I've been thinking about what you said.  Consider briefly treasury bonds.  Right now they are giving you a negative yield.  Thanks for challenging me.  It makes me think.

I'll have to give that some serious thought.  Hmm.  Thanks mate.

Thought Experiment: Banking and Debt in a Deflationary Currency

The drive back down south on the east cost I started thinking about the differences between our current banking and debt system versus a system that was done entirely in a deflationary currency.  Forgive me for over simplifying this, but I want people to understand the basic concept.

1.  How it is "Done" Now

In a system where inflation exists, the system is as the following.  Central banks lend out money to the banks at an interest rate that mimics inflation.  Why?  Because if someone lends you money, you don't want the money back, you want the value of the money you lent to them originally to be worth the same amount as when they pay you back.  If you expect a currency to be worth 2% less because of inflation after a year -- why lend money out for a year at 1%?  You would be getting back less buying power then when you lent it out.

The banks borrow the money from the central bank at the rate of inflation.  Then, in order for them to lend it out at a profit, they tack on additional percents to account for risk of default.  So if the central banks lend to them at 2%, they lend it to the end borrower (with decent credit score ) at say, at 3%.

The end effect is the end borrower -- someone buying a house or a car with credit is a large APR.  The good news is that in an inflationary economy as the dollar becomes less, so does the weight of any debt.  For example, if you had borrowed a quarter from your great granddad (as he tells it), you could have spent all day at the movies with popcorn and soda.  If you paid back a quarter today, it would be meaningless.  If you paid back the "value' of a quarter today while taking inflation into account it would be well over fifty dollars.  What am I trying to say?  Inflation is bad for the saver, and excellent for the debtor.

2.  How it Would "Work" in an End-to-End Deflationary Currency

In a deflationary currency -- one that say gained value of 2% a year.  The central banks would not loan out money to banks at under 2%.  Why?  Because they could make 2% by doing absolutely nothing but sitting on the currency.  Therefore, they would have to loan it out at the rate of deflation to get back the same amount of pricing power they lent.  So the central bank lends money at 2% to banks.

Banks get these funds and now have the ability to loan out to companies and individuals.  What are the risks?  A bank has to worry about default risk.  What if the borrower isn't very smart about computers?  What if their hard drive crashes?  What if they are scammed online?  What if.. if.. if...  The fact is, that dropping BTC into someone's anonymous wallet as a loan has a much higher consequences then dropping a number that represents dollars into a verified account.  It would be like me mailing your a hundred dollar's worth of gold, vs putting one hundred dollars in your bank account where it could be "properly accounted for".  To combat this, banks will necessarily not use BTC without verifying the accounts identity wallets will have to be tied to accounts.  Would you loan someone money "anonymously"?

In addition, without a fractional reserve system, you don't get to "make up" bitcoins to loan.  They actually have to be coins the bank owns.

3.  The Big Difference in the Price of Debt

In an inflationary economy the value burden of debt decreases over time.  You may have gotten "cost of living" raises at your job.  Or switched jobs to maintain a competitive rate.  However, in a deflationary currency the debt value grows and grows and grows.  It punishes the debtor and rewards the saver.  If you are trying to get a loan for starting a small business or buy a house you can see easily which system makes it safer for you to do so.

My example is this.  Lets say you borrowed a bit coin from a co-worker to buy lunch two months ago when the value was ~15 dollars.  You owe them one bit coin.  However, now to pay them back, you have to buy one at ~90 dollars -- that's a lot o' lunches.

In a deflationary currency, you may get "cost of living" decreases as the value of the currency they are paying you goes up.  Can you briefly imagine what this would do to a debt owed in a currency that grows in value over time?

4.  Conclusion

Debt and leverage is almost always dangerous for the un-initiated to it's workings.  If you do use debt, use it in dollars, not in bit coins.  I believe this is one reason why BTC will be more like a commodity then a currency.

I've been thinking about this as well:

https://bitcointalk.org/index.php?topic=162438.0

My contrarian conspiracy theories.

Friday I drove up the east coast.  It was about a 5 hour drive with plenty of coffee.  However, my radio was broken and so my mind started wandering.  These are my contrarian BTC conspiracy theories.

The government will never outlaw bitcoins, transacting bitcoins, or mining.

The common wisdom is that the government will, at some point, step in and make this currency illegal.  While I agree that politicians lack creativity, they are advised (traditionally) by some very creative economists;  Ben Bernanke and Henry Paulson for example.  The following are ways in which a creative government could use the BTC network to it’s advantage.

