Topic: the effects of fractional reserve on bitcoins value - page 2. (Read 3888 times)

It is irrelevant whether people consider something as a proxy of money or as a direct representation of it: representational monetary identity affects both direct representations and their proxies. I cannot mistake the representation of money for its value without also mistaking its proxy representations for that same value. Fractional-reserve banking could originate only because as long as people used gold-deposit receipts as monetary proxies, it was irrelevant whether there was actual gold in deposit or not: the confusion between the value of money and its representation makes the difference between proxies of money and its direct representations irrelevant.


Bank notes and bank deposits are both representations of money, and they both suffer from the same problem of providing no distinction between themselves and the monetary value they represent.


Only the Bitcoin protocol can affect the supply of bitcoins. Instead, financial institutions could try to offer Bitcoin proxies. However, Bitcoin requires an actual public key while its proxies could only offer a possible one: whenever you try to create a proxy of Bitcoin, you end up with a proxy of something else.

I think I do understand your argument. I'm just trying to point out that whether something is a proxy or a representation is a subjective issue. I admit that some people might think that what you think is a proxy is in their opinion a representation because the system is confusing, I just don't think that this is either a necessary or a sufficient requirement for the proxy being perceived as a representation.

I subjectively view both cash and bank deposits as representations of money. From economic point of view, to me, they act as close substitutes. But I do not think that the bank has enough cash to refund everyone. I am not confused about the nature of the banking system, their history, legal status or risks. I understand that if the pyramid collapses, the deposit is gone (unless the central bank inflates the money supply to refund everyone). I still use bank deposits and treat them as a final means of payment.

On the other hand, I agree with you that Bitcoin does separate the essence from a particular physical manifestation and that this makes it more difficult for financial instruments denominated in bitcoins to be confused with Bitcoin. And that this in turn makes it less likely that financial institutions can affect the money supply of Bitcoin. I just don't think this is an all exhaustive approach.

You still don't understand what I mean by the confusion between money and its representation: monetary proxies are proxies of monetary representations, rather than being those representations themselves.

The identity of money is its value: this is its abstract, subjective aspect. The representation of money is its concrete, objective aspect. These two aspects do not exist separately, and yet remain distinct. The form of money we have today lacks an inherent distinction between them. It is to this indistinction that I give the name "representational monetary identity." Bitcoin, on the other hand, inherently distinguishes money from its representation by representing monetary value as a private key then metarepresenting it as the corresponding public key.

It was more than just a joke. It was meant to show how ill-defined a concept "something liquid" really is: "All it takes is a little push."

Chase Bank limited withdraws to $50,000.00 a month and blocked international wire transfers beginning November 17. Do you think they "underestimate folks"?


People (except for bankers) never wanted fractional-reserve banking: they wanted to store their gold and started using gold-deposit receipts for commodity, that's all. When they found out bankers were loaning gold-deposit receipts for gold never deposited with them they got angry. There is no need to "stopping" people from doing something they do not want or even know about: we need to give them what they really want: ease of monetary storage, transport and transmission without the need to leave their money with someone else.


Resistance to what? What urge do people have to do fractional-reserve banking?


People do not care about fractional-reserve banking, they are not even aware of it.


Now you have a point: there is not yet an infrastructure in place for Bitcoin loans. However, Bitcoin is evolving rapidly, and the protocol has all resources to build something unprecedented in both ease of use and security.


Neither does "jargon."


It is not a matter of competition. Without overcoming representational monetary identity, full-reserve banks will end up becoming fractional-reserve banks, as they always did in the past.


+1

I don't believe Fractional Reserve Banking will (or can) exist with Bitcoin.

Bitcoin is solving a very huge problem. One of trust. This trust in the past has required a 3rd party that has managed it in a proprietory, closed (and some would say deceptive) manner.

One of Bitcoin's biggest contributions has been to give us an understanding of how this "trust" can be created and managed in an open and public way.

Once you understand that paradigm, you start realizing just how big of a game changer this is. DIS-RUP-TIVE would be an understatement of the decade.

The future is all about point-to-point, peer-to-peer.

Trust -- from ME to YOU. No middle men/agents with their own agendas.

Do you often underestimate folks?

