The Big Question: 21 Million Coins (yes, I know its been asked before)

[MoonShadow]

That is an interesting perspective, and it may very well prove true.  Yet, Bitcoin was designed to be cash on the Internet, and thus in person transactions are actually an expansion of the protocol in the same way that Paypal is an expansion of the 'protocol'  for fiat currencies on the Internet.  So even if Bitcoin is always a niche medium of exchange, that's still a huge niche.

I'm not sure of the point you're trying to make with cash on the internet. Businesses accept CCs online, and they still pay a fee. If online businesses want to accept BTC and convert it to something else, they're going to pay a fee.

And not that you are the only one guilty of this, but I'm tired of the "but bitcoin is this" statements whenever it seems to apply in the most beneficial way to make a point. Lots of people believe bitcoin is the second coming of currency, and I'm just pointing out that it is going to have an incredibly difficult if not impossible time trying to fulfill that role. No, the deflation aspect and 21 million limit don't really mean anything if bitcoin is mostly just a payment processor with a few speculative nerds hoping to make money on volatility here and there.

The point that you're missing is that bitcoin isn't just a payment processor.  It can function in that role for a very large portion of it's economy for decades, but that isn't it's only use.  CC's & paypal have no other use and therefore those transaction fees are truely unavoidable.  With bitcoin, there and will be many different wasy to exchange.  In teh early stages, yes, any bitcoin accepting business is going to have to deal with the exchanges & the costs that they can impose.  This will limit early adoption rates.  However at some point (usually aroun 12% of the general public in any given area or market) bitcoin is suddenly 'mainstream' and the savvy business owner doesn't have to depend upon the exchanges for all of their conversions.  I'll concede that a future that involves never needing to deal with the exchanges if you are a bitcoin business owner isn't going to happen in my lifetime, but it's all a matter of degree.  These are not sudden events, they're transitions.  The business owners who deal with bitcoin early on are as likely to keep a portion of those funds as not.  No business just hangs onto checks or credit card receipts on the possibility of appreciation or the possibility of reduced conversion costs.  Such things will never happen.  Again, bitcoin is much more than a payment processor, even though that is a large part of it's current functions.

[Etlase2]

And the less bitcoin is used as just a payment processor the more likely a deflationary spiral and people bailing. We're going in circles here. Bitcoin is not going to be an effective medium of exchange by my logic. We can agree to disagree, but I most certainly did not miss the point that bitcoin is not just a payment processor.

And through all this, anyone holding runs the risk that satoshi decides to just utterly collapse the market one day and buy his private island.

[MoonShadow]

And the less bitcoin is used as just a payment processor the more likely a deflationary spiral and people bailing. We're going in circles here. Bitcoin is not going to be an effective medium of exchange by my logic. We can agree to disagree, but I most certainly did not miss the point that bitcoin is not just a payment processor.

And through all this, anyone holding runs the risk that satoshi decides to just utterly collapse the market one day and buy his private island.

There remains no evidence that a deflationary spiral is a real threat, or even a real economic theory.  I find this to be one of the most amusing things about this viewpoint, let's explore it a bit, please.

The theory, at it's root, is that if the value of the bitcoin increases too much, people will
hoard' it, increasing it's value further.  This leads to a crash in the exchange volume as some other comparable currency is used in it's place.  Grisham's law in effect.   While this sounds reasonable to an academic, it ignores the reality that we are talking about common people doing common things, not the rational speculator looking for an ideal exit.  Real people don't hold currency for it's own sake, nor to trade for some other currency in the hopes of turning a nominal profit on arbitrage.  Real people hold currency in order to spend it later, and real people don't consider only the future value of a currency in choosing to spend it now or later.  Real people have real problems that often require them to spend money sooner rather than later, and for those people the future value of the currency is irrelevant.

[Etlase2]

There remains no evidence that a deflationary spiral is a real threat, or even a real economic theory.  I find this to be one of the most amusing things about this viewpoint, let's explore it a bit, please.

The theory, at it's root, is that if the value of the bitcoin increases too much, people will
hoard' it, increasing it's value further.  This leads to a crash in the exchange volume as some other comparable currency is used in it's place.  Grisham's law in effect.   While this sounds reasonable to an academic, it ignores the reality that we are talking about common people doing common things, not the rational speculator looking for an ideal exit.  Real people don't hold currency for it's own sake, nor to trade for some other currency in the hopes of turning a nominal profit on arbitrage.  Real people hold currency in order to spend it later, and real people don't consider only the future value of a currency in choosing to spend it now or later.  Real people have real problems that often require them to spend money sooner rather than later, and for those people the future value of the currency is irrelevant.

