Closing schools and lockdown exacerbate the inequality that has already been in place. Instead of seriously looking at how to address the problems, we blame it on lockdowns. We're taught to think that opening schools will fix the problems. The US government printed 16k per individuals. Each person gets 1.4k. The rest goes into "recovery". We just want to find convenient ways to bury the real problems.
For those who are confused by Taleb, I recommend reading some Eastern philosophy. It offers insights for coping with circular and contradictory life. Tao Te Ching, Yi Ching, Buddhist texts.
I have the opposite take. In bull runs, the market swings between BTC and altcoins. Dogecoin rise unintentionally benefits ETH. It weakened Bitcoin but strengthens Dogecoin and Ethereum. With this crash, people will realize that BTC is the crypto that matters. BTC runs the market. The FUD will cause people to flock to BTC. But that's just a guess. Anything can happen in crypto.
Elon Musk will learn that Bitcoin is difficult to control. He seems pretty confused about the market. My guess is Elon has been using Dogecoin to reign in Bitcoin. He's somewhat got what he wanted. Bitcoin has been stagnant for a few months. However, his promotion of Dogecoin pumps other crypto, like Ethereum and their meme tokens. Elon Musk probably didn't expect this. Promoting Dogecoin doesn't directly hurt Bitcoin. It strengthens other altcoins. At some point, it'll hurt Dogecoin.
Bitcoin is shaking Elon Musk off. It has a history of sending thought leaders to the trash bin.
The problem with using Bitcoin for payments is volatility. Bitcoin's price is volatile. Bitcoin supporters say volatility will go down "at some point". The logic is pretty silly. Bitcoin is money for the people. But when the super rich people adopt it, volatility will go down. They have more money. The Bitcoin money "tank" will be bigger. Its volatile flow will go down.
Bitcoin is digital gold, God's money. When it comes to volatility, it's up to humans to "fix" it. The fix means we all have to "buy" into it, that is, blindly believe the problem will be fixed somehow. Stop selling, keep holding. Maybe, forever. :)
It's probably not going to be fixed. Volatility is likely an inherent property due to its limited supply.
How the heck would bitcoin volatility go down when there's no fixed reason to use it? USD has value despite fiat status because it's required to pay US taxes and oil markets are priced in USD (by force and trade agreement). Bitcoin is totally unteathered from reality (and deflationary which is another story entirely).
This means Bitcoin's value is based on completely ephemeral feelings, and the size of its network -- both things that can disappear overnight. The most solid thing you can say about it is that you can use it to get around government sanctions, which is not exactly high praise.
I understand what you mean and it's true in theory, but could never happen in reality. Even if a lot of the world stops believing in Bitcoin and the price tanks, there will always be at least two people interested in trading it with each other. If those two people run one node each, they can make it happen.
Bitcoin can no longer disappear overnight. It was true in the beginning, but the network and mind-share is too big now.
> which is not exactly high praise
The market seems to value a independent and censorship proof currency differently than you, as those are two of the main features of Bitcoin and Bitcoin is seemingly receiving a lot of high praise, at least at the moment and past 7 years.
> Bitcoin can no longer disappear overnight. It was true in the beginning, but the network and mind-share is too big now.
This is what they said about the housing market in 2008. The question isn't whether bitcoin would operate at least 1 transaction, it's whether it is usable as a stable store of value or a large useful network.
> The market seems to value a independent and censorship proof currency differently than you, as those are two of the main features of Bitcoin and Bitcoin is seemingly receiving a lot of high praise, at least at the moment and past 7 years.
I meant morally, not financially. I suspect that multi-nationals are trying to become supranational entities and would be thrilled to be able to become more powerful and free from discipline from individual nations.
The argument you made was (Bitcoin's value is based on...):
- completely ephemeral feelings
- the size of its network
And that both of those can disappear overnight.
Now you're changing the argument to if Bitcoin can be used for "a stable store of value" and if it's a "large useful network".
