Topic: Interest rates in a deflationary currency - page 2. (Read 5553 times)

You have highlighted the distortion we now have in the economy, it is about saving something of value - real money to debt money.

Wealth isn't created by overconsumption, but by deferred consumption.  Hard money's value is reflected in the state of the economy, Fiat is reflected by the optimism of central planners, or bankers. Saving hard money is risky in itself but saving fiat is just stupid.  

We should be saving something of value, but instead we are consuming it exponentially, to satisfy the return on investment in recourses extraction ripening through the entire civilisation, in order to stay solvent.

In Fiat terms investing in more efficient oil extraction, is a good investment, simply put in a dynamic situation it will lower the cost of Oil, and the profit to cover the investment will be made on the increase in volume. The input costs in other industries will benefit and they too can lower their production costs, they will make up the investment on the increase in volume. Before you know it you will take what used to be a recycled bottle and be throwing it away, because we have invested in industries that do that more efficiently, while it is progress, it is progress that is a result of malinvestment, ultimately based on avoiding a default in1971. (I am not bitter just grateful it happened now and we didn't have to keep a fractional reserve gold standard going for a few more hundred years of operation.)    

In Fiat terms saving money is deferred consumption, and collectively inflating the value away is theft.
Not so with hard money or a bushel of wheat or something.

The only option now is to invest your way out of the problem, (as saving fiat is for stupid people who want to see their money devalued) but the viable alternate is investments that are more of the same resulting in concern highlighted here: http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/

The old way of doing things is broken, we need to learn to fly, and stop thinking we have launched off a cliff in the 1900 believing we are flying while just a few realise we are falling and can see the ground approaching fast, if you have better ideas or if I am missing something I would like to learn.

Good luck selling the IOU as money. 

To your point, great well done, there is lots of opportunity, I haven't been so lucky, not because it is wrong, just because the price of goods and services are deflating in relation to Bitcoin's value. 

Fortunately not everyone is lending there Bitcoin's out now and trusting they will be repaid when the value is $1000+. If you want to speculate and you think the future value will be $1 then (inflation in goods and services relative to Bitcoin is a good time to lend - it's up to the market to assess the risk, all the power to you, your actions are valued in the free market)

I think you may be missing my point.
I don't think we disagree on anything, other than you believe the IOU you create by lending Bitcoin's is sound money because you are a law abiding and trust worthy citizen, and I believe your IOU's are risky, and it is immoral to argue otherwise.

Or phrased in contemporary banking terms:

I don't think we disagree on anything, other than you believe money created by Banks through fractional managed reserve assets baked by debt is sound money and I believe it distorts the economy and is risky and it is immoral to argue otherwise.

That and Depositors traditionally are entitled to withdraw the deposit.  Shareholders must find the greater fool and sell for what they can get.

Well compare how is USA doing with all this "stealing" and how is Spain doing. Spain has over 27% of unemployment and over 50% among youths and it is not temporary but from 3 years and still getting worse. You cannot save work potential for later, if someone is unemployed his output is lost forever.

And saving money is just saving money. It is not automatically investment and/or really saving something valuable (like bushel of wheat or something).

Well I did lend some bitcoins on coinlenders. Are they fraudsters? Or am I?

No kidding workers are being screwed, this is a mess and solving it, something has to give.  
Penalising savers through inflation (adjusting exchange rate) flies in the face of what has allowed humans to flourish,  i.e. Penalising the savers of recourses (Differed consumption of others debt in the case of fiat) for unforeseen events.

I am not convinced with " adjust it more efficiently through exchange rate of domestic currency" (ie. The invisible thief) is the most efficient option.

The net result of inflation is investing in future risk taking to maintain value. That investment = Economic growth, or stagnant growth and accelerated consumption. The net result is malinvestment.
I suspect we'd be better off taking the hit hard now and reinvesting finite recourses after the economic corection as opposed to business as usual and malinvestmenting the recourses compromising the future.  

Go for it, lend you Bitcoin's while they are hyper deflating, I'll save my own Bitcoin's and be my own bank, each to their own.

When you see this you Know Bitcoin is something to be loved, it will make bankers honest, or better illuminate banking fraud.

Workers and retirement are already screwed. So either you get straight retirement default and workers fired or adjust it more efficiently through exchange rate of domestic currency.

But in my example it was created by risk taking of private individuals? 

You may disagree, but this is the way it is. How you are supposed to stop it? Prohibit lending? And it is not stealing. Like any other commodity you have right to your property but you don;t have right to it's value. You don't loose money because some other people starts using money substitutes. You just loose it's purchasing power. It's ok. It is same as you hold your gold/car/home you have right to it, but if other people actions affects it's price you wasn't robbed.

And this risk should fall on me and Bob, because I lent money and accepted risk of potential default. Bob accepted it too when he made transaction with me.

