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. A producer who only owns does not produce and a consumer who does not own does not consume. 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 either the extraction of service to its owner (utility) or waste. Waste is depreciation on which the owner places no value. Only destruction reflects actual consumption just as only creation reflects actual production. Only action is economically meaningful, the name of a given role is not. The net proceeds of a sale from producer to consumer is interest, even if it is capitalized through reinvestment.

Wealth, defined as capital accumulated, 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 the sum of production costs equates to investment principal, the net increase in products is simply interest.

The Fisher Equation is used to relate the rates of growth, interest and depreciation (simplified by using ratios in place of rates). Notice that the absolute amount of capital (i.e. product value) is not relevant to these ratios.

growth-ratio = interest-ratio / depreciation-ratio

The following examples demonstrate the effect of depreciation on growth:

growth-ratio = interest-ratio / depreciation-ratio
~104.7% = 110% / 105%
~91.67% = 110% / 120%

The depreciation ratio (1 + rate) is always greater than 100%, as all property depreciates.

depreciation-ratio > 100%
interest-ratio = depreciation-ratio * growth-ratio
interest-ratio / growth-ratio > 100%
interest-ratio > growth-ratio

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

The economic interest rate can be observed over time as the return on capital invested.

Investors expect returns of 10.2% with millennials hoping for more.

Shroders: Global Investor Study

The depreciation rate can be derived from observed interest and capital growth rates.

Global growth in 2019 has been downgraded to 2.6 percent, [...] reflecting weaker-than expected international trade and investment at the start of the year. Growth is projected to gradually rise to 2.8 percent by 2021.

World Bank: Global Economic Prospects

In this case an interest rate of 10.2% is offset by ~6.9% depreciation to obtain 2.6% growth.

depreciation-ratio = growth-ratio / interest-ratio
depreciation-ratio = 102.6% / 110.2% = ~93.10%
depreciation-rate = 1 - ~93.10% = ~6.897%

This is consistent with estimates of capital depreciation. While buildings and machinery have low rates of depreciation, food stocks have much higher.

For the period 1960-2000, the three estimates for machinery and equipment are 5.61%, 5.42%, and 5.68%. For buildings, the estimates 3.36%, 3.43%, and 3.43%.

OECD: Estimating Depreciation Rates

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. A pure money exhibits no growth due to 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.

pure-money-growth-ratio = interest-ratio / interest-ratio.
100% = 109% / 109%

All actual money value also depreciates due to demurrage.

commodity-money-growth-ratio = pure-money-growth-ratio / demurrage-ratio.
~99% = 100% / 101%

Monopoly money also exhibits depreciation due to seigniorage.

monopoly-money-growth-ratio = commodity-money-growth-ratio / seigniorage-ratio.
~96% = ~99% / 103%

Fixed supply money may appreciate due to price deflation.

fixed-supply-money-growth-ratio = commodity-money-growth-ratio / inflation-ratio.
~102% = ~99% / 97%

A fixed-supply money is often presumed to change 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.

purchasing-power-this-year = purchasing-power-last-year * annual-growth-ratio
84 = 42 * 200%

The presumption of fixed-supply money price deflation also 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-ratio > depreciation-ratio > 100%
growth-ratio / interest-ratio = depreciation-ratio
growth-ratio / interest-ratio > 100%
growth-ratio < interest-ratio

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, as suggested by the Fisher Hypothesis.

depreciation-ratio > interest-ratio > 100%
growth-ratio / interest-ratio = depreciation-ratio
growth-ratio / interest-ratio > 100%
growth-ratio < interest-ratio

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.