Topic: Deflation and Bitcoin, the last word on this forum - page 19. (Read 135976 times)

vrotaru gave some interesting thoughts!

I think hoarding(or saving in general) do not necessary translate into a future spending, they could be spent at many years later as pension, or not at all (I could die with 1 billion saving, giving I have enjoyed my life fully). There are always huge amount of saving which never get spent, but loaned out by banks to business as an investment

When it comes to investment, every kind of investment is a risk taking game, it is impossible to say a certain investment will be successful or not, and there is no sure thing like "profitable investment", even if you buy government bonds, you risk a default

I see. And I realise I must correct myself. Hoarding doesn't cause deflation, an increase in the hoarded money pool does. A decrease causes inflation.
The more constant that pool is, the more stable V and P.

There should be no difference between investors that rely on loans and investors that doesn't. The self-financing entrepeneurs should think that they're lending to themselves. All borrowers and money holders investors are competing in the same market, the money holder must account the costs of capital-money even if he doesn't have to borrow it.
Yes deflation can lower interest rates (negative inflation premium) but it cannot lower the interest to zero.
A more extremist example:
Stable prices, 5% interest rates and capital yields. The entrepreneur should get at least a 5% profit/yield in his investment.
10% deflation, interest rates (and therefore minimum capital yields) drop to 0.1%, the entrepreneur should get a 10.1% profit yield in his investment.
So effectively the minimum capital yields become the interest rate + deflation instead of only the interest rate.
From my point of view, to meet demand, the minimum yield of the means of production should be 0. When that yield is reached, as much capital of the same type (which competes with itself) has been created. Other profits tend to zero by competition, capital yields don't. But this is another topic.

My point that an increase in the hoarding pool doesn't lead necessarily to more investments. You assume that someone will buy the bricks, but they can stay in the stock of the producer. Or the deflation can force him to sell them at a lost, which will cause is bankrupt. Wasn't his business profitable? It was without deflation, but not with it.

This may be the central point of our disagreements. You say that money can't yield on its own, it needs profitable investments.
But money performs services on its own and "it can charge" for those services.
Money is by definition the more liquid asset. That represents an insurance against uncertainty that the money holder gets for free. The rest of the money users are paying indirectly for that insurance.
Also, money is needed for trade, even when there's no profitable potential investments nor growth. And "the wares pay" for that reallocating service. The basic interest is included in the final selling price of every product. The merchant not only collects his wage from the final selling price, but also the interest on the liquidity he needs in his operations. Again, if the merchant have the money, it should consider that he's lending to himself, because he's competing with other merchants that operate with borrowed money.
In this sense, capital-money is the only authentic capital (here I define capital as something that has sustained yields rather than means of production) and the interest rate is what protect the means of production (that need financing to come into existence, not simple nets) yields. Capital that won't yield as much as money does is simply not financed, and that prevents further competition within a certain type of capital.


In fact there's a source of major disagreement that you missed there:

Well, maybe I could have said it better. The only reason to save money is for spending it at later date. So for every 10 (20) hoarders who do not spend right now, there's an ex-hoarder who just now spending, spending, spending.  Then he will start "hoarding" again, and someone else will spend. That is what I had in mind when speaking about a "constant rate of hoarding".


And the problem is? While it may be only half of the old price but every coin can buy now twice as much.


I'd say you should qualify your "Deflation is bad". Namely, deflation is bad for entrepreneurs/investors who heavily rely on loans,  and especially those cannot learn neither from thought experiments nor experience. Also if everybody expects price deflation even a lower percent become more attractive for lenders. Especially if those are long-time savers.

Call me an optimist, but I really do think that people will learn. If a project is worth starting purely from investor savings then there is a loan percent at which it worth starting from loans. And only foolish investors... but that's obvious.


Now, that was funny. No, that's not investment. But if you sell the bricks and keep the money, the price of bricks will go down and investors needing bricks will get them cheaper and this way you'll have more investments.


