Topic: Inflation and Deflation of Price and Money Supply - page 51. (Read 1424916 times)

Interest is paid by the borrower to the lender. They don't have to magically spring into existence. It is just like another trade.

The velocity of money comes into play. Assuming at some point you spend some of your interest received, you can be paid back again with the same money.

e.g. month 1 borrower pays lender 50BTC, lender buys stuff for 25BTC, now 25BTC is back in the economy and can be used to help make the next 50BTC payment, and so on. While it is very difficult to measure the velocity of money, I think I remember reading that real world currencies typically have a velocity of around 1 - for each dollar/euro/etc. that exists, it gets spent once per year on average. That doesn't mean that it can't be spent twice a year if the incentive to spend money is high. However, as BTC has some extreme deflationary characteristics, it is highly unlikely that BTC's velocity will be higher than fiat - the incentive to spend is low. A velocity of less than 1 will make it very difficult to pay back loans.

My concern was a bit different. Let me rephrase it.
Assume there are total 1000 BTC in the world
I have 500 BTC which I lent to another person @10%. Now where will that extra 10% BTC or 50 BTC for the interest come from in the economy? The only way he can repay the interest is if someone in the economy faces a loss of 50 BTC from which he profits. So are we devising an economy where loss is certain for some and all cannot profit at the same time?

Money value up means less investments, which is ok sometimes, frenetic investment of all sorts of value destructing ventures is not always what the world needs.

Ok. Let's take the lending - borrowing side of things.
Assume I lend 100 BTC @ 10% interest.
If apart from me and the borrower, the entire economy remains constant, then where will that extra 10% BTC come from? That can happen only when someone looses that 10% equivalent BTC. So it will become a system where someone will have to lose for other to win and it can never be a win-win. Which means that all people can't live happily in such a system

You can not stop consuming (neither can the wealthy men).
So deflation have some lower limit (you must pay for food, water, clothes, shelter, drugs (in you get sick), etc.)
Wealthier you are more you consume in absolute even if it is not in proportion compared to poor people (this is the purpose to be wealthy).

The main reason deflation self correct is it discourage investments and favor savings.
Savings =  seeds in storage (less risky or no risk at all)
Investments = seeds in the soil to become more seeds (more risky)

The value of money depend on the quantity of goods available: if they increase, the value of money increase. If they decrease, the value of money decrease.
If the value of money increase 3% per year, the economy increase 3% per year. Investments promising more than 3% will be funded (in not too risky), investment promising 3% or less will not be funded.
If the value of money increase 2% per year, the economy will increase 2% per year. Investment promising more than 2% will be funded, promising 2% or less will be not.

Now, if we suppose a 3x risk premium, if the riskless increase in the value of money is 3% and someone promise >10% return for a reasonable risk, these projects will be funded.
If these projects are successful, the overall economic return will be 3%. The economy it is now larger, the investors get 4-5-6% per year (after profits and losses) instead of 3%.
If there are not projects able to return 10%, the growth will fall to 2%. People will increase their savings (they produce more than they consume) until they have enough and a 2% return will start to appear interesting. Then they will start to fund risky projects returning 6% (3 times 2%).

They can take risks because they have other savings. Even if their investments are wiped out, their savings are not and they are able to continue to consume as before.

In an inflationary environment, you are forced to have less saving (because they lose value) and more risky investments. And, because the good investments with good returning are not infinite, you end with lossy investments.

If deflation transfers value from owners of assets to owners of money, that would mean it disinventivizes people owning assets and incentivizes people holding money. That would result in people hoarding money instead of investing and that would be negative for the growth of the economy (GDP), possibly resulting in negative GDP. Is that sustainable?

That is just spinning on the current central bank meme. It is wrong.

Deflation is worse than inflation. Look at Japan. Deflation decreases money velocity, people tend to hoard instead of spending and spending is crucial to the growth of GDP.

Another fundamental difference: Deflation transfers value from debtors to creditors and from owners of assets to owners of money, and these transfers apply to the wide economy. Inflation transfers value to the money creators, then the banks, then the privileged corporations, then everybody else. Inflation is continuous, enforcing and widening the wealth inequality.

Deflation corrects misallocations of capital, inflation destroys the capital structure.

Khan Academy video is a thesys non a demonstration.
Mild inflation transfer wealth from creditors to debtors and from owner of money to owners of assets (land, shares, gold)
Mild deflation transfer wealth from debtors to creditors and from owners of assets to owners of money.

I would like no transfer at all and zero inflation or deflation.

The difference is deflation is self correcting, because people dislike to not consume, where inflation is not self correcting, because people like to consume.
Even mild inflation penalize savers and reduce the quantity of savings available in a system.
Less savings are there less resilient is the system to black swans.
If there are no savings or debts start to pile up, even white swans with a small spot are enough to collapse the economy.

But I believe the ideal case scenario for an optimum economy is mild inflation. The following Khan academy video explains my point:
https://www.khanacademy.org/economics-finance-domain/core-finance/inflation-tutorial/inflation-scenarios-tutorial/v/moderate-inflation-in-a-good-economy

Yes, we can.
If it is a strong deflation (caused by a correction of a previous inflation) it will last a short time, because the increase in purchasing power will "force" people to spend their money in some extent reducing the deflation in the same way.
People, also, can not stop consuming completely. So, there is a limit how fast a currency can deflate.

On the other side, if the deflation is cause by technological progress reducing the costs of things, as it is natural to happen, the deflation will be a mild 2-3% per year.
You will be able to lend your money at 7-10-15% per year, depending on the quantity of saving people have around.
Higher the saving, faster they lower the interest rate the takers will be able and willing to pay.
Because there will be a limited number of business able to pay back >20% interest rate, more able to pay back 15% interest rate, many more able to pay back 10% interest rate and so on.
Higher the return you will be able to obtain from a loan, earlier you will be able to obtain it.
More business willing to pay 15% exist, more people will be willing to save to obtain that return.
If the business are able to just pay 10% less people will be willing to save as much as before
It is just a market dynamics.

Prices going down is a good thing that the market brings to people; governments like inflation because it allows them not to face all the consequences of their actions

Already, in Europe, the EU member country central banks have to give interest every time they loan money to the central EU bank, so your last sentence is already true in Europe with central banks.

To the economists - Can we sustain in a deflationary economy?
So when I lend money, what kind of interest should I get since I know after some time any it is gonna depreciate? Would that give rise to a scenario where I'm asked to pay interest for giving loans?

Thank God for economics.

I think the same for each country, inflation will occur when the exchange rate of the country against another country is too large, so that the country of the currency market will be less used, and in the event of deflation, the price of the country's currency value decreases the difference, so the market will be more trust in the currency of the country ...
hopefully inflation does not happen too long in a country .... 

At the moment the FED wants a bit better now with jeopardising the future, it prefers something horrible in a few years that having pain now because when it starts accepting the pain it will get ugly so they try to keep the illusion alive; more drug not to suffer the withdraw symptoms of not getting the drug but it will end in an overdose or even bigger withdraw with physical disabilities for life

Debt muddles the picture a bit. The most important things to not about debt is that it expands the total amount of money (which might reduce the urge to hold and therefore the value of the currency unit), that debt is transient, and that you have to pay interest for the loan.

Interest is the value of consuming now, compared to consuming later. Said another way, the compensation you want to have in exchange for going to the back of the consumption queue.

The appreciation of bitcoin is not interest.