Topic: Why are fiat/banks destined to fail and bitcoin to succeed? Explain. (Read 10955 times)

I'm probably missing the point, but had he 100% reserve ratio, the run would be meaningless (he'd have the metal to back all of his notes).  And nothing short of 100% backing guarantees that bank runs will not happen, or be inconsequential if they do.
The reason for central banks -- the reason that perfectly intelligent ruling elite allow a seeming parasite to feed on them & the plebes below -- is it performs many necessary & difficult tasks.  In short, that's why central banks are allowed to exist. I'll quote wikip:

"To mitigate the risks of bank runs (when a large proportion of depositors seek withdrawal of their demand deposits at the same time) or, when problems are extreme and widespread, systemic crises, the governments of most countries regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks.[2][3] In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and other capital adequacy ratios. This limits the amount of money creation that occurs in the commercial banking system, and helps ensure that banks have enough funds to meet the demand for withdrawals.[3]
Fractional-reserve banking is the current form of banking in all countries worldwide.[4]"

Today's bank run is caused by FRB, but that is more or less a management of reserve ratio thing, a 50% reserve ratio will avoid all bank runs. But in John Law's case, even if he had 100% reserve ratio for his paper money, people would still run for gold/silver coin

Bitcoin's market cap could absolutely exceed $1trillion.  It isn't a near term goal but 10-20 years from now, who is to say it isn't possible? The market cap is a direct reflection of the value it's holder's give it.  If the market cap isn't large enough for individual holder's to maintain a sizeable portion in their wallets (i.e. enough to make daily purchases, receive wages, pay taxes, pay your mortgage, have a savings, etc) then it cannot ever replace FIAT.  There are other obstacles mentioned in this thread as well.

If 15 years from now, bitcoin is worth $40,000 USD per coin, the market cap will be roughly 750 billion.  That means 1 billion people could hold $750 each, or 10m people could hold $75,000 each to put it in perspective.

The "market cap" of Bitcoin is not currently greater than $1 trillion. Therefore it will never be greater than $1 trillion. Therefore Bitcoin will always be an alternative currency. Q.E.D.

I want to point out that the OP's question was whether Bitcoin could or should replace FIAT.

The answer is a resounding no.  Bitcoin is a substitute or alternative currency.  It is a global currency and an online currency, very much unlike any of the current forms of FIAT.  This is where it's primary strengths lie.  As the economies of the globe become significantly intertwined it makes sense to share a simple and easy way to make transactions and spend between countries. No other currency allows for this in a simplistic manner.
 
FIAT of other countries will remain the base for determining the exchange rates between countries....  Bitcoin is no where near large enough to operate as a currency of scale on a stand alone basis.  It's value is going to be derived from the other currencies of the world as it changes hands.

Bitcoin is significantly less expensive for businesses. There is no risk of chargeback and the fees are exceptionally lower than standard payment methods.  You can't ship cash to pay for something online. There is also a very low risk of fraud.  Without more research, it is hard to say if it is a safer form of payment for businesses than accepting credit cards but I would venture to say there is far less fraudulent activity in bitcoin purchases than credit card purchases.

The benefits for business, the ability to be used globally, as well asthe low risk of theft and ease of use on the internet are all factors to promote the adoption of bitcoin AS an onlien currency.  Not necessarily a replacement for FIAT....

That being said, Bitcoin isn't even large enough to support replacing a FIAT.  If it has a $1billion market cap, then 10 million people could each hold $100.  That is not enough to support a population in standard trade.  The market cap would have to exceed $500b to $1 trillion to service a large portion of the global population.

I agree with everything you say, with a few qualifications:
1.  If there is one country USD is not a problem for, it is US.  It's only reasonable for US to do everything in its power to maintain status quo.
2.  China's economy is dependent on US; destabilizing the USD makes as much sense as cutting off the nose to spite the face.
3.  Money will never be apolitical, even when the currency for all nations is the same.  Those who have it will control those who do not, those who do not will resent those who have it.  This is not a USD problem, it's a money problem.
4.  Bitcoin does not have the primary advantage (and the primary flaw) of fiat -- elasticity.
5.  As far as adoption, $1bil. worth with next to no velocity (excluding speculation) -- too early to tell.

   What is the problem of the dollar?

