Victoria Grant explains Fictional-Reserve Banking and why everything is crashing

[hazek]

Similarly as if I figure out how to create oranges out of nothing, the other producers would take a huge loss even though their property rights were not violated.

Bad analogy. Possibility of creating oranges out of nothing != possibility of creating money out of nothing. The former is impossible the later not at all.

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[hazek]

Oh I see, sorry I skimmed through your posts.. So you're saying the mere act of creating counterfeits is not fraud but spending them as if they real money is. Ok, I agree with that. But how is spending counterfeits any different from spending a loan created out of thin air?!

Trading "counterfeits" may be fraudulent, but there is no necessity. If I put a sticker on a piece of rock saying "orange", and sell it, it also may or may not be fraud, depending on the context.

Oh come on, you aren't being serious. How is putting a sticker on a rock labeling it an orange in any way similar to a counterfeit money note? The former clearly isn't what the label says it is while the later might be indistinguishable from the real thing.

[hazek]

Edit: furthermore, since substitutes which have reserves are associated with costs (e.g. storage), the issuer of them needs to compensate for this somehow. He can charge the users (e.g. demurrage, transaction fees), or he can use the reserves for some other purpose (e.g. loans or financial markets). All other things being equal, a user would choose the one where he does not have to pay. If there is a demand for substitutes, the market forces will lead to fractional reserves.

A customer choosing a more convenient service only able to be provided by committing fraud does not undo the fact that fraud is being committed.

This makes a full-reserve unlikely on a free market.

Is that why we don't have full-reserve banking in Bitcoin? Oh wait.

The reason the quote is wrong is because you mistakenly claim that 100% reserve deposit for investment purposes would carry a cost instead of the reality where it would pay an interest which is what is happening in Bitcoin. I think you might be confusing a savings account which would carry a cost for safekeeping of your money with an investment account which would pay a yield but make the deposit unavailable for a certain period of time that was needed for the investments made by the bank to be repaid.

[lonelyminer (Peter Šurda)]

Bad analogy. Possibility of creating oranges out of nothing != possibility of creating money out of nothing. The former is impossible the later not at all.

Let's put it differently then. Technically, the money is not created out of nothing, there is always some non-zero cost associated with it. If not for any other reason, at least for opportunity cost of the resources (e.g. bank's computer) involved for the duration of the creation. Let's say I would find out a way to produce oranges more cheaply (for example, by using Star Trek replicators). Or by inventing a car I would put the horse-pulled carriage operators out of business.

A more deep reason why this is happening is that the newly printed money acts a substitute for the old money, similarly as a car acts as a substitute for a carriage. But absent legal restrictions, it is not the producer who determines whether the new money acts as a substitute or not. So the producer's act of creating new money, per se, cannot violate anyone's rights. Similarly, B and C trading this new money as if it was old does not violate the rights of D. The only way the new money can be used to violated D's rights is if someone trading with D misrepresents their characterstics, or forces D to accept it.

[lonelyminer (Peter Šurda)]

Oh come on, you aren't being serious. How is putting a sticker on a rock labeling it an orange in any way similar to a counterfeit money note? The former clearly isn't what the label says it is while the later might be indistinguishable from the real thing.

This assessment belongs to the buyer, not you or me. If you try to interfere with this process against the wishes of the buyer, you are violating his rights.

[hazek]

Right, and I thought you were trying to actually remain open and honest and perhaps learn something but in fact you are simply trolling me.

[hazek]

Bad analogy. Possibility of creating oranges out of nothing != possibility of creating money out of nothing. The former is impossible the later not at all.

Let's put it differently then. Technically, the money is not created out of nothing, there is always some non-zero cost associated with it. If not for any other reason, at least for opportunity cost of the resources (e.g. bank's computer) involved for the duration of the creation. Let's say I would find out a way to produce oranges more cheaply (for example, by using Star Trek replicators). Or by inventing a car I would put the horse-pulled carriage operators out of business.

More bad analogies. Again Star Trek replicators do not exist, money printing machines do, and if they did exist there would be no one on this planet who would still be producing any oranges. Inventing a car is no way similar to printing money.