Whatever, I just use the term deflationary spiral because it basically gets the gist across. I don't think bitcoin will ever have a deflationary spiral--and I basically said as much in that post but explicitly said it a couple posts up too; so enjoy your amusement. What it will have are deflationary "jerks" where there are sharp periods of deflation among more mellow periods. This causes massive problems for debt (and massive problems with adopting bitcoin as a replacement currency). But the "real people" argument still doesn't hold water. "Real people" aren't the ones that control the wealth of a nation (for example). Real people aren't the ones packaging subprime mortgages into a CDS. Real people aren't the ones who cause credit crunches--whether real or imagined(/fabricated). This all falls into the hands of the top 1% or so. Real people have no power to retract liquidity, only the wealthy/banks do. So what real people do or do not do is irrelevant.

Wealthy people are going to find themselves in positions to be able to manipulate the bitcoin economy in unnatural ways. This is never good news for "real people."

[MoonShadow]

There remains no evidence that a deflationary spiral is a real threat, or even a real economic theory.  I find this to be one of the most amusing things about this viewpoint, let's explore it a bit, please.

The theory, at it's root, is that if the value of the bitcoin increases too much, people will
hoard' it, increasing it's value further.  This leads to a crash in the exchange volume as some other comparable currency is used in it's place.  Grisham's law in effect.   While this sounds reasonable to an academic, it ignores the reality that we are talking about common people doing common things, not the rational speculator looking for an ideal exit.  Real people don't hold currency for it's own sake, nor to trade for some other currency in the hopes of turning a nominal profit on arbitrage.  Real people hold currency in order to spend it later, and real people don't consider only the future value of a currency in choosing to spend it now or later.  Real people have real problems that often require them to spend money sooner rather than later, and for those people the future value of the currency is irrelevant.

Whatever, I just use the term deflationary spiral because it basically gets the gist across. I don't think bitcoin will ever have a deflationary spiral--and I basically said as much in that post but explicitly said it a couple posts up too; so enjoy your amusement. What it will have are deflationary "jerks" where there are sharp periods of deflation among more mellow periods. This causes massive problems for debt (and massive problems with adopting bitcoin as a replacement currency). But the "real people" argument still doesn't hold water. "Real people" aren't the ones that control the wealth of a nation (for example). Real people aren't the ones packaging subprime mortgages into a CDS. Real people aren't the ones who cause credit crunches--whether real or imagined(/fabricated). This all falls into the hands of the top 1% or so. Real people have no power to retract liquidity, only the wealthy/banks do. So what real people do or do not do is irrelevant.

Wealthy people are going to find themselves in positions to be able to manipulate the bitcoin economy in unnatural ways. This is never good news for "real people."

Real people are quite relevant for bitcoin.  Much like a gold standard, there is no way for the "one percent" to leverage liquidity flucuations, which is really the condition that you are describing.  This is one major reason that bankers don't like the idea of a gold standard, and why they won't like bitcoin either.  That's one effect of fractional reserve lending, which has practical limits under a true gold standard or a bitcoin standard that do not exist under a pure fiat currency.

[Etlase2]

How do the ones who provide liquidity and debt leverage liquidity? Leveraging liquidity to leverage liquidity? I don't get it, but maybe it's just over my head rather than three words cobbled together.

I'm curious to where you get the idea that "bankers don't like the gold standard." First off, bitcoin really should stop being compared to the gold standard. The gold standard as we know and talk about it is a complete bastardization of gold as money. Governments would add and drop the standard when it suited them; they would raise and lower the conversion price at will; and fractional reserve made it essentially meaningless. As long as paper money is legal tender, the reserve can drop to 5% by law to effectively double the money supply. Instead of going that route, we have central banks and interest rates. It's really not much different from fiat other than the warm feeling that your money is backed by 10% of what it says it's worth in pretty metal.

