Talk:Myths

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Terrorism

From the linked Wikipedia page:

The USA PATRIOT Act defines terrorism activities as "activities that (A) involve acts dangerous to human life that are a violation of the criminal laws of the U.S. or of any state, that (B) appear to be intended (i) to intimidate or coerce a civilian population, (ii) to influence the policy of a government by intimidation or coercion, or (iii) to affect the conduct of a government by mass destruction, assassination, or kidnapping, and (C) occur primarily within the territorial jurisdiction of the U.S."

This definition is broad enough that it could probably be applied to the Bitcoin system. IANAL but I imagine lawyers could pretty easily demonstrate that Bitcoin is 'dangerous to human life' because the Four Horsemen can use it for evil [drug-dealers, money-launderers, terrorists, and pedophiles.] It can 'influence the policy of a government by coercion' by removing options such as Federal Reserve dollars. (C) might be tricky to prove. PLATO 22:34, 23 March 2011 (GMT)

besides the one attorney general that made a snide remark about terrorism in the LibertyDollar case, i don't think that this is in any way a 'common misconception', so i'd question whether we need to have the 'terrorism' section at all.--Nanotube 04:02, 24 March 2011 (GMT)

I agree. All yes for removing terrorist stuff? EvanR 00:10, 30 March 2011 (GMT)

Fractional Reserve Banking

I'd like to suggest a change here (translation: I fundamentally disagree with the tenor of the article). Credit Unions/Building Societies could quite easily be created, and this would increase the apparent amount of BTCs in existance, but it probably wouldn't exceed twice the original number.

However, a bank functions differently: it creates a distinction between "hard money" (bank notes+coins) and "credit money" (money in bank accounts). So, in a bank I may deposit some real money (notes) but the bank effectively may lend some of that money to others AND I may also spend that money "in" my account by transferring it via a cheque or e-transfer to another person's account. (Building socities don't allow you to do that.)

Now if I were to make a _BTC_ deposit into a "bank", then I wouldn't be able to spend the money in my "account" using conventional BTC trading (confirmations etc). No, what the bank would have to do is to set up a "virtual BTC" (vBTC) trading system, whereby they would manage accounts and transactions, and banks would owe each other v-BTCs depending on how their clients were deciding to spend/borrow their money. Banks could issue huge (virtually infinitie) amounts of v-BTCs depending on how risky they felt that morning.

But then we'd be back to the present situation with fiat currencies, banks, treasury bills, etc etc. I guess it could be a new kind of "gold standard" - a "BTC standard". But the banks would still rule the world, and I thought we sought a way out of that....

...maybe the ability of the user to transact BTC independently of any "fractional reserve banks" would keep a check on their potentially enormous power. But then if the number of v-BTCs was much more than real BTCs (as seems very likely if FRB took off - currently then ratio of v-GBPs to real GBPs is 20:1) then BTCs might end up so scarce in comparison that user trading in BTCs would no longer take place: it would all be in v-BTCs. All this make me think actually v-BTCs wouldn't work in the conventional way, and therefore that fraction reserve banking might not generate any more than 21m v-BTCs. I'd welcome help here.

So my simple answer to the "Myth" question would be "FRB is possible, but "virtual BTCs" would be created, not real BTCs. Lawrence18uk 19:47, 8 September 2011 (GMT)


No no.. No v-BTCs are necessary for Fractional Reserve Banking at all. You can read how Fractional Reserve Banking works on Wikipedia. Pay special attention to the "Example of deposit multiplication" section.

--Atheros 03:02, 11 November 2011 (GMT)

Fractional reserve banking with Bitcoin is fundamentally different

--------PeterSurda said the following-------

My edit was removed only because someone disagrees with it, although they did not provide counterarguments. I did not claim that FRB is impossible, I claimed it is unlikely, due to lack of demand for Bitcoin substitutes. Without substitutes, FRB is impossible. Supply of Bitcoins cannot be increased beyond 21 million. The only thing that can be increased is the amount of Bitcoin substitutes, which are incompatible with Bitcoins. Demand for lending does not increase demand for Bitcoin substitutes. The argument presented by the author of the current text on the wiki is erroneous. It is impossible for a bank to accept a Bitcoin demand deposit and lend it simultaneously. It requires a creation of a Bitcoin-subsitute, for which there is no demand, because Bitcoins can exist in forms that other money, such as gold or fiat, require substitutes. PeterSurda 09:28, 7 November 2011 (GMT)

I rewrote FRB, hopefully it is more understandable now. I found the explanation of Atheros in my talk page so I was able to address it. PeterSurda 23:44, 7 November 2011 (GMT)


--------Atheros Response-------

I (Atheros) have responded on your talk page and I will respond here as well.

You are confused because you are confusing money supply with currency supply. Indeed, you are only using the word "supply". The currency supply is limited to 21 million bitcoins. The money supply is not. MtGox could tomorrow start lending out the hundreds of thousands of bitcoins they have in cold storage without adjusting the amount of bitcoins presented to users as available for withdrawal. They would maintain a reserve for the people who do withdraw bitcoins. We would then instantly have Fractional Reserve Banking. You need to give up this idea of substitutes that you keep using. Substitutes which are fundamentally different from Bitcoins are not necessary for fractional reserve banking. You've said several times on several talk pages that "Without substitutes, FRB is impossible" but need to explain what you mean by substitutes in the first place. The Wikipedia article on FRB, despite being very detailed, does not talk about substitutes.


You said on my talk page that "With fiat dollars, the base money are the reserves the commercial banks have with the central bank"

Why must the reserves be held at a central bank? I see no reason that this is necessary.


You said: "Only the central bank can create the reserves. "

What does this mean? If a commercial bank holds money in an account from which they do not lend out any money, then that money is held in reserve. No central bank is needed.


You said: "With gold, banks take in gold bullion or coins, and provide either bank notes, account balances or cheques as substitutes. The banks in case of gold money cannot create more gold any more than in case of fiat money commercial banks cannot create more reserves."

Ok, suppose they did not provide cheques or bank notes. Suppose that they only provided an account balance. I suppose you could call this account balance a substitute, but I've never heard it called such a thing. No one calls their bank account balance their "substitute dollars". For all intents and purposes, they consider their balance to be as good as dollars- indeed they can demand dollars at any time which is why the deposits made with the bank are called demand deposits.


In response to the rest of your post on my talk page, you seem to be saying that because Bitcoin has no substitutes, then there cannot be FRB. My response is to say, first of all, that I'm just barely going along with your idea of a substitute anyway. I still don't see why having or not having substitutes has anything to do with FRB. But I will respond to your paragraph anyway because it contains a contradiction which makes winning this argument easy. You have previously defined that account balances (along with things like cheques) are substitutes, correct? And Bitcoins can be put in accounts, right? So then the user would be presented with an account balance, for example their MtGox balance, right? So there is your substitute! You have said that "The only way to do FRB is to present an alternative, a substitute, which of course is incompatible with Bitcoin". Thus we have a clear contradiction in your logic.


I will now respond to your sentence: "Bitcoin Substitutes are required. Please explain how otherwise you can expand the supply without using magic."

