Topic: Why Bitcoin is ultimately doomed to fail (not today or tomorrow) - page 16. (Read 40866 times)

Sorry, I didn't understand it, could you please explain the scheme as you see it? I'm always curious what are people's own thoughts on the theme, lol. Also, the term "money multiplication" is an official one, so in any case it is not me who called the process so...

Here is a nice animation about "the creation of money", which you euphemistically call "money multiplication". Sorry, it's in Dutch, but you will get the gist ... hopefully.
http://www.trosradar.nl/standalone-player/aflevering/16-12-2013/geldcreatie/#sites/radarextra/animaties

You also seem not to properly understand how money multiplication works. Banks don't lend money they don't have (thus no "creating money out of thin air"). They can only lend money they have in deposits. Technically, they can in fact lend money they don't have, but they will have to close this imbalance as soon as possible...

To better understand what's going on here, think not in terms of money (since both loans and deposits are the same money which is confusing) but in terms of assets and liabilities

I hope you (both of you) understand that this "velocity" pays a price. This price is that two more participants are in debts; the loaner and the bank itself. Besides this increasing number of debtors, the moral question pops up wether a bank is really allowed to lend money it does not have? Who owns the 4X ? Do they agree? Hmm, strange to call this "one of the most prudent comments".

This is one the most prudent comments I've seen here recently that doesn't go along those stupid lines of "banks creating money out of thin air". My addition is that it is not banks that change the velocity of money, or rather a primary driver for that. Banks are just an instrument to make it possible whenever it is required, a sports car where economy is the driver...

What is going to take the place of this sports car in case there are no more banks?

No. To play their role in the economy and accumulate significant means banks have to attract money into term deposits, which no other financial institution is allowed to do. In any case, the possibility of accumulation of money is what important here (names don't matter)...


I think I've already explained pretty clear why banks are needed in the economy. And this is obviously not "the fractional reserve game"...

There is no before, it is always now whenever the economy is expanding, i.e. there is a need for new money at first to be accumulated somewhere and then lent to finance this new growth. The interest is paid back for banks service with part of this growth. How on earth is this going to happen in the bitcoin economy if we exclude banks out of the equation?

To make banks irrelevant in the bitcoin economy you still have to address the primary issue, i.e. to take on the role banks serve in the economy by bitcoin alone (now without banks). Just saying that bitcoin is a superior substitute for banks won't do...

I think I made it clear for now

I just have no other option left but to draw a conclusion that you can't address the primary issue why banks are needed in the economy and where bitcoin itself would fail (without the help of creating bitcoin banks). That's all

An even more fundamental reason why Btc notes will not work over the next few years is due to the increased adoption rate. As the Bitcoin economy is expanding much faster than regular growth, Bitcoin deflation is running at greater than 15% per year, probably much more. No one will borrow in Bitcoin to start a fiat business.

When Bitcoin becomes pervasive and perhaps a currency of its own with a complete economic cycle, there will still be no incentive to borrow in Bitcoins for fiat. Why? Because bitcoins are limited to 21 million, lost coins, productivity growth in real economy, population growth and fiat inflation all adds up to a real deflation of Bitcoins exceeding 6% per year in fiat terms.

During the adoption phase of Bitcoin, I believe there will be more equity financing.  Basically, use Bitcoins to buy into alt coins, 2nd gen coins and various Bitcoin businesses. Hopefully, by the time Bitcoin hits some kind of terminal value (in terms of user growth, which will be many years down the track), we would've gotten comfortable with equity financing as the primary means of finance.

Why equity financing?  Because it is much more robust than debt financing and there is no possibility of a debt crisis with equity financing.  The financial sector will be a lot more stable. 

I think most economists at this point see the creation of money supply as the primary purpose of banks.  

The most meaningful definition of 'money supply' that I know of is the amount of 'actual' money (under the gold standard that meant unfakeable money such as gold or silver; now it's something more like the total of the printed paper notes in circulation) times the velocity of money, ie, the number of spendings of that money per time period.  

