Topic: If you have 100 bitcoins in your computer wallet and 100 in your MtGox account, - page 2. (Read 15429 times)

In my opinion, those saved money is just an illusion, there is no corresponding wealth to consume when they start to spend those savings, so inflation is the first thing to come

But this is not very precise, I will try to use an island model to explain this, will be much easier

In response to lonelyminer,
Those quotes are good and clear. So if Bitcoin demand deposits are not in M1, they would certainly be in M2. And Fractional Reserve Banking can still be easily exercised with funds counted in M2. No substitutes-circulating-as-money are required.

You now have my admission that Bitcoin demand deposits might not be counted as M1, but rather M2.

In response to johny,
What do people do with money they take out of a savings account. Spend it, right? Then what do the people who receive the money do? Either spend it further or put it back in the bank.

I think FRB based on a simple fact that people do not utilize their saving in the bank until much later.

It works for 2-3 generations when savings are expanding, but when a country has matured and shifted to older populations, more people will be taking money out of the banks, FRB will have big trouble. In principle, all the saved money will be spend sooner or later, banks can not keep the same lending speed unless the growth/inflation is enough high to offset the slow down in saving

Macroeconomics: Private and Public Choice By James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David MacPherson (2010):

(emphasis added)
Not available online, but google books can provide this quote.

Ralph Byrnes (University of North Carolina): An illustrated encyclopedia of economics, 2009:
http://www.unc.edu/depts/econ/byrns_web/Economicae/moneysupply.html
(emphasis added)

Encyclopedia of Business http://www.referenceforbusiness.com/encyclopedia/Mor-Off/Money-Supply.html
(emphasis added)

But please Atheros, feel free to deny and ignore.

I also quoted wikipedia and some other guy I found on the internet. Ignorance is knowledge.

Ignorance is knowledge.

Thinking Mises is the 'specialist publication' and the Fed's website is the high school textbook is lunacy.

I won't be able to respond to what you say unless you speak more precisely. Nevermind. Don't care.

rahl, since you have Mises as an avatar, can you review http://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin and comment on it?

During my research of Bitcoin, I asked genjix from Intersango and Darren from Tradehill about FRB. They said that they're not conducing FRB. Genjix was particularly opposed to FRB and said something like "it's not my money".

As long as the trust and reliability of if the bank is high enough yes.

First of all it is not fractional reserve any longer or a demand deposit if you have any kind of contractual restriction on redemption (well at least that isn't purely logistical as complying with the opening hours of the money warehouse). If you got some kind of restriction that let's the bank lend out the money you don't have a demand deposit you have a IOU, even if the bank actually repay it's debt instantly in 100% of cases.

Now if everyone believes the bank will be able to pay instantly in 100% of cases then it is likely those particular IOU will become as good as money and the money supply will increase anyway. But this should all still be ok since the price of money will still be correct and the market can account for trust and reliability of various banks.

But should actually not really happen, there is always extra risk of an IOU compared to money. So they should be traded at a discount. Just that the transactional fees of counting the discount might be higher then the discount if the bank is incredibly effective. Anyway the important thing is that the market can distinguish between money and IOUs and account for it accordingly which it can not do in a central banking system, in a system where banks lie or in a system where warehouse banking have special legal advantages over other warehouse storage services.

This could be a problem with Bitcoin at this stage because the institutions to prevent the lying like auditing is not really there. But then again who would an exchange be lending there Bitcoin too that wouldn't make there operation incredibly risky for them anyway?
I think it is fairly safe to assume all the Bitcoin are in there wallet. If they are running fractional practices in anything it is more likely to be USD...

Keynes claims that as long as there is involuntary unemployment, an increase in the quantity of money (which is what he called money supply) does not cause inflation.

The IOU has no effect on the money supply. The effect you describe is not an increase of the money supply, it is a decrease in the size of the Bitcoin economy, because there is a good that is not traded against Bitcoins anymore. The value of Bitcoins would only decrease if the change in size was not compensated by a change in the money velocity (in your example, it might or might not, we don't know).