Gold standard as we know it was a banker's paradise, just like modern fiat. Until I understand how to leverage liquidity fluctuations and what that may or may not have to do with retracting liquidity, I can't really respond an appreciable way. I agree though that traditional bankers will not like bitcoin very much because they cannot hope to retain the power that they have now. 50% of the currency to ever be in circulation will already be in circulation by the end of this year. However, this most certainly does not preclude some kind of bitcoin cartel from emerging.

[MoonShadow]

How do the ones who provide liquidity and debt leverage liquidity? Leveraging liquidity to leverage liquidity? I don't get it, but maybe it's just over my head rather than three words cobbled together.

I'm curious to where you get the idea that "bankers don't like the gold standard." First off, bitcoin really should stop being compared to the gold standard. The gold standard as we know and talk about it is a complete bastardization of gold as money. Governments would add and drop the standard when it suited them; they would raise and lower the conversion price at will; and fractional reserve made it essentially meaningless. As long as paper money is legal tender, the reserve can drop to 5% by law to effectively double the money supply. Instead of going that route, we have central banks and interest rates. It's really not much different from fiat other than the warm feeling that your money is backed by 10% of what it says it's worth in pretty metal.

 
you're confusing fractional reserve banking with a gold standard.  A gold standard is, generally speaking, referring to the convertability of a national currency note into a predefined weight of gold.  Fractional reserve banking is the idea that a bank can lend out more in loans than it actually has on deposit.

Gold standard as we know it was a banker's paradise, just like modern fiat. Until I understand how to leverage liquidity fluctuations and what that may or may not have to do with retracting liquidity, I can't really respond an appreciable way. I agree though that traditional bankers will not like bitcoin very much because they cannot hope to retain the power that they have now. 50% of the currency to ever be in circulation will already be in circulation by the end of this year. However, this most certainly does not preclude some kind of bitcoin cartel from emerging.

If the gold standard was a bankers' paradise, we would have never left it anywhere on Earth.  Are you really going to claim that bankers don't have influence over governments?  Or that the Federal Reserve system wasn't created by and for bankers?  The Federal reserve system is why inflation occurs to begin with, and why there was too much cash chasing too little gold.  Nixon didn't have any choice, the gold was probably long gone before he ever got there.

[Etlase2]

you're confusing fractional reserve banking with a gold standard.  A gold standard is, generally speaking, referring to the convertability of a national currency note into a predefined weight of gold.  Fractional reserve banking is the idea that a bank can lend out more in loans than it actually has on deposit.

MY POINT, my dear, is that they have been intertwined for hundreds of years. This is why I say things like "gold standard as we know it."

If the gold standard was a bankers' paradise, we would have never left it anywhere on Earth.  Are you really going to claim that bankers don't have influence over governments?  Or that the Federal Reserve system wasn't created by and for bankers?  The Federal reserve system is why inflation occurs to begin with, and why there was too much cash chasing too little gold.  Nixon didn't have any choice, the gold was probably long gone before he ever got there.

Central banking is just the next step. The gold standard and central banking coexisted, and inflation has risen about the same with and without the gold standard during that time. Nixon could have just decreased the amount of gold per dollar, but why bother with the farce and potentially lose all our gold?

There is a difference between pre- and post- central banking modified "gold standard" though, and that is the point I have tried to make time and time again as the reason why bitcoin will fail as a replacement currency. Inflation is not obvious theft; wealthy elites liquidating stock markets and large banks to restore the economy in a bust cycle is very visible and very irksome to the public. People demand change, and the bankers (JPM specifically) are more than happy to "help" the politicians write some laws to "regulate this problem." The first time a major event like this happens in bitcoin, the public will be running back to their inflationary ignorance. It may have already happened with last year's run-up. How many entrepreneurs were turned off by it? Who knows.

Bitcoin will absolutely fail as a replacement currency because of the 21 million limit and other factors, in my typically not so humble opinion. So scream for liberty and freedom from government and all that jazz, but you're screaming at the wall. People will not adopt bitcoin as anything more than a token novelty or for the occasional black/grey market purchase. With all the problems we both recognize with fiat currency, I had hoped bitcoin was that replacement currency. But then I researched it more and understood how flawed it was. And then I loudly made my opinion known and you deleted my posts and got my original account squelched, thus the notorious 2 on my user name. I was really disappointed with bitcoin and obviously still am. And I will create a competitor, it's just a matter of time.

[miscreanity]

Whatever, I just use the term deflationary spiral because it basically gets the gist across.

