Yes, yes, of course. The deflationary bust starts with an increase in hoarding, not with constant hoarding.
But an increase in hoarding means a decrease in the time preference. The decrease of the interest rate is a move of the economy towards an equilibrium, reflecting the choices of the consumers.
No.
You assume that an increase in hoarding must come from an increase in savings but my sequence of events assumes precisely the opposite. You see the "spend vs save" but you don't subdivide savings into "hoard vs lend".
It is not a decrease in the time preference what causes the drop in interest rates. It is continued prosperity and capital accumulation what make capital yields (or RoI, if you prefer) drop.
With low interests, there's a self-accelerating move from lending to hoarding. Because hoarding causes deflation and deflation makes hoarding more attractive. Deflation also invalidates the plans of some business so they can't pay their loans. Bankrupts and capital destruction (maybe just through lack of maintenance) will continue until interests rates rise again and the money gets enough incentive to circulate again. Money needs an inherent incentive to circulate or it will demand it elsewhere. It demands it from high capital yields and interests and if he doesn't get it, it has the ability to "reset the market" in order to accomplish it. That's capitalism, the demand for real capital can't never be fully satisfied because capital yields can't drop under certain levels because capital-money prevents that from happening when capital-money considers that there's to much prosperity for it to keep on profiting. Capital-money forces society to save more than it needs but without investing. That's the "lack of demand". It is not caused by a lack of quantity of money, it is caused by a reduction in its velocity. When the process stops, the smart ones buy the cheapest real assets and an inflationary period starts because money goes back to the market, to more sustainable hoarding levels but this time with higher interest rates again.
Thus monetary cycles existed before elastic cash. FRB and keynesianism are failed attempts to fix capital-money, but monetary cycles predated them.
My point is that if the business is created with borrowed money and has to service a debt, it won't be profitable.
It would, because the interest rates would equilibrate at a level where the currency choice was irrelevant.
I'm not talking about two competing currencies, but rather parallel universes with or without deflation.
Say you have real interest 5%, then nominal interests would be...
With inflation 5 + 3 = 8%
With deflation ¿ 5 - 50 ? No, it must be a positive value, ¿1%?
Here's the problem. The relationship is not linear. I did not understand that myself until I did my simulation.
It is obvious that the relation is not linear because despite nominal interest = real interest + inflation premium, nominal interest can't be negative with capital-money. I was just guessing some numbers for the loans of the entrepreneurs.
Nominal rates of 8% for the inflationary folk and 1% for the deflationary one seem reasonable for me.
What numbers did you use?
So the problem with my example is...
That the relationship between real interest rate and price level changes is not linear (i.e. changes in the nominal interest rate). The theory did not explain this sufficiently well for me to grasp, but once I did the simulation it became obvious.
I was surprised, but in retrospect it should be clear. As long as the difference between revenue and costs is positive, there must be a positive RoI as well. And the average RoI on the market is the interest rate.
Exactly, and not the time preference. Capital yields determine the interest rate and capital accumulation pushes yields down. And monetary cycles prevent them from dropping near zero as we would expect in perfect competition.
The data is in a google docs, which I'll make public once the paper is published (I hope this happens over the summer). So you can look at the formulas and adapt the variables to see how it changes.
Thank you, that will be interesting.
Thank you for the velocity numbers, really interesting to know that LETS is faster.
I think the author of the paper about LETS velocity is Dr. Hugo Godschalk, I don't remember if it's in English or German, I only looked at it briefly, I don't even have it in my bibliography. You can google for it if you want.
Thank you again.
No, no. I want a fixed money supply. But the demurrage will make velocity less variable. I expect it to suppress the monetary cycles that I believe were already common without FRB and gold. FRB and the elastic supply are the wrong fixes, but they were trying to fix something, precisely the cycles.
But as I explain above, for a consumer, velocity is a meaningless concept. Demurrage, in my opinion, merely motivates people to spend more. But it's merely a trick to confuse their economic calculation. Assuming people do not fall for the trick and there are other liquid assets, absent transaction costs, again the effect should be nullified.
No. It doesn't motivate them to spend more, only to hoard less. The only option available for savers is to lend. Well, they can also buy things they know they will need. Yes, there would be more stocks at consumer's houses and less in merchant's shops, but that reduces the cost of commerce, that's what money is meant to do. That's good. Lowering the costs of commerce should be a criterion of quality on money.
Back to its effects on interest rates...It is now rational to lend at 0% instead of hoarding, that cannot happen with capital money. It does not merely changes the nominal interest rate, it DOES AFFECT THE REAL INTEREST RATE.
I don't see how you can conclude that from this sentence.
A steady, predictable falling price level (first level derivation) would not cause any problems. Only an unpredictable change in price level can cause the problems you are describing. But absent changes in the money supply, this can only be a result of a change on the demand side, in which case it would be a proper response.
I think that even being predicted, deflation makes loans less attractive and maybe unsustainable. The entrepreneur in your example is loaning money knowing that there would be 50% deflation?
His idea must be really innovative to take those risks.
Are you saying that would ask the same real interest rate for your freicoins that for your bitcoins?
That's a common dogma which comes from the time-preference theory of interest. But it is false, the basic interest is not independent from the type of money.
The real interest rate would be the same. But as I attempted to explain above, that does not mean that the difference between the two nominal interest rates would be equivalent to the difference in the inflation rates. It's not a linear relationship.
So you have 1000 freicoins and 1000 bitcoins, you're losing 5% from demurrage from the freicoins, nothing from the bitcoins and you ask the same interest rate for your fcn than for your btc?
You want to make a loan and offer the same interest rate for freicoins than for bitcoins?
Really?
No. The time preference does depend on the form of money. The real interest rate does it too.
The time preference is not what causes interest but the other way around.