If deflation is predictable, then speculation is almost always possible. (And, in fact, automatic. You don't need to do anything for it to happen. The reason there's deflation is because people already value the currency more highly.) If it's unpredictable, of course it's bad. But to say a system will definitely suffer from unpredictable deflation is self-refuting.

My understanding isn't that predictable deflation is impossible.  It's that predictable runaway deflation is impossible.   If runaway deflation were predictable, everyone would want to get in on the (relatively costless) riches to be had by simply holding currency.  Accordingly, people would bid up the price of money until equilibrium is reestablished. Yes, bidding up the price of money is itself deflationary, but that adjustment should happen very quickly and its final stopping point should be governed by fundamentals.  Of course, deflation can still continue predictably after that initial quick adjustment, but at a slower, market rate.  There will still be a reward for deferring consumption, but it'll be much smaller and again, I think that's the efficient result.

Another thought that occurs to me is you seem focused on a single positive feedback loop, i.e. hoarding --> deflation --> more hoarding --> more deflation, etc.  But that's obviously not the only game in town, because you admit that this process is self-limiting (i.e., you won't eventually be able to buy a mansion with a penny).  So there must be other feedback loops, at least some of which are negative.  

You compared deflation to a pill that makes you throw up when you've accidentally ingested poison.  You said that while throwing up is necessary in such a case that doesn't make it "good." And you conceded that the real problem in that scenario is the poison (i.e. the initial disequilibrium). That sounds reasonable.  But I think this may sum up some of the disagreement.  I think there are two types of deflation: (1) sudden unpredictable deflation caused by the market attempting to correct misallocations of capital fueled by government intervention and (2) steady relatively predictable deflation caused by sound money and a growing economy.  The poison pill analogy seems apt for the first type of deflation but not the second.  And in a Bitcoin-based free economy, it seems like the second type is all we would see.  

I'm mostly interested in discussing this case: no fractional reserve lending and a gold standard.
This bring us back to my question...What happens when most capital yields get under the basic interest (time preference if you prefer)?


I would say that fractional reserve, like regular money printing can act as a patch that delays the bust and makes it much worse. Following your wave analogy, it would act like some kind of amplitude and wavelength amplificator.


With money-printing combined with fractional reserves gets you in a much worse disaster than only fractional reserve with a gold standard.
In summary, I think we can agree that...
keynesian base supply + FRB < gold standard + FRB < gold standard


Not sure I understand this point. I suspect it has to do with the supply of money provided by miners.
If you prefer, let's forget the gold standard and consider a completely fixed monetary base, ok? When no new bitcoins are going to be created (and forgetting that some of them will get lost).
A fixed monetary base and no FRB for our discussion. I still claim that there will be cycles and that deflation will destructively participate in the "ugly side of the curve".

Thereortically yes, but here's the problem with that...

1) would shove many marginal banks into insolvency.  The federal reserve exists to prevent this, they are not really going to ever do this to any degree that would really matter.

2) would do pretty much the same thing as above, so again, not going to do it to any effective degree and

3) would, for many reasons, increase the effective interest rate that the government pays to it's own banks for rollover debt financing.  Which would bankrupt the government which holds a monopoly on force within the same nation that said banks reside.  I can't really see that one happening either.



Well, there is a sweet spot, it's just always moving and we don't know what it is.  And we can't know what it is except in hindsight.  That's the 'fatal conceit' that Hayak talked about.



Close enough.


There are actually better 'catastrophy' investments than bitcoin.  Silver is one, to a point.  So are bullets for coo=mmon calibers even if you don't own a gun, because of the varoius commodites used in the product as well as teh practical usefullness of the item in teh worst of conditions.  Obviously this should come after a well stocked pantry & a couple of cans of kerosene.  “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.” Proverbs 21:20

jtimon, apologies for my ignorance on this, but could you explain what is meant by "basic interest" and this statement:
Does that just mean that the market interest rate will never drop to 0% (or do you mean something different by "capital yields")? And why is that the natural tendency? I guess my understanding is that the interest rate is the "price of money." Why would the price of money  (or any other scarce, useful thing) drop to zero?

You also say:
So you're saying that the business cycle which will include periods of corrective but unnecessarily destructive deflation is baked into the pie of an inelastic currency? Is that right? But assuming that's true, is there anything we can do about it?  We've tried a fiat system that relies on the intelligence and benevolence of top men to sort of twist the dials and smooth things out.  That hasn't worked very well.

No worries. I'm using this definition:

nominal interest = real interest + inflation premium = basic interest + risk premium + inflation premium

I use basic all the time so that people don't think I want to suppress interest altogether or fix the price of savings.


Yes.
Capital yields is like the "interest on real capital". Or like "the profits on real capital".


