Topic: How come the bank failure destroy the wealth??? - page 2. (Read 8896 times)

Good example

Hundreds of years ago, Adam Smith tried to define the value of the goods by using amount of labor used to produce the goods in general, that theory has been replaced by supply and demand in later economics. But I still feel that an unbiased measure of value is needed. Up until now, the best measurement I can find is Energy - If a product include lots of energy or it is made by lots of energy, then it will have high value

But even this measurement is not static: Depends upon the technology level of the human, same energy can be very valuable or not valuable at all. Imagine that you have found a stone that contains billions watts of power but the technology in the near future still are not able to utilize that power, then it will worth nothing

Keynes said from long term point of view we are all dead, maybe that is he's view: Only those happened when you are alive are valuable, then it is almost impossible to find an unbiased measure of value

I'll quote Alan Watts who back in the 1970s pointed out how people often confuse measure with what is being measured:

I wouldn't say that wealth and value are the same thing.
Value is very relative and wealth also a bit relative but not that much.
I'll try to explain it with an example similar to yours.
Let's say we have city A with 50 people and 7 three-room houses and another one with also city B with 50 people and 25 four-room houses.
A house in city B can be considered more wealth than a house in city A, because it has an extra room.
But a house in city A is certainly more valuable due to the city's real state scarcity.
As an investment, the house in A is probably a better choice because its yield is higher.

In this sense, wealth is even harder to define than value.

Good view, I think the word "value" seems play a vital role here.

I spent lots of resources to dig out a stone that no one seems like, my labor has just been wasted, this means wealth are destroyed. But if a person with the right knowledge can identify the stone as a diamond, then suddenly I have made a fortune, wealth are created

So, is wealth dependent on others valuation?

In a desert, a man desperately looking for water, how much a bottle of water value to him, compared with the same bottle of water in the city? Can we say that scarcity create wealth and abundance destroy wealth?

No, wealth was not destroyed during the crisis. It is is during the boom that wealth is destroyed.

When you build a house that no one is going to value enough to live in you are destroying wealth. So it is the distorted market signals during the booms that make people allocated wealth to wastefull use that is the destruction. The crisis is just the correction when people start to realise they destroyed capital...

Some progress:

With only 2 people, the speed of wealth accumulation can not be fast: A could both capture fish and pick fruits as much as possible to free B from the food gathering work, but B will still consume only one fish and one basket of fruits per day while he is building the boat, the excessive fish and fruits will get trashed, thus the maximum saving A could have is 1 fish + 1 basket fruit per day

Since a big society can be divided into millions of A and B pair, so the society as a whole can not have huge savings per person if the daily consumption per person is limited by 1 fish and 1 basket fruit

Imagine that the consumption level increased: B can consume fish/fruit/egg/milk and many other things per day, thus A could also produce all of these things, but B still make the same boat for A, this means the boat price will get much higher. But since A are not able to build boat due to lack of skills, A might still accept a boat with higher price

Here is something notable: The productivity of A increased, but the wealth accumulation did not

I think interest and deflation has no direct connection to employment, the employment rate can be assured by job-guarantee or similar program, and the high unemployment rate is caused by a high level of automation and high number of matured consumer


Very good point! You showed that short term saving (food) can translate into long term saving (boat)

On further thought, in an island with only 2 people, the speed of this saving will not be fast: A could both capture fish and pick fruits as much as possible to free B from the food gathering work, but B will still consume only one fish and one basket of fruits per day while he is building the boat, the excessive fish and fruits will get trashed, thus the maximum saving A could have is 1 fish + 1 basket fruit per day. Anyway, A can have some saving without causing B's debt, but his saving still caused stocking of goods (the boat), but that is more acceptable since boat can be regarded as value keeping


In my island model, it is very easy to see that A's saving will cause either stocking of goods or B's debt, but if those stocked goods are everlasting and their value seldom changes (This is another aspect: Even the goods are everlasting, people's preference changes), then saving in money's form in principle can be unlimited. But in reality, nothing's value is everlasting, if saving can not be translated into everlasting goods, then it must come from some one else's debt

Well, I suppose it all depends on how the demurrage is applied. Obviously neater tricks can be done with a virtual currency. But yeah I'll concede the point that it doesn't raise the cost of borrowing.


