Bitcoin major fail - doesn't allow credit creation (aka deflationary currency)

[bobitza]

Did you guys see the Digital Coin video?
Video link: http://www.digitalcoin.info/Digital_Coin_Introduction.html

It looks like the proposed solution of the combined Perpetual coin (aka Bitcoin) and Credit coin might "solve" the problem of credit.

Your thoughts on the suggested system?

[MoonShadow]

. . . The only function that a traditional bank could offer the Bitcoin economy would be interest bearing accounts in return for investment lending. . .

I disagree with this.  My opinion is that an insured banking system will eventually be developed to provide security against theft and loss as well as ease of use for the technically disinclined.  Rather than providing an interest bearing account, it is entirely possible that these banks will charge either a storage fee or a transaction fee for providing this service.  Some of these banks may engage in lending (either through fractional reserve, or by providing as a service (for a fee) connections between borrowers and lenders.

I invision a future that online wallet services will be bonded, insured and interconnected; and thus be able to provide for near-instant transfers to 98+% of the bitcoin users regardless of which wallet service that they use.  I don't regard this to be equal to wallet services becoming banks, even though this kind of interconnected distance transfer service is a large part of what we commonly think of what a bank does today.  That is not to say that wallet services cannot become true banks, or that a bank cannot offer a wallet service, but they are not equivilant.  I honestly don't have any idea if, or how much, a future user of wallet services would be willing to pay as a monthly service fee for this kind of service, which isn't much of an upgrade from what the client can already do.  The only way I can foresee such pay-to-play services becoming common among bitcoin users is if the transaction traffic were to increase to such a degree that a standard blockchain transaction were to become so expensive as to justify a parrallel/overlay network of major wallet service users that can save users' money by avoiding blockchain transactions altogether.  Such a parrallel/overlay netowrk is not simply likley, it's already occuring, as that is what Stratum does.  But again, Stratum is a free client that anyone can use, so I don't know how profitable such wallet services could ever realisticly become.

[kjj]

Just FYI, fractional reserve was invented for gold.  Goldsmiths created the practice by issuing more warehouse receipts (bearer certificates) for gold in their warehouses than they actually held in gold, and those receipts (certificates) were already circulating as money because they were much more convenient than actually fetching and hauling gold around.

In practice, this is pretty safe, since most people won't want their gold all at once.  Keeping healthy reserves will reduce the chances of being unable to meet a withdrawal request (a bank run) to whatever level is deemed appropriate by the bank.

The real innovation of the Federal Reserve system is that the Fed is able to create dollars out of thin air and can lend them to member banks instantly, making bank runs entirely impossible.  This really just passed the danger up the chain though, leading to the closing of the gold window when France (and friends) attempted to redeem lots of dollars for gold.

In the bitcoin world, fractional reserve is still totally possible.  It is just risky.  A bank that does it faces the very real chance of not being able to make a bitcoin transaction to back up a depositor request.  Banks can mitigate this risk to some extent with pooling and interbank lending agreements, but that exposes the pool to a much lower chance of a much worse event, and it will be impossible to eliminate the risk entirely.

[bb113]

Oops, this is where you go wrong.  Growth does not require credit.  Growth requires saved past production (commonly known as "capital").  Credit just means that it isn't the grower's capital.  Manipulation of credit also does not magically make that capital spring into existence.

I did mentioned previously about the savings which can be used as source of credit. Each company would save first the amount they need to built the new thingy they need to grow. Well, not so fast. Perhaps it can work with small companies that need to buy and hire an extra service desk or a small building, but with large companies or small companies that have R&D costs ... this is painfully slow. Think about mining companies. They have huge upfront costs when opening a new mine. Even with credit available it's hard for them to get all the capital they need. And then it takes years to do exploration, drill holes and setup shafts. Add more years to save all that money upfront.

The point that you are missing is that the capital was saved in advance either way.  Credit just changes who has access to it, and under what terms.  Equity investing does the same thing.  Neither one is required for growth.

And I disagree totally about the length of time it takes.  Accumulating the capital takes the exact same time either way.  Again, credit does not magically cause capital creation.  It can change the way that capital is allocated, but it doesn't create it.

This exactly, way better than I could put it.  What is capital? It is resources and efficient ways to use those resources (tech). If people get access to resources and/or develop ways to utilize their resources more efficiently then the result is growth, which leads to credit. Any other source of credit creation is just wealth transfer, which may lead to more efficient resource utilization or it may not.

[hazek]

After 21 mil BTCs are mined even loans are not the answer because there is no money created to cover the interest.

I'm just curious, why exactly do you think loans can ever only be made if interest can be charged? Do you not think loans could have a different kind of a price?

[Richy_T]

After 21 mil BTCs are mined even loans are not the answer because there is no money created to cover the interest.

I'm just curious, why exactly do you think loans can ever only be made if interest can be charged? Do you not think loans could have a different kind of a price?

