Why Bitcoin is ultimately doomed to fail (not today or tomorrow)

[tacotime]

And I guess my argument really just boils down to: "Banks need to 'price' paper derivatives against mass averages of things that actually exist, rather than magic money printed from thin air by the government.  Things that actually exist include equities representing worth/revenue streams of corporations and physical commodities."

[1713997291]

1713997291

[tacotime]

Could you please expand more on this? Not saying that you're wrong, just don't get your point and how it is related to the issue at hand, i.e. how unequal distribution of gold deposits could support the gold standard itself and mend its inherent deficiencies?

Sorry, I should have mentioned that these are deficiencies listed on the Wikipedia page for gold standard:
http://en.wikipedia.org/wiki/Gold_standard

See, "disadvantages"

I don't doubt about the disadvantage you advanced here (lol), but I didn't mean this as being a primary disadvantage that I was referring to when I compared Bitcoin "standard" with gold standard and through which, in my opinion, Bitcoin should fail in the end...

Oh, sorry.  I was just going through some of the arguments as to why gold doesn't work as a currency, and why Bitcoin solves some (but not all) issues.

[deisik]

The gold standard acts as a limit on economic growth. "As an economy's productive capacity grows, then so should its money supply. Because a gold standard requires that money be backed in the metal, then the scarcity of the metal constrains the ability of the economy to produce more capital and grow."[64]

This statement is itself not true.  Bitcoin itself simply becomes more valuable, and everyone moves on with their day.

Yes, I consider this as a central problem for Bitcoin and gold standard. If "Bitcoin itself simply becomes more valuable", everything else becomes not that simple for producers in the first place, and you won't get away with it by just saying "and everyone moves on with their day". It has already been proven so many times that if you claim otherwise, it can be considered that you don't actually understand the issue at hand...

[tacotime]

The gold standard acts as a limit on economic growth. "As an economy's productive capacity grows, then so should its money supply. Because a gold standard requires that money be backed in the metal, then the scarcity of the metal constrains the ability of the economy to produce more capital and grow."[64]

This statement is itself not true.  Bitcoin itself simply becomes more valuable, and everyone moves on with their day.

Yes, I consider this as a central problem for Bitcoin and gold standard. If "Bitcoin itself simply becomes more valuable", everything else becomes not that simple for producers in the first place, and you won't get away with it by just saying "and everyone moves on with their day". It has already been proven so many times that if you claim otherwise, it can be considered that you don't actually understand the issue at hand...

http://www.bloomberg.com/news/2013-04-03/the-gold-standard-wasn-t-so-bad.html

The gold standard wasn't bad for growth, either. The most reliable information comes from an annual index of industrial production from 1790 to 1915. We can compare that index against the monthly industrial production data collected by the Federal Reserve since 1919 to get a sense of how rapidly the economy grew under different monetary arrangements. It turns out that industrial production grew much more rapidly under the gold standard than in the years since. This doesn't change even if you exclude the world wars and the Great Depression.

[tacotime]

See also: http://elsa.berkeley.edu/~cromer/JEP_Spring99.pdf

Which is cited in that article.  These are current financial advisers themselves admitting that the gold standard does not make the economy more volatile some 14 years ago.

Does this mean that there really is a “new economy” today where cycles are largely
nonexistent? Perhaps. We have had the potential for greater stability since the advent
of aggregate demand policy, automatic stabilizers, and deposit insurance. In the last
decade or so we have used these tools to counteract shocks and have not created new
ones. As long as policy continues to make few mistakes toward over expansion, policy induced
recessions to control inflation should continue to be rare.

2008 confirmed her to be completely wrong about the influence of current economic policy.  Greed will find a way around attempts at market stabilization.

[deisik]

Yes, I consider this as a central problem for Bitcoin and gold standard. If "Bitcoin itself simply becomes more valuable", everything else becomes not that simple for producers in the first place, and you won't get away with it by just saying "and everyone moves on with their day". It has already been proven so many times that if you claim otherwise, it can be considered that you don't actually understand the issue at hand...

http://www.bloomberg.com/news/2013-04-03/the-gold-standard-wasn-t-so-bad.html

The gold standard wasn't bad for growth, either. The most reliable information comes from an annual index of industrial production from 1790 to 1915. We can compare that index against the monthly industrial production data collected by the Federal Reserve since 1919 to get a sense of how rapidly the economy grew under different monetary arrangements. It turns out that industrial production grew much more rapidly under the gold standard than in the years since. This doesn't change even if you exclude the world wars and the Great Depression.

