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

[bitcoinbear]

The world has used gold as money for thousands of years because its purchasing power cannot be inflated away by governments and banks. Gold is mined at roughly the same pace as the increase in world population.

Well, you are forgetting 17th century southern Europe when Spain imported so much plundered gold from the New World that it caused widespread inflation.

This raises an interesting questions: Is bitcoin (or something like it) the final nail in coffin of nationalism? Once everyone's using the same money... doesn't that largely remove the need for government beyond the local level?

I would hardly call bitcoin the last nail in the coffin. It is a step in the right direction, but there is plenty of other stuff in the way of peace besides just which money people are using.

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[myrkul]

The world has used gold as money for thousands of years because its purchasing power cannot be inflated away by governments and banks. Gold is mined at roughly the same pace as the increase in world population.

Well, you are forgetting 17th century southern Europe when Spain imported so much plundered gold from the New World that it caused widespread inflation.

This raises an interesting questions: Is bitcoin (or something like it) the final nail in coffin of nationalism? Once everyone's using the same money... doesn't that largely remove the need for government beyond the local level?

By itself, no.

Yeah, there are other reasons for nation-states more pressing than a unified currency. However, it does severely hamper that nation-state's ability to collect taxes non-voluntarily. So it's not the final nail. But it is a nail.

[amagimetals]

Deflation is a separate issue from credit creation. In a healthy economy there should be deflation. All goods should be getting cheaper relative to the money supply.

Fractional reserve banking is not necessarily inflationary. Under the gold standard there was fractional reserve banking and healthy deflation (goods became cheaper). There is nothing immoral or wrong about fractional reserve banking. The problem is the coercive monopoly (read: inefficiency) of central banking put into place by government regulation and legislation.

The Austrian School economist Steve Horwitz has a great article on fractional reserve banking here. People who criticize fractional reserve banking should read it.

As for the creating credit, that is a separate issue. Banks would either have to create their own separate currency, redeemable in Bitcoins electronically or through paper. I guess you could also deposit your Bitcoins at a bank and receive some kind of interest and then the bank invests Bitcoins in businesses for a higher return. Of course I use the word bank loosely.

[Rassah]

This raises an interesting questions: Is bitcoin (or something like it) the final nail in coffin of nationalism? Once everyone's using the same money... doesn't that largely remove the need for government beyond the local level?

There's still plenty of jingoism, regardless of the currency involved, so no.

[MoonShadow]

Deflation is a separate issue from credit creation. In a healthy economy there should be deflation. All goods should be getting cheaper relative to the money supply.

Fractional reserve banking is not necessarily inflationary. Under the gold standard there was fractional reserve banking and healthy deflation (goods became cheaper). There is nothing immoral or wrong about fractional reserve banking. The problem is the coercive monopoly (read: inefficiency) of central banking put into place by government regulation and legislation.

Taken alone, this is true enough.  In practice, however, fractional reserve banking has too many flaws that can be manipulated by certain people with particular positions.  Experience tells us that any advantage that such flaws may create will be taken advantage of by someone eventually, and will continue to be taken advantage of even to the detriment of the entire system.

So while not actually evil, fractional reserve banking is certainly amoral, offering no net benefits to the populace in the long run.  The gold standard functioned as a limiting factor upon those who would have taken advantage, and thus delayed the breakdown of the system for much longer, but ultimately the breakdown still had to occur by some method or another.  Likewise, central banking delayed the greater of those flaws for some time, but at the cost of permitting such flaws to spread to the whole of the system before they are catastropic; so rather than simply a regional problem that destroys a few local banks, they become problems that grow to the point that they threaten the entire economy at once.

[amagimetals]

Deflation is a separate issue from credit creation. In a healthy economy there should be deflation. All goods should be getting cheaper relative to the money supply.

Fractional reserve banking is not necessarily inflationary. Under the gold standard there was fractional reserve banking and healthy deflation (goods became cheaper). There is nothing immoral or wrong about fractional reserve banking. The problem is the coercive monopoly (read: inefficiency) of central banking put into place by government regulation and legislation.

