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

[deisik]

If banks made loans and someone necessarily borrows then why are there $4 trillion sitting in bank reserves? Why is velocity at decade lows? It is simply not true that someone necessarily borrows. There is a limit to debt based systems and I can see the end is coming soon.

This is called liquidity trap, if I'm not mistaken. I think it is actually a consequence of the previous credit boom...

Also, that part somewhat contradicts this:

The fed reserve then helps the rich by printing money to suppress long term interest rates, which encourages yet more credit creation which devalues the dollar via asset price inflation. Meanwhile, workers are subjected to mild inflation whilst their wage growth is stagnant.

[Lloydie]

Governments and banks love loans. Other people not so much. Prior to the 80s loans were actually paid back with real savings. Minsky describes that the end phase of debt systems is towards disequilibrium because more debt is required just to pay off old debt and cover interest. Economists always forget Minsky.

I'm sure you are aware that the whole point of bitcoin is to replace centralised systems like banks. You can argue with this all you want but now there is real competition and choice.

Banks were not centralised initially, so centralization is not inherent to them. It means that they can coexist with bitcoin without a hitch...

Businesses love loans too. If banks make loans, someone necessarily borrows from them

Bitcoin the PROTOCOL obviates the need of a third party in any transaction. Therefore, *poof* bank no longer required.

I have written above the primary purpose that banks serve in the economy. Unless you can substitute this with something else without the help of banks (or somehow eliminate the need for money redistribution), banks will exist....

Yes. Amazing to me you still don't realise that bitcoin is a superior substitute for banks.

[deisik]

Bitcoin the PROTOCOL obviates the need of a third party in any transaction. Therefore, *poof* bank no longer required.

I have written above the primary purpose that banks serve in the economy. Unless you can substitute this with something else without the help of banks (or somehow eliminate the need for money redistribution), banks will exist....

Yes. Amazing to me you still don't realise that bitcoin is a superior substitute for banks.

What about going into detail?

[Lloydie]

If banks made loans and someone necessarily borrows then why are there $4 trillion sitting in bank reserves? Why is velocity at decade lows? It is simply not true that someone necessarily borrows. There is a limit to debt based systems and I can see the end is coming soon.

This is called liquidity trap, if I'm not mistaken. I think it is actually a consequence of the previous credit boom...

Also, that part somewhat contradicts this:

The fed reserve then helps the rich by printing money to suppress long term interest rates, which encourages yet more credit creation which devalues the dollar via asset price inflation. Meanwhile, workers are subjected to mild inflation whilst their wage growth is stagnant.

You are not in the "previous" credit boom. You are in the same credit boom but re inflated by Ben. We never had the correction we needed.

There is no contradiction. Ben was trying to escape the liquidity trap and he tried to do that by creating another asset bubble, exactly like his mentor Greenspan. So far the US has seen weak credit growth, which why there is a weak recovery if one can call it that.

You may not recall but everyone praised Greenspan when he retired but now he is known as the fed chair that created two asset bubbles. Has there been a more hated chairman? Now maybe yes. Bernanke is leaving a similar time bomb for yellen. When it blows, yellen will have no choice but to print, not realising that the USD might devalue significantly as she strives for "optimal" control. Then the fed will be cornered by rising inflation and GDP contraction. Say hello to stagflation.

[Lloydie]

Bitcoin the PROTOCOL obviates the need of a third party in any transaction. Therefore, *poof* bank no longer required.

I have written above the primary purpose that banks serve in the economy. Unless you can substitute this with something else without the help of banks (or somehow eliminate the need for money redistribution), banks will exist....

Yes. Amazing to me you still don't realise that bitcoin is a superior substitute for banks.

What about going into detail?

If you haven't got it yet, you probably never will. I don't know why that is the case but it is not my problem to rectify.

[Lloydie]

As for the existence of banks, there are two primary reasons for that. One is that banks do serve some useful purposes. Facilitating the fractional-reserve paper money scam isn't one of those purposes, but other bank services are. The second reason is that the government has repeatedly intervened to maintain the existence of banks and in particular the centralized fractional-reserve banking system. But each intervention has been bigger and bigger, and eventually the crisis is going to be too big, and the whole thing is going to collapse. And Bitcoin, should the government not succeed in killing it, likely will serve to make this day come sooner.

