and a prefect safe investment you wouldn't lend your money at zero interest, because you would lose the capacity of using it in the meantime. Having that money in your bed is an insurance in certain sense. The basic interest is also referred to as "liquidity premium". And the austrian explanation for the basic interest is, as far as I can tell, the so called "time preference".
On the other hand, according to Gesell comes from the quality of money as exchange facilitator combined with its typical quality of being non perishable and it is also paid several times (from the act of trade itself and from the funding of the capital that produced the ware) in the price of every product.

You're saying that in real life, the risk premium will always be positive and that's pretty reasonable.
But that doesn't imply that deflation can't make the nominal interest lower as I'm proposing.
Just like inflation pushes the nominal interest up (by lowering the real interest), deflation can push nominal interests down.
Although, as I think we all agree, there's some limits, and a zero nominal interest rate is not possible with the variables we're considering.

I think, that deflation never reduces the nominal interest rate, because you don't get the interest rate for investing the money, you are getting them for taking the risk to loose it.
With or without deflation, the risk exists.
In a economy with deflation, keeping your money under your bed is really cool. If an investor asks you for it, it's riskier than keeping it warm and save.
And you know, that there is a risk, for not getting back. The 5% are the "insurance"-fee. So the rates are always summing up.

I would say that the return has to big at least as big as the nominal interest + deflation. Greater than the real interest rate.
So I would replace the AND for PLUS.


I think we can agree that we don't like these market manipulations.


This is the main source of my disagreements with Austrians. According to Gesell, interest is not caused by real capital returns but the other way around.
"Capital yields tend to equal interest rates" instead of "the interest rates tend to equal capital yields".
Just like "production costs tend to equal market prices" instead of "market prices tend to equal production costs".
Interest would be a purely monetary phenomenon and would explain the almost constant interest rates (around 4%, 5%) of pre-Keynes economic history.


Although we disagree in our theory of interest, I get this point.


You're assuming the AND in the previous point instead of a PLUS.
Let's explain this with an example.
Say nominal interest rates are at 5% and deflation at 3%.
When you're considering if you want to lend your 10,000 or invest them yourself, you will want your investment to have an 8% return, just as you would have by lending.
Therefore, even with a deflation under the interest rates, less investments would take place than would be made with stable prices.
Here you could say:
"With stable prices, nothing else changing, the interest rates should be at 8% instead of 5%, and therefore the result is the same. Because the real interest rates and not the nominal interest rates are what equal the average capital yields".
Here you're assuming that the deflation can always be factored in the real interest.
Say we have 8% deflation and 5% capital yields. The nominal interest rate would need to be -3% (which is just impossible with most monetary systems).

Mhmmm, I think this is why you're saying that deflation won't be a problem if it's under the capital yields. You expect the nominal interest rate to be reduced linearly with interest with the only lower limit of 0% nominal interest.
But I'm not sure about it. I could even accept that a 1% deflation and 5% capital yields would "produce" a 4% nominal interest instead of moving the minimum profitable capital yield to 6%.
But will 4.5% deflation and 5% capital yields produce a 0.5% nominal rates?
Not sure that relationship is really linear.
Take into account that not all the money must be necessarily spent or invested. It can be hoarded too and in fact deflation is an incentives that. And hoarding is supposed to rise interest rates and make prices drop.

I have been thinking about this for a while.

Entrepreneurs invest into projects as long as these two conditions are fulfilled:

• the project provides a higher nominal return than the rate of interest that occurs at that time on the market
• the project provides a higher real rate of return than the rate of deflation

Of course, there is an auxiliary condition: the rate of inflation/deflation must be known to the market participants, and current neo-Keynesian system is based on the assumption that the central bank can trick people into believing the inflation is lower than it actually is. With Bitcoin, however, this is not a problem, since the money supply is highly predictable.

Some economists argue that under deflation, this results in a suboptimal growth, because not all projects that are possible are undertaken. This however neglects to take into consideration what interest rate is: it's a reflection of the time preference of the market participants. If money is loaned below this rate, it means that scarce resources are used inefficiently, in a way that does not satisfy the needs of consumers.

