Fractional Reserve Banking and the creation of the Debtcoin

[crumbcake]

Never heard of repaying loans in installments, have you?

"Here's my first payment of 1.01 coins. I'll have my next one next week."
"Excellent. Thank you. Only 20 more."
"Yup, see you next week!"

http://images.wikia.com/spongebob/images/8/89/Later.jpg

"Here's my final payment of 1.01 coins. Finally out of debt."
"Indeed. If you ever need another loan, you know where to come."

Note that at this point, you have paid me 21.21 coins, all told. Even though there are only 21 in circulation, total.

Oh, come on.  Let's at least play by the rules   Sure you can come up with a scenario where it would be possible to make partial payments, restructure loans, renegotiate terms etc., etc. -- though it's not the scenario at hand, amirite?  Or are you trying to simply show that lending with premium is possible in a deflationary currency?  I can argue against that as well, but we'll have to use substantially more complex models & the arguments won't be slam dunks.  People are dedicating their entire careers to arguing the finer points & publishing reams of paper without even trying for definitive yes or no answers.  Sort of silly to try to resolve anything more complex than a few extreme case scenarios in a few posts, no?

[myrkul]

Sounds like a pyramid scheme to me. The rich (big lenders) get richer, and the poor get poorer by borrowing and paying interest on top of it. Eventually this will shift most of the BTC in the hands of a few, just like we see now with fiat money. I don't think FRB and charging interest is in our best interest if we want a sustainable economy and future.

You're only looking at half the picture. Of course it looks unbalanced.

[myrkul]

Never heard of repaying loans in installments, have you?

"Here's my first payment of 1.01 coins. I'll have my next one next week."
"Excellent. Thank you. Only 20 more."
"Yup, see you next week!"



"Here's my final payment of 1.01 coins. Finally out of debt."
"Indeed. If you ever need another loan, you know where to come."

Note that at this point, you have paid me 21.21 coins, all told. Even though there are only 21 in circulation, total.

Oh, come on.  Let's at least play by the rules  

That is the rules. I loan you 21 coins, and you pay me back 21.21.

It doesn't matter if you pay me in one lump sum, or over the course of 20 weeks. Except that you actually can pay me, if I let you make payments.

And you'll note, that in the real world, almost every loan is indeed paid back in installments. Especially the big ones.

Would you accept a loan that required you to make a lump sum payment of more currency than was actually in circulation?

[crumbcake]

Never heard of repaying loans in installments, have you?

"Here's my first payment of 1.01 coins. I'll have my next one next week."
"Excellent. Thank you. Only 20 more."
"Yup, see you next week!"

http://images.wikia.com/spongebob/images/8/89/Later.jpg

"Here's my final payment of 1.01 coins. Finally out of debt."
"Indeed. If you ever need another loan, you know where to come."

Note that at this point, you have paid me 21.21 coins, all told. Even though there are only 21 in circulation, total.

Oh, come on.  Let's at least play by the rules  

That is the rules. I loan you 21 coins, and you pay me back 21.21.

It doesn't matter if you pay me in one lump sum, or over the course of 20 weeks. Except that you actually can pay me, if I let you make payments.

And you'll note, that in the real world, almost every loan is indeed paid back in installments. Especially the big ones.

Would you accept a loan that required you to make a lump sum payment of more currency than was actually in circulation?

Hi again --
I think i get where we're parting ways:  You're not willing to maximize your profit (in your example above), either that, or you're simply not seeing your way clear to doing it.  I'll help you:

"Here's my first payment of 1.01 coins. I'll have my next one next week."
"Excellent. Thank you. Only 20 more."
"Yup, see you next week!"

http://images.wikia.com/spongebob/images/8/89/Later.jpg

---and here's where things turn to shit for me---

Me: "Here's my final payment of 1.01 ... wait!  I got all your money back that i've spent, but I only have ... what is this?"
You:  "Huh, you idiot.  Of course you don't have 1.01 coins, you think I run a charity here?  A soup kitchen FFS?  You thought i was stoopit enough to circulate the money you've returned to me, and only profit one motherraping percent by loaning you all the money in the world?!  No, you brain-dead prole! I've kept the money, and now you have to borrow it from me at an ungodly rate, so that you can borrow it from me at a redoubled rate another year later.

