Topic: Some dilemma regarding investments and social welfare in an all bitcoin economy (Read 2372 times)

That problem exists because bitcoin is a failure.

That problem only exists if bitcoin is in a vacuum.

For simplicity:

There ever exists only 2 types of investments.

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.

You don't need to invest in anything when everything is already built, like now  

The only thing you need is more money to buy product from these already built facilities

This information is hard to find and harder to fully understand. A phenomenal resource that cuts through the bullshit can be found here: http://wfhummel.cnchost.com/index.html It is a very unbiased view of how fractional reserve, fiat, and all the rest play into a system that is actually pretty ingenious. It is unfortunately terribly flawed because corruptible people are at the helm of it (which that link does not delve into).

Interest has nothing to do with fractional reserve lending, interest is a byproduct of liquidity premium and that premium comes from the marketplace not from the lender.  Fractional reserve lending allows more credit expansion then would be possible otherwise so that an expanding economy won't experience deflation as demand for money outstrips supply.

The entire modern attack on fractional reserves by liber-anarcho-austrians is profoundly dumb as they don't even know how credit expansion and contraction actually works and the fail to make distinctions between cash and credit or to consider differences in liquidity.

The interest you get from your bank deposits now are due to fractional reserve banking. Because your bank stores a fraction of your deposit, and gives out the rest as loans on which they charge interest on, you get interest on your dollar. If banks couldn't do fractional reserve banking, there would be negative interest on your bank deposit.

BitFinex can provide interest because the bitcoin money supply is still growing.

Consider the following:

1. Money supply = 1
2. N people in the world.
3. 1 of the N (lets call X) has 0.9 of the money supply and the rest divided evenly. 0.1/(N - 1).
4. Because X has a significant proportion of the money supply, capital has to come from X.
5. Only X can invest and improve the lives of the other N - 1 population.
6. X will only invest if he gets a positive interest.
7. X provides a loan of 0.1 to someone from N - 1 (lets call Y) with an interest of 10%. X requires a repayment of 0.11.
8. Because money is capped = 1, there is no way X will get back the loan + interest unless Y gets some of the 0.1 from the rest of the other (N - X - Y).
9. Now the whole world is left with 0.09 to be shared instead while X goes up to 0.91.
10. Repeat this process several times and X ends up with almost all the money supply in the world while you and I share a smaller and smaller portion of a smaller and smaller money supply for the rest of N - X.

This, I'm sure you agree is unsustainable.

If you think about the simplest example, I ask: why not buy an ASICMiner for 50 BTC? Simple because you know that investment (of 50 BTC) will never get you > 50 BTC. Similarly, when the bitcoin supply gets capped, investors would not invest, why? because there is no more money to get hold of in the next period. The only way to do this is some people in the economy consistently lose money until they are at 0 balance (supply is capped remember so in order for you to get investment + interest, someone else has to LOSE). Having a significant amount of people in poverty (0 money supply) I'm sure is not good for the welfare of the greater population. Unless of course you say you are a benevolent individual who freely gives his money away.

Sorry but 1 bitcoin tomorrow will be worth more, we can debate on the importance of choice today vs quantity tomorrow but if supply is capped, today 1 bitcoin buys you 1 pen but tomorrow 1 bitcoin buys you 2 pens because more pens are being made and bitcoin is limited.

Interest is the price of time. Time is a scarce valuable resource, thus it will have a price as all scarce valuable resources do. You can have interest rates on the lending of any good. I can lend you a hammer, and demand 2 hammers in return, the second hammer being the interest. What that says is simply that the time I won't be able to use my hammer is worth an extra hammer, and it's up to you to either accept or refuse this offer.

It's simply more effective to lend money in most cases, and the same principle applies. If I lend you one bitcoin I will require more than 1 bitcoin in return. The time where I won't be able to use my bitcoin has value. That value is priced as the interest rate. In a market for lending I will look for those who give me the best offer.

Besides we already have interest in the bitcoin economy, see BitFinex. Explain why that would just dissappear if the supply got capped right now.