Yet you crucify others for nebulous definitions. Quite the double-standard.

I don't think bitcoin will ever have a deflationary spiral--and I basically said as much in that post but explicitly said it a couple posts up too; so enjoy your amusement. What it will have are deflationary "jerks" where there are sharp periods of deflation among more mellow periods. This causes massive problems for debt (and massive problems with adopting bitcoin as a replacement currency).

There is no problem with debt in any situation, deflation or inflation, unless it is leveraged or there is no means to pay it back. FRB is a form of leverage. Bitcoin is not the issue here. Derivatives that develop based on it may be.

But the "real people" argument still doesn't hold water. "Real people" aren't the ones that control the wealth of a nation (for example). Real people aren't the ones packaging subprime mortgages into a CDS. Real people aren't the ones who cause credit crunches--whether real or imagined(/fabricated). This all falls into the hands of the top 1% or so. Real people have no power to retract liquidity, only the wealthy/banks do. So what real people do or do not do is irrelevant.

Wealthy people are going to find themselves in positions to be able to manipulate the bitcoin economy in unnatural ways. This is never good news for "real people."

What liquidity needs to be retracted from the Bitcoin system? That's like saying gold needs to be destroyed. There is no sensibility to that whatsoever.

Attempts will be made to profit off of the Bitcoin base, no doubt. That has nothing to do with Bitcoin itself. At this point, technical issues have far greater potential for impacting the system than economic concerns.

How do the ones who provide liquidity and debt leverage liquidity? Leveraging liquidity to leverage liquidity? I don't get it, but maybe it's just over my head rather than three words cobbled together.

That's what it boils down to. Currencies today have no direct connection to real assets, and no real restrictions on liquidity due to management decisions. FRB provides the mechanism by which liquidity begets liquidity. Who would agree to give up the digits in their account to drain liquidity when necessary? The only solution is to provide more.

I'm curious to where you get the idea that "bankers don't like the gold standard." First off, bitcoin really should stop being compared to the gold standard. The gold standard as we know and talk about it is a complete bastardization of gold as money. Governments would add and drop the standard when it suited them; they would raise and lower the conversion price at will; and fractional reserve made it essentially meaningless. As long as paper money is legal tender, the reserve can drop to 5% by law to effectively double the money supply. Instead of going that route, we have central banks and interest rates. It's really not much different from fiat other than the warm feeling that your money is backed by 10% of what it says it's worth in pretty metal.

Gold is the closest to an abstract form of money that a physical item can get. Because it has physical limitations, it forces deleveraging issues with liquidity. Bankers cannot continue business as usual, ignoring debts and deficits, when gold acts as a brake on their levering of financial instruments.

No government has ever willingly picked up the gold standard. It has always been due to duress of instability. The gold standard is as pure a monetary function for gold as there can be. Are you suggesting that you're smarter than Isaac Newton?

Fractional reserve did not make the gold standard meaningless: it simply allowed for expansion of the monetary benefits further from the foundation. Scarcity in a common form of capital restrains real economic growth. Additional supply allows for accelerated progress, just as a larger pot can allow a plant to grow bigger than a smaller one.

The difference is not just a "warm feeling" - with FRB, there is a chance that you might not get back but a fraction of your wealth should a collapse occur. The longer FRB continues, the greater the probability that a collapse will occur. With a 100% reserve system, there is no danger of losing any of your wealth; the only difference is that progressively smaller shares of it are necessary to conduct commerce. The real danger there is concentration of wealth, absent any other dynamics that would cause accumulation ratios to shift.

See the image below, where Bitcoin value is comparable to economic growth, and subunit value is comparable to price levels:



Gold has stringent limitations because it is physical: it is not infinitely divisible. If it were, there would never have been any need for another currency - just keep dividing gold smaller and smaller. MMT should love Bitcoin because it creates a form of gold in a purely abstract sense. The only problem current economists have is that they can't get past their fervent attachment to fractional fiat.

What gold can do is act as a large scale reserve. It could theoretically function as a currency as well. There are close to 170,000 metric tons of gold, which equates to over 5,400,000,000 troy ounces (~32,150 t ozs per metric ton), or approximately 169,000,000,000 grams (~31 grams per t oz). That supply could support global commerce, but would soon need to be subdivided if prices were to be kept stable.

