If you have 100 bitcoins in your computer wallet and 100 in your MtGox account,

[Atheros]

I'm very glad we're making progress!

With Bitcoin, this is not possible, because the amount is limited by the reserves.

This doesn't make sense. What amount?

I think that unless you can inflate M1 over the amount of reserves, M1 = M2 = M3.

Use the word expanded rather than 'inflated'. The word inflated is already taken.
Why can M2 only be expanded if M1 can be expanded? There is no reason to think this.

While people might think that M2/M3 functions as a store of value, if it neither acts as a medium of exchange, nor, nor can it be converted into one in an amount exceeding the reserves, it should not have an effect on the supply.

Dollars in a savings account can't be converted into cash exceeding the reserves either, and they are still counted in the M2 money supply. Dollars in savings accounts don't act as a medium of exchange but are still counted in the M2 money supply. Both of your points are wrong.

And they should be counted. This is money that people think themselves to have. And they behave accordingly. When they need to buy something big, they do not need to work hard to acquire bitcoins/dollars; they simply can use their savings, which affects the value of all bitcoins/dollars.

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[johnyj]

From that wiki page's description of M0,M1, etc, I just see lot's of double accounting practice, M1 is just same money added multiple times, it's amazing this kind of calculation are used for government money supply control

For example:
-----------------------------------------------------------------------------------------------------
    * Laura takes the remaining nine bills and deposits them in her checking account (current account) at her bank. (MB = $900, M0 = 0, M1 = $900, M2 = $900)
    * The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra money. If the minimum reserve is 10%, this means $90 will remain in the bank's reserve. The remaining $810 can only be used by the bank as credit, by lending money, but until that happens it will be part of the banks excess reserves.
    * The M1 money supply increased by $810 when the loan is made. M1 money has been created. ( MB = $900 M0 = 0, M1 = $1710, M2 = $1710)
-----------------------------------------------------------------------------------------------------

M1 is just a number which added 90% of Laura's $900 to themselves (what is the use of this calculation???). Suppose this 900$ are all $1 coins, then the total coin supply is 900 coins, no matter what banks do, they will never get 1710 coins at any time.  (If they want to use M1 to calculate the money flow, then the time frame is very important, 1 month loan and 1 year loan will generate different amount of money flow, static money supply at any given time and dynamic money supply through en period are totally different concept)

Usually, banks can argue that those 900$ were just sit there and doing nothing, the lending will make use of it, but they forgot that 900 coins belongs to Laura, they do not have the ownership of coins, what Laura do with her money has nothing to do with banks (actually banks are borrowing from Laura, it is Laura who created money supply in the first place)

And based on my model, Laura's $900 must corresponding to either $900 worth of products, or other's $900 worth of debt (debt can be regarded as consumable products in the future), that products or debt is the real wealth in the society, what banks lend out is actually those products or debts, so they can not lend out more than these $900 worth of products anyway

In one word, commercial banks could not creat money supply, they just calculate the same money multiple times and add them together

[DeathAndTaxes]

In one word, commercial banks could not creat money supply, they just calculate the same money multiple times and add them together.

That is the money supply.  Commercial banks can't increase the monetary base.  They increase the money supply by increasing the availability of money. 

[johnyj]

In one word, commercial banks could not creat money supply, they just calculate the same money multiple times and add them together.

That is the money supply.  Commercial banks can't increase the monetary base.  They increase the money supply by increasing the availability of money. 

You can define the money supply to be the total amount of money that has been loaned out multiple times added together, then the most important factor is the loan frequency, which is seldom discussed in the money supply topic

If the bank loan out once per day, then the money supply in the first day increase $810, second day, increased $729, third day, increased $656, etc... then during one month it created about 8000$ money supply

If the bank loan out once per month, then the money supply will only increase $810 for one month, which is only 10% of the money supply in the previous case

And, if the bank loan out once per year, the money supply will decrease to about $67.5 for one month, which is another magnitude lower

[DeathAndTaxes]

In one word, commercial banks could not creat money supply, they just calculate the same money multiple times and add them together.

That is the money supply.  Commercial banks can't increase the monetary base.  They increase the money supply by increasing the availability of money. 

