Topic: If you are being paid interest on your money, why would you spend it? (Read 2065 times)

FRB just makes bankers more rich. From what I understand of fractional reserve banking, the bank does not loan your money to other borrowers as many people view. The bank borrows from the central bank and pays it as a loan - in the UK, there was not long ago the LIBOR scandal and banks fixed their rates between other banks. The money passed on to the borrower has thus an added interest fee plus the effect of inflation which is viewed as a hidden tax; i.e. your money is worth less over time.

The problem with FRB is that if there was a bank run, the banks would have a very short supply of notes as these are no longer backed by gold or silver. It is just a very good scheme to make paper (the IOU known as greenbacks during the american civil war) as valuable as gold. Now in the advent of electronic entries, it can create another problem that the figures that is represented on your bank statement is not even backed by paper.

Going back on the OP, I would spend the interest because interest rates are too low to save and I have no confidence in the banking system to keep most of my money stored in banks.

Normally I do, but what I find particularly vile are people who go around actually trying to make people believe in what they say when it's completely wrong, like religious preaching, I just hope the people reading this stuff research and form their own opinions even if it's something I disagree with.

To me, this doesn't contradict the lending theory, it means your dollar in a bank is loaned several times over (what could possibly go wrong?).

Not that this affects anyone's answer to the original question.

That is what most people think and this is not what happens when people save money; see Fractional Reserve Banking.

http://en.wikipedia.org/wiki/Fractional_reserve_banking

Fiat put into a savings account, in theory is invested (The banks should be using this money to make loans to others). 

I wouldnt spend it, id hoard it and then jump on the forums to tell everyone how rich ill be meanwhile causing the market to swing because i contributed to its heart condition.

My favorite anecdote to counter the silly Keynesians is any kind of computing/smart phone/ electronic technology. Everyone knows that if you wait 12-18 months you can get exactly the same thing for less money. By that argument no one would ever buy electronics because they can get a better deal by waiting a few months when prices are better. I haven't done the math but I'm pretty sure that the increased buying power you get in terms of bang for your buck by waiting is still outpacing inflation by a long shot.

The problem really lies at the end of Krguman's quote. Our economy and its exponential growth relies on an unsustainable amount of borrowing. If you buy into the idea that no amount of debt is ever to high for a government to incur, then bitcoin might not be right for you  But the travesty is that our current economic system is predicated on astronomic debt levels and massive borrowing. We cant continue to grow as we have in the past without a populace that is massively indebted, and companies that are outrageously indebted. If you want to return to the post WWII boom years where the economy is growing at 5-6% you need high levels of debt. If you accept the new reality and are comfortable with an economy that only grows at the rate of population growth (the only long term sustainable solution) then high levels of debt and borrowing are unnecessary and a currency that is deflating is actually a good thing.

What if someone uses a credit card to import some expensive bottles of wine for their wine collection and someone else holds onto a few bitcoin until the value is high enough to where they can buy a car for commuting to work?

Buying a car now or buying a car in a year will eventually even out as far as the economy is concerned. The fact is, not everyone is switching over from fiat to bitcoin all at once, so the guy who may have purchased something with a credit card now will instead buy that same thing in a year with bitcoin.

The key is, the credit card company will not get 17% of the value of the purchase just for making the purchase more convenient. 17% worth of productivity spent on some people working in an office moving numbers that could otherwise be adding to the economy in a more productive way.


This thread is to highlight the argument by keynsians that if you have a deflationary currency, you would never spend it because if you spend it, you lose on the gain in value you could have had from holding it. The same thing with compound interest (as Einstein said, the greatest force in nature is compound interest). The argument falls flat on its face if your savings is paying out 4% and there is only 1% inflation. Why spend when your money is gaining value? As we can see from history, spending was quite common in years with high interest savings.

"when people expect falling prices, they become less willing to spend, and in particular less willing to borrow" -Paul Krugman

I'm not sure it is a good comparison.   If you are lending your money the borrower generally isn't putting it under the mattress but instead is spending the funds and economic activity results.   So lending is essentially the same as spending.