While this does not necessarily mean that a deflationary currency is optimal, it means that deflation does not apriori pose a problem, as long as it's lower than the free market interest rate. If this condition is not met, admittedly, I can see how it would cause a problem, because some projects which would satisfy the time preference of consumers would not be undertaken.

Interesting. Specially the datapoint with more than 10% deflation and 5% growth.
It doesn't makes much sense to me, I would say something special was happening in that country.
Still waiting for someone to debunk my reasoning here with logic rather than data. Explaining me what's wrong with my example showing that deflation discourages real capital accumulation (real investments).
Interesting document nonetheless.

There is no link between deflation and poor economic conditions. Here is a study of the data for 17 countries over a period of more than a 100 years which concluded: "The data suggest that deflation is not closely related to depression. A broad historical look finds
many more periods of deflation with reasonable growth than with depression and many more periods
of depression with inflation than with deflation. Overall, the data show virtually no link between
deflation and depression."
http://www.minneapolisfed.org/research/sr/sr331.pdf

Let me call it then, demand for saving, because what it is demanded here is the quality of storage of value, not the medium of exchange one.
An increase in the demand for saving causes price deflation (always assuming a constant monetary base).


I suppose we should separate investments that need money from investments that don't. You can build your own net today and it would be a means of production, but nothing warranties a capital yield for it, because money is not needed to build another one. Anyone with or without money can build one, so by competition with other nets, the profit tends to zero. The cost of production of the net tends to equal the utility extracted from it in the fishing market.


Ok, with every loan there's an investment (let's exclude consumption loans for simplicity). And there's a part of the yield of the investment that goes to the investor, let's call it profit; a part that goes to the lender, let's call it basic interest and a part that goes to the insurance company that warranties the loan for the lender, let's call it risk premium. For our analisys, we don't care if the lender takes the risk to take the risk premium himself or if the investor and the lender are the same person and therefore takes all the yield of the investment.

Well, you're assuming that the deflation only comes from growth, but as we've seen the deflation can also come from an increase in the demand for savings.
Deflation comes also during the liquidation phase of economic cycles. A claim that you will probably harder to believe is that basic interest as defined above is the cause of economic cycles. But you're asking me to prove that less profitable investments will be made with deflation.
We must agree that the primary force that drives investments is profit and not the basic interest.  
Then in my bakery example I show how with each iteration, deflation reduces the profit of the investor both nominally and in real terms, because the interest of the lender stays nominally stable and grows in real terms.
Also, the principal to be paid back stays fixed but the price of the real capital acquired by the investor shrinks, so if he consumed the profit, payed the interest and risk premium, and relays on selling the capital to repay the principal after the operation, his business becomes insolvent through deflation.
You can say: "The financial market will make the basic interest drop as less investors will be willing to borrow and the investors can refinance his loan". That's true. Deflation acts on gross interest as a negative inflation premium.
But there's a minimum basic interest that is over zero.
Here you can say "When the investor and the lender are the same person, a zero basic interest rate loan makes sense, because he can still make profit".
So I still must prove that money can always yield over zero, even with no investments.  

Yes, hoarding doesn't necessarily causes harm. But the possibility of hoarding disturbs the medium of exchange function of money.
Is not the hoarders the ones we have to blame. Is the agreement that the medium of exchange must also be a storage of value what is wrong.

Money can "profit" (not itself, the owner) from those services. But is not the market that chooses what money is, is an agreement between the market participants. That's why it doesn't have to be necessarily a commodity, it can be made out of paper or even bits.  

It is an externality. The first thing we must realize is that someone somewhere is paying the costs, there's a victim somewhere.
The first that will pay that cost is the borrower, in form of higher basic interest. It makes better to just hold the money than lending at zero interest.
If interests suddenly dropped 1%, the firsts to take it would be the investors through extra profits. They would compete for that 1% extra profit until the "gain" (the non-loss) would be transferred to the society in form of cheaper products.  
So the whole society is paying for that free privilege in form of higher prices. And the costs are payed not only through financial costs but also through capital yields.
The basic interest prevents the yields of capitals that really need financing from dropping below the basic interest itself. It limits competition between means of production of the same type.
For example, if the basic interest were lower, houses could yield less (in proportion of the costs of production of the house) and still get financed, making rents drop.  

