Topic: Some dilemma regarding investments and social welfare in an all bitcoin economy - page 2. (Read 2374 times)

I recently came across Freicoin and demurrage. Extremely interesting concepts. Couple of question though;

1. Why would any reasonable merchant/seller/firm accept currency for their goods and services if it is common knowledge? Wouldn't they rather have currency that stays the same in face value or even goes up in face value?

2.  Is the supply of Freicoin limited as well? Can't seem to find this on the wiki/site.

Your describing how deflation reduces the incentive to invest.  The systemic effect of reduced investment is that #5 growing future goods in fact do not grow.  But this leads to a catch-22, once their is no growth the conditions fro growth exist again, and once their is growth it's very existence is self defeating.  The result is a fluctuation stop-start serious of growth spurts and growth stoppages or outright contractions which we call the 'business cycle'.

Freicoin developers are well aware of this shortcoming in BTC and have implemented a solution thought up over a hundred years ago by German/Argentine monetary theorist Silvio Gesell.  Coins simply lose face value at a modest rate of 5% a year. This changes the math of #1 to I - Demurrage < R which cascades to allow a real growth rate equal to demurrage rates.

Sorry, you seem to be misinterpreting a lot of these. Firstly it doesn't matter how you label 2 consecutive periods. It can be period 1 and period 2, today and tomorrow, period 0 and period 1, period t and period T, 2011 and 2012, etc. Its just a reference to 2 time periods.

For the first part:

y comes from investing x in the prior period. We both agree that the nominal value of what we have now decreases, thus the x that we had in period 1, in nominal terms would be worth more than y period 2, hence x > y. Suppose instead of using x to buy 1 good in period 1, we invest that and get y in the next period and y = 2 goods, then instead of investing x in period 1 we save it and bring it forward to period 2, because x > y (we both agree on this, the nominal value we get from investing anything is a lower nominal value next period, why? because of the limited supply of money) and y = 2 , then it follows that x > y = 2, i.e. we would be better off not investing.

Secondly,

No one said I'm investing 10 and "instantly" getting 8. I don't really get where you come across me saying non-zero period of time. Using 2 time periods again, period 1 and period 2. Both time periods can have a start and end (i.e. Jan 2011 and Dec 2011, Jan 2012 and Dec 2012, 2 time periods). At the start of period 1, we have the choice of investing 10 or saving 10. If we choose to invest, the return we get is at the beginning of period 2, the return of which is 8 (once again, we both agree the nominal value of what we are holding drops if we invest). If we choose to invest, we get 8 in period 2 which we can use to buy 8 goods. BUT what if we decided to just put the 10 into our pocket at the beginning of period 1 instead of investing it? THEN at the beginning of period 2, we most certainly still have 10 of which in period 2 can buy us 8 goods + more. This proves we are better off putting the 10 in our pocket instead of investing.

Hold it. If y is twice the value of x, then, by definition, y is not less than x (assuming positive values of x and y).

Impossible. x is 1 output, remember? How, then, can it be greater than 2 output? Oh, right, because you assumed that y < x when the opposite is the case.

Those aren't 2 periods. Those are just three ways of writing the number zero. 0 is zero, t is zero, and T is zero.

Uh, yeah. "Saving" 10 for a zero period of time is better than "investing" 10 and instantly receiving 8. Not exactly what I would call a good investment, though. Or a good savings, plan, for that matter. "Saving" and "investing" is generally something that you do for a non-zero period of time (at least, that's the way I do it). What was this supposed to prove, exactly?

Perfect information and perfect competition are unlikely to economic situations though is a benchmark case necessary to analyse before moving forward into imperfect markets.

I invest x today which buys one output so tomorrow I can get double the output for which the value is y. If y < x (we both agree in nominal terms we have less money), then it is certainly better I not invest x in the first place because y = 2 output and x > y, thus x > 2 output.

Consider 2 periods t=0 and t=T. Any any real positive value at time T will hold for time t=0 irregardless of the nominal value, wouldn't you say so? If I invested 10 at t=0 and get 8 at t=T and at t=T, 8 buys me 8 goods, wouldn't that 10, I spent at t=0, if saved and spent at t=T buy me 8 goods + more?