Just like profits tend to zero by competition capital yields should do the same, because different capitals of the same type (for example, houses) compete with each other for the revenues. And the "price of savings" are naturally coupled with capital yields.
I use "price of savings" to separate it from "price of money", which I think is more useful in the inflation/deflation context.
This way you can study the demands and offers of money (as medium of exchange) and savings (transporting value into the future) separately.


Yes. It also has to be non-perishable so that money holders can enjoy for free the "liquidity insurance" which constitutes a positive externality for them that we all end up paying in several ways.


Scarce money (cash) can be charged with a demurrage fee so that it is still good for exchange but can't be useful as a storage of value and people prefer to lend or invest themselves rather than hoarding.


Yes, they have miserably failed as Gesell predicted.
He said that paper money without demurrage is doomed to failure, but now I don't even want his flexible supply with demurrage. If basic interest was the real problem there should be no need for an elastic supply, the demurrage should suffice. Unlike Gesell, I don't want an elastic supply, only demurrage to suppress the basic interest. The Austrian school have really changed my mind in this respect

Like a negative interest on cash.
http://en.wikipedia.org/wiki/Demurrage_(currency)


The issuing authority. For Gesell's free-money, the state. For local currencies like the later prohibited Wörgl miracle, to the city. In the modern chiemgauer I think it goes to non profits, but there's more regio currencies in germany.
In the case of freicoin, it goes to miners.


With paper money is typically implemented through stamps that you need to stick to the bills for them to continue being valid.
For freicoin, you just change the way you look at balances. When you want to know the balance of a given address you look at the amount that is written in the chain, the block number in which it appears and substract the demurrage fee per block.
That money gets destroyed. Miners count on a perpetual constant reward but eventually the new money created equals the money destroyed by demurrage and the monetary base gets stable (morestable than bitcoin's because you also recycle lost wallets with this). That's why I say that the fees go to miners.


Public institutions: take it as a tax.
Miners: take it for the security service they provide. They will be able to provide more security with less transaction fees so in certain way it also goes back to the users in the form of lower tx fees. This would also solve the "transaction fee tragedy of the commons" if it happens to occur with bitcoin when there's no other reward for miners.


That's the hard one. Ideally you want to equal the basic interest with the demurrage rate, but what's the natural basic interest?
Gesell estimated it around 4% or 5% based on historic data, but have other improvements in commerce lowered that figure?
I guess the best solution would be to have different currencies with different demurrage rates and let the market decide.
Borrowers will prefer high demurrage rates to lower their borrowing costs but lenders won't accept less than 0% interest.


Yes the wey they affect interest is different. The inflation is added to the inflation premium of the gross interest so you don't really lower interests.
Let's compare freicoin with expocoin/inflatacoin bouth at 5% demurrage/inflation.
Let's say we have some real capital (say a house) with zero risk that yields y% anually and costs 10000.
You're a lender with 10000...

10000 inflatacoins
You ask me borrower at least y + 5 % or you just buy the house.

10000 freicoins
You just ask me for y% because the house is not expected to rise in price 5% anually.


That's only necessary if you want an elastic supply. Anyway, a central bank issuing money with demurrage would have much more control over the price of money because V would be not only greater (which means a smaller increase or decrease in the base will affect more and faster) but much more predictable. Current central banks just can't control the price of money even if they were benevolent.
But the power of a free-money central bank could also be abused.

There are no rules to the minimum fee structure - miners and nodes are free to enforce whatever fees they want. Ultimately the market will decide what fee structure is best for Bitcoin, which is the way it should be.

Does this means that you would be ok with a government issued currency with a fixed monetary base and demurrage? What could be the problems?
For the bitcoin like currency...please, tell me what would be broken.


I think it adds little complexity. It just replaces the generation equation with a constant and changes the way balances are interpreted.
How is worse than bitcoin consolidating inputs?
With a minimum absolute demurrage fee per account you're in fact penalizing people who hold their money in many addresses.
Also demurrage destroys old accounts. I think it is better than bitcoin at consolidating inputs unless you mean something else.
By consolidating inputs you mean basically saving miner's storage in their database, right?


I think demurrage + constant reward for miners solves the "transaction fees tragedy of the commons" potential problem.

But besides those technical byproduct advantages what's more relevant to this thread is that demurrage enables a free savings market with lower interest rates and paying no manipulation/inflationary costs. I want to preserve that credit = debit equation that keynesians and fractional reserve banking destroy through the creation of fictional savings. But I also think interest could be lower if hoarding the medium of exchange was discouraged. And if the time preference interest rate is allowed to drop to 0% (which would mean society doesn't value more the present than the future), hopefully the cycles will disappear (also removing central and commercial banks counterfeiting privileges, of course).
Please, anyone tell me how demurrage could affect the financial market negatively.
Is there any paper on the subject?