Topic: Interest and Bitcoin - Impossible? (Read 6563 times)

Simple, because money (or rather, the economic surplus it represents) is scarce, and has uses other than investment. This is like asking why more production and competition don't get directed to a particular good and drive its price down to zero. As for why different investments have different rate of return, the answer is uncertainty. An investment with a guaranteed return will tend to reach equilibrium with the interest rate, but a more typical investment involving a degree of risk requires a higher return to compete.

From the depositor's and bank's points of view it makes no difference whether the loan is for investment or consumption. The loan itself is the investment which provides a 5% return. In the case of a business loan the return will generally come out of the proceeds from a capital investment, while the return on a personal loan is typically funded by foregoing future consumption. The former is easier to analyse in terms of accounting, but economically the personal loan is just as productive—it corrects an imbalance involving an excess of future income relative to the desire for present consumption, just as capital investments improve the balance between future supply and present supply when future demand is projected to be higher than present demand. (When future demand is expected to be lower than present demand, capital investments are malinvestments.)

Well, yes, of course any investor is going to need to weigh the opportunity cost of depositing the money in an interest bearing account against the return expected from the investment. And against every other investment he could make with that money over the period of time that it will be invested. And of course, not all profit is financial. Perhaps an investor is willing to forgo the interest from a bank account or other investment because he likes the view that the copse of trees gives him from his window.

Its just one misinterpretation after another with you isn't it.  When ANYONE considers investment activity they will need to decide for themselves what they PREDICT the average amortized interest rate to be over the time span of their investment activity.  Central or decentralize control of the rate is irrelevant, the holder of money is going to decide what rate they believe is going to occur so they can weight the investment against the opportunity cost of just letting the money collect interest.

Elwar just stated that he loans at 19%, thus he would logically not lend too (nor would any entrepreneur attempt to borrow for) any investment activity which gets less then 19% internal rate of return.  That's an absurdly high return by modern standards and virtually no investments are available at that kind of return other then speculating and other high risk activities which we know are not the basis for a sound economy.

Well, except for loans.

You also seem to assume a uniform interest rate, as though it were set by a central bank. I don't think that's a fair assumption in a bitcoin economy.

If I payed back a loan that would be with money which would be an additional input into the investment and be part of the NPV calculus.  The tree isn't going to produce any cash flow for 100 years so I can not use it to payback the loan until it is salable.

If the tree sold for 100K then it would have an internal rate of return of ~7.1% which would be higher then 5%, all your showing is that an investment with a higher rate of return is more profitable then putting money in a bank at a lower rate.  Your hypothetical tree of high return and mine of low return just demonstrate that only investments higher then the rate of interest are profitable because profitability is effectively internal rate of return minus interest.  That is why lowering interest rates stimulates investment because it makes all investment more profitable.

Um, I do not know what conclusions you all have come to on whether or not interest can be made from bitcoin, but I am glad that I can make money on the interest I charge for loaning out my bitcoin.

I am currently getting about 19% interest yearly on 25 BTC compounded daily.

Assuming, of course, that they had not paid it off long before.

And your example is intentionally distorted. If I said "I plant $100 worth of trees, and in 100 years I get $100,000 from the sale of the trees, at 5% interest, putting that money in a bank would lose me $86,850." My example would be no less valid, but the answer to which project would be more profitable is reversed.

Each dollar put into tree planting returns less then a dollar put in a bank so your most profitable choice is to but the whole $100 in a bank and have $13,150 dollars in 100 years.  Also consider the scenario ware the tree planter wants to borrow the initial $100, they would then owe
$13,150 in 100 years and only have $1000 in revenue to pay it back with making their whole business a massive loss.

This gets back a bit to nybble41's claim that ALL that money in the 5% interest earning bank account is actually going out into productive investments with a 5% return on investment.  I don't think it's at all reasonable to make that kind of leap of faith when we know that LOTS of loans are just for short-term consumer credit.

Your still asserting that interest is caused by the return on investment of capital and thus the interest rate reflects currently available investment opportunities that have that rate of return.  If this was the case why doesn't more money get directed to these investments saturating them and dropping us down to the next tier of investments and a lower rate and eventually to zero?  Clearly their is some floor that gets hit to prevent remaining investments from being funded because their are always a broad spectrum of opportunities available.  myrkul has argued this is due to time-preference in which peoples short time horizons cause them to forgo a longer term investment.


Further more your argument breaks down as soon as investment that is not for the purposes of investment is added to the picture, GC gave some examples which are some what inflammatory and I think distract us by bringing in banking practices that are not necessary.  Lots of lending is to non-investment activity without it being fraudulent.  If a lender can lend to someone in need of some money to cover an immediate expenditure that their savings don't cover (lets say a Root-canal) at 5% then they will do that first.  So these non-investment loans will 'pollute' the pristine investment-as-the-cause-of-interest-rates scenario your presenting.  I maintain that liquidity value of money is going to act as a floor for interest rates and simply cuts off a large chunk of possible investments.

Ah, thank you, I was confused as to how you got from $900 profit to $93 loss. In that case though, why not just plant $93 worth of trees, and invest the $7 at 5%, and have $1930 at the end of 100 years, plus a plot of land that you can continue to plant trees on?

Assuming, of course, that you can find an investment that will pay out 5% for 100 years.

As I said

But don't think I've confused inflation with interest because I'm counting the interest rate as a discount rate for NPV calculus, if I can put money in a bank and get X% return then any future sum of money needs to be compared to how much money I would need to put in a bank today to get that much.  In the simplest example a dollar one year from now is worth 95 cents today because if I had 95 cents today I could put it in a bank earn interest and have a whole dollar in one year.  Being able to earn interest makes them equivalent and thus discounts the future.

