I think time frame is very important in any kind of precise calculation of money supply and its flow, in any given time, there is only one fixed amount of money in the whole society

My theory of energy: A product can contain or made by using lot's of energy but still worth nothing because people have no way to transform those energy to serve their needs, but a product worth something must contain certain amount of energy, energy is what living creatures always seeking during the phase of their life

This means, people will not value something which contains no energy at all, every consumable goods have energy inside, consuming those energy will make the life continue

From this point of view, every product have a minimum energy required to produce them, no matter how efficient the manufacturing process is, this minimum energy requirement can not be changed, and this could be regarded as the base value of everything

And of course the valuation of human are really difficult to anticipate, especially some intangible products, besides this base value, there are other factors

Back to the topic, in the boom era, people feel they are much richer due to registered asset value gain, but the energy contain in the assets that they own did not change, so eventually the price bubble break, and they feel much poorer. Although loss is just a paper loss (the energy contained in the house that they own do not change), but due to the house price dropped, they now have to pay a higher monthly rate to banks, that is the real loss of energy (they have to work harder to produce those energy)

I think FRB just works like insurance, most of the time banks can loan out the deposited money without huge risk, due to the risk is diversified between different saving accounts. But if they fully utilize that credit, and a social or economy crisis come, most of the people will have to withdraw money to pass the difficult time, then banks will get hit badly

And, I think like government debt, it is always the first group of people entered the system benefit the most. The current banking system were mostly established after the world war II, at that time very few people were withdraw money from the system, they were keep accumulating through 20th century and now they are going to
withdraw, and anyone who joined this system today will have to pay older generation's pension, thus impossible to accumulate new wealth in bank's system

I don't exactly follow...

Let's look at the Net Asset Value of A, B and C

At the beginning:
A's NAV is 100 BTC
B's NAV is 0
C's NAV is 0, but since he have 100 BTC worth of goods, his NAV should be counted as 100 BTC

Now after the lending
A's NAV is still 100 BTC, he does not have any BTC, but he owns a 100 BTC loan contract which worth 100 BTC
B's NAV is still 0, since he owns 100 BTC value of goods and 100 BTC debt to A
C's NAV is still 100 BTC, since he owns 100 BTC

With each lending, the corresponding debt is created, the debt is always a negative NAV, the totally amount of NAV will not change, you can lend out the same BTC multiple times but that will not change the NAV of the whole system, and will not change the money supply

I created a gold coin, that coin can be spent hundreds of times if it goes into circulation, but that does not equal to creating hundreds of gold coins

Good example

Hundreds of years ago, Adam Smith tried to define the value of the goods by using amount of labor used to produce the goods in general, that theory has been replaced by supply and demand in later economics. But I still feel that an unbiased measure of value is needed. Up until now, the best measurement I can find is Energy - If a product include lots of energy or it is made by lots of energy, then it will have high value

But even this measurement is not static: Depends upon the technology level of the human, same energy can be very valuable or not valuable at all. Imagine that you have found a stone that contains billions watts of power but the technology in the near future still are not able to utilize that power, then it will worth nothing

Keynes said from long term point of view we are all dead, maybe that is he's view: Only those happened when you are alive are valuable, then it is almost impossible to find an unbiased measure of value

I believe in the near future, virtual economy will take over the physical economy and be much bigger in size, and the virtual product at that time will be good enough to encourage people spend more money than they did today on housing

So if you are still looking at the exchange price of the BTC, then you are on the wrong track, just like in a RPG game world you always talk about how many gold a certain item require, not $. Just ask a child today, is $ more valuable or his wow gold more valuable? I'm sure sometimes he will be willing to pay more $ for the gold, the problem now is just he could not get $ easily

I have never believed those fractional reserve banking related money supply creation, you can not just add the same money multiple times (typical lacking of knowledge of accounting) and said money were created by loaning out savings

Banks can lend out the same money multiple times in a year, that will change the money flow speed, but the money supply will not change without someone creating new money

Simple but still useful formula:
MV=PY
M is money supply
V is money flow speed
P is price level
Y is real GDP

Good view, I think the word "value" seems play a vital role here.