       The US, since they can take on more and more debt all the time, doesn't have any incentive to fix the current account deficit because making reforms would cause political upheaval, and simply going deeper into debt is a much easier political solution. If the US was not the issuer of the world currency, they would actually have to get their act together and bite the bullet of adapting to a globalization.
        The new money that is being injected concentrates into the hands of fewer people leading to increased tension. Inflation shifts wealth from creditors to debtors, leading to resentment from creditors who have no control over the debasement of the currency. China openly criticized the fed for quantitative easing, and since quantitative easing continued after the criticism they have been making moves to internationalize the Yuan and reduce the trade in dollars in the Western Pacific.
   So there is a problem with the dollar- it is the problem of a politicized global currency and it leads to decadence and complacency as the country issuing the world currency grows fat and loses its flexibility and vitality, then leading them to abuse their position as the manager of the global economy, leading to resentment from competitors and conflict and possibly all out war. This is the flaw of the dollar.
   
     Bitcoin is apolitical and avoids this because it combines the advantages of fiat with the advantages of gold- it has a limited supply and cannot be debased, and it is easy to divide and transfer as a medium of exchange. In a free market it will win out over fiat by means of simple competitive advantage. If you try to regulate it it will just flee to the fringes and continue to erode the value of fiat. Bitcoin adoption is not a matter of if, it is a matter of when and how fast.

Offhand, i would say the difference is faith in the backers (US vs John Law) & political stability.  As i understand it, he played his hand very fast & hard, exaggerating the wealth of Louisiana & the success of the Mississippi  Company.  Even smoke & mirrors fail if there's too much smoke & too many mirrors.  He may have succeeded with a slower, more artful approach.  But i'm completely out of my depth here -- it's presumptuous of me to voice an opinion.  I'll embarrass myself after i do some reading

If you compare with Law's scheme, USD had a very different fate after the gold backing it was removed. Law also tried to stop pay back gold/silver coin for his notes, but then his notes lost their value overnight, no one accept them anymore

What is the difference between Law's failure and USD's success? Is it because USD has a much longer history than Law's experimental paper?

The problem is today bank runs still happen, and trust in bitcoin is represented by its fluctuating price. 

10% at the current prices, which would skyrocket if the gold standard was readopted. Gold prices, as we all know, fluctuate over time.  


Free market at work -- a thing of beauty.  I hope you're not suggesting tighter regulations on successful businesses like the FED.


Another enthralling instance of free market.  Might is yet again shown to be right.


That's why we have fiat


What i assume you're saying is "bitcoin attempts to solve," since the dollar & its associated problems are still with us today.  If the people controlling and abusing the dollar choose to give up their advantages & agree to level the playing field, then bitcoin may become a solution.  Since that's not likely to happen, it's not.


Global financial system is crucial to mankind.  The nations of the world live & die by it.  It caused wars and brought peace.  Not a single aspect of our lives remains unaffected by it.  I get it.


There's nothing to sum up yet, other than a history lesson & an unsubstantiated claim that "bitcoin solves the problem of the dollar."


Thus far it hasn't done much shifting, but the shifting that has been done was into the hands of SR, SD, petty scammers & currency speculators.
Adopting monopoly money would lower the average age of the elite even further, if that's the sort of thing you find mind boggling.


The Chinese.  Scheming, sneaky orientals...  Got it. "Don't let the dollar become a chink in the US armor."  


Sure.  They said atomic La-Z-Boys wouldn't catch on.  I'm still waitin'.

    The reason the gold standard was lifted was so the US could produce more money to finance the viet nam war. There was the threat at the time that France was going to start cashing out dollars for gold, so they just decided not to honor that obligation anymore.

     Sure, all currency could be backed by gold if gold was considered valuable enough. People just don't consider it valuable enough though, relative to other commodities like land, agricultural produce, and services, like trade and software. People would have to agree that the amount of gold in the world is more valuable than the sum of all real estate transactions, all rents, all opera tickets, all computers, all pharmaceutical patents, all copyrights on songs, all fish, all oil and gas, all water, and so on and so forth, and they just don't.

      Bitcoin has the advantage of gold of being outside of government manipulation, and the advantage of fiat of being basically infinite in terms of circulation. It serves just as a better medium of exchange like asset backed fiat was originally supposed to, while still having a fixed supply. So I think just based on that property bitcoin can be assigned more value than gold ever can.

