Topic: Interest rates in a deflationary currency - page 3. (Read 5553 times)

I didn't come to that conclusion, I merely wanted to discuss this objection against a global hard money because I'm unclear how this argument really works so I cannot answer adequately to it, which I would very much like to be able to do. So I was kind-of playing devils advocate in arguing for local currencies.

Let's look at the argument again how I see it: the idea is that a nation or economic are (which has its own currency) can devalue their currency in order to increase outside demand of their goods (these good will be cheaper for outsiders to be bought) and services (tourists can consume services within the country for cheaper than before). The argument implies this is a good thing because that country can help its economy in this way.

Is this a valid argument?


Like "ok, then you have to sell your gold to the IMF"?

Yes, it's true and I think it's basically the only sensible way to go. People invested in banks, banks failed, people lost money. The way it should be.
Sideonote: The opposite happened with greece: People (institutions mainly) invested in greek bonds, greece failed, european taxpayer bailed them out. Taxpayer insures creditor. Not the way it should be.

Of course there are some problems with this (letting banks fail), namely that people are generally mislead to believe that when they put money into a bank account they still own it (not the case, they borrow the money to the bank and the bank owes them money) and that this deposit is somehow insured (by who? to what extent? obvously it's not really insured as could be witnessed).

Another problem is that it wont work globally because then the whole financial sector fails (as it should) and that's not something the powers that be want to see because then all their funny money power would vanish due to the debt collapse. They'd rather see ww3, a reduction of the population and a scape-goat to blame for the consequences of all the crimes they commited.

(I don't know why, but this thread makes me rant a lot. Dont know wether that's productive)

I think you are making artificial distinctions. If you lend $100 to your friend John you hold his IOU where he promises to return $110 in a year (or $101 in month, or any day on your notice, depends on contract) . John is free to do anything he want with borrowed money. If John is credible you can use his written promise to pay for goods from your other friend Bob. Congratulations you have just increased money supply, because you made transaction with money you don't yet have. It is basis of all credit creation and it does not depend on what John does for living. Substitute John with bank and you have how banking system works.
This is wishful thinking. Bitcoin does not have power to do so.

Great thread. Thanks.

I don't come to the same conclusion, Cypress by joining the EU and the Euro, is not being controlled but is being freed to interact in trade according to common laws.

They gave up the ability to steel from the people by printing money, and as they did not take fiscal responsibility for there spending, someone had to define another viable solution for them.

No forbidding necessary we just need to use the same language to ensure we all understand each other. 

Your definition of credit (involving IOU's) is the bases for the system we have today, and it requires unsustainable growth.

Credit also involves the matter of moral principle, and an honest understanding of who can create real credit.
Only the producers in an economy are the ones who create goods and services, and as a result they take the risk by producing (hopefully something other want) and can risk again when lending to others hoping to be repaid with something they want.

Regress to a prehistoric agricultural society, to understand the principle: the producer of the wheat, can create credit by lending the wheat, but if the producer promises to lend the wheat he intends to grow, he has not created credit, but a debt.

As long as credit is created from goods and services that have been produced (or saved), it is honest, and real credit, provided it is given at the discretion of the producer / owner.  But when credit is artificially created, it is a debt, and will ripple through an economy as boom and bust as the system re-balances.

Bitcoin functions on the premise that Bitcoin credit will be created from Bitcoin's already saved, and as a result should only flow at the discretion of the saver.

painloard2k, I loved your real-world explanation of austrian school thinking above


This hits to the heart of the more general problem we have: people being coerced to do involuntary (or mislead to do unprofitable) transactions.

Regarding other parts of the discussion above: I agree a fixed money supply is a good thing and I think the world would run much more efficiently and general prosperity would be much higher than with the elastic ("managed") supply we currently use that in addition unfairly favors certain groups of people.

The argument that an inflexible money can't support growth of an economy is simply false. Prices can adjust. You could run the world economy on one Bitcoin without a problem. There are some political and psychological problems ("price stickiness") that will have to be overcome, though.

Another argument that is being made against a fixed global money supply is that this would result in the inability of nationstates (or other smaller/bigger economic regions) to adjust the value of their currency in order to "regulate" their local economies import/export ratio. I'm unsure about wether or not I like the idea of local elastic-supply currencies in addition to a global fixed one with exchange markets in between.