 (you get the idea from here on out, my parcel repayments wouldn't address the fundamental problem if you played your cards right & didn't give me access to the money you've lent me.  If this seems too convoluted, i'll re-write)

[myrkul]

You thought i was stoopit enough to circulate the money you've returned to me, and only profit one motherraping percent by loaning you all the money in the world?!  No, you brain-dead prole! I've kept the money, and now you have to borrow it from me at an ungodly rate, so that you can borrow it from me at a redoubled rate another year later.

Derp. Moneylenders gotta eat, too.

[crumbcake]

You thought i was stoopit enough to circulate the money you've returned to me, and only profit one motherraping percent by loaning you all the money in the world?!  No, you brain-dead prole! I've kept the money, and now you have to borrow it from me at an ungodly rate, so that you can borrow it from me at a redoubled rate another year later.

Derp. Moneylenders gotta eat, too.

Don't I know it!  My point exactly.  That's why i decided to show you just how to keep the great unwashed in perpetual debt.  If i had a bitcoin addy in my sig, i'd stick my hand out
*Of course in reality that trick wouldn't work, but this was one of those reductio ad absurdum cases   BTW, is it really true that most loans are repayable before they mature (if that's the right word)?  Seems to fly in the face of reason

[myrkul]

You thought i was stoopit enough to circulate the money you've returned to me, and only profit one motherraping percent by loaning you all the money in the world?!  No, you brain-dead prole! I've kept the money, and now you have to borrow it from me at an ungodly rate, so that you can borrow it from me at a redoubled rate another year later.

Derp. Moneylenders gotta eat, too.

Don't I know it!  My point exactly. 

How is he gonna eat if he keeps all the money?

BTW, is it really true that most loans are repayable before they mature (if that's the right word)?  Seems to fly in the face of reason

You really haven't heard of repaying loans in installments, have you?

Here's the way loans work. Let's say I give you 21 coins for a year at 1% yearly. At the end of the year, you'll owe me 21.21 coins. We have two options here: I could wait that whole year, and you pay me back in a lump sum, OR, each month you could come in and pay me 1.7675 coins. Either way, at the end of the year, you've paid me 21.21 coins.

There are several benefits to using an installment plan:
1. It's easier for the borrower to pay back smaller installments, so it's less likely that they will default (especially if there are only 21 coins in circulation in the first place)
2. It provides a constant stream of income from interest, instead of a lump sum at the end of the year.
3. I can loan out the principle again, even before your loan is fully paid off. For instance, if someone comes in, six months after you, and wants a 10 coin loan, I can do that, because you've paid me 10.605 coins.

[crumbcake]

You thought i was stoopit enough to circulate the money you've returned to me, and only profit one motherraping percent by loaning you all the money in the world?!  No, you brain-dead prole! I've kept the money, and now you have to borrow it from me at an ungodly rate, so that you can borrow it from me at a redoubled rate another year later.

Derp. Moneylenders gotta eat, too.

Don't I know it!  My point exactly. 

How is he gonna eat if he keeps all the money?

I swear, we must be talking in different languages   How did he eat when he had all the money?  And how was it that the borrower wanted to borrow all the money (To what end?  The Lender has *all* the money, so the money is *worthless*
You're a regular on a forum loosely related to finance, you are capable of abstract thought -- that pretty much guarantees that  you're not a stranger to hypothetical models & strictly defined problems.  So when someone asked you "If train A left the station at t= ...," you wouldn't think of asking "Ummm, so when does the conductor get to have caek?  It is delicious caek, he must eat it!" would you?  Of course not.  Silly, not a part of the problem.
To the alternative: I've known money lenders who owned property along with money.  Some of them more property than i own.

