Topic: How come the bank failure destroy the wealth??? - page 3. (Read 8896 times)

There's two equations there:

1) nominal interest = inflation premium + real interest
2) real interest = basic interest + risk premium

I just wanted to put them in a single row.


Because it encourages lenders to loan even at a lower interest. Because money holders can't sit on their money for free.


Lost funds that they don't loan out? You mean they don't loan ten times, don't you? Remember fractional reserve.
But anyway, if banks didn't had fractional reserve, a percentage of the interest (or maybe just fees) must go to them in exchange of the service they provide. They can give a certain interest to their lenders and don't inform them accurately about the risk of the investment (as they did) but that's fraud. If they say to their clients "the loan is at 5 nominal interest with zero risk" but in reality the loan is at 1% interest + 4% risk premium, that doesn't rises the interest, they're just lying.
I don't claim that things will work in a vacuum, just that's how I like to simplify things for a better reasoning. I know there's no robinson island.
What I claim about demurrage is that it will lower the basic interest.


What you're describing is timecoin. But I mean a coin with constant monetary inflation, say 5%.
And constant monetary inflation is exactly an exponentially growing monetary base.
The nominal reward has to increase with every block so that the proportional reward can be kept constant.


Agreed.

Yes, it is much simpler with fish. And I think that comic is a great reasoning exercise. But commodity money (say gold) already changes how the financial market works. Just because what you have said. Fish rots but gold doesn't.
Here's my island story:

https://bitcointalksearch.org/topic/m.392389

I've seen you use this equation before, and I have to ask why inflation premium is in it twice. And I have to ask why you assume basic interest would be lowered because of the cost of money--the main argument against demurrage is that this is an assumption that will likely prove to not be true. Basic interest may need to be higher than you assume for banks to recover lost funds that they did not loan out. Alternatively, too many bad loans are given out because of the cost of money, and the risk premium is higher as a result. Things do not work in a vacuum just because you add demurrage.

And as I pointed out to you previously, your expocoin description is terribly inaccurate. Any inflation-based coin is likely to increase the money supply at an ever-reducing rate of inflation. It certainly doesn't make sense otherwise, and it would function (almost) identically to bitcoin for a very long period of time.


Ignoring how banks work doesn't make us richer either.

Exactly, I still remember that original comic book about island economy, if people could use number of fish as a counter for the wealth, most of the economy activities are much simpler and easy to understand, the productivity/consumption power can be translated into number of fish produced/consumed per day/year

But that situation does not exist in the real world, and fish can not be stored for a long time, so do most of the wealth. Money were introduced to facilitate the trading, but due to it has many different characters, economy activities have changed: People are using money as a benchmark for value, people store money as wealth, bank loan out money to support business activities... All these getting more complicated after gold has been replaced by paper/digital money

And I think that is the reason of financial crisis: Money covered lots of real economy activities and gave people lots of illusions, but since it also has lots of benefits, we should know how it works, and that is not very easy if you are not a central banker thus have a good overview

Let's make your example simpler. Let's remove your abstract markets.
There's only 3 people A, B, C with 3 products a, b, c.
Each one produces 3 of them, consumes one unit himself and sell the other for 1 shell.
Say A has the shel first. He buys 1 b from B.
balances:
A: 2 a, 1 b
B: 1 b, 1 S
C: 2 c

More trades...
A: 2 a, 1 b
B: 1 b, 1c
C: 1 c, 1 S
--------------
A: 1 a, 1 b, 1 S
B: 1 b, 1 c
C: 1 a, 1 c
--------------
A: 1 a, 1 b, 1 c
B: 1 b, 1 c
C: 1 a, 1 S
--------------
A: 1 a, 1 b, 1 c
B: 1 c, 1 S
C: 1 a, 1 b
--------------
A: 1 b, 1 c, 1 S
B: 1 c, 1 a
C: 1 a, 1 b
--------------

See? All the trades can be made with just 1 shell if the shell moves enough.
There's no need for a change in prices.


Why do we need a profit "in form of money". You mean nominal profit but not real profit?
I don't get it, we want more goods and services not bigger numbers in our accounts.
Printing money doesn't make us richer.