An increasing fiat base is necessary to maintain price stability in accordance with economic growth. Without that expansion, prices would plummet just as they would with gold at the limits of its divisibility.

Instead of succumbing to the unreliable course of managed fiat, Bitcoin eschews unit expansion for decimal expansion, allowing it to maintain price stability with a static base. Available supply (stock to flow ratios here again) will vary, but doing so within a static base container strongly limits the range.

Gold standard as we know it was a banker's paradise, just like modern fiat. Until I understand how to leverage liquidity fluctuations and what that may or may not have to do with retracting liquidity, I can't really respond an appreciable way. I agree though that traditional bankers will not like bitcoin very much because they cannot hope to retain the power that they have now. 50% of the currency to ever be in circulation will already be in circulation by the end of this year. However, this most certainly does not preclude some kind of bitcoin cartel from emerging.

MMT works wonderfully when there is no connection to reality - monetary actions can make the numbers do what's intended. When coming back to the notion of physical supply & demand, MMT falls apart. Bitcoin recognises this and ingeniously accommodates the function of both a store of value and means of exchange; it satisfies Triffin's dilemma.

Central banking is just the next step. The gold standard and central banking coexisted, and inflation has risen about the same with and without the gold standard during that time. Nixon could have just decreased the amount of gold per dollar, but why bother with the farce and potentially lose all our gold?

Lose all our gold through balance of payment transfers? You mean, like gold as a reserve currency? Shocking.

There is a difference between pre- and post- central banking modified "gold standard" though, and that is the point I have tried to make time and time again as the reason why bitcoin will fail as a replacement currency. Inflation is not obvious theft; wealthy elites liquidating stock markets and large banks to restore the economy in a bust cycle is very visible and very irksome to the public. People demand change, and the bankers (JPM specifically) are more than happy to "help" the politicians write some laws to "regulate this problem." The first time a major event like this happens in bitcoin, the public will be running back to their inflationary ignorance. It may have already happened with last year's run-up. How many entrepreneurs were turned off by it? Who knows.

Some will be scared back to fiat, but when has fear ever stopped progress? Hint: never.

Delays and setbacks are not death knells, no matter how bitter you may be over the fact that your own bright idea for a crypto-currency failed. My apologies, it never even got off the ground, so it couldn't have failed: it was still-born.

Bitcoin will absolutely fail as a replacement currency because of the 21 million limit and other factors, in my typically not so humble opinion. So scream for liberty and freedom from government and all that jazz, but you're screaming at the wall. People will not adopt bitcoin as anything more than a token novelty or for the occasional black/grey market purchase. With all the problems we both recognize with fiat currency, I had hoped bitcoin was that replacement currency. But then I researched it more and understood how flawed it was. And then I loudly made my opinion known and you deleted my posts and got my original account squelched, thus the notorious 2 on my user name. I was really disappointed with bitcoin and obviously still am. And I will create a competitor, it's just a matter of time.

See the diagram from earlier. You would do well to grow some humility before you fade into irrelevance. I've seen your kind come and go like so many gnats.

Oh, and your "competition" is based on laughably idiotic assumptions backed only by Byzantine rationale and a hostile persona. Were you wondering why not even the reputable fellow behind Solidcoin wouldn't help you? Now you know. Your strategy of dazzling people or, failing that, blinding them with bullsh*t is best left to professional bankers and politicians.

Stop trolling and grow up.

[Etlase2]

Yet you crucify others for nebulous definitions. Quite the double-standard.

lol are you talking about the FRB nebulousity? Anyways, again I never did claim a deflationary spiral would happen, I always added a caveat. It was MoonShadow who ignored the caveat and ran with it.

There is no problem with debt in any situation, deflation or inflation, unless it is leveraged or there is no means to pay it back. FRB is a form of leverage. Bitcoin is not the issue here. Derivatives that develop based on it may be.

I am not saying that debt is the problem; the repayment of it is.

What liquidity needs to be retracted from the Bitcoin system? That's like saying gold needs to be destroyed. There is no sensibility to that whatsoever.

:le sigh: Wealthy elites/bankers can retract liquidity; the regular joe cannot. The point I was making is that under a bitcoin-like currency, the regular joe will once again be at the whims of the wealthy elite and will be poorer for it through no fault of his own.

Attempts will be made to profit off of the Bitcoin base, no doubt. That has nothing to do with Bitcoin itself. At this point, technical issues have far greater potential for impacting the system than economic concerns.