The primary purpose of banks is redistribution of money from those who don't need them right now to those who do (thus facilitating production, trade and what not)

Why do you think money multiplication (which is the correct term for what you wanted to say here) is a scam? Do you also hold the view that banks can "create money out of thin air"? Besides that, first banks were just financial institutions without any centralized banking system existing along...

Money multiplication is a scam because any idiot can borrow cheap money and speculate on property and shares, which pushes up asset prices. This devalues our currency in real terms.

The rich then withdraw equity or generate capital gains to fund their lifestyles. They never have to spend their real wealth which they keep invested in assets. This widens the wealth gap as ordinary workers' earnings are less than capital gains of the rich, generated simply by holding assets. This is the exact definition of the rentier class that Keynes himself detested.

What does it have to do with that as such? Should we prohibit lending money at all?

You can't prohibit anything whether in fiat or bitcoin. That is the same top down thinking that has pervaded society. With Bitcoin, we won't need lending to provide liquidity. People now have a choice.

[johnyj]

The primary purpose of banks is redistribution of money from those who don't need it right now to those who do (thus facilitating production, trade and so on)

Before, when there were lots of demand, bank could increase the utilization of money, and make the development faster, but once majority of demand is fulfilled, no need for banks to do this. And they start to gamble with other people's money

[Cryddit]

I think most economists at this point see the creation of money supply as the primary purpose of banks.  

The most meaningful definition of 'money supply' that I know of is the amount of 'actual' money (under the gold standard that meant unfakeable money such as gold or silver; now it's something more like the total of the printed paper notes in circulation) times the velocity of money, ie, the number of spendings of that money per time period.  

Banks under a 20% reserve requirement hold X 'actual' money, and loan out 5X that amount to people at interest.  This increases the velocity of money by five times, because now the money, as loans, is spent as often as five people can spend it rather than only as often as one person spends it.  There's still technically the same amount of 'actual' money, but the velocity of money hence the 'money supply' goes up.

So banks are very much in a percentages game.  Under a 20% reserve, they cannot continue if more than 20% of the debtors default or more than 20% of their lenders (ie, the account holders whose 'actual' money they are loaning out) withdraw their money.  In fact the only difference between these two classes as far as the banks are concerned is which one they have to pay interest to and which one has to pay interest to them.  In a crisis, there is also the factor of which they can prosecute and which can prosecute them, but that's really part of the same issue.

The problem is that these loans create an obligation on the part of the bank and, if more than 20% of their debtors defaults on their loans, or more than 20% of the lenders whose money they are lending out want it back, the bank cannot meet that obligation and as a result must demand more of their remaining debtors (for example by jacking up interest rates suddenly and often unilaterally) or be prosecuted by their remaining lenders.

Bitcoin does not change this equation any more than gold did.  A bank holding 3 tons of gold, under a 20% reserve requirement, was authorized to loan out 15 tons of gold (or issue 'money' theoretically redeemable for 15 tons of gold).  Bankers fully expect to do exactly the same thing with Bitcoin.  They will hold the keys to say a thousand Bitcoin, and issue obligations worth five thousand Bitcoin.  If more than 20% of those they're borrowing from want the keys to their coins, or more than 20% of those they're lending to cannot produce keys when the banks need them to pay those they're borrowing from, then the bank fails.

The difference is that there is no real reason (unless they pay interest) for anyone to loan banks Bitcoin.  

Bankers are able to 'sweeten the deal' for account holders by providing financial services - security, money transfers, etc - that Bitcoin holders are able to provide for themselves.  This is why people loan money to banks instead of directly to mortgage holders who will, at least in theory, pay a higher average rate of interest even including the defaults (or the banks wouldn't be profitable).

Bankers aren't able to 'sweeten the deal' for Bitcoin lenders, and as a result will have to justify their existence solely by paying interest.  As a result interest rates for lending Bitcoin to banks (ie, what they have to pay account holders) will approach the interest rates they can charge for lending it out (ie, what debtors have to pay them).  If liquidity and markets in Bitcoin become as efficient as the best that can be provided by banks, then interest rates will become equal and there will be no money to be made by banks loaning out Bitcoin.

