Bitcoin Forum

The current banking system is not lossless:

(P + I)issued + (P + I)collected != 0

where are the leaks?

Do you mean: "The central bank lends out money, then gets back the same amount plus interest. Where does the interest come from?"

It comes from an ongoing increase in the amount of money lent out by the central bank. This, of course, causes monetary inflation. The system can be regarded as lossless if we record the value of money at time "t+1" as less than the value of money at time "t". Then we get:

(P + I)issued [valued at time 't'] + (P + I)collected [valued at time 't+1"] = 0

Or, the amount owing by an insolvent bank could be written off:

(P + I)issued + (P + I)collected + (P+I)written-off = 0

So what does that mean for Bitcoin loans? Where would the money come from to pay interest?

The loaner would have to pay it to the person who they were loaning the money too in return for services offered. It doesn't have to be the same loaner but basically the loaners need to spend their money into the economy.. they basically get free services in return for loaning.

The analogous problem would be if you needed to pay interest on the generated bundles of 50 BTC. Eventually the interest payments on each bundle would exceed 50 BTC and the system would collapse (for lack of coins with which to pay the interest).

It's not an issue for regular Bitcoin loans, because the money doesn't enter or leave the Bitcoin economy, it just transfers to different people. You could charge 100 BTC interest on every 50 BTC loan, and the system would not collapse, no matter how many such loans you made (provided the loans didn't all mature at the same instant of time).

Even then the system doesn't collapse, the guy who made the dumb loans just doesn't get paid.

Government printing money.

The government does not directly decide to print money, but when the central bank monetizes government debt its equivalent to government printing money.[1] So basically the amount of money increases definitevely due to government spending through monetized debt.

Btw you dont need an increasing money supply to pay interests (it just makes it more easy to repay but its not necessary).


[1] Monetizing government debt is equivalent to government printing money: The central banks always keep renewing the government debt and buying more, they always increase the amount of government debt they hold in the medium and long term (you can easily check this). Therefore the principal never gets payed back because its always renewed. What about the interests? The interests the government pay on the debt is central bank benefit. The benefit of the central bank goes back to the government (in the case of the fed weekly). Therefore the government get the interests back. Its like if it never payed them.

If the principal will never be repayed and the interests are not payed either... its not debt. In reality its just an accounting trick. The central banks use the government debt to inflate. When the government spends through monetized debt, its spending printed money (not debt).

Here's a spreadsheet that shows how a loan can be paid back with interest without the money supply ever changing:

https://spreadsheets.google.com/ccc?key=0Agps_CxeNSeBdDhrQUNrLUl2bWlBc1RBY1JWUWE0OHc&hl=en

Yes, that's fine for the productive sector, but it doesn't apply when the central bank issues money.

The reason it doesn't work is that there's no central bank equivalent of "A buys apples from B", i.e. "Central Bank buys things produced by the bank it lent the money to".

If the central bank creates a million dollars from nothing, lends it to a bank, and requires that the bank pay back a million dollars plus interest, then the money supply is reduced after the loan has been paid back with interest.

I had Hal's question in mind when I made my post:


When dealing with monetary systems controlled by a central bank, whether or not all the debt can be paid back with interest depends on details of the system as it's not a free market money.

Agreed. Within the Bitcoin economy there's no problem with interest.

Sure there is.  Start with 1000 coins, lend at 10% per year.  After 100 years you have all 21 million coins.

I don't see a problem with that, if the government is subject to democracy (basically working for the people) then fair play. If you're going to just go all 'libertarian' on the shizzle and concede the state to shady power-complexes, then of course this trick sucks.

OK, you are right but only "in extremis" and "in theory". In practice, there will always be people who don't need to borrow.

Wrong. In a hard currency economy, interest rates greater than the money supply expansion are not competitive and never taken up by the market, (unless the debtor is extremely risky and then you can basically kiss your BTC's goodbye (i.e. a loan to your useless, unemployed brother-in-law cause your sister is screaming at you).)

The gold supply expansion from mining is around 2.25% per annum and it is almost impossible to get gold loans at rates that high.

In the long term, since BTC expansion goes to zero they will be basically interest free ... if you can find a risk-free debtor. More likely loans and debt will become less widespread and joint ventures will become more the norm where the loaner really does have an "interest" in what you are using the money for and doesn't just collect the interest cause he created the money out of thin air.