You can define the money supply to be the total amount of money that has been loaned out multiple times added together, then the most important factor is the loan frequency, which is seldom discussed in the money supply topic

If the bank loan out once per day, then the money supply in the first day increase $810, second day, increased $729, third day, increased $656, etc... then during one month it created about 8000$ money supply

If the bank loan out once per month, then the money supply will only increase $810 for one month, which is only 10% of the money supply in the previous case

And, if the bank loan out once per year, the money supply will decrease to about $67.5 for one month, which is another magnitude lower

Well no.  The constraint on the money supply is the multiplier.  Monetary Base * Multiplier = Money Supply. 

The multiplier depends on reserve requirements.  Either statutory reserve requirements (like laws in US requiring US banks to hold so much in reserve) or practical reserve requirements (in that lower reserve is riskier and thus makes attracting deposits harder).

http://upload.wikimedia.org/wikipedia/commons/0/01/Fractional-reserve_banking_with_varying_reserve_requirements.gif

For example the max multiplier w/ 10% reserve is 10x monetary base.  In reality the effective multiplier is much lower because not all money is put into fractional reserve accounts.

[johnyj]

In one word, commercial banks could not creat money supply, they just calculate the same money multiple times and add them together.

That is the money supply.  Commercial banks can't increase the monetary base.  They increase the money supply by increasing the availability of money. 

You can define the money supply to be the total amount of money that has been loaned out multiple times added together, then the most important factor is the loan frequency, which is seldom discussed in the money supply topic

If the bank loan out once per day, then the money supply in the first day increase $810, second day, increased $729, third day, increased $656, etc... then during one month it created about 8000$ money supply

If the bank loan out once per month, then the money supply will only increase $810 for one month, which is only 10% of the money supply in the previous case

And, if the bank loan out once per year, the money supply will decrease to about $67.5 for one month, which is another magnitude lower

Well no.  The constraint on the money supply is the multiplier.  Monetary Base * Multiplier = Money Supply. 

The multiplier depends on reserve requirements.  Either statutory reserve requirements (like laws in US requiring US banks to hold so much in reserve) or practical reserve requirements (in that lower reserve is riskier and thus makes attracting deposits harder).

http://upload.wikimedia.org/wikipedia/commons/0/01/Fractional-reserve_banking_with_varying_reserve_requirements.gif

For example the max multiplier w/ 10% reserve is 10x monetary base.  In reality the effective multiplier is much lower because not all money is put into fractional reserve accounts.

This picture is correct, it compared the effect of different multiplier (under the same loaning frequency), and the difference between the biggest and the lowest amount is about 5 times.

And if you consider the different loaning frequency in my example, the money supply can differ 100 times. Unless loaning frequency always stay the same, it will have much bigger impact on the final money supply

[DeathAndTaxes]

This picture is correct, it compared the effect of different multiplier (under the same loaning frequency), and the difference between the biggest and the lowest amount is about 5 times.

And if you consider the different loaning frequency in my example, the money supply can differ 100 times. Unless loaning frequency always stay the same, it will have much bigger impact on the final money supply.

I think by loan frequency you mean velocity of money.  No bank can exceed its reserve requirement thus the frequency of the banks loans is immaterial.  If a bank has $100 in deposits and a reserve requirement of 10% then it can only loan $90.  It can't then loan any more (no matter how fast it loaned the $90) until it gets more deposits.

Demand for money always exists.  If demand for money is well than what bank needs to achieve to loan out all of the no-reserve portion of its deposits the bank can simply lower interest rates.  If demand is too high it can raise interest rates.

If banks aren't loaning "fast enough" then in effect they have a higher defacto reserve requirement.  (i.e. bank with 10% reserve requirement but who can only find loans for 80% of deposits is no different than a bank with 20% reserve requirement).

[jtimon]

@lonelyminer and Atheros
So both of you agree that if debt is not denominated in a currency and is not generally circulated, the debt doesn't create price inflation for the currency?

I disagree. Let's modify a little bit my previous example:

-A wants to buy bread for 1 dollar.
-B offers an "IOU 11 pencils from B shop" ($1.1)
-C sells the loaf to B

In this case, C can only redeem the IOU at B's shop.
Isn't this trade pushing prices higher as the IOU is competing with regular money?
Note that the IOU cannot circulate generally like bank balances.