The effect you describe is an outflow of goods from the "dollar economy" into the "Bitcoin IOU economy", and subsequently into the "Bitcoin economy". At the first stage, the size of the Bitcoin economy would remain constant, because there's no change in the supply or demand of Bitcoins. At the end of the month, the demand for Bitcoins would increase while the supply would be the same, thus the price would increase.

I'm still not sure though what this has to do with your position.

Your description, however, does not accurately reflect FRB as we know it. What you portray is more similar to an investment in general.

Debt instrument is a generic name for an obligation denominated in the unit. Demand deposits, cheques, EFT, bank notes based on gold, personal credit, these are all debt instruments. I introduced it to make my argument more accurate.

Excellent.

As I explained, money supply is the amount of money base plus debt instruments in circulation. But this is not a superset of FRB. These are two sets which contain a certain overlap.

So, according to your logic, because you cannot find a book that says that plasma does not exist, a high school text book claiming there are only three states of matter refutes specialist publications that mention plasma. This is what your argument boils down to.

I worry you conflate liquidity and maturity. If you can only redeem the deposit at the issuer, why does it affect the supply? That's like saying that if I issue a zero-maturity debt instruments denominated in tomatoes, regardless of whether this instrument is accepted by the general public instead of actual tomatoes, it increases the supply of tomatoes. This makes no sense. You invented a new economic theory apparently.

The term "money supply" was popularised by the monetarists in the 60s. Keynes used "quantity of money" or "money quantity".

I agree that Keynesians probably dislike Bitcoin. I disagree that deflation is bad. See e.g. Deflation and Liberty by Joerg Guido Huelsmann

My View, which is probably Keynesian:
Fractional Reserve Banking increases the money supply, which causes inflation. Inflation is the rise in the general prices of goods and services in an economy over a period of time. The inflation would be limited because the money supply could only rise to a certain multiple of the monetary base. For example, the money supply could rise to two times the monetary base, but wouldn't go any higher.

Private credit wouldn't push inflation because it is not the case that two people both believe they have easy access to the same bitcoins; one person has the bitcoins and the other doesn't and they know it. IOUs are a little different; instead of lending you bitcoins, the lender lends you a product or service and expects payment back in bitcoins. OR you could say that he lends you bitcoins, and then pays himself with those bitcoins. Although the IOU is denominated in BTC, neither of you are actually using bitcoins yet. Thus the demand for BTC will be lower until you sell something to acquire BTC to repay the IOU. The IOU would lower the value of bitcoins by a very small amount: the same as if the two parties had decided to not use BTC in the first place.

If millions of people today started writing IOUs denominated in bitcoins which all required that they be repaid in a month, the value of the dollar would drop a little bit because people would have less demand for dollars. The value of individual bitcoins would stay the same for much of the month until people started acquiring bitcoins to repay the IOUs, at which point the value of each bitcoin would skyrocket.
(I'm ignoring the effects of instantaneously informing millions about Bitcoin for the sake of the example.)

I can't tell what the first one means. What is this debt-instrument? You talk about debt instruments in your section but I do not. Can we thus not mention it in the introduction?

Concerning the second bullet, lets just leave it out if neither of us are talking about it.

Did anyone disagree on this? Fractional reserve banking necessarily increases the money supply. Did someone disagree?

We all agreed that FRB with Bitcoin is possible, we just disagreed on what it would entail, right? So why not just say that?

Your point that money supply would not include demand deposits if the demand deposits don't include checking services or EFTs? How could I prove a negative? How could I find a quote which directly says that that isn't the case? I can't. If someone were to assert that demand deposits are only included in the money supply if the depositor's last name starts with a vowel, I won't be able to find a quote to counter that claim. I'll only be able to explain why that definition isn't useful, as I have tried to do.

I agree.

I disagree because demand deposits are highly liquid just like cash. They also do not earn "the market rate of interest" that a normal "debt" would earn.

Concerning Keynes, I might not be getting FRB right either. "The General Theory of Employment, Interest
and Money" doesn't reference Fractional Reserve anything or Money Supply. I would have called my viewpoint the Mainstream Viewpoint, but I figured you would have objected.