I'm not sure why you have to magic up money to pay the interest either. Could there be no interest charging loans in a gold-only economy?

[MoonShadow]

After 21 mil BTCs are mined even loans are not the answer because there is no money created to cover the interest.

I'm just curious, why exactly do you think loans can ever only be made if interest can be charged? Do you not think loans could have a different kind of a price?

I'm not sure why you have to magic up money to pay the interest either. Could there be no interest charging loans in a gold-only economy?

Yeah, it's kind of a rediculous statement, considering interest predates fractional-reserve lending and 'flexible' monetary systems by 4000 years.

[johnyj]

Capital corresponding to ready-to-spend goods/services, and it normally depreciate slowly(Any kind of captial lose value over time, factory, machine, stocked goods etc...)

Capital in gold/silver's form do not depreciate, so they are generally regarded as a better medium for capital, then there is less risk that ready-to-spend goods/services will depreciate, since they will be produced when gold/silver is paid to producer. But there is a risk of inflation when lot's of gold and silver enter the market at the same time

Loan corresponding to future goods/services, it does not depreciate, so generally loan is a higher quality asset, cost of ownership is almost 0, if the default risk can be contained

[DoomDumas]

Growth isn't necessarily always a good thing... look at everyone complaining about global warming, etc. If the company really is a good investment they will find investors.

+1

[DoomDumas]

If credit implies interest, then, it's a flaw in itself.  If interest are charged, the fund for paying back those interest just dont exist.  Eg : There is only 100 $ all around the world, and it's mine.  Someone borrow me that 100$, and I charge 1% interest.  This borrower would never be able to give me the 100$ + interest, because there is only 100 $ in existence.. 
That's why bankruptcy are built-in in this "credit/interest/fract-banking" system..

That built-in need for bankruptcy (interest) is a major cause of the faillure of the actual monetary system world-wide.

Perso, I dont wish to create a feature in Bitcoin that renders bankruptcy inevitable.

was my 2 satoshi

[odolvlobo]

Did you guys see the Digital Coin video?
Video link: http://www.digitalcoin.info/Digital_Coin_Introduction.html
It looks like the proposed solution of the combined Perpetual coin (aka Bitcoin) and Credit coin might "solve" the problem of credit.
Your thoughts on the suggested system?

Your belief that there is a problem is based on the assumption that 100% the BTC is hoarded and nobody spends it. Then there would be no ability to pay interest because there would be no way to acquire more BTC. That might happen in a hyper-deflation scenario, but it wouldn't happen normally.

These examples should prove that there is no problem.
On a small scale, I can loan you 2 BTC, and you use it to earn 4 BTC, and pay me back 3 BTC.
On a large scale, I could loan a company 2 million BTC, it manufactures products and makes 4 million BTC, and it pays me back 3 million BTC.
On a larger scale, I could loan a country 20 million BTC (over time), it uses it to fund Social Security, and it pays me back 30 million BTC (over time). Of course, in this case both parties would have to spend their BTC, or there would be a problem.

[kjj]

Capital corresponding to ready-to-spend goods/services, and it normally depreciate slowly(Any kind of captial lose value over time, factory, machine, stocked goods etc...)

Capital in gold/silver's form do not depreciate, so they are generally regarded as a better medium for capital, then there is less risk that ready-to-spend goods/services will depreciate, since they will be produced when gold/silver is paid to producer. But there is a risk of inflation when lot's of gold and silver enter the market at the same time

Loan corresponding to future goods/services, it does not depreciate, so generally loan is a higher quality asset, cost of ownership is almost 0, if the default risk can be contained

Unless you are a jeweler, gold and silver aren't really capital in this sense.  They are money, which can be used to buy the capital.

[kjj]

If credit implies interest, then, it's a flaw in itself.  If interest are charged, the fund for paying back those interest just dont exist.  Eg : There is only 100 $ all around the world, and it's mine.  Someone borrow me that 100$, and I charge 1% interest.  This borrower would never be able to give me the 100$ + interest, because there is only 100 $ in existence.. 
That's why bankruptcy are built-in in this "credit/interest/fract-banking" system..

That built-in need for bankruptcy (interest) is a major cause of the faillure of the actual monetary system world-wide.

Perso, I dont wish to create a feature in Bitcoin that renders bankruptcy inevitable.

was my 2 satoshi

Sorry, but you are just totally wrong.  You are using a static view, which won't work.  In the real world, the lender will spend at least one dollar back into circulation in order to capture the value that they earned through the loan, and when they do, the borrower can acquire it and make the final repayment.  If the lender fails to do this, then the dollars don't generally circulate, and they will have no value, which would make the loan pointless in the first place.