Then no, Bitcoin is currently not stable, it's pretty easy to see if you look at the fluctuation of the price. And yes, it is a useful, large network currently live in a production environment today. Sure, it has lots of problems, but since people are using it, we can consider it useful (at least to the people using it), otherwise people wouldn't use it.
The housing market in 2008 is hardly relevant to Bitcoin, as that market is controlled by larger entities that has power to decide things, ultimately the government. Bitcoin doesn't work like that, but I'm sure you're familiar with how Bitcoin works already, otherwise why would you discuss about it here?
The second argument you made was that "You can use Bitcoin to get around government sanctions" is the most "solid thing" you can say about Bitcoin, and that it's not exactly "high praise". The market clearly disagrees with you here, but then you think that it's more about "morals" than "financials". I agree with you here, but I say it's morally a good praise to be able to get around any restriction, especially since that was one of the original goals with Bitcoin. That Bitcoin set that as a goal, and still is achieving it after many years of attempts of being taken down, shows that the value the market assigns to Bitcoin is much closer to reality than what you think is the value of Bitcoin.
Overall, you are discussing in bad faith it seems. You're not interested in learning a new perspective, you're interested in converting others into your perspective, so unfortunately this conversation is not very fruitful. Take care.
> Now you're changing the argument to if Bitcoin can be used for "a stable store of value" and if it's a "large useful network".
The point of Bitcoin is to serve those purposes. My critique is that it cannot because it is based mostly on ephemeralities.
> The housing market in 2008 is hardly relevant to Bitcoin,
The housing market collapsed because of government inaction, not action. People valued CDOs as AAA rated when the actual underlying reality was worthless. Eventually reality caught up with us.
> That Bitcoin set that as a goal, and still is achieving it after many years of attempts of being taken down
This is agreed, incredibly technically successful. I do not agree that violating democratic rules is always a good thing, but I do see it as a good thing for countries that come under the gun of US imperialism such as Iran or Venezuela. However, in general, I am not a fan as the people that will use it the most are likely to be large corporate actors to escape any kind of accountability.
Censorship resistance is the only thing I can see in Bitcoin that is not ephemera.
> This means Bitcoin's value is based on completely ephemeral feelings, and the size of its network -- both things that can disappear overnight.
Yet here we are in 2021. The ephemeral feelings to me are the memes that keep things like culture going as well as Bitcoin, and thanks to the Lindy Effect [1], everyday Bitcoin doesn't die, it grows stronger. If ever there was a time for Bitcoin to die, it would've been in its infancy days in 2009 -- yet here we are in 2021.
> This means Bitcoin's value is based on completely ephemeral feelings
How is this different from any other asset? Value always disappears when people stop believing in it. People invest in company stock because they believe the company is valuable and will grow over time. Nobody wants to hold coins that lose value constantly. Governments have to literally force people to use their currencies by force of law.
What you described is a speculative asset (and something with inherent value). I hate to trot out the tired tulip analogy, but there's a difference between an item that people need and use practically and something that they just think is great b/c they think other people believe in it.
Taleb changed his mind on this subject. :) I can see Bitcoin as a "stable" long-term Store of Value. Short-term, it's always volatile. It's not suitable as a Medium of Exchange.
I follow cryptocurrency and they usually say: Bitcoin Fixes This. It sounds pretty silly. Bitcoin hasn't really fixed anything. It's just a generalization. But the motto draws attention to the cause of many problems in America: the US Dollar monetary system. The Dollar's reserve currency status causes other countries to flood the US with goods in exchange for the currency. It causes trade balances.
The US over time loses its manufacturing and tooling capabilities. Most infrastructure work is custom. You can't build a bridge overseas, ship, and install it in the US. You can build the parts overseas. But it'll take a lot more time and resources to design and assemble them into a bridge in the US. So the final cost ends up being more.
I live in a neighborhood built in the 1980s. Up the hill, there are neighborhoods built in the 1990s and 2000s. After 2000s, houses look pretty much the same. The houses are more expensive. But the amount of custom design decreases over time. It's got more and more expensive to build custom things in the US.
