Topic: Lending at negative interest rates. (People like bigger numbers.) - page 3. (Read 17954 times)

Or the economy is stimulated less than usual, and you end up with less total wealth growth between the two of you.

Expanding upon "bunk"


Lending 100 BTC and having it double the economy is an example equivalent to saying, "And then monkeys fly out of my butt..."

So here's more monkeys!

Scenario 1:

YOU:
At the start of the year you have 1000 bitcoins, you lend out 100 for 1 year at -50% interest.
This stimulates the economy to grow 100%
At the end of the year, you will have 950 bitcoins, but they are worth 1900 loaves of bread.

ME:
At the start of the same year I have 1000 bitcoins. I lend out 0.
You stimulate the economy to grow 100%
At the end of the year, I will have 1000 bitcoins, but they are worth 2000 loaves of bread.

I win!

Scenario 2:
Neither of us loans coins.
The economy increases
We tie in value.

I think I'll just restate what I said in the post he was responding to.

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This logic is mathematically flawed. People don't realize it because they have never seen it.

If external value starts to flock to bitcoin, than the external value to trade increases, while the number of coins to trade stays the same. That means if the value of external commodities traded doubles overall, than the value of each bitcoin doubles as well.

Example: If there were 100 loaves of bread a day and 100 bitcoins the mean value of bread is 1 BTC. If you want to trade an additional 100 loaves a day, you either have to double the velocity of the coins, or trade in 1/2 BTC coins at the same velocity.

That's the easy part! What is counter intuitive is the dynamic vs lending.

In this situation your argument says that people would start lending their excess bitcoins (at interest I'm presuming). So what would the interest rate be in this situation? So if we presume that the amount of value people want to trade using bitcoins will double this year (not unlikely) what is a reasonable interest rate? Well, just putting them in my mattress will give me 100% interest in commodity value with 0% risk.

However, if I want to borrow the money to start a business manufacturing some commodity widgets, the if I borrow the equivalent of 100 widgets today in BTC, then I need to pay the BTC back with the equivalent value of >200 widgets in a year. So if my widget business is growing at 50% growth a year, I'm screwed.

Deflation make lending very expensive, and very risky. That is why there is minimal lending now, EVEN THOUGH the government is giving away free money for banks to lend.

People are not used to this in their regular life because they are used to price inflation.

Inflation means that money in your mattress is worth less to you (in commodities) next year than it is worth today. That encourages you to LOAN your money to a bank in hopes that they will pay you at least as much interest to make up the difference. A little extra is even better!

This makes lending cheap for new businesses and much less risky for lenders. Business need a much smaller growth rate and profit margin to succeed. Including the bank to whom you lent your money.

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In my follow up to his reply (which you used to begin this thread) I said


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And he replied


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So generally I think the negative interest rate argument is bunk.

Red did have a question about it which I've tried to answer myself:

If everyone just hoards the economy stagnates. By lending out bitcoins it is possible to stimulate growth in the economy.

As a simple example:

Say 1 bitcoin buys you 1 loaf of bread, and the entire economy is based on comparisons to loaves of bread.

Scenario 1:
At the start of the year I have 1000 bitcoins, I lend out 100 for 1 year at -50% interest.
This stimulates the economy to grow 100%
At the end of the year, I will have 950 bitcoins, but they are worth 1900 loaves of bread.

Scenario 2:
1000 bitcoins, I lend out 0.
The economy doesn't grow at all,
At the end of the year, I will have 1000 bitcoins, but they are still only worth 1000 loaves of bread.

There is a lot more math you can do to cover more complex scenarios and make more acurate estimates of growth, but I think this illustrates the general principle.