Take example of mtgox. There was mtgox codes back then and was traded for same price as bitcoin and in fact it was only mtgox IOU. When you make deposit to mtgox you no longer have bitcoins but only mtgox promise to repay. Nothing stops mtgox from creating new account contract which allows lending of deposited bitcoins. If user accepts it it will work as good as any normal bank.

One would invest in bank to get interest on top of this appreciation.

@ molecular - all good points,


re aaaxn point about he is correct, that is why we have problems today.

What I have learned from this exercise is that sticky prises are in fact subject to human preference and fall out of the science of economics and into the realm of the social science of economics.

Sorry to quote myself and fly off on a tangent, but: fuck wage negotiations anyways. People should just either get a new job every year (or month/week) or have their own profitable businesses.

so the purpose of local currencies is to more easily and sneakily be able to screw over workers and retirement savers?


What ranting of sound money advocates? I think that wasn't ranting, that was advertising: "had you used sound money to save instead of bank deposit (aka investment in bank) you would now be better off".

the difference between depositor and shareholder is largely that depositor has no vote.

I think this is where you and I part ways, I don't see when and how and from what as an artificial distinctions, I see the when and how  and from what credit is created as fundamental to prosperity in the economy.  As I illustrated your definition of credit is dept based, and is controlled by trust - and human preference (and today somewhat by economists and central bankers) - where it shouldn't be fallible to the will of the controller/ creator, but be created by the risk taking of individual members needs in the economy. 

Quote simplified to illustrate based on hard money and to show who is at risk:"you" and "other friend Bob".
I agree with how credit is created, but disagree why it should be, and by inflating the money supply it is but steeling by another name (via the Cantillon Effect). Make it legal and Congratulations you have guaranteed wealth and no liability.

John's ability to repay is dependent on the unpredictable future, the result is John is actually taking the risk, not you or Bob. John now has at his disposal the ability to Malinvest, (simple example - not foreseeing a drought), he will not be able to get the wheat to repay, however he is absolved on the risk and the risk falls to you and Bob. 
   
I don't understand your position, the power to do so, exist inherent in the protocol, by exposing the risk to the lender.  Let me explain, if you are lending your Bitcoin you are not lending an IOU to lend Bitcoin, you are risking your own Bitcoin. I would be more comfortable just giving an IOU or credit to the borrower like the banks do today and if he can't repay, it is just a bad debt not at my expense. 

Let me illustrate by modifying you quote below.
Now that the risk has been exposed, why would anyone invest Bitcoin in a Bank when it's purchasing power is increasing (economic growth = Price deflation)
The result, the viability of credit is based on the ability to get repaid and earn interest, this post dose the basic job of illustrating how this function is a by-product of a free economy: https://bitcointalksearch.org/topic/m.2476856 both saving and lending (credit creation) is reworded according to the needs of the economy. Not the ability of the bank to create credit.

If you put money to bank you are no longer its owner. You just have bank liability. If bank goes bankrupt you don't get your money (unless you are insured).
There are some distinction between bond holders and depositors but only regarding payout priority. If bank looses enough money (or all) no one gets anything.

The new piece is that not just lenders take the loss, but also depositors, who are converted to shareholders in the failing bank.

I'd agree, it is one of 2 options, I would go further and say when I have invested in something and it has gone bankrupt or delisted, I just lose my money, and so it should be for the lenders who miscalculated and lent to those states.

I think a bigger reason for continuing reduction in exchange rate is the fact that miners are currently transferring btc (wealth) to chip makers in a futile attempt to maintain hash rates and those manufacturers are converting those btc into fiat because it's not like the avg Chinese factory worker wants to get paid in btc.  This trend will continue for a while since true asic chip cost is very cheap vs current high exchange rate.  But irregardless of that short term issue all fiat is currently in a race to the bottom anyways so btc future will be fine.  Also nothing wrong with a deflationary currency.  During the entire human existence gold/silver was deflationary vs the entire human population growth rate with maybe a few short term exceptions (bubonic plague, new world ore discoveries) and yet it's still managed to be used as a store of wealth to this day.

The Cyprus issue includes not just what happened, but what was considered and expected for future.
The "bail-in" proposal of deposit tax exchanged for shares of failing banks presents a future model.
Wipe out lenders/bondholders and dilute shareholders by hitting the deposits to cover losses and secured debt and issuing essentially worthless shares to compensate for the deposits seized, and let it keep functioning.  If the bank manages to pull out after that, those shares may someday be worth something, but that would be largely unexpected.

It is pretty valid argument. Lot of prices in economy are sticky. You can't easily reduce wages or retirement entitlements. It is more efficient to inflate them away.

I was always wondering why all this ranting about what happened in Cyprus among sound money advocates. What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.