This thread is about economic concerns so let's try to stick with that, ok?

Gold has stringent limitations because it is physical: it is not infinitely divisible. If it were, there would never have been any need for another currency - just keep dividing gold smaller and smaller. MMT should love Bitcoin because it creates a form of gold in a purely abstract sense. The only problem current economists have is that they can't get past their fervent attachment to fractional fiat.

This infinitely divisible crap is so outside anything relevant. Infinitely divisible is not some panacea, it just allows the currency to have a physical limit and still allow for some semblance of expansion. The equivalent with gold is moving on to silver or copper or whatever else for smaller denominations if necessary.

Some will be scared back to fiat, but when has fear ever stopped progress? Hint: never.

When has fear allowed bad legislation to pass? oops. And I am not referring to potential future legislation that may hurt bitcoin.

You would do well to grow some humility before you fade into irrelevance. I've seen your kind come and go like so many gnats.

How benevolent of you.

Were you wondering why not even the reputable fellow behind Solidcoin wouldn't help you? Now you know.

What in the hell are you talking about?

Your strategy of dazzling people or, failing that, blinding them with bullsh*t is best left to professional bankers and politicians.

I could say the same for anyone who argues for bitcoin as a solid foundation for money. It's practically evoorhees's MO

[lonelyminer (Peter Šurda)]

Despite the endless discussion, I see no reason why Fractional Reserve Banking shouldn't work in principle.

It depends on what you mean by "work". Obviously, it works in the sense that it exists and is a pervasive phenomenon. I would also argue that it is not necessarily a violation of property rights (unlike some Austrians). I would also argue that it is the expected outcome of the conditions, similarly to what the freebanking branch of the Austrian School claims, except my reasoning is different.

However, if the leveraged instruments are accepted as a medium of exchange, it leads to business cycles, as explained in the Austrian Business Cycle Theory. It creates a boom by misleading the investors into thinking that the resources in the economy are more abundant than they really are. This leads to unsustainable projects. Once it turns out that there really are less resources available than the investors assume there were (which eventually it must, since otherwise the supply/demand is in a disequilibrium), the projects go bankrupt. This leads to a depression and a credit contraction. The central bank can also attempt an exponentially increasing money supply to postpone the bust, which eventually ends up in a hyperinflation.

[Boussac]

This infinitely divisible crap is so outside anything relevant.

How can it be irrelevant when it is a key feature of bitcoin, one that never existed before in any monetary system ?

I thought the excellent post by miscreanity above made that point clear..

[Mageant]

I doubt that there really is a deflationary spiral effect in a truely free market. I suspect the deflationary situations we have had, have been engineered by central banks.

People cannot delay all purchases forever. If it is *necessary* to have it then people will buy it, regardless if it gets cheaper later.

If there are unnecessary purchases that people can delay then it is better for everyone when people do that. It creates less waste that way. Goods should be more durable anyway. We already have too much crap polluting our environment.

[lonelyminer (Peter Šurda)]

Well, it's not entirely correct that Bitcoin is infinitely divisible. In order to use smaller units than satoshis directly in the Bitcoin protocol, it requires an incompatible change. The Bitcoin protocol internally calculates in satoshis as integers. Other than that, it's right. Even when we use nanotechnology (see http://www.rfreitas.com/Nano/TangibleNanomoney.htm), gold cannot be transacted in units smaller than an atom. Bitcoin can be modified for any arbitrarily low smallest unit.

[MoonShadow]

Despite the endless discussion, I see no reason why Fractional Reserve Banking shouldn't work in principle.

It depends on what you mean by "work". Obviously, it works in the sense that it exists and is a pervasive phenomenon. I would also argue that it is not necessarily a violation of property rights (unlike some Austrians). I would also argue that it is the expected outcome of the conditions, similarly to what the freebanking branch of the Austrian School claims, except my reasoning is different.

However, if the leveraged instruments are accepted as a medium of exchange, it leads to business cycles, as explained in the Austrian Business Cycle Theory. It creates a boom by misleading the investors into thinking that the resources in the economy are more abundant than they really are. This leads to unsustainable projects. Once it turns out that there really are less resources available than the investors assume there were (which eventually it must, since otherwise the supply/demand is in a disequilibrium), the projects go bankrupt. This leads to a depression and a credit contraction. The central bank can also attempt an exponentially increasing money supply to postpone the bust, which eventually ends up in a hyperinflation.

