Topic: Why FED like bitcoin (Read 4509 times)

But why will the reserve bank lend there money to people to buy Bitcoin instead of giving it to the government to build projects? For all I know even if you lend the money to people who will buy Bitcoin will there be any guarantee that their will be any return to you? Bitcoin is a volatile currency and there is no assurance that people who you have lent money will earn from the market. The end result will be a more unstable economy, unemployment rate is up, and poverty rate as well will rise. I think OP is thinking that investing in Bitcoin is a magic pill to end the poverty in their country. Also are you not even thinking of the consequence of printing 1 Trillion Dollars to your economy just for the sake of lending it? The U.S.A will basically be devaluing their own money in the global market.

I think bitcoin can not compete with the US dollar. And, Fed Chairman: "Bitcoin is not a threat to the dollar."

But isn't that is the case when we do have real money in circulation and people are actually getting the profits and earnings back into the main stream circulation. I ma not sure if you understand my thought or not but let me put it in simple word. Juts printing more money will increase the supply a lot and if this kind of money is given to the people who are going to put it into the bitcoin then they will increase it by means of profits. Thus they will bring even more money into the circulation and the supply will be huge for the real money. I would call that set back of the economy because there is no demand for it and people are just bringing more of it. Call it for the inflation and nothing else. Just an another thought out of my brain.

The Fed does not hate bitcoin but always brings up issues. Virtual currencies may not have much of a risk with current usage, but financial uncertainties will arise when virtual currency is used more widely. Without central bank backing and institutional support, it is not clear how virtual money will manage in a large-scale payment system or payment system that can operate stably during the transaction. unstable or not.

Second one actually happens but I do not think it is significant thing in a large scale. Fed also does not care about btc by now for me.

Yes it is a liability they borrowed from the god, and they never need to pay back

Confused by all those accounting terms?  Although none of the economic books will tell you that, you maybe realize that there is a big difference in gold (you have to put your labor in to mine it out) and fiat money (FED just write number of 0s in their balance sheet), don't you feel that there must be something very wrong? 

It's very difficult to understand what you say, especially given your poor grammar, but your basic premise is wrong. In fact the polar opposite is true, USD are actually liabilities of the FED, not assets.

Debt owed to FED

FED create money out of thin air to buy assets/bonds from government and commercial banks, through this way government and commercial banks get money to spend/lend and so on... So for each dollar government/bank spend, there is a corresponding asset/bond located at FED

Notice the ownership here: If FED do not have the ownership of those created money, they can not buy assets with those money, since that violated even the basic rule of barter. So they must first rightfully claim the ownership of those money created out of thin air and then use these money to buy assets from government/banks

So, through printing money and spend them, FED has claimed equal amount worth of the assets and government debt

In the worst case scenario the FED can write off the debts, but they should not have the ownership of those debt from the beginning, because they should not have the ownership of those printed money either



I agree that early adopter problem existed everywhere in this world, due to scarcity maybe, but at least it is honest money. If you compare some early adopters using CPU to generate millions of bitcoins with FED just adding some 0 in his balance sheet, at least they are not any worse than FED. And if the community agree, future bitcoin version could keep the coin supply as a constant, so that early adopter's benefit won't be that significant

And since it is worldwide, I don't think any single government can do a lot about it

It has nothing to do with debt/credit at micro economy level, it's about money creation

Since 1971, each one dollar has one dollar worth of debt corresponding to it when it is created, no matter what kind of productivity/efficiency/wealth distribution a society has, the overall wealth count by dollar is always 0, if you count interest, it will be negative. You have 2 trillion us dollar in circulation, then you must have 2 trillion debt somewhere else in the society, actually the debt of government is 16.7 trillion, thanks to this money creation mechanism

Each bitcoin has no debt corresponding to it, that is the fundamental difference

Not quite. You are using a modified version of the "wealth effect" argument that is used to support the housing and other asset bubbles as a means of restoring economic growth.

Let's analyse it a little bit.

First of all, debt/credit created in the private sector (that includes mortgages, credit card debt, margin debt, you name it) is independent of whether the dollar is backed by gold or not. We had a credit explosion in the 1920's when the US$ was still in the gold standard. We've had another one starting in the 80's and peaked in 2007, when the US$ is not in the gold standard. In both cases, the vast majority of the debt is private sector debt. This is important because given that the private sector doesn't have access to the printing press it means that the only way to pay it back is if (as you pointed out) income goes up substantially or if assets purchased with this debt (such as houses or stocks) increase in value, so that they can be sold to pay back the debt. Given that they actually need to be SOLD in order to pay back that debt, it all goes back to actual income increasing (otherwise, by the very act of selling them the price goes down so the debt remains high as a % of assets' value). We saw an example of this in 2008.

