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Topic: Interest rates in a deflationary currency - page 5. (Read 5553 times)

sr. member
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Your confusing risk premium in an individual loan with core interest rates, risk-free loans such as government bonds still carry interest.
Were Greece bonds risk-free? Yes they were until they weren't Wink
But serious: interest of individual loans and 'risk free' government bonds are not independent variables. You have opportunity cost for eg. If private sectors are wiling to pay more for capital it also increases government bonds interest.
Anyway I don't see how it is relevant to my post. I was talking about problems of commercial lending market under high deflation.
sr. member
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Of course you are right. There is also risk of borrower default and it must be factored into interest rate. If you lend to 100 different people and expect 10% to default you need to charge ~10% interest just to cover that loss. That lower bound interest is not affected by inflation/deflation rate (you can't go with interest below expected default rate). What is tricky is that in deflation you actually have more chance for default, because borrower nominal income falls over time.

Your confusing risk premium in an individual loan with core interest rates, risk-free loans such as government bonds still carry interest.
sr. member
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Their is an unabashed moralistic tone on these forums that praise savings as virtuous and noble and thus entitled to great personal gain, the only distinction is most of BTCs windfall is deflationary rather then from interest.  But the same general tone is present when ever I've discussed interest.  Naturally such moralizing dose not appear in dry academic papers that constitute the academic Austrian school core (or at least its subtle), but no one can seriously deny that this belief is rampant amongst the wider non academic Austrian populous.
sr. member
Activity: 359
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I like to add to the discussion that even in a deflationary currency negative interest rates occur. Germany had them last year on their bond offerings.
It was only 'slightly' negative. Nominal interest cannot go much below zero, because you can do arbitrage by just holding cash. Holding cash incur some small cost too and that is why you can get 'slightly' negative nominal rates.

Inflation isn't the only component in interest rates.  Take a CC for example it is 20%+ even in an economy where inflation is ~3%.  Even a mortgage generally run 1% or so higher than the 10 year treasury bond (which rarely current QE fun aside) has negative real interest rates.
Of course you are right. There is also risk of borrower default and it must be factored into interest rate. If you lend to 100 different people and expect 10% to default you need to charge ~10% interest just to cover that loss. That lower bound interest is not affected by inflation/deflation rate (you can't go with interest below expected default rate). What is tricky is that in deflation you actually have more chance for default, because borrower nominal income falls over time.
hero member
Activity: 532
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Inflation is not what causes interest, interest arises purely from liquidity premium, aka the value of liquidity.  The only argument among economists is to what the source of that liquidity value is.  The general Austrian answer (which myrkul endorsed last time we debated) was a time-preference in which everyone wants to engage in shortsighted consumption in the present.  Thus the 'good' savers who resist the temptations of immediate gratification are entitled to extract interest from the shortsighted gluttons, basically a kind of sick morality play designed to justify usury upon ones fellow man.
Wow, talk about distorting a viewpoint to suit one's own needs. If you were anyone else, I'd call that out as a textbook strawman.

No, my friend. Time preference is merely that: a preference. Austrians make no moral judgment as to whether or not savings is good and borrowing bad in a personal finance situation. It is what it is. Time preference is the value a person places on having money now as opposed to waiting. No more, no less, and no more "good" or "bad" than sexual preference.

The borrower and the lender come to an agreement that satisfies both the borrower's preference to have money now, and the lender's preference to have money later. As long as everybody's happy, there's no need to put any moral judgments on either side of the equation.
sr. member
Activity: 350
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Hi,

I have searched the forums and haven't found a satisfactory discussion, please correct me if I'm wrong.

Question:How do banks get more coins to pay interest rates if no new money is produced?

Further explanation:
Let's say we have 21M bitcoins and a free-market economy based on them. Everyone has some of those bitcoins and are exchanging them with each other for services and goods. Now, if I am a bank, how do I get more money to pay my lenders? I understand that the things you can buy with your coins grows overtime, but how do you get more money itself? If everyone lends to everyone (like kind of what happens today), then we would want the number of coins to grow, or someone would not be able to get enough to pay back, despite being able to purchase more stuff (his intrinsic wealth growing). On a further note, even a 1% interest would be actually compounded by the deflationary trend, making it quite lucrative. Is it possible that negative or zero interest would be lucrative (just to keep your money safe?)