It is important to recognize the difference between Currency Supply and Money Supply. The currency supply of bitcoins is limited to 21 million. Money supply is higher because it includes demand deposits. Let us take an example: Suppose that there are only 100 Bitcoins on Earth all owned by Satoshi. He puts all 100 in Bank Alpha. Bank Alpha puts 20 of the bitcoins (20%) in a special account and leaves them there. They then lend out 80 bitcoins to Gavin. Bank Alpha tells Satoshi on his account page that his account has 100 bitcoins in it. The total money supply of Bitcoins at this point is 180. You can see that there is no magic required. Now, Gavin buys some LolCat comics from Cameron for 80 bitcoins. Cameron puts his 80 bitcoins in his bank, Bank Beta. Bank Beta puts 20% in reserve (16 bitcoins) and has 64 to lend out. They lend those 64 bitcoins to someone else. Cameron's account page on Bank Beta's website says he has 80 bitcoins in his account. The money supply of bitcoin is now 100+80+64 = 244 bitcoins. Supposing all banks put 20% in reserves for safe keeping, and suppose everyone uses banks (as opposed to keeping them in a wallet on their computer) then the money supply of bitcoin will max out at 500 bitcoins. Obviously because some people will hold their own bitcoins and because they will be used out in the world for transactions, the money supply wouldn't reach 500 bitcoins, but it can easily exceed 100.

An obvious response is 'Well what happens when Gavin takes his bitcoins out of the bank!?' The answer is that that is what the reserves are for. Although not reflected in this example, the actual reserves held by a bank would be vastly greater than the amount held in any individual customer's account.

And that is how Fractional Reserve Banking works.

To avoid an edit war on the wiki page, I have put in a temporary message which I believe is neutral.

--Atheros 02:55, 11 November 2011 (GMT)


--------PeterSurda Response-------

You are confused because you are confusing money supply with currency supply.

Your alleged distinction between "money supply" and "currency supply" is bogus. Please look at the wikipedia page about Money supply: http://en.wikipedia.org/wiki/Money_supply

MtGox could tomorrow start lending out the hundreds of thousands of bitcoins they have in cold storage without adjusting the amount of bitcoins presented to users as available for withdrawal.

You fail to address my point that this requires that these balances need to be accepted as if they were real bitcoin. That's not the case. It is explained in the wikipedia page: http://en.wikipedia.org/wiki/Metal_as_money :

Money must be a tangible asset while a money substitute may be only a claim on a tangible asset. Either money or a money substitute may circulate as currency.

This matches exactly your descriptions of fictional FRB-Mt. Gox activies: they provide to borrowers claims on bitcoin: Mt.Gox account balances. Only if someone else accepts these balances instead of Bitcoin, would the FRB have an effect on the money supply.

Why must the reserves be held at a central bank? I see no reason that this is necessary.

The reason why commercial banks cannot create fiat reserves is that it's illegal: only central banks are permitted to do that. They allow commercial banks to use these reserves and issue substitutes (e.g. bank account balances) upon that. The physical currency (notes and coins) is, in case of fiat, merely a distraction. Typically, the bank notes and coins are also issued only by the central bank, but in small exceptions, private banks are allowed to do that too (e.g. Scotland, Northern Ireland, Hong Kong). In the latter case, these are however also only substitutes: the issuing bank must redeem them to legal tender upon request. Please read the wikipedia page on Reserve requirements: http://en.wikipedia.org/wiki/Reserve_requirement . Of course, a commercial bank can create their own fiat currency, let's call them Rothbards. But that's not the case we are discussing.

No one calls their bank account balance their "substitute dollars"

Economists do.

For all intents and purposes, they consider their balance to be as good as dollars- indeed they can demand dollars at any time which is why the deposits made with the bank are called demand deposits.

However, they only do this because they know that if they use EFT or cheque, the recipient will accept it as if it was money proper. There is no way of creating cheques or bank account balances with fiat money or gold that does not involve substitutes, and because these have sometimes lower transaction costs, this creates demand for these substitutes. With Bitcoin, the requirement for such substitutes is absent (or, better said, limited).

you seem to be saying that because Bitcoin has no substitutes, then there cannot be FRB.

I did not say FRB or substitutes with Bitcoin are impossible, on the contrary, I provided examples of both FRB and substitutes as such. I just explained why it is difficult to conduct in in a profitable manner, unlike with fiat and gold.

My response is to say, first of all, that I'm just barely going along with your idea of a substitute anyway.

Money substitutes are not "my idea", these are terms by many economic schools and even the legal system. I merely merged various facts into a unique arrangement.

I still don't see why having or not having substitutes has anything to do with FRB.

Let's say I have 100 BTC. How can I increase the money supply to 200? Only by promising to my customers "I will redeem up to 200 BTC". This is a claim they have on me, i.e. a money substitute I issued. If these claims are accepted as if they were money proper, they can circulate, and increase the money supply. If they do not circulate, they cannot increase money supply, they can only make me bankrupt (or a rich scammer).

You have previously defined that account balances (along with things like cheques) are substitutes, correct? And Bitcoins can be put in accounts, right?

Poor choice of words on my part I am afraid. I said that "Bitcoin is the equivalent of a bank deposit". I should have written rather something like "Bitcoin is functionally similar to a bank account".

So then the user would be presented with an account balance, for example their MtGox balance, right?

Bitcoin Mt.Gox balance is a substitute: it is an entry in their database that represents a claim on their reserves, an actual Bitcoin wallet. You cannot transfer this substitute outside of Mt.Gox' systems, i.e. they do not circulate. Even withdraw methods like green addresses and redeemable codes are Bitcoin rather than substitutes.

They then lend out 80 bitcoins to Gavin. Bank Alpha tells Satoshi on his account page that his account has 100 bitcoins in it. The total money supply of Bitcoins at this point is 180.

The total account balances indeed list 180. However, this only increases money supply if someone is willing to accept these fractional balances as if they were real Bitcoin. But you can't do anything with them. In order to use them, you need an account in Bank Alpha. For people that do not have an account with Bank Alpha, these balances are not only worth less, they are unusable (incompatible with Bitcoin network). And even if there was Bank Beta that accepted it, these two banks would need to agree upon a way of settling these balances, and promise not to redeem other banks' deposits against real Bitcoin. This works with fiat and gold because there is no alternative to these settlements, and it can increase banks profits. With Bitcoin, it would just increase the costs so banks cannot gain anything in participating in something like this.

And that is how Fractional Reserve Banking works.

You omit the point where the substitutes need to be accepted as if they were money proper, which is the basis of argument.

To avoid an edit war on the wiki page, I have put in a temporary message which I believe is neutral.

Thank you, I prefer to have it clarified instead of an edit war too.

Let's say I store Bitcoins and instead provide you "Surdas", which will be denominated in BTC. You can only use Surdas in my "bank". Bitcoin users cannot send or receive Surdas because they are incompatible with their systems. Let's say I collect 100BTC from you, and issue you a trillion Surdas. Will that increase the money supply of the Bitcoin economy?

--PeterSurda 10:15, 11 November 2011 (GMT)


--------Atheros Response-------

Let's say I collect 100BTC from you, and issue you a trillion Surdas. Will that increase the money supply of the Bitcoin economy?

