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Topic: Remove economic nonsense from home page - page 2. (Read 18129 times)

sr. member
Activity: 434
Merit: 251
youtube.com/ericfontainejazz now accepts bitcoin
August 12, 2010, 05:30:33 PM
#11
1) "instability caused by fractional reserve banking" probably means that in presence of fractional reserve banking, economy enters boom-bust cycle [1]

Bitcoin can protect anyone from instability caused by fractional reserve banking, can it? I can easily operate a fractional reserve bank using Bitcoin, and create fake credit out of thin air. If the created credit becomes significant to the economy, the bitcoin economy will operate in cycles just like any other economy. What "safety" you are talking about? Is safety claim comes from the fact that no fractional reserve BTC banks are known to operate?

nimnul, the short answer is that in a free banking-system (such as the bitcoin community), competition amongst banks will lend itself towards 100 percent reserve banking.  Additionally, since you don't need to physically store your bitcoins (since your wallet can be stored, encrypted, and backuped on computers for zero cost), you do not even need to store your bitcoins in any bitcoin bank.  I have actually addressed your concern in another post, so I'm am just copying and pasting that here:

I've seen that some people here believe that there can be no fractional reserve banking in the BitCoin market (because there is no central bank). I believe there can be something that works like fractional reserve banking. So, I am not saying that people would start lending their excess BitCoin, but that some highly skilled, highly determined individuals would create credit BitCoin out of thin air, just like in the fractional reserve banking system.

Now of course private individuals are free to set up their own private fractional reserve bitcoin banks, which could offer on-demand deposits holding people's bitcoins with a certain interest rate and give out loans at another interest rate (and keep the difference as profit), while only holding a certain percentage of total assets.  But then that bank would be at risk of default if all of its creditors simultaneously requested their on-demand deposits.  Even the thought of default in people's mind is a self-fulfilling prophecy, since it would cause a chain reaction of other depositors worrying about the security of their deposits, and likewise would request to withdraw their deposits from a potentially untrustworthy bank.  Murray Rothbard does a great job explaining this mechanism in Chapter VIII "Free Banking and the Limits on Bank Credit Inflation" of his book The Mystery of Banking (you can read the entire book for free).  Basically, he argues that the threat of bank runs are a good thing, since they will keep the banks honest (by engaging in 100% reserve holdings).  Here are the relevant paragraphs:


    "The bank run is a marvelously effective weapon because (a) it
is irresistible, since once it gets going it cannot be stopped, and (b)
it serves as a dramatic device for calling everyone’s attention to
the inherent unsoundness and insolvency of fractional reserve
banking. Hence, bank runs feed on one another, and can induce
other bank runs to follow. Bank runs instruct the public in the
essential fraudulence of fractional reserve banking, in its essence
as a giant Ponzi scheme in which a few people can redeem their
deposits only because most depositors do not follow suit."
...
    "Fortunately, the market does provide a superb, day-to-day
grinding type of severe restraint on credit expansion under free
banking. It operates even while confidence in banks by their cus-
tomers is as buoyant as ever. It does not depend, therefore, on a
psychological loss of faith in the banks. This vital restraint is sim-
ply the limited clientele of each bank. In short, the Rothbard Bank
(or the Jones Bank) is constrained, first, by the fear of a bank run
(loss of confidence in the bank by its own customers); but it is
also, and even more effectively, constrained by the very fact that,
in the free market, the clientele of the Rothbard Bank is extremely
limited. The day-to-day constraint on banks under free banking is
the fact that nonclients will, by definition, call upon the bank for
redemption."
...
    "The beauty and power of this restraint on the banks is that it
does not depend on loss of confidence in the banks. Smith, Jones,
and everyone else can go on being blithely ignorant and trusting
of the fractional reserve banking system. And yet the redemption
weapon does its important work. For Jones calls on the Rothbard
Bank for redemption, not because he doesn’t trust the bank or
thinks it is going to fail, but simply because he patronizes another
bank and wants to shift his account to his preferred bank. The
mere existence of bank competition will provide a powerful, con-
tinuing, day-to-day constraint on fractional reserve credit expan-
sion. Free banking, even where fractional reserve banking is legal
and not punished as fraud, will scarcely permit fractional reserve
inflation to exist, much less to flourish and proliferate. Free bank-
ing, far from leading to inflationary chaos, will insure almost as
hard and noninflationary a money as 100 percent reserve banking
itself."