It has a very simple explanation. The rapid economic growth and ever increasing industrial production of the 19th century was due to tremendous scientific and technological advances (electricity, chemistry, internal combustion engine, etc) back then which partly compensated for the deficiencies of gold standard but still couldn't prevent the train of economic crises in the second half of that century as well as the war in Europe and the Great Depression in the 20th century...

[AnonyMint]

capital gains taxes are due on Bitcoin but not on legal tender

On legal tender, ordinary income taxes are due. Capital gains tax rates are generally lower than ordinary income tax rates. In fact, for most people the long term capital gains tax rate is 0%.

Income taxes are due on any method of payment, including barter. So your entire point is vacated.

Capital gains on precious metals are 28% in the USA so it is possible for the government to create unfavorable rates on special categories that compete with fiat (their power). Capital gains taxes were very low under Bush, but they are increasing now under Obama to 20%.

Europeans generally don't pay capital gains tax on Bitcoin, but they arguably must pay VAT, and the UK at least has declared this requirement.

[AnonyMint]

Yes, I consider this as a central problem for Bitcoin and gold standard. If "Bitcoin itself simply becomes more valuable", everything else becomes not that simple for producers in the first place, and you won't get away with it by just saying "and everyone moves on with their day". It has already been proven so many times that if you claim otherwise, it can be considered that you don't actually understand the issue at hand...

http://www.bloomberg.com/news/2013-04-03/the-gold-standard-wasn-t-so-bad.html

The gold standard wasn't bad for growth, either. The most reliable information comes from an annual index of industrial production from 1790 to 1915. We can compare that index against the monthly industrial production data collected by the Federal Reserve since 1919 to get a sense of how rapidly the economy grew under different monetary arrangements. It turns out that industrial production grew much more rapidly under the gold standard than in the years since. This doesn't change even if you exclude the world wars and the Great Depression.

It has a very simple explanation. The rapid economic growth and ever increasing industrial production of the 19th century was due to tremendous scientific and technological advances (electricity, chemistry, internal combustion engine, etc) back then which partly compensated for the deficiencies of gold standard but still couldn't prevent the train of economic crises in the second half of that century as well as the war in Europe and the Great Depression in the 20th century...

That is true. But the simple difference has nothing to do with gold per se.

In the 1800s we had private banks doing fractional reserve lending and so when they failed all depositors were wiped out. Which caused frequent mini-depressions.

That was actually better, because it meant debt write downs and readjustments were more frequent so the economy annealed and was more efficient. But those failures lead to the need for a Central Bank (remember JP Morgan had to bail out the country).

Whereas since 1913, we've had a central bank that prevents write-downs, and that is why global debt is now $150 trillion, misallocation has never ceased/corrected, and we are headed to the apocalyptic implosion and confiscation of all wealth.

[AnonyMint]

Capital gains on legal tender are treated as ordinary income.

There are no capital gains on legal tender. I have no need to respond to your blather and nonsense.

[cal_guy]

Example: Jimmy borrows 50,000 0.0001 BTC bank notes from the bank to help buy a house, which is worth 5 BTC.  The price of BTC in wheat bushel equivalents (or whatever consumer price equivalents) increases two-fold in a year, and now Jimmy owes the bank twice as much.  But wait!  What if Jimmy instead borrowed against the value of wheat?  Jimmy owes 200,000 wheat bushel equivalents in this year and next, and the "price" of wheat bushels has more or less stayed the same even though BTC value has fluctuated a lot -- so Jimmy is okay.

Except that Jimmy isn't the only debtor in this scenario the bank is one as well so now the depositors will have to accept that their deposits are indexed to deflation. Except they don't have to as they can withdraw their BTC.

[tacotime]

Example: Jimmy borrows 50,000 0.0001 BTC bank notes from the bank to help buy a house, which is worth 5 BTC.  The price of BTC in wheat bushel equivalents (or whatever consumer price equivalents) increases two-fold in a year, and now Jimmy owes the bank twice as much.  But wait!  What if Jimmy instead borrowed against the value of wheat?  Jimmy owes 200,000 wheat bushel equivalents in this year and next, and the "price" of wheat bushels has more or less stayed the same even though BTC value has fluctuated a lot -- so Jimmy is okay.

Except that Jimmy isn't the only debtor in this scenario the bank is one as well so now the depositors will have to accept that their deposits are indexed to deflation. Except they don't have to as they can withdraw their BTC.

I guess the banks will just have to stop dabbling in so much fractional reserve gambling if they want to stay afloat.

[Etlase2]

Except that Jimmy isn't the only debtor in this scenario the bank is one as well so now the depositors will have to accept that their deposits are indexed to deflation. Except they don't have to as they can withdraw their BTC.