The situation in Europe seems to suggest that the common currency will in effect enable a move toward more central policy control and it can be argued that this was the goal of the Euro all along: a centralizing "coup d'etat" from above, essentially a power grab.

Maybe local currencies are a way to decentralize (policy) control?

(sorry, I went off on a tangent there)

There is no need to forbid credit creation if the credit is not forced on unwilling people.
If people give credit, they do it at their own risk.

With a fixed supply of money, the government can not create "insurances" like FDIC (because they can not print money), so people would be picky about giving credit to a bank or any other entity.
This would avoid the problem of bankers giving credit to any bum they find just to inflate their ratings and be given bonuses and leaving the mess to someone else a few years later.
People would not bank with a bank with less than 20% of reserve and they would probably prefer bank with much higher reserves.

Banks would specialize in money services (payments, holding, transmitting) or in loaning services (obtain loans/capital from investors, giving loans to dependable people under decent conditions like "50% down to buy the first home and we will finance the other 50% at 5%-10% year).
This would have the advantage money would not be jeopardized without the explicit and informed consent of the owner.

Credit creation is very basic. All you need is to generate some promises to repay (IOU) and if you have enough credibility people can start to accept this IOUs as good as money. There is absolutely no magic in a way bank works. How do you suppose to forbid this? You can however limit to what extend it happens through careful regulation (limit single entity size, limit size of multilateral guarantees, etc), but austrian economists wouldn't be happy with that?
Another approach is to guarantee system solvency at central level (it is quite opposite of limiting regulation) by introducing central banks, but austrian economists are not happy with it too?

That's not a problem that's amazing, it automatically adjust. Consequently it will cool off and stop growing and the balance of maximum prosperity will be kept in equilibrium.

The problem with a fixed money supply is that if the economy grows too fast, it won't grow very fast. Because interest rates.

I was going to add something to address your point, but I thought it was a little deep until I read your reply, what I have come to understand is the money supply should be restricted by the base money supply to degree the free market allows. Free Market Banking money theorists presumed, money creation is a function of the free market, and it shouldn't be. (Although fractional reserve banking in Bitcoin is viable, the valid response should be but why do it! you don't own your Bitcoin's unless you own your Bitcoin's.)  

When banks make money or fractional reserves credit, they are pre-empting or overcompensating for the natural economic correction, this will eventually result in the Boom Bust cycles the Keynesians, set out to eliminate.  Keynesians and Monetarists, ironically try and manage the situation but can only make the cycles bigger and more damaging as they are working of the same incorrect premise.

Hayek, and Mises, on the other hand have taught me that having a fixed money supply free of fractional reserves credit creation will provide maximum prosperity in the economy, and the risk of lending will be driven purely by market forces, and not banking interests.

So the periods of monetary inflation and deflation if base money is constant, should be avoided if the goal is to maximise prosperity in the economy, that is why the Bitcoin experiment is so great, it will allow this idea to be tested despite it flying in the face of "contemporary conventional wisdom".

Everything's fine except that you are missing that constrained base money does not mean that money supply is constant. Money supply is affected by credit creation and result is that there are  periods monetary inflation and deflation even if base money is constant.

And how the price of money is valued can only be a function of the market, free of manipulation and distortion.

 In an economy, where you manipulate the money supply to encourage growth you have to invest to maintain your value resulting in perpetual growth ( ie. the economics today - it is unsustainable for scientific reasons, and is immoral as the new money creates poverty as a result of the Cantillon Effect )

In an economy, where you have a fixed money supply growth or lack thereof is a result of corporative trade, if the economy is growing, you have price deflation, investing and borrowing are naturally unfavorable, and saving with 0% interest is beneficial. (Perpetual deflation reflects prosperity)   

When the economy is shrinking you have price inflation (a lack of goods and services), higher prises provides opportunities for entrepreneurs and innovators, investing and borrowing are the way entrepreneurs get capital to grow the economy. Saving with 0% interest while experiencing inflation is unwise as the saved value is eroded, lending is naturally encouraged. (inflation reflects a need to fulfill wants in society)   

In a fixed currency model like the Bit-economics - both saving and lending is reworded according to the needs of the economy - economy being defined as the level of cooperation in trade between individuals and businesses to sustain maximum prosperity.)