This is a valid point, if the final products were trashed, then we can say the wealth are destroyed

From another point of view, I buy some fireworks just to burn it, I have already paid for it, no matter the fireworks are fired today or after 1 year, the production part of the economy activity is already finished

It's always very difficult to save the real wealth since they have a short lifespan, while money never get destroyed equally easy, since money are getting more and more, the size of production and consumption must also grow, even unnecessarily

havent read all this but the US and other countries have been at war for ten years, all that money and labor goes to nothing, when tax payers money that could be used to build up productive business and assets goes into building missiles that cost millions of dollars and are then sent into a wedding party on the other side of the planet to cause more loss of assets it has to have an effect. sure some of that money gets siphoned off into other pockets but most of it goes up in smoke

 hehe, as for banks;
 

I don't fully understand your point, maybe you could give some example to make me understand better

The reason I'm using an island model with only 2 person and one market, is to show the real money flow and product consumption clearly. For example, like you suggested, if the market demand more shell for the fish, it will only affect fish price, not the total amount of shell supply (which is loaned out by central bank) or total amount of fish, we will see the effect immediately

Let's say the fish price has dropped to 0.5 shell, then both A and B's 2 shells loan will give them the possibility to buy 2 fish and 2 baskets of fruits each, but since market only have 2 fish and 2 basket of fruits at the beginning of the day, they will have to make a choice: Either consume less and keep the money or competing for the products and lift the price. But no matter what action they take, the total amount of shell is not changed, the total amount of real wealth(fish and fruits) is not changed

This brings out a question: If the total amount of shell is not changed, how could anyone have any profit at all? In order to have net profit (in money's form) for EVERYONE, the money supply must be continously increasing, otherwise it's only a zero sum game

Please tell me you don't believe in so called "intrinsic value".


They could have used LETS or Ripple instead of the bank. They could have just used verbal IOUs.
Why are people accepting the IOUs from the bank (shells)? If you don't owe nothing to the bank and go to the bank with it. Do they give you something? 


B could buy things after selling his products. There's no limit in circulation. If all the products are priced 1 shell, they can conduct all trades with a single shell.
But every time the shell changes hands, the owner has the opportunity to demand more than a product for the shell or all trade will stop. This is the real source of the basic interest.
All trade must pass through the money bridge and the bridge keeper can demand his fee. He says:
"The shell doesn't rot, I can wait all they until you decide you really need to sell your fish, and I say 1 fish is not enough for my shell, give me more".


Interest = general investment return, I think they are interchangeable. In a developed country, the general investment return will  be much lower than a developing country, even stay negative (means most of the investment will generate a loss)
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This is like saying: Price in the market = costs of production.
Prices drive production and not the other way around.
In the same way, interest drive investments but not the other way around.
By competition, investments returns would drop slowly to zero, but there's a minimum interest that the money holder can exact from the necessity of money in trade, not only in investments.
That's what makes capital yields different from other profits. The basic interest protects them by stopping further investment when the minimum yield (not zero, but the basic interest) is reached.
In a developed country, capital yields are closer to the basic interest because there's more capital (and different capitals of the same type compete between them for the yields).
When there's no investment that can be done and get a yield at least as high as the basic interest, investment stops.
Time will destroy the capital that's already there and allow new "profitable enough" investments. Usually countries prefer to go to war, that destroys capital much faster.

But what we're discussing is that:

nominal interest = inflation premium + real interest = inflation premium + basic interest + risk premium

Expocoin (inflationary bitcoin) would just increase the inflation premium, so it would increase nominal interest but would keep real interest untouched.
Freicoin (bitcoin with demurrage) would reduce the basic interest and therefore the real and nominal interests.

So no, inflation and demurrage are not equivalent. Do you disagree in how each one affects interest?
What's your prediction for interests with bitcoin, expocoin and freicoin?

