Depreciation Principle

Ownership of a product moves from producer to consumer (or producer), yet neither production nor consumption occurs at that time. The producer hoards the product before the trade and the consumer hoards it after. The product exists and is eventually traded between two people. The terms "producer" and "consumer" are names for the objectives (production and leisure) of the two primary economic actors. The producer intends to create (appreciate) capital, while the consumer intends to destroy (depreciate) it. But the producer's hoard (inventory) depreciates the product just as does the consumer's.

The common use of the term "consumption" conflates interest and depreciation. The fact of a product sale represents interest to the investor, not depreciation of the product. The depreciation of a product is actual consumption, and represents the extraction of service to its owner (utility). A producer who only owns does not produce and a consumer who does not own does not consume. Only depreciation reflects actual consumption just as only creation reflects actual production. The net proceeds of a sale from producer to consumer is interest, even if is capitalized through reinvestment. Only action is relevant to the economic meaning of consumption, not the name of a given role.

Wealth, defined as capital accumulation, is the sum of products. All products are always hoarded and depreciating. Production creates products, where interest is both the cost of, and return on, doing so. The price of a product is the sum of its interest return on investment and the cost of all products consumed in its production. Any product incorporated as a component of the final product is fully depreciated as an independent product and appreciated in the new product. Given that costs equate to investment principal, the net increase in products is simply interest. Capital accumulation rate is therefore the amount that interest exceeds depreciation. Notice that the absolute amount of capital (i.e. product value) is not relevant to these ratios.

growth-rate  = interest-rate - depreciation-rate
growth-rate  = (wealth-today - wealth-yesterday) / wealth-yesterday
growth-rate * wealth-yesterday = wealth-today - wealth-yesterday
wealth-today = wealth-yesterday * (1 + (interest-rate - depreciation-rate))

The following examples demonstrate the effect of depreciation on economic growth.

growth-rate = interest-rate - depreciation-rate
5.0% = 10% - 5%
0.5% = 10% - 20%

If sale and full depreciation of products occurs immediately after production, the products exhibit an infinite rate of depreciation, or no durability. While production still earns interest, there is full economic contraction (no wealth). On the other hand, if products exhibit no depreciation, economic growth is the interest rate.

growth-rate = interest-rate - depreciation-rate
-∞% = 10% - ∞%
10% = 10% - 0%

All property exhibits depreciation, which ensures economic interest is always greater than economic growth.

To the extent money exhibits use value, it depreciates as any good. Fiat money, such as Bitcoin or the U.S. Dollar, is presumed to have no use value. However money value also depreciates due to demurrage and the opportunity cost of interest foregone. In other words, interest is the capture of time value and money depreciation includes the failure to capture that value, or negative interest.

money-growth-rate = interest-rate - (interest-rate + demurrage-rate).
-1% = 9% - (9% + 1%)

Monopoly money also exhibits depreciation via seigniorage.

monopoly-money-growth-rate = interest-rate - (interest-rate + demurrage-rate + seigniorage-rate).
-4% = 9% - (9% + 1% + 3%)

A fixed-supply money changes in purchasing power in proportion to the products it represents. In other words, with twice the amount of products each unit of the money will trade for twice its previous amount of products. This is the meaning of the term "deflationary money".

purchasing-power-today = purchasing-power-yesterday * (1 + growth-rate)
84 = 42 * (1 + 100%)

The assumption of fixed-supply money price deflation rests on the assumption of positive economic growth. In the case of economic contraction the money exhibits price inflation. The case of economic growth (increasing wealth) implies interest exceeds depreciation. Both interest and depreciation must always be positive as implied by time preference.

interest-rate > depreciation-rate > 0
growth-rate = interest-rate - depreciation-rate
interest-rate - growth-rate = depreciation-rate
interest-rate - growth-rate > 0
growth-rate < interest-rate

Economic contraction (decreasing wealth) implies increasing demand for products, as implied by the theory of marginal utility. As capital is required for production, this implies an increasing rate of interest until positive growth is restored. As such contraction is a self-correcting condition.

depreciation-rate > interest-rate > 0
growth-rate = interest-rate - depreciation-rate
interest-rate - growth-rate = depreciation-rate
interest-rate - growth-rate > 0
growth-rate < interest-rate

Notice that in both cases of economic growth and contraction, interest must exceed growth, as lending to production is the only source of growth. Given that growth is the sole basis of deflation in a deflationary money, hoarding the money represents monetary depreciation (consumption). Accordingly it is rational to lend any money, including one that is deflationary. Any contrary behavior implies a purely speculative condition, not supported by the fact of fixed supply.