Representational Monetary Identity

[mirelo]

Let us analyze what happens in commercial banking (from http://omniequivalence.com/fractional-reserve-banking/ and http://omniequivalence.com/representational-monetary-identity/):

First, we have a deposit. Then, we have a loan of up to a fraction (of 90%) of this deposit. Finally, the borrower can deposit the borrowed money into another bank account, in the same bank or not. Suddenly, the trillion dollar question emerges: is the borrowed money in these two bank accounts the same?

• On the one hand, the answer is yes: all borrowed money came from the original deposit---so it is that same original money.
  
• On the other hand, the answer is no: all money deposited into the borrower's account possibly stays in the original depositor's account---so it is not that same original money.
  

How can that be?

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[solex]

The simplest answer is that bitcoin cannot be debased by Fractional Reserve Banking. It is the same in this respect to gold. You cannot have a purely gold-based FRB.

It is however, possible to build a paper system on top, where loans are made in paper, but the banks retain deposited gold or bitcoins. This is how paper money started in England in the 1600s as gold deposit receipts were used in commercial trade as paper money.

However, the only reason to have a paper (or an electronic) system is to facilitate fast, easy payments (gold is heavy and a hassle to trade with). Electronic systems are needed for remote payments which are essential in a modern economy. This is IMHO why gold will always remain at the sidelines of the world economy, because it is useless for remote payments and probably 99% of the world's payments (by value) are remotely transacted.

Bitcoin on the other hand is excellent at both functions, unable to be debased yet available for fast and remote payments. So the FRB system is unnecessary in a bitcoin economy. Questions of FRB about which piece of paper is "original money" disappear. Gold will always have some value in case of a total systemic collapse, where modern civilization is wrecked. This is very unlikely, so in a bitcoin economy gold will become very much viewed as an industrial commodity like silver is today.

[mirelo]

The simplest answer is that bitcoin cannot be debased by Fractional Reserve Banking.

This was not the question. The question was how can the money loaned from a bank account be both the same and not the same as the money from which it is a loan.

[solex]

The simplest answer is that bitcoin cannot be debased by Fractional Reserve Banking. It is the same in this respect to gold. You cannot have a purely gold-based FRB.

This was not the question: the question was how can the money loaned from a bank account be the same and yet not the same as the money from which it was loaned.

This is a bitcoin forum so I am pointing out that bitcoin makes FRB obsolete, which makes this question moot.
FRB enables the duplication of currency (within reserve limits which prove to be a mirage because of central banking which is the achilles heel of fiat systems).

[mirelo]

This is a bitcoin forum so I am pointing out that bitcoin makes FRB obsolete, which makes this question moot.
FRB enables the duplication of currency (within reserve limits which prove to be a mirage because of central banking which is the achilles heel of fiat systems).

If you cannot answer how is the replication of money possible, then how can you know that Bitcoin makes it impossible?

(What you call "duplication" I prefer to call "replication" because the exact multiple depends on the reserve requirements.)

[Bit_Happy]

The simplest answer is that bitcoin cannot be debased by Fractional Reserve Banking.

This was not the question. The question was how can the money loaned from a bank account be both the same and not the same as the money from which it is a loan.

You deposit $1000 and the bank loans out $500 (for example) to make a profit.
If you want to withdraw your full $1000 before the bank has "the same" money, then they have to give you someone else's (not the same) money to cover the other half.
This Fractional Reserve Banking works fine until too many people want their money all at once, then...



In America, you can rest assured your account is covered by the FDIC.   

[mirelo]

You deposit $1000 and the bank loans out $500 (for example) to make a profit.
If you want to withdraw your full $1000 before the bank has "the same" money, then they have to give you someone else's (not the same) money to cover the other half.
This Fractional Reserve Banking works fine until too many people want their money all at once...

...or until inflation destroys the currency, or until the country defaults.

Yet the question remains unanswered: how is it possible that the money from a deposit becomes a loan that is both the same and not the same as the originally deposited money? I offer an answer to that question at http://omniequivalence.com/fractional-reserve-banking/ and http://omniequivalence.com/representational-monetary-identity/.

[solex]

OK. This question has intrigued me too. As when I first learned about bitcoin I just assumed that FRB would work. The problem for me now is I just can't see any money-multiplier effect possible.

In FRB 90% of a deposit from person X at Bank A can become a loan to person Y at bank A.
Person Y can then deposit his borrowed money at Bank B. So there are now two deposit accounts with the "same" fiat money. With bitcoin, when a loan is made to person Y the bitcoins follow him to Bank B. Bank A no longer has the bitcoins.

Now you might say that Bank A can pretend to still have the bitcoins just as it would "pretend" to still have the fiat in the form a loan account in a fiat system. However, the latter case works as the FRB system is backed by central banks who can print fiat to supply to Bank A if depositor X wants his money back while the loan to person Y is still outstanding.