Sure, but my point is that unlike gold, the money we are using today are not value itself, it has gained strange characters: Money were created only for loan out

To clearly show this, let's imagine an island with 2 people and one central bank, the market has 2 fish and 2 basket of fruits (the real saving), bank provide one-day loan with interest 0

Now A borrow 2 shells from bank and use these shells to buy 1 fish and 1 basket of fruits for 1 day's food, at the end of day, he captured 2 fish and sell to the market to get 2 shells, and return those 2 shells to bank

B did the same thing, he borrow 2 shells to support his life in the day, while he pickup 2 baskets of fruits and sell to market and get back 2 shells to return to the bank

Here, bank first created money, provided loan to society, and finally got it back. Without loan, A and B's business can not carry out. So, loan act as the driven power that pushes business activities forward

But if A borrowed 2 shells and B only borrowed 1 shell, then the market will have 1/2 fish and 1/2 fruits left, when A returned at the end of day with 2 fish, he will not be able to get 2 shells since market now have more fish than last day, the price of fish would drop due to oversupply of fish. B will not be able to sell all his products to market either due to the same reason

This means, if the whole society can not consume all the real saving, then they can't return the loan  





Interest = general investment return, I think they are interchangeable. In a developed country, the general investment return will  be much lower than a developing country, even stay negative (means most of the investment will generate a loss)

Money can be backed by good and services like LETS currencies are.


The difference is that demurrage reduces real interests and inflation doesn't. Inflation just increases nominal rates (through the inflation premium).

Here I have some observation: In the old time, miner produce gold to exchange other products, the labor involved can also be quite much, just the gold miner's product will be saved as a wealth because it almost never degrade. But in today's monetary system, producing money involves almost no real work, that is the difference, the paper/digital money's credit must be backed by an authority




Demurrage is equivalent to inflation: money's value drops and everything becomes more expensive.

In fact you don't need a central bank or a the force of a state to have money. You can use gold, silver, salt, shells or any other commodity as long as there's an agreement (probably not explicit) within the users and it is scarce enough to be cash.
Everybody could print their own currency accepted only by the people who trust them and then exchange the currencies to be able to pay the person you want to pay (that's how ripple really works). People can just use credit like they have been doing probably most of our history as species.
Today, you can use a block chain to create the scarcity instead of relying in a commodity. Or you can make those exchanges between currencies/credit very complex and fast using computers.
The typical argument for central banks is to have stable prices. Lately the "liquidity argument" has become more popular.


Many people think demurrage is equivalent to deflation but I don't share that view. Their effect on interest rates is completely different.

Yes, demurrage have the same effect as inflation, why it is not implemented, might only be a psychology issue, people always want more instead of less, in a inflation environment, people just feel richer and be happier 

Financial market is key in money redistribution, but the wealth are created by labor and the money are created by central bank

Without central bank create money at the first place, it will not be possible to have saving in money's form. From this point of view, if central bank already created money, then it can be used to invest without saving first

Good view, it is only a perception, and perception change only make the money re-distributed, not destroyed

So, if most of the society member get poorer while a few get richer, then it is a recession, although the total wealth might be increased

Is not that wealth is destroyed, is that wealth is prevented from being created because the financial market is key in real capital creation.
Real capital is not everlasting and needs to be replaced and repaired. Since nominal interest rates and inflation/deflation (or just real interest rates) are the most important thing (apart from the expected yields of the capitals) from the investor perspective, investments stop (or slow down) and that prevents further wealth from being created and destroys jobs.
If the real interest rates are above the expected yield of certain investment, it doesn't take place.
Creating inflation is a patch, it lowers the real interest rates by creating sudden inflation (and by providing new funds that don't come from savings), but the solution is wrong.
First because nominal interest rates will catch up by adding the proper inflation premium. But most importantly because you're making investments that are not based on savings. To invest you have to save first, that's almost common sense.
The solutions central banks and governments are taking are not real solutions, it would be better to just take the damage and wait for the deflation to disappear and the financial market to stabilize. They're just postponing the damage, maybe changing deflation for hyperinflation, which is worse.

Nothing physically is destroyed.
It is just the perception of wealth changes.
The perception may be more accurate or less accurate after the bank failure, remember these are only estimations and can sometimes be manipulated too.
What matters more is how the people *react* to it. If they *think* wealth is destroyed then that is what will happen then too.

If you don't won't the velocity of money to slow down and you don't want inflation, only one idea comes to mind: demurrage.
http://en.wikipedia.org/wiki/Demurrage_(currency)


You previously said (in another post) that the "proof of work" should not be everlasting and people should save through investments or non perishable goods. What do you think about demurrage?