BTW, is it really true that most loans are repayable before they mature (if that's the right word)?  Seems to fly in the face of reason

You really haven't heard of repaying loans in installments, have you?

Here's the way loans work. Let's say I give you 21 coins for a year at 1% yearly. At the end of the year, you'll owe me 21.21 coins. We have two options here: I could wait that whole year, and you pay me back in a lump sum, OR, each month you could come in and pay me 1.7675 coins. Either way, at the end of the year, you've paid me 21.21 coins.

There are several benefits to using an installment plan:
1. It's easier for the borrower to pay back smaller installments, so it's less likely that they will default (especially if there are only 21 coins in circulation in the first place)
2. It provides a constant stream of income from interest, instead of a lump sum at the end of the year.
3. I can loan out the principle again, even before your loan is fully paid off. For instance, if someone comes in, six months after you, and wants a 10 coin loan, I can do that, because you've paid me 10.605 coins.

Again, I feel like we're from different worlds (and this is completely possible, it's the nature of the tubez).  I didn't ask if it was possible or common for loans to be repaid in parcels, i know that's common.  My question was "is it really true that most loans are repayable before they mature (if that's the right word)?"  In other words, why would a lender, who is in the business of lending money, allow me to repay a loan I borrowed for 10 years in just 1 month?  He would have to find another person to borrow it, et cetera, et cetera, et cetera -- having to repeat each month the process he could have done once if I was to keep the loan for 10 years?  Do you see how even in real situations turning long time loans into short time loans will make the moneylenders *really* work for their $$$?

[myrkul]

You thought i was stoopit enough to circulate the money you've returned to me, and only profit one motherraping percent by loaning you all the money in the world?!  No, you brain-dead prole! I've kept the money, and now you have to borrow it from me at an ungodly rate, so that you can borrow it from me at a redoubled rate another year later.

Derp. Moneylenders gotta eat, too.

Don't I know it!  My point exactly. 

How is he gonna eat if he keeps all the money?

I swear, we must be talking in different languages   How did he eat when he had all the money?  And how was it that the borrower wanted to borrow all the money (To what end?  The Lender has *all* the money, so the money is *worthless* )

Don't ask me, it's your hypothetical. You're the one that postulated the absurd situation of one man having all the money in an economy, and another borrowing it all.

In other words, why would a lender, who is in the business of lending money, allow me to repay a loan I borrowed for 10 years in just 1 month?

If you're paying him back with the agreed upon rate of interest, why shouldn't he? He's getting his money back, plus profit. And there is always demand for more capital.

[crumbcake]

You thought i was stoopit enough to circulate the money you've returned to me, and only profit one motherraping percent by loaning you all the money in the world?!  No, you brain-dead prole! I've kept the money, and now you have to borrow it from me at an ungodly rate, so that you can borrow it from me at a redoubled rate another year later.

Derp. Moneylenders gotta eat, too.

Don't I know it!  My point exactly.  

How is he gonna eat if he keeps all the money?

I swear, we must be talking in different languages  How did he eat when he had all the money?  And how was it that the borrower wanted to borrow all the money (To what end?  The Lender has *all* the money, so the money is *worthless* )

Don't ask me, it's your hypothetical. You're the one that postulated the absurd situation of one man having all the money in an economy, and another borrowing it all.

The value of a hypothetical scenario is not its realism, but its ability to highlight the flaws in a particular line of reasoning.  

In other words, why would a lender, who is in the business of lending money, allow me to repay a loan I borrowed for 10 years in just 1 month?

If you're paying him back with the agreed upon rate of interest, why shouldn't he? He's getting his money back, plus profit. And there is always demand for more capital.