I don't think it's possible to fix these infrastructure costs until we can fix the monetary policy. I think a new crypto system can provide a solution to this problem. Until then, we're stuck with cheap and unnecessary goods while our infrastructure is slowly deteriorating.
Bitcoin, Ethereum, and cryptocurrency spawn a generation of people who worship Austrian economics. This ETH upgrade is making ETH even more deflationary. People are obsessed with price and want to pump the numbers. These wars are not doing anything to advance adoption and bring freedom to people. Crypto builders are pumping the coins under the banners of freedom and decentralization.
The problem with crypto is volatility. The whole market moves in one direction or another, usually with Bitcoin. Scarcity is not the only thing that makes up the economy. We need also need inflation. Stop engaging in these ideological wars. Let's fix the problem and drive adoption.
If you already come to the very sane and correct conclusion that deflationary and volatile cryptocurrencies are effectively useless as a means of exchange and as a primary tool to run an economy then you should just ditch decentralized currencies altogether because then you also get rid of the meaningless complications around mining, energy efficiency or user-friendliness and go to a digital central-bank currency directly which actually has the proper tools to do monetary policy and all you need is a database.
>If you already come to the very sane and correct conclusion that deflationary and volatile cryptocurrencies are effectively useless as a means of exchange and as a primary tool to run an economy then [...]
What about as a store of value? Gold is still around despite being heavy and hard to transact with.
Wanna store value? Buy actual value - that is things that make the wealth. Stocks in major companies, real estate, land in places people want to live in. The concept that buying promises is a good way to store value is a bizarre concept to me.
"Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it
would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At
$1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400
million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most
profitable company, one earning more than $40 billion annually). After these purchases, we would
have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying
binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual
production of gold command about $160 billion. Buyers – whether jewelry and industrial users,
frightened individuals, or speculators – must continually absorb this additional supply to merely
maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn,
wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the
currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its
owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The
170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can
fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m
confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at
a rate far inferior to that achieved by pile B."
I have noticed that people who advocate for this "store of value" idea have this tendency to insinuate that cash is the only alternative to gold or bitcoin or whatever it is. There has always been alternatives to letting your savings be eroded by inflation (stocks, bonds, etc) and part of the reason for inflation is to incentivize people to invest their money in these productive things.
If you bought Exxon Mobil in 2011, oof. It's down 25% while gold is up 25%. Warren Buffett is irrelevant, literally the old man shouting at sky. His ideas are garbage and lose money, what other proof you need?
Share this quote with someone in Venezuela with a straight face. Or the countless unbanked that have access to a divisible digital gold but not stocks, bonds, gold, or enough to direct invest.
I can definitely agree that Bitcoin is a step in the right direction for expanding access to the financial system and I think the whole DeFi space on Ethereum is pretty incredible too (Uniswap, Curve, etc). It's outrageous that there are hundreds of millions of people who can't even open a bank account because they have no form of ID. I recognize that theoretically everyone can have a Bitcoin address and obviously there is tremendous value in that. But it's unlikely that these people will have real access to Bitcoin either when you consider that most Bitcoin users get it through centralized exchanges like Coinbase who must comply with whatever AMC/KYC garbage FINCEN and the rest of the American regulatory apparatus put out.
I have read about too many hyperinflation stories that I forgot the specifics of Venezuela but the vast, vast majority of them are caused by food shortages which themselves are caused by government repossession of productive assets. The problem is that the government is stealing your land, your company and your gold. The problem isn't that money is getting less valuable, it's that there is nothing to spend it on.
I do think CBDCs are the digital cash that most people want but a decentralized implementation of Keynesian monetary policy would be interesting to see (for the half-dozen people who care).
I don't think cryptocurrencies will replace fiat completely. They're still crypto. They have fixed rules. We still need currency "bridge" between crypto and the real world. Cryptocurrencies offer decentralized options which can address problems with money distribution.
