Is this a time deposit or an on-demand deposit? I do not see interest being paid on on-demand deposits. That could imply that the bank is using that money and that it's not really there.
Scratch the interest then. The bank IS using money that's not there. That's the whole point. They're using dollars that aren't there today, and tomorrow they're using bitcoins that aren't there. That is the definition of fractional reserve lending.Agreed, the bank is lying to you. I hope it is clear to everyone why this is unstable, and can even be considered fraud. If the bank tells you that the deposit is on demand and always available, then it better always be available. If it's not, that's a contractual failure and fraud.
No. Under the US Code and the code of every other developed nation, then they are only committing fraud if the percentage of actually available accounts falls below some threshold. For standard savings in the US, that ratio is now around 11%. Which means that 89% of all accounts are at any given point *not redeemable.* They are lying to you. It is fraud. Its just not *legally* fraud. And no one is ever going to convince a solid 11% of all bank account holders to go demand cash at the same time, so they will never be caught.Fractional reserve is OK so long as the banks aren't blatantly lying about what they're doing. Without a government ready to print additional bitcoins to bail out banks, you can bet that they will be more careful about what they're doing, since if they get caught in the lie, they're fvcked.
Fractional reserve is by definition the creation of liquidity (purchasing ability, or as I call them, "lie dollars") backed only by a borrower's promise to pay, not by actual currency. This is, in your parlance, "blatantly lying about what they're doing." I agree with you. However, its legal with dollars and pounds and euros and it will be legal with bitcoins. It SHOULD be illegal, but changing from dollars to bitcoins will not make it so.
Also, you're correct that they're screwed if they're caught in the lie. That's a run on the bank, and is a heck of a lot worse than even our current financial mess. It causes everyone to open their eyes, go "the banks are lying to us!" and hide their money in their mattress for the next hundred years. There are senior citizens today who don't have bank accounts because they were rudely awoken to the bank's fraudulent but legal system in the thirties, while the rest of us have the wool over our eyes.
I understand what you mean, but what I mean is that there will be no backstop called the Federal Reserve to bail out the banks when they go bust, and trust me, the greedy ones WILL go bust.
I wish this were the case. However, why would their be no Federal Reserve? The Federal Reserve is independent of the US Bureau of Engraving and Printing - its just another bank. Nothing stops a nation from creating such a bank with bitcoins. They don't have to print bitcoins, they just have to engage in fractional reserve and seem big and strong and legit enough that no one will ever question whether they have the money they claim to have.
However, I would demand honesty from the banks. I can surmise others can do the same. We can never be entirely sure what's going on; the banks could lie, they could be running a pyramid scheme; what we DO know is that honesty is in everyone's best interests...
Absolutely! We should all demand honesty from the banks, and an end to the pyramid scheme that is going on. However, my point is that shutting down the literal printing presses, which Bitcoin does when it gets to 21,000,000BTC, does not do this.
You're forgetting that Bitcoins are not an inflationary regime. It will be much more difficult to keep the correct number of Bitcoins on hand when you can't just print them willy nilly.
I think you're both right and wrong here. Yes, it would be more difficult to keep a day's supply of bitcoins on hand when you couldn't request more cash. However, I also believe that, under bitcoins, no one would *EVER*, or almost ever, request real bitcoins. Today, people know the difference between a piece of paper with a picture on it and a number on a bank website. Even though they don't understand the bank's fraud, they know there's something different about the electronic number and the paper. Therefore, the bank must keep paper on hand, because people might demand it, believing it to be more secure than the bank number on the screen. However, the distinction between bitcoins and bank balances is *much* more difficult to grasp. If you're a computer scientist, if you've read the bitcoin whitepapers, etc, you know that there's a difference between a real bitcoin and a number on a bank account website. The real bitcoin is cryptographically generated, and is not a lie. Its even far more true in its value than the US paper money, which is what bitcoin is going for. However, for 99.99% of the population, there is *no* difference between a bitcoin and a bank's fraudulent claim that bitcoins are in an account. So, no one would ever (or would very rarely) demand bitcoins, making the number that the bank had to keep on-hand far more manageable, and in fact probably just a bit above 0.
I essentially agree with everything you say, but I see the dynamics as being different because there's no Big Daddy to bail the kids out from their mistakes when they mess up, yet again 
I agree that the fact that bitcoins are separate from any government makes a difference. Its a significant difference, and probably the biggest difference between bitcoins and dollars, pounds, euros, or whatever. However, I think that fractional reserve bailouts could still happen, unfortunately, because people will not demand real bitcoins, not knowing the difference between a bitcoin and a bank balance.