No. The money supply would be the number-of-bitcoins-in-existance + 1 Trillion Surdas.

Your alleged distinction between "money supply" and "currency supply" is bogus. Please look at the wikipedia page about Money supply: http://en.wikipedia.org/wiki/Money_supply"

Why? You did not say why. I am very familiar with Money supply. Perhaps instead of currency supply, I should say monetary base since there is a Wikipedia article on "Monetary Base".

You fail to address my point that this requires that these balances need to be accepted as if they were real bitcoin. That's not the case. It is explained in the wikipedia page: http://en.wikipedia.org/wiki/Metal_as_money

The Wikipedia article "Metal as Money" is garbage, as evidenced by all the tags at the top. The article does not cite any sources. I see now why you keep talking about money substitutes.

The balances to not need to be accepted by anyone except the holder of the account. The balances to not need to be transferred by cheque or EFT.

Gox activies: they provide to borrowers claims on bitcoin: Mt.Gox account balances. Only if someone else accepts these balances instead of Bitcoin, would the FRB have an effect on the money supply.

No, you misunderstand. They don't provide borrowers claims on bitcoins. They provide real bitcoins.


I said "Why must the reserves be held at a central bank? I see no reason that this is necessary." You responded: "The reason why commercial banks cannot create fiat reserves is that it's illegal: only central banks are permitted to do that."

You and I are using the word reserves differently. You are using it to mean a reserve of the monetary base. But that is not what reserves means in the context of Fractional Reserve Banking. Reserves can and often are held by commercial banks. Even the top of the "Reserve Requirements" Wikipedia page to which you link says that "It is normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank." If you want to talk about holding gold or even fiat money in reserves at a central bank, you can, but that is not what reserves are in the context of Fractional Reserve Banking.

I said: "No one calls their bank account balance their "substitute dollars"" You said: "Economists do."

No they don't. Economists call them Demand deposits.

However, they only do this because they know that if they use EFT or cheque, the recipient will accept it as if it was money proper.

No, people consider the money in their bank account to be as good as dollars in their hands because they can access the money on demand. Cheques and EFTs need not be involved.

Money substitutes are not "my idea", these are terms by many economic schools and even the legal system.

It is not mainstream. The one article that talks about substitutes to which you linked on Wikipedia is slanted, unbalanced, disputed, contains original research, and lacks citations.

"If these claims are accepted as if they were money proper, they can circulate, and increase the money supply. If they do not circulate, they cannot increase money supply"

False. Money does not need to be in circulation to increase the money supply. It can be stored in bank accounts. Bank accounts contain demand deposits. Demand deposits are included in the money supply. It annoys me that you wouldn't know this despite telling me to read the article on money supply. Here are the very first two lines: "In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions)."


You said: "The total account balances indeed list 180. However, this only increases money supply if someone is willing to accept these fractional balances as if they were real Bitcoin."

No, you misunderstand. When I said that Bank Alpha lends out Bitcoins, I meant it. Bank Alpha does not lend out Bitcoin Substitutes, they lend out Bitcoins.

You have admitted that the account balances in the example total 180. Therefore you have admitted that demand deposits are equal to at least 180 bitcoins. Money supply is defined as "currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions)." Therefore Money supply is greater than or equal to 180 bitcoins at that point in the example.

I have countered your claims and answered your questions. I have provided an example of Fractional Reserve Banking with Bitcoins. Fractional Reserve Banking with Bitcoins is possible.

--Atheros 18:32, 11 November 2011 (GMT)

--------PeterSurda Response-------

No. The money supply would be the number-of-bitcoins-in-existance + 1 Trillion Surdas.

Exactly. The issue of Surdas would have no effect on the Bitcoin economy, unless someone accepted Surdas instead of Bitcoins. That's my whole point.

Why? You did not say why. I am very familiar with Money supply. Perhaps instead of currency supply, I should say monetary base since there is a Wikipedia article on "Monetary Base".

You first need to define these two terms in a coherent manner, which has not happened.

The Wikipedia article "Metal as Money" is garbage, as evidenced by all the tags at the top. The article does not cite any sources. I see now why you keep talking about money substitutes.

That does not disprove my point. I could have just as well quoted Mises' Human Action or Theory of Money and Credit, http://mises.org/books/Theory_Money_Credit/Part1_Ch3.aspx

The balances to not need to be accepted by anyone except the holder of the account. The balances to not need to be transferred by cheque or EFT.

In order to increase the money supply, they do. You admitted this yourself in my example with Surdas vs. Bitcoins. Now, lets' get one step back and ask ourselves, why would the account holder accept such a weird instrument in the first place if he knew noone would accept it? It provides him no advantage over what he already has.

No, you misunderstand. They don't provide borrowers claims on bitcoins. They provide real bitcoins.

In that case, they need to provide the claims (=substitute) to the lender. It's logically impossible to provide real bitcoins in excess of the reserves.

You are using it to mean a reserve of the monetary base. But that is not what reserves means in the context of Fractional Reserve Banking.

Of course it does. Wikipedia page on Bank reserves, http://en.wikipedia.org/wiki/Bank_reserves , says:

Bank reserves are banks' holdings of deposits in accounts with their central bank (for instance the European Central Bank or the Federal Reserve, in the latter case including federal funds), plus currency that is physically held in the bank's vault (vault cash).

And, since the currency is also issued by the central banks, that closes the circle.

Reserves can and often are held by commercial banks.

This has no effect on my claim.

Even the top of the "Reserve Requirements" Wikipedia page to which you link says that "It is normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank." If you want to talk about holding gold or even fiat money in reserves at a central bank, you can, but that is not what reserves are in the context of Fractional Reserve Banking.

This does not negate the fact that both cash and central bank deposits are, in fact, created by the central bank.

No they don't. Economists call them Demand deposits.

Demand deposits are a subset of money substitutes. Read the aforementioned chapter from Mises' book.

No, people consider the money in their bank account to be as good as dollars in their hands because they can access the money on demand. Cheques and EFTs need not be involved.

If they do not deposit the money in the bank, then it is also accessible on demand. Therefore, if your argument was correct, there would be no demand for bank deposits in the first place and banks would not exist. Your reasoning is therefore erroneous.

It is not mainstream.

The term might not be mainstream, but the concepts are. Even the article about Demand deposits you reference explains what it is. It says "These account balances are usually considered money and form the greater part of the money supply of a country." (emphasis added). However, it does not explain why. I provide an explanation. You just assume that there's some magic behind this, yet don't provide an explanation.

Money does not need to be in circulation to increase the money supply.

You phrase it wrongly. If it is not in circulation, it is not money in the first place. It is just some financial instrument. Like my Surdas.

Demand deposits are included in the money supply.

Wrong. Even the article you quote says "usually". You just assume that this is always true for some magical reason. It isn't, but until Bitcoin, it was not apparent. I explained the reason: the deposits are accepted as a method of payment, because there are situations where they provide lower transaction costs than the money proper, and with fiat/gold, this requires substitutes.

It annoys me that you wouldn't know this despite telling me to read the article on money supply.