You are also confusing price with value. 1 Bitcoin today is always worth more than 1 Bitcoin tomorrow. 1 bitcoin today could actually be saved and used tomorrow, but the opposite is not true, so 1 bitcoin today gives you more options. 1 bitcoin tomorrow likely has a higher price though, but that is a different thing.

There could be, they just won't be positive rates. Negative and zero rates have been discussed on this board previously. Some believe that this can work, but they tend to back this only with beliefs rather than any kind of economic propensity. Alternatively, lending money in a bitcoin-like system will have to be for extremely short durations. Kind of the opposite of what deflation purportedly achieves ("sane economic growth")--finding the quickest, most economic and environmentally disastrous way to profit regardless of the consequences.

Otherwise, there is simply no point in investing with bitcoins in the tragedy of the commons situation that it will inevitably encounter. You really aren't going to get many of the established here to agree that this will be the case, because then they are agreeing that bitcoin will ultimately fail. So they will either divert or ignore the issue. I've watched this happen for 2 years now, and I don't expect the mentality to change.

In my signature is a link for a proposed design that fixes this plus a multitude of other problems with bitcoin. You may be interested in it.

Note that in my model, money is capped to 1 (divisible infinitely). We can't expand money. So there's no inflation. Not sure how we would get interest here.

Sorry but if money is capped then won't money today be worth more than money tomorrow? Think about it, if you could only ever have 1 dollar divided in between everyone in the world, wouldn't your portion tomorrow be worth more than it is today? Today I invest 50 bitcoins buying 1 ASICMiner blade, but I know I will never even get 50 bitcoins back (exponentially rising difficulty, more people getting asics, BFL to ship, etc). So I don't invest. No reasonable person would invest 50 bitcoins today to get some <50 bitcoins in the future. So I require R>I to invest. Wouldn't you?

How are there interest rates in a world where money is finite?

This is wrong. Firms will invest to the point where their revenue equals the natural rate of interest, which is determined by peoples time preferences.

That is, firms do not only require that R>I to invest. They require that R>k*I where k would be the natural rate of interest. Money today is worth more than money tomorrow. Interest rates are the market price for time, and that price is not 0 as you assume.

This is the problem, the aggregation of all goods and services into a total which is growing.  People may still dig up raw minerals, but they want iphones.  Raw materials and raw labor become plentiful and cheap, while finished goods become scarce and expensive, as existing goods wear out, and population grows.  The growing price differential between raw goods and finished goods creates profit opportunities.

bump

Foxpup:  Way to completely miss the point and state the obvious, I never said investments don't increase the volume of good.  IT DOSE.  My point that you completely failed to respond too is that the individual investor is not large enough to change the volume of goods or the value of money by anything but a trivial amount.  For the individual the state of the rest of the economy is independent of his actions, if deflation is going to happen regardless of what you do then you act accordingly and only invest if your future revenue exceed the investment in NOMINAL units.  You do not invest $10 to get back $6 of money that has doubled in value (for a effect $12 of spending power), you would just have been better off holding the original $10 which would double to the equivalent of $20.

The increase in the value of money happens not because investors are deliberately trying to bring about that effect, but simply as a natural consequence of them trying to increase their own wealth by investing (the invisible hand strikes again). Companies invest in means of increasing their own production, to sell more goods. As best as I can tell, what jerye is trying to prove is that because the same supply of money is buying the same supply of goods, there is no increase in value to be had anywhere, and therefore investing is pointless. But increasing the supply of goods while the supply of money remains the same increases the value of money (because each unit of currency can buy more goods), and that's why investing can produce a net increase in value (not that it always does; I initially got sidetracked by that point).

A single investment can not possibly have such an effect as to cause a shift in the total value of money, that's only the result of the cumulative effect of all investment the overwhelming majority of which are outside any one investors control (unless your now in favor of communism).  From the perspective of the individual investor the value of money is the same if you make or do not make the investment, it is thus a classic tragedy of the commons ware the individual incentive is to do the 'wrong' thing from the wider group perspective.

