Network-wide self-corecting mechanisms

[bytemaster]

U r right. To justify lending then they would want a positive interest rate.   This means that no one could borrow for less than the average productivity of society.  This makes perfect sence because any activity that isn't at least that productive is not worth the risk. With inflation or price stability people are forced to take unnesisary risks just to avoid losing money.   

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[HZPyR8eVk]

f there is deflation and people start hoarding money thinking that their money will value more later (so they have an incentive to start spending their money later - half the money for milk), credit creationists would intervene on this opportunity.

This logic is mathematically flawed. People don't realize it because they have never seen it.

In this situation your argument says that people would start lending their excess bitcoins (at interest I'm presuming). So what would the interest rate be in this situation?

Ah, I understand now. I've seen that some people here believe that there can be no fractional reserve banking in the BitCoin market (because there is no central bank). I believe there can be something that works like fractional reserve banking. So, I am not saying that people would start lending their excess BitCoin, but that some highly skilled, highly determined individuals would create credit BitCoin out of thin air, just like in the fractional reserve banking system.

Basically, while the math you gave is flawless, I am talking about human behavior. Math says that people can not have the same wealth unless they all produce the same, but human behavior says that one can rob (/ trick into relinquishing) another of wealth.

[em3rgentOrdr]

Ah, I understand now. I've seen that some people here believe that there can be no fractional reserve banking in the BitCoin market (because there is no central bank). I believe there can be something that works like fractional reserve banking. So, I am not saying that people would start lending their excess BitCoin, but that some highly skilled, highly determined individuals would create credit BitCoin out of thin air, just like in the fractional reserve banking system.

Basically, while the math you gave is flawless, I am talking about human behavior. Math says that people can not have the same wealth unless they all produce the same, but human behavior says that one can rob (/ trick into relinquishing) another of wealth.

umm...it's not possible to "create credit BitCoin out of thin air".  One must consume significant processing power to find a (previously undiscovered) large number whose SHA-256 hash is below the current target.

Now of course private individuals are free to set up their own private fractional reserve bitcoin banks, which could offer on-demand deposits holding people's bitcoins with a certain interest rate and give out loans at another interest rate (and keep the difference as profit), while only holding a certain percentage of total assets.  But then that bank would be at risk of default if all of its creditors simultaneously requested their on-demand deposits.  Even the thought of default in people's mind is a self-fulfilling prophecy, since it would cause a chain reaction of other depositors worrying about the security of their deposits, and likewise would request to withdraw their deposits from a potentially untrustworthy bank.  Murray Rothbard does a great job explaining this mechanism in Chapter VIII "Free Banking and the Limits on Bank Credit Inflation" of his book The Mystery of Banking (you can read the entire book for free).  Basically, he argues that the threat of bank runs are a good thing, since they will keep the banks honest (by engaging in 100% reserve holdings).  Here are the relevant paragraphs:


    "The bank run is a marvelously effective weapon because (a) it
is irresistible, since once it gets going it cannot be stopped, and (b)
it serves as a dramatic device for calling everyone’s attention to
the inherent unsoundness and insolvency of fractional reserve
banking. Hence, bank runs feed on one another, and can induce
other bank runs to follow. Bank runs instruct the public in the
essential fraudulence of fractional reserve banking, in its essence
as a giant Ponzi scheme in which a few people can redeem their
deposits only because most depositors do not follow suit."
...
    "Fortunately, the market does provide a superb, day-to-day
grinding type of severe restraint on credit expansion under free
banking. It operates even while confidence in banks by their cus-
tomers is as buoyant as ever. It does not depend, therefore, on a
psychological loss of faith in the banks. This vital restraint is sim-
ply the limited clientele of each bank. In short, the Rothbard Bank
(or the Jones Bank) is constrained, first, by the fear of a bank run
(loss of confidence in the bank by its own customers); but it is
also, and even more effectively, constrained by the very fact that,
in the free market, the clientele of the Rothbard Bank is extremely
limited. The day-to-day constraint on banks under free banking is
the fact that nonclients will, by definition, call upon the bank for
redemption."
...
    "The beauty and power of this restraint on the banks is that it
does not depend on loss of confidence in the banks. Smith, Jones,
and everyone else can go on being blithely ignorant and trusting
of the fractional reserve banking system. And yet the redemption
weapon does its important work. For Jones calls on the Rothbard
Bank for redemption, not because he doesn’t trust the bank or
thinks it is going to fail, but simply because he patronizes another
bank and wants to shift his account to his preferred bank. The
mere existence of bank competition will provide a powerful, con-
tinuing, day-to-day constraint on fractional reserve credit expan-
sion. Free banking, even where fractional reserve banking is legal
and not punished as fraud, will scarcely permit fractional reserve
inflation to exist, much less to flourish and proliferate. Free bank-
ing, far from leading to inflationary chaos, will insure almost as
hard and noninflationary a money as 100 percent reserve banking
itself."