1) And there's no need for it. Saving (as in "hoarding") can pull out of circulation a certain amount of money, but it will not pull out of circulation the produced goods. The one which were already sold by savers.
2) No money-capital doesn't produce anything. But... Money hold as capital (uninvested), lowers the prices of goods for money which is invested and makes the investment money more productive.

Enough, I think. The other points are either minor disagreements, or, IMHO, will add little.

I don't get it. If someone hoards a fixed percentage of his income, the amount of money in circulation is getting smaller and smaller.

No. I mean the price of the capital is being reduced and also its nominal yields (assuming the percentual capital yield remains constant).

Money-capital. The money yield (interest) doesn't procude anything real.

Yes, in my example, the baker will buy his supplies cheaper and could also maintain his standart of living with a lower wage, but the interest he's paying for the loan stays the same. Also, if for years he only pays the interest and then sells his capital to pay the principal of the loan, his nominally devalued bakery won't pay the principal of the loan.

So if I hoard 200,000 bricks in my house that's going to investment?
You can save without investing. Your production - consumption = investment formula is wrong.
I would say prodction - consumption = potential investment.

1) Not all what is saved is invested.
2) Deflation makes money-capital more desirable in relation to real capital, but money-capital doesn't produce anything if it isn't invested/lent.

Sorry, I don't know the myth. But what I mean is that how money is used affects everyone and not only its current holder. And money is "created" by the whole society. No one can "create" money if others are not willing to accept it. The total money belongs in some sense to the whole society and it can decide what rules apply to it.

Agreed.

The main problem I see with hoarding is not the deflation it causes. The posibility of hoarding for free, that free insurance (a service that the rest of society provides) is what causes interest. Inflation doesn't helps because:

1) Eventually the loss will be factored in loans in form of inflation premium, because the lender can just acquire real capital to avoid that loss.
2) It distorts our previous formula: it creates the illusion that we've saved more than we actually had.

What makes you think that only that kind of debt contraction is catastrophic or can just cause deflation?

Also, What you propose to do against fractional reserve? I propose to deregulate it. If the reserve is something that banks must compete on, the fraction will be probably greater than 10%. Still, is going to be fractional reserve. Do you think it should be prohibited?
That doesn't sound like advocating for freedom.

Not exactly. An increase in hoarding, ceteris paribus, will lead to price deflation. But there's absolute no reason why a constant amount of hoarding (as, say, percentage of income) should lead to price deflation, since the amount of money in circulation stays the same.


I must confess, that i'm slightly puzzled. What does that exactly mean. Decreased physical output of real capital? Hardly. (And what is the *un-real* capital, for that matter). A decreased return on investment? Well, I don't know. The monetary return can be lower but the costs of operating and replacing the capital will also be lower. (As for past costs those are always sunken costs.)


Let me put it that way. There is a current consumption fund and there is a investment fund which is equal to total production - current consumption fund. Anything which increases the investment fund encourages investments. And if you think that price deflation encourages savings and think that investments are good thing you should hail price deflation. Because it increases the investment fund. And that's, what investment's are made from.


No, I no do not see money as a common. As a tool which allows us to coordinate our activites and extend cooperation between people, yes, as something belonging to some kind of mythical Geia, no. The mythical Geia, is, well, mythical, and for exactly that reason she cannot own anything.

I can accept the "society benifits more" as a shortcut for most people want (will benefit from) more goods, and I agree that the way to having more goods is to have more (successful) investments. But there's absolutely no harm in some people just "hoarding".  And I've already explained why.

Only under a fractional reserve system is the debt contraction ever 'catastrophic' for the economy at large.  Your confusing a symtom with the cause.

A constant price deflation rate, say 5% annual price deflation. The monetary base can be stable.

Good point, but still the principal (and interest) of your loan is nominally fixed and the price of real capitals (and their yields) are falling nominally.