A more deep reason why this is happening is that the newly printed money acts a substitute for the old money, similarly as a car acts as a substitute for a carriage. But absent legal restrictions, it is not the producer who determines whether the new money acts as a substitute or not. So the producer's act of creating new money, per se, cannot violate anyone's rights. Similarly, B and C trading this new money as if it was old does not violate the rights of D. The only way the new money can be used to violated D's rights is if someone trading with D misrepresents their characterstics, or forces D to accept it.

Bullshit.

Example:

D has 10BTC and one day it takes D 0.1BTC to buy a loaf of bread, one week later because of A doing FRB and B and C spending the newly created money it suddenly costs me 0.2BTC, was D not robbed of 0.1BTC in this example?! It's 0.1BTC that D could have kept if no one did FRB.. how is that not theft?! How is that not D being robbed?! Did A ask D for permission to potentially diminish his purchasing power through counterfeiting when D first decided that 10BTC is a good store of value i.e. a good money to hold?! Of course not.

[lonelyminer (Peter Šurda)]

A customer choosing a more convenient service only able to be provided by committing fraud does not undo the fact that fraud is being committed.

I have already disproved that fraud is a necessary attribute of FRB. I am merely adding that irrespective of this, demand for substitutes leads to fractional reserves.

Is that why we don't have full-reserve banking in Bitcoin? Oh wait.

I explain the situation about Bitcoin and FRB on the Bitcoin wiki page

This makes a full-reserve unlikely on a free market.

The reason the quote is wrong is because you mistakenly claim that 100% reserve deposit for investment purposes would carry a cost instead of the reality where it would pay an interest which is what is happening in Bitcoin.

The payment of interest is a proof that the reserves are not 100%. Unless of course the operator is running at a loss.

[lonelyminer (Peter Šurda)]

Right, and I thought you were trying to actually remain open and honest and perhaps learn something but in fact you are simply trolling me.

You have yet to provide a coherent argument and instead divert attention into ad hominems.

If A and B agree on trading their own properties, on their premises, why is C's opinion relevant in any way whatsoever relevant for the legality of this transaction?

[JusticeForYou]

IMO, FRB is a normal process. Most people don't want their money just sitting there otherwise they would get safety deposit boxes and not  bank accounts.

What we are really arguing about is the amount of Leverage that is applied to FRB. I think 30-40 is a good amount, apparently banks thought 400 was good. I guess they know better NOW.

[hazek]

The payment of interest is a proof that the reserves are not 100%. Unless of course the operator is running at a loss.

Non sequitur. The question is whether or not the operator has to relinquish ownership over 100% of the deposits in order to charge interest on a loan. And the answer is a clear yes, which is why he needs 100% reserves in order to make a loan or more accurately an investment. 100% reserve does not mean that the operator has 100% of the serves after he makes his investment but instead that he has to have 100% reserve before he can make it.

[lonelyminer (Peter Šurda)]

More bad analogies. Again Star Trek replicators do not exist, money printing machines do, and if they did exist there would be no one on this planet who would still be producing any oranges. Inventing a car is no way similar to printing money.

In other words, you assert that money is a special type of good, and normal property rights do not apply to it. It's a sort of collective ownership, where a change of price thereof constitutes an illegal act. The problem is, almost any act whatsoever changes the prices, so almost any act whatsoever therefore should be illegal.

Bullshit.

Ad hominem, non-sequitur and an appeal to emotion.

D has 10BTC and one day it takes D 0.1BTC to buy a loaf of bread, one week later because of A doing FRB and B and C spending the newly created money it suddenly costs me 0.2BTC, was D not robbed of 0.1BTC in this example?! It's 0.1BTC that D could have kept if no one did FRB.. how is that not theft?! How is that not D being robbed?! Did A ask D for permission to potentially diminish his purchasing power through counterfeiting when D first decided that 10BTC is a good store of value i.e. a good money to hold?! Of course not.

Appeal to emotion and circular reasoning.

[hazek]

IMO, FRB is a normal process. Most people don't want their money just sitting there otherwise they would get safety deposit boxes and not  bank accounts.

Is that why we have FRB in Bitcoin? Oh wait we don't have it.

So then people holding bitcoins have them just sit there? Oh wait we don't, they are investing or depositing them with operators who invest for them.

What we are really arguing about is the amount of Leverage that is applied to FRB. I think 30-40 is a good amount, apparently banks thought 400 was good. I guess they know better NOW.