I'm only trying to say that the effects of demurrage are not simple to predict. Especially using real-world scenarios. In a virtual currency with a fixed supply, it is somewhat easier, but still not obvious.


I am not here to argue about expocoin. That's why I said stop bringing it up. I don't know who these people are that say Freicoin is similar to expocoin, I am not one of them.


Then fight it by having a sane distribution of the currency too then. Not one like bitcoin's. I can't comment on how good or bad it might be until I know exactly what you guys are doing. But if it's the same as bitcoin's, then I wouldn't support it.


I need to make a wiki or something so that it is easier to follow. The network would manage smaller, "pool"-like groups of people. The more pools, the more currency is created. But there are two ways the difficulty is raised: based on the changes in the average speed of currency creation, and based on temporarily reducing the supply to encourage competition among more efficient machines to set a new difficulty for when the supply is no longer reduced. People who hoard/save money are encouraged to trade it when demand is high (velocity is low) because otherwise more money will be created and the value of their money is reduced. I am always looking to tend to a stable purchasing power.

Since the amount of people creating money is variable, I have come up with a whole different system to secure the network that is not based on hashing power.


The labor of processing cycles. Ah yes, merged mining. The wet dream of a secondhand currency creator. I'm glad your intentions are honest, maaku did everything to sound just like a bitcoin pyramid supporter in my eyes.


Most of the economic summary is in section 4. Everything else revolves around how the network works completely differently from bitcoin. But yes, I'm aware the proposal is not written well, but I'm on the fourth major revision but this is the first one where I believe the concept is solid from beginning to end. The next major revision will be a clear whitepaper.

But rise the price compared to what? For example, say he charges 4 btc or 5 frc. Fair enough.
But the price won't be risen over time because the demurrage is constant. Therefore it doesn't rise the costs of borrowing in the way you earlier suggested.


I don't remember that maaku said that but I'm also against that. First, I don't think that you should do anything special to attract early adopters.
Second, if you think that a demurrage rate is convenient, it is from the beginning. And finally, web services have already to adapt their deposits to demurrage and a variable demurrage only gives them more work.


To prove me wrong you only need to invalidate a deduction I make by showing that I'm not using cartesian logic rules. Or you can deny the validity of one of my assumptions.
Then I will have to get to that premise from logic rules and premises that you accept.
Discussing is not about being smarter, is about using logic and know the other person's assumptions.


If they're different, is Freicoin better than expocoin? How?


The way we fight that "transfer of wealth" is by discouraging speculation through demurrage.
Again, I'm against a lower demurrage at the beginning.


I downloaded one of your proposals, but it is very long.
Can't you make a sumary on how you decide the target monetary base?


What labor?
With merged mining, I expect difficulty to be relatively high from the beginning. Most miners will sell most of the freicoins they mine for a long time.
So I expect freicoins to "cheap" for long. But that doesn't bother me. I want people to buy things with freicoins, is not important if they need 10 or 10000 fcn for a loaf of bread.


I think your proposal lacks a clear summary.

By raising the price, I thought that was obvious.


I haven't kept up to date, but last I saw he wanted to have demurrage at 1% for the first 4 or 5 years or whatever as well. I'll get back to this later in my reply.


Yes, you've told me and you ask me to prove you wrong. How can I possibly prove you wrong? I am either supposed to assume that you are smarter than every financial mind that has ever existed and have finally found a solution to the ills of the world's currencies, or I am supposed to pretend I am smarter than every financial mind that has ever existed and can prove you wrong. I don't really have a way out here.


I don't think expocoin is equivalent, but I think it is better in one way over how fiat works because of how the money is distributed. However, it has no way of adjusting to economic conditions, so that will ultimately lead it to many of the same problems as fiat.