Because real world assets don't get minted like crypto. They are tied to physical world. They are volatile. Bitcoin produces a block every 10 minutes. It's a fairly precise schedule. On the other hand, real world assets grow and contract at unpredictable rates. Even gold mining fluctuates. The real world is volatile. The BTCUSD peg is free floating. It's also volatile.
Crypto is rigid. Real world is volatile. It's hard to create a stable peg between crypto and the real world. So some kinds of bridge currencies are necessary. Fiat or some forms of digital fiat will continue to exist.
Bitcoin is a deflationary (disinflationary) asset. The BTCUSD peg is volatile. We need better money instruments to reduce volatility. I think an inflationary crypto can help.
I'm not saying it will be an exact peg. I am saying that colored coins can represent specific batches of a real world asset. For example gold mined from a specific mine by a specific company from date x to date y. That company would also create the colored coins that represent a claim to the gold mined. They could even mint the coins ahead of time and they would act as futures on the output of the mine during that time.
It's difficult to build layers on top of the Bitcoin blockchain. The base asset, Bitcoin, is volatile. Its volatility affects the assets on 2nd layers. There isn't a one-one peg between the 2nd layer and the base chain. You'd need to trust an oracle. In your gold example, you'd need to trust the miner for authenticity and their books. For use-cases with oracles, it's more efficient to use a database. There's no need to use a blockchain.
Some projects on Ethereum, like DAI, have explored these use-cases. I think they have not been successful. DAI requires high reserve ratio (1-1.5) to manage the volatility of the base chain. You're using 1.5 USD to get 1 USDDAI. It's not very efficient. I'm less excited about assets on blockchain. I think the market is not ready. We need to reduce volatility first.
Because people incur nominal debt contracts which causes wages to be sticky downwards --> they can go up more easily than down. With inflation, if wages are too high, you can let inflation eat away at them. If there were no inflation, the downward stickiness would lead to a lot of market failures (bankruptcies and unemployment) when wages were too high.
But then why do people incur nominal debt contracts? Because production occurs throughout time but must be settled in some medium. The farmer needs to know how much he will get for his wheat, the shipper needs to know, so someone needs to promise to buy wheat next year for $X and for that contract to be useful, everything else needs to be priced in terms of $ as well, so that the farmer can buy fertilizer for $ today, and agree to hire workers to work the field for $ from today to harvest time, etc. In this way, the farmer can estimate what he will get next year, what he will pay throughout the year, and what investments he needs to make right now. It is nothing special about the dollar -- if everyone used bitcoin for real contracts then wages would be downward sticky in terms of bitcoin, too. But as there is no way of expanding the supply of bitcoin, this downward stickiness would lead to a lot more market failures, and thus a lot more unemployment. We would then be effectively back on the gold standard, but at least with the gold standard, you'd occasionally find lots of gold in a mountain and this would stimulate the economy and increase employment. With BTC, you'd have all the financial crises of sticky prices but without the occasional gold discovery.
What does “worship” mean? I am a believer of the Austrian theory of economics. Are Keynesian / Monetarists also “worshippers” of a theory? Modern economics is not that old. I fundamentally believe printing as much money as we are across the rich world is going to lead to disaster, just as it has time and again in the developing world (see Venezuela, Zimbabwe, Argentina, Brazil, etc.).
If anything, Austrian economics is a reversion to the standard theory of economics for thousands of years. The “innovation” of Keynesian economics is one of the greatest evils ever perpetuated on society. But again - what do I know - I don’t have a PhD from an Ivy. I just protect my assets in a zero-interest world by avoiding government threat.
In any case, in a multi-currency world with low-friction electronic exchanges available, it stands to reason that deflation is less likely to be damaging, since the switching costs to more inflationary currencies are low.
Keynesians think money grows on tree. It is true in some senses. Apples grow on tree. At the extreme, they think money is imaginary. They can print as much as they want.
Austrians think money grows from hard money. It is also true in some senses. Money is made from money. It's circular and Ponzi-like. It requires you to believe in what hard money is. Austrian thinking leads to some cult-like behaviors. At the extreme, they'd be rent-seeking their precious Store of Value. It's just as evil as the Keynesians.
