Topic: The Real Differences Between Fractional Reserve in Fiat, Gold, and Bitcoin. - page 2. (Read 2922 times)

So, by buying corporate bonds, are you turning debt into money?

Seriously. Assets are always exchangable for other assets. Money owed to you is an asset. It isn't money because it doesn't have a standardized worth. Calling debt money when its spendable is like calling a house money when you sell it.

What you don't understand is that the moment you make any IOU "spendable" you turn it into money. However, IOUs are not money. They are the owing of money: they are debt, not money. The moment you turn them into actual money you need more money to pay interest on old money (debt principal). Finally, since you turned IOUs into actual money, the new money will be more IOUs, which will require more interest payments, hence more debt-based money, then even more interest payments, etc.

The same way all debt is paid back, by the debtor working harder in the future, or defaulting and losing his property.

I don't understand ow and why you seem to think the process of making an IOU spendable somehow changes it from a payable IOU to a non-payable IOU.
the only case in which new IOUs are created to pay interest on the old ones is if both the creditor and the debtor is irresponsible, since nobody would accept such worthless debt as payment and the debt has no way in which it can actually be paid back.
So, you think that nobody accepts Inputs.Io? Coinbase? etc...

That is precisely what I said: monetary proxies are not exclusive to fractional-reserve banking - nor is their purpose.


Let us play this game: imagine everyone using Bitcoin IOUs thus partially replacing Bitcoin as money while multiplying the supply of "bitcoins" by, say, ten. Then, answer me: since the supply of actual bitcoins is fixed, from where would come the additional bitcoins to pay the outstanding interest on those IOUs? Would we create new IOUs for paying interest on the old ones? Then create even more IOUs, until we eventually start backing IOUs with IOUs and utterly forget about bitcoins?

Of course, this game is meaningless from the start since no coffee seller would prefer to rely on debtors just to gain interest on their debt instead of owning an ever-appreciating money that requires trusting nobody.

What are you even talking about. Sure, they make money circulation easier, but so would non-fractional reserve.

There needs not to be a centralized authority in order for a fractional reserve multiplying effect to occur. Person A lends person B 10 BTC, person B gives 10 BTC to person C, person C lends person D 10 BTC, then person A & person C want to buy coffee but don't have the money since they lent it, but the person selling the coffee decides to accept Person B and person D's IOUs instead of actual money because they carry an interest rate, and he knows Person B and Person D to be reliable.

Since the 2 IOUs act as currency, 30 BTC worth of goods were exchanged, and 10 BTC is still owned by a borrower about to be spent, so the money was effectively quadrupled, and there was no central reserve authority.

Of course, they serve a purpose, which is not making loans possible, but rather making money circulation easier. Before loaning receipts for deposited gold, people loaned the gold, which nobody could multiply at will: Bitcoin makes this possible again. You need not scam people in order to loan them your money.

Monetary proxies exist because they serve a purpose. What do you suggest, banning them all? So much for the free market 
And how can you possibly protect yourself against this? Banning loans altogether?

Say you are an 'innocent' loanbroker. Mr. Money comes in with 10 BTC, and says 'hey, lend this out and pay me 1% interest.' So you accept the money, and lend it out. Is there anything fraudulent about that transaction? Then, another person comes in with 10 BTC, and says 'hey, lend this out and pay me 1% interest.' What exactly are you going to do, make them prove its not the same money? Of course not, you're going to take it, and re-lend it out as well. And if it was the same money? Then you "created" 20 BTC, when Mr. Money goes up to another person and says "hey, I lent this 10 BTC 6 months ago at 1% interest, want to buy it from me for 10 BTC, you'll make that 1% as profit at the end of the year?"

Who exactly is at fault in this scenario? Mr. Money asked you to invest his money. Is that in any way fraudulent? Nope. You did what he told you to do. Is that fraudulent? Nope. Somebody borrowed from you, using the rates you stated. Obviously, thats fine as well. Then he spent the money, and the person who got the money, who had no way of knowing it was borrowed, invested it in turn.  Is that fraudulent? Of course not. Then, Mr. Money sold your debt, while fully representing what it is, and a person bought it, because buying the debt made logical sense.

Nobody did anything wrong. Unless you are for banning debt entirely, fractional reserve can and will happen in one form or another because  people want to borrow, people want to lend, and money lent to you is an asset, an asset that can be bought and sold just like any other asset.

Okay, no. If I give you 10 BTC, you lend it out, and owe me 10.5 BTC, and get a borrower to promise to pay you 11 BTC, and somebody spends  that 10 BTC again, and that 10 BTC is lent to you again, and you owe 10.5 BTC, and you get another borrower to promise to pay you back 11 BTC, that additional 2 BTC that you say must be 'created', will, in a free market, either be (A) earned by the borrowers or (B) destroyed, when a default occurs.