[BurtW]

But the "price" paid was 11 pencils, not 1.1 dollars.  Also, I assume that if there was another loaf of bread the shop keeper was still selling it for 1 dollar to the next customer.  He has not raised his price in general he just made a swap for 11 pencils instead of 1 dollar.  Are you saying that because of this one trade he will now start selling all future bread for 1.1 dollars?  That does not make any sense to me.

[lonelyminer (Peter Šurda)]

@lonelyminer and Atheros
So both of you agree that if debt is not denominated in a currency and is not generally circulated, the debt doesn't create price inflation for the currency?

Atheros does not agree, he thinks rather than this makes these instruments M2 rather than M1. I disagree with him, because the only point of M2 is that it can be converted into M1 (with some delay), which is not the case with Bitcoin-FRB, because M1 is in general only Bitcoin itself. The quotes I referenced confirm that M2 can be converted into M1. If you put non-circulating Bitcoin-FRB demand deposits into M2, they cannot be converted into M1. So putting them into M2 does not match the reasoning by the authors of the quotes.

In this case, C can only redeem the IOU at B's shop.
Isn't this trade pushing prices higher as the IOU is competing with regular money?
Note that the IOU cannot circulate generally like bank balances.

I already explained this, this IOU does not affect the money supply of the "dollar economy", rather it reduces its size. Inflation could follow if this change of size is not offset by a change in money velocity. There might be some mechanism that affects this which I'm not aware of so I'll rather say that we don't know whether this results in inflation or not.

[jtimon]

But the "price" paid was 11 pencils, not 1.1 dollars.  Also, I assume that if there was another loaf of bread the shop keeper was still selling it for 1 dollar to the next customer.  He has not raised his price in general he just made a swap for 11 pencils instead of 1 dollar.  Are you saying that because of this one trade he will now start selling all future bread for 1.1 dollars?  That does not make any sense to me.

No, I don't mean that. What I mean is that some of the trade would be conducted without money. So part of Q will have to be discounted (M * V = P * Q).
If there's the same money but half of the bread is bought with IOUs, there's more money to be used (to buy bread or another product) that can rise prices.

@lonelyminer and Atheros
So both of you agree that if debt is not denominated in a currency and is not generally circulated, the debt doesn't create price inflation for the currency?

Atheros does not agree, he thinks rather than this makes these instruments M2 rather than M1. I disagree with him, because the only point of M2 is that it can be converted into M1 (with some delay), which is not the case with Bitcoin-FRB, because M1 is in general only Bitcoin itself. The quotes I referenced confirm that M2 can be converted into M1. If you put non-circulating Bitcoin-FRB demand deposits into M2, they cannot be converted into M1. So putting them into M2 does not match the reasoning by the authors of the quotes.

Not sure I did understand you, but you disagree there.

In this case, C can only redeem the IOU at B's shop.
Isn't this trade pushing prices higher as the IOU is competing with regular money?
Note that the IOU cannot circulate generally like bank balances.

I already explained this, this IOU does not affect the money supply of the "dollar economy", rather it reduces its size. Inflation could follow if this change of size is not offset by a change in money velocity. There might be some mechanism that affects this which I'm not aware of so I'll rather say that we don't know whether this results in inflation or not.

Exactly. This (like barter) reduces the dollar economy that results affected.
I don't see why V should rise. So I think barter and transaction credit do compete with money and create price inflation.

[lonelyminer (Peter Šurda)]

Not sure I did understand you, but you disagree there.

Yes it looks like Atheros and me are still in some amount of disagreement.

Exactly. This (like barter) reduces the dollar economy that results affected.
I don't see why V should rise. So I think barter and transaction credit do compete with money and create price inflation.

In general, I agree, that under the stipulated conditions (people switching from money to barter/credit, and no change in velocity), this would cause price inflation in the reduced economy.