And it annoys me that you miss the big gap in your reasoning, although I have been pointing to it since my first edit.

Here are the very first two lines: "In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions)."

(emphasis added) Again, you miss the gap in your reasoning. Even here, it says "usually". You just jump to the conclusion that it is always like this. It's not and I explained several times why.

When I said that Bank Alpha lends out Bitcoins, I meant it. Bank Alpha does not lend out Bitcoin Substitutes, they lend out Bitcoins.

In that case, it is the lender that receives the substitute, which noone accepts. So he has no reason to deposit the money in the first place and Bank Alpha would not come to existence.

Money supply is defined as "currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions)." Therefore Money supply is greater than or equal to 180 bitcoins at that point in the example.

Again, gap in reasoning, I already explained it several times. Merely because demand deposits form money supply with gold and fiat, it does not follow it works the same way with Bitcoin. You do not understand why economists include them in the definition of money supply in the first place.

I have countered your claims and answered your questions.

You make systematic errors in your claims. You also fail to answer the core question, why are money substitutes such as demand deposits considered a part of the money supply in the first place.

I have provided an example of Fractional Reserve Banking with Bitcoins. Fractional Reserve Banking with Bitcoins is possible.

For the last time, I did not claim FRB with Bitcoin was impossible. I even provided actual empirical evidence of it, unlike you. You have obviously no idea what you're talking about.

--PeterSurda 21:07, 11 November 2011 (GMT)


--------Atheros Response-------

"Exactly. The issue of Surdas would have no effect on the Bitcoin economy, unless someone accepted Surdas instead of Bitcoins. That's my whole point."

But this isn't Fractional Reserve Lending. I just answered your question to be polite.

"You first need to define these two terms in a coherent manner, which has not happened. "

Money supply is amount of currency in circulation plus demand deposits (depositors' easily

accessed assets on the books of financial institutions).

Apparently you do not accept this definition (more on this below).

The monetary base is highly liquid money that consists of coins, paper money (both as

bank vault cash and as currency circulating in the public), and commercial banks' reserves.

In the case of Bitcoin, this would be real Bitcoins which are limited to 21 million.

Do you accept this definition?

Here is a helpful table. Monetary Base is MB and Money Supply is M1.

Type of money M0 MB M1 M2 M3 MZM
Notes and coins (currency) in circulation (outside Federal Reserve Banks, and the vaults of depository institutions) V[1] V V V V V
Notes and coins (currency) in bank vaults V[1] V
Federal Reserve Bank credit (minimum reserves and excess reserves) V
traveler's checks of non-bank issuers V V V V
demand deposits V V V V
other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. V[2] V V V
savings deposits V V V
time deposits less than $100,000 and money-market deposit accounts for individuals V V
large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets[3] V
all money market funds V
I said: "No, you misunderstand. They don't provide borrowers claims on bitcoins. They provide real bitcoins." You said: "In that case, they need to provide the claims (=substitute) to the lender."

Who needs to provide claims to the lender? Who is the lender, Bank Alpha for example? And what do you mean by claims? Can you please rewrite your statement so that I can understand?

"It's logically impossible to provide real bitcoins in excess of the reserves. "

Fortunately no one needs to.

"Of course it does. Wikipedia page on Bank reserves, http://en.wikipedia.org/wiki/Bank_reserves , says:..."

Ok, suppose Satoshi puts 100 bitcoins in Bank Alpha and Bank Alpha puts a fraction of the deposit (20 bitcoins) in a special account and does nothing with them. They then lend out 80 bitcoins. Can we say that the 20 bitcoins are held in reserve by the bank?

"This has no effect on my claim. "

Great. I am happy that we are starting to show some signs of agreement.

"If they do not deposit the money in the bank, then it is also accessible on demand. Therefore, if your argument was correct, there would be no demand for bank deposits in the first place and banks would not exist. Your reasoning is therefore erroneous."

I can give you two examples that currently or formerly exist that show that people do demand bank deposits despite not having substitutes like cheques and EFTs: MyBitcoin and MtGox. People hold/held quite a bit of money in these services. There would be further demand for deposit accounts if banks offer a bit of interest payment. Did you really think that there couldn't possibly be other advantages to having money in a bank besides being able to write cheques and use EFTs with it?

I said: "Demand deposits are included in the money supply."


You said: "Wrong. ..."

So do you assert that demand deposits are not included in the money supply as it applys to bitcoin? Edit: You stated this clearly in the rest of your post. I'm glad we are close to identifying the reason we disagree. I will address this in my next post after you respond.

You said "In that case, it is the lender that receives the substitute, which no one accepts. So he has no reason to deposit the money in the first place and Bank Alpha would not come to existence."

Why would Bank Alpha receive substitutes? As I explained in the example, Bank Alpha receives Bitcoins!

"You do not understand why economists include them in the definition of money supply in the first place."

Ok, Why is that? And why would it be any different for Bitcoin?

"For the last time, I did not claim FRB with Bitcoin was impossible. I even provided actual empirical evidence of it, unlike you. You have obviously no idea what you're talking about."

I provided an example of Fractional Reserve Banking above! You didn't say that FRB is impossible but you did say that "Without demand for Bitcoin-substitutes, FRB is not possible." You also said, "If someone tried Bitcoin FRB, they would produce Bitcoin-substitutes: digital services or physical goods incompatible with the Bitcoin network, fiat money or gold. Who would accept something like that for payment?"

Doesn't that clearly suggest that FRB with Bitcoin isn't realistically happening?


I have asked several questions (this last one being the least important). I look forward to hearing your response.

--Atheros

--------PeterSurda Response-------

Let's put our arguments into a formal structure.

Issue 1: definition of money supply:

  • Atheros: Zero maturity is a necessary and sufficient condition for a claim to be considered a part of the money supply.
  • PeterSurda: Both parts are incorrect. The necessary and sufficient condition is acceptance of the claim as a means of payment instead of the base.

Proof:

  • there are claims which have zero maturity, and are not considered a part of the money supply. The best example I could think of are casino chips. They are zero maturity, but do not increase money supply regardless of whether they are backed by full or fractional reserves. Mt. Gox accounts are the equivalent of the casino chips: you can use them to exchange against other currencies on Mt.Gox' systems, and you can withdraw BTC. Other example I found are certain promissory notes.
  • even demand deposits do not always have zero maturity. Banks typically request a prior notice if you want to withdraw larger amount of cash, however require no such notice if you just want to transfer money out via EFT.

Issue 2: application of the definition of money supply:

  • Atheros: money supply is cash (including one held by public and bank reserves) and demand deposits. Money supply increases when banks lend reserves.
  • PeterSurda: these two claims contradict each other.

Proof:

Money supply calculation
Stage Cash held by public Demand deposits Bank reserves Money supply if demand deposit is not acceptable for payment Money supply if demand deposit is acceptable for payment Sum (cash + demand deposits)
Prior to deposit 100 0 0 100 100 100
Creation of deposit 0 100 100 100 100 200
Fractional reserve lending 80 100 20 100 180 200
Creation of another deposit 0 180 100 100 180 280
Additional fractional reserve lending 60 180 40 100 240 280

Clearly, the sums in last two columns are different. So either your description of FRB is wrong, our your definition of money supply.