So to derive ways to encourage lending and pay interest in a deflating economy is unnecessary and wrong as it sends the incorrect signal to the free market. 

You are right about the premises but not the conclusion, because your economic thinking is wrong.

Lowering the level of investment is not wrong if the level of investment is too high.
There is a healthy level of investment (E.G. between 10 and 20% of your net worth) and there is unhealthy levels (E.G. less than 10% and more than 20%).
In the case of not enough investment, the society (or individual) is not able to rebuild the capital consumed in production (E.G. substituting a milling machine with another milling machine when the first become obsolete or break down)
In the case of too much investment, the society (or individual) is investing in something unable to return enough to justify the investment (and associated risks). In short, the investment is at a loss.

With a fixed money supply it is impossible for the government (for anyone) to manipulate the currency so to cause booms and the correlated busts. It can not push people to invest just because it drugged and doped the markets with unlimited cash injections.

As too much money is spent in investment or consumption, the prices spike and people is forced to slow down investment and consumption.

As consumption is lower and only high yields investments are allowed by the markets (compared with inflating fiat), people is able to continuously accumulate real capital (stuff) to use to increase production, make it more efficient, and so on. Capital accumulation is fundamental, because productivity is linked to the capital available:
a man with a shovel is a lot less efficient than a man with a caterpillar, but the latter need a lot more capital.
The work done by the first is one or two orders of magnitude lower than the work done by the latter, but the capital needed is much lower.
The first could be able to earn 5$/hours where the latter could earn 20$ (after the costs are deducted) but one need just 10$ of capital where the latter need 10K $ of capital.
The first could save 1$ at hour of work where the latter could save 12 $.

With a depreciating currency like the US$, with an inflation of 5% (if it was so low) a men would need 500 hours of work (around 6 months of work) just to keep the value of his saving constant at 10.000$ (and be able to move from a hand shovel to a mechanic one).
First year he would be able to save 2800 $, but the price of the MS would be 10.500.
In the second year, he would reach 5600+140 (he also raised his earning of 5% - if he is lucky), but now the caterpillar price is 11.250 $.
In the third year he reach 8827 US$ and the price would go to 11812 $.
In the fourth year he reach 12.068  US$ and the price move up to 12155 $.

If the currency kept his value (so prices are stable) he  would be able to buy a mechanical shovel in 3 years and half, where with a 5% depreciating currency he would be able to buy it in just more than four years.
This guy would delay the ability to go from 5$/h to 20$/h for more than 6 months (months he would just work, eat and sleep to save as much as possible).
Due the additional six months, he would not be able to earn 42.000 additional $.

The difference between the two scenarios are staggering: the US paper $ (with 5% inflations) guy lost 6 months and 42.000$ (in constant purchasing power) compared to the gold $ guy.
These 42K$ and six months are available to consume and invest more and earlier.

In the inflating scenario, the people increasing their purchasing power faster are the people able to obtain newly printed $ before all other at low interest, buy stuff and resell it later at higher prices (aka carry trade). They do not benefit society with more good and services, just suck wealth from it.

There ever exists only 2 types of investments. I being investments and R being next period returns and currency being capped:

1) I
2) I>R. Keeping the money makes more sense then investing. So these investments are never made.

The problem with a capped currency is almost all investments fall into category 2 and therefore a bitcoin only world would stifle investment.

Read more: https://bitcointalksearch.org/topic/some-dilemma-regarding-investments-and-social-welfare-in-an-all-bitcoin-economy-213860

Banks don't pay interest rates. They are just (taken we're talking about classic "depository & loans" operations) intermediaries.

Borrowers pay interest rates. They can pay them because they make a good business with the capital and come out on top (investment).

There's also the possibility of default, that's why money doesn't concentrate in a single point in the long run.

Economics is not an ideology; it is a science.  Like other sciences, to properly study economics you must be able to remove your ideological hats.  I know that it's hard and that many people fail.

I agree.  Only the market can properly determine risk, and only when it is not interfered with.

Of course it works, but the point is, why do it? Why intentionally cause a shortage of money?

I think the whole point of limiting interest is to cause shortage of lending with interest higher than cap. You seem to agree it works.