There's nothing stopping folks from participating in fractional-reserve banking; they have to invent a device that is different than the underlying full-reserve commodity --- hmm, Alice sold Bob's promise (apparently Bob's promise is potentially just such a device).  Obviously Bitcoin could end up underneath a fractional-reserve bank system despite resistance.  What's new is Bitcoin let's folks avoid fractional-reserve banking if they prefer.  Without Bitcoin where can Alice and Bob make full-reserve deposits and take loans today?  Well, they can do so personally; e.g. we lent my daughter and son-in-law money to purchase a vehicle (rather than co-signing on a loan from an institution) -- I no longer have those funds at my disposal until they repay.  Where is there an institution operating thusly?

Proxy, monetary identity, or whatever jargon you like reveals no especially deep insight per se.

If a full-reserve bank can't compete effectively with a fractional-reserve bank then so be it.  I for one would rather try to preserve my wealth in non-interest bearing Bitcoin rather than $US denominated CDs that barely earn any interest at all and are at huge risk to devaluation due to quantitative easing (idiots).  If I happen to gain wealth relative to others that choose differently then great.  If Bitcoin goes to zero in the next 5 minutes then I am glad I remained diversified.

I am not sure. It is not unusual that a good acts as a substitute for another good, even though they are not legally related. Copies are a very good example. If you copy a file, the original file is still there, but there's now two of them. The question is, what is the essence of the good in question? And that is a subjective issue. I am not fully convinced that the essence of money is cash (or precious metals back during the old times), if not for any other reason then because I subjectively don't view it that way.

While I tend to agree that the confusion probably is a contributing factor, I don't think it is either sufficient or necessary. I think transaction costs are more relevant.

This is just full-reserve banking (sorry for the fancy word), which is precisely how fractional-reserve banking began hundreds of years ago (as also how most people think it still works today). To understand why it ended up being how it is today, you will have to go deeper than you seem willing to go. Unfortunately, if we don't go there, we will end up watching the same movie again from the beginning (with us in it).

If Alice loans to Bob then Alice no longer has the thing she lent, period (this is simple stuff; it don't take fancy terms to describe it).  She has instead Bob's promise to repay.  If Alice wants to eat then the promise might not satisfy.  Perhaps Alice has enough other resources to make it by until Bob repays but if Bob fails to repay then Alice is screwed unless she can find and beat the repayment out of him.

If Alice and her many friends join together to make Bob a loan then each of the lenders lends less and can still eat with their remaining resources.  If need be then together they can more easily find the deadbeat and extract their due.

Alice and her many friends outsource the job of finding, qualifying, collecting from, etc., borrowers.  Let us call the outsourcing company a Savings and Loan (S&L).

Depositors at the S&L can make withdrawals only to the extent that resources have not been lent.  Perhaps the depositors would make deposits but stipulate only a portion for lending to remain more liquid.  Only the portion available for lending would earn interest.  The non-lendable portion might be charged a small fee for administration overhead.  Making a non-lendable deposit could make lots of sense; saves Alice from having to care for her own keys.

Lent lendable deposits are locked in until loans are repaid, period (see paragraph 1) -- well, I suppose Alice might sell Bob's promise to someone else -- one wonders what Bob thinks about this (he might have been happy enough to borrow from Alice but might not be too happy when Guido buys his loan).  If a depositor isn't careful and deposits too much as lendable then when they are hungry enough they will regret depositing too much.  Perhaps Alice will borrow to eat -- ugh -- but at least she "knows" she can repay since she has Bob's promise to repay.  So now Alice and Bob owe each other; what a tangled web we weave.

The confusion between money and its representation is at the heart of fractional-reserve banking, by making it possible. Imagine I deposit $1,000.00 into a bank, which loans $900.00 into your bank account without withdrawing them from mine. Now ask yourself: are the $900.00 in your bank account and the $900.00 not subtracted from mine the same money? In other words: do the $900.00 in your bank account and the $900.00 not subtracted from mine have the same identity? On the one hand, the answer is yes: the $900.00 in your account are a loan of part of my original deposit of $1,000.00. On the other hand, the answer is no: the same deposit money cannot be at the same time in both accounts. The reason for this ambiguity is that the identity of that money (its value) has been mistaken by its representation (the bank account in which it sits). Money in different bank accounts is different money, even when the money in one account is just a loan of money in the other. This confusion between monetary identity and its representation is what I call "representational monetary identity." It is inherent in both gold and bank-account money.