However, the shrinking of the economy through voluntary action must have some sort of trigger. Why would the seller prefer non-money to money, even though it is less liquid? This already indicates that there's something fishy going on. So I wouldn't simply make the assumption that V would also be the same. If you view this from a long term perspective, the situation described by you would only require consideration if the relative amount of situations involving non-money to the relative amount of situations involving money changed. Why would this happen? Why would people voluntarily restrict the scope of their markets? The only reasonable answer I can think of is if the monetary economy is collapsing anyway and people are looking for a better money.

[jtimon]

They could prefer the IOUs simply by charging more.
Or they could consider an IOU system, like Ripple or LETS, a convenient medium of exchange. So depending on your definition of money they could be looking for a "better money".
Mutual credit has some advantages over regular money. For example, most LETS comunities operate at zero interest and there's always enough liquidity to trade.
I said barter and credit transactions, but this should be also applicable to mutual credit systems and other complementary currencies.

But why do you expect the velocity of regular money to slow down in response to competition?

[lonelyminer (Peter Šurda)]

They could prefer the IOUs simply by charging more.
Or they could consider an IOU system, like Ripple or LETS, a convenient medium of exchange. So depending on your definition of money they could be looking for a "better money".
Mutual credit has some advantages over regular money. For example, most LETS comunities operate at zero interest and there's always enough liquidity to trade.
I said barter and credit transactions, but this should be also applicable to mutual credit systems and other complementary currencies.

I still think that the situations you describe indicate that there is something hampering free market. For example, banking regulations, minimum wage laws, hyperinflation, confusing tax system and so on.

Charging more? Neglects the risk/liquidity and indicates a problem with the loan market.
Local currencies? This means that people voluntarily restrict their ability to trade. It makes no sense, since it runs contrary to the alleged goal.
No interest? This eliminates the ability for intertemporal plan coordination.
Barter? Same as local currencies.

If the "official" economy is screwed up, I can imagine that a LETS system might be an improvement, because the proximity and familiarity of the participants allows for better assessments than by someone in Washington. It might also work for groups that are intentionally isolated, such as the Amish. But I'm skeptical about the widespread viability of such systems on a free market.

But why do you expect the velocity of regular money to slow down in response to competition?

I think that what you described is a symptom and has some deeper causes. So I think that we're not under a ceteris paribus assumption. Unless we understand the causes, we can't make the ceteris paribus assumption. That does not necessarily mean your conclusion is wrong, rather that there is step missing in the argument.

[Atheros]

@lonelyminer and Atheros
So both of you agree that if debt is not denominated in a currency and is not generally circulated, the debt doesn't create price inflation for the currency?

Atheros does not agree, ...

Indeed, if I just read that sentence, I think I disagree with the sentence. If people are circulating anything besides dollars, even if the instruments are denominated in dollars, then there is less demand for dollars at least for today...

Let's modify a little bit my previous example:

-A wants to buy bread for 1 dollar.
-B offers an "IOU 11 pencils from B shop" ($1.1)
-C sells the loaf to B

In this case, C can only redeem the IOU at B's shop.
Isn't this trade pushing prices higher as the IOU is competing with regular money?

...but when I read this example I'm just confused.  

lonelyminer, I don't believe that the contracts are in M1 or M2. I believe that they would (slightly) affect the value of dollars because they affect the demand for dollars, not the number of them in existence.

[niko]

Ok, So suppose MtGox lends out 10% of their Bitcoins. They have then increased the money supply, right? Assuming people agree, what do I do about someone who is editing the wiki and talking about 'substitutes' and other nonsense instead of leaving it the way it was?

 

Isn't this what types of money means? You are talking about MB, M1 or whatever, and they are including M2, M3, or whatever in their definition of the supply...

[jtimon]

@lonelyminer and Atheros
So both of you agree that if debt is not denominated in a currency and is not generally circulated, the debt doesn't create price inflation for the currency?

Atheros does not agree, ...

Indeed, if I just read that sentence, I think I disagree with the sentence. If people are circulating anything besides dollars, even if the instruments are denominated in dollars, then there is less demand for dollars at least for today...

That's exactly my point. The reduction in demand for dollars (I don't have any reason to believe that the offer must drop accordingly) is what would cause the price inflation.