So there you have it.  In a free banking system (which bitcoin is, since there is no central authority), competition amongst bitcoin banks will lend itself towards 100 percent reserve banking.  BitCoin users could conceivably come up with a similar strategy to maintain bank honesty, whereby depositors to a certain bank will deliberately and simultaneously request to withdraw their assets from a particular bank at a randomly chosen (but mutually-agreed) time.  If the bank is honest, it will pass this test.  If it is not honest (i.e. it engaged in fractional reserve banking), it will fail this test.  Or alternatively, a bank could instead not even offer on-demand withdraws, whereby it would maintain a strict policy by having the schedule of payments for loans it lent out to borrowers match the schedule of interest payments to its depositors.

But with bitcoin, unless you wanted to gain interest at real risk of loosing your deposit, there is no need to store your bitcoins at someone else's bank, since your wallet is your own bank:).  Unlike with real species or physically holding fiat currency notes, your bitcoin wallet is not at risk of being stolen by common criminals if you keep it encrypted and backed-up in multiple places online.  All you will have to know is your password, which you can memorize.  But of course you would need a password or pin when accessing a regular bank anyways, so memorizing a password is not an extra burden on you.  So there is no serious need to deposit your money at some bank, if all you desire is to hold your money (without gaining interest).  But since there is not significant inflation of the bitcoin money supply, one need not be concerned with gaining interest simply to keep up with inflation.  So just keep your money in your own wallet:).

[HZPyR8eVk]

it's not possible to "create credit BitCoin out of thin air".  One must consume significant processing power to find a (previously undiscovered) large number whose SHA-256 hash is below the current target.

You're thinking "BitCoin", but I said "credit BitCoin", like "credit dollars" which don't require printing dollars, just accounting.

In a free banking system (which bitcoin is, since there is no central authority), competition amongst bitcoin banks will lend itself towards 100 percent reserve banking.

There is no free banking system, nor will there be (as long as people have a physical presence) because of the ultimate centralization point: the state. The state (/ banks) has replaced gold with paper. If a digital distributed currency becomes important in the world's economy, the state would want its cut. But if the currency is able to increase its supply as the entire network decides, the state can no longer substitute cash needs with credit.

So there is no serious need to deposit your money at some bank

I have not thought for a moment about people depositing their BitCoin so that banks could lend it further. I have only thought about the state creating the laws which would allow banks to create credit BitCoin. Thusly, the state creates the inflation. This is my point. Rather than having the state do it, create the mechanisms for the peers to do it as they see fit so that they can as a whole self-correct themselves.

[Babylon]

If there are not enough bitcoin someone will create a new system.  Satoshi has done the hard part already.

[HZPyR8eVk]

If there are not enough bitcoin someone will create a new system.  Satoshi has done the hard part already.

True and might work even better than having a variable money supply (because there is no tricky voting involved), but I do wonder if they would reach the same level of trust?! (I mean, people trust dollars more than, say, rupees.)

[kiba]

True and might work even better than having a variable money supply (because there is no tricky voting involved), but I do wonder if they would reach the same level of trust?! (I mean, people trust dollars more than, say, rupees.)

What is this tricky voting that you speak of?

[HZPyR8eVk]

True and might work even better than having a variable money supply (because there is no tricky voting involved), but I do wonder if they would reach the same level of trust?! (I mean, people trust dollars more than, say, rupees.)

What is this tricky voting that you speak of?

The tricky part is the algorithm by which votes would be weighted.

[bytemaster]

The fallacy is that a majority by any measure of voting has authority to dictate to the minority what the rules should be.   The result of any and all "rule changes" will be to effect the market value and purchasing power of bitcoins.   If you change the generation rate, inflation rate, etc you will be transferring wealth from some individuals to others.  In effect, everyone against the change will be hurt by the majority for the change. 