Unfortunately I do not have a full answer to that. I have been trying to understand this issue as well and all I found were conflicting and inadequate economic texts. The best I can do is yet again point to the subjective perception, which is difficult to assess. Another factor is the final means of payment. Unless these highly liquid non-money financial instruments are treated as a final means of payment by the recipient, that probably means they are not viewed by him as equivalent and should not be a part of the money supply. Instead, they would be either redeemed right away (which will take them out of circulation) or sold on secondary markets (at a discount, which decreases the subjectively perceived wealth of the recipient).

I'm not saying that none of these obstacles can't be overcome by Bitcoin-denominated financial instruments. I just don't think it's likely.

Water is "really liquid" and it doesn't "affect the money supply in a way or another."

A similar argument is being made by some Austrian economists (that the cause is confusion about property rights). I don't however agree with either. As I said, I understand that my deposit account balances are fractionally reserved and the cash is not really in the bank, yet I still treat the deposits as money them because the alternatives are impractical. I'm pretty sure that the said Austrian economists do use bank accounts as well and you probably do too. So the confusion alone is not a sufficient condition.

But I agree that the confusion is less likely to happen with Bitcoin.

If something is really liquid, I can't understand how it won't affect the money supply in a way or another.
The only reason to hold money is because we expect to be able to exchange it for something else. If there's something almost as liquid as money and which also happens to be a stable form of investment (think reputable bonds), then people might hold some of this asset instead of "raw money".

You don't even need fractional reserves as is to have monetary aggregates higher than the monetary base.

Imagine some bitcoin bank one day becomes famous, and many people start using its services. Among such services, there's the possibility of converting part of your bitcoin balance to bitcoin quoted bonds offered by the bank. You configure to have 50% of your account on bonds, and the bank automatically sells/buys them every time some money leaves or enters your account. Aren't you using bonds as money after all? And if eventually you make a transfer to somebody else in the same bank who also has his account configured to have a percentage of its balance in bonds, the bank doesn't even need to actually sell and buy back again, it can just transfer the bonds at current market price.
There you have it: a very liquid asset being used as money. A monetary aggregate. And that's not fractional reserves.

So, answering OP, yeah, I do think some level of monetary aggregates will eventually appear someday, if bitcoin succeeds. Fractional reserves or not. And of course, that should push the price of bitcoin down (or prevent it from going upper) to some extent. You might want to change your investment strategy from that moment on. But let's not forget though: monetary aggregates can't expand infinitely like the monetary base of fiat currencies can. And since the monetary base of bitcoins is capped, I think we can expect monetary aggregates on top of it to be limited too.

Well, if you studied philosophy and not comedy, then I would expect you to point out where my reasoning went wrong, instead of making fun of it (it is not a treatise, just three sentences).

Regarding representational monetary identity, the easiest way of understanding it is observing how Bitcoin distinguishes between monetary representation (a public key) and monetary identity (a private key). Bitcoin represents monetary value as a private key then metarepresents it as the corresponding public key. Now go back to gold. The yellow shiny metal is a mess: it makes no distinction whatsoever between its monetary value and its representation, which results in what Marx called commodity "Fetishism" (it also results in "intrinsic" monetary value, but let us save that one for later).

Let's tighten up our definitions so we won't keep going 'round in circles:

1.  Commodity money = tangible object with intrinsic value, e.g. gold.
2.  Monetary value = buying power of a unit of money, inversely "worth denominated in units of money."
3.  Yellow shiny metal = yellow shiny metal once used as commodity money, "gold."
4.  Monetary identity = pointless jargon.  Just googled it & hit your book.

Allow me to quote you:

"1. Nothingness is the absence of something, possibly of everything. 2. If anything is absent, then a) its presence is nothing (and) b) The nothingness of its presence is present."

Having spent a good chunk of my life studying philosophy, i still fully expected an early Woody Allen punchline at the end, something about not being able to buy good knishes there, whatever it is.

The confusion between money and its representation is not the one between gold and its proxies. Monetary proxies are not the monetary representation itself: they are, precisely, proxies of it. The confusion between gold money and its representation is the confusion between the yellow shiny metal (monetary representation) and its monetary value (monetary identity). As I said before, it "is already there from the beginning" (even before monetary proxies).

Although the concept of representational monetary identity shares many aspects with Marxian commodity "Fetishism," it is also fundamentally different. As far as I know, it is a new concept - hence the need for new terminology.

There's no confusion for the average guy between commodity money (gold) & its representation (IOU for gold).  It's the difference between shiny yellow metal & a slip of paper that represents it (gold certificate, representative money).
Not confusing.
That's why commodity money was such a win for so long.  No new terminology needed.