This is a bit frustrating.  You're a moneylender.  Your business consists of lending a sum of money, N, at 10% yearly interest.  You can:
A.  Lend all the money, in one lump sum, to a single borrower for the duration of 10 years.
B.  Lend all the money, in one lump sum, in the morning of every day of the year, including weekends and holidays, and have that money returned to you the following evening.  Since you're an excellent businessman, you successfully re-lend the money each consecutive morning, and succeed in generating the same 10% yearly interest.  Minus your time and expenses.

Would you chose A or B, everything else being equal?  (In your business model, 10% ROI is the pinnacle of success -- you're not looking for greater profits @ higher risks)

[myrkul]

The value of a hypothetical scenario is not its realism, but it's ability to highlight the flaws in a particular line of reasoning. 

In which case, we've successfully highlighted the flaw in your reasoning: that no one person will ever hold all the money in an economy.

In other words, why would a lender, who is in the business of lending money, allow me to repay a loan I borrowed for 10 years in just 1 month?

If you're paying him back with the agreed upon rate of interest, why shouldn't he? He's getting his money back, plus profit. And there is always demand for more capital.

This is a bit frustrating.  You're a moneylender.  Your business consists of lending a sum of money, N, at 10% yearly interest.  You can:
A.  Lend all the money, in one lump sum, to a single borrower for the duration of 10 years.
B.  Lend all the money, in one lump sum, in the morning of every day of the year, including weekends and holidays, and have that money returned to you the following evening.  Since you're an excellent businessman, you successfully re-lend the money each consecutive morning, and succeed in generating the same 10% yearly interest.  Minus your time and expenses.

Would you chose A or B, everything else being equal?  (In your business model, 10% ROI is the pinnacle of success -- you're not looking for greater profits @ higher risks)

Definitely B. I like to buy groceries more than once every 10 years.

[townf]

Here is the crux of the situation you guys are talking about (i think):

To make it easy to see what is going on let us create a situation that, while outwardly ridiculous, nonetheless accurately illustrates what really happens. It's ridiculousness just makes it more obvious.

Let us pretend that there is $0 (zero) dollars in the economy (that's the ridiculous part). Person A goes to a bank and borrows $1,000. Now there is $1,000 in the economy.

The bank says, "Person A, you owe the bank $1,100 with the $100 interest"

The system is already obviously some kind of scheme because $1,100 doesn't exist, only $1,000 exists. It's hard to see this today, since there are trillions of dollars in the economy. That is why I started at $0, but let's continue with this example.

Person B goes to the bank and borrows $1,000. The bank says, "Person B, you owe the bank $1,100 with the $100 interest"

Person A then has a garage sale where he sells Person B $100 worth of junk. Person A can now pay his loan back.

The bank takes the $1,100 Person A paid back, extinguishes $1,000 and puts $100 in its pocket.

Person B can't pay his $1,100 obligation until Person C borrows some money and gives Person B some, but then Person C is short of his obligation.

But then Person D....

And then Person E.....

And then Person F....

And then Person G....

It's a freakin' scam. It used to be kept in check when the reserve was a physically accountable and uninflatable commodity (gold), but since it is now "monetized government debt" being used as reserves, this scam just vomits all over itself.

We are quantitatively easing ourselves into total debt slavery.

[myrkul]

Here is the crux of the situation you guys are talking about (i think):

To make it easy to see what is going on let us create a situation that, while outwardly ridiculous, nonetheless accurately illustrates what really happens. It's ridiculousness just makes it more obvious.

Let us pretend that there is $0 (zero) dollars in the economy (that's the ridiculous part). Person A goes to a bank and borrows $1,000. Now there is $1,000 in the economy.

See, no. That's fractional reserve banking in an elastic currency. We're talking about an inelastic currency, like BTC.

[townf]

Here is the crux of the situation you guys are talking about (i think):

To make it easy to see what is going on let us create a situation that, while outwardly ridiculous, nonetheless accurately illustrates what really happens. It's ridiculousness just makes it more obvious.

Let us pretend that there is $0 (zero) dollars in the economy (that's the ridiculous part). Person A goes to a bank and borrows $1,000. Now there is $1,000 in the economy.

