Quote from: bubblesort on March 24, 2013, 10:04:44 PM

Quote from: lonelyminer (Peter urda) on March 24, 2013, 12:49:47 PM

I think you misinterpreted my argument.

I agree, and I'm sorry about that. I didn't misinterpret you on purpose. I'm not trying to be dense, but I'm still not sure that I understand your argument. Are you saying that inflation doesn't cause people to save less? The current situation in US retail banks seems to suggest that people do save less when interest rates are lower than inflation.

Quote from: nwbitcoin on March 24, 2013, 02:00:49 AM

The only element of the original Krugman quote that seriously needs looking at again is the idea of lending not being possible, and with this I think he is wrong. Mostly because he is not thinking outside the box. You can lend bitcoins at a very low level of interest, but only if you don't want to work with a different currency as well.

Borrow 1 BTC, and pay back 1.1BTC can work over any time.

Ironically, while a large number of bitcoiners are ranting for the end of fiat, without the exchange rate, bitcoin would be more useful.

How we solve that problem is beyond me at this time on a Saturday!

I presented that wrong. Krugman doesn't actually talk about lending in his short essay (it's only a few paragraphs long). I gave my description of Krugman's argument after I gave the link to it, and threw in the credit part to show the problems I think we might see with deflation.

You are right that the nominal interest rate would be lower for a deflationary currency like BTC, but the real interest rate is what will make things more difficult. Lets run some numbers to see how a loan would work out:

Alice loans Bob 120 BTC for 1 year at 1% simple interest to purchase a physical capital to build a widgit factory. That means that payments will be 10.1 BTC per month for 12 months ((120 BTC * 1.01)/12 months). Widgits currently sell for 0.10 BTC per unit. Deflation is 5% per month.

In the first month Bob has to sell 101 widgits to make his 10.1 BTC loan payment to Alice.

In the second month deflation effects Bob's business. Because deflation is at 5%, widgits now sell for 0.095 (0.10 BTC - (0.01 0.05)) If we round up (assume widgits are not divisible), this means that Bob has to sell 107 widgits to make his loan payment.

In each successive month Bob has to sell more widgits to make his loan payment. This continues along these lines, every month Bob has to sell more and more widgits to make his loan payment, resulting in this table (rounded to 5 decimals):

Month \|	Widgit Price \|	Widgits Sold
1	0.10 BTC	101
2	0.095 BTC	107
3	0.09025 BTC	110
4	0.08574 BTC	118
5	0.08145 BTC	125
6	0.07738 BTC	131
7	0.07351 BTC	138
8	0.06983 BTC	145
9	0.06634 BTC	153
10	0.06302 BTC	161
11	0.05987 BTC	169
12	0.05688 BTC	178

Bear in mind, this is in addition to the iron law of wages, which drives down prices as more competition enters the market place. Lets assume that Bob has a monopoly, though, just for the hell of it, and that widgits are in no way necessary to anybody's survival, so he's still a price taker due to the trivial nature of the product. Lets say his widgits are something stupid like Justin Beiber albums.

If the market for Justin Beiber albums demanded exactly 150 units per month reliably, then the latest Bob could possibly operate is month 8, because even with zero overhead, Bob could not make his loan payments any more (and music fans rejoiced!). That isn't because there is no demand for Justin Beiber albums and it isn't because Bob is a bad businessman who let his overhead run away on him. People are willing to buy them, Bob is willing to make them, this transaction just can't take place because the financial system will not support the transactions because deflation killed the real value of Bob's business.

This is just the effect of one very short term loan on a small business. Imagine a 30 year home mortgage. Deflation would put everybody underwater almost immediately and keep them there for the life of the loan (assuming there is no insane housing bubble or something). Deflation effects wages as well, so people would find their nominal income shrinking as time goes on, making it harder for them to make their mortgage payments. If the bank came in and repossessed a home after a few years they would loose even more money. It would be an endless cycle of loss for the banks and consumers.

I appreciate your work but I could write out this exact same example with inflation at %3 and loans at 8%, or whatever spread you want. All deflation does is change the starting point.
Ex: bank needs a 5% profit margin, deflation is running at -3% so they lend at +2%. Pick any spread you want, the math doesn't change.
Ex: deflation is at -10% and banks need a 7% profit margin on an x years loan, so they loan at -3%.
Ex: inflation is at 7% and banks need a 4% profit margin on an x years loan so they loan at 11%. Etc

Same with home loans,etc...

Inflation in currency encourages people to spend it before it loses value. Deflation encourages savings. Savings is what ultimately makes people more productive and wealthier over the long term. Economic activity for the sake of activity is not a good thing, i.e. war isn't helpful and broken windows dont increase wealth. Inflation leads to chronically overworked people with stagnating or even decreasing real wealth. In other words, pretty much what we have right now with Krugman, Bernanke and the fed.