[Lloydie]

An even more fundamental reason why Btc notes will not work over the next few years is due to the increased adoption rate. As the Bitcoin economy is expanding much faster than regular growth, Bitcoin deflation is running at greater than 15% per year, probably much more. No one will borrow in Bitcoin to start a fiat business.

When Bitcoin becomes pervasive and perhaps a currency of its own with a complete economic cycle, there will still be no incentive to borrow in Bitcoins for fiat. Why? Because bitcoins are limited to 21 million, lost coins, productivity growth in real economy, population growth and fiat inflation all adds up to a real deflation of Bitcoins exceeding 6% per year in fiat terms.

During the adoption phase of Bitcoin, I believe there will be more equity financing.  Basically, use Bitcoins to buy into alt coins, 2nd gen coins and various Bitcoin businesses. Hopefully, by the time Bitcoin hits some kind of terminal value (in terms of user growth, which will be many years down the track), we would've gotten comfortable with equity financing as the primary means of finance.

Why equity financing?  Because it is much more robust than debt financing and there is no possibility of a debt crisis with equity financing.  The financial sector will be a lot more stable. 

[deisik]

Bitcoin the PROTOCOL obviates the need of a third party in any transaction. Therefore, *poof* bank no longer required.

I have written above the primary purpose that banks serve in the economy. Unless you can substitute this with something else without the help of banks (or somehow eliminate the need for money redistribution), banks will exist....

Yes. Amazing to me you still don't realise that bitcoin is a superior substitute for banks.

What about going into detail?

If you haven't got it yet, you probably never will. I don't know why that is the case but it is not my problem to rectify.

I just have no other option left but to draw a conclusion that you can't address the primary issue why banks are needed in the economy and where bitcoin itself would fail (without the help of creating bitcoin banks). That's all

[deisik]

As for the existence of banks, there are two primary reasons for that. One is that banks do serve some useful purposes. Facilitating the fractional-reserve paper money scam isn't one of those purposes, but other bank services are. The second reason is that the government has repeatedly intervened to maintain the existence of banks and in particular the centralized fractional-reserve banking system. But each intervention has been bigger and bigger, and eventually the crisis is going to be too big, and the whole thing is going to collapse. And Bitcoin, should the government not succeed in killing it, likely will serve to make this day come sooner.

The primary purpose of banks is redistribution of money from those who don't need them right now to those who do (thus facilitating production, trade and what not)

Why do you think money multiplication (which is the correct term for what you wanted to say here) is a scam? Do you also hold the view that banks can "create money out of thin air"? Besides that, first banks were just financial institutions without any centralized banking system existing along...

Money multiplication is a scam because any idiot can borrow cheap money and speculate on property and shares, which pushes up asset prices. This devalues our currency in real terms.

The rich then withdraw equity or generate capital gains to fund their lifestyles. They never have to spend their real wealth which they keep invested in assets. This widens the wealth gap as ordinary workers' earnings are less than capital gains of the rich, generated simply by holding assets. This is the exact definition of the rentier class that Keynes himself detested.

What does it have to do with that as such? Should we prohibit lending money at all?

You can't prohibit anything whether in fiat or bitcoin. That is the same top down thinking that has pervaded society. With Bitcoin, we won't need lending to provide liquidity. People now have a choice.

To make banks irrelevant in the bitcoin economy you still have to address the primary issue, i.e. to take on the role banks serve in the economy by bitcoin alone (now without banks). Just saying that bitcoin is a superior substitute for banks won't do...

I think I made it clear for now

[deisik]

The primary purpose of banks is redistribution of money from those who don't need it right now to those who do (thus facilitating production, trade and so on)

Before, when there were lots of demand, bank could increase the utilization of money, and make the development faster, but once majority of demand is fulfilled, no need for banks to do this. And they start to gamble with other people's money

There is no before, it is always now whenever the economy is expanding, i.e. there is a need for new money at first to be accumulated somewhere and then lent to finance this new growth. The interest is paid back for banks service with part of this growth. How on earth is this going to happen in the bitcoin economy if we exclude banks out of the equation?