I spent lots of resources to dig out a stone that no one seems like, my labor has just been wasted, this means wealth are destroyed. But if a person with the right knowledge can identify the stone as a diamond, then suddenly I have made a fortune, wealth are created

So, is wealth dependent on others valuation?

In a desert, a man desperately looking for water, how much a bottle of water value to him, compared with the same bottle of water in the city? Can we say that scarcity create wealth and abundance destroy wealth?

People's behavior changes over time, my father's generation can not imagine children today sitting before a computer surfing all day, internet based consumption need a internet based currency, but the limited amount of BTC supply is really a problem and may ultimately fail it

The bank is operated by heavily armed robots 

And, if they are so easy to get that 2 million, it will worth nothing to them, and there will be no economy activities. You can regard the planet earth as a closed system with billions pair of A,B and banks, same principle still holds

I'm thinking about a simplified case:

On an island with only 2 people (A and B) and a bank, at the beginning of the day, bank loan out 1 million dollar (the island dollar) to A and 1 million to B, with 0 interest

A then capture a fish and sell to B at price of 1 million, B pick up a basket of fruits and sell to A at price of 1 million. After this, they both spent 1 million and earned 1 million, at the end of the day, they return the money to Bank, thus completing the credit loop

So, money is the driven power of economy activities, same as BTC is the driven power of miner's activities, under this driven power, there will be economy activities.

What if second day bank only will loan 100 dollar to A and 100 dollar to B? A and B will refuse to do anything because they think the dollar is not worth their effort. Actually their economy activities in this case are totally independent of how much bank loan they have, they could still complete the activities with 100 dollar loan, but now they have some HISTORY to compare and FEEL unfair

So, the most important use of currency is the benchmark of value

Actually I don't think the price of BTC is an issue

If someone traveling abroad wants to have some local currency to spend, he could easily exchange money to BTC from his home country and exchange BTC to local currency at once, if the whole process do not take more than 1 hour, the price change can be ignored

I can even see BTC as a good utility to wash money, so those exchanges will be the weak point of BTC, a decentralized exchange system is needed

No, I can not, so does FED. You can not really tell people buying a house for speculation or for consumption

By the way, high frequency trading increased money flow speed, thus will cause money supply decrease.

MV=PY, if V increase, M will decrease, given PY do not change

Coin generation speed could be adjusted based on economy activities, so if more coin is needed in transaction, more coin will be generated through mining, if more coin is transacted per day, less coin will be generated. But the amount of coin will never get less, not like FED can do tightening. But if that function can be merged into transaction, it will be an automatic approach

Some progress:

With only 2 people, the speed of wealth accumulation can not be fast: A could both capture fish and pick fruits as much as possible to free B from the food gathering work, but B will still consume only one fish and one basket of fruits per day while he is building the boat, the excessive fish and fruits will get trashed, thus the maximum saving A could have is 1 fish + 1 basket fruit per day

Since a big society can be divided into millions of A and B pair, so the society as a whole can not have huge savings per person if the daily consumption per person is limited by 1 fish and 1 basket fruit

Imagine that the consumption level increased: B can consume fish/fruit/egg/milk and many other things per day, thus A could also produce all of these things, but B still make the same boat for A, this means the boat price will get much higher. But since A are not able to build boat due to lack of skills, A might still accept a boat with higher price

Here is something notable: The productivity of A increased, but the wealth accumulation did not

I think interest and deflation has no direct connection to employment, the employment rate can be assured by job-guarantee or similar program, and the high unemployment rate is caused by a high level of automation and high number of matured consumer


Very good point! You showed that short term saving (food) can translate into long term saving (boat)

