some thought about digital currency of the future

[falkenberg]

Here I do not try to give hints or modify current bitcoin implementation. Just some ideas for the currency in digital world which, according to my IMHO, are interesting.

According to some sources, the currency is not like other commodities, the money is just a media for exchange the commodities. In current economy the banks provide this media as credits and get payed for that. The difference between a regular commodities and the credits is that the money backed upped by credits do not have a real value. The money makes sense only as an exchange media and do not have own value. That means the banks sells an air (in some sense) for the real price, forcing the economy to grow infinitely.

I think it would be a good idea if any digital currency agent would be able to behave as a bank for himself. I mean it can be a good idea if an agent could request the network for a credit under condition that this credit will be returned back after some period of time without interest rate. I.e. I want to pay for a service or the goods, but I do not have money on my account. But still I can do it, having by the end a negative account on my balance. The negative balance must be turned to positive, or at least zero after some period of time. The system (the network) must be able to evaluate my previous history in order to limit my possible negative balance to some amount to prevent abuse. How to do it? I do not know.

 With this strategy the banks can be excluded from the economy with their interest rate. As a consequence the economy will not be forced to grow infinitely.

Sorry for possible gibberish. I'm not an economist

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[FreeMoney]

What is the procedure for someone who borrows and does not return the currency? If there is to be any procedure at all then identity will have to be verified (presumably by some special authority).

[jgarzik]

What is the procedure for someone who borrows and does not return the currency? If there is to be any procedure at all then identity will have to be verified (presumably by some special authority).

The same procedure that is followed when someone borrows hard currency, and does not return it...  Up to the lender to set the level of security.

[falkenberg]

not really. There is no lender in this scenario: an agent "borrows" the money from the air (like banks do). The system must just evaluate the trust level of this agent to set the limits. Somehow, I do not know exactly how. Maybe based on the previous transactions (i.e. the more successful  payments were made from the different agents, the better reputation is). Of course, the identity will be disclosed (or partially disclosed). But this is needed to avoid abuse. This system can be coupled with the anonymous cash like bitcoins to enable anonymous transfers for those who care.
If someone do not return the money to the system his ability to borrow more is just blocked. If the account is coupled with a person (i.e. by a trusted certification center which emits the key for individuals (and organisations). Like digital passport. AFAIK in some countries this is done by state authorities. I remember we had such initiative in Russia, but this does not work yet, just a project. Or commercial CA like VeriSign or Thawte ), a wise behavior is to avoid this situation, or the person will not be able to make new purchases anymore. 

[Red]

not really. There is no lender in this scenario: an agent "borrows" the money from the air (like banks do).

Do people really think that banks generate or borrow money from the air? That is just uninformed.

Banks borrow money from each other and from the Fed/Central banks at interest. The Fed/Central banks set interest rates (and make other monetary policy decisions) to keep the currency relatively stable. Stable meaning $1 buys 1 loaf of cheap bread. (It has for the better part of a decade now.)

In general the Fed/Central banks guard vigorously against a price deflation. They also guard against rapid inflation. This means the fluctuations are NOT zero centered. Value fluctuations tend to stay on the slightly inflated side of zero. This is all by design.

Getting a 3% pay raise is a little nice. Getting a 3% pay cut sucks really bad.

[falkenberg]

Do people really think that banks generate or borrow money from the air? That is just uninformed.

Here I meant fractional reserve policy banks usually use to generate credits. In some sense it's making the money from air

This means the fluctuations are NOT zero centered.

Agree, but I am talking about improving the bitcoing model only. I think zero centered model must be just *better* the current one, but not ultimate, for sure. Also, I think smart taxation can perform the same regulation as interest rate does. Not sure however.

[Red]

Here I meant fractional reserve policy banks usually use to generate credits. I some sense it's making the money from air

I'm really not picking on you. :-)

It's just that a lot of the "fractional reserve" discussions on this site are hooey. Everyone just nodding at each other doesn't re-enforce validity of a fallacious argument.

If I loan the bank 100 gold coins, then the bank promises to repay me 100 gold coins. It doesn't promise me to keep 100 gold coins on hand incase I bang on the door and want to see them.

We have such deposits but they are called "safe deposit boxes" you pay the bank for the privilege of them keeping your hoard safe. They pay you nothing, because they are in business to make money. What you hoard has zero benefit to them. It could be gold, could be comic books. They are just renting really expensive cubic inches to you. If you wanted the bank to keep a 100% reserve of the money you deposit with them, you simply have to pay them for their services. You can't expect them to pay you for it.