Issue 3: Usage of services:

  • Atheros: People deposit money into Mt. Gox. or mybitcoin (well, at least until it went belly up). These balances are demand deposits and therefore considered part of the money supply.
  • PeterSurda: Being a demand daposit does not mean it increases the money supply. Only if they circulate. As far as I know, Mt.Gox does not even support P2P payments outside of the BTC network, and I think mybitcoin did, but of course this only works among mybitcoin customers. Flexcoin supports this too, but I think Strongcoin does not. Furthermore, acording to your definition of the money supply (see previous table), if Satoshi deposited a million Bitcoins into Mt.Gox, that act of depositing would increase the money supply of bitcoins by about 13%, regardless of what Mt.Gox did with their reserves! Clearly there is something fishy about this.

Issue 4: Effect of FRB on Bitcoin:

  • Atheros: PeterSurda claims that FRB with Bitcoin won't happen.
  • PeterSurda: I claim that FRB with Bitcoin has very little effect on money supply and is unprofitable.

--PeterSurda 12:30, 12 November 2011 (GMT)


--------Atheros Response-------

Issue 1: definition of money supply:

I thought I gave a pretty clear definition of money supply: The amount of currency in circulation plus demand deposits (depositors' easily accessed assets on the books of financial institutions). The only reason casino chips aren't part of "the money supply" is because you haven't defined "the money supply". If by "the money supply" you mean "the money supply of casino chips" then casino chips are indeed part of the money supply (of casino chips).

Your definition of money supply: "The necessary and sufficient condition is acceptance of the claim as a means of payment instead of the base." (emphasis added)

What does this 'instead of the base' mean? Bitcoins are the monetary base of Bitcoin. Doesn't your definition mean that Bitcoins are not part of money supply?

Issue 3: Usage of services (related to issue 1):

I think it is goofy that you say that "being a demand deposit does not mean it increases the money supply". Let us suppose you have 100 bitcoins in your computer wallet and 100 bitcoins in MtGox in case you want to trade them some day. Wouldn't you say that you own 200 bitcoins? Wouldn't any reasonable person say that they own 200 bitcoins? Why, then, should the money supply be only 100 bitcoins? Why on Earth would the money supply go down when you move bitcoins from your computer to MtGox?

In reply to your "fishy" comment- As I've said, the money supply is currency in circulation plus demand deposits. If Satoshi moves a million Bitcoins from his wallet (which are 'in circulation') to a demand deposit, the money supply stays the same.

Issue 2: application of the definition of money supply:

There are problems with your table.

  • The reason the last two columns are not equal is because you added bank reserves in your sum. Bank reserves are not included in M1 (money supply) which you can see in my table above in the minimum reserves and excess reserves row.
  • Demand deposits are never accepted as payment so having two columns to address this doesn't make sense. That said, the values you have in the column Money supply if demand deposit is acceptable for payment are correct. The only thing that is accepted in the case of Bitcoin is bitcoins. A person can either withdraw the bitcoins himself and give them to someone else, or he can instruct his bank to move the bitcoins from his account to someone else's. Here is the corrected table:
Money supply calculation
Stage Cash held by public Demand deposits Bank reserves Money supply
Prior to deposit 100 0 0 100
Creation of deposit 0 100 100 100
Fractional reserve lending 80 100 20 180
Creation of another deposit 0 180 100 180
Additional fractional reserve lending 60 180 40 240

--Atheros 19:05, 12 November 2011 (GMT)

--------PeterSurda Response-------

I thought I gave a pretty clear definition of money supply: The amount of currency in circulation plus demand deposits (depositors' easily accessed assets on the books of financial institutions).

No, that's not what you said, you also included bank reserves. You also quoted sources that include bank reserves as money supply, including the description and the tables. You contradict that now.

The only reason casino chips aren't part of "the money supply" is because you haven't defined "the money supply".

According to your justification for demand deposits being a part of money supply (zero maturity claim), casino chips should also be a part of the money supply. Can you address this?

If by "the money supply" you mean "the money supply of casino chips" then casino chips are indeed part of the money supply (of casino chips).

The question is not what I mean, but what you mean.

What does this 'instead of the base' mean?

I've been talking about this since the beginning, it looks like you're finally coming around to confront it. It means that whoever you are sending money to is willing to accept this claim instead of accepting Bitcoins. Like cheque or EFT instead of cash, or (on gold standard) banknote instead of a gold coin.

Bitcoins are the monetary base of Bitcoin. Doesn't your definition mean that Bitcoins are not part of money supply?

Read what I wrote. I did not say that the base (Bitcoin) is not the part of money supply, I wrote that claims on Bitcoin are only a part of the money supply if they are an accepted method of payment.

I think it is goofy that you say that "being a demand deposit does not mean it increases the money supply".

I think it's regrettable that you still don't understand this.

Let us suppose you have 100 bitcoins in your computer wallet and 100 bitcoins in MtGox in case you want to trade them some day. Wouldn't you say that you own 200 bitcoins?

You own 100 bitcoins and a claim on 100 bitcoins. This claim is only a part of money supply if you can use it for payment. At the moment, you can't. While it is hypothetically possible to use this claim as a method of payment in the future, there is no demand for it, unlike the situation with fiat and gold.

Why, then, should the money supply be only 100 bitcoins?

I already explained it several times: for the same reason that owning 100 USD's worth of casino chips is not a part of the money supply of USD: they are not acceptable for payment. The "reserves" of the casino, however, in the absence of FRB, are a part of the money supply. So in your case the money supply is 200 BTC: 100 Bitcoins in your own wallet plus 100 Bitcoins as Mt.Gox reserves. The account balance you have with Mt.Gox does not appear in the equation.

Why on Earth would the money supply go down when you move bitcoins from your computer to MtGox?

They money supply does not go down, because Mt. Gox keeps reserves in the nominal value equivalent to your deposit.

As I've said, the money supply is currency in circulation plus demand deposits.

That's not what you said. Go back and read your own words. You also included bank reserves. In fact, you complained about me not including cash reserves in my definition of fiat FRB.

If Satoshi moves a million Bitcoins from his wallet (which are 'in circulation') to a demand deposit, the money supply stays the same.

In that case, your prior definition of money supply is wrong and your whole argument collapses.

The reason the last two columns are not equal is because you added bank reserves in your sum.

Go back and read what you wrote. You wrote several times that bank reserves are a part of the money supply. Look at the definition you quoted, and at the table you copied from the wikipedia article.

You still have failed to address the question why are demand deposits a part of the money supply in the first place, whereas casino chips aren't (at least I hope you do not claim that casino chips are a part of the money supply).

--PeterSurda 20:41, 12 November 2011 (GMT)

--------Atheros Response-------

I said: "I thought I gave a pretty clear definition of money supply: The amount of currency in circulation plus demand deposits (depositors' easily accessed assets on the books of financial institutions)."
You said: "No, that's not what you said"

Not only did I say it, I said it three times!

"...you also included bank reserves. You also quoted sources that include bank reserves as money supply, including the description and the tables. You contradict that now." (and) "Go back and read your own words. You also included bank reserves. In fact, you complained about me not including cash reserves in my definition of fiat FRB."

