Topic: Why Bitcoin Is Not Gold (Read 5212 times)

The part about the 1935 dime versus a dime today, is more less paraphrased from a video clip on Schiffs web site, EuroPac.

Peter Schiff has a beautiful analogy regarding the difference between a PM-backed currency and fiat money:

If you had a dime in 1935, you would be pleased to know that it had 90% silver content. And in 1935 a dime could buy you a gallon of gas

Today, that same 1935 dime with its current silver value, can STILL buy you a gallon of gas. Yes, that 1935 dime is worth $3, because once upon a time we actually backed the value of coins and dollars. That 1935 dime retained its value against inflation for 75 years. Many thanks to FDR and the U.S. Mint for knowing back in the day what money was suppose to be.

On the other hand, a 2011 dime which is based on fiat currency might buy you 5 drops of gas.

Since 1965, all our coinage has had it's silver content removed, and our dollar currency has the promissory backing of gold removed since 1971. The worth of our money today is quickly declining as we print more and more paper money to bail out failing banks and failing nations.

I find bitcoins a refreshing alternative with a lot of potential, and physical silver a good investment hedge.

Your explanation is right to the point.

Thanks Lonelyminer, I've had more than too little of the Christmas Gløgg to fully appreciate your post. But I suspect you put me in my place. Thanks for the education.

Many in North Korea talk about returning to food, but if food was that much better than tree bark, then why has tree bark replaced food in the North Korean economy?







Answer: Government force.

All of the above and more.

Mt. Gox codes, however, are not in general accepted instead of Bitcoins as a method of exchange.

The reason why such instruments do not increase the money supply is the same that deciding to buy an apple instead of an (originally desired) orange does not increase the supply of oranges: for people other than those involved in the transaction, they do not, in general, act as substitutes.

What you describe is a reduction of the size of the Bitcoin economy and an increase of the size of the "Mt.Gox Bitcoin code" economy, rather than an increase of the money supply (of Bitcoins).

Paper money and demand deposits (or another credit instrument) in fiat act as substitutes (of each other). A necessary condition for this is that demand deposits (via cheques, ATMs, EFT) often reduce transaction costs compared to paper money. Mt. Gox codes denominated in Bitcoin do not (and, possibly, never will) reduce transaction costs, and are not, in general, accepted in Bitcoin-denominated transactions.

Money velocity and money supply are two different variables.

And I suggest you read more in-depth books about money supply, it does not matter whether you choose Keynesian, monetarist or Austrian, since they all support my position.

The definition of M2 as quasi-money includes that a redemption of instruments belonging to M2 increases M1. For redemption of fractional reserve M2 instruments to increase M1 this requires that there exist fractional reserve M1 instruments. With Bitcoin, they do not (even though they are hypothetically thinkable, if there was a M1 instrument that decreased transaction costs, such as Ripple).

Let me repeat that: the existence of fractional reserve M1 instrument is a necessary condition for Bitcoin-denominated debt instruments to affect the money supply of Bitcoins.

But unless someone else than the loan taker accepts these virtual bitcoins as if they were real Bitcoins, this would not affect the money supply. Conversely, unless people in general accepted these virtual bitcoins in the first place, the loan taker would not accept them either, and your business model would not work.

And the reason why this would be a pyramid scheme is that there would be no other use for these virtual bitcoins than to get people to give you real bitcoins.

As any populist will tell you: YES YOU CAN!

I suggest you google BASE, MB, M0 versus M1, M2, M3. A bank can not print paper dollars, euros, yuan, but they can create M2 credit (aka money) just as I can create M2 bitcoins. A fractional reserve bitcoin bank can get into just as much trouble as a traditional bank. The only difference is that no one lender of last resort can bail out a bitcoin bank through monetization (printing).

I can take bitcoin deposits from all of you and lend virtual bitcoins. As long as I keep up a confident smile and not all of you simultaneously run to withdraw, I can keep the ponzi scheme fractional reserve system in perpetuity.

Bankers will, if the law and the market allow them, move toward fractional reserve banking under fiat or commodity money. They will do it regardless of the fact that there was a gold standard, not because of the fact.

Saying that commodity money leads to fractional reserve banking is like saying that private property leads to trespassing. Yes, people trespass on private property, but they do it in spite of the fact that it's private property, not because it's private property. And the right response is to uphold and enforce the private property, not to embrace the trespassing.

What I am saying is that commodity money in general (and gold money in particular) leads to fractional reserve banking, which leads to central banking, no matter how gradually. As I am also saying that Bitcoin is essentially different.

Except with mining, you cannot "create more money" with Bitcoin, period.

To leverage your position in Bitcoins, Bitcoinica has to already have those additional Bitcoins: it cannot create them, like commercial banks do by loaning deposit money.

You describe the difference between inflationary and default risk. A bank run is a default risk (you get nothing) while this 'exchange run' is inflationary risk (what you get is worth less) just as much as a deflationary risk (what you get is worth more). That potentially no one wants bitcoin is no different than every asset in existence sans pure energy.

Lack of market liquidity is not good, but it is completely unrelated to anything like fractional reserve banking and bank runs. It's an inherent risk in owning anything that you might not be able to sell it for what you paid.

Bank runs occur when people have been told they own dollars but those dollars have already been used by someone else. Owners of Bitcoin are, or should be, under no false impressions that their investments will be redeemable for a set number of dollars.

Funny, I think of the lack of exchange depth and corresponding illiquidity for a high volumes of USD-BTC makes the exchanges essentially fractional reserve USD banks.  Bitcoins may be worth $3 each, but if everyone tries to cash out at once, they'll be in for a rude surprise as this is essentially a bank run (exchange run?) that causes liquidity problems, just like a real bank run, except that the last person to try to cash out only gets $0.30 on the dollar (or whatever).  As much as we might all like for bitcoins to be a standalone currency, I think it will always be the child compared to USD, at least for the forseeable future (which is 3-5 years, in my book).