The only reason why in the USD system dollars must constantly be created to pay the resulting interest is because there is effectively no M0, and every dollar carries an interest rate payable to the federal reserve, who in turn passes a fraction of those profits to banks. There is no such constant 'leak' of value of all Bitcoins, because they don't carry an interest rate payable to anyone.
Obviously they are more convenient because, of course, they will earn you interest if you invest your Bitcoins into them. Which means people, for fairly clear reasons, will do so.

Money proxies go through many stages. In the beginnings of gold-based fractional-reserve banking, although goldsmiths gave people receipts for deposited gold, those receipts were not yet money: people started using them as money because they were much more convenient than the gold they represented. Then, goldsmiths started loaning receipts for nonexistent gold. Fast-forward to 1971: Nixon eliminates the last vestige of gold-backing from the dollar. Do not get fooled by the seeming innocence of monetary proxies.

Still, you are not just talking about money proxies, but about those proxies in the context of fractional-reserve banking. In other words, you already start in a relatively advanced stage of monetary proxy development. In that stage, fractionally backed proxies are loaned recursively at interest, so:

1. Their supply must become a multiple of the money supply they represent.

2. Even more money must be created to pay the resulting interest.

Because no more bitcoins can be created, the ratio of bitcoin to its proxy representations must continually decrease, just like that of gold to dollars continually decreased, eventually reaching zero.

However, we need not worry too much about all this because Bitcoin proxies have no inherent reason to be more convenient than bitcoins themselves.

There is a huge difference between a Bitcoin 'proxy' and a Gold proxy. Gox-Bitcoin, Bitstamp-Bitcoin, Coinbase-Bitcoin, those are all Bitcoin 'proxies.' Do those eventually obsolete Bitcoin? Obviously not, because merchants can easily accept Bitcoin itself, not the proxy, and thus the proxy is constantly being converted into the base currency.

Wait, what? I have no idea what you're talking about. The only reason why a central bank exists in the first place is because of its government-sponsored monopoly. How exactly would a Bitcoin 'central bank' ever begin to exist? If people really wanted, in a free market, a central bank's inflated money more than Bitcoin, that would prove that the central bank is providing a service that is worth more to people than the devaluation of their currency.

The final question, of course, being "is gold 'obsolete'?"

Fractional-reserve banking based on Bitcoin must replace Bitcoin with a Bitcoin proxy, just like fractional-reserve banking based on gold replaced gold with a gold proxy. The only difference is that the money supply available for bank reserves would be fixed and easily verifiable, so the central bank no longer could create money against government debt. However, fractional-reserve banking eventually requires the central bank to have that ability, which would in turn press for the conversion of Bitcoin proxies into independent money based on debt, just like today. So fractional-reserve banking based on Bitcoin is just its own programmed obsolescence.

Traditional Fractional Reserve: Gold
The traditional form of Fractional Reserve is that of Gold. Depositors, due to practicality, must usually deposit their Gold into a bank so as to allow convenient transactions. There are some maintenance costs associated with storing gold, so the bank must either engage in Fractional Reserve practices, or charge the Depositors, either in the form of transaction fees (this possibility is greatly increased due to the internet) or through periodic holding fees. If Fractional Reserve occurs, it is difficult for the customer to verify how much gold is actually in reserve, thus making the process even more dubious. However, the bank is ultimately responsible for its own lending practices to avoid a bank run, so it can be argued that in a free-market scenario most trusted banks would be responsible with user's deposits. Also, the system is somewhat stable, since without the existence of Fractional Reserve banking, there is still a finite amount of base currency which can be used to sustain market activity, although depending on the gravity of the credit collapse, there is a possibility of severe deflation. Finally, no bank has an infinite line of credit since a bank must still loan out Gold, and cannot loan out more Gold than it has. It can lend the same gold multiple times to create a similar effect, but this cannot be done by the bank "whenever."

Modern Fractional Reserve: Fiat
Currently, fractional reserve banking is done in Fiat, which might also be called "no-reserve banking." In this system, all currency is created through a fractional reserve process which begins when government bonds are exchanged for the first fiat notes. It is difficult for the customer to verify how many fiat notes any bank has in reserve. The bank is not responsible for its own lending practices to avoid a bank run, since more fiat will be lent to it by a Central Bank. This Central Bank effectively does have an  infinite line of credit since it is the issuer of the monetary base consisting of fiat notes. As such this scenario is by definition, not a free market. Finally, the system is not stable because without any debt (public or private) no currency can exist in the system. This means that, even in a 'fiscally responsible' scenario assuming no expenditures on the part of governments, constant inflation must be maintained to pay back the interest associated with this debt. The deflationary problem under this system can be avoided.

Bitcoin Fractional Reserve
Bitcoin fractional reserve is like gold in that the bank's are responsible for their own lending practices and that a monetary base exists outside of the fractional reserve system. However under Bitcoin, it is potentially possible for a bank to provably show it has a reserve, and to quantify that reserve. Also, there is less need to engage in depositing Bitcoins at all, since transactions can easily occur outside of any banking system. The problem of deflation in the case of a fractional reserve collapse still exists, however.