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

[anth0ny]

Because you intentionally (as I see now) tried to create a false impression that there was universal misunderstanding...

Universal misunderstanding? I never claimed it was universal. In fact, I suggested that maybe you had learned things differently than I had.

Had it been the case, you would obviously have asked "explain this to me". And I didn't say you claimed, I said that you tried to create such an impression...

But as I said, I didn't want you to explain it to me privately. I wanted you to explain it to us publicly.

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[Timetwister]

But if you borrow BTC from a bank to make a purchase, the seller will expect to receive the actual BTC, not a BTC bank credit. So the scope for FRB is far more limited.

You won't borrow BTC from a bank, the bank will issue a credit card with which you will pay for your purchases. Whether this bank (or any other bank for that matter) actually has all the BTCs it has credited you with is another question... So, unless there is a Central Bank which has set the economy on a Bitcoin standard (with all ensuing dramatic consequences), banks will still be able to create more money (virtual BTCs) than there are bitcoins out there...

If you agree with this, then the fixed supply nature of Bitcoin becomes unnecessary and detrimental here

But when a bank becomes insolvent, the extra money created from thin air just disappears. The monetary expansion is just temporal.

Under the current system, a central bank can just print that extra fiat money to save the bank, increasing the money supply and reducing the purchasing power of the previous supply. That's not possible with Bitcoin, as they can't be created by central banks. We can't forbid banks from lending more than they don't have, unless the government forbids them to do so. But I wouldn't expect that from governments, as they have historically encouraged banks to increase the money supply, to create temporary prosperity (which increases tax revenue) and lend money to the same government.

[deisik]

But if you borrow BTC from a bank to make a purchase, the seller will expect to receive the actual BTC, not a BTC bank credit. So the scope for FRB is far more limited.

You won't borrow BTC from a bank, the bank will issue a credit card with which you will pay for your purchases. Whether this bank (or any other bank for that matter) actually has all the BTCs it has credited you with is another question... So, unless there is a Central Bank which has set the economy on a Bitcoin standard (with all ensuing dramatic consequences), banks will still be able to create more money (virtual BTCs) than there are bitcoins out there...

If you agree with this, then the fixed supply nature of Bitcoin becomes unnecessary and detrimental here

But when a bank becomes insolvent, the extra money created from thin air just disappears. The monetary expansion is just temporal.

Under the current system, a central bank can just print that extra fiat money to save the bank, increasing the money supply and reducing the purchasing power of the previous supply. That's not possible with Bitcoin, as they can't be created by central banks. We can't forbid banks from lending more than they don't have, unless the government forbids them to do so. But I wouldn't expect that from governments, as they have historically encouraged banks to increase the money supply, to create temporary prosperity (which increases tax revenue) and lend money to the same government.

A central bank is not incidentally called a lender of last resort. I intentionally stressed 'last' here which means there are other lenders that a bank can appeal for help to. In case there is a bank-run, the bank can either directly borrow insufficient funds from other banks through interbank market or sell its loans (probably with discount) to anyone willing to buy them (usually other banks or the government) to fill a cash gap (cash deficiency). In either case, there is no money printing...

Also, we can't forbid banks from lending more than they have since they just can't lend more than they actually have. If you think otherwise, I'm all ears!

[Timetwister]

A central bank is not incidentally called a lender of last resort. I intentionally stressed 'last' here which means there other lenders that a bank can appeal for help to. In case there is a bank-run, the bank can either directly borrow insufficient funds from other banks through interbank market or sell its loans (probably with discount) to anyone willing to buy them (usually other banks or the government) to fill a cash gap (cash deficiency). In either case, there is no money printing...

Also, we can't forbid banks from lending more than they have since they just can't lend more than they actually have. If you think otherwise, I'm all ears!

If there's no money printing, then what's the problem with Bitcoin?

They do lend more than they have, under the fractional reserve system, which could be done also using Bitcoin. They just print bank notes or add the new money to accounts.

[anth0ny]

A central bank is not incidentally called a lender of last resort. I intentionally stressed 'last' here which means there are other lenders that a bank can appeal for help to. In case there is a bank-run, the bank can either directly borrow insufficient funds from other banks through interbank market or sell its loans (probably with discount) to anyone willing to buy them (usually other banks or the government) to fill a cash gap (cash deficiency). In either case, there is no money printing...

They can't borrow from other banks if the other banks are all experiencing bank runs too.

As far as selling its loans at a discount, you seem to be contemplating bankruptcy. Yes, when pretty much everyone goes bankrupt that would solve the problem.