It would be better than bitcoin, but it's still a transfer of wealth and it still doesn't solve the speculative bubble that will happen when a small number of people grab a large portion of the supply before it has a chance to distribute. It will undoubtedly ease the bubble though. And perhaps with people that are not brainwashed by what satoshi has said about how a currency must work (lol @ the advertisements in the middle of threads quoting satoshi's feelings on the central bank and such--very third reich-esque), they will voluntarily make an effort to have a stable currency before manipulating it for profit. I won't bet on it though, especially if maaku is at the head. 1% demurrage to encourage early adoption is the same line of thinking that encourages hoarding and speculative bubbles.


If you can separate yourself from thinking a fixed supply of money is the only way, you should read the newest version of my proposal. I believe I am quite close to achieving a stable exchange rate. It is light years ahead of the last version. And it is based purely on the economy and market forces, not a strict set of rules.


It's a pyramid if the early adopters spent comparatively nothing while the later adopters do all the labor for a pittance. If Freicoin has a similar distribution to bitcoin, it is going to be a pyramid. Being able to use Freedom money should not entail forking over your life savings and waiting for the next batch of suckers to come along to prop you up.

Again, see my proposal for technically feasible solution that solves a myriad of other problems with using the block chain to secure transactions.

I understand that you want a simple example to help you see things clearer. But 2 persons is too few if you want to think about money. Because with two people money is not even necessary. With 2 people having cash doesn't even make sense.


Interest and deflation are profoundly related to unemployment.


Sorry about that. I was just answering your questions.
But I've already answered to that question. Is not that wealth is destroyed. Is that wealth creation stops or slows down.
The reason is that investments depend on the financial market. If Bernanke wasn't printed like crazy we would have had deflation, which discourages real capital investments.


I can help you with your example, but you really need more than two people. You're already using more than two people by referring to an abstract impersonal market.


They can save by lending the fish to other people who can use their time in investments (say the construction of a boat).
But saving is not a goal in itself. You save to consume later, not just for the shake of saving.


Yes, they use to be more durable. Even (real) capitals deteriorate, but that fact is often ignored.
They're more durable, let's say they're everlasting. What's your point here?

And how do you think he will (should) take it into account?

maaku is working on a currency with 4% demurrage, but is not based in the bitcoin code, they're coding it from scratch.
There's two points where I highly disagree with him on the implementation, but I will support their currency anyway.
I haven't time right now to code the freicoin I want, but I think is not so hard.

I'm not using an example with two fish and two freicoins. I've told you the effects on interest that demurrage would have compared to inflation.
Ask whatever you don't understand or, if you disagree, prove me wrong.


I guess you mean freicoin will be better than bitcoin.
What about expocoin? Do you think is equivalent to freicoin too?


There's a difference in how both system reward early adopters. With freicoin, speculators are losing freicoins with time. They cannot sit in their coins forever.


I don't think that a decentralized system can warranty stable prices (actually I don't think a centralized system can do it neither) and I have read many proposals in this forum.
If it appears, I think it have many possibilities of being more used than bitcoin. I don't think that anything special must be done to reward early adopters.
But it's just the way it is. If very few people want the coin and later on many people want them, it's price is going to rise. You have inflation at the beginning of the coin, so they can lose money by speculating too.


I don't see how a fixed supply is a pyramid, but not all people in the forums agree with the fixed monetary base.
For example, Sepp thinks an elastic supply is completely necessary. I'm not completely against an elastic supply, to be honest I doubt if its is desirable or not.
My point is that without a technical feasible solution we don't really need to discuss its desirability.