In a bitcoin system the central bank would not be able to print bitcoin and would have to source it, from tax revenues perhaps. This is the inflexible part of the BTC monetary base.

[Bit_Happy]

How can that be?

FRB 'expands' the money supply.
Some things really are simple*, and the question is answered now, imho.

*It isn't "the same money" vs "not that same original money", rather the amount of money has increased and you still own most of it.

[Bit_Happy]

Let us analyze what happens...

Let us analyze what happens if we Google Representational Monetary Identity.
All 4 results lead directly to you.

< No offense, this is just my opinion >
Does the world need a new phrase "Representational Monetary Identity" to help describe a tired old problem, FRB?
IMO, no.

You think we do, and good luck with your project...

[mirelo]

OK. This question has intrigued me too. As when I first learned about bitcoin I just assumed that FRB would work. The problem for me now is I just can't see any money-multiplier effect possible.

In FRB 90% of a deposit from person X at Bank A can become a loan to person Y at bank A.
Person Y can then deposit his borrowed money at Bank B. So there are now two deposit accounts with the "same" fiat money. With bitcoin, when a loan is made to person Y the bitcoins follow him to Bank B. Bank A no longer has the bitcoins.

Now you might say that Bank A can pretend to still have the bitcoins just as it would "pretend" to still have the fiat in the form a loan account in a fiat system. However, the latter case works as the FRB system is backed by central banks who can print fiat to supply to Bank A if depositor X wants his money back while the loan to person Y is still outstanding.

In a bitcoin system the central bank would not be able to print bitcoin and would have to source it, from tax revenues perhaps. This is the inflexible part of the BTC monetary base.

When you say that bitcoins cannot replicate because they are an "inflexible" monetary base, you are saying they cannot replicate because they cannot replicate. To understand why they cannot replicate you must first understand why today's money can.

[mirelo]

Let us analyze what happens if we Google Representational Monetary Identity.
All 4 results lead directly to you.

I hope this discussion will improve that.

< No offense, this is just my opinion >
Does the world need a new phrase "Representational Monetary Identity" to help describe a tired old problem, FRB?
IMO, no.

I'm not offended, although "representational monetary identity" is a concept, not just a phrase---a concept intended to explain fractional-reserve banking, and not only to describe it.

You think we do, and good luck with your project...

Yes, I think we do. We must understand a problem before we can solve it.

[mirelo]

It isn't "the same money" vs "not that same original money", rather the amount of money has increased and you still own most of it.

A loan must be the same old money from which it is a loan, otherwise it is no longer a loan.

[solex]

mirelo, I found this very interesting...

http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-surda-2012-11-19b.pdf

[mirelo]

mirelo, I found this very interesting...

http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-surda-2012-11-19b.pdf

From the text:

Large parts of this thesis are based on the teachings of the Austrian economic school. There are several reasons for this. As for the subjective ones, it is the school I am familiar with the most, and that I nd myself in most agreement with.

I disagree with Austrian monetary theory: I propose a new theory of exchange value that resembles the Marxian variety despite no longer being Marxian.

[hazek]

First, we have a deposit. Then, we have a loan of up to a fraction (of 90%) of this deposit. Finally, the borrower can deposit the borrowed money into another bank account, in the same bank or not. Suddenly, the trillion dollar question emerges: is the borrowed money in these two bank accounts the same?

• On the one hand, the answer is yes: all borrowed money came from the original deposit---so it is that same original money.
  
• On the other hand, the answer is no: all money deposited into the borrower's account possibly stays in the original depositor's account---so it is not that same original money.
  

How can that be?

It can't be and it isn't.

I mean of course it is the same money and the same money only, thinking about it any other way is an illusion. How can you tell? Well if all demand depositors at a bank came to withdraw their balance all at once the bank couldn't pay them back.

It's no different if you gave me some money to keep safe and I told you I'm going to loan out some of it and give you a share of the interest but because I have many clients like you I can give you back everything should you really need it - unless I can't.

And that's exactly what demand deposit contracts say. Hence why FRB isn't a fraud (something I used to believe it was until I really thought about it). The problem is that because how FRB works today, with FDIC and the FED there to repay the depositors should a bank run happen and a bank can't get enough short term loans from other banks, it leaves people under the illusion that the money they store in a demand deposit account is always in it's entirety available to be spent at any moment and this affects their behavior. They now instead of knowing that they may not have that money available to them and spend accordingly, they spend as if their balance is guaranteed whenever. This is the only reason why all the balances combined that have been created out of the same money can be counted towards an increase in the money supply - purely because people behave like it - and not because an actual increase in money supply happened.