Also, we can't forbid banks from lending more than they have since they just can't lend more than they actually have. If you think otherwise, I'm all ears!

A bank is able to loan money into your checking account even though they don't actually have any physical dollars to back it up. They're forbidden from doing so, so they have to take the roundabout route described by myself and Wikipedia and that video I linked to, but it's possible for them to just directly credit people's accounts with money that doesn't exist physically.

Were you able to watch the video I linked to?

[deisik]

A central bank is not incidentally called a lender of last resort. I intentionally stressed 'last' here which means there other lenders that a bank can appeal for help to. In case there is a bank-run, the bank can either directly borrow insufficient funds from other banks through interbank market or sell its loans (probably with discount) to anyone willing to buy them (usually other banks or the government) to fill a cash gap (cash deficiency). In either case, there is no money printing...

Also, we can't forbid banks from lending more than they have since they just can't lend more than they actually have. If you think otherwise, I'm all ears!

If there's no money printing, then what's the problem with Bitcoin?

They do lend more than they have, under the fractional reserve system, which could be done also using Bitcoin. They just print bank notes or add the new money to accounts.

I don't quite understand what problem you are referring to (with Bitcoin)

No, this was possible to do in the 19th century when they (banks) did actually issue more bank notes than they had gold as reserve. Today, you can't create assets ("just print bank notes or add the new money to accounts") without first balancing them with corresponding liabilities (claims, i.e. money lent to a bank). If you still think otherwise, please tell precisely how new money is added to an account and what happens to the balance

It seems that we are going for the second round with what was explained previously in much detail here

[deisik]

A central bank is not incidentally called a lender of last resort. I intentionally stressed 'last' here which means there are other lenders that a bank can appeal for help to. In case there is a bank-run, the bank can either directly borrow insufficient funds from other banks through interbank market or sell its loans (probably with discount) to anyone willing to buy them (usually other banks or the government) to fill a cash gap (cash deficiency). In either case, there is no money printing...

They can't borrow from other banks if the other banks are all experiencing bank runs too.

As far as selling its loans at a discount, you seem to be contemplating bankruptcy. Yes, when pretty much everyone goes bankrupt that would solve the problem.

Also, we can't forbid banks from lending more than they have since they just can't lend more than they actually have. If you think otherwise, I'm all ears!

A bank is able to loan money into your checking account even though they don't actually have any physical dollars to back it up. They're forbidden from doing so, so they have to take the roundabout route described by myself and Wikipedia and that video I linked to, but it's possible for them to just directly credit people's accounts with money that doesn't exist physically.

They still have to balance this money within a short period of time (within a working day, if I'm not mistaken) with corresponding liability (claim). And this has nothing to do with FRB...

[anth0ny]

A central bank is not incidentally called a lender of last resort. I intentionally stressed 'last' here which means there are other lenders that a bank can appeal for help to. In case there is a bank-run, the bank can either directly borrow insufficient funds from other banks through interbank market or sell its loans (probably with discount) to anyone willing to buy them (usually other banks or the government) to fill a cash gap (cash deficiency). In either case, there is no money printing...

They can't borrow from other banks if the other banks are all experiencing bank runs too.

As far as selling its loans at a discount, you seem to be contemplating bankruptcy. Yes, when pretty much everyone goes bankrupt that would solve the problem.

Also, we can't forbid banks from lending more than they have since they just can't lend more than they actually have. If you think otherwise, I'm all ears!

A bank is able to loan money into your checking account even though they don't actually have any physical dollars to back it up. They're forbidden from doing so, so they have to take the roundabout route described by myself and Wikipedia and that video I linked to, but it's possible for them to just directly credit people's accounts with money that doesn't exist physically.

They still have to balance this money within a short period of time (within a working day, if I'm not mistaken) with corresponding liability (claim)...

My whole point is that it's possible. Forbidden, but possible.

I thought you were suggesting that it can't be forbidden, because it's impossible ("we can't forbid banks from lending more than they have since they just can't lend more than they actually have").

[deisik]

A central bank is not incidentally called a lender of last resort. I intentionally stressed 'last' here which means there are other lenders that a bank can appeal for help to. In case there is a bank-run, the bank can either directly borrow insufficient funds from other banks through interbank market or sell its loans (probably with discount) to anyone willing to buy them (usually other banks or the government) to fill a cash gap (cash deficiency). In either case, there is no money printing...

They can't borrow from other banks if the other banks are all experiencing bank runs too.

As far as selling its loans at a discount, you seem to be contemplating bankruptcy. Yes, when pretty much everyone goes bankrupt that would solve the problem.