Banks under a 20% reserve requirement hold X 'actual' money, and loan out 5X that amount to people at interest.  This increases the velocity of money by five times, because now the money, as loans, is spent as often as five people can spend it rather than only as often as one person spends it.  There's still technically the same amount of 'actual' money, but the velocity of money hence the 'money supply' goes up.

So banks are very much in a percentages game.  Under a 20% reserve, they cannot continue if more than 20% of the debtors default or more than 20% of their lenders (ie, the account holders whose 'actual' money they are loaning out) withdraw their money.  In fact the only difference between these two classes as far as the banks are concerned is which one they have to pay interest to and which one has to pay interest to them.  In a crisis, there is also the factor of which they can prosecute and which can prosecute them, but that's really part of the same issue.

The problem is that these loans create an obligation on the part of the bank and, if more than 20% of their debtors defaults on their loans, or more than 20% of the lenders whose money they are lending out want it back, the bank cannot meet that obligation and as a result must demand more of their remaining debtors (for example by jacking up interest rates suddenly and often unilaterally) or be prosecuted by their remaining lenders.

Bitcoin does not change this equation any more than gold did.  A bank holding 3 tons of gold, under a 20% reserve requirement, was authorized to loan out 15 tons of gold (or issue 'money' theoretically redeemable for 15 tons of gold).  Bankers fully expect to do exactly the same thing with Bitcoin.  They will hold the keys to say a thousand Bitcoin, and issue obligations worth five thousand Bitcoin.  If more than 20% of those they're borrowing from want the keys to their coins, or more than 20% of those they're lending to cannot produce keys when the banks need them to pay those they're borrowing from, then the bank fails.

The difference is that there is no real reason (unless they pay interest) for anyone to loan banks Bitcoin.  

Bankers are able to 'sweeten the deal' for account holders by providing financial services - security, money transfers, etc - that Bitcoin holders are able to provide for themselves.  This is why people loan money to banks instead of directly to mortgage holders who will, at least in theory, pay a higher average rate of interest even including the defaults (or the banks wouldn't be profitable).

Bankers aren't able to 'sweeten the deal' for Bitcoin lenders, and as a result will have to justify their existence solely by paying interest.  As a result interest rates for lending Bitcoin to banks (ie, what they have to pay account holders) will approach the interest rates they can charge for lending it out (ie, what debtors have to pay them).  If liquidity and markets in Bitcoin become as efficient as the best that can be provided by banks, then interest rates will become equal and there will be no money to be made by banks loaning out Bitcoin.

Before, when there were lots of demand, bank could increase the utilization of money, and make the development faster, but once majority of demand is fulfilled, no need for banks to do this. And they start to gamble with other people's money

You can't prohibit anything whether in fiat or bitcoin. That is the same top down thinking that has pervaded society. With Bitcoin, we won't need lending to provide liquidity. People now have a choice.

If you haven't got it yet, you probably never will. I don't know why that is the case but it is not my problem to rectify.

You are not in the "previous" credit boom. You are in the same credit boom but re inflated by Ben. We never had the correction we needed.

There is no contradiction. Ben was trying to escape the liquidity trap and he tried to do that by creating another asset bubble, exactly like his mentor Greenspan. So far the US has seen weak credit growth, which why there is a weak recovery if one can call it that.

You may not recall but everyone praised Greenspan when he retired but now he is known as the fed chair that created two asset bubbles. Has there been a more hated chairman? Now maybe yes. Bernanke is leaving a similar time bomb for yellen. When it blows, yellen will have no choice but to print, not realising that the USD might devalue significantly as she strives for "optimal" control. Then the fed will be cornered by rising inflation and GDP contraction. Say hello to stagflation.

What about going into detail?

Yes. Amazing to me you still don't realise that bitcoin is a superior substitute for banks.

This is called liquidity trap, if I'm not mistaken. I think it is actually a consequence of the previous credit boom...

Also, that part somewhat contradicts this:

I have written above the primary purpose that banks serve in the economy. Unless you can substitute this with something else without the help of banks (or somehow eliminate the need for money redistribution), banks will exist....

What does it have to do with that as such? Should we prohibit lending money at all?