In a market regulated strictly by consumption i.e. in a free market where there is no FDIC and FED, these risk would be much more apparent and people would spend accordingly and this illusion that they have their entire money available to them would get destroyed. Well I don't there would be no increase in the perception of how much money depositors have available but I'm certain it would orders of magnitude less than today and thus booms and buts fueled by an increase in people's illusion of how much money they have available for spending would be significantly smaller and shorter eventually leading to decent stability assuming this system would keep it's form for a long period of time.

[CurbsideProphet]

In a bitcoin system the central bank would not be able to print bitcoin and would have to source it, from tax revenues perhaps. This is the inflexible part of the BTC monetary base.

There is no central bank.  That's the point, decentralization.  In that aspect, Bitcoin is inflexible I suppose but that is by design.

[Puppet]

Think of money as an accounting system. What is an asset on my balance sheet, could be a liability on someone else's, or an asset of a company thats owns my company. Does the asset exist 1, 2 or 3 times? Is it the same? Its a meaningless discussion. Money is fungible, and its just accounting of debt.

[mirelo]

[...] it is the same money and the same money only, thinking about it any other way is an illusion. How can you tell? Well if all demand depositors at a bank came to withdraw their balance all at once the bank couldn't pay them back.

It's no different if you gave me some money to keep safe and I told you I'm going to loan out some of it and give you a share of the interest but because I have many clients like you I can give you back everything should you really need it - unless I can't.

And that's exactly what demand deposit contracts say. Hence why FRB isn't a fraud (something I used to believe it was until I really thought about it). The problem is that because how FRB works today, with FDIC and the FED there to repay the depositors should a bank run happen and a bank can't get enough short term loans from other banks, it leaves people under the illusion that the money they store in a demand deposit account is always in it's entirety available to be spent at any moment and this affects their behavior. They now instead of knowing that they may not have that money available to them and spend accordingly, they spend as if their balance is guaranteed whenever. This is the only reason why all the balances combined that have been created out of the same money can be counted towards an increase in the money supply - purely because people behave like it - and not because an actual increase in money supply happened.

In a market regulated strictly by consumption i.e. in a free market where there is no FDIC and FED, these risk would be much more apparent and people would spend accordingly and this illusion that they have their entire money available to them would get destroyed. Well I don't there would be no increase in the perception of how much money depositors have available but I'm certain it would orders of magnitude less than today and thus booms and buts fueled by an increase in people's illusion of how much money they have available for spending would be significantly smaller and shorter eventually leading to decent stability assuming this system would keep it's form for a long period of time.

I make a deposit of U$ 1.000,00. Then, my (so to speak) bank loans one of your debtors (if any) the U$ 900,00 in excess reserves created by my deposit. Finally, that guy pays you his debt with a bank transfer of the borrowed U$ 900,00. Now imagine a voice telling you that the U$ 900,00 you just received in payment are just an illusion. Is that voice really yours?

[hazek]

[...] it is the same money and the same money only, thinking about it any other way is an illusion. How can you tell? Well if all demand depositors at a bank came to withdraw their balance all at once the bank couldn't pay them back.

It's no different if you gave me some money to keep safe and I told you I'm going to loan out some of it and give you a share of the interest but because I have many clients like you I can give you back everything should you really need it - unless I can't.

And that's exactly what demand deposit contracts say. Hence why FRB isn't a fraud (something I used to believe it was until I really thought about it). The problem is that because how FRB works today, with FDIC and the FED there to repay the depositors should a bank run happen and a bank can't get enough short term loans from other banks, it leaves people under the illusion that the money they store in a demand deposit account is always in it's entirety available to be spent at any moment and this affects their behavior. They now instead of knowing that they may not have that money available to them and spend accordingly, they spend as if their balance is guaranteed whenever. This is the only reason why all the balances combined that have been created out of the same money can be counted towards an increase in the money supply - purely because people behave like it - and not because an actual increase in money supply happened.

In a market regulated strictly by consumption i.e. in a free market where there is no FDIC and FED, these risk would be much more apparent and people would spend accordingly and this illusion that they have their entire money available to them would get destroyed. Well I don't there would be no increase in the perception of how much money depositors have available but I'm certain it would orders of magnitude less than today and thus booms and buts fueled by an increase in people's illusion of how much money they have available for spending would be significantly smaller and shorter eventually leading to decent stability assuming this system would keep it's form for a long period of time.

I make a deposit of U$ 1.000,00. Then, my (so to speak) bank loans one of your debtors (if any) the U$ 900,00 in excess reserves created by my deposit. Finally, that guy pays you his debt with a bank transfer of the borrowed U$ 900,00. Now imagine a voice telling you that the U$ 900,00 you just received in payment are just an illusion. Is that voice really yours?

Um? the illusion is that you have $1000 available to you in your demand deposit bank account, not that I didn't receive $900.