Also, we can't forbid banks from lending more than they have since they just can't lend more than they actually have. If you think otherwise, I'm all ears!

A bank is able to loan money into your checking account even though they don't actually have any physical dollars to back it up. They're forbidden from doing so, so they have to take the roundabout route described by myself and Wikipedia and that video I linked to, but it's possible for them to just directly credit people's accounts with money that doesn't exist physically.

They still have to balance this money within a short period of time (within a working day, if I'm not mistaken) with corresponding liability (claim)...

My whole point is that it's possible. Forbidden, but possible.

I thought you were suggesting that it can't be forbidden, because it's impossible ("we can't forbid banks from lending more than they have since they just can't lend more than they actually have").

I wrote several times about this possibility in this thread. These are very intricate and technical details of actual banking (and accounting) which are irrelevant to how FRB works or what people mean by "creating money out of thin air"...

[anth0ny]

No, this was possible to do in the 19th century when they (banks) did actually issue more bank notes than they had gold as reserve. Today, you can't create assets ("just print bank notes or add the new money to accounts") without first balancing them with corresponding liabilities (claims, i.e. money lent to a bank). If you still think otherwise, please tell precisely how new money is added to an account and what happens to the balance

In a situation where there's not enough liquidity for the banks to handle the demand through interbank lending, the bank borrows money from the Federal Reserve, through the discount window. There's no physical money which is transferred in that case, at least not immediately. Usually the need is temporary and the physical cash never needs to be even printed, let alone shipped to the bank. The promise that the Fed will have physical cash printed if necessary is usually enough to keep most people from demanding physical money.

But with Bitcoin, that promise couldn't be made, or at least it wouldn't be credible if it were made.

[anth0ny]

My whole point is that it's possible. Forbidden, but possible.

I thought you were suggesting that it can't be forbidden, because it's impossible ("we can't forbid banks from lending more than they have since they just can't lend more than they actually have").

I wrote several times about this possibility in this thread. These are very intricate and technical details of actual banking (and accounting) which are irrelevant to how FRB works or what people mean by "creating money out of thin air"...

I must have misunderstood you. Thanks for the clarification.

[deisik]

No, this was possible to do in the 19th century when they (banks) did actually issue more bank notes than they had gold as reserve. Today, you can't create assets ("just print bank notes or add the new money to accounts") without first balancing them with corresponding liabilities (claims, i.e. money lent to a bank). If you still think otherwise, please tell precisely how new money is added to an account and what happens to the balance

In a situation where there's not enough liquidity for the banks to handle the demand through interbank lending, the bank borrows money from the Federal Reserve, through the discount window. There's no physical money which is transferred in that case, at least not immediately. Usually the need is temporary and the physical cash never needs to be even printed, let alone shipped to the bank.

Yes, so a newly created bank asset (claim on money lent, i.e. "printed out of thin air") is balanced by the bank's liability before the Federal Reserve, or an old liability (before a depositor) is replaced with the new one (before the Federal Reserve). Still, there is no asset without a balancing it liability (though the balance itself either increases giving an illusion of creating money out of nothing or decreases giving an illusion of money disappearing into nothing)...

[anth0ny]

No, this was possible to do in the 19th century when they (banks) did actually issue more bank notes than they had gold as reserve. Today, you can't create assets ("just print bank notes or add the new money to accounts") without first balancing them with corresponding liabilities (claims, i.e. money lent to a bank). If you still think otherwise, please tell precisely how new money is added to an account and what happens to the balance

In a situation where there's not enough liquidity for the banks to handle the demand through interbank lending, the bank borrows money from the Federal Reserve, through the discount window. There's no physical money which is transferred in that case, at least not immediately. Usually the need is temporary and the physical cash never needs to be even printed, let alone shipped to the bank.

Yes, so a newly created bank asset (claim on money lent, i.e. "printed out of thin air") is balanced by the bank's liability before the Federal Reserve. Still, there is no asset without a balancing it liability (though the balance itself increases giving an illusion of creating money out of nothing)...

I'm not sure what you're getting at. Dollar bills themselves are a liability. A liability of the federal reserve.

I don't think anyone is under the impression that money is literally created out of nothing. It's a metaphor, not an illusion. Literally, money is created out of a balance sheet entry. Literally, dollar bills are created out of ink and paper.