See, no. That's fractional reserve banking in an elastic currency. We're talking about an inelastic currency, like BTC.

To actually perform FRB you need an instrument like a note that can be redeemed for the BTC. These notes are elastic

[myrkul]

Here is the crux of the situation you guys are talking about (i think):

To make it easy to see what is going on let us create a situation that, while outwardly ridiculous, nonetheless accurately illustrates what really happens. It's ridiculousness just makes it more obvious.

Let us pretend that there is $0 (zero) dollars in the economy (that's the ridiculous part). Person A goes to a bank and borrows $1,000. Now there is $1,000 in the economy.

See, no. That's fractional reserve banking in an elastic currency. We're talking about an inelastic currency, like BTC.

To actually perform FRB you need an instrument like a note that can be redeemed for the BTC. These notes are elastic

Indeed there are.

But you can lend, even at interest, in an inelastic currency, without practicing fractional reserve. And that's what we're taking about.

[townf]

Ah i see. Carry on!

[crumbcake]

The value of a hypothetical scenario is not its realism, but it's ability to highlight the flaws in a particular line of reasoning. 

In which case, we've successfully highlighted the flaw in your reasoning: that no one person will ever hold all the money in an economy.

In other words, why would a lender, who is in the business of lending money, allow me to repay a loan I borrowed for 10 years in just 1 month?

If you're paying him back with the agreed upon rate of interest, why shouldn't he? He's getting his money back, plus profit. And there is always demand for more capital.

This is a bit frustrating.  You're a moneylender.  Your business consists of lending a sum of money, N, at 10% yearly interest.  You can:
A.  Lend all the money, in one lump sum, to a single borrower for the duration of 10 years.
B.  Lend all the money, in one lump sum, in the morning of every day of the year, including weekends and holidays, and have that money returned to you the following evening.  Since you're an excellent businessman, you successfully re-lend the money each consecutive morning, and succeed in generating the same 10% yearly interest.  Minus your time and expenses.

Would you chose A or B, everything else being equal?  (In your business model, 10% ROI is the pinnacle of success -- you're not looking for greater profits @ higher risks)

Definitely B. I like to buy groceries more than once a year.

You're trolling me?  Not much of a challenge  On the off-chance that you're serious, enjoy your life at the office -- i'll be on my 45-footer island-hopping in the caribbean somewhere.

And, as a customary end to end an interwebz debate (Great men think alike (one word changed for readability) ):

"Truly, this earth is a trophy cup for the industrious man. And this rightly so, in the service of natural selection. He who does not possess the force to secure his wealth in this world, and, if necessary, to enlarge it, does not deserve to possess the necessities of life. He must step aside and allow stronger peoples to pass him by."

[myrkul]

You're trolling me?  Not much of a challenge  On the off-chance that you're serious, enjoy your life at the office -- i'll be on my 45-footer island-hopping in the caribbean somewhere.

With what?

You've loaned out all your money, and you won't get your profits for ten years. Assuming, of course, that they don't default.

[townf]

But you can lend, even at interest, in an inelastic currency, without practicing fractional reserve. And that's what we're taking about.

When you are doing full reserve lending as opposed to fractional, the interest rates are completely determined by the market. The lender has no control over it. Not sure how that ties in with some of yourall's crazy examples. If you lend out all the money in the world, the interest rate by then would effectively be infinity. I just kind of skimmed yourall's conversation, just saying.

[myrkul]

But you can lend, even at interest, in an inelastic currency, without practicing fractional reserve. And that's what we're taking about.

When you are doing full reserve lending as opposed to fractional, the interest rates are completely determined by the market. The lender has no control over it.

Which is the other side of the picture I was talking about, earlier. Interest is the "market price" of money.

If you lend out all the money in the world, the interest rate by then would effectively be infinity. I just kind of skimmed yourall's conversation, just saying.

Yeah, that's why the example is ridiculous, but I ran with it anyway.