Now back to my gold coins, they didn't appear out of thin air. I loaned them to the banker and they are hard and metal. If a home buyer wants a loan, the bank spend my gold coins on a real world house. The coins don't disappear, they go to the previous owner of the house, or pays the builder for creating the new commodity.

Now if I want my gold coins back they don't appear from thin air. The bank gets coins from another bank by simply selling them the house. If you have every mortgaged a house, you would have seen your mortgage change hands several times during the life of your loan. There is no magic involved.

If you do responsible banking, the system works well. If you suck at banking, your bank fails. This can only happen if you give money to someone who won't pay it back AND you didn't take the proper collateral to guarantee zero loss.

That is the problem with depreciation. The collateral for loans no longer provides the value needed to back a default on the loan. That is why NO ONE loans in a depreciating environment.

[falkenberg]

it would be true if we were talking about gold coins. But the gold is not used as money anymore. So, If a home buyer wants a loan, a bank may to give it to him even if it does not have enough deposits. Basically, what it does is just giving you a sort of bill of a debt, not the gold money. This bill is backed upped by the the loan-certificates it got from borrower mostly, not the gold money it loaned from other banks or had before (partially yes, but not 100%).

I also have some ideas about bitcoin generation policy. I think it's bad that total amount of money is limited. Sellers are interested in money supply: the more goods are available the more money are needed to buy them. What I would do I would change the rules how BCs are generated: the more money are generated, the higher difficulty level is. The more money are received (that means more goods are sold out), the lower the difficulty level shall be adjusted to stimulate new coins generation.
 

[Red]

it would be true if we were talking about gold coins. But the gold is not used as money anymore. So, If a home buyer wants a loan, a bank may to give it to him even if it does not have enough deposits. Basically, what it does is just giving you a sort of bill of a debt, not the gold money. This bill is backed upped by the the loan-certificates it got from borrower mostly, not the gold money it loaned from other banks or had before (partially yes, but not 100%).

Everything I wrote is accurate whether you do good banking with gold coins, dollars, or BTC. Banks never give you money without borrowing it first. That is called forgery. You don't have to care where the banks borrowed the money from. You don't even have to care if they pay their loans back. The person the bank borrowed from has to care. And in turn the bank has to care whether you pay your debt. Banking is inherently a trust enterprise. Or as Ronald Regan would say, "trust but verify". That is where collateral comes in.

In your example, your "sort of bill of a debt" is actually an interbank loan. When you say "This bill is backed upped by the the loan-certificates it got from borrower mostly" I'm assuming you mean the loan is secured by the property/collateral taken from the consumer borrower. Yes, both of those things are sound rational banking practices.

If the consumer defaults on the debt, the collateral is sold and used to pay back the interbank loan. If the bank didn't hold proper collateral, then they suck at banking and deserve to fail. So does the bank that trusted them with interbank loans.

I also have some ideas about bitcoin generation policy. I think it's bad that total amount of money is limited. Sellers are interested in money supply: the more goods are available the more money are needed to buy them. What I would do I would change the rules how BCs are generated: the more money are generated, the higher difficulty level is. The more money are received (that means more goods are sold out), the lower the difficulty level shall be adjusted to stimulate new coins generation.

I disagree about bitcoin monetary policy too, to it is the bitcoin way. The system and policy will likely rise or fall together. Don't expect drastic change unless you start a competing network.

[bytemaster]

Red you have it wrong about banks.   If they didn't create money/credit from nothing then there would be slow steady deflation.  If you think that the federal reserve is really "managing" the economy through "price fixing" then I have a bridge to sell you.  The only way they can "price fix" is to print money from nothing and thus steel from the current owners of money. 

You deposit your 100 gold coins, the bank can lend out 1000 gold coin notes and still have 10% backing in real gold.  Of course the bank wants interest on "gold notes created from nothing" and ultimately the interest exceeds the real supply of gold.  Then you get into a situation where more new money must be lent into existence or everyone defaults for lack of money in the system.  Also, today the reserve requirement is practically 0 because of games they can play.

If you deposit 100 gold coins and the bank promises you that you can withdraw them at ANY TIME.  And the bank promises 10 other people that they can withdraw 100 gold coins at any other time then they are COMMITTING FRAUD because it is impossible for them to make good on their promises.   

Now if you put money in a CD for 1 year then the bank can lend it out to someone else for up to 1 year.   The problem is when banks borrow short term money to lend long term, this is also a fraud.  They are lending money they do not have legitimate claim to for the duration of the loan. 