Money is data (Keynesian) with some kind of illusions (Austrian). The money that we need is between the Keynesians and Austrians.
Keynesians believe that stimulating the right part of the economy will increase the speedup of recovery. When you fail to stimulate the right part of the economy that's not Keynesian economics. Most proponents of Keynesian politics are in favor of fiscal stimulus. Namely infrastructure investments and jobs programs. Where do you see this happening?
Meanwhile Austrian economics is just some meme that is anti Keynesian and doesn't even attempt to solve any problem other than get rid of Keynesian economics. This is especially telling when they are extra loud when no Keynesian economics are being done so they feel justified in their criticism.
What we have right now is closer to trickle down economics. Douse the rich in money with the hope that some drops reach the poor.
>I fundamentally believe printing as much money as we are across the rich world is going to lead to disaster, just as it has time and again in the developing world (see Venezuela, Zimbabwe, Argentina, Brazil, etc.).
When will the US government repossess farms and corporations? Once that happens I can guarantee that hyperinflation is going to happen. Another way is to just bomb the USA's means of production.
Those are the primary ways hyperinflation happens. By destroying the ability to exchange currency for products and services the perceived value of the currency becomes worthless. It doesn't even take an increased money supply for it to happen, it merely accelerates hyperinflation by adding additional money into an economy where the velocity of money is at its peak.
>If anything, Austrian economics is a reversion to the standard theory of economics for thousands of years. The “innovation” of Keynesian economics is one of the greatest evils ever perpetuated on society. But again - what do I know - I don’t have a PhD from an Ivy. I just protect my assets in a zero-interest world by avoiding government threat.
According to Keynesian economics we would have to print significantly less money. Whatever is happening right now is neither Keynesian economics nor MMT. It's a pump and dump for rich people.
Bitcoin is bad for the environment, for now. There is no way to value Bitcoin. It has no intrinsic value. Its valuation is a narrative. The higher the price goes, the more energy we'd spend on mining it. I call this the Bitcoin Price Paradox [1]. But it's not all hopeless. We can find a way to ground Bitcoin to reality by develop non-speculative use-cases. Then we can develop a valuation model. I believe the key to solving this paradox is to have an inflationary crypto. It can drive payment adoption. I'm involved with Bitflate, a crypto with 7% inflation [2]. Once we have payment adoption, we can create valuation models and control energy spend on mining.
I think demand for transactions is an issue. When it fluctuates, miners' earning becomes volatile. Some blockchains, like Grin and Dogecoin, have tail emission. But that's a pretty dumb solution. The reward/supply rate would approach 0. It's effectively the same as zero new supply unless dev teams decide to increase rewards. Changing reward defeats the purpose of decentralization. This problem is prevalent in any limited supply crypto.
I've been involved with Bitflate, a crypto with 7% inflation. We propose running a parallel inflationary blockchain. Inflation discourages hoarding. People have incentives to spend. We can also "mix" the inflationary crypto with Bitcoin. This mixing allows us to create digital native crypto with any inflation rate. It also creates demand for transactions on the Bitcoin blockchain.
PS: Some bitcoiners think that fee volatility is not a big issue. There will always be demand for transactions. Miners just have to deal with volatility. But fee volatility will translate to price volatility. It contradicts with the claim that Bitcoin will become stable.
> Inflation discourages hoarding. People have incentives to spend.
I'd rather we use a coin that people want more of (deflationary), rather than a coin people want less of (inflationary). There's no inherent reason we want there to be incentives to spend, unless you're some central planner trying to keep the populace invested in society.
> There's no inherent reason we want there to be incentives to spend, unless you're some central planner trying to keep the populace invested in society.
You're confusing spending and consumption. Bitcoin holdings don't do anything. They're a nominal amount on a public ledger, and if bitcoins also serve as the medium of exchange this would be subject to the paradox of thrift.