How do you define transaction cost? Does it include risk, literal fees, confirmation time, convenience?

Mt. Gox codes present a default risk, but there are no fees, transactions are nearly instantaneous, and at least where accepted, they are convenient. They are essentially one-time use and could not replace bitcoin because of the redemption race condition.

But I don't see that it follows, as you seem to imply, that such instruments do not inflate the money supply even if only minusculely. During the short life time of a redeemable code, before it is redeemed, doesn't it carry the same transactional value of a static bitcoin that might otherwise have been used? Is it any different if the US Fed doubles the paper dollar supply in the morning and destroys the excess in the evening, versus some other doubled credit instrument with a twelve hour lifespan? I understand the stickiness of prices (wages probably won't budge nor will prices double), but when a street market vendor notices that his fresh fruit are selling especially quickly, might he not consider raising prices or pulling the discounts?

I could believe that digital money increases velocity by design, providing an extra inflation for which gold is not similarly susceptible.

(emphasis added) In order for them to be in circulation, they need to be generally accepted as a medium of exchange instead of Bitcoin. However, this is not the case. They are only usable for limited specific purposes and are technologically incompatible with Bitcoin. Because they do not, in general, reduce transaction costs, they will probably never circulate as if they were Bitcoins. Practicing such overissue probably still falls under the definition of Fractional Reserve Banking, however it does not increase money supply. I provided several quotes which explain this in the other thread. Here's the basic one from wikipedia:

Overissue is an insufficient condition for an increase of money supply. Acceptance of these new instruments as if they were money proper is also necessary. Whether they are depends on the transaction costs.

More likely contenders for increasing the money supply are projects which issue debt instruments that are specifically designed to decrease transaction costs, for example Ripple (and, maybe, OpenTransactions, I'm still not 100% sure about this one).

Bitcoinica offers loans (margin) at interest (5% spread of variable duration) with fractional reserve (1:10 leverage).

Mt. Gox offers reserve notes (redeemable codes) which like fiat to gold may be more convenient than bitcoin. For all we know, there may (soon) be more of these reserve notes in circulation than bitcoin.

What Atheros presents as Keyensian viewpoint is not Keynesian viewpoint. However, I have promised not to edit the Keynesian section. I contacted two keynesian economists to clarify their position by email, but got no reply.

Any debt instrument can theoretically create money, if it is used as a medium of exchange instead of the object of the debt. This occurred historicaly because these instruments (e.g. banknotes, cheques, EFT) decrease transaction costs. With Bitcoin, this advantage is absent: Bitcoin denominated debt instruments do not generally decrease transaction costs apart from special uses (e.g. the aforementioned exchanges), therefore they are not used as media of exchange instead of Bitcoin and do not affect money supply, so an overissue does not create macroeconomic questions.

Such a system you describe already exists: Mt.Gox payments can be made from one person to another without ever being processed through the Bitcoin blockchain. There is no evidence that Mt.Gox is anything but honest about having enough Bitcoins to cover the deposits of each user, but the only thing stopping them from cheating is their own honesty and business reputation.

The only reason Bitcoin would be less likely to fall to fractional-reserve problems is that the Bitcoin software reduces the need for 2 out of the 3 reasons for having a bank:

1. To protect one's money from theft. (Bitcoin can be encrypted and backed up on your own)
2. To act as a clearinghouse for transactions, bill payment, etc (Bitcoin software handles this well, it's not instant, but that doesn't matter for most transactions)
3. To act as a middleman between people who want to lend their money out for interest, and people who wish to borrow money at interest (Bitcoin does not address this)

Fractional reserve is an enormously popular topic in circles of jerks everywhere. The web page you link to is probably helpful for someone although one might conclude from it that the differences in the two viewpoints are mostly semantics around the definition of money supply. IMO, the Keynesian model seems much more in contact with behavioral reality, it's based on observations of what people have actually done for thousands of years, practices predating Keynesian ideas like actively managing the money supply through lending. The Austrian school strikes me as one of these prescriptive ideologies like Soviet-style Marxism that establishes a "rational" model ( by some definition ) and then tells us it should be how the world is made to work because of the internal "correctness" of the model.

In any case, bank lending is not the only way that leverage can be used to create money. For example, margin lending can have the same effect. Such lending does exist in the Bitcoin world at the exchange site Bitcoinica. The hedging that inevitably is done by keepers of large concentrations of money ( e.g. Mt. Gox ) almost certainly involves the use of leverage. One way or the other, all lending can create more money in circulation, not just the evil deeds of fiendish central banks   

First, what do you mean that 'mos gold monetary systems were also centralized' ? Are you talking about gold and silver certificates which were then later not redeemable in gold and silver? Centralization was a necessary step to wean the public off of gold and silver money and move to a more centralized system of purely fiat money.

(It's also not just a matter of centralization, it's how much power over the money supply the centralized authority has.)

It was an extremely gradual process from the gold standard of the 1800s, to the increasing use of gold certificates, to the introduction of Federal Reserve Notes, to the confiscation of privately held gold in 1933 (but dollars were still redeemable in gold by foreign governments), to the removal of silver from the coinage in 1965, to the point where dollars were no longer redeemable for gold in any way in 1971. Each step gave more power to the Fed to create money at will.


Basically, I'm not sure what your question is. Centralization was necessary for the government/Fed to get more power to create money - why do you think this says anything about the merits of a gold standard?