Thanks for expanding on that. So I guess one of the problems with Fractional Reserve Banking can, as usual, be boiled down to human intervention. I have a theory that if a Fractional Reserve System were devised with rules that were set in stone,

e.g.:
X units of base money with 0% inflation,
Y% reserve ratio, unchangeable,
Z% interest, also unchangeable,

although there might initially be one or more boom-bust cycles (a la: Bitcoin 2011), people will eventually modify their behaviour. They won't expect to get "magically bailed out" because they accidentally miscalculated the profitability of their business. As it stands, it looks like the people f**king with the levers are the problem because they introduce feedback loops and create instability. Thus you get "chicken and egg" problems with everyone trying to second-guess everyone else.

Amen, brother.  Now go forth and preach the word!

[DeathAndTaxes]

Amen, brother.  Now go forth and preach the word!

Genesis (block) Chapter 1, Verse 1
In the beginning there was only fiat.  The currency was without form or limit and darkness was upon the face of the people.  They cried out from the multitude of oppression and humiliations inflicted upon them by the FED.  And the Satoshi said "let their be a block" and there was.  Satoshi verified the block and it had but one transaction, and it was good.  Satoshi called the block number 0 for it was special and from it all others block would come.   The crypto was a mere spark of light in an sea of darkness but it would grow.  The world was forever divided between the fiat and the crypto and it was good.

[lonelyminer (Peter Šurda)]

I have a theory that if a Fractional Reserve System were devised with rules that were set in stone
....
although there might initially be one or more boom-bust cycles (a la: Bitcoin 2011), people will eventually modify their behaviour.

If I remember right, Detlev Schlichter argues that FRB could eventually find an equilibrium (if there are no bailouts etc). Many Austrians disagree that "no bailout" is a sufficient condition. For example, the businessmen might invest even if they know that it will go bust, as long as they believe they can sell it before the tide turns.

But if the majority of people understood the consequences, I think that could counteract it, so I tend to agree with you. The reason why expansion of credit leads to cycles is because the users are confused (deliberately tricked even). If they adapt their behaviour, the cycle would be mitigated. Theoretically, if the money supply is still elastic, there could be a misallocation of resources, but there would be no cyclical economic behaviour.

[MoonShadow]

I have a theory that if a Fractional Reserve System were devised with rules that were set in stone
....
although there might initially be one or more boom-bust cycles (a la: Bitcoin 2011), people will eventually modify their behaviour.

If I remember right, Detlev Schlichter argues that FRB could eventually find an equilibrium (if there are no bailouts etc). Many Austrians disagree that "no bailout" is a sufficient condition. For example, the businessmen might invest even if they know that it will go bust, as long as they believe they can sell it before the tide turns.

But if the majority of people understood the consequences, I think that could counteract it, so I tend to agree with you. The reason why expansion of credit leads to cycles is because the users are confused (deliberately tricked even). If they adapt their behaviour, the cycle would be mitigated. Theoretically, if the money supply is still elastic, there could be a misallocation of resources, but there would be no cyclical economic behaviour.

I don't quite agree.  I think that there would still be a cycle that statistics could identify, but that it's period and amplitude would be significantly attenuated under such a condition as to be inmaterial for the majority of people.  This is generally how it was for Joe Average for the first 100 or so years of the United States (generally) under a gold standard, it was those who earned an income (directly or indirectly) from investment capital and banking that such cycles affected to any dramatic degree.  Perhaps the Interent could one day lead to such a rise of distributed wisdom, but until such event the cycle will continue.

[Technomage]

There is a major problem with the "deflation is doom" arguments that should be pointed out. From the consumption side it's very clear of course, people do buy things even in a deflationary situation which is evident even with goods that are not required for staying alive. Computers, smartphones, tablets etc. These are in a much sharper deflationary spiral than Bitcoin is likely to ever be and still those industries are doing fine.

With loans and investments this is usually not that simple but in fact it actually is. One just has to start thinking about WHY would deflation happen in the first place. One reason is population growth, or user growth. This is the main reason why the value of bitcoins has grown until now but let's assume we have 21 million coins and everyone is using Bitcoin. Then it's growing with the real population growth rate which is a small yearly percentage and it's going to actually turn to negative in a few decades (most population growth prediction models indicate this) which will actually cause a small inflationary pressure.