The great thing about bitcoin is that it prevents FRAUD in the money system.   Sure someone could create a "bit bank" and then issue their own "bit notes", but the value of the "bit note" would be different than the value of a "bit coin" because the "bit note" is a non-interest bearing IOU from a 3rd party whom you are required to trust where as a bit coin is not an IOU and you need not trust anyone. 

[Red]

I know you really want what you say to be true but it doesn't match with any reality that I know of.

Bitcoin does absolutely nothing to prevent fraud in banking. Any commodity can be stolen with clever fraud.
Bitcoin does absolutely nothing to improve responsible banking. Banking can be done using any commodity.

Banks never create money however, they really do increase the velocity of money. That makes it look like there is more money, but responsible banking backs everything with outside commodities.

[FreeMoney]

I know you really want what you say to be true but it doesn't match with any reality that I know of.

Bitcoin does absolutely nothing to prevent fraud in banking. Any commodity can be stolen with clever fraud.
Bitcoin does absolutely nothing to improve responsible banking. Banking can be done using any commodity.

Banks never create money however, they really do increase the velocity of money. That makes it look like there is more money, but responsible banking backs everything with outside commodities.

Are you saying the FED creates money and the banks just help hand it out? I completely agree that separate "banks" are just office fronts of the FED.

If you don't think the FED creates money then where does it come from at all?

[Red]

Are you saying the FED creates money and the banks just help hand it out? I completely agree that separate "banks" are just office fronts of the FED.

If you don't think the FED creates money then where does it come from at all?

Really now, this is all getting quite silly. Isn't this on wikipedia?

The Bureau of Engraving and Printing makes the bills. The U.S. Mint makes the coins. The Federal Reserve orders the money from the BEP and acts as HOARD. That is why it's called "reserve". The hoard is used to replace worn out money. And more importantly, it serves as a central bank that operates on principles similar to most other banks. It loans money from the hoard at interest to other banks. That is what "the prime rate" and "the fed rate" are all about.

The Fed never prints money and willy nilly sends the money out to citizens, politician or even other banks.

The thing that makes the Fed special and the part that you seem preoccupied is the fact that they The Fed is responsible for setting the interest rates, and rules for other banks.

Feel free to read about it. It's all public information.

If you find an instance of someone who got to benefit first from newly printed money please let me know. I want to go stand next to that guy.

Note that even with "the bank bailout" the Fed didn't just print money and give it to the failing banks. The money was budgeted and loan terms were set by congress. Most of the banks repayed the loans with interest.

[falkenberg]

Hi, bytemaster, Red.

I think you are both right. In some sense

When you say "This bill is backed upped by the the loan-certificates it got from borrower mostly" I'm assuming you mean the loan is secured by the property/collateral taken from the consumer borrower.

Yes, but partially. I meant the bill is secured by the loan-certificates it got from BORROWERS before and after. Not real money/gold coins. In turn they are backed upped by  the property/collateral. Or, being more accurate, EXPECTED PRICE for this property. When you get a loan from a bank, you actually exchange the certificates, one you get from the bank can be exchanged to the money at any time (your account balance), the second - your promise to return the money to bank after some period of time. The bank certificate is usually seen as "real money", because it can be exchanged at any time. And it's not our business how a bank does it. If bank gives away the credits without smart analysis then it will fail to exchange it to the money and this is the way to the default.

The way bytemaster describe the situation is not wrong. But he described not a situation, but just a view to the situation. I would call it "a conspiratorial view" The other view is the banks just serve growing market by selling the credits. Their work is to feed the system with money, but in an accurate way. They shall not give more money to the system then economy grows. If they do, they will fail to get them back and the penalty is loosing their money, or, in the worst case the default. And they are payed for their job with interest they get for the loans. They sell the credits just like others sell their goods.

The real problem here that this scenario is defined ONLY while the economy grows. If for any reason the economy stops growing, the system will fail (IMHO). And the banks are not interested in it at all. While this situation is just a hypothetical, it's still worth to think on it. It's very carelessly way of thinking that economy will grow forever. If the economy of the future will be based on renewable resources it won't be able to grow as it does right now (IMHO).

[Red]

Hi falkenberg,

I agree with you. If anyone does banking badly they can crash the system.

In the US the banking system did Real Estate really badly. In California the decided it was sensible to lend people 9 times their annual salary with no money down! They also didn't require people to pay even the interest on their loans as part of their regular payment. The excess unpaid interest just rolled into the growing principle.

The could only do this because there was a market of EVEN STUPIDER investors to sell these idiotic loans to.

What happened? Well house prices spiked of course!