Now there are differing beliefs as to which is better ... spending today by the borrower versus later spending that would occur by you (from your bitcoins kept "under the mattress").  Let's say the borrower uses the funds to buy a car for commuting to work, whereas your later spending might be used to import some expensive bottles of wine to add to your collection in your wine cellar, let's say.   For the economy as a whole that money might be more useful going to the car today rather than to the wine for the cellar later.    And thus you lending out the money is better than you buying gold with it and sticking it in the ground, for instance -- at least that's the argument as I understand it.

However, the problem is that the lending isn't just going for the cars for commuters and other productive uses but instead it goes for overpaying for goods and services and for speculation on commodities such as crude oil which raises the street price for all.   So there's good lending (investment) and bad lending (resulting in malinvestment).   Evidence of systemic malinvestment might look like this

Unemployment worsening in much of Europe:
 - http://www.cbc.ca/news/interactives/map-europe-unemployment/

while at the exact same time a designer handbag manufacturer sees sales in Europe double for the quarter:
 - http://www.foxbusiness.com/industries/2013/05/29/michael-kors-net-income-doubles-in-4q

i.e., lots of money sloshing around, going to consumption spending instead of to uses that increase productivity, or to factories, etc.   If there's more profit from creating designer handbags than, let's say, designing and improving water purification technology, then that's where human talent will focus their efforts.   If markets are left alone they are pretty good about figuring out the where and when investment should occur.

But there are those who think the central bank is smarter than you as far as what you should be doing with your money, and monetary policy is used to persuade you to behave in a certain way.  Like spending it now (to cause economic activity) versus seeing it lose value (as the result of currency inflation).

Because INTEREST = +1.5% and INFLATION = -8.5% thus LOSSES = 7.0% by keeping money in SAVINGS.

Taxes = 6% thus... you save another 1% by spending what you earn, ASAP.

Reality... Everything in CC sales = 16% to 35% losses... Thus... Bank-lenders rob you twice... once lending, and again when saving. They do NOT have that much overhead.

Bitcoins... FTW, what's mine, is mine... Earnings... 100%

so don't. ... It's okay to see something you disagree with and then not do anything about it. especially if it doesn't benefit you at all.  Do what makes you happy. even if that means letting other people think differently than you.

Why spend money when you can save it and enjoy the afterlife?

Interest is pretty much non-existent in our current economy unfortunately. Holding fiat is the worst thing one can possibly do with their wealth in my opinion, wisely invest and you can double your money several times throughout your lifetime.

Thanks for saying that. I think the original post was an interesting discussion-starter. Definitely no need for anyone to get riled up.

I spend money because there are basic needs like food, shelter, transportation.

Interest paid from the banks is way less than the real world inflation.  

Take for example, food.  1 gallon milk used to be $1.75 in 2000.  Now it's nearly $4.0.  

So that's roughly 13 years to double the price.  Use rule of 72 for calculations, gives us 5.5% inflation every year.  Regular 1 year CD is 0.7%.

This is forcing me to chase yield instead of saving, just to keep up with the real world inflation.

Bitcoin is more like a hobby, an experiment.  I want to see how things would pan out differently if parameters are different from what's going on with the world.

Funny.   

First, I don't trust banks. I spend my money on long term investments such as mining rigs which itself have liquidity in the even I want to sell. These mining rigs are providing me the interest via bitcoin mining which its possibility may or may not devalue, though trends indicate that it is a strong currency.

Second, I have lost faith in fiat currencies in learning how money is made.

Third, banks interest rates are so low, that saving is not an option for me. The money stored in your bank will devalue over time because of inflation.

 I believe that by stating that fiat money will devalue over time would get people to spend fiat money.

People who save are home-grown terrorists.

Guys, calm down, Elwar is being sarcastic, he's obviously playing on the whole "Deflationary currencies are doomed because no one spends money that will be worth more in the future" concept by applying it to fiat money and showing how it doesn't hold water.

I don't see how inflation is particularly relevant. Most people in my country have no idea what the inflation rate is, and if they do, have no idea that it actually has a real effect on the money in their savings account. To them, the money in their savings account IS increasing every quarter, and they think they are making money by keeping it in savings. They really don't understand that they are just losing a little less than they would lose if it were held in cash or in a checking account. Yet, despite the perception that the are gaining money by hoarding it, they still spend the money, or at least they did, until recession hit a couple years back.