The point of an island with only 2 people is to simplify the complexity, in a market based economy, everything for sell have a buyer, everything produced has a consumer. If a model can clearly illustrate the process between one producer and one consumer, then after multiply, it could suit economy of any size

Most of the macro economists are rather talking about general concepts instead of precise numbers, the demand curve is merely a concept instead of mathematics. But 1% and 100% are totally different things, so most of the macro economy theories today are not very convincing, what they think a big impact might be a small ripple in reality while what they ignored small parameters might generate devastating effect. For example, I think interest rate is rather unimportant compared to jobless rate, and the usefulness of BTC is much more important than the deflation nature of BTC, etc... If we take that approach, economy discussion will end up with a endless debate of "which one is more important", and developed into political practice

Back to the topic, "How come the bank failure destroy the wealth", this puzzle is still not solved  

The financial crisis seems to be too complex to understand, but if I could explain in an island with only 2 people how the bank failure destroyed the wealth, it will certainly help a lot, and it is not impossible either

I just had some new progress in thinking: Since fish and fruit are definitely not suitable for long term storage, a fish based economy will not be able to have lots of savings, everything produced are to be consumed quickly, no matter how high their productivity is, all their savings have to be consumed in one day, they can not increase their long term saving

What can be kept for long term are utilities/machines/tools/resouces etc, and in classical economics these are called capitals

Whenever the borrower spends that money, the receiver is going to look at it and see "oh the payment is due tomorrow, the cost of my product must take this into account." I'm talking about a real-world scenario here, I don't know how Freicoin will do it. (and apparently you don't either... where's the release?)


That there are financial systems in place (or would eventually be in place in a cryptocurrency) and you can't use an example of 2 fish and 2 Freicoins to prove a point as to how demurrage will affect an economy.


Well, I am biased by common sense and have little investment in BTC, but of course it will be better.

However, the two major problems I see with Freicoin are:

1) Unless you use a different manner for distributing the initial coins, mountains of wealth will still be placed in the hands of early adopters. See: speculative bubble, ad nauseum.
2) If you use a different manner of distributing coins (such as ease-in, ease-out described in some other threads), you have little hope of having it adopted now that bitcoin is already here.

This community has already been convinced that a pyramid is the only proper way to start a cryptocurrency. This is quite evidenced by my thread on your forums.

Someone will pay the demurrage, but probably not the borrower. My point is that it makes no sense to include demurrage in the costs of borrowing like you did.
Not sure I understand your last sentence.

This tells me nothing. Please, just say what you think I'm ignoring.


Oh, the formula was for all the systems. But if you expect deflation for bitcoin in the long term, you should expect deflation for freicoin too.
Only this time deflation won't hurt the financial market so badly because of demurrage.


From the lender perspective, there's no difference between 5% interest with 5% inflation and 0% interest with 5% demurrage.
But that's with a basic interest at 0%. I claim that this cannot happen without demurrage.
I still don't get why the risk must be higher with demurrage.

Look some people claim that expocoin would be equivalent to freicoin. No one claims that timecoin would be equivalent to freicoin.
I try to explain why expocoin wouldn't be equivalent to freicoin from the financial perspective.
Here's the first mention I read of expocoin. Sorry for giving you too many links.
https://bitcointalksearch.org/topic/m.110548

Of course demurrage is not the same as deflation. My point is that demurrage is not equivalent to inflation neither.
But you can have demurrage + deflation or demurrage + inflation. I usually compare constant demurrage with stable prices vs constant inflation.


The question is if freicoin it's better than bitcoin and expocoin.

At some point, somewhere, somebody is paying demurrage. You can only pass the hot potato so many times before the buzzer goes off. No one is going to take your demurrage currency at face value today when the payment is due tomorrow.


Limiting the scope of your thinking is asking for economic failure.


Where is the inflation coming from in your equation? I'm only using what you used.


How is this any different from a 2% yield (or whatever inflation is supposed to be) safe investment in an inflationary economy? There's no difference, just like I've said.


You argue about expocoin and link a bunch of threads to timecoin. I was just pointing out (again) that nobody has seriously suggested expocoin, and it's a deceptive argument to use to support Freicoin as being better.

Demurrage is not the same as deflation, you seem to be conflating the two points and arguing for whatever economic outcome suits supporting Freicoin depending on which way you look.

Demurrage + fixed supply of money may very well be better than standard fiat currency. But most of the properties you argue already come from a fixed supply of money. Demurrage merely spreads the wealth back around in the same way inflation does in a non-fixed supply (except for the fact that governments give money out to preferred borrowers first, but this is a property of governments, not cryptocurrencies).