Wrong. If you invest 10 in something that increases the value of the currency (ie, something that makes goods cheaper, such as a more efficient manufacturing process), then that 10 (in nominal terms) is suddenly worth more than 10 in real terms, eg, if the value of the currency doubles, it is worth 20 in real terms. Let us postulate two alternate universes, Alternate Universe A, in which your investment increased the value of the currency, and Alternate Universe B, in which you didn't make that investment, and so the currency did not increase in value. $10 from Alternate Universe A are certainly not the same as $10 from Alternate Universe B if dollars from A are worth more than dollars from B. I honestly can't help you if can't figure that out.

This is how I meant it to be:

https://i.imgur.com/FmpcmeO.png


I have 10 in my pocket now. Let 10 = x. If I invest 10, I invest x. If I didn't invest the 10, how much would I have? 10, which is x.

What I invest = 10
What would I have if I didn't invest? the 10 in my pocket.

Is 10 = 10 not the same quantity? Is there something wrong with this assumption? Sorry I'm not getting where you're coming from.



Even if you didn't invest, population grows (unreasonable to assume we can stop this), your 10 is now worth more in real terms of distribution of income. In this case, the 8 I used to hire 16 singers in the next period to sing to me, is most certainly less than the number I can hire if I kept the 10.

Appreciate the comments

Ideally demurrage currency is stable in the sense that prices do not gradually rise so demurrage is the only thing causing money to lose value (the value loss is entirely by nominal loss rather then inflation loss), as most economies typically have inflation of 2-5% this is no worse for the merchant then the current monetary paradigm.  Second their would still be bank deposits that pay interest of a few percent which manifests as subtracting from demurrage, so a short term deposit might be net 3% demurrage and a savings account just 2% and most people will naturally use these accounts when they want to save.  Third most businesses have a high turn over of their cash so transaction fees have a much larger impact on them then dose demurrage, our implementation will pay miners from demurrage thus keeping transaction fees to a minimum.  Third demurrage lowers interest rates meaning loans can be very near zero (in practice their would be a risk premium which is legitimate), and merchants can thus finance their business by a low interest loan and will naturally need to acquire FRC to repay it with.  The merchant also dose not suffer from increased cost of overhead burden, if things like salary and rent are payed for in denominated in deflating currency then all these costs are constantly growing.  Lastly the potential customer no longer has a death-grip on the coins, in fact they want to spend them so the merchant isn't forced to constantly undercut and race-ahead of the current deflation by offering an even lower price such that the customer is finally induced to buy (their are BTC merchants adopting that strategy right now), when merchants do this they are forced to hold coins themselves waiting on deflation so they can sell them for enough to cover their costs.  This slows down commerce and drives yet more deflation as coins are removed from circulation and velocity drops.



Yes the current protocol is for a stable 100 million coin base, but we reach it quickly in just 3 years because we have no need to stretch it out for eternity as BTC dose and we really want to know what happens when a coin base stops growing, it's literally never been done before.  Now we have some some theories on what will happen if demand continues to grow after that point, one possibility is that velocity of money goes up to accommodate the higher level of goods being exchanged, but it might also happen that we see deflation emerging, though we expect it would never be as high a deflation rate as seen in BTC.  Possible solutions range from simply forking to create more coins, or my personal preference creating a futures-market like mechanism inside the protocol that manages money supply in a distributed fashion, much like how difficulty is controlled now.  As users buy futures with present coins they indicate the predicted future value of coins and volume is increased or decreased in a compensatory manor.

It does matter when you label them the exact same thing. If t=0 and t=T, they're all zero. t=0 means t is zero. It doesn't mean anything else. t=T means T is the same thing as t, which is also zero.

But you can't use x to refer both to "what you invest" and "what you would have if you didn't invest", if x increases in value if you invest and does not increase in value if you don't. They're two different quantities.

Not if the real value of the currency increases. In that case, the 8 you get by investing can be used to buy 16 goods (because the currency increased in value as a result of the investment), as opposed to the 10 you get by not investing which can only buy 10 goods (because, by not investing, the currency did not increase in value). 16 goods are better than 10, last time I checked.