Perhaps my questions are simplistic, but then again so is my knowledge in economics.

Thanks for reading

Borrowers earn coins by providing goods and services to the lenders, which is paid from the interest received.  This happens until the debt is fully repaid or partially canceled.

Note that a short squeeze can be applied onto the borrower if the lender keeps hold of the interest.  The result is that the borrower must scramble to make a repayment or default, in a secured or unsecured way.
legendary
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I like to add to the discussion that even in a deflationary currency negative interest rates occur. Germany had them last year on their bond offerings.
sr. member
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Inflation is not at all a component of REAL interest which is what were really concerned with, real interest arises purely from liquidity premium, aka the value of liquidity.  The only argument among economists is to what the source of that liquidity value is.  The general Austrian answer (which myrkul endorsed last time we debated) was a time-preference in which most people wants to engage in shortsighted consumption in the present.  Thus the 'good' savers who resist the temptations of immediate gratification are entitled to extract interest from the shortsighted gluttons, basically a kind of sick morality play designed to justify usury upon ones fellow man.

The reality is that liquidity is in the nature of money and it has value because liquidity is insurance against any possible calamity as well as a ticket to any opportunity that may arise.  And their is nothing wrong with people acting on the real opportunities or calamities that may be occurring, it is not a moral failing on their part to seek liquidity, but it is an impediment to the economy when they are forced to pay for it.  For liquidity is not created by the money holder, it is created by the marketplaces willingness to accept money and thus give it liquidity, a publicly created good like liquidity should not be monopolized but instead it should be available to all but it should cost you what it's worth. 

Getting something for nothing is never fair, as they say their is no such thing as a free lunch and liquidity under a hard currency is a glaring example.  How ever free the lunch might seem someone else always bears the cost and no self-respecting believer in fairness should endorse such a thing.
member
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Bitcoin's economy
Inflation isn't the only component in interest rates.  Take a CC for example it is 20%+ even in an economy where inflation is ~3%.  Even a mortgage generally run 1% or so higher than the 10 year treasury bond (which rarely current QE fun aside) has negative real interest rates.

The issue would be that Bitcoin is currently experience very high deflation relative to the dollar and other major currencies.  However that trend will not hold forever.  I mean at only 24% USD:BTC growth we would be looking at the Bitcoin money supply worth  ~2T in a decade, then what 20T by the next decade, 300T by the decade after that.  
You mean the price pf Bitcoin is rising?What does your money supply mean?

donator
Activity: 1218
Merit: 1079
Gerald Davis
Inflation isn't the only component in interest rates.  Take a CC for example it is 20%+ even in an economy where inflation is ~3%.  Even a mortgage generally run 1% or so higher than the 10 year treasury bond (which rarely current QE fun aside) has negative real interest rates.

The issue would be that Bitcoin is currently experience very high deflation relative to the dollar and other major currencies.  However that trend will not hold forever.  I mean at only 24% USD:BTC growth we would be looking at the Bitcoin money supply worth  ~2T in a decade, then what 20T by the next decade, 300T by the decade after that.  

As the Bitcoin economy gets larger its growth rate will slow.  Bitcoin will not have extreme price deflation.  Under a scenario where the purchasing power of a Bitcoin is increasing by say 1% a year I would expect interest rates to be very similar to inflationary interest rates but 2% to 4% lower because the inflation component has been replaced with a deflation component.

hero member
Activity: 532
Merit: 500
FIAT LIBERTAS RVAT CAELVM
I agree.  I'm no fan of demurrage.  I just see it as slightly more honest than willful inflation.
Oh, it's much more honest. I mean, when your money has an expiration date, any fool knows not to hang on to it lest he get stuck holding the bag.
legendary
Activity: 1904
Merit: 1002
Question on demurrage:
What do you do with those lost coins? If they are annihilated than it just changes amount of money without affecting value. If it is distributed to everyone then nothing changes. I guess it is being distributed to miners so it is effectively exactly same as just giving miners new money. Miners simply increase their share of currency vs everybody else. Old school inflation have one big advantage of being compatible with human psychology. No one wants to see his account shrinking in real-time.

