ejhuff
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January 31, 2014, 07:59:37 AM |
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I agree, bitcoin is a commodity. People do not generally write contracts payable in bitcoin, because the price of bitcoin is too volatile. Also, they are not enforceable when there is a legal tender law, except as commodity contracts where the bitcoin is being delivered, not paid.
However, there is one thing which cannot be bought except with bitcoin: the right to record something in the blockchain. There are many uses for this aside from recording bitcoin transactions, and so long at the blockchain is being maintained, the transaction fee required to make an entry sets the value of that fee no less than the value of the entry. So bitcoin is a currency when it comes to buying certain goods and services which exist on or as part of the internet, such as blockchain entries, server hosting, VPN services, etc. It would also be serve nicely to pay peer-to-peer distributed storage nodes for storage services. And in cases where the seller cannot afford to do business if he must take chargeback risk.
One thing which bitcoin lacks is fractional reserve banking. This is another argument that bitcoin is not a currency. But as a commodity, it could in theory serve to back a currency, so that bitcoin would be the thing (like gold coins) the bank coughs up from its reserves when you withdraw funds from your account. If you like gold-backed currency, you should like bitcoin-backed currency.
A tiny fraction of all USD exist as paper currency.
A large fraction of all USD are created by commercial banks when they lend money they don't have, debiting the loan to their "assets", crediting the new cash to the borrower's checking account in the same bank (so the ledger balances), and then counting it as money they "have," and calling the borrower a "depositor." In exchange for the right to create money, banks must ensure that their loans are repaid (which destroys the money).
If the borrower then writes checks or withdraws cash, he is acting as a depositor claiming his deposits, and the bank pays the amount from its reserves.
Once each day, the banks determine how much reserve cash they need, some fraction of their total obligations (deposits and borrowing from other banks or the Fed). If they have too much reserves, they offer it to other banks at the interbank rate. If they have too little, they borrow from other banks, or if that fails, they borrow at the Fed discount window. (The Fed is the "lender of last resort," always ready to prevent bank runs).
The Fed debits the bank's promise to pay to "assets", and credits the cash created and paid to the bank to "liabilities," and the Fed's ledger balances. That also creates some money, but only the part the bank isn't allowed to create by itself. (The bank creates say 90% of the loan, and if no other banks have funds to lend, borrows 10% from the Fed, which the Fed creates. Funds repaid to the Fed are destroyed, by crediting the redeemed promise to pay to assets, and debiting the cash destroyed to liabilities).
In order to make the best profit, if they can get deposits for a lower price than the interbank rate (including interest and expenses), they advertise for depositors. But they don't actually need depositors bringing existing USD into the bank, unless the discount/interbank rate rises too high.
Presently (since 2008), the discount/interbank rates are essentially zero. The money supply has gone through the roof. It all stays in the banks, since businesses cannot exhibit a way to make money on borrowed funds, because they have no customers, because the customers have no money to buy things with. So the banks do not approve loans. Also the banks have no need to lend the funds because they are essentially free.
Therefore, in order to ensure that Treasury bondholders can get their own cash out by selling the bonds at the price they expected when they bought the bonds, the Fed has been buying Treasury bonds on the open market, debiting the bonds to their "assets" and creating money by crediting the created money to their "liabilities," so the ledger balances.
But there is no price inflation to speak of (i.e., less than 3%), except in cases where the value of the thing being purchased has increased due to external factors.
One early reason (i.e., in 2008) people didn't have money to spend (before they became unemployed because their employers couldn't sell goods to people with no money) is that they had and still have large debts to pay off.
But should this abnormal state of high unemployment and low consumer spending end, and the banks start lending, the Fed will raise the discount rate, and banks will have to charge more interest in order to pay for the funds they borrow to meet their reserve requirements, so as old loans get repaid (which destroys money, reducing the supply), the banks will only offer new loans (create new money) to businesses that can afford the higher rates, so the money supply and price inflation will remain under control.
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