I just searched this thread for every occurrence of 'reserve' and read each paragraph and couldn't find where I claimed money supply includes bank reserves. Could you point it out for me? Concerning the table, I said that "Money Supply is M1". Note that M1 doesn't have a tick mark in the minimum reserves and excess reserves row.

"According to your justification for demand deposits being a part of money supply (zero maturity claim), casino chips should also be a part of the money supply. Can you address this?"

If we are talking about the money supply of dollars, then casino chips, bitcoins, gold bars, and chickens are all not part of the money supply (of dollars). Only dollars are. If we are talking about casino chips, then casino chips are included in the money supply of casino chips but those other things are not.


Is this statement correct? PeterSurda says that the Money Supply of Bitcoin is the total value of claims on Bitcoins which are an accepted method of payment. If that isn't correct, can you fix it?

I would like to be able to calculate the money supply. Is this statement correct? PeterSurda says that Money Supply is the amount of money in circulation plus bank reserves. If that isn't correct, can you fix it? Thank You.

"You own 100 bitcoins and a claim on 100 bitcoins. "

>99% of the population doesn't see it like that. They see the money in their bank account and money in their hand as basically the same thing. Certainly I admit that they aren't the same, but if you ask people how much money they have, nearly everyone is going to take the number of dollars (or euros, etc.) in their wallet and add the number of dollars (or euros) in their bank account, and tell you that number. They will also behave as if they have that number of dollars/euros. This is why demand deposits are included in the money supply. This is why my definition of money supply is useful.

"So in your case the money supply is 200 BTC: 100 Bitcoins in your own wallet plus 100 Bitcoins as Mt.Gox reserves. The account balance you have with Mt.Gox does not appear in the equation. "

Excellent- I understand what you are saying. You claim that money supply does include bank reserves but not demand deposits, correct?

(I may not be able to continue responding until Monday evening. We need a break anyway.)

--Atheros 05:54, 13 November 2011 (GMT)

--------PeterSurda Response-------

Not only did I say it, I said it three times!

I apologise, you used confusing terminology and I though that's what you're saying. Nevertheless, why did you pick M1 rather than M2 or MZM? You said that zero maturity is the reason why demand deposits are a part of the money supply.

Let me address the two definitions you provide, monetary base and money supply.

Monetary base is the money itself. In case of gold, it's the gold in existence. In case of fiat, it's very muddled: whatever the central bank produces (coins, banknotes, commercial bank deposits), to a certain extent other things, such as gold deposited in the CB, are also acceptable. In case of Bitcoin, it is Bitcoin. Claims on money are not a part of this.

Money supply is all the base money, plus claims on money that people accept as a means of payment, minus reserves of the issuers of those claims.

If we are talking about the money supply of dollars,

Casino chips (in US) are denominated in dollars, just like demand deposit accounts. Why are they not a part of the money supply, while demand deposits are?

Is this statement correct?

No.

If that isn't correct, can you fix it?

See above.

I would like to be able to calculate the money supply.

See above.

99% of the population doesn't see it like that.

There is a reason why economists use the definitions they use, and you still do not understand this reasoning. You use "money supply of dollars" when addessing casino chips, but what does it actually mean? Do you understand that?

They see the money in their bank account and money in their hand as basically the same thing.

And the reason why they do this is that they can use it as a payment method instead of using cash printed by the central bank: e.g. cheque, EFT, debit card. That's also the reason why they do not see casino chips as money: they cannot use it as a payment method instead of the dollars (or euros or whatever). That's also the reason why economists include demand deposits in fiat world in the money supply. This reason is absent with Bitcoin, and there's little reason for it to change.

See aforementioned Mises:

Technically, and in some countries legally as well, the transfer of a banknote scarcely differs from that of a coin. The similarity of outward appearance is such that those who are engaged in commercial dealings are usually unable to distinguish between those objects that actually perform the function of money and those that are merely employed as substitutes for them. The businessman does not worry about the economic problems involved in this; he is only concerned with the commercial and legal characteristics of coins, notes, checks, and the like. To him, the facts that banknotes are transferable without documentary evidence, that they circulate like coins in round denominations, that no fight of recovery lies against their previous holders, that the law recognizes no difference between them and money as an instrument of debt settlement, seem good enough reason for including them within the definition of the term money, and for drawing a fundamental distinction between them and cash deposits, which can be transferred only by a procedure that is much more complex technically and is also regarded in law as of a different kind. This is the origin of the popular conception of money by which everyday life is governed. No doubt it serves the purposes of the bank official, and it may even be quite useful in the business world at large, but its introduction into the scientific terminology of economics is most undesirable.

In 1912 when he wrote it, he saw a difference between the cash deposit and a bank note. In the meantime, the difference has vanished, because it became much easier to do these transfers (e.g. cheque/debit card/EFT). With Bitcoin, you cannot transfer these balances among each other outside of closed systems, you need to perform a withdrawal as a part of the procedure.

Once again, the reason why demand deposits are included in the supply of money is not that they are redeemable on demand, but because they are an accepted method of payment. That's the purpose of the term money supply too: to measure the amount of whatever is usable for payment. That is why casino chips and Surdas are not included in it, and that is why balances of claims-issuing companies like Mt.Gox and flexcoin should not be included in it either, as long as they are not used as a method of payment without conversion into "native" Bitcoin. That is also why economists use the definitions they use: the amount of things that are usable as payment is what they analyse, not the maturity of claims.

--PeterSurda 07:45, 13 November 2011 (GMT)

One link to support my definition of money supply: http://wiki.mises.org/wiki/True_Money_Supply :

Algebraically, TMS = Standard Money (held by the public) + Money Substitutes

And here is Rothbard in Austrian Definitions of the Supply of Money, http://mises.org/rothbard/austrianmoneysupply.pdf , confirming my analysis:

It is important to recognize that demand deposits are not automatically part of the money supply by virtue of their very existence; they continue as equivalent to money only so long as the subjective estimates of the sellers of goods on the market think that they are so equivalent and accept them as such in exchange.

--PeterSurda 12:00, 13 November 2011 (GMT)

--------Atheros Response-------

I picked M1 because that is what all the mainstream textbooks say. I believe they say that because the things in M1 are the things most people consider to be their money. Certainly that definition of money isn't useful for all situations which is why those other M's are shown. This is why the word usually appears in the description of money supply on Wikipedia which you pointed out earlier.

Concerning casino chips, I didn't know casino chips were valued in dollars. Now that I know that: Whether we consider casino chips part of the money supply or not has no effect on the size of the money supply; the money supply will remain the same. The reason is that supposing we consider casino chips to be money, then when we put 1 dollar into the casino's vault, that dollar is removed from the money supply, and one dollar in the form of a casino chip is added to the money supply. Notice that we are still talking about the money supply of dollars. (Chickens, Bitcoins, and Gold are not included.) The money supply remains equal to what is was earlier, but an additional dollar is now held in reserve. If you don't like this and don't want to say that casino chips are money; that's fine. In that case, the dollars in the vault are still part of the money supply and the chips simply represent a claim to retrieve them.