"There is not enough gold for the world economy to grow" is the same as "There is not enough bitcoin to carry the world's trade", it is simply not true, you can always use a fraction of a gold coin to represent its previous value, and there is silver too, which has much higher quantity for trades

The reason that central banks always lift this excuse is because they want to totally eliminate the obligation of exchanging of gold for each fiat dollar, so that they won't have a risk of bank run any more

But the interesting thing is, after the gold that backed the USD have been removed, the USD did not crash, it still worth something. This proved Law's theory that money's value could be arbitrary set by law or contract, as long as there is a consensus about its value in trading, it will keep its value

I have reorganized some of the Adam Smith's view on him here:
https://bitcointalksearch.org/topic/very-nice-story-about-john-law-263267

I can imagine that the whole scheme is well planned, at some point on the way, people thought that he created the financial miracle of France and there were booms around Paris area

There are different reasons for his failure, but I think the main reason is that there were silver/gold coins in circulation, so when there was a panic, people would run for silver/gold coins and create a bank run for his central bank. He is the first one bring out the idea of fiat money, people don't trust it enough. But today, fiat money is the only medium of transaction in any country (until we have bitcoin), so the possibility of that kind of bank run on central bank is permemantly eliminated

This is the first time we have a monetary system that can be accessed at the push of a button by anyone, anywhere with a computer or phone.

    Um, in the past kings debased their currency by mixing tin into the silver coins or copper into the gold so they could issue more coins. They also waged monetary warfare by counterfeiting neighboring countries coins with lower gold and silver content.

    The john law scheme, as I understand it, was basically the origin of fractional reserve bamking, and can't work for the following reason: there has to be enough output of export products that people want to keep your currency afloat, otherwise they will make a run on it and try to exchange it for land or whatever the underlying commodity is and it will become worthless. If you try to fix the price of the currency to a commodity, you have to issue way more currency than you have of the underlying commodity, or else there won't be enough in circulation to act as an effective means of exchange.

     There is not enough gold in the world to back even 10% of the volume of trade that goes on, so the gold standard is not viable because people will eventually make a run on the currency as soon as the slightest crisis is perceived, leading to panic dumping and mass unemployment and freeze in trade. Fiat solves this problem by making available enough money so everyone can trade with eachother, including labor, so people can be employed, buy the products they need, trade, etc., without a bunch of productivity being lost due to a shortage of the medium of exchange causing people to not work, or people having to haggle about how many potatos a sheep is worth on a given day. In short it makes everyone wealthier by enhancing productivity and efficiency.
Of course people can and do make runs on fiat currency, see the asian crisis 16 years ago. They do so when they perceive that the economy of a country may not be able to sustain growth. It means that country may not be able to pay debt down, which may lead to a credit downgrade, which may lead to less foreign direct investment, which may lead to reduction in exports, which may lead to a decline in demand for the currency, which may lead to devaluation in the currency, and if one whale thinks this and sells, it can set off a feedback loop that crashes the currency as others see the price dropping and panic sell, even if the country's economy is fine. The dollar is immune to this because of the demand for dollars as world reserve currency and the trade in oil being mostly dollar denominated. So the fed is gleefully buying up 80 billion of debt a month even though the current account(trade) balance is way in the negative and the budget is getting tighter all the time. They call this expansionary monetary polic or quantitative easing, some call it printing money. This is sort of like congress voting to raise their own salaries- it means the US is in a position of power and trust as the issuer of the world currency, and they are printing more to pay off their own debts and maintain totally unsustainanle spending habits, thereby devaluing the currency which doesn't go into hyperinflation mainly because of hoarding and international demand. The international demand is there because people have to buy dollars in places like the congo, somalia, ecuador, panama, and everywhere where oil is being bought with dollars.

      This system was set up at bretton woods at the end of the second world war. The english wanted a single international currency but the US decided to make the international currency the dollar. An international currency probably would't have worked because it would make the playing field more level and put huge power in the hands of whoever issued it. A level playing field would mean no unfair advantages in trade with africa and layin america, which would mean a levelling of global income- which would mean a reduction in income growth in Europe and the US which would translate to less political support from the populace. The US set up the system as would be most beneficial to them, as we see now by the seemingly unlimited line of credit.
         