[deisik]

I have written above the primary purpose that banks serve in the economy. Unless you can substitute this with something else without the help of banks (or somehow eliminate the need for money redistribution), banks will exist....

By "bank" do you mean "financial institution"? Because not all lending institutions are banks.

No. To play their role in the economy and accumulate significant means banks have to attract money into term deposits, which no other financial institution is allowed to do. In any case, the possibility of accumulation of money is what important here (names don't matter)...

You only need banks if you want to play the fractional reserve game. (Is "game" sufficiently non-pejorative, or should I come up with something even more innocuous?)

I think I've already explained pretty clear why banks are needed in the economy. And this is obviously not "the fractional reserve game"...

[deisik]

Banks under a 20% reserve requirement hold X 'actual' money, and loan out 5X that amount to people at interest.  This increases the velocity of money by five times, because now the money, as loans, is spent as often as five people can spend it rather than only as often as one person spends it.  There's still technically the same amount of 'actual' money, but the velocity of money hence the 'money supply' goes up.

This is one the most prudent comments I've seen here recently that doesn't go along those stupid lines of "banks creating money out of thin air". My addition is that it is not banks that change the velocity of money, or rather a primary driver for that. Banks are just an instrument to make it possible whenever it is required, a sports car where economy is the driver...

What is going to take the place of this sports car in case there are no more banks?

[Xav]

Banks under a 20% reserve requirement hold X 'actual' money, and loan out 5X that amount to people at interest.  This increases the velocity of money by five times, because now the money, as loans, is spent as often as five people can spend it rather than only as often as one person spends it.  There's still technically the same amount of 'actual' money, but the velocity of money hence the 'money supply' goes up.

This is one the most prudent comments I've seen here recently that doesn't go along those stupid lines of "banks creating money out of thin air". My addition is that it is not banks that change the velocity of money, or rather a primary driver for that. Banks are just an instrument to make it possible whenever it is required, a sports car where economy is the driver...

What is going to take the place of this sports car in case there are no more banks?

I hope you (both of you) understand that this "velocity" pays a price. This price is that two more participants are in debts; the loaner and the bank itself. Besides this increasing number of debtors, the moral question pops up wether a bank is really allowed to lend money it does not have? Who owns the 4X ? Do they agree? Hmm, strange to call this "one of the most prudent comments".

[deisik]

Banks under a 20% reserve requirement hold X 'actual' money, and loan out 5X that amount to people at interest.  This increases the velocity of money by five times, because now the money, as loans, is spent as often as five people can spend it rather than only as often as one person spends it.  There's still technically the same amount of 'actual' money, but the velocity of money hence the 'money supply' goes up.

This is one the most prudent comments I've seen here recently that doesn't go along those stupid lines of "banks creating money out of thin air". My addition is that it is not banks that change the velocity of money, or rather a primary driver for that. Banks are just an instrument to make it possible whenever it is required, a sports car where economy is the driver...

What is going to take the place of this sports car in case there are no more banks?

I hope you (both of you) understand that this "velocity" pays a price. This price is that two more participants are in debts; the loaner and the bank itself. Besides this increasing number of debtors, the moral question pops up wether a bank is really allowed to lend money it does not have? Who owns the 4X ? Do they agree? Hmm, strange to call this "one of the most prudent comments".

You also seem not to properly understand how money multiplication works. Banks don't lend money they don't have (thus no "creating money out of thin air"). They can only lend money they have in deposits. Technically, they can in fact lend money they don't have, but they will have to close this imbalance as soon as possible...

To better understand what's going on here, think not in terms of money (since both loans and deposits are the same money which is confusing) but in terms of assets and liabilities

[Xav]

Banks under a 20% reserve requirement hold X 'actual' money, and loan out 5X that amount to people at interest.  This increases the velocity of money by five times, because now the money, as loans, is spent as often as five people can spend it rather than only as often as one person spends it.  There's still technically the same amount of 'actual' money, but the velocity of money hence the 'money supply' goes up.

This is one the most prudent comments I've seen here recently that doesn't go along those stupid lines of "banks creating money out of thin air". My addition is that it is not banks that change the velocity of money, or rather a primary driver for that. Banks are just an instrument to make it possible whenever it is required, a sports car where economy is the driver...