"You use "money supply of dollars" when addressing casino chips, but what does it actually mean? Do you understand that?"

Did my above paragraph answer this? If no, can you please restate?

"That's also the reason why they do not see casino chips as money: they cannot use it as a payment method instead of the dollars (or euros or whatever). "

Except that people do use casino chips as a payment method in cities like Las Vegas. You can pay a hooker or tip a waitress in a restaurant with the casino chips. If casinos were in every city, then you could use the casino chip anywhere as a payment method. Also, if you can't use a cash dollar as a method of payment in the jungle, wouldn't you have to admit that under your definition, tourists remove their dollars from the money supply when they visit the jungle?

Concerning your quotes from Mises and Rothbard, and really your views at-large: This is the Austrian school of thought. This isn't mainstream. Your definition of money supply is not in textbooks taught in very many schools. Your definition of Fractional Reserve Banking thus doesn't match what most economists consider it to be.

--Atheros 04:15, 15 November 2011 (GMT)

--------PeterSurda Response-------

Regarding casino chips: I think we're making some progress. You argue that the reason why casino chips do not affect the money supply is not that they are not used as a general medium of exchange, but because the issuers thereof do not overissue them (FRB). How do you know they do not overissue?

Use of chips as a payment method: please look at wikipedia page of Money: http://en.wikipedia.org/wiki/Money:

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.

(emphasis added) Are chips generally accepted? No, they are only accepted within a very narrow geographical area, and only for certain services. Similarly as vouchers, coupons, bus tickets and so on. So why do you think they should be reflected in the money supply? More importantly though, balances on Mt.Gox, flexcoin and so on are used as a medium of exchange even less: in the hypothetical scenario of transferring Bitcoins from Mt.Gox to flexcoin, rather than exchanging the balances, the Bitcoins are withdrawn from Mt.Gox, sent over the Bitcoin network, flexcoin stores them in their "reserve" wallet and issues new claims (balance) to the recipient. So even if we omitted the requirement for general acceptance, it still would not support your argument.

As your example with jungle and uselessness of dollars, I admit that the definition is fuzzy, I have my own problems with it. But hopefully we can agree that unless you accept something as a means of payment, the change of supply of it has no effect on our spending decisions, correct? If Walmart issues vouchers in the value of, say, one trillion dollars, unless you intend to shop at Walmart, this has no effect on your purchasing decisions, correct?

Most importantly though, you still haven't address the core issues. Why economists use the definitions they use? Why do the definitions of M1 say that it usually includes demand deposit, but not always? What does money supply measure? If you disagree with Austrians, what is your alternative explanation?

While it isn't as clear from wikipedia as from the Rothbard quote, here it what it says about money supply: http://en.wikipedia.org/wiki/Money_supply :

In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.

and

Money is used as a medium of exchange, in final settlement of a debt, and as a ready store of value.

Are account balances on Mt. Gox or flexcoin used for any of this? Maybe for the last one. But they are rarely a medium of exchange or a final settlement of debt. The wikipedia article continues:

Narrow measures include only the most liquid assets, the ones most easily used to spend...

(emphasis added) Are Mt.Gox / flexcoin balances used to spend? In general, no, they are redeemed into Bitcoins in order to spend them.

Mt.Gox offers the following methods of transferring Bitcoins:

  • redeemable Mt.Gox code
  • Green address
  • Bitcoin address

Only the first one is a claim, the others are native Bitcoin. The claim is only usable for other Mt.Gox users.

Flexcoin offers the following methods of transferring Bitcoins:

  • another flexcoin ID
  • an e-mail address
  • an external bitcoin address

The first two are claims (I think, I am not sure about the inner workings of flexcoin). The claim is only usable for other flexcoin users.

The only people who are affected by (hypothetically) inflated balances of Mt. Gox or flexcoin are those that accept those claims. From this perspective, both functionally and scope-wise, this is similar to the aforementioned casino chips, vouchers and so on. It does not have an effect on the money supply any more than an overissue of casino chips has effect on the purchasing decisions of people other than the casino guests, aforementioned hookers and waiters.

--PeterSurda 08:00, 15 November 2011 (GMT)

--------Atheros Response-------

I assumed that casinos weren't over issuing chips. I've just done some research and found that they are allowed to do this legally. So they are probably doing it. So they are increasing the money supply of dollars.

We could argue all day about what things are 'generally accepted'. 100 bills aren't generally accepted at gas stations. We shouldn't read too much into that particular phrase. Casino chips wouldn't be money far away from a casino, but they are money in Las Vegas. I have a Chinese 2 unit bill around here somewhere. It isn't money to me.

"If Walmart issues vouchers in the value of, say, one trillion dollars, unless you intend to shop at Walmart, this has no effect on your purchasing decisions, correct? "

If everyone in a 'community' of some sort shops at Walmart, then the vouchers would start to be traded like money among the members of the community for goods and services for a period of time before making their way back to Walmart.

"Why economists use the definitions they use?"

Because their definitions are the most useful.

"Why do the definitions of M1 say that it usually includes demand deposit, but not always?"

You are confused. The definition of M1 always includes demand deposits. The definition of money is usually M1. The definition of money is usually M1 because in most situations when you ask someone how much money they have, they add up the things in M1.

"What does money supply measure?"

I've answered this six times.

"If you disagree with Austrians, what is your alternative explanation? "

Mainstream Economics

Concerning Fractional Reserve Banking in particular, this.

Here is Money supply.

"Narrow measures include only the most liquid assets, the ones most easily used to spend... "

So are you telling me that money stops being money when you put it in a bank, or MtGox? Because you are telling me that money in MtGox isn't sufficiently easy to spend because their transfers naturally aren't accepted by everyone.

"It does not have an effect on the money supply any more than an overissue of casino chips has effect on the purchasing decisions of people other than the casino guests, aforementioned hookers and waiters. "

No no; because the money supply increases as I described above, the value of each dollar goes down slightly which affects everyone.

I would like you to respond to this example:

Suppose that there are only 100 Bitcoins on Earth all owned by Satoshi. He puts all 100 in Bank Alpha. Bank Alpha puts 20 of the bitcoins (20%) in a special account and leaves them there. They then lend out 80 bitcoins to Gavin. Bank Alpha tells Satoshi on his account page that his account has 100 bitcoins in it. Now, Gavin buys some LolCat comics from Cameron for 80 bitcoins. Cameron puts his 80 bitcoins in his bank, Bank Beta. Bank Beta puts 20% in reserve (16 bitcoins) and has 64 to lend out. They lend those 64 bitcoins to someone else. Cameron's account page on Bank Beta's website says he has 80 bitcoins in his account. Despite the fact that Satoshi, Gavin, and Cameron only have claims to bitcoins, isn't the fact that they collectively know they can access 244 bitcoins significant to note and measure? This means that each bitcoin will be nearly 1/3rd as valuable as before Fractional Reserve Banking. How is that not significant?

--Atheros 09:31, 15 November 2011 (GMT)

--------PeterSurda Response-------

Here we have it from wikipedia ( http://en.wikipedia.org/wiki/Demand_deposit : )

Demand deposits are usually considered part of the money supply, as they can be used, via checks and drafts, as a means of payment for goods and services and to settle debts.