So there you have it.  In a free banking system (which bitcoin is, since there is no central authority), competition amongst bitcoin banks will lend itself towards 100 percent reserve banking.  BitCoin users could conceivably come up with a similar strategy to maintain bank honesty, whereby depositors to a certain bank will deliberately and simultaneously request to withdraw their assets from a particular bank at a randomly chosen (but mutually-agreed) time.  If the bank is honest, it will pass this test.  If it is not honest (i.e. it engaged in fractional reserve banking), it will fail this test.  Or alternatively, a bank could instead not even offer on-demand withdraws, whereby it would maintain a strict policy by having the schedule of payments for loans it lent out to borrowers match the schedule of interest payments to its depositors.

But with bitcoin, unless you wanted to gain interest at real risk of loosing your deposit, there is no need to store your bitcoins at someone else's bank, since your wallet is your own bank:).  Unlike with real species or physically holding fiat currency notes, your bitcoin wallet is not at risk of being stolen by common criminals if you keep it encrypted and backed-up in multiple places online.  All you will have to know is your password, which you can memorize.  But of course you would need a password or pin when accessing a regular bank anyways, so memorizing a password is not an extra burden on you.  So there is no serious need to deposit your money at some bank, if all you desire is to hold your money (without gaining interest).  But since there is not significant inflation of the bitcoin money supply, one need not be concerned with gaining interest simply to keep up with inflation.  So just keep your money in your own wallet:).
newbie
Activity: 35
Merit: 0
August 12, 2010, 04:01:36 PM
#10
I don't want to engage with detailed specifics of this issue, but I do not think it is actually beneficial to tie Bitcoin "officially" to claims about economic issues like ideal banking systems, especially any that may be perceived as political in nature. I see Bitcoins as useful for people and offering benefits regardless of your opinions about questions like fiscal policy and banking.

It seems the real point of this line of information is to explain that the money supply of bitcoins is very stable and there is a reliable system in place to generate the currency. Perhaps it could be reworded slightly to simply state these positive characteristics and not debate the issue of banking systems.
Red
full member
Activity: 210
Merit: 111
August 12, 2010, 02:59:12 PM
#9
Second the inherent value of gold.

It is an easy to work metal that conducts electricity well and doesn't tarnish, rust or otherwise degrade over time.

One of the worst possible uses I can think of for gold is to use it as money. As shown in everyday life, anything can be used as money. It's better to use something otherwise useless for money. Say britney spears CDs.

:-)
 
donator
Activity: 826
Merit: 1039
August 12, 2010, 12:13:27 PM
#8
...I do not need gold in my everyday life and I do not know anybody who does
Tell that to people who have gold fillings in their teeth! And professional flautists who feel that a gold flute mouthpiece makes the best sound.

Also, your cellphone contains about $0.40 worth of gold.

Every computer needs gold for some of its internal connections, so in a way every bitcoin minted depends on gold. Is that ironic or what?

[not that it affects the economic arguments being made in this topic; I just didn't want to leave the error about gold not being needed in everyday life uncorrected]
legendary
Activity: 1246
Merit: 1014
Strength in numbers
August 12, 2010, 11:15:11 AM
#7
It does not have any inherent value, I do not need gold in my everyday life and I do not know anybody who does.  

Having value is just a way of saying people want it. I want it, I bet you wouldn't decline if I offered you some at $4/oz.

And regarding inherent, would you rather have something with a little inherent value or more 'non-inherent' value whatever that is. It's a non-distinction.

...there is no way for you to know whether there actually is in the safe the amount of gold the bank says there is, this is what led to the fractional reserve in a first place.

Banks that can't convince people of their solvency will just go out of business in a free banking world. Maybe there is no 100% fool proof way to know the bank isn't tricking you, but it's the same with hamburgers. You can't be 100% sure they didn't water it down with dog brain, but my burgers taste pretty damn good, and there are things you can do or insist that they do to make it better. Watchdog groups, audits, glass safes, , etc.