No I'm not. If I have information that nobody else has, I am more profitable using that information to make better investment decisions than everybody else. Everyone else is losing money by lacking this information, so it is more profitable for them to try to acquire this information, assuming it is not too expensive (the cost of information is the main reason (and if you assume everyone acts rationally, the only reason) for the market being a game of imperfect information in the first place). Either way, it is most certainly not profitable to do nothing.

This model also neglects the changing value of money. Suppose a company invests in more efficient manufacturing technology, and can produce twice as many goods as a result. Since the money supply is constant, the same amount of money is now buying twice as many goods, or in other words, each unit of currency is worth twice as much in terms of goods. So even if the company has not gained any money in nominal terms by its investment, in real terms, it has doubled its wealth (along with the wealth of everyone else using the currency).

The point, my dear Watson, is that either way you are more profitable by doing nothing.

Whoops, I missed this. This is the fatal flaw in the model. In any real economy, not all participants have access to the same information. People with access to good information can profit at the expense of those who don't, by buying undervalued investments and selling overvalued ones. I don't see how that's "conflating away the issue" or "irrational", that's just common sense. (It also allows one to put an exact price on the act of acquiring good information, but that's another story.)

This won't happen because if it does, bitcoin doesn't work. So we must distract and conflate away the issue such as foxpup has attempted to do, and throw in homerisms about how bitcoin is undervalued to encourage people to ignore the irrationality of the system.

Lets include investment risk in the model. Combine this risk with the fact that money will not expand the next period and you get an even stronger case for the 0.9 currency individual to NOT invest in improving goods for the next period. Why would he? The most he can get is a smaller part of that 0.1 currency left and even that is uncertain (risky).

I myself believe that Bitcoins are undervalued and so I have them. In my model above however, we use a currency (may or may not be bitcoins) as money which facilitates transactions, not as an investment tool/commodity.

You're forgetting the obvious: investing is risky. No investment is guaranteed to give a positive return. In a perfect market, the price of an investment is equal to the expected return multiplied by the expected probability that it will actually deliver that return. Companies (and individuals) will invest if they believe (possibly with good reason) that a particular investment is less risky (or would give a greater return) than what the rest of the market believes.

Take Bitcoin for example. I, personally, believe Bitcoin is grossly undervalued. It has the low value that it has because most of the market believes that it is very risky, and unlikely to generate good returns. I, on the other hand, do not think it's as risky as people say it is, and that it has the potential to generate fantastic returns. So I invest in it. All other investments are bought for ultimately the same reason.

1. Assume perfect competition (reasonable assumption for analysis before we move on to other market models, this is the status quo in bitcoins; no regulation, free market entry, etc), no firm invests (I) today unless tomorrows revenue (R) is higher than the investment.

2. Higher I in a prior period results in higher R in the next. At any I < R, firms make a profit the next period, new entrants can enter and invest some (I + small amount) such that R > I + e > I.

3. In perfect competition, I = R because both firms (or any number of n firms) will invest up to a point just below I > R.

4. Limit currency to 1 (divisible infinitely).

5. Population n and amount of total goods and services x are growing. Note that investment is not needed for either of this to grow. Someone might find a new mineral, new population = new labour, etc.

6. Because 4 and 5, then 1/n and 1/x is decreasing. Population n has to spend 1/x on goods each period.

7. Assume perfect information and n buys all x goods produced by firms.

8. Because I = R, firms investing gets a smaller and smaller balance sheet as the time period increases infinitely.

9. Knowing that, and playing the game from 1 to 8, firms hold onto their money instead of investing.

10. 9 is especially apparent if  one firm is starts out the game endowed with a significant proportion of the currency. E.g. If any one firm holds 0.9 currency (arbitrary value), there would be no way any competitor can invest and come out on top because the sum of money = 1.^*

Hence, no investment, which is needed to improve social welfare. In a one economy world with limited currency, money can't expand to attract investments so they obtain more in the next period because everyone knows in the next period, the quantity of money is the same while more n people and more x goods chase the same portion of 1.

^* Note that the current distribution of Bitcoin is also skewed with a smaller proportion holding a significant amount. Read: http://eprint.iacr.org/2012/584.pdf

No math/econ expert by any means and would love to hear your thoughts on this.

Edit:

Simple example:

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.