Not necessarily. For example, when interest rates are lowered through monetary inflation, it makes by new printed money competing with real savings. That makes the illusion that we have more savings that we actually have. More investments will be made, but many of them won't account the future price inflation caused by the monetary inflation and many of those investments will fail.

See above. I'm going to repeat my example, if you think it is wrong, please point out the assumptions or reasoning that you think it's false or incorrect.



Oversimplifying it: Interest makes the total level of debts grow exponentially. When the growth in debt is no longer possible, deflation makes the total level of debts decrease in a catastrophic manner.


Sorry I use to clarify and say monetary xflation when it is the monetary base what changes and price inflation when the prices do, but sometimes I forget to put the "price" in front of xflation.

I really don't know what you're talking about. It seemed to me that you considered falling prices to be a bad thing.

What is "constant deflation"? Wouldn't that mean that eventually the money supply would reach zero, and the purchasing power would be infinite? Do you think that this is realistic? As the purchasing power of money increases, the incentive to spend it increases, regardless of what you think it will be worth tomorrow.


Do more investments equal better investments?


If you build it tomorrow, you won't make any money today. You're ignoring an entire set of incentives.


I don't understand why you think demurrage will help avoid the business cycle. Can you explain this simply?

I think it would make your posts infinitely clearer if you only referred to the shrinking of the money supply as deflation, and the falling of prices as a result of economic growth with a stable money supply as falling prices, or something of the sort.

You're talking about one-time deflation. Thanks to an technological advance I produce it cheaper and I sell it cheaper. I hoard a million dollars and prices get cheaper. But I'm talking about a constant deflation rate, that's what is dangerous for the financial market and discourages investments. You can say that deflation only caused by growth and hoarding cannot be sustained as an annual rate like the one in my example.
What about cycles deflation? Deflation produced by credit/debt shrinking? Credit acts like part of M, interest expands debt and higher part of the total production goes to pay interest with time. When that cannot be sustained any longer, the debts start to be liquidated, effectively reducing M. That creates deflation that makes liquidity even better and investments (and loans from the perspective of borrowers) worse, accelerating the liquidation process during the depression phase of the cycle.

The assumption in my example is a constant deflation rate, and logic tells us that discourages investments: more investments would be made with stable prices.
Yes, the bakery will be cheaper thanks to deflation and that's what makes me prefer to build it in the future rather than today. What's bad is not low prices but falling prices. How that fact affects the calculations of investors and borrowers.

Do you think economic cycles are a problem?
I think they are, and I want to attack their cause (basic interest) instead of their symptom/effect (deflation). I don't want monetary inflation to avoid price deflation, I want demurrage to avoid cycles and reduce the undesirable effects of deflation.

Wealth means nothing, unless you can acquire more of the goods and services you need and want. So, we have higher standards of living because more capital allows lower prices.

Besides, as explained by vrotaru, lower prices means that all businesses can acquire more capital cheaply.

Deflation makes non monetary capital less attractive, because its price (and nominal yield) is dropping. See my bakery example.
Real capital accumulation is the source of the wealth. We're wealthier than people in earlier times because we have more capital, more investments have been made.
I think that if there were enough (to meet demand) of certain type capital, the competition between the capitals of the same type would make their yields zero.
If there's sustained profits of any type a competitor can enter the market to get that profit, and that makes profit go to zero. But capital yields are a different type of profit that never goes to zero, they can only fall down to the basic interest, money-capital won't allow the construction of factories that profit less than money itself from liquidity.

Sorry, I also hoard bitcoins and namecoins.

I agree with what you say about gold, but I don't agree with the analogy to roads. Occupying a section of road does not increase its value to others.