What is going to take the place of this sports car in case there are no more banks?

I hope you (both of you) understand that this "velocity" pays a price. This price is that two more participants are in debts; the loaner and the bank itself. Besides this increasing number of debtors, the moral question pops up wether a bank is really allowed to lend money it does not have? Who owns the 4X ? Do they agree? Hmm, strange to call this "one of the most prudent comments".

You also seem not to properly understand how money multiplication works. Banks don't lend money they don't have (thus no "creating money out of thin air"). They can only lend money they have in deposits. Technically, they can in fact lend money they don't have, but they will have to close this imbalance as soon as possible...

To better understand what's going on here, think not in terms of money (since both loans and deposits are the same money which is confusing) but in terms of assets and liabilities

Here is a nice animation about "the creation of money", which you euphemistically call "money multiplication". Sorry, it's in Dutch, but you will get the gist ... hopefully.
http://www.trosradar.nl/standalone-player/aflevering/16-12-2013/geldcreatie/#sites/radarextra/animaties

[deisik]

I hope you (both of you) understand that this "velocity" pays a price. This price is that two more participants are in debts; the loaner and the bank itself. Besides this increasing number of debtors, the moral question pops up wether a bank is really allowed to lend money it does not have? Who owns the 4X ? Do they agree? Hmm, strange to call this "one of the most prudent comments".

You also seem not to properly understand how money multiplication works. Banks don't lend money they don't have (thus no "creating money out of thin air"). They can only lend money they have in deposits. Technically, they can in fact lend money they don't have, but they will have to close this imbalance as soon as possible...

To better understand what's going on here, think not in terms of money (since both loans and deposits are the same money which is confusing) but in terms of assets and liabilities

Here is a nice animation about "the creation of money", which you euphemistically call "money multiplication". Sorry, it's in Dutch, but you will get the gist ... hopefully.
http://www.trosradar.nl/standalone-player/aflevering/16-12-2013/geldcreatie/#sites/radarextra/animaties

Sorry, I didn't understand it, could you please explain the scheme as you see it? I'm always curious what are people's own thoughts on the theme, lol. Also, the term "money multiplication" is an official one, so in any case it is not me who called the process so...

[Xav]

In one sentence, this animation illustrates your misconception about "They can only lend money they have in deposits. Technically, they can in fact lend money they don't have, but they will have to close this imbalance as soon as possible..."

First off, at the banker's counter you see two balancing rows of people; 1. adding money to a deposit and 2. borrowing money from the bank. All's well and sound. Yet, those were the old days and that situation complies to "our" common sense about a bank's process. Nowadays though, when a starter needs money, he goes to a bank where the banker gives him credits by filling in numbers in a computer. The bank's safe actually is (almost) empty (2% liquidity is no exception). So in fact the bank created money it did not possess merely by typing a number in a computer. This virtual number gets in the starter's briefcase and is spread into the market; invisible (non-existing) coins are everywhere and people treat them as if they are real. In times of crises however the whole imaginarium falls to pieces and the debt-relay ends at the tax-payers; those are your 4X.

[deisik]

In one sentence, this animation illustrates your misconception about "They can only lend money they have in deposits. Technically, they can in fact lend money they don't have, but they will have to close this imbalance as soon as possible..."

First off, at the banker's counter you see two balancing rows of people; 1. adding money to a deposit and 2. borrowing money from the bank. All's well and sound. Yet, those were the old days and that situation complies to "our" common sense about a bank's process. Nowadays though, when a starter needs money, he goes to a bank where the banker gives him credits by filling in numbers in a computer. The bank's safe actually is (almost) empty (2% liquidity is no exception). So in fact the bank created money it did not possess merely by typing a number in a computer. This virtual number gets in the starter's briefcase and is spread into the market; invisible (non-existing) coins are everywhere and people treat them as if they are real. In times of crises however the whole imaginarium falls to pieces and the debt-relay ends at the tax-payers; those are your 4X.

This is likely what most people think about banks "creating money out of the thin air". And this is obviously not what money multiplication is all about in reality. If the shown animation (or your description of it) had any semblance with reality, banks could create assets without balancing them with corresponding liabilities (this would make the whole idea of FRB null and void)...