Topic: The Bitcoin deflation annoyance (Read 4034 times)

They won't be able to get their money immediately, but a bank can easily prevent a bank run from being particularly disastrous. What they have to do is explain in advance what their bank run policy is and have sufficient assets of some kind (which can be loans) to cover the run in the long term.

For example, if the prevailing interest rate is 4%, they can have an "emergency run interest" of 9%. If there's a run on the bank, they declare an emergency and cover withdrawals with 9%, fixed-term notes. Sure, some people won't be too happy to have these notes instead of bitcoins, but their value will likely be a bit higher then the corresponding number of bitcoins, so they could likely sell them for a slight gain.

This assumes the bank isn't in danger of going out of business. This means the loans (or other bank assets) must still be sound. This can only cover a short-term liquidity run problem, not a long-term solvency crisis. (It wouldn't have helped with the bank failures we saw recently.)

However, a bank can easily cover a bank run with non-cash assets. This is another way commodities can be used to inflate the money supply. You might not trust a bank to keep only a 10% bitcoin reserve, but if they had a billion dollars worth of gold or also owned many stable businesses, you probably would. So a bank can leverage any other asset to allow them to put more bitcoins into circulation than they could otherwise.

As I already pointed out a bank cannot have a 0% reserve because in that case depositers would not be able to withdraw cash. You always have to maintain enough cash to cover fluctuations in depositer withdrawals. Also, any bank will have instruments, like CDs, constantly coming due. You have to have cash reserves to pay these debts.

Interestingly, many countries have much lower than 10% reserve requirements, and some have no reserve requirements at all.  In a system that doesn't have FDIC like insurance, where banks are allowed to fail, a bank can be left to decide for themselves what level of reserves they maintain (but buyer beware).  A bank could conceivably make loans and issue a currency (account balances) without any backing at all.  They just have to convince people that it has some value in some way.  They could setup an exchange that trades their currency for something else of value and establish some level of support without any explicit reserve backing.  Over time, people could come to trust the value of that currency and the bank could gradually withdraw its support from the exchange.  As long as the bank didn't inflate the currency, it could continue to maintain value.  It's not that dissimilar to bitcoin except that you have to trust this central issuer.

Right, I was just pointing out the first step in the chain.

That's incorrect...if you deposit 1 million BTC in the bank and they operate on a 10% reserve policy, they can then lend up to 9 million additional BTC.  They would have claims of 10 million BTC in their customers' accounts and 1 million backing those claims (10%).  Of course they're not creating BTC out of thin air, they are actually only just updating an account balance (or they could issue their own "Debt Coins fractionally backed by BTC").

Death, you have a misunderstanding of fractional reserve.

If I deposit 1 million BTC in a bank, and they have a 10% reserve, they can loan out 900k of that BTC. I still have 1 million BTC. 1.9 million BTC now exists from that 1 million.
This is the exact same thing that happens with fiat.

Since there can be no FDIC in bitcoin, people will probably not want to bank with a bank that only keeps a 10% reserve because if there is a bank run, they are forked. But 10% reserve banks will have the highest interest (or however it works in a deflationary economy), so you will have greedy people that will use them. But hey, that's their problem if they can't get paid when the bank goes bankrupt.

Again, most people will probably find it convenient to use the USD together with a measure of inflation when calculating costs (assuming US based). Finding an accurate figure to approximate the inflation in the basket of goods you typically buy is tricky, but doing the calculations yourself would give you an exactitude that is probably not worth the candle. (your figure of 8% p.a. for staple goods sounds about right to me)

Fractional reserve banking is debt. My $100 checking account balance is the bank's debt. If a checking account balance is part of the money supply, then debt can be part of the money supply.

Your dollar bill is debt. It is an obligation of the United States. If a dollar bill is part of the money supply, then debt can be part of the money supply.

Whether or not debt actually *will* be part of the money supply depends on a lot of factors. The primary one is whether or not it makes economic sense for it to be. In a hypothetical economy with a currency shortage, there will be a demand for currency, and debt will meet that demand.

I'd rather based it on actual costs of other goods to remain independent of any other currency.  For curiosity, back in July I started tracking the prices of 9 staple items at my local grocery store.  The prices were 2% higher at the last check about a week or so ago.  That's a 2% rise in ~3 months!

Quite Right!

May I suggest the USD is a rather stable unit of account. It is widely used and people are familiar and comfortable with it. This problem is largely solved.

I don't know why one would wish to use Bitcoin to solve a problem that is already solved, and for which Bitcoin is manifestly unsuitable, when there are so many unsolved problems for which Bitcoin is ideal.

In the US, FRNs are not debt, but they are backed by debt (on the FED's balance sheet)...that's an important distinction.  A large part, but not all, of that debt backing is US Treasury debt (in particular, the FED has added large amounts of MBS debt in recent years to its balance sheet).  However, when you deposit dollar bills into a bank checking account, that is debt (a debt the bank owes you).  And since the bank only maintains a fractional reserve backing of that debt and a checking account balance is for the most part as good as a physical note (especially due to FDIC insurance), that debt does effectively expand the money supply (of course there are different measures of money supply..."money supply" itself isn't a very specific concept).

We will have to agree to disagree.

The money supply in many countries is based on debt but the actual money supply (as in the count) doesn't include debt.

Banks use fractional reserve banking to increase or decrease the money supply and central banks influence that action via monetary policy.

Still the ACTUAL MONEY SUPPLY = MONEY not debt.

As an example, the federal reserve defines the US money supply as:

Currently the M2 is ~10 trillion.  Obviously debt is not a component of the money supply given US mortgages and national debt are ~7T and ~14T respectively and collectively the US has roughly ~30T in debt of all forms.