But that is exactly what is happening with old school inflation.... but most people are unaware.  At least with demurrage, it is an honest shrinking of your purchasing power rather than a sneaky one.
Demurrage does have that going for it, But it's still a drain on purchasing power, and a currency with demurrage will never survive next to one that doesn't in a competitive market.

I agree.  I'm no fan of demurrage.  I just see it as slightly more honest than willful inflation.
hero member
Activity: 532
Merit: 500
FIAT LIBERTAS RVAT CAELVM
Question on demurrage:
What do you do with those lost coins? If they are annihilated than it just changes amount of money without affecting value. If it is distributed to everyone then nothing changes. I guess it is being distributed to miners so it is effectively exactly same as just giving miners new money. Miners simply increase their share of currency vs everybody else. Old school inflation have one big advantage of being compatible with human psychology. No one wants to see his account shrinking in real-time.

But that is exactly what is happening with old school inflation.... but most people are unaware.  At least with demurrage, it is an honest shrinking of your purchasing power rather than a sneaky one.
Demurrage does have that going for it, But it's still a drain on purchasing power, and a currency with demurrage will never survive next to one that doesn't in a competitive market.
legendary
Activity: 1904
Merit: 1002
Question on demurrage:
What do you do with those lost coins? If they are annihilated than it just changes amount of money without affecting value. If it is distributed to everyone then nothing changes. I guess it is being distributed to miners so it is effectively exactly same as just giving miners new money. Miners simply increase their share of currency vs everybody else. Old school inflation have one big advantage of being compatible with human psychology. No one wants to see his account shrinking in real-time.

But that is exactly what is happening with old school inflation.... but most people are unaware.  At least with demurrage, it is an honest shrinking of your purchasing power rather than a sneaky one.
sr. member
Activity: 359
Merit: 250
Question on demurrage:
What do you do with those lost coins? If they are annihilated than it just changes amount of money without affecting value. If it is distributed to everyone then nothing changes. I guess it is being distributed to miners so it is effectively exactly same as just giving miners new money. Miners simply increase their share of currency vs everybody else. Old school inflation have one big advantage of being compatible with human psychology. No one wants to see his account shrinking in real-time.
member
Activity: 82
Merit: 10
Bitcoin's economy
anaikh:  We get asked this question frequently

We believe that no one should be deprived of the VALUE of their money by the monetary system, but neither should money earn interest that gives one more value, demurrage in our view a means to make money held by a person completely constant in value once the wider economy is factored in.  All money has by necessity of being money high liquidity (indeed an accurate definition OF money is what ever thing in society has highest liquidity).  That liquidity has a value over time which gives rise to interest and which someone with money can gain more value from without engaging in any risk.  Gaining without risk is considered usury.

Hope So  Wink

The ideal rate of demurrage is the rate that matches and counter-acts the liquidity premium.  We used a 5% per year rate in Freicoin as this is the figure Gesell's believed (siting earlier research) was a long term historical rate and we do not believe it will be significantly different now, a floating rate was considered but no technical solution was evident so a fixed rate was employed.  Rates of demurrage intentionally set far above the liquidity premium would be unfair by this standard.

A person stuffing money under a mattress would indeed lose 5% a year to demurrage, but that person would be very liquid and enjoy the safety that liquidity provides.  On the other hand someone placing money in a long term savings account with a bank would be giving up most of their liquidity and the bank would pay a rate to him that effectively lowers their demurrage loss.  The more liquidity one gives up the less demurrage one should pay, the longest term lending should be very nearly at par.
I don't know whether 5% is responsible or not. But your coin's foundation is hoarding coins for the first 3 years...I do not like that.
vip
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sr. member
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anaikh:  We get asked this question frequently

We believe that no one should be deprived of the VALUE of their money by the monetary system, but neither should money earn interest that gives one more value, demurrage in our view a means to make money held by a person completely constant in value once the wider economy is factored in.  All money has by necessity of being money high liquidity (indeed an accurate definition OF money is what ever thing in society has highest liquidity).  That liquidity has a value over time which gives rise to interest and which someone with money can gain more value from without engaging in any risk.  Gaining without risk is considered usury.