In the tree example it's not the tree that's collecting interest, its the 7 dollars today that I could simply put in a bank at 5% and which would become $1000 dollars in 100 years without having to DO any tree planting at all.  This is really very basic NPV math, if you still don't understand then go educate yourself on this concept because it has a huge bearing on what activities the monetary system is encouraging and discouraging.

+1

Well, there you go. [/thread]

Of course you can lend bitcoin and charge interest. People do it all the time.

If you're getting a 5% real return, then it doesn't matter how much fractional-reserve banking is involved; it's still a waste to put the money into planting trees at 2.3%. Changes in the money supply just make it much more difficult to determine what the real return is; this impacts the estimated return of the tree investment just as much as everything else. That $1000 you're expecting to sell the tree for in 100 years may be worth less than the $100 you're spending now to plant the tree.

Neither interest nor fractional-reserve banking is evil. Fraud is evil, and FRB can be fraudulent (even if it is spelled out in the fine print). However, that is not always the case. It is only when people try to manipulate the interest rates, by whatever means--printing money, lowering FRB reserves, demurrage, fraud--that we are prevented from measuring wealth properly. In this money is no different than any other good whose price is being manipulated, save that money is the one good against which everything else is measured, so when its price is manipulated the effects are felt throughout the economy.

Yeah. And if "they" invest your money to trading fractional banking based financial instruments to get that 5%, it is quite certainly rather wasteful as compared to any productive activity such as planting trees, no matter how low the return % in numbers. See, I don't care what a theory of economics says, productivity in real life can not be measured as increase in numbers of your wealth, because the numbers of your wealth can be skewed to not reflect real value.

And we come back to the great evil, interest and fractional banking combined. It messes up everything, we can not even measure wealth properly or talk about interest without confusion.

Whether you buy it or not, it's true. Planting trees at a 2.3% return is more wasteful than "sitting on your money" (a.k.a. investing the excess production that money represents) at a 5% return. Remember that the only reason you can get interest (or deflation) and thus gain anything from "sitting on your money" is that your deferred consumption is allowing others to make investments with a return which exceeds the interest/deflation rate. It's not a matter of whether investment happens, just whose investment--yours at 2.3%, or theirs at 5%.

Great, then could you please explain how (and why!) one would charge interest on a plot of trees?

I don't know whats giving you that idea, all my NPV examples lack any adjustment for inflation because both of us agree inflation is bad and no one in this thread is advocating for inflationary money.  Demurrage can and should be implemented alongside policies that target zero long-term inflation.  Your objection to inflation is different or perhaps just more inclusive in that you believe it has a whole slew of negative effects, I believe it destroys price information in the economy and I see no positive effect from it that can not be achieved with demurrage so I reject it on the price information basis alone and do not need to defend it.

Their is also a subtle argument against inflation that I've heard and while open too am not entirely convinced of, that is is by nature non-uniform across the economy.  The new money created either by the printing press or through credit expansion generally get put in the hands of the same people first (entrepreneurs able to get loans or government) and they enjoy the benefits of the preexisting low prices before they are bid up and then simultaneously enjoy paying back their loans with money that has reduced value (unless the lender is wise enough to pad the interest rate to compensate for inflation).  Now this isn't to scapegoat entrepreneurs, governments or banks, the fact is you have new money entering an economy in a non-uniform manor and you would have the same problem if it was all given to the poor or any other select group, every dollar held is not spawning a nickle to making every individual 5% wealthier (nominally).  So it must 'ripple' outwards in waves and cause disruption in prices and possibly creating a significant wealth transfer.  Demurrage because of it's absolute uniformity won't cause that, it's a bit analogous to how the surface of a bath tub remains smooth when you drain water from the bottom, but it is covered in ripples when you fill it from above with the spigot.


The effect of inflation is generally included in the Discount rate of a NPV calculation because its one factor that would lead us to discount future money.  But inflation if it is truly a broad and uniform increase in prices and wages then our future cash flows should increases even as our business activity remains consistent.  If we take inflation into account to increase our discount rate then we should also modify the expected future cash flow.

So in our tree example lets add 5% inflation.  Now if the $1000 dollars is what lumber sells for in the present then we can expect that lumber to be selling for $131,500 in 100 years after 100 years of inflation.  The discount rate is now increased to 10% by combining the interest rate and the inflation rate.  The tree is once again worth just a few dollars and the whole venture is unprofitable, effectively inflation is canceling out if it's on both sides of the equation.  If their were no demurrage and no interest at all and we had a discount rate of 5% from inflation alone, and used the expected future inflated price of lumber then this would also cancel out and give a $900 profit.

Only problem is we expect inflation to effect interest rates to some degree.  Maybe the effect is the same as demurrage, maybe not.  As I said I'm not defending inflation and think it has significant downsides that rule it out as a solution when we have demurrage as a better option, so I don't really care to go into it's effects.  But don't think I've confused inflation with interest because I'm counting the interest rate as a discount rate for NPV calculus, if I can put money in a bank and get X% return then any future sum of money needs to be compared to how much money I would need to put in a bank today to get that much.  In the simplest example a dollar one year from now is worth 95 cents today because if I had 95 cents today I could put it in a bank earn interest and have a whole dollar in one year.  Being able to earn interest makes them equivalent and thus discounts the future.

Money is "trading some apples in the autumn to a contract that provides fresh food throughout the winter".