Instead, a healthy economy encourages people to invest. If I have money (or bitcoins) I don't need for immediate purposes, I shouldn't put it under the mattress (or on the blockchain). I should instead loan it out as debt or equity to someone else who wants to expand production in some way, producing a (probable) real return. That's how we become a wealthier society.
A deflating bitcoin is not well-suited for these investments, since a rational holder of bitcoin would probably prefer to continue to hold bitcoin (not doing anything) rather than take an investment with an interest rate less than the expected appreciation on bitcoin. At the same time, bitcoin's volatility is also bad for secondary finance because it becomes difficult to properly value future payments.
Hoarding currency should never be a viable investment strategy. That it is so for bitcoin is evidence for the speculative bubble hypothesis.
You're comparing want (saving) and utility (spending). They're contradictory. They have different purposes. A functioning money system needs to have:
(1) A Store of Value
(2) A Medium of Exchange
(3) A Unit of Account.
Bitcoin is mostly a Store of Value. It doesn't have the other 2 functions. We can try to fit all 3 into Bitcoin. The Gold Standard failed to do it. The US Dollar system is failing. Bitcoin will likely fail to do it.
The US Dollar is supposed to be a Medium of Exchange and a Unit of Account. It is also being used as a Store of Value for countries with unstable currencies. Demand for the dollar causes trade imbalance, wealth inequality, and political problems. I think the Fed is doing a fairly good job in managing the dollar. It has becoming more political as the problems are moving closer to the source.
The whole economy depends on people spending. If everybody starts to hoard currency, economy will implode. That's why deflation is worse than (light) inflation, from an economic standpoint.
The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience.
They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.
It's easy to see logically if we flip the relationship. If house prices are steadily increasing (equivalent to inflation, where my purchasing power is decreasing), I want to convert my money into a house as quickly as possible. If house prices are decreasing (equivalent to deflation, where my purchasing power is increasing), I want to hold off as long as possible.
In recent experience, the rapid deflation of bitcoin has coincided with its identity pivot from medium of exchange to store of value - because why would you spend an appreciating asset?
That's not to mention the other side of the coin that deflation is necessarily accompanied by decreases in nominal income (because all the products you sell are cheaper in dollar terms, by definition) and nominal salaries.
And as coliveira stated, the economy depends on spending - and that applies just as much to an open free market economy. To suggest that the desire to want people to spend is somehow a feature unique to planned or state-run economies is nonsense.
Sounds good to me, if you don‘t buy the house because your money is not devalued consistently. House buyers might actually get more use out of it than holding their money, instead of just (or in part) buying it for monetary reasons
If the value of houses keeps going up and up at some point it becomes profitable to build more houses. It's just a matter of getting rid of stupid laws that prevent economic actors from doing so.
If the value of houses goes down over time then people will stop building houses. Housing can easily last decades or centuries if done properly. By the time the problem grows to become unsurmountable you might find that all the construction workers and companies are gone. That's what happened with the nuclear industry. You run a plant for 50 years until people retire all at once then you suddenly have to train thousands of new workers since you failed to maintain the industry.
This is a fundamental problem with providing food. Most food has to be eaten within weeks after the harvest. This means that you must ensure that at all times there are people farming for food. It's not possible to save it for decades or at least people don't want to eat 10 year old food (there are companies that specialize in prepper food). So ultimately, you need to keep the farms going all the time. How can you tell them to keep going if the price of food is going down... forever?
I'm on board with your socialist sensibilities when it comes to housing - but when the same effect is occurring throughout the entire economy the result is a depression.
Surely with a deflationary currency, interest rates would need to be significantly higher, making it harder to borrow the capital you need to start a business.
As someone with capital the expected rate of return will have to be high to make it worth lending rather than just holding on to it in a deflationary situation.
The opposite actually. The Real interest rate is the nominal rate minus inflation. So negative inflation of, say, 2% pa, effectively adds 2% of real interest to any loan, since 100k of principal today will be worth ~111k in 5 years’ time. In response lenders and central banks are likely to decrease interest rates as, firstly, the money is appreciating in real terms anyway and, secondly, the appreciating value of money makes it harder for debtors to repay debt, so people won’t be able to afford high interest loans. Compare that with high inflation periods where repaying the principal gets easier, since the 100k you borrowed five years ago is only worth ~90k in today’s money (with 2% inflation).