On further thought, in an island with only 2 people, the speed of this saving will not be fast: A could both capture fish and pick fruits as much as possible to free B from the food gathering work, but B will still consume only one fish and one basket of fruits per day while he is building the boat, the excessive fish and fruits will get trashed, thus the maximum saving A could have is 1 fish + 1 basket fruit per day. Anyway, A can have some saving without causing B's debt, but his saving still caused stocking of goods (the boat), but that is more acceptable since boat can be regarded as value keeping


In my island model, it is very easy to see that A's saving will cause either stocking of goods or B's debt, but if those stocked goods are everlasting and their value seldom changes (This is another aspect: Even the goods are everlasting, people's preference changes), then saving in money's form in principle can be unlimited. But in reality, nothing's value is everlasting, if saving can not be translated into everlasting goods, then it must come from some one else's debt

The point of an island with only 2 people is to simplify the complexity, in a market based economy, everything for sell have a buyer, everything produced has a consumer. If a model can clearly illustrate the process between one producer and one consumer, then after multiply, it could suit economy of any size

Most of the macro economists are rather talking about general concepts instead of precise numbers, the demand curve is merely a concept instead of mathematics. But 1% and 100% are totally different things, so most of the macro economy theories today are not very convincing, what they think a big impact might be a small ripple in reality while what they ignored small parameters might generate devastating effect. For example, I think interest rate is rather unimportant compared to jobless rate, and the usefulness of BTC is much more important than the deflation nature of BTC, etc... If we take that approach, economy discussion will end up with a endless debate of "which one is more important", and developed into political practice

Back to the topic, "How come the bank failure destroy the wealth", this puzzle is still not solved  

The financial crisis seems to be too complex to understand, but if I could explain in an island with only 2 people how the bank failure destroyed the wealth, it will certainly help a lot, and it is not impossible either

I just had some new progress in thinking: Since fish and fruit are definitely not suitable for long term storage, a fish based economy will not be able to have lots of savings, everything produced are to be consumed quickly, no matter how high their productivity is, all their savings have to be consumed in one day, they can not increase their long term saving

What can be kept for long term are utilities/machines/tools/resouces etc, and in classical economics these are called capitals

Just read your island story, there are many islands in your model, I'm still confused, can't you have en island with only 2 Crusoe 

I am always confused about an essential problem regarding money:
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How do wealth increase connected to money supply increase, and through which channel the newly created wealth connected to newly created money?
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In an island with only 2 people, if A produce more and more fish everyday, how could he trade for more money, if the market does not have enough money, or the market can not sell all of his fish to A and B?

In both case, the fish price will drop, that is a deflation scenario which central banks always try to avoid. So there must be a way to let newly created money to match the newly created fish, in order to keep the price stability

(But on the other hand, normally we say that market should adjust the price based on demand and supply, that is also a big trouble here!)

When I design my island model in early years, I always suppose that new money is provided into market to facilitate the trading, but now I realized market is only an exchange place, the new money must enter the market by other means, e.g. in loan's form

Exactly, I still remember that original comic book about island economy, if people could use number of fish as a counter for the wealth, most of the economy activities are much simpler and easy to understand, the productivity/consumption power can be translated into number of fish produced/consumed per day/year

But that situation does not exist in the real world, and fish can not be stored for a long time, so do most of the wealth. Money were introduced to facilitate the trading, but due to it has many different characters, economy activities have changed: People are using money as a benchmark for value, people store money as wealth, bank loan out money to support business activities... All these getting more complicated after gold has been replaced by paper/digital money

And I think that is the reason of financial crisis: Money covered lots of real economy activities and gave people lots of illusions, but since it also has lots of benefits, we should know how it works, and that is not very easy if you are not a central banker thus have a good overview

This is a valid point, if the final products were trashed, then we can say the wealth are destroyed

From another point of view, I buy some fireworks just to burn it, I have already paid for it, no matter the fireworks are fired today or after 1 year, the production part of the economy activity is already finished

It's always very difficult to save the real wealth since they have a short lifespan, while money never get destroyed equally easy, since money are getting more and more, the size of production and consumption must also grow, even unnecessarily