I think that Keynesian economists like Krugman would and do dislike Bitcoin (as well as a Gold standard) from an economic-good perspective and I think that they are justified. High deflation is terrible for an economy. Fortunately we aren't discussing the theoretical good or harm to the economy- we are mostly discussing fractional reserve banking. 

I think I get what you mean. You're talking about the substitution effect of credit. But unless the this private credit circulates, this is actually a shrinking of the economy, because the creditor is withdrawing his activites from the bigger market. If the creditor had a choice, he would not act this way because it's detrimental for him. I think this is the problem with the proposals of voluntary local debt-based systems like those Gesell proposes.

I agree. Inelastic money supply does not prevent all errors, just the systematic ones. Most of the issues only arise due to monopolies.

What you describe means that there is some sort of interference with the market. If a seller has the choice between selling for money and selling for credit, why would he accept credit? Merely because someone has an IOU does not mean anyone would accept this IOU. At par even.

I think this ignores investing (people selling future goods), but for simplicity we can leave it as it is. Otherwise I don't really have a problem with this formulated this way. I only worry that this leads to erroneous conclusions, much like the Keynesian C + I + G = Y leads to the assumption that by increasing G, one is increasing Y.

I think you're not getting my point. I think I don't mean money substitutes the way you do.
I'm talking about credit from the provider to the purchaser of the good.

I'll put here another quote also from the same text.


If this is true, an increase in private credit or just an increase in bartering would cause price inflation (assuming zero growth to simplify).
Those things could also happen under a gold standard. So, even if cycles don't get worse through elastic monetary policies, the inflation/deflation cycles may also appear within an unelastic monetary supply. Of course, this assumes a money monopoly, which will never be the case for bitcoin.

You say that the money substitute should have an advantage over money to be used. I disagree. Sometimes the lack of money is enough of an advantage. What's the advantage for B when paying with IOUs instead of money? Well, he doesn't have the money. What is the advantage for C in accepting it? None, only a higher price.

In summary, the sentence by Gesell I would like you to agree with or to deny is:

"The daily demand for money therefore equals the quantity of wares daily brought to market, less the wares exchanged by way of credit (or barter)."

Note that when he says wares he includes all produced goods and services.

Ok.

I agree, merely would like to add that

• by this debt-instrument circulating, the risk of performing FRB is decreased and becomes more likely
• term deposits or other investment instruments, which do not have zero maturity, should not be considered relevant for this topic

I hope none of my dissenters will object to these two points.

I also agree.

For simplicity, I was assuming that there is only one RB issuer. However, I agree that this is not a necessary requirement. Just like in Northern Ireland, Scotland or Hong Kong there are multiple bank note issuers, there could be also multiple RB issuers. To what extent they would be treated as fungible is of course another question.

I do not have a theoretical objection to any debt instrument becoming a money substitute. The question is the likelihood. It needs to offer something as a method of payment which the money-proper does not. With gold/fiat, this is straightforward. With Bitcoin, not so much. Even the hypothesised advantages of ripple might not be sufficient to cause enough demand, I just think it makes more sense than with classical demand deposits.

In Austrian terminology, as far as I know, money-substitute is a debt claim on money-proper which is generally accepted as a medium of exchange instead of money.

I've heard about Gesell, I read Alternatives to Legal Tender (or something like that) by Thomas Greco. I agree with the quote, however it neglects the informational function of money, i.e. the intertemporal and interpersonal coordination of plans, as well as the speculation (uncertain future). These needs might affect the outcome.

This is a slightly controversial topic in the Austrian circles. The main problem, as far as I understand it, is not really whether prices would rise (they might not, assuming the extra supply is offset by extra growth of the economy), but that the new money is "injected" into the economy without causing corresponding production costs. This causes a redistribution of purchasing power as the new money propagates through the economy, and leads to boom & bust cycles (Austrian Business Cycle Theory).

I am not an expert in the Keynesian school, but I think Keynes argued that if there is involuntary unemployment, expansion of money supply does not cause inflation.

Under typical circumstances, no. This is actually how the full reservist branch of the Austrian school sees a proper economy.

I did not put enough thought into my previous response to this post and it ended up totally wrong.  So I have deleted it and here is another attempt at a summary:

I am sorry but can you republish the link for me?