Taken alone, this is true enough.  In practice, however, fractional reserve banking has too many flaws that can be manipulated by certain people with particular positions.  Experience tells us that any advantage that such flaws may create will be taken advantage of by someone eventually, and will continue to be taken advantage of even to the detriment of the entire system.

So while not actually evil, fractional reserve banking is certainly amoral, offering no net benefits to the populace in the long run.  The gold standard functioned as a limiting factor upon those who would have taken advantage, and thus delayed the breakdown of the system for much longer, but ultimately the breakdown still had to occur by some method or another.  Likewise, central banking delayed the greater of those flaws for some time, but at the cost of permitting such flaws to spread to the whole of the system before they are catastropic; so rather than simply a regional problem that destroys a few local banks, they become problems that grow to the point that they threaten the entire economy at once.

People will kill other people with government. People will kill other people without government. Businesses will do fraudulent things whether there is government or not. No matter what situation, someone will find a way to take advantage of it if they really want to. So yes, someone will find a way to take advantage of fractional reserve banking like they would anything else. Does that mean that there will a "breakdown of the system?" Probably not. Fractional reserve banking in a free market world may put some businesses and banks out of business, but just because one bank or individual in a bank took advantage of fractional reserve banking doesn't mean all banks will go out of business and destroy the world as we know it today in some apocalypse that you see coming from fractional reserve banking.

[myrkul]

Deflation is a separate issue from credit creation. In a healthy economy there should be deflation. All goods should be getting cheaper relative to the money supply.

Fractional reserve banking is not necessarily inflationary. Under the gold standard there was fractional reserve banking and healthy deflation (goods became cheaper). There is nothing immoral or wrong about fractional reserve banking. The problem is the coercive monopoly (read: inefficiency) of central banking put into place by government regulation and legislation.

Taken alone, this is true enough.  In practice, however, fractional reserve banking has too many flaws that can be manipulated by certain people with particular positions.  Experience tells us that any advantage that such flaws may create will be taken advantage of by someone eventually, and will continue to be taken advantage of even to the detriment of the entire system.

So while not actually evil, fractional reserve banking is certainly amoral, offering no net benefits to the populace in the long run.  The gold standard functioned as a limiting factor upon those who would have taken advantage, and thus delayed the breakdown of the system for much longer, but ultimately the breakdown still had to occur by some method or another. 

The only way to hold off the collapse indefinitely and to limit the damage that fractional reserve banking can do is to use the same system the Chinese banks did. Schedule a bank run every week or so. Demand silver - or gold, or Bitcoins - for your deposit slips. Keeps 'em honest.

[MoonShadow]

Deflation is a separate issue from credit creation. In a healthy economy there should be deflation. All goods should be getting cheaper relative to the money supply.

Fractional reserve banking is not necessarily inflationary. Under the gold standard there was fractional reserve banking and healthy deflation (goods became cheaper). There is nothing immoral or wrong about fractional reserve banking. The problem is the coercive monopoly (read: inefficiency) of central banking put into place by government regulation and legislation.

Taken alone, this is true enough.  In practice, however, fractional reserve banking has too many flaws that can be manipulated by certain people with particular positions.  Experience tells us that any advantage that such flaws may create will be taken advantage of by someone eventually, and will continue to be taken advantage of even to the detriment of the entire system.

So while not actually evil, fractional reserve banking is certainly amoral, offering no net benefits to the populace in the long run.  The gold standard functioned as a limiting factor upon those who would have taken advantage, and thus delayed the breakdown of the system for much longer, but ultimately the breakdown still had to occur by some method or another. 

The only way to hold off the collapse indefinitely and to limit the damage that fractional reserve banking can do is to use the same system the Chinese banks did. Schedule a bank run every week or so. Demand silver - or gold, or Bitcoins - for your deposit slips. Keeps 'em honest.