Not for holding it. When you hold it, is like if you were spending it in the insurance to uncertainty that a pile of cash represents. To take the basic interest, you need to invest it (or lend it, letting other do the investment).
Another way of taking the basic interest is trading. That's what a merchant does. Even with no investments, merchants need liquidity that will pay for. Again, we don't care if in some cases the lender and the merchant are the same person.
He buys wares at a price and sells them at higher prices his wage and his costs of operation, which include the basic interest on the liquidity they need.
So the basic interest is extracted in first term from the wares.
The consumer also pays more here because of interest. If money wasn't a store of value, people would actually have more to save.
Most people pay more (indirectly) in concept of interest than what they receive from their savings. Even many of the people who doesn't have debts and have lent savings.

No, no. Don't get me wrong. Value is relative. What I'm assuming is that investors know the input before making the investment and selling the products. That's not always the case. But costs (including capital yields) tend to be lower or equal to selling prices by market forces.
Capital tend to yield at least as much as the basic interest, but that's not a universal law of nature and sometimes it doesn't. That's what bubbles are about. People overestimating the yields of the capitals in certain sector.
And there's supply and demand in the financial sector, but there's a minimum basic interest that lack of demand or excess of offer can't beat.


Let them save whatever they feel they need to save. Gold could act as a parallel "store of value agreement", but the saver would be more exposed to changes in the "demand for savings", because the value derived from the medium of exchange function won't be there anymore.
Yes, I prefer people saving anything but the medium of exchange.
If they want to be sure they can eat tomorrow, let them store food instead of outsourcing their storage needs for free.

Yes, the technical term for it is demand for money. A rather unfortunate one, since simple souls (and most of the economists) take it rather literally. As demand for nominal money, little peaces of paper with portraits of dead leaders or their electronic equivalents. It's a related topic, that's why I mention it here, but.. just mention. FTM.


Well, the world just doesn't work this way, and there's a difference between investors which rely on loans and those who do not. The loan market is an attribute of a rather developed and sophisticated economy and you can have (and there are) investments even without loans markets. Robinson Crusoe Examples to Rescue!

And when looking at the relation between investments and loans, I insist in treating the investment as the more fundamental.. eh... whatever. If you have an investment project and you think it will be profitable then there is also an opportunity for a loan. Rate negotiable, but greater than zero and lower than the expected rate of profit.

So, in order to prove (credible claim) that price deflation (in the conditions of stable money supply and increasing technological productivity) will kill the loan market you have to prove that such conditions will turn all investments projects into unprofitable one. Now.. are you accepting the challenge?


Business plans going bad? Happens all the time. People learn and try to be wiser next time. But, I have to say that you are saying here is slightly different from your original position (as I understood it). Namely that saving can lead to losses for the society as a whole, not that saving is inherently harmful.



Well, I guess that exactly for that "services of its own" that markets choose a commodity to serve as money, medium of exchange. Also it is  "it can charge" or "it can't charge" If the second that's part of the appeal for holding money.


OK, someone gets something for free. Relatively speaking. So much I get. How is this a big deal? Where's and who's the victim?


Market prices, market prices, market prices.. For goods and interest rates. Also there is no such thing as basic interest and hold money does not yield (monetary) interest.

Your theory of value seem to be a variant of cost theory of value where as a fixed cost into the price of every good enter the (a fixed?) interest rate on the price of loaned (own) capital. But that's backwards! First it is from the prices of goods that prices of inputs are inferred, and second interest is also a market price set by supply and demand.

Well that's about it. Also about that "free insurance" that you seem to hate so much. Like it or not, but there is a demand for safe, long term storage of value. And if money cannot server as such a storage people will start looking for substitutes.

Do you really think that it is better for people to save in paintings, old violins, even gold? Shotguns and canned beans?

Well, if it is loaned, it is invested and therefore spent. In terms of money circulation, it is the same.


I think you mean there's no secure investments. But that's why we should separate the risk premium from the basic interest. It is dificult to do it in real life but investors should at least try it and it is very useful for abstract discussions like ours.
If you could knew without a doubt the risk of each investment, you could calculate the risk premium, make an insurance to cover you and earn only the basic interest (and inflation premium) from your now really secure loan.
When you buy government bonds your only risk is not default but also monetary inflation that the government can create to avoid the default.