Also, "real inflation" in many areas may be higher than interest rates, but the officially reported inflation figures tend to be either very close to interest rates or below them. So for the 1% of people who actually understand that inflation rates reflect on the real, immediate purchasing power of their dollar, only 1% of those are smart enough to not believe the official figures and realize that they are much higher than reported for anyone that spends more than 5% of their income on food and energy I mean really, is it so hard to include, like, a weighted long-term moving average of food and energy indexes rather than skipping them altogether because we don't want the plebs to worry "volatility"

Negative interest rates are a real and looming phenomenon. People will be very interested in spending that money! Saving money shouldn't be penalized; saving money shouldn't be discouraged with stupid alt-coin concepts that mimic failed neo-keynesian policies. Thank the lord I still have my bitcoins, litecoins, namecoins, gold, silver, etc. No negative interest/super-inflated dollar or freicoin demurrage bullshit is going to disincentivize me from being a responsible consumer and saving money for future debt-free large purchases, rainy day, medical expenses, etc.

It's like we are trying to FORCE people to live paycheck to paycheck! Lol.

Yeah, but holding an appreciating currency for awhile, and spending it later (when it has more value), seems logical to me.

Money only has value when it is spent. It doesn't make sense to keep your money in the bank forever. If the money is never spent, it is effectively worthless.

Well due to effects of QE that is true but over any longer period of time interest yields tend to be higher than inflation.  The FED currently is trying to force people to spend by making it punitive to hang on to cash.

I seriously want to know where you guys are getting your information about Bitcoin from, do you actually have proof of this? Or are you just regurgitating what you've learnt in schools about economics? I'm getting tired of having to argue with people about this now.

Why do you believe that introducing artificial incentives (e.g., "penalizing money that has been sitting in the bank too long") is preferable to just letting fiat money becoming worthless (if that truly is the outcome due to a decline of spending)?   Better yet, who elected you (or anyone else) to decide for me what I should be doing with my money?

Keep yer grubby mitts off of other people's property.

High interest rate are typically a way for the central bank to slow down production/consumption and fight inflation.

Uh, do you remember the circumstances under which that happened? Word-wide economic recession, IIRC.

If I had a safe, longterm interest-bearing investment (perhaps a government bond that was earning 10% right now, that was purchased when that was the going rate), I certainly would not want to cash in the bond, I'd use other money and maximize the appreciating investment. And yes, interest rate vs. inflation rate (as well as what other investment options there are) are pretty huge parts of the equation to consider.

In the world of Bitcoin, I don't own much, and I surely don't want my net BTC to go down much, because I do have hopes it will be worth much more in the future. I want to keep what I think will appreciate (BTC), and spend what I don't think will appreciate (USD). If you can poke any holes in that logic, I'm all ears. Maybe if I owned hundreds or thousands of BTC, or if I had more value in BTC than in USD, I might feel different about my net BTC going down.

I'm trying to use/spend Bitcoin a bit, to understand BTC commerce better, one of many ways I'm attempting to immerse myself in Bitcoin. But overall, at least in the near term, I want my net BTC to go up, and I'm okay if that's at the expense of my net USD going down.

I don't think this means Bitcoin will fail, as some argue. I think it means it will appreciate longterm while simultaneously being used as the backbone to many amazing things we have yet to see or dream of...

As stated above, inflation is more than the interest.

Even if it weren't, people will still spend money because ultimately it costs money to live.

BTW interest rates were up to 15 or 18% 30 years ago, and fiat didn't fail then. Interest rates are 1-4% these days.

Penalizing idle fiat would not solve anything and cause a shift to gold, property & other hard assets. It might even cause a failure of fiat, and drive society towards a search for new ways to store wealth, perhaps in some form of stateless digital currency.

Make inflation higher than interest rate.

Cute, but interest (if you even have that anymore) is much less than inflation.

If your current money is in a bank gaining interest, why would you ever spend your money? Is this a flaw in fiat? Everyone is hoarding their money to get interest on their money so nobody is spending their money. Should we penalize money that has been sitting in the bank too long?

If nobody spends their money fiat will become useless. What are some ways we can get people to spend fiat instead of hoarding it for the interest?