For people seriously interested in this subject, Steve Keen has done a lot of work on dynamic nonlinear economics.  Read some of his papers and watch some of his videos.  He'll fix you right up if you pay attention.  At least a couple of his videos cover this topic in great detail.  He shows that it is very possible to have a functioning economy (including a loan market with interest) with a fixed amount of currency.

[steelhouse]

For people seriously interested in this subject, Steve Keen has done a lot of work on dynamic nonlinear economics. 

Steve Keen is an embarrassment.  He is a joke.  He wants the government to give a debt jubilee to deadbeats in debt.

Fractional reserve lending is nothing more than a fancy name of stealing your money.  Get your money out of the bank asap.

[Wekkel]

For people seriously interested in this subject, Steve Keen has done a lot of work on dynamic nonlinear economics. 

Steve Keen is an embarrassment.  He is a joke.  He wants the government to give a debt jubilee to deadbeats in debt.

While you can disagree with his proposed solutions for the debt-crisis, that does not take away his awesome work in explaining the current system of 'lending before reserves' and similar topics. I can be thousands of persons, combined in one single physical body. Let's approach Keen's work the same way - on its merits.

[kjj]

For people seriously interested in this subject, Steve Keen has done a lot of work on dynamic nonlinear economics. 

Steve Keen is an embarrassment.  He is a joke.  He wants the government to give a debt jubilee to deadbeats in debt.

While you can disagree with his proposed solutions for the debt-crisis, that does not take away his awesome work in explaining the current system of 'lending before reserves' and similar topics. I can be thousands of persons, combined in one single physical body. Let's approach Keen's work the same way - on its merits.

+1

I'm not a big fan of Steve's political views either, but his dynamic approach to economics is fucking fantastic.

[johnyj]

If credit implies interest, then, it's a flaw in itself.  If interest are charged, the fund for paying back those interest just dont exist.  Eg : There is only 100 $ all around the world, and it's mine.  Someone borrow me that 100$, and I charge 1% interest.  This borrower would never be able to give me the 100$ + interest, because there is only 100 $ in existence.. 
That's why bankruptcy are built-in in this "credit/interest/fract-banking" system..

That built-in need for bankruptcy (interest) is a major cause of the faillure of the actual monetary system world-wide.

Perso, I dont wish to create a feature in Bitcoin that renders bankruptcy inevitable.

was my 2 satoshi

One easy to ignor aspect: Although there are only 100$ in existence, they can change hands many times, each time it changes hands, some goods change hand and get consumed (MV=PY)

Same when talking about fractional reserve banking: "With 10% reserve requirement, 100$ could create 1000$ loan after many times of deposit and loan process"

This 1000$ is very misleading, it is just a count of the same money multiple times in different time, the total available money at any given moment is always 100$

[adamstgBit]

credit as capital investment into production is something good.

why?

[bobitza]

On a larger scale, I could loan a country 20 million BTC (over time), it uses it to fund Social Security, and it pays me back 30 million BTC (over time). Of course, in this case both parties would have to spend their BTC, or there would be a problem.

I am aware that the lender will spend some money back into the economy which might end up in the borrower's bank account as profit. Assuming 20 mil BTC is the total amount of BTC in existence, in your example, the lender will have to buy 10 mil BTC worth of good and services from that country so that in the end, the lender gets 30 mil BTCs as 20 mil in coins + 10 mil in the form of good and services. Right?

Well, I'm not sure that is the perception that many people have when making a loan. If you give a loan for $1000 with 10% interest, you expect to get $1100 after a (long) period of time, not to get $1000 + a $100 voucher worth of goods and services. I'm not saying that we shouldn't go back to the "voucher" system when money are backed by good and services, maybe that would be one of the fixes ...

why?

Because it will help production companies to create more/better goods and services that are required by a growing population and/or more competitive business landscape. Already sparred on the subject. Are you asking this because you think growth is bad?

For people seriously interested in this subject, Steve Keen has done a lot of work on dynamic nonlinear economics.

Will take a look.

[Richy_T]

I am aware that the lender will spend some money back into the economy which might end up in the borrower's bank account as profit. Assuming 20 mil BTC is the total amount of BTC in existence, in your example, the lender will have to buy 10 mil BTC worth of good and services from that country so that in the end, the lender gets 30 mil BTCs as 20 mil in coins + 10 mil in the form of good and services. Right?

Well, I'm not sure that is the perception that many people have when making a loan. If you give a loan for $1000 with 10% interest, you expect to get $1100 after a (long) period of time, not to get $1000 + a $100 voucher worth of goods and services. I'm not saying that we shouldn't go back to the "voucher" system when money are backed by good and services, maybe that would be one of the fixes ...

The real issue arises when the money loaned is magiced out of nowhere. If I have $100, loan you that, get $110 back, that's one thing. If I don't have $100 but magic it from nowhere, lend it to you, get $110 back, I have obtained $10 for nothing. That is what the government/federal reserve is up to at the moment and it's a problem.