A lot of western economies experienced the inflation side of the equation in recent history - see the 70s/80s in the us, when both the inflation rate and interest rate were very high. In reality the Real interest rate is generally less variable than either inflation or nominal rates.
I'm obviously no expert, but I don't think it'd make sense for the real interest rate being higher under deflation to factor into anyones decisions about whether to make loans available, so the supply of loans would be lower.
Keeping the money in a hole in the ground gets you that return without taking on any risk, so when you're considering whether to invest your money in a potentially risky venture, you aren't going to care about the appreciation of money over the term of the loan.
My perspective is that if you want a return you consider the expected excess return over the risk-free return, and think about how much you're paying for that. Deflation increases the risk-free return you're comparing all investment opportunities with, so the number of opportunities with excess returns will diminish as that rate increases.
The availability of credit is a separate question from the interest rate, and may indeed fall.
Rising real interest rates directly impact borrowers and their ability to borrow, as their debt burden increases without any changes to interest rates. Borrowers are therefore both less likely and less able to borrow. Lenders may simultaneously decide not to lend. Japan is a good case study and has suffered from both phenomena. But interest rates in Japan are very low and fell substantially as soon as the economy got stuck in a deflation rut:
The charts below are illustrative if you set them both from 1979 to now:
Thanks, this is very interesting, and certainly gives me something to think about. Is the causation the right way round though (i.e. that the deflation has caused low interest rates)?
Could it be rather that because of the deflationary situation, the government tries to stimulate the economy with cheap money, and without that action, the natural rates of interest would be set by supply and demand and would be much higher?
I think you’re right on the supply side of the equation, that the profit motive applies upward pressure. But the constraint is on the demand side - if I increase or even maintain my interest rate, the number of borrowers that are able to service the loan drops and the amount of bad debt increases. That’s in addition to the general disincentive to bring forward spending caused by deflation, which has already reduced the pool of borrowers. If I lower my interest rate I’m making less money but still taking on the same risk (if I calibrated my reduction in the rate to that effect). I might then mitigate the risk by tightening my lending requirements. Or I can choose to just stop lending. The result is a simultaneous drop in interest rates and in available credit. The central bank can try to boost lending by dropping its interest rates. When rates get near or below zero things get weird.
Yes and no. Higher savings would also mean more capital to load from. Expected return on investment would be higher, which is probably just a good thing. Lots of non-profitable companies today can keep surviving without doing any real good due to money being cheap.
Those savings would be distributed, and difficult to access, especially if they are primarily relying on deflation to increase their value.
Saying that the expected return would be higher is just the other side of saying it would be harder to find capital to start businesses.
> Lots of non-profitable companies today can keep surviving without doing any real good due to money being cheap.
This seems like a huge topic on its own. If there's an 'ideal' availability of money to ensure that companies are providing value, just switching to a supply limited currency is extremely unlikely to luck into selecting the right value. In fact, because it makes it harder to adjust things it makes it pretty much a certainty that at least at some point the wrong value will be selected.
>The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience.
That's not necessary. Simply reducing spending to the bare minimum possible is enough. Humans don't need that much to survive.
>They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.
Well, first of all, why would you start a business if your money works for you? It would be a waste of money. Secondly, if everyone is starting their businesses instead of buying things then who is going to buy the things those businesses provide? Nobody? Isn't an oversupply of goods just going to drive prices even lower, causing companies to close down? Would you really risk starting a company when you know that in the future your potential income will be even lower than today?
Here's a video of Ray Dalio explaining inflation-deflation and some other basic economic principles. The process explained in the video is the reason why you can never have a real economy running on Bitcoin.
Deflation of a currency only increases the purchasing power of people who already hold that currency. If they start a business, they'll only be able to earn revenue solving the problems of other bitcoin holders.