We don't really have these technologies because we have a law instead, but that doesn't mean it's impossible to design ways of proving and verifying things.
Red
full member
Activity: 210
Merit: 111
August 12, 2010, 11:13:04 AM
#6
In reality bitcoins are the first master planned scarce COMMODITY. It is unique to this commodity that we know it's total available quantity in the universe. We also know exactly how hard it will be to discover this commodity over the next XX years. Also this commodity is generally seen as easily divisible and fungible, but otherwise it is useless.

The only thing not master planned about this commodity is what people will do with it. Since there are no other known uses competing for this commodity, some people think bitcoins should be used as money. Others think this is a highly implausible foundation for monetary policy.

----

All true, no politics!
legendary
Activity: 1106
Merit: 1004
August 12, 2010, 11:08:41 AM
#5
You are wrong Smiley

You can not operate a fractional reserve bank using bitcoins, it's impossible by definition because you can lend only the money you actually own and no more. Fractional reserve system works such that you need only 10% reserve of actual money and you can create 90% out of thin air ...

Sorry, but I think it's not quite that...

You could, in theory, have fractional reserves of bitcoins, as with dollars. Banks don't create dollars (FDR notes) out of thin air, they create bank account balance out of thin air, and that's is counted as actual dollars in the economy.

Suppose some bank stores bitcoins. People would transfer their bitcoins to the bank and would have an account balance, that they could retrieve when needed. The bank could then lend part of this money without blocking your balance, thus creating fractional reserves.

Of course that, as I said before, there is not much interest in this, because you don't really need to pay for somebody else just to store your bitcoins. You can do it yourself, easily and safe.

So, although in theory it would be possible, in practice it might never happen.

It does not have any inherent value

Nothing has inherent value.  Wink

Value is subjective, people give value to stuff, it's not part of stuff.
That's why you can not claim that someone that built an ugly building beside your house damaged your property by reducing its value, for example. The value of your house is not an inherent attribute of it.
full member
Activity: 124
Merit: 100
August 12, 2010, 10:41:04 AM
#4
Having watched Zeitgeist movie and having read one book from mises.org [1], I cannot be an economy expert, so please correct me if I'm wrong.

1) "instability caused by fractional reserve banking" probably means that in presence of fractional reserve banking, economy enters boom-bust cycle [1]

Bitcoin can protect anyone from instability caused by fractional reserve banking, can it? I can easily operate a fractional reserve bank using Bitcoin, and create fake credit out of thin air. If the created credit becomes significant to the economy, the bitcoin economy will operate in cycles just like any other economy. What "safety" you are talking about? Is safety claim comes from the fact that no fractional reserve BTC banks are known to operate?

You are wrong Smiley

You can not operate a fractional reserve bank using bitcoins, it's impossible by definition because you can lend only the money you actually own and no more. Fractional reserve system works such that you need only 10% reserve of actual money and you can create 90% out of thin air ... you can not create new bitcoins out of thin air like that, you have to actually own them to lend them. And that's why a fractional reserve banl can never ever exist in bitcoin economy no matter how anybody tries Wink

And hello to fellow Zeitgeist member Wink

Quote
2) "Be safe from bad policies of central banks"

By "central banks" you certainly mean "state banks that print paper money".

This seems to be true. Bad problem with central banks is that they print money at will, creating money out of thin air, and that printing is equivalent to stealing money from everyone else, so states are major thieves [1]

Bitcoin is in this aspect very similar to genuine golden money. While in a gold-driven decentralized economy everyone can mine gold and mint golden coins, minting is a business with low profit margin (at least much lower than current "printing business" of state banks").

So bitcoin, while technically a pure fiat money, is very special kind of fiat money that is almost as good as gold in terms of impossibility to create money out of thin air and use these fake money to finance wars, provide bailouts to fractional reserve banks etc [1].