That was Hong Kong prior to WWII, not the Chinese in general; but yes, that would keep things honest.

[MoonShadow]

Deflation is a separate issue from credit creation. In a healthy economy there should be deflation. All goods should be getting cheaper relative to the money supply.

Fractional reserve banking is not necessarily inflationary. Under the gold standard there was fractional reserve banking and healthy deflation (goods became cheaper). There is nothing immoral or wrong about fractional reserve banking. The problem is the coercive monopoly (read: inefficiency) of central banking put into place by government regulation and legislation.

Taken alone, this is true enough.  In practice, however, fractional reserve banking has too many flaws that can be manipulated by certain people with particular positions.  Experience tells us that any advantage that such flaws may create will be taken advantage of by someone eventually, and will continue to be taken advantage of even to the detriment of the entire system.

So while not actually evil, fractional reserve banking is certainly amoral, offering no net benefits to the populace in the long run.  The gold standard functioned as a limiting factor upon those who would have taken advantage, and thus delayed the breakdown of the system for much longer, but ultimately the breakdown still had to occur by some method or another.  Likewise, central banking delayed the greater of those flaws for some time, but at the cost of permitting such flaws to spread to the whole of the system before they are catastropic; so rather than simply a regional problem that destroys a few local banks, they become problems that grow to the point that they threaten the entire economy at once.

People will kill other people with government. People will kill other people without government. Businesses will do fraudulent things whether there is government or not. No matter what situation, someone will find a way to take advantage of it if they really want to. So yes, someone will find a way to take advantage of fractional reserve banking like they would anything else. Does that mean that there will a "breakdown of the system?" Probably not. Fractional reserve banking in a free market world may put some businesses and banks out of business, but just because one bank or individual in a bank took advantage of fractional reserve banking doesn't mean all banks will go out of business and destroy the world as we know it today in some apocalypse that you see coming from fractional reserve banking.

Were you not paying attention for the past five years?  Or did you swear off bad news?

[myrkul]

Deflation is a separate issue from credit creation. In a healthy economy there should be deflation. All goods should be getting cheaper relative to the money supply.

Fractional reserve banking is not necessarily inflationary. Under the gold standard there was fractional reserve banking and healthy deflation (goods became cheaper). There is nothing immoral or wrong about fractional reserve banking. The problem is the coercive monopoly (read: inefficiency) of central banking put into place by government regulation and legislation.

Taken alone, this is true enough.  In practice, however, fractional reserve banking has too many flaws that can be manipulated by certain people with particular positions.  Experience tells us that any advantage that such flaws may create will be taken advantage of by someone eventually, and will continue to be taken advantage of even to the detriment of the entire system.

So while not actually evil, fractional reserve banking is certainly amoral, offering no net benefits to the populace in the long run.  The gold standard functioned as a limiting factor upon those who would have taken advantage, and thus delayed the breakdown of the system for much longer, but ultimately the breakdown still had to occur by some method or another. 

The only way to hold off the collapse indefinitely and to limit the damage that fractional reserve banking can do is to use the same system the Chinese Hong Kong banks did. Schedule a bank run every week or so. Demand silver - or gold, or Bitcoins - for your deposit slips. Keeps 'em honest.

That was Hong Kong prior to WWII, not the Chinese in general; but yes, that would keep things honest.

Ah. I stand corrected.

[firefop]

People will kill other people with government. People will kill other people without government. Businesses will do fraudulent things whether there is government or not. No matter what situation, someone will find a way to take advantage of it if they really want to. So yes, someone will find a way to take advantage of fractional reserve banking like they would anything else. Does that mean that there will a "breakdown of the system?" Probably not. Fractional reserve banking in a free market world may put some businesses and banks out of business, but just because one bank or individual in a bank took advantage of fractional reserve banking doesn't mean all banks will go out of business and destroy the world as we know it today in some apocalypse that you see coming from fractional reserve banking.