There's no point on having money if there's only two people. They would just use IOUs.


There's no problem with deflation if there's not a financial market. There's no problem with the price of fish dropping.
The problem is when there's interest and capital yields and the price of the capitals drops.
See the island story above mine.
https://bitcointalksearch.org/topic/m.388939


I recommend you reading about mutual credit. Time banking and LETS to understand the basic concept and Ripple to get the general model.
With those systems money is created when needed. With Ripple, you don't need a central authority.
You think that central banks are needed to achieve price stability, but that's not true.
With a reference currency (not issued nor backed, non existent) to denominate LETS/Ripple IOUs you can have stable prices.

If the borrower just invest the money when he gets it, he won't pay demurrage.
What's the point of borrowing to sit on the money while paying interest?

I just say how I think it would work, you can always have an alternative prediction so we can discuss. Yes the world is complicated, but that's not a reason to make our reasoning confusing.

There will be no monetary inflation in freicoin. Where is the price inflation coming from?


Why the risk must be higher? Are you saying that there won't be enough 0% yield safe investments for all the lenders to avoid demurrage?


This inflatacoin was first named timecoin. But expoCoin (or kingCoin) is bitcoin with a constant inflation rate, with an exponentially growing supply.
https://bitcointalksearch.org/topic/list-of-bitcoin-like-proposed-currencies-and-chains-7500
https://bitcointalksearch.org/topic/m.110548
https://bitcointalksearch.org/topic/probabilty-of-losing-a-bitcoin-a-case-for-constant-growth-2971
https://bitcointalksearch.org/topic/timecoin-2792

Just read your island story, there are many islands in your model, I'm still confused, can't you have en island with only 2 Crusoe 

I am always confused about an essential problem regarding money:
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How do wealth increase connected to money supply increase, and through which channel the newly created wealth connected to newly created money?
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In an island with only 2 people, if A produce more and more fish everyday, how could he trade for more money, if the market does not have enough money, or the market can not sell all of his fish to A and B?

In both case, the fish price will drop, that is a deflation scenario which central banks always try to avoid. So there must be a way to let newly created money to match the newly created fish, in order to keep the price stability

(But on the other hand, normally we say that market should adjust the price based on demand and supply, that is also a big trouble here!)

When I design my island model in early years, I always suppose that new money is provided into market to facilitate the trading, but now I realized market is only an exchange place, the new money must enter the market by other means, e.g. in loan's form

You do it in a confusing way though. There's no need for the second inflation premium.

Nominal Interest Rate = Inflation + Real Interest (Basic Interest + Risk)


They loan at a lower interest, you pay the fee. Where is the difference? Again, as I pointed out before, demurrage does not mean there is no inflation. It depends on the currency in question. Assuming a standard fiat currency, you get:

Real Cost of Borrowing = Demurrage + Nominal Interest (Inflation + Basic + Risk)

There isn't going to be a fixed supply of money in the real world, so it is hard to simply say "this is how it will work." Inflation will certainly be lower, but only because demurrage will make up for it. Basic might be lower, but then risk must be higher as you must loan the money or risk paying demurrage.

The affect this has on the economy is hard to predict, but odds are it would be more beneficial to the middle/lower class than the rich. Which, I believe, in turn would still benefit the upper middle class and such. The superrich would be likely lose, but they lose anyway when the divide is so great that we enter a recession yet again because the middle/lower class has no wealth.

It is a way of money that would probably be less apt to fall into the business cycle, but that does not mean the cost of borrowing money goes down.



If the risk premium is higher, real and nominal interest is not lower. Cost of borrowing is likely completely unchanged. I couldn't even speculate how this would affect fractional reserve.


When someone talks about "inflatacoin" they are referring to a bitcoin-like system where the monetary base does not stop producing. This is not a 5% inflation of the money supply every year. I don't think anyone has seriously ever suggested that. Even if the award increases by 5% every year, that is still nowhere near inflating the money supply by 5% every year. In fact, I think it would work reasonably well as an alternative.