Topic: Bitcoin major fail - doesn't allow credit creation (aka deflationary currency) - page 10. (Read 22207 times)

Oh, it is. And that's a conclusion any sane person would come to after having read those studies, or possibly even having read of them. But how many politicians read those sorts of things? They don't even read the bills they pass.

What it boils down to is they're either idiots, or evil. I prefer to think of them as idiots, since that allows me to seek a peaceful solution.

I think it could be done if there was some complex emergent system where the better people were at controlling resources the more they were able to control....

I read a book a long while ago about some systems theory stuff. The author reported on some experiments with a software he wrote... a simulation of a small kingdom in Afrika or something. Groups of contestant were given the job of the king and they should try to make it good for the inhabitants. They were able to change some values and they all fucked up badly.

Another experiment was even simpler: A simulation of a cold storage. The goal was to keep the cold storage at a temperatur of -20 °C, they had a controller knob and temperatur display and were told that lower knob setting meant lower temperature. Nothing fancy in the simulation, just some latency as a cold storage would usually have. Only a small percentage of participants (I don't remember exaclty, maybe 20% or 30%) managed to get the temp under control within the reasonable time they had to accomplish this.

This leads me to think that it's extremely naive to believe "controlling/steering/regulating" something as complex as the economy of a country or even the world could be successfully accomplished by a group of people, however smart, educated and well-meaning they might be.

That's the scary thing. They actually believe this crazy shit.

I think they might know it's a farce, just an excuse to be able to print/spend more money and control the people.

true.

It's not in theirs, though, which is why they would do it. The lure of "We can get it right this time." is strong.

I don't contest your predictions, but that doesn't change the likelyhood of some entity trying somehting alng these lines, nor does anything in Bitcoin actually inhibit such an action.

Let's say some country, like greece, decides to back a new drachma with bitcoins (which it first mines and/or buys using its gold reserves) and has its state bank issue this new currency redeemable in bitcoins (1 drachma = 1 millibitcoin) and then gives power of reserve lending to commercial banks, requiring a certain reserve of bitcoins to be held by the commercial banks in an account at that state bank. The idea being that by manipulating the required reserve ratio the government can "regulate the economy" by effectively controlling the money supply to help avoid "booms and busts" and "support growth".

Why would they do that (apart from that idea of being able to regulate the economy, which is a farce in my mind).

What would happen? Would the market prefer to hold 1 drachma or 1 millibitcoin?

I say there will be a run on the bank at some point (once they have lowered the reserve requirements sufficiently on pressure by politicians who argue this needs to be done to help the economy and create jobs) and everyone will want to redeem their drachma for bitcoins, and/or: there will be some Nixonesque event where some Papadimitriou will tell the people of greece that the "bitcoin window is now closed" and to "keep using the drachma", which is "the sole currency in greece allowed to be accepted for payment of debt and taxes". -> failure of the idea to make bitcoin backed currency with fractional lending and probably also failure of greek economy.

This is a fair question, but that does not make it impossible for fractional reserve lending to rise up among the Bitcoin economy, if the public or market demand it.  As has been already noted, a great many people are under the impression that fiat currencies are somehow superior to the gold standard, and by extention any other form of sound monetary system.  So in a bitcoin dominated world, there is nothing to prevent some minor nation from pegging their currency to a reserve of bitcoins, and then permitting their banks fractional lending supported by their taxpayers.  This would, in effect, amount to the same thing as a bitcoin bank going it alone.

There can be no lender of last resort with bitcoin. The banks running fractional reserve schemes would have to fear bank runs and buy insurance and earn the trust of their customers.

In addition: bitcoin has low transaction cost (as opposed to gold) and the reason why people started using "receipts for gold" as money instead of the gold itself was lower transaction costs.

Why would a customer accept the third party risk of depositing his BTC in a bank and then using the receipt as money if the BTC itself is just as cheap to store and transact? Why would anyone accept such a receipt at full value?

One of the traditional businesses of banking is lending. This is entirely possible with bitcoin, but it's different than fractional reserve banking: the customer depositing the money is fully aware that it's being lent out at interest and there is a risk associated with that. There are no receipts that are used as money and if there were, they would be valued lower in the market than the BTC they are for because of the associated risk.

Yes. Borrowing exposes you to quite a lot of risk. Unfortunately, those making the decisions typically a)Have an ego the size of the titanic and don't believe that anything could possibly go wrong and b)are somewhat shielded from the outcome of bad outcomes of their decisions.

Very well said!

I guess the only counter argument is that a $ today is worth more than a $ in the future (the first thing they teach you in economics schools). In other words if I want to start a project today and I can either a) borrow the money or b) save for 1 year ... if I choose a) and assuming the project's return rate is greater than whatever interest I need to pay on the loan, I will be better off by starting the project today and not delaying for one year.

However, not everything goes well with all the projects and growing with credit borrowed from future savings doesn't always end well (aka look around in Europe, U.S., etc.). Or like Adrian put it:

Investment should come from savings, not credit of a bank. 

Today every company has cash on the books.  You pay an inflation tax.  To replace the same equipment it costs more, an inflation tax.  When the stock rises you pay capital gains on the inflation. 

If the cash on the books increased with deflation, the company could install better capital faster and give bigger dividends to shareholders. 

Steve Keen GFY. 

What you have described is the problem associated with the mis-allocation of tomorrow's capital.

Try driving a car down a road you have never traveled, you constantly need to adjust for obstacles and unanticipated events as and when they happen.  Now drive the same car down that same road, but don't steer from the present but pre-program today when and how to steer and break. Even if you can anticipate all the stops turns (not possible), you can't anticipate the kid running out into the road.

The bottom line is the future isn't predetermined; there is climate change, technological innovation and population size, all with unpredictable results. Make the wrong investment today with the futures capital "the thin air" and humanity pays the price down the line.


@johnyj MoonShadow position in mis-allocation of capital is the only logical outcome. The difference is today's savings are for tomorrows unanticipated outcomes, erode tomorrows savings today and today's savings are worthless tomorrow.

There is no big difference between credit from today's saving or credit from tomorrow's saving. The later gives people a feeling that those money are created out of thin air, since currently there are nothing connected to those credit, but if the future is close and sure enough, the difference can be ignored

A short term loan is almost as good as saving, but a long term loan should be very difficult to get, since the risk of future must be factored in, this is not the case in today's credit market, banks try to get everyone a long term loan and collect interest forever, and when the situation changes, they all screwed

He's got a point.

Look, "credit" is just someone else's saved money. If you want capital creation out of thin air, then that is counterfeiting. If you just want credit, that's not a problem. There are already Bitcoin banks which give credit. I'm an investor in one. My BTC is out there, making people money. Until GLBSE shut down, it was making me money at the same time.

Then why not just present your question in that way?  Instead you come in here and act like so many trolls before you.  Don't you realize...

Nobody likes a troll.

Please contribute with something or post your wise a$$ comments elsewhere. Nobody likes a troll.


Thanks, that makes a lot of sense and to be frank, the whole post has been done from a devil's advocate perspective. I had someone asked me that question (how can Bitcoin work if you can't get credit/loan to grow) and I couldn't answer and I wish I would have a good answer to defend Bitcoin. I was hoping to start a discussion where I could find answers on the subject.

Oh look, another thread where we can discuss bitcoin's fatal flaw:
I can't counterfeit it.