1.  As a Federal Reserve tool

The federal reserve could use BTC to control key inflation rates by buying and selling BTC.  The traditional tool to combat inflation is to raise interest rates to pull liquidity out of the market -- making borrowing money more expensive.  With a common Forex style BTC/USD they could effectively make dollars “appear” or “disappear” from the system.  This could save our country from run-away inflation by something horrible -- say, printing 85 billion dollars a month to buy mortgage backed securities and treasuries on the open market.  I know, who in their right mind would do that?

Let’s get slightly more sinister.  They not only could use the system as a monetary tool by buying/selling.  They could also have miners set up around the country (or world) in which they mine or don’t mine, raising or lowering the hash rate, and reward for mining.  This would be manipulating the currency market.  It wouldn’t be hard to do with almost 900 billion military budget.

So.  Why can’t they do this with gold; buying and selling the GLD?  I would argue that most large countries _are_ manipulating their currencies with gold.  However, gold is no longer bought and sold as a physical commodity.  It is typically bought (by non-millionaire, non-government investors) using an index that tracks it’s price.  In the event of a crisis, investors/savers only have a piece of paper or number on a screen.  This piece of paper/number could easily fall prey to something like a net worth tax ala Cypris.  In addition, if you think that bitcoins are hard to buy and sell -- trying buying or selling a car with physical gold.  You need third parties to verify that the substance offered is actually the gold quality the sellers/buyers say it is.

2.  As a tool for currency war.

The international community has been very worried about this recently as everyone from China, to the US to Japan are in a rush to devalue their currency.  Why?  Because the lower the value of your currency the more of it you get when doing international trade.  While the value might not change, ask a stock trader if it matters that their company has grown it’s profits in the last year.  Buying and selling stocks of companies based on metrics of this type like the P/E (Price to Earnings) ratio raises the market in general and gives confidence to the system.

So how could the United States use BTC to wage currency war?

The simple answer is that making BTC more attractive to investors, reduces the value of fiat money in _any_country by definition.  The US can control the value of the Yen, by again injecting or removing BTC from the network.  As long as the US is in a better position to handle an increase or decrease in the dollar vs BTC, they can force this change on foreign countries currency as well.

3.  Let’s say they do...

Yes.  I the government does weird stuff that is counter intuitive all the time.  Let’s say my conspiracy theory is wrong and they do take action against BTC.  If they are creative, they will make owning more than a certain amount of hashing power per-miner illegal.  See Marijuana and Guns.  Why do this?  Because they could set up their own block chain where they control greater than 50%.  This would give them all the benefits of an alternative currency, combined with the backing of the “full faith” of the United States and they would still control the entire currency.  Could you imagine the effect of printing money to buy their “BTC” version on the national debt?  We could print to infinity to service our Bonds (debt vehicles) while never really losing any taxpayer value that was invested in a crypto currency.

4.  Ignore the ASIC behind the curtain.

Worrying about ASICS are out of the context of the macro discussion I believe.  However, for fun I came up with a Contrarian Conspiracy Theory for those.  Is it more interesting to believe that BFL sucks, or is mining the coins themselves?  Or, perhaps men in black cars drove up and the Govt. ordered them to delay so that the “J. Edgers” could position themselves better for the future.  Don’t mind me, just having some conspiracy fun   The 3ffBee3y3 have recently, in my opinion, indicated not to worry much about BTC -- which makes the argument that the Govt. will use this as a tool even more solidified.

5.  Disclaimer:

I’m a just a guy.  I have no crystal ball.  I trade in the market in ETFs, Variable Rate Bonds, Stocks etc.  I am not an economist, tax professional, or professional trader/money manager.  None of this should be construed as financial advice.  I own ~.007 BTC   I simply am fascinated by it’s potential and like to play mental games with myself.  I lurk these boards a great deal as they are interesting, but haven’t bothered to ask to be let out of n00bie world.  I don’t have nearly as much to contribute as some of the informative things I’ve read here.

With all the heat coming from this hardware, has anyone considered basic thermal electric elements?  These generate energy via the differentiation in temperature on one side over the other.  I would assume placing between the heat sink and the chip would be ideal.

I"ve been you tube videos where the cpu fan was actual run from the electricity created by the temperature differences.

Thoughts?  Cost analysis? 

-ee

18FZEFBpypAB5vz6qGEFo636og6jso1BK3

What if BF are just promising these returns to keep people out of the market so they can continue with the current difficulty?