No, we are arguing about whether or not stealing purchasing power from some third person without their consent is fraud or not.

[JusticeForYou]

Is that why we have FRB in Bitcoin? Oh wait we don't have it.

We don't? Hmm.. Ok, I missed something.

[hazek]

More bad analogies. Again Star Trek replicators do not exist, money printing machines do, and if they did exist there would be no one on this planet who would still be producing any oranges. Inventing a car is no way similar to printing money.

In other words, you assert that money is a special type of good, and normal property rights do not apply to it. It's a sort of collective ownership, where a change of price thereof constitutes an illegal act. The problem is, almost any act whatsoever changes the prices, so almost any act whatsoever therefore should be illegal.

Wrong. Money is a special good, because it has to have special properties that make it attractive to be used as money in the first place (fungible, divisible, recognizable, STORE OF VALUE) none of which apply to most goods hence why so few are ever chosen as money and even fewer are a good money. Denying this is being completely oblivious to history of money.

Bullshit.

Ad hominem, non-sequitur and an appeal to emotion.

Yeah I bet you just love pointing out my frustration with your irrationality which is the only perhaps error in my arguments.

D has 10BTC and one day it takes D 0.1BTC to buy a loaf of bread, one week later because of A doing FRB and B and C spending the newly created money it suddenly costs me 0.2BTC, was D not robbed of 0.1BTC in this example?! It's 0.1BTC that D could have kept if no one did FRB.. how is that not theft?! How is that not D being robbed?! Did A ask D for permission to potentially diminish his purchasing power through counterfeiting when D first decided that 10BTC is a good store of value i.e. a good money to hold?! Of course not.

Appeal to emotion and circular reasoning.

Riiiiiiight, someone being robbed is circular reasoning, care to elaborate how?

[hazek]

Is that why we have FRB in Bitcoin? Oh wait we don't have it.

We don't? Hmm.. Ok, I missed something.

Oh we do? Then I missed something and should sell my BTC asap since apparently someone figured out how to counterfeit bitcoins. When, where and who did it?

[Kluge]

Is that why we have FRB in Bitcoin? Oh wait we don't have it.

We don't? Hmm.. Ok, I missed something.

For some reason, the concepts of money creation and FRB are being blurred together in this thread. I sure as Hell don't keep 100% FV of deposits or bonds in my wallet.

[lonelyminer (Peter Šurda)]

Non sequitur. The question is whether or not the operator has to relinquish ownership over 100% of the deposits in order to charge interest on a loan.

A deposit contract means that the depositor retains ownership. So your argument makes no sense. What you are describing is a loan contract, where the ownership is transferred.

And the answer is a clear yes, which is why he needs 100% reserves in order to make a loan or more accurately an investment. 100% reserve does not mean that the operator has 100% of the serves after he makes his investment but instead that he has to have 100% reserve before he can make it.

An operator cannot invest more than 100% of his reserves, that's logically impossible. However, he can issue instruments whose price exceeds that of the reserves. If these instruments are usable in some way (for example, they can be used for payment, or at least speculation like on Bitcoinica), he can make additional profit on that, and he is operating at fractional reserves.

[realnowhereman]

As I said above; money is under FRB is not created out of thin air.  It is created by pulling apart a zero into an asset and a matching liability.

The money created by FRB is indeed an increase in money supply; it is increased by the amount savers are willing to lend and borrowers are willing to borrow.  In that sense, it is the moving of a portion of the borrowers future wealth creation into the present.

If you want to argue about what the correct reserve ratio is; then I'll agree, the current (in the UK) 3% is appalling and results in 32 pounds being lent for every 1 printed.  I would argue though that the fact we've reached that reserve ratio is not a function of the law setting that reserve ratio, but the central bank making borrowing too cheap (and hence demand for credit is too high, resulting in too many willing borrowers).  The reserve ratio is the buffer at the end of the track, not the speed of the train.

[JusticeForYou]

Is that why we have FRB in Bitcoin? Oh wait we don't have it.

We don't? Hmm.. Ok, I missed something.

Oh we do? Then I missed something and should sell my BTC asap since apparently someone figured out how to counterfeit bitcoins. When, where and who did it?

Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer's deposits.

This has nothing to do with 'counterfeiting".