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> From the point of view of production: deflation would get priced into the value of the currency ... The discount rate cannot be negative. That is, lenders wi
by Daniel_Newby 13y ago
> From the point of view of production: deflation would get priced into the value of the currency ...
The discount rate cannot be negative. That is, lenders will never pay people to borrow money from them.
The natural interest rate since ancient times is about 10%/year. So if there is 1% annual deflation, lenders can charge 9%. If the deflation is 8%, lenders can charge 2%. But if deflation is 13%, lenders cannot charge -3% interest. You cannot possibly pay people to borrow money from you. At that point all the mortgaging, public works bonding, factoring, revolving credit, etc. comes crashing to a halt. And firey politicians start saying that mankind shall not be crucified on a cross of gold.
- saalweachter 13y agoApologies for the friendly fire, but we did manage to achieve negative real interest rates in recent history. People bought debt from governments at a negative discount at several points during the Great Recession because it was perceived as less risky than a bank (they were afraid the bank would go under, and take with it their money), and less costly than a cash vault. So that once self-evident fact now has a couple of exceptions. Of course, this doesn't help consumers, since they aren't safer than banks, and it doesn't apply to Bitcoins, since the cost to store them securely is zero.
- javert 13y agoI learned from this, and boy, was it elegant. Anyway, in a hypothetical bitcoin economy, I can't _imagine_ annual deflation in the range you are talking about (e.g. close to 10% or greater), because that should be "priced in" ahead of time. I mean, there should/could be some deflation (or even inflation) on a year-by-year basis, but it shouldn't be that high. Right?
- Daniel_Newby 13y agoHint: when a thing is deflating, it costs more to buy.