Regardless that will be a small factor. What we're left with is economic growth. Now, how does economic growth happen? With loans and investments. How will we manage to even get into a situation where nobody loans or invests because we have deflation, when there is no way for a deflationary situation to happen unless we first have economic growth?! The answer is, we can't. This is actually a paradox, deflation can't happen without economic growth (assuming the user base is fairly stable) which generally doesn't happen without loans and investments.

The answer in length is that in an economy with a fixed money supply debt and new loans will become increasingly expensive with increased economic growth. This will of course reduce loan-taking which will calm down the economic growth which will reduce deflation which will again decrease the price of loans and so on. In reality there will be an equilibrium of course so it doesn't actually go up and down all the time.

The point of this exercise was to show that it's not set in stone that the value of bitcoins just rise all the time. We simply might not have economic growth and then it will certainly not deflate. Which will keep money fairly cheap. If we start experiencing degrowth, money will get increasingly cheap making loan based investments much safer.

The likely result of this is that in a Bitcoin economy lot less unsound investments are made because you don't have inflation keeping those investments alive by keeping the debt cheap. Thus we will have a much healthier economy in a large number of ways. People will consume less because there are incentives to wait. People will save more money because saving is actually a sound possibility. People will take on less debt especially during deflation because debt is more expensive and more risky.

It won't end in a deflationary spiral. It won't kill the economy since people will still continue to buy whatever they need. Investments continue to be made, less if the economy is growing a lot, more if it's not growing. As evoorhees said, production, not consumption, is the driving force of this type of economy. Investments will also be more sound because the possibility of deflation will make loans much riskier than they are now. This will lead to a more stable economy with less ups and downs which is generally a good thing.

As a final note I'd like to add that this whole issue of investments becoming more difficult during deflation and economic growth applies really well only to loan based investments. Investments based on savings is still smart even if the economy is growing a bit. It has to be growing and thus Bitcoin deflating at a very high rate for a good savings based investment to become unprofitable. At that point the growth will stall at the latest and deflation will start decreasing.

So it's actually possible for the economy to grow and keep deflating even if loan based investments are difficult, if there is still a good market for high profit investments, which can then be funded from savings. In any case all types of loans and investments become increasingly profitable if economic growth stalls or starts degrowing.

Deflation while the economy is growing really can't be that bad, the whole notion is ridiculous. And what other ways are there for Bitcoin to deflate? The money supply is fixed, the supply is not going to deflate with the exception of lost coins. User base will eventually be fairly stable, right now the situation is complex because the supply is still in its high inflation phase but user base has grown sharply. The value of bitcoins rising and prices going down in a growing Bitcoin economy has not been a bad thing though, in fact we have seen Bitcoin merchants get more activity during user growth simply because people are trying out payments in this new economy.

I haven't really seen any good arguments yet for a sustained deflation problem that applies to Bitcoin. Keep them coming though. Bitcoin is a good experiment for an economy with a fixed money supply by the way. We'll find out if it works or not.

[Technomage]

FRB is also a fairly interesting topic. Bitcoin banks can use FRB to an extent of course but only within their own accounts. The reserve requirements would naturally have to be a hell of a lot bigger than now because the "hard currency" would move in and out of the bank much more than it does in regular fiat banks.

This is because Bitcoin users can have individual hard currency accounts (Bitcoin wallets on their computers), while in fiat-land hard currency (money issued from central banks) only moves when a transfer is made from a bank to another bank. All transactions within the same bank, which are common in the traditional economy (but would be much less common in a Bitcoin economy simply because using banks and depositing to them is not "mandatory" in the same way) are simply the bank moving the debt based money around their own database, while not touching the hard currency at all.

So in a Bitcoin economy I would expect there to actually be some banks with no FRB, or 100% reserves and banks with a variety of different reserve requirements. The lower the reserve requirement the more risks are involved regarding bank runs.

The day to day transfers of hard currency (actual bitcoins) would likely be so high that even the biggest risk takers would have significantly higher reserves than the most sound banks in our mainstream economy. People could choose however, from banks that give you a high interest rate (because they use lower reserves and are able to loan out more) and banks that use a 100% reserve or close. The risks involved with those high interest deposits would be much higher of course.