(emphasis added)

Another link: http://www.economicsjunkie.com/true-money-supply/ :

Virtually everyone accepts payment in demand deposit money. Demand deposits are thus to be included in the money supply.

And here we have the Federal Reserve Bank of New York, http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html :

The money supply measures reflect the different degrees of liquidity—or spendability—that different types of money have.

So what reason do you have in asserting that maturity, rather than acceptability in transactions (as seen above), is the reason for including a claim in the money supply? And what do you think money supply actually measures?

--PeterSurda 10:14, 15 November 2011 (GMT)

So are you telling me that money stops being money when you put it in a bank, or MtGox?

It stops being a part of the money supply if it is held as reserve for money substitutes.

Because you are telling me that money in MtGox isn't sufficiently easy to spend because their transfers naturally aren't accepted by everyone.

What this means is that these balances are not money substitutes, only claims. They are not a part of the money supply of Bitcoin, rather the "reserves" of Mt.Gox are, because these "reserves" are what circulates if people are transferring Bitcoin among themselves. It is the equivalent of gold being able to instantly teleport among vaults at negligible cost. If this was possible, bank notes, cheques and EFT would not be used for exchange of gold, and bank balances would cease to be a part of the money supply.

--PeterSurda 10:45, 15 November 2011 (GMT)

Also, definition of money supply from Merriam-Webster http://www.merriam-webster.com/dictionary/money%20supply :

the total amount of money available in an economy for spending...

Another definition: http://www.investorwords.com/3110/money_supply.html :

The total supply of money in circulation in a given country's economy at a given time.

These quotes (and the ones from previous post) lead to the following conclusion:

  • the money supply does not measure the nominal value of zero maturity instruments denominated in that currency, but the nominal value of the instruments that are accepted as media of exchange
  • deposit accounts are not always, by their virtue, a part of the money supply, but only to the extent they are accepted as a method of exchange

I provided quotes by non-Austrian, mainstream sources. What is your evidence that your position is correct?

--PeterSurda 12:12, 15 November 2011 (GMT)

--------Atheros Response-------

I've cited many sources throughout this thread. I can even take your own Fed link and see that "The Federal Reserve publishes weekly and monthly data on two money supply measures M1 and M2. ... The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds."

Your definition of money supply is not useful.

I would like you to respond to this example:

Suppose that there are only 100 Bitcoins on Earth all owned by Satoshi. He puts all 100 in Bank Alpha. Bank Alpha puts 20 of the bitcoins (20%) in a special account and leaves them there. They then lend out 80 bitcoins to Gavin. Bank Alpha tells Satoshi on his account page that his account has 100 bitcoins in it. Now, Gavin buys some LolCat comics from Cameron for 80 bitcoins. Cameron puts his 80 bitcoins in his bank, Bank Beta. Bank Beta puts 20% in reserve (16 bitcoins) and has 64 to lend out. They lend those 64 bitcoins to someone else. Cameron's account page on Bank Beta's website says he has 80 bitcoins in his account. Despite the fact that Satoshi, Gavin, and Cameron only have claims to bitcoins, isn't the fact that they collectively know they can access 244 bitcoins significant to note and measure? This means that each bitcoin will be nearly 1/3rd as valuable as before Fractional Reserve Banking. How is that not significant?

--------PeterSurda Response-------

Atheros, your quotes do not address my points at all, they skip over them. From this you incorrectly conclude that they disagree with my arguments.

In your example, since Gavin, Cameron and Satoshi cannot at the same time buy anything worth more than 100 Bitcoins without using their account balances as a medium of exchange (thus elevating it into a status of money substitute), it means the money supply is only 100 Bitcoins. That's the purpose of the term money supply, it measures how much can be spent.

Your is the definition that is not useful in economic theories. Money supply measures the amount that is available for payment. Not the sum of zero-maturity debt instruments. Absent the requirement to be usable as a medium of exchange, it cannot be used in calculations of inflation or money velocity. You practically invented your own economic theory.

I challenge you to pick any professional economists, who disagrees with either of these claims:

  • The purpose of the money supply is to measure the nominal value of whatever is used as a medium of exchange.
  • The reason why demand deposits are included in the money supply is because they are used as a generally accepted medium of exchange.

--PeterSurda 08:16, 16 November 2011 (GMT)

Bitcoin mining is a waste of energy and harmful for ecology

IMHO this chapter is superficial. Compare Bitcoin to electronic fiat currencies. --Shrewdwatson 17:57, 23 April 2011 (GMT)


How about this:

The electricity spent in hashing is not wasted. It creates a product of value to the Bitcoin economy. The product is a supersignature on the complete list of transactions to date (the Block chain). This supersignature attesting to the chain's completeness is Bitcoin's defense against double spending.

Many sources of energy vary in their availability in ways that do not match the variations in demand. The law of supply and demand will require Bitcoin to soak up a lot of energy that is currently "wasted" without making a big dent in the otherwise usable energy supply. [Perhaps cite estimates of the break-even point for mining profitability that imply near zero-cost electricity.]

More --JohnTobey253 04:49, 29 April 2011 (GMT)

This paragraph is not honest. Right now the energy consumption of mining might be raletively low, but it is strongly dependant on BTC value because of economical basics. Please add something like the following:

Energy consumption for mining has a high correlation with bitcoin exchange rate to fiat currency. Because variable costs of mining are dominated by electricity price, the economic equilibrium for the mining rate is reached when global electricity costs for mining approximate the value of mining reward plus transaction fees.

  • more efficient mining gear does not reduce energy use of the bitcoin network. It will only raise the network difficulty
  • cheaper energy linearly increases mining energy use of the bitcoin network
  • the same conclusions apply to all proof of work based currencies (i.e. Litecoin).

I'v estimated that bitcoin has the potential to increase world electricity consumption by 7% if really breaking through (meaning drawing equal to the USD in market cap). If you're not convinced, please come and discuss with me Brenzi (talk) 21:12, 22 April 2013 (GMT)

Ratio of Capital Costs versus Electrical Costs

This interesting, but it wrongly assumes that the lifetime can be determined by amortisation time. Mining gear will be run as long as bitcoin rewards are higher than electricity cost. Amortisation is irrelevant for this aspect.



Categories and subcategories

Now we have everything in one place, but it should be divided into smaller subcategories to make it easier to find interesting topic

--Zwierzak 22:03, 13 August 2011 (GMT)

That's an excellent idea.

--Atheros 03:46, 11 November 2011 (GMT)

Early adopter advantage

I'd like to comment on the fact that new bitcoins are evenly and competitively distributed over a period of 140 years or so. We are still very much in the "early" stages of bitcoin and only just recently passed "the half way mark" with two more halvings in the next 8 years. The generation of 90% of all new bitcoins happens over the first 15 years or so. JulianTosh 2012-12-11 19:18 (GMT-8)

References

  1. 1.0 1.1 http://dollardaze.org/blog/?post_id=00565
  2. http://research.stlouisfed.org/fred2/series/M1
  3. http://www.investopedia.com/terms/m/m3.asp