There is some weird gold worship going on in some economic circles, gold is not so special or particularly good money IMO. It does not have any inherent value, I do not need gold in my everyday life and I do not know anybody who does. There is some use for gold but that's not what gives it its value ... in that sense gold is just as fiat as US dollar except it's not unlimited supply of it. But even if we disagree on this which we probably will there is another problem, there is no way for you to know whether there actually is in the safe the amount of gold the bank says there is, this is what led to the fractional reserve in a first place. You do not have to actually create more gold to create money out of thin air, you just have to *cliam* you have. So Bitcoin is much better than gold because you can not fake how much you own.

Quote
3) "The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) throughout the network, not monopolized by the banks."

This sounds as complete nonsense to me, can someone explain?

Inflation is essentially a process of creating money out of thin air that causes drop of monetary value of money and rise of prices. Bitcoins are not created out of thin air just like gold is not. Is my definition of inflation wrong?

[1] Hans-Hermann Hoppe "The Economics and Ethics of Private Property"

It is created "from thin air" because when you solve the hash, 50 bitcoins just appear out of nowhere Smiley

The trick is that there is no central authority which issues bitcoins so nobody can use this to manipulate the market. It is evenly and at predictable rate distributed through the economy according to CPU power which is the most fair way without any central authority Satochi could think of (and I can't think of any better, can you?)

If it causes drop of monetary value depends on multiple factors, in isolation yes it would result in that but the bitcoin economy is dynamic and if the supply of bitcoins increases just as bitcoin economy expands it can actually be gaining value while new bitcoins are injected. Which seems to be happening now.

I hope I helped to clear up some things Wink
legendary
Activity: 1106
Merit: 1004
August 12, 2010, 10:12:00 AM
#3
It's not nonsense.

Item 2 is definitely the most important.

Fractional reserves are not that horrifying when alone, it's true.
But Bitcoins may also bring an end to fractional reserves since nobody would need to pay somebody else to protect/keep their money.
It's only the union of "vault" services with "landing" services that allowed banks to create such fractional reserves.

And monetary inflation is whatever that adds new money. Gold mining is monetary inflation if people use gold as money.
legendary
Activity: 980
Merit: 1014
August 12, 2010, 09:30:18 AM
#2
Inflation is essentially a process of creating money out of thin air that causes drop of monetary value of money and rise of prices. Bitcoins are not created out of thin air just like gold is not. Is my definition of inflation wrong?


This is called monetary inflation. It doesn't matter if it is created out of thin air or not.
sr. member
Activity: 252
Merit: 250
August 12, 2010, 09:20:14 AM
#1
The alleged nonsense is:

"Be safe from the instability caused by fractional reserve banking and bad policies of central banks. The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) throughout the network, not monopolized by the banks."

Having watched Zeitgeist movie and having read one book from mises.org [1], I cannot be an economy expert, so please correct me if I'm wrong.

1) "instability caused by fractional reserve banking" probably means that in presence of fractional reserve banking, economy enters boom-bust cycle [1]

Bitcoin can protect anyone from instability caused by fractional reserve banking, can it? I can easily operate a fractional reserve bank using Bitcoin, and create fake credit out of thin air. If the created credit becomes significant to the economy, the bitcoin economy will operate in cycles just like any other economy. What "safety" you are talking about? Is safety claim comes from the fact that no fractional reserve BTC banks are known to operate?

2) "Be safe from bad policies of central banks"

By "central banks" you certainly mean "state banks that print paper money".

This seems to be true. Bad problem with central banks is that they print money at will, creating money out of thin air, and that printing is equivalent to stealing money from everyone else, so states are major thieves [1]

Bitcoin is in this aspect very similar to genuine golden money. While in a gold-driven decentralized economy everyone can mine gold and mint golden coins, minting is a business with low profit margin (at least much lower than current "printing business" of state banks").

So bitcoin, while technically a pure fiat money, is very special kind of fiat money that is almost as good as gold in terms of impossibility to create money out of thin air and use these fake money to finance wars, provide bailouts to fractional reserve banks etc [1].

3) "The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) throughout the network, not monopolized by the banks."

This sounds as complete nonsense to me, can someone explain?

Inflation is essentially a process of creating money out of thin air that causes drop of monetary value of money and rise of prices. Bitcoins are not created out of thin air just like gold is not. Is my definition of inflation wrong?

[1] Hans-Hermann Hoppe "The Economics and Ethics of Private Property"
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