You are of course drawing the wrong conclusion, the fact that the flaws exist and are exploitable... ensures that the system will break at some point in time. The problems will either accelerate until they destroy the system or something else will change somewhere else making the entire system pointless. obsolescence is the only thing capable of slowing down acceleration of a flawed system as it nears critical mass.

Or if you don't quite follow that:

"On a long enough time line, the survival rate for everyone drops to zero."

[Rassah]

Did anyone on this thread already bring up the point that there may not be a need for banking as we know it with Bitcoin? We mainly use banks to keep out money safe and easily accessible, but Bitcoin allows us to do that on our own (that whole "Be your own bank" thing), so the only reason for people to pool their money together would be to invest in something, be it private loans or large business projects. I.e. banking and investment would be "naturally" separated, the way they used to be until a few years ago. Thus, people's personal savings and checking accounts probably won't get wiped out from bank failures due to fractional reserve and other shenanigans the way they did before FDIC came around, and my hope is that those investing would actually do some research into the investment banks they're putting their money into. Am I wrong about this? (Or overly optimistic about Bitcoin technologies that'll let us store our money on our own devices safely enough?)

[bitfreak!]

Let me put this rather simply...

The entire concept of bitcoin would be undermined by allowing credit creation to happen. If you want to get a loan of some BTC you can sign a contract with someone and get given some REAL bitcoins. That's what a loan is supposed to be. If the creditor is just giving you imaginary credit (like bank credit), then the lender didn't really have anything to lend you in the first place, and they are creating new money out of nothing.

As already mentioned, it's pointless to use bitcoin promissory notes within a fractional reserve system because 1) it's already easy to store and transport BTC and 2) there is no central authority which can guarantee the authenticity of those notes. Of course it is technically possible if some central institution decided to do it, but I highly doubt it would happen because it's too risky for both the institution and note holders.

So in conclusion, bitcoin is not meant to be a currency where the total money supply can be easily expanded by the creation of new imaginary credit. We already have an entire banking system which works like that, and clearly benefits the banks in unfair ways while screwing the rest of us over and undermining the integrity of the economy. We prefer to trade actual bitcoins, not imaginary credit based on a fraction of real bitcoins.

[bitfreak!]

After 21 mil BTCs are mined even loans are not the answer because there is no money created to cover the interest. If everybody start making loans with interest, there will soon be not enough BTCs in circulation to cover the interest, not to mention the principal.

I should have read your post first before replying, because this is actually a reasonable question. As you should be well aware, even with a finite currency, the interest on loans can be paid by debtors who do work and make money from that work. It's a constant circulation of money between hands which allows that to happen. Of course, if we have too many loans at the same time, it could be a problem. But the flaw in your premise here, is that it's unlikely that too many people will issue loans at the same time. And even if they did, the worste case scenario would be that some, but not all of those people, would default on their loans. This exact same "problem" will occur with any finite currency, and that's exactly why they keep printing new government money, to make sure there's enough in circulation to service the ever growing debts. So it's like never-ending a spiral of insanity in my opinion, but by having a finite currency you have naturally built in limits on how much debt can exist.

[odolvlobo]

The entire concept of bitcoin would be undermined by allowing credit creation to happen. If you want to get a loan of some BTC you can sign a contract with someone and get given some REAL bitcoins. That's what a loan is supposed to be. If the creditor is just giving you imaginary credit (like bank credit), then the lender didn't really have anything to lend you in the first place, and they are creating new money out of nothing.

I don't know how this misconception started, but it seems to be common. Even with fractional reserve banking, if you get a loan, you get real bitcoins, not imaginary bitcoins.

Fractional reserve banking is simple. You deposit BTC1 and the bank loans out BTC0.90 of that BTC1 to someone else. That's it. That's how it works. The implications are much bigger, of course.