Yes, prices dropping means economic progress means the real living standards of all are increasing. It's the sort of thing that will eliminate poverty, eventually. I think you need to examine your assumptions. For instance, HOW do falling prices discourage investing? If that is true, why is that a bad thing? Why do you feel that you know the proper amount of investment, but everyone else doesn't?

so so you're trolling a bit with the bitcoin hoarding... hmm

What I mean is that whatever money is, it's the whole community of users who decide what money is (it can be imposed by a state). If the world decides that, for example, gold is not money anymore (not the case for now) then gold can lose all its monetary value overnight.
You can't be in the same exact place of a road at the same time, but a road can still be a common.

When you hoard money, you're lowering prices for all, and that discourages investing. Discouraging real capital accumulation doesn't sound good to me. I still don't know what do you think is wrong with my bakery example. Of course, if you don't see any problem with prices dropping consistently, it's harder to see something wrong with hoarding. I hoard euros and silver myself, so I don't see hoarding as immoral: it's just a consequence of the structure of capital-money.

Did you read/understand what he wrote? When you invest, you're investing in one company. When you hoard money, you're lowering prices for all. Sounds pretty good to me.

Money is a common... what? I assume you mean a "common good". Common goods are both rivalrous and non-excludable.

"A rival (subtractable) good is a good whose consumption by one consumer prevents simultaneous consumption by other consumers."

That does not describe money. There is not a limited quantity of money. If you think there is, then you don't know what money is.

I understand that, hoarding causes deflation. But as said in my example, deflation devalues real capital and that doesn't encourage investments.
The thing you fail to see is that money is a common. You're holding it now, but it belongs to the whole society because it is an abstract good, an agreement. The money you hold could be worth nothing overnight if society decides so.
So the way people saves should be the way that the society benefits more, and that's not hoarding.

It is still savings, and it still is making investments possible (and sound) however in a slightly more roundabout way. The stuff you do not consume remains available for investors as a fund from each to "draw" resources for their investment projects.

And the way those resources are available to them is through lower prices of goods. Since you are not spending, your (honestly hoarded) money is not entering the marketplace and thus lowers the price of your those goods you choose not to consume. As compared with the alternative of you spending all/most of your money.

Let me put it that way. If you are investing (in a traditional way) you are putting the resources you did not consume at the disposal of one investor. If you are just saving, you are putting the resources you did not consume at the disposal of all investors as a whole.

What should you do? Whatever you want, dude.

I suppose that our disagreement is more of a matter of degree.  I don't contest that deflation can be a destructive force.  I do think that a monetary system that tends towards deflation (gold standard, Bitcoin) and is naturally moderated is preferable to one that tends towards inflation (fractional reserve fiat) and is actively moderated.  The reason that it's preferable is because the consequences of the business cycle are more muted in a deflationary monetary model.  Thus, deflation is not "good" so much as it's better than the alternative, generally speaking.


Although praxeology attempts to use reason and logic, it's still a social science.  There are no such things as 'undeniable truths' in any social science.  And the greatest folly of most self-described economists, both in history and modern, is the failure to recognize that economics is a social science.  Otherwise, mathmatical models really could be developed that consistantly predict economic events.  People have been trying to do this for decades in some form or another, but none are particularly good.  The best predictive model ever devised is the predictive market, such as Intrade, that leverages the collective wisdom of society itself in an organized fashion.  Even the best prophet among us isn't as good as all of us.


Again, I'm not making such a claim.  I'm been arguing that it's better than the alternative.


Again, I have to say that you are correct, but not completely so.  Economics is a complex topic, and any such simplification of causes such as you present are bound to leave out or gloss over non-trivial contributing factors.  But it doesn't matter what the root causes are, if one accepts that any market is 'unstable' and always seeking it's equalibrium.  Once you accept that, then it becomes obvious that the business cycle, as the agragate view of that unstablility, is inevitable.  If the cycle is inevitable, then the best overall solution is to use a monetary system that is self-regulating and generally less likely to reach extremes.  The only monetary systems that fit that description are commodity standards and Bitcoin.


In what way do you consider them flawed?