I guess the banks will just have to stop dabbling in so much fractional reserve gambling if they want to stay afloat.

FRB does not have to be in effect for this scenario. Lending of any kind will be a massive risk.

[tacotime]

FRB does not have to be in effect for this scenario. Lending of any kind will be a massive risk.

Lending has to be against a basket currency of things like commodities or equities that have more stable prices, e.g. a credit representing the S&P500 or a small quantity of the food staples of the nation.  You still run a large risk that your Bitcoins or gold you cash out could be worth much more tomorrow, but they might also be worth much less.

It will probably settle to just having a bank that deals mostly in these equity/commodity notes with a little Gold/Bitcoin/whatever backing, e.g. the Deutsche Bundesbank (with 3000 tonnes of gold), and this will end up the bank people actually trust.

Bitcoin thus serves a role in wealth maintenance, like gold, for when the markets trainwreck themselves by gambling with fiat inappropriately.

[Etlase2]

Bitcoin thus serves a role in wealth maintenance, like gold,

You hope.

for when the markets trainwreck themselves by gambling with fiat inappropriately.

Because bitcoin doesn't fix anything. A replacement for gold isn't what society needs, it needs a replacement for fiat so we can stop worrying about having to run to gold. If bitcoin doesn't get used in commerce (which will require lending), it will never have a tangible grasp over society like gold, in which case it becomes easily replaceable. Not a good property to have for a value store.

[AnonyMint]

Etlase2 I don't hold the unrealistic dream of ending fiat. I just want a parallel economy that those of us who want to escape the coming scorched earth can operate in while the world burns itself to ground.

Capital gains on legal tender are treated as ordinary income.

There are no capital gains on legal tender. I have no need to respond to your blather and nonsense.

26 USC 988.

Precisely the point has been in this thread that we don't exchange legal tender for foreign currencies before we spend it, and when we do (e.g. paying for something with our credit card priced in a foreign currency) we spend the foreign currencies immediately so there is no capital gain on legal tender.

The point is we don't exchange the currency of our country for other currencies, we exchange it for goods & services. That is why it is a currency. When we exchange our legal tender for those goods & service, the legal tender never has a capital gain. This is not the case for Bitcoin.

[tacotime]

Because bitcoin doesn't fix anything. A replacement for gold isn't what society needs, it needs a replacement for fiat so we can stop worrying about having to run to gold. If bitcoin doesn't get used in commerce (which will require lending), it will never have a tangible grasp over society like gold, in which case it becomes easily replaceable. Not a good property to have for a value store.

I think this point is arguable.  Alan Greenspan from this year:

“We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity… There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.”

“It [bitcoin] has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of bitcoin is. I haven’t been able to do it. Maybe somebody else can.”

Greenspan can't see the forest through the trees: that Bitcoin is similar to gold but is mathematically designed for distribution in a way superior to gold, and whose transport and storage is also easier than that of gold.

My work on MC2 is attempting to resolve some of the issues regarding the uselessness of Bitcoin as an actual currency, as I suspect your Decrits are.  I don't care who succeeds in the end, as long as one of us does.

A pleasant future may be something like this: Bitcoin functioning as gold used to, and some other cryptocurrency functioning as fiat used to.

[deisik]

Precisely the point has been in this thread that we don't exchange legal tender for foreign currencies before we spend it, and when we do (e.g. paying for something with our credit card priced in a foreign currency) we spend the foreign currencies immediately so there is no capital gain on legal tender.

First of all, foreign currencies are legal tender.

If foreign currencies are legal tender, it means that US citizens can pay taxes with, say, Euro without first converting them to dollars, right? It seems that you're misusing the term legal tender here...

[rammy2k2]

bitcoin wont die, this is just the start .. fiat will be gone tho

[deisik]

Precisely the point has been in this thread that we don't exchange legal tender for foreign currencies before we spend it, and when we do (e.g. paying for something with our credit card priced in a foreign currency) we spend the foreign currencies immediately so there is no capital gain on legal tender.

First of all, foreign currencies are legal tender.

If foreign currencies are legal tender, then US citizens can pay taxes with, say, Euro without first converting them to dollars, right?

Which taxes? VAT taxes?

Taxes that the US government imposes on US citizens and which they pay in US dollars. And the US dollar is the only legal tender in the USA as far as I know...

[deisik]

Really? Misusing the term?

I can understand how there might be other uses for the term, but Euros are clearly legal tender.

Euros are legal tender only in the territory of the European Union. It means that with euros you can pay only EU taxes (not US ones). In short, if a foreign currency were a legal tender, it would no longer be foreign...