Topic: Interest rates in a deflationary currency - page 6. (Read 5553 times)

Actually, I think demurrage is a very interesting idea. However, firstly, is it legal or moral to deprive money from its owners?  secondly, how to set up the demurrage rate? The rate should be able to push users to spend their money and not push to hard. thirdly, even with the demurrage thing, economy has to develop, as a result, some new products will enter the world and they need money too. If the total amount is fixed, then some other products must lower its value. This will also cause deflation. Imaging you produce A @ 1000BTC in year1 and you produce all of them into your inventory. Then as the shortage of money supply, you have to lower its price to 900BTC in year2. However, your COGM (cost of goods manufactured) is 950BTC in year1. Your inventory price is also 950BTC. So in Year1 you can gain 50BTC revenue but in year2 you will loss 50BTC. This happens to all manufaturing business as they have to buy raw-material first and then produce the product. If the production time is too long, it will be not profitable. The business operators will lose confidence in the production.

To be more accurate HARD money is not a good choice, money can be made soft by inflation OR by demurrage as in Freicoin.  Both have the effect of lowering interest rates and breaking the cycle you describe.  But we feel demurrage is superior for several reasons, first it is universal and constant on every coins and everyone that holds coins, where as inflation must ripple through the economy as prices rise from people bidding them up, a messy process that an easily overshoot.  I like to say demurrage moves at the speed of light while inflation moves at the speed of sound. 

Second demurrage eliminates the first-spender problem under inflation, when new money comes into existence the first person to spend it enjoys the still low prices before his own activity increases prices.  This is even the case if the new money is borrowed as most new money is under our current system, the borrower gets to spend high value money and repay with lower value money.  Under demurrage new money is typically given to pensioners or other charitable causes or used to pay for the system overhead costs.  Currently Freicoin directs demurrage to mining but we have plans for a PoS based voting system that will direct those funds in the future.

This is not accurate, as you are discounting the existence of credit-money, which is the essence of the question posed here.
Lenders / Banks which own Bitcoins may lend the right to them out as credit-money, letters of credit, or other instruments useful in trade.  The bank may charge some interest on this credit-money.  This is what happens today with fiat currencies.  It is the same mechanism.  It doesn't matter that the quantity of Bitcoin is fixed to an absolute number at any given moment.  Credit-money may expand the amount of circulating money beyond that fixed amount.

This is the same way that the amount of printed serial numbered paper dollars is different from the amount of "money" being used in commerce.  Much of it is a secondary ledger held in a bank accounting system and not physical paper fiat currency.

This is not a real problem, or rather it was a problem solved several thousand years ago, and really very well re-solved by Italian Banking to end the "dark ages".
The world was using gold and silver, also a fairly fixed quantity, with only tiny amounts of inflation/mining/discovery.  As well as plenty of losses in shipwrecks and such.

The only reason this is even a question is because folks have become so accustomed to inflationary fiat currency that doing without them is outside imagination.  But we used to all do without them very nicely.

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?

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.

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.

So here is the conclusion, fixed money amount is not a good choice.

If you are lending Bitcoin, you charge interest in Bitcoins.
There is no problem provided the lender is making sound judgement in assessing risk.

Perhaps you are considering the foolish bank which might lend Bitcoins and charge interest in fiat currency.  Don't deposit or buy shares in that bank.

Yeah, that's exactly what I wanted to say. If you say that the units of currency are fixed, then with economic growth, the value of each of these unit will increase proportionally. The reason that doesn't happen with fiat currency is essentially inflation (inflation defined in terms of increasing the supply of currency, not CPI based inflation). In a Bitcoin economy, the value of 1 Bitcoin will be 1/21 millionth of the size of the economy. The economy grows irrespective of the currency units.

Well-said, well-said... This goes to show that miners don't really have an incentive to hoard bitcoins beyond the GOLD 2.0 era we are currently in. If only we had figured out how to make the best use of that era in creating a bitcoin economy that doesn't have to rely on fiat currencies for commerce transactions?

The only growth your seeing in the BTC economy is the growth in demand to speculate.  Actual goods and services transacted in BTC are flat or barely rising, and even that is mostly commerce that would otherwise have occurred in USD even without BTC existing.

My suspicion is that miners are hoarding most coins right now because they can cover their energy costs selling just a few.  We will see difficulty increase until it becomes self limiting and once all miners are forced to liquidate to pay for electric costs the price will crash as their is no way that people will put a half million dollars a day into buying newly minted BTC, the amount necessary to sustain the current price.

Yes, I reread thread and I agree.

Economic growth is only one of reasons that can cause deflation. It can also be caused by shrinking money supply (eg. credit bubble pops) or by increase of money demand (all people at once are worried and starts to accumulate savings in money) and whatever the reason economy as you said will adjusts growth lower. But why accept slower growth just because of certain monetary system?

It was a good answer to the original poster's question: 'How do banks pay their lenders?'  The OP seemed to be under the mistaken impression that a specific business (a bank) needs to increase the stock of money to to pay the interest off loans.  The truth is that profit can pay the interest.

Also, if the currency is increasing in value 20% per year, think about why that is.  It's because of economic growth.  If you can't have economic growth with the currency appreciating that much, then the growth slows, and the currency increases in value at a lower rate.

No one is going to lend you in such potentially moving satoshies, because he risk getting only 10% or 1% of principal back.

Not if you borrow satoshies in the first place.

It is irrelevant to interest rates in deflation problem. If you borrow 1 BTC you have to give back 1 BTC no matter how many decimal places were added to protocol in meantime.

Banks would need to take control of the 51% hashing power and propose to move decimal places from 8 to 9 (or so). But to understand what I've just said requires that you change your thinking from deflationary bitcoins to inflationary satoshies.

Some would argue that it's better if economy reward those who invest than those who just sit on cash doing nothing and risking nothing.

You have to get out of the frame of thought of banks producing money by using means such as interest bearing accounts. The bitcoin economy truly does reward those who save. At a 0% interest rate, your money will naturally appreciate over time whilst prices depreciate. It is the prices constantly depreciating that your 'savings' are delivered. This is what's nicknamed as a deflationary economy.

I believe the real world tries to model its economies to grow at 2% fixed rate, as psychologically it cons the population into thinking that each payrise they get every year is progression.

In a hard money loans are repaid with interest, given enough time and a stable monetary base and economy this will result in only two possible outcomes.  The lenders gradually gain a larger and larger share of all currency (assuming they don't spend it back into the economy), or borrowers default at a rate equal to the interest rate to bring the lenders profit down to zero.

Growing the economy is one possible escape as it allows most or all loans to re repaid, monetary velocity will now be higher and the loan interest will be a smaller portion of the whole economy.  Alternatively growing the money supply (without growing the economy) has the effect of making money soft and lowering interest rates, if interest rates are lowered to equal the growth in money supply then lenders will not grow their share of total currency and borrowers will repay loans with the expanded supply, but it is the borrower who must receive the new money for this to work.

You did not understand the problem. If deflation is 20% a year you cannot lend from bank for anything under 20% in real terms. Such high interest would cause demand for credit to be very small and without demand there is now way bank can profit from lending.

Stampbit was never meant to be taken seriously.

Also the banks can become more profitable through expansion, which may justify borrowing on the part of the bank.