Economics is all about "consent" and politics is about "force".  Voting is a means of using force.  Instead of fighting to a bitter death people recognize the crowd is against them and avoid the fight.  It does not change the nature of voting.   

If people want to "change the rules" they need to create a competing system and "out compete" this one instead of using force of numbers to change the rules on the minority.

[Anonymous]

The fallacy is that a majority by any measure of voting has authority to dictate to the minority what the rules should be.   The result of any and all "rule changes" will be to effect the market value and purchasing power of bitcoins.   If you change the generation rate, inflation rate, etc you will be transferring wealth from some individuals to others.  In effect, everyone against the change will be hurt by the majority for the change. 

Economics is all about "consent" and politics is about "force".  Voting is a means of using force.  Instead of fighting to a bitter death people recognize the crowd is against them and avoid the fight.  It does not change the nature of voting.   

If people want to "change the rules" they need to create a competing system and "out compete" this one instead of using force of numbers to change the rules on the minority.

Mob rule?

+ 1 for this post.

[HZPyR8eVk]

The fallacy is that a majority by any measure of voting has authority to dictate to the minority what the rules should be.

The fallacy is that anybody is forced to use BitCoin (in any form it is and might be), or that having a single person (in this particular case the developer of the BitCoin client) decide what the maximum money supply is, is better than the majority of the peers.


What Babylon said triggered some other idea directly related to the money supply. I've made another thread.

[bytemaster]

You are right, that no one is forced to use the system.   But the #1 consideration for economic stability is PREDICTABILITY.  Mob rule is not PREDICTABLE.

If you give people a "vote" you transfer power to those who control that mass media.  The mass media can and do manipulate people to vote against their best interest.

Another way to put it, you *vote* by using the system or not.   Thus competing systems would spring up and if the "majority" really thinks that system is better they switch.

So for those in favor of "voting" create a new competing currency powered by voting and see if the masses like that system better.

[em3rgentOrdr]

it's not possible to "create credit BitCoin out of thin air".  One must consume significant processing power to find a (previously undiscovered) large number whose SHA-256 hash is below the current target.

You're thinking "BitCoin", but I said "credit BitCoin", like "credit dollars" which don't require printing dollars, just accounting.

Did you even read my entire post?  The rest of my entire post was dealing with credit BitCoin, whereby I explained that under a free banking system, reserve ratios will tend towards 100%.  Your above critique is irrelevant.

In a free banking system (which bitcoin is, since there is no central authority), competition amongst bitcoin banks will lend itself towards 100 percent reserve banking.

There is no free banking system, nor will there be (as long as people have a physical presence) because of the ultimate centralization point: the state. The state (/ banks) has replaced gold with paper. If a digital distributed currency becomes important in the world's economy, the state would want its cut. But if the currency is able to increase its supply as the entire network decides, the state can no longer substitute cash needs with credit.

You are ignoring something very different about cryptographic virtual currency (BitCoin) that separates it from physical currency (gold).  See my comment below...

So there is no serious need to deposit your money at some bank

I have not thought for a moment about people depositing their BitCoin so that banks could lend it further. I have only thought about the state creating the laws which would allow banks to create credit BitCoin. Thusly, the state creates the inflation. This is my point. Rather than having the state do it, create the mechanisms for the peers to do it as they see fit so that they can as a whole self-correct themselves.

Sure, The State can create laws to allow banks to create credit BitCoin and thereby creating inflation.  But no one needs to use or accept inflation-ridden credit BitCoin for transactions, since people are free to use raw non-inflatable BitCoins for transactions.  And it doesn't matter if The State makes a law declaring that BitCoins are illegal.  In fact, BitCoin is currently technically illegal to trade (as I assume BitCoiners are not paying taxes on transactions:), but people can still use BitCoins without being caught due to its pseudonymous properties if they are careful to not reveal their real identity.

The State can make whatever laws it pleases.  Whether those laws can be enforced is the real question.  Only an extreme totalitarian regime could prevent its populace from using raw BitCoins (since it would have to prohibit use of cryptology by regular folk, or would allow police force to enter people's homes at random to inspect people's computers, be able to extract people's passwords at force, or simply disconnect their internet).  And history has proven that extreme totalitarian regimes do not last long, because they must cripple the economy to enforce their laws (see history of USSR), and thus have too weak of a tax base to function.