[amagimetals]

People will kill other people with government. People will kill other people without government. Businesses will do fraudulent things whether there is government or not. No matter what situation, someone will find a way to take advantage of it if they really want to. So yes, someone will find a way to take advantage of fractional reserve banking like they would anything else. Does that mean that there will a "breakdown of the system?" Probably not. Fractional reserve banking in a free market world may put some businesses and banks out of business, but just because one bank or individual in a bank took advantage of fractional reserve banking doesn't mean all banks will go out of business and destroy the world as we know it today in some apocalypse that you see coming from fractional reserve banking.

You are of course drawing the wrong conclusion, the fact that the flaws exist and are exploitable... ensures that the system will break at some point in time. The problems will either accelerate until they destroy the system or something else will change somewhere else making the entire system pointless. obsolescence is the only thing capable of slowing down acceleration of a flawed system as it nears critical mass.

Or if you don't quite follow that:

"On a long enough time line, the survival rate for everyone drops to zero."

I actually did not say there were flaws. I said that if someone really wanted to they can take advantage of other people.  This isn't mutually exclusive to banking. This relates to life and all business transactions in all industries. I have yet to hear someone actually tell me what these "numerous flaws" are.

Were you not paying attention for the past five years?  Or did you swear off bad news?

Oh, you mean the economic collapse caused by a monopoly (central banking)? Did you read the article I posted? That's not a fault of fractional reserve banking, that's a fault of a coercive monopoly.

[bitfreak!]

Fractional reserve banking is simple. You deposit BTC1 and the bank loans out BTC0.90 of that BTC1 to someone else. That's it. That's how it works. The implications are much bigger, of course.

You seem to be skipping over the most important part of FRB. Those loans are usually redeposited into a bank and used as the basis for a new loan. This process repeats over and over again, until the amount in each account at the bank(s) is much higher than the amount of reserves held. And since the money in those accounts is typically traded as if it were the original reserves (not only as bank transfers but as note withdrawals), the money supply is essentially expanded.

[myrkul]

Fractional reserve banking is simple. You deposit BTC1 and the bank loans out BTC0.90 of that BTC1 to someone else. That's it. That's how it works. The implications are much bigger, of course.

You seem to be skipping over the most important part of FRB. Those loans are usually redeposited into a bank and used as the basis for a new loan. This process repeats over and over again, until the amount in each account at the bank(s) is much higher than the amount of reserves held. And since the money in those accounts is typically traded as if it were the original reserves (not only as bank transfers but as note withdrawals), the money supply is essentially expanded.

Yes, that's what he meant by "The implications are much bigger, of course."

[molecular]

The Austrian School economist Steve Horwitz has a great article on fractional reserve banking here. People who criticize fractional reserve banking should read it.

Truly an enlightening article. Explained in a way even I can understand.

So after explaining fractional reserve banking and why it is not the reason for inflation (the central bank of central banking is), this guy argues for a commodity-backed free banking system (of course as a commodity I myself am thinking: "bitcoin", here).

It has been argued in this thread that with bitcoin banking would be obsolete. I'm not so sure. Deposit/Loan banking is still different from "people pooling money to invest", because with banking, the people (savers) do not usually concern themselves with selecting how the money is invested (who it is loaned out to) nor do they carry the default risk directly.
As I understand it in a free banking system the banks would control each other to not overdue it with the reserves they keep and the riskyness of loans they make. So banks make saving possible in a relatively risk-free and easy way. So they perform a valuable function.

Another thought: Thinking about how supposedly nationstates use their currency to "regulate" their economy (they have a weaker economy so they need to have a weaker currency) and seeing the Euro fail (not sure wether it's because differences in fiscal policy or because all fiat currencies are failing) there is a question bugging me: would a single-currency world economy work?

[justusranvier]

Another thought: Thinking about how supposedly nationstates use their currency to "regulate" their economy (they have a weaker economy so they need to have a weaker currency) and seeing the Euro fail (not sure wether it's because differences in fiscal policy or because all fiat currencies are failing) there is a question bugging me: would a single-currency world economy work?

Much better, once the central planners are tossed to the curb.