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Imagine if you had to pay off any kind of Bitcoin debts this week.

by betterunix 13y ago

TomGullen 13y ago
You mean shorting bitcoin?
- Jtsummers 13y ago
  No. Like if you have a debt in a deflationary currency. Start with this: you owe 10% of your income this year as payment for debt. Suppose this is a mortgage and you'll be paying the same amount for the next 15 or 30 years. Assume that under either inflation or deflation your salary/income changes each year with the inflation/deflation rate. [1] Inflation rate of 3% Deflation rate of 3% So year one you pay 10.00% of your income to debt. Year two: Percent of income paid to debt under inflation is 9.70%. Percent of income paid to debt under deflation is 10.30%. Year ten: Percent of income paid to debt under inflation is 7.66%. Percent of income paid to debt under deflation is 13.05%. [1] We already know this isn't true for many people under inflation, though it hopefully averages out to better than inflation over several years (between bonuses, pay raises, pay bumps from changing jobs). The same will likely be true under deflation.
  - dllthomas 13y ago
    Why wouldn't nominal rates simply be adjusted to account for inflation/deflation?
jamoes 13y ago
Simple solution: don't go into debt. If you must go into debt, make the debt in terms of hours worked or some other asset.
- betterunix 13y ago
  That is a great way to establish an aristocracy, where only people who are already wealthy can ever start or maintain a business. What do you think venture capitalists are? They are creditors, whose loans enable people to start businesses they could not otherwise afford. Your great idea for disrupting some old entrenched industry will almost certainly need to be funded, and if you are not already wealthy that will mean taking on debt. Not only that, but there are plenty of people whose businesses need to take on short-term loans to remain competitive. Maybe your business is profitable but you do not have enough capital to fill a really big order -- which could be a great opportunity for your business to grow. If you are not going to take on any debt, then the really big order will be given to your competition, and eventually your business will fail. Debt is not universally bad; there are a lot of cases where debts make sense. Debt is bad when you cannot repay it, which is why deflation is bad.
  - jamoes 13y ago
    I would argue that if the global economy operated on a fixed-supply currency, there would be no aristocracy. Those with the largest stash of currency would have to spend some of their wealth in order to realize its benefits. This spending would naturally result on a more even distribution of wealth. It also wouldn't be the end of debt - just the end of the ridiculous debt-for-life system that most people live like today.
    - betterunix 13y ago
      "I would argue that if the global economy operated on a fixed-supply currency, there would be no aristocracy. Those with the largest stash of currency would have to spend some of their wealth in order to realize its benefits. This spending would naturally result on a more even distribution of wealth." You are assuming that the richest people in the market would not have any income at all. I think that assumption is pretty dubious. Sure, they will spend some money; but all they would need to do is balance their budget, and they would remain rich perpetually since the currency has a fixed supply. In fact, if their income was larger than their spending, they would actually become wealthier over time, as they removed more and more money from the market and took advantage of deflationary effects.
- waps 13y ago
  Yes let's turn back the economy to the situation before 1940, when most normal people couldn't get credit. What could go wrong ? The GFC being the a chain reaction started by ~2% less borrowing you say ? Nah, that won't happen "this time". Like it or not, our economy is based on forgiving debt at the rate of inflation. And it's better than what came before. Can we please stop deluding everyone else ?

Imagine if you had to pay off any kind of Bitcoin debts this week.

TomGullen 13y ago

You mean shorting bitcoin?

Jtsummers 13y ago
No. Like if you have a debt in a deflationary currency. Start with this: you owe 10% of your income this year as payment for debt. Suppose this is a mortgage and you'll be paying the same amount for the next 15 or 30 years. Assume that under either inflation or deflation your salary/income changes each year with the inflation/deflation rate. [1] Inflation rate of 3% Deflation rate of 3% So year one you pay 10.00% of your income to debt. Year two: Percent of income paid to debt under inflation is 9.70%. Percent of income paid to debt under deflation is 10.30%. Year ten: Percent of income paid to debt under inflation is 7.66%. Percent of income paid to debt under deflation is 13.05%. [1] We already know this isn't true for many people under inflation, though it hopefully averages out to better than inflation over several years (between bonuses, pay raises, pay bumps from changing jobs). The same will likely be true under deflation.
- dllthomas 13y ago
  Why wouldn't nominal rates simply be adjusted to account for inflation/deflation?

jamoes 13y ago

Simple solution: don't go into debt. If you must go into debt, make the debt in terms of hours worked or some other asset.

betterunix 13y ago
That is a great way to establish an aristocracy, where only people who are already wealthy can ever start or maintain a business. What do you think venture capitalists are? They are creditors, whose loans enable people to start businesses they could not otherwise afford. Your great idea for disrupting some old entrenched industry will almost certainly need to be funded, and if you are not already wealthy that will mean taking on debt. Not only that, but there are plenty of people whose businesses need to take on short-term loans to remain competitive. Maybe your business is profitable but you do not have enough capital to fill a really big order -- which could be a great opportunity for your business to grow. If you are not going to take on any debt, then the really big order will be given to your competition, and eventually your business will fail. Debt is not universally bad; there are a lot of cases where debts make sense. Debt is bad when you cannot repay it, which is why deflation is bad.
- jamoes 13y ago
  I would argue that if the global economy operated on a fixed-supply currency, there would be no aristocracy. Those with the largest stash of currency would have to spend some of their wealth in order to realize its benefits. This spending would naturally result on a more even distribution of wealth. It also wouldn't be the end of debt - just the end of the ridiculous debt-for-life system that most people live like today.
  - betterunix 13y ago
    "I would argue that if the global economy operated on a fixed-supply currency, there would be no aristocracy. Those with the largest stash of currency would have to spend some of their wealth in order to realize its benefits. This spending would naturally result on a more even distribution of wealth." You are assuming that the richest people in the market would not have any income at all. I think that assumption is pretty dubious. Sure, they will spend some money; but all they would need to do is balance their budget, and they would remain rich perpetually since the currency has a fixed supply. In fact, if their income was larger than their spending, they would actually become wealthier over time, as they removed more and more money from the market and took advantage of deflationary effects.
waps 13y ago
Yes let's turn back the economy to the situation before 1940, when most normal people couldn't get credit. What could go wrong ? The GFC being the a chain reaction started by ~2% less borrowing you say ? Nah, that won't happen "this time". Like it or not, our economy is based on forgiving debt at the rate of inflation. And it's better than what came before. Can we please stop deluding everyone else ?