BECAUSE, houses don't cost what people can afford. Houses cost what banks will LOAN! That is how supply and demand work in real estate.

[bytemaster]

The key question to ask is "do the banks have privileges citizens do not". 

If I lend you a house and then charge you rent and then turn around and rent the house to yet someone else at the same time that would be considered FRAUD.  If neither party ever tries to visit the house at the same time then the fraud is successful. 

If I give you give me gold, and in exchange I give you a note promising to return it "on demand" then all is well.   If I then "rent" 9 other notes payable on demand then I have 10% reserve "lending".  The other notes are a fraud.   

Anyone can issue credit without limit.  The fraud occurs when a credit is passed off as a claim and then price fixed to be equal by the state.   With bitcoin someone could create a bank and practice fractional reserve bitcoin lending, but it would not work because there would be a clear difference between a bitcoin and what ever digital note the "bank" issued.  The bitcoins would be just as easy to use as the notes and so no store would ever accept an IOU from a bank over a real bitcoin. 

When the government says that a debt payable in gold can be paid off with an IOU gold from the bank and then that same government then says that bankers are no longer obligated to honor the contracts stipulating gold-on-demand then that is FRAUD. 

[Red]

If I give you give me gold, and in exchange I give you a note promising to return it "on demand" then all is well.   If I then "rent" 9 other notes payable on demand then I have 10% reserve "lending".  The other notes are a fraud.   

If you give me 10 coins and I lend out 9 of them, that is a 10% reserve. If you loan out 90 coins that is fraud. Math is important.

Anyone can issue credit without limit.  The fraud occurs when a credit is passed off as a claim and then price fixed to be equal by the state.   With bitcoin someone could create a bank and practice fractional reserve bitcoin lending, but it would not work because there would be a clear difference between a bitcoin and what ever digital note the "bank" issued.  The bitcoins would be just as easy to use as the notes and so no store would ever accept an IOU from a bank over a real bitcoin. 

Fraud happens when you can't meet your obligations. If you do it doesn't matter what banking magic or collateral swaps you use.

When the government says that a debt payable in gold can be paid off with an IOU gold from the bank and then that same government then says that bankers are no longer obligated to honor the contracts stipulating gold-on-demand then that is FRAUD. 

A one dollar silver certificate is worth exactly the same as a one dollar fed reserve note.

A one dollar of lead would be worth just as much. I fail to see any significance.

[bytemaster]

Red,
  When you deposit a FRN into a bank the "reverse reserve rule" applies and 100 FRN results in $10 of new reserves.
  When you deposit 100 oz of gold it serves as enough reserves for 1000 FRN.   The gold is the asset, the notes are the debt.  The debt is backed by 10% real assets.

  The process is so crazy that the the mind is repulsed.   

Checkout Money as Debt for a complete history of banking.   While there are some issues with their proposed solutions, it does a great job explaining how the current system works.

http://www.youtube.com/watch?v=vVkFb26u9g8

[Red]

Watched the silly video. It explains much of the bantering.

I'll leave you to your notions, because if that is your authoritative source there is no further point in discussion.

[falkenberg]

bytemaster,

Money as debts cartoon is a classical conspiracy theory movie. There are many others about politics, religion, whatever. It is a simplest explanation for everything, but simplest does not mean a correct one. It tells you true, but not all true, making you feel you got the point.
As I already told, your (their) vision is just a view to the situation, but not the explanation. I gave you other view, not worse then yours. Other accents and there is no more "evil banks". Banks are not evil, they are serving growing economy.

The key question to ask is "do the banks have privileges citizens do not".

A regular people work in the banks. THEY ARE regular citizens.

The money is not like houses. Who ever told you that an account you have in a bank shall be 1=1 mapped to the gold or money someone deposited there? The account is just a product banks sell, according to the agreement you have with a bank the bank shall exchange your "digital money" on the account to the real banknotes by your request. I agree with Red, as soon as a bank does it there is no fraud. This system will work fine while the economy grows. These endless loans do not mean anything else except PAYMENT TO THE BANKS they force the economy to pay them for analysis of the economy and taking the responsibility for money making (credit making). If they do it wrong they answer for that by their money. The system works (shall work) so that the failure of one bank will not fail the whole system. I do not think that the system is a ultimate one (economy shall grow forever), but others are much worse. If you have an idea of a better system, let us know please

I like the idea of generation the credits bypassing the banks. But I do not know how to do it properly. If the system would give all the agents the power to generate the credits without checks, everybody would take the loans and would never give it back. Then the economy would stop. Too bad for everybody.