The ideal rate of demurrage is the rate that matches and counter-acts the liquidity premium.  We used a 5% per year rate in Freicoin as this is the figure Gesell's believed (siting earlier research) was a long term historical rate and we do not believe it will be significantly different now, a floating rate was considered but no technical solution was evident so a fixed rate was employed.  Rates of demurrage intentionally set far above the liquidity premium would be unfair by this standard.

A person stuffing money under a mattress would indeed lose 5% a year to demurrage, but that person would be very liquid and enjoy the safety that liquidity provides.  On the other hand someone placing money in a long term savings account with a bank would be giving up most of their liquidity and the bank would pay a rate to him that effectively lowers their demurrage loss.  The more liquidity one gives up the less demurrage one should pay, the longest term lending should be very nearly at par.

Your also naturally correct about money supply needs to be managed to keep valuation constant, this is another area ware FRC developers acknowledge a potential flaw in the economics of the coin as-launched but hope that the core demurrage concept will prove itself to be useful regardless and that improvements can be made by future hard-forks.  My personal opinion is that an internal futures market could regulate the quantity of coins such that they keep a deflation rate sufficiently low as to avoid hoarding.
full member
Activity: 145
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The question is If bitcoin is the only currency in the world (as most of you expect), How the Economy will grow if the interest rate is not stable and is very high?

For the record, I personally don't believe that bitcoin (or any other crypto-currency) will be the only currency in the world.  I suspect that most bitcoin supporters believe it will become a world currency but not the only world currency.

For the purpose of discussing bitcoin interest rates, I am also ignoring interest rate manipulation by central banks.

If the economy is growing, one bitcoin has bigger buying power, then why do not the bitcoin owner hoard the money rather than send it to the bank? You can say the bank will pay for the interest. So the lending cost will be the interest + economic growth rate.

How can economy grow? By investing and developing new things/methods to satisfy human needs. No lending, no investing and as a result, no economic growth (even there is economic growth, this kinds of growth will centralize bitcoin to big monopoly enterprises). The ROI(return on investment) must be bigger than the lending cost. Which means the ROIs must exceed the economic growth rate.


Well, I would wager that some form of banking will persist.  Regular people may use banks to safely store their bitcoin and for easy lending.  Plus banks may offer some other bitcoin-centric services.

But even if the traditional bank went the way of the dodo, lending could continue.  Using the internet, it's actually much easier to find borrowers today then it was 10 years ago, and it will probably become easier still.  I mean, using the internet these days I can loan money to farmers in Africa if I wanted.


Let's assume there is only one project for the whole world with an ROI 10%. Then if the project can be done by its own money, the ROI of the world will be 10% and so the economy growth will be 10%. So where is the interest?

If there are two projects for the whole world with the same size and ROI 15% 5% each. then the economy growth rate will be 10%. People will expect the 5% project can not pay back the interest and will stop investing in it. as a result, the economy growth rate will be 15%/2=7.5%.

If people are expecting economic growth too high, the required ROI will be too high and few projects can achieve that, which will lead to a frozen in the lending market. A frozen market will lead to the withdraw of industry and is harmful to the society.

If people are expecting higher economic growth, other things being equal, then they will probably want to save (invest) in order to buy more goods for less money.  In fact, one of the arguments against a fixed money supply is that the value of the money goes up so quickly that nobody wants to spend.  I say that it's unlikely but not impossible.

If phenomenal growth is already locked in and businesses don't want any more investors (0% interest rates), then people will either hold on to their money (because they are perfectly content) or spend some money on things that they want now.

There is nothing inherently wrong with slowing investment when growth is high.  When people don't want any more investment, more investment is bad.  It sounds like you are worried that lending will stop when it is too high.  Of course!
hero member
Activity: 532
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FIAT LIBERTAS RVAT CAELVM
The question is If bitcoin is the only currency in the world (as most of you expect), How the Economy will grow if the interest rate is not stable and is very high?
Well, setting aside that nobody with a lick of sense thinks bitcoin will be the only currency in the world (or even that cryptocurrencies will be the only thing used as money), the simple answer is that it won't. Which is why the interest rate will be low, and fairly stable.
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