     The problem with international currency until bitcoin was who issues it- look at the euro, they are issuing a currency for a block of 17 countries(or something, i dont know how many), and they are barely keeping it together because of disparities among the countries and political resentment that comes from the so called freeloader problem. That means people in souther europe are relaxing, hanging out in cafes and eating antipasti while people in northern europe work more and carry the burden of propping up the value of the euro with exports.

       Bitcoin is a solution to the problem that people don't feel that the sum of commodities in the world are enough to back all of the currency needed to cover all trade in goods and services. Especially considering the value of the information economy, commodities or commodity backed currency just doesn't cut it. Bitcoin also solves the problem of the dollar- or the problem of abuse of the world currency for personal gain. By being apolitical and infinitely divisible, and revolutionizing payments to incentivize adoption, it easily, as a concept, can offer major improvements to the fiat system. If you think about how much email, skype, and facebook have changed the world, and they were just revolutionizing the post office and telecom, think about the importance of the global financial system in relation to the post office.

    So in summary, dear sir or madam, switching to bitcoin is not pointless. It offers efficiency gains and increases in wealth on so many levels, and while it doesn't fix human nature, it shifts the balance of power to the hands of much younger people which could revitalize the global economy by lowering the average age of the elite. The implications are truly mind boggling.

      So while there is no reason for fiat to crash right away since old habits die hard and there is a lot of technical catching up that needs to happen for bitcoin to be more widely adopted, I think people with dollars need to look out for the yuan. The Chinese have been keeping it artifically low to keep exporrs high, and they are making moves right now to unleash it onto the world stage as a competitor to the dollar. They could destroy the dollar right now, but are holding back because they have 3 trillion of them. Their civilization is like 5000 years old, they are not going to make any hasty decisions. Anyway... in conclusion, people also said those ridiculous, stinking, noisy, horseless carriages would never catch on. They're expensive, ugly, no one knows how to use them, they break down all the time and on and on. But they offered major improvements in efficiency, so eventually they just caught on because people who used them outcompeted those who didn't. History repeats.
     The extent to which fiat crashes right now will affect how quickly bitcoin is adopted, and how quickly bitcoin is adopted will affect how much fiat crashes.
   
     

Didn't John Law die penniless?  I remember reading about him a while back, i thought his scheme imploded in the end?  I'm pretty ignorant when it comes to history, but i think he started something very similar to a bank issuing fiat, and when things began to fall apart he was already guzzling his own kool aid.  If i'm dead-wrong, sorry -- i'll try to google him now.

Edit:  Pretty much.  Wikip names his venture "[France's] first central bank."

That John Law's scheme is worth studying. He successfully erased nations debt by exchange those government bonds using stocks of a state owned company, since those stocks had higher dividend, those previous bond holders happily gave up their bonds in exchange for stocks

Same could happen for bitcoin, if somehow the government claim the bitcoin will be officially supported in all transaction and establish a state owned investment company to invest in bitcoins, that investment company will have superior return. Those government bonds will all flow back into this state owned investment company, and the state can happily destroy these collected bonds

In my opinion debt is only a tool for maintaining slavery.

It's not about switching. I think everyone is delusional who expect a quick transition. I can imagine that the current system will die very slowly.

I do understand that bitcoin is not compatible with todays economy, mainstream world view and mentality - it doesn't need to be - I for one strongly believe that the current system is fundamentally flawed and it's not just a matter of used currencies but the sustainability of our civilization.

Don't get me wrong, I don't think that bitcoin in itself can achieve anything. For me it's just a tool. It can be used for positive and negative things alike. I think it's a small step into the right direction though as I find the idea behind it fascinating.
It shows us many things: the importance of money; we don't necessarily need leeches like the banking world (we need "independent" money); and the potential effect on the war on drugs/censorship and similar subjects.

Having said that, I come from a place where politicians and bankers lured most of our population to questionable mortgage deals which caused mass defaults creating a situation where the brighter folks are fleeing abroad to have a chance of better living standards. In the mean time the damage done is very transparent everywhere, you can experience how entropy works first hand ;-)

If the problem is national debt, as the posters here have suggested, then shifting from an inflationary currency to one that is non-inflationary will only aggravate the problem
Assuming the debt is unmanageable now (impossible to pay it back with inflationary currency), it will become *more* unmanageable (impossible++ ) with a currency that can not be inflated (printing your way out of the problem is no longer on the table).

*Assuming that national debt is a problem (unclear), and that there is a practical method for a country to convert its currency into bitcoin (there isn't).