How does the "wealth effect" come into play? Well, according to many people, and most certainly policy makers in the US and elsewhere, if peoples' assets increase in value, people will feel wealthier and therefore will spend more. This will increase GDP and therefore disposable income for all. The economy will acquire "escape velocity". So, the recipe for any economic downturn is to try to reinflate asset bubbles to restore that "wealth effect". The 2000 dot-com crash led to the housing bubble, the 2008 crash led to the current reflation of both equity and housing markets, etc.

The problem with this is that it doesn't really work, or at least it doesn't work enough to make it worth it. Most asset-rich people will not change their spending patters if they are even richer, while the really poor that could use the extra dollars to spend, don't have any assets and are therefore not benefiting from the asset bubbles. Warren Buffet may have been a few billion $ richer than last year but he will consume exactly the same as last year.

When and where would such an asset boom successful and positive for the economy? If the asset price increase spurred investment in productive businesses that generated income. In that sense the dot-com bubble didn't go wasted because several successful businesses came out of it, and today's productivity and arguably standards of living are higher that 15 years ago thanks to the Internet. When venture capitalists invested in Google, Amazon, etc., they actually created value. I'm not sure the same can be said about the housing bubble, but that's another story.

Now to the interesting part: As bitcoin increases in value, more and more income is spent in it, just like any other asset. The very fact that the value rises compared to the US$ is because people spend US$ to buy it. On top of that people spend their money in mining equipment, electricity, etc. This initially actually reduces the available income, but in the process it creates an asset with a certain value (as determined by the market), which could in theory lead to people creating businesses around it that would improve productivity and potentially raise available income. If for example there are businesses that take advantage of bitcoin's features to offer better micropayment services or P2P microloans or whatever else, this could have a positive effect on the actual economy and income. If, on the other hand, you rely on the asset bubble itself to help the economy, it's not going to work. It's a zero sum game, and by its very nature it decreases rather than increase available income (as US$ income has been spent on bitcoins). So the important thing is to establish a robust ecosystem of businesses that offer services that wouldn't be possible without the bitcoin, so that they net add value to the economy.

Yes, that's the point, and it is not the only reason. If you closely study how today's fiat money are created, you will notice the fundamental difference between a debt based money (fiat money) and honest money (gold/silver/bitcoin)

Before 1971, US dollar is 40% backed by gold, so in certain degree fiat money is not debt based, but after that backing is removed, all new created money are backed by future debt. After 40 years, it has grown into a huge mountain there is just no hope to pay back that amout of debt without significant increase in income

But bition might be able to help pay back that debt, the only thing it requires is its value grow to a scale close to the current debt

OP, PLEASE tell me you're trolling us.

Not quite.

Debt/credit is a separate layer on top of any monetary system or currency. Credit has existed for thousands of years and asset bubbles that resulted from huge credit expansion (and always ended in tears) have also been plenty. There's nothing that stops people from extending credit denominated in bitcoins. If this happens, and whatever investment is funded with such credit fails, default will follow.

In fact, given bitcoin's design (limited supply), debtors would have a very hard time paying off debt after bad investments as they will not even have the benefit of inflation eroding the real value of their debt over time. So, if anything, if an economy based on BTC evolved, and there was an established credit system in place (again, in BTC), and there was significant credit expansion, the next time a recession came, there would be mass defaults everywhere, much worse than the current situation in the Eurozone.

But we are nowhere near this happening. Because it's so obvious, I doubt anyone would ever extend credit on BTC, so in that sense you are right, a debt crisis will not happen in bitcoinland.

The cyprus problem recently again showed how dangerous today's monetary system is. If it could not find any higher consumption that could keep the country's exponential growth, the only way to reduce that debt is to reduce the saving

But with bitcoin, there will never be such kind of problem, it is not debt based. No debt = freedom, you can select whatever growth rate you want without worrying about the debt interest

This.

I would be buying up every cheap bit-coin I could

All these events won't change the supply

But Bernanke slow-roasted with an apple in his mouth would feed a family of four for a week.

A number of factors can affect the bitcoin supply/demand equation.  Here are a few examples:

• What happens if the US government announces new regulations that outlaw (or effectively outlaw) the use of bitcoins by US businesses/citizens?
• What happens if Mt. Gox is hacked again?
• What happens if someone holding 250,000 bitcoins decides that the market has reached a top and dumps them all at once on Mt. Gox?

Any of the above scenarios, while hopefully unlikely, could cause a dramatic selloff not unlike what happened in 2011.  Bitcoin was designed to weather such storms, but it could take a long time for the price to recover, as it took over 1.5 years to recover from the last time this happened.

Why do you think it is a bubble? 

In order for bubble to burst, one condition must be met: supply >> demand

Any other things in the current world can increase supply when demand rises, and typically there is a delay, so when the added supply reaches market at large scale, the market has already fullfil the demand by a higher price, so there comes the crash

But for bitcoin, supply is fixed and transparent, demand is just start to rise, it might take 100 years before it bursts, or it might never burst, just absorb all the over produced values into it like a black hole