M0, M1, M2, M3 are the measures of money supply and include ... money. 

The whole purpose of counting money supply is because the supply of money (not debt) affects prices.  People buy and sell things with money not fractional mortgage notes or partial credit card bonds.  Thus the amount of mortgages changing isn't going to directly affect the change in prices (inflation).  The change in the supply of money (actual money both physical and electronic) relative to the change in productivity is what results in inflationary or deflationary pressures.

If that were true, then no fiat currency would be part of the money supply, inlcuding dollar bills. Fiat currency notes are debt -- most of the money supply for most of the world's nations are notes that represent sovereign debt. See, for example, 12 USC 411. http://www.law.cornell.edu/uscode/12/411.html

It may be "reasonable" but it isn't used.  A bearer bond isn't part of US money supply.

For example no commonly accepted definition of US money supply includes mortgages which you would include for bitcoin economy.  Similarly the US money supply would be many magnitudes larger if you considered all mortgages, students loans, credit card balances, corporate bonds, derivatives, stocks, options, credit default swap, US national debt, etc to be part of the money supply.   It may be part of the economic activity but it isn't the money supply.

The same applies for global money supply and bitcoin money supply.

Debt isn't used to conduct trade.  Sure debt trades hands but it is the item being sold not the medium for trade.


People buy debt.  
People sell debt.  
However the other side of that trade normally involves money.

People buy potatoes
People sell potatoes
However the other side of that trade normally involves money.

Unless your definition of the bitcoin money supply includes potatoes it shouldn't include debt either.

Nobody for example goes to Grocery stores and pays for groceries with some debt they own.  The money supply is what facilitates trade not what is purchased.

Grocery <-> Currency
Debts <-> Currency
Videogames <-> Currency
...
Houses <-> Currency


The reason we track & measure the money supply is it is the intermediary that facilitates trade.  No matter what someone wants (from debt to videogames) they can acquire it via money and likewise when someone wants to sell something they can sell it for money.

If you trade debt for something other than money that is barter.  It doesn't make the debt part of the money supply.  Likewise if I trade you $1600 in potatoes for an ounce of gold are those potatoes part of the gold supply now.  Did the gold supply grow by $1600?  Of course not and likewise if you barter some debt you own for some other asset it doesn't increase the money supply.  I mean if you include debt in the money supply to not be arbitrary anything bartered for gold should be part of gold supply.

Lastly one trait of money is fungibility.  Each dollar is worth exactly the same as every other dollar.  Each unit of debt isn't worth the same (even if it has the same face value and interest).  Some will default, some will payoff early, some will payoff in full.  When you get paid in dollars (or bitcoins) it doesn't matter which dollar you get paid with however if you get paid in debt it does matter which debt you get paid with.  

While you can barter with debt it isn't money and thus isn't part of the money supply (any money supply).

This is a reasonable definition of money supply. The fact that the block chain can never contain more than 21 million bitcoins puts no limit whatsoever on how many can be in circulation (just as a bearer bond can circulate the same way dollar bills do) or in demand deposits. The reason you don't see equivalents in circulation with dollars is because of a combination of legal restrictions and the lack of any need for them.

Not to sound like a broken record in this thread, but check my sig

You can't enforce stability merely by a generation function, hence it's not relevant to the topic. If you have an idea about how to stabilize exchange value without compromising freedom from central authority, I'd like to hear it. At this point, I consider it impossible, since exchange value is external to the currency. In the same manner, you can't stabilize the value of corn relative to acetone without taking external measures either.


Cents? Correct me if I'm wrong but Bitcoin keeps it as a signed 64-bit Integer (1 BTC is 10^8 units). Increasing the precision is only possible with a change in protocol, but it can be seamless if done in a long interval, say two years. After that, clients older than two years wouldn't be able to connect to the network. No practical problems there. This is not "core logic" either.

While it is certainly true you can increase the supply of bitcoins by loaning them, even this is subject to the limitations of requiring a fractional reserve. Even the most reputable loaner will require a reserve to honor ongoing redemptions. Let's say, for the sake of argument the reserve is 10% and that 50% of the total supply is net loaned then perhaps we can expand the total supply by 500%. So, now, instead of 21 million coins we effectively have 100 million floating around. Once again the limit is fixed.

By loaning bitcoins we can expand the BC supply, not increase it indefinitely.

Posters arguing that price stability is not an important monetary objective need to go back to "skool" and take Econ 101.

Internally the bitcoin source code uses coins and cents as the fundamental units and formats and parses strings that way. Any change of denomination would require changes to the core logic of the current client.

Your definition of money supply and the standard accepted definition of money supply are not the same thing.

Debt isn't part of money supply.  Debt is part of the larger economy but not the money suppy.
Debt isn't fungible, easily divisible, or have low friction.

The bitcoin monetary supply is fixed.
The US monetary supply is expanding.

Neither of those definitions require printed money.  The federal reserve doesn't print any money.  They expand or contract money supply via open market policies.

Just because something has an equivelent value in BTC doesn't mean it is part of the BTC money supply.

You have 500 BTC, I have one ounce of gold.  Using your debt analogy if I sell you the gold coin the BTC money supply has doubled because their is 500 BTC and 500BTC (equivelent) of gold.  In reality there isn't.  The money supply is still 500 BTC. 

I hate to quote wikipedia but:

Who said the face value of the loan was 5,000 bitcoins? I said the loan was *worth* 5,000 bitcoins (because a disinterested party paid 5,000 bitcoins for it in an open market). The value of a loan includes the risk.

The money supply is not fixed. Think about dollars for a minute. Bitcoins are like dollars but the Federal reserve can't print any more of them. So what? What percentage of US dollars are in the form of physical currency?