[deisik]

No, this was possible to do in the 19th century when they (banks) did actually issue more bank notes than they had gold as reserve. Today, you can't create assets ("just print bank notes or add the new money to accounts") without first balancing them with corresponding liabilities (claims, i.e. money lent to a bank). If you still think otherwise, please tell precisely how new money is added to an account and what happens to the balance

In a situation where there's not enough liquidity for the banks to handle the demand through interbank lending, the bank borrows money from the Federal Reserve, through the discount window. There's no physical money which is transferred in that case, at least not immediately. Usually the need is temporary and the physical cash never needs to be even printed, let alone shipped to the bank.

Yes, so a newly created bank asset (claim on money lent, i.e. "printed out of thin air") is balanced by the bank's liability before the Federal Reserve. Still, there is no asset without a balancing it liability (though the balance itself increases giving an illusion of creating money out of nothing)...

I'm not sure what you're getting at. Dollar bills themselves are a liability. A liability of the federal reserve.

I don't think anyone is under the impression that money is literally created out of nothing. It's a metaphor, not an illusion. Literally, money is created out of a balance sheet entry. Literally, dollar bills are created out of ink and paper.

It is not money that is being created through FRB or MM. It is money derivatives that are actually created and redeemed. And yes, many are under the impression that money is literally created out of nothing (there was an animation presented earlier here that shows just that)...

Surely, I wouldn't call a metaphor an actual increase in money terms on the balance sheet. As to me, illusion of creating money out of thin air is the right word

[anth0ny]

It is not money that is being created through FRB or MM. It is money derivatives that are actually created and redeemed.

That's your terminology. As I understand it, most of the rest of the world calls checking account balances money.

If FRB creates money derivatives, and not money, then how is the money created? For that matter, what do you mean by "money"? If you're talking about the printed pieces of paper, I think pretty much everyone knows they're literally created out of paper and ink, not out of air subject to a low amount of pressurization.

And yes, many are under the impression that money is literally created out of nothing (there was an animation presented earlier here that shows just that)...

Really? It showed money being literally created out of nothing?

Was it created out of nothing, or was it created out of thin air? If we're going to be literal, there's quite a big difference. Thin air is, after all, something.

Was there some magician who pulled dollar bills out of his hat?

[deisik]

It is not money that is being created through FRB or MM. It is money derivatives that are actually created and redeemed.

That's your terminology. As I understand it, most of the rest of the world calls checking account balances money.

If FRB creates money derivatives, and not money, then how is the money created? For that matter, what do you mean by "money"?

Yes, I intentionally used such terminology to show the difference between a central bank created money and an ordinary bank created money. Though I agree that we can call checking account balances money since they function as money (and this is the reason they are counted as money)

Central bank emitted money can be considered in this context as base money (as it is)...

[deisik]

And yes, many are under the impression that money is literally created out of nothing (there was an animation presented earlier here that shows just that)...

Really? It showed money being literally created out of nothing?

Was it created out of nothing, or was it created out of thin air? If we're going to be literal, there's quite a big difference. Thin air is, after all, something.

Was there some magician who pulled dollar bills out of his hat?

I don't quite remember the details of the animation but it showed that banks could unconditionally increase their assets by just writing numbers, when the assets are actually created out of liabilities (accounting identity)...

[anth0ny]

And yes, many are under the impression that money is literally created out of nothing (there was an animation presented earlier here that shows just that)...

Really? It showed money being literally created out of nothing?

Was it created out of nothing, or was it created out of thin air? If we're going to be literal, there's quite a big difference. Thin air is, after all, something.

Was there some magician who pulled dollar bills out of his hat?

I don't quite remember the details of the animation but it showed that banks could unconditionally increase their assets by just writing numbers...

So literally, money was created out of a balance sheet entry. That's how it works. But it's only legal if you do it with the permission of the Federal Reserve.

[anth0ny]

Central bank emitted money can be considered in this context as base money (as it is)...

So then it is money that is created through fractional reserve banking. Central bank emitted money is created when the Federal Reserve lends through the discount window, right?

[deisik]

And yes, many are under the impression that money is literally created out of nothing (there was an animation presented earlier here that shows just that)...

Really? It showed money being literally created out of nothing?

Was it created out of nothing, or was it created out of thin air? If we're going to be literal, there's quite a big difference. Thin air is, after all, something.

Was there some magician who pulled dollar bills out of his hat?

I don't quite remember the details of the animation but it showed that banks could unconditionally increase their assets by just writing numbers...

So literally, money was created out of a balance sheet entry. That's how it works. But it's only legal if you do it with the permission of the Federal Reserve.

Bank takes money from a depositor, and now it has a liability (depositor's claim) and an asset (his money)...