[jtimon]

They could prefer the IOUs simply by charging more.
Or they could consider an IOU system, like Ripple or LETS, a convenient medium of exchange. So depending on your definition of money they could be looking for a "better money".
Mutual credit has some advantages over regular money. For example, most LETS comunities operate at zero interest and there's always enough liquidity to trade.
I said barter and credit transactions, but this should be also applicable to mutual credit systems and other complementary currencies.

I still think that the situations you describe indicate that there is something hampering free market. For example, banking regulations, minimum wage laws, hyperinflation, confusing tax system and so on.

I'm confused. Do you believe a free monetary market with different options can exist?
Do you think that nobody would be using bitcoin if there wasn't an economic crises or if we were under a global gold standard?
Do you think money is a natural monopoly?

Charging more? Neglects the risk/liquidity and indicates a problem with the loan market.

If I value more $20 than an IOU for $20. Isn't it logic that I demand, for example, an IOU for $21 instead?
If we set a deadline for the settlement of the debt, the difference is the interest. The IOU would work just like a bond.

Local currencies? This means that people voluntarily restrict their ability to trade. It makes no sense, since it runs contrary to the alleged goal.

They also restrict where the value can go. This way they know the value will stay within the community and also this makes the community less dependent on transport and oil, thus more sustainable.
Anyway, it seems that you're assuming they will only accept the local currencies, but that's just not the case, they circulate in parallel.
Thanks to the local currencies they actually perform MORE trade than only with the national currency, because there's no absolute limitation on liquidity.
When we use bitcoins or when people use gold dinars instead of rupiahs in indonesia they're also restricting the people who will accept the money.
Are we (and them) acting irrationally?

No interest? This eliminates the ability for intertemporal plan coordination.

This is usual in LETS systems, but it's not mandatory. Ripple allows you to set the interest rate in each credit connection, but I believe the market forces would make it drop close to zero.

Barter? Same as local currencies.

You're not going to be using barter in most cases, but if you're lucky enough to find someone who wants something from you and can give you something you want, What's the drawback?

If the "official" economy is screwed up, I can imagine that a LETS system might be an improvement, because the proximity and familiarity of the participants allows for better assessments than by someone in Washington. It might also work for groups that are intentionally isolated, such as the Amish. But I'm skeptical about the widespread viability of such systems on a free market.

This again leads me to think that you believe money is a natural monopoly. Or all the currencies in a free market must target global usage to succeed?
I think that, for example, bitcoin and ripple have advantages over state fiats even if there's no crises or hyperinflation.

But why do you expect the velocity of regular money to slow down in response to competition?

I think that what you described is a symptom and has some deeper causes. So I think that we're not under a ceteris paribus assumption. Unless we understand the causes, we can't make the ceteris paribus assumption. That does not necessarily mean your conclusion is wrong, rather that there is step missing in the argument.

I get your point. You assume that if alternative currencies are being used, is only because the main monetary system is having problems. And I'm not explaining what the problem is.
But I don't think problems are needed, at least not the ones that you describe. Like Gesell, I think gold-money is flawed and also leads to economic cycles (although doesn't postpone and make worse the liquidation phase through printing, like state fiats do).

[johnyj]

I think by loan frequency you mean velocity of money.  No bank can exceed its reserve requirement thus the frequency of the banks loans is immaterial.  If a bank has $100 in deposits and a reserve requirement of 10% then it can only loan $90.  It can't then loan any more (no matter how fast it loaned the $90) until it gets more deposits.

By loan frequency, I mean the mature period of a loan: If a $810 loan gets paid back after one month, then the bank will regain the ability to loan out that money next month. If the pay back time is 10 year, then in 10 years banks will not be able to loan out that $810 again.

But I just noticed a strange but interesting thing: As soon as the borrower get the loan, the loan will be deposited into his bank account or someone else's bank account (if he purchased something right away). That means the bank system at a whole will immediately get back the loaned out money, thus can loan out again.

In such case, I can imagine that if the society as a whole is willing to take loan, then in a very short time the same money will be loaned out multiple times, thus quickly reach the theoretical limit of the money supply.

But then there comes another limitation, e.g. how many people are willing and be able to take new loan after they have made a 30 years mortgage?

Seems still like a Ponzi scheme: After majority of the people have taken their loan, the bank will not be able to further increase money supply