Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I think we've advanced a bit further in our discussion. We've now come to the agreement that it is mainly government intervention into the market, in the form of legal tender laws and taxation (among other things) that keeps a dishonest currency stable and prevents it from collapsing. Am I right on our agreement on this so far?

Agreed. The culprit is a combination of three things:
1)Banks can do BS things legally, like backless loans.
2)The whole "sheeple" complex, where people don't know that this is going on. This is not because they're stupid, its because between studying for their MDs (using smart people as an example here...)and getting kids to soccer practice and paying their bills they don't have time to study monetary theory.
3)For those who do wake up, the fact that fake-money is legal tender means that there's nothing they can do about it. By law, they have to accept the garbage.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

Let's say that we don't have government intervention into the Bitcoin market. I know we can argue on if and when it is going to happen, and I don't see it as a very fruitful argument because there is no way to really be sure on how effective government intervention would be or what form it would take. For the sake of a free market analysis, let's look at the situation without intervention taking place.

Without government intervention, and provided people aren't blind, then all you've been saying is right. However, if the economy is in bitcoins, and we want roads and schools and troops to prevent China from waltzing over us, there will be government intervention. *This* is where I primarily differ from you. The laws which screw up the ideal analysis of Bitcoin's inflation-proof nature are in place because the government exists. As long as it exists (provided that it doesn't suddenly grow a conscience), the legal tender law, which is the ultimate stopgap against responsible people demanding real money, remains in place. My contention is that we shouldn't claim...

Quote

# Be safe from the instability caused by fractional reserve banking and bad policies of central banks. The limited inflation of the Bitcoin systems money supply is distributed evenly (by CPU power) throughout the network, not monopolized by the banks.

For now, this is true. Banks are not issuing bitcoin loans, and so bitcoins are inflation-proof. However, nothing prevents banks engaging in fractional reserve policies and creating backless bitcoin-credit (since its all still legal) if they wanted to, and thus, to imply that using bitcoins in the context of the present, law-bound economy is proof against these inflationary actions is untrue. Maybe Satoshi wasn't meaning to imply this, but as someone who's very concerned about these matters, that's what I took from the statement, until I further analyzed it later on.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I believe that you've made two main points as to how you see a dishonest banking system operate:

* Loans are compounded upon loans, therefore increasing the amount of money chasing goods and creating general inflation.
* The banks stay solvent by "not being stupid"; by ensuring that the ratio of deposits to reserves does not get so out of hand that it is possible for a single depositor to single-handedly bust the bank.

Agreed.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I don't deny that it may be possible for a bank to loan out some of their "on-demand" deposits and thereby create some inflation by creating more liquidity than was saved. I also don't deny that they might be able to keep up the charade for a long time by advanced management of their reserves. What I do deny is that such a system can possibly expand without limit, either in the aggregate or for individual banks.

The central issue is not the loaning out of deposited money, but the keystroke-creation of money that doesn't exist. However, I suppose that this does make it "on-demand," as you can theoretically go "You just loaned me $500,000. I'd like that in twenties."

However, most likely, a bank would say "Sir, I just loaned you one million bitcoins. That's 1/21 of the entire world economy. You don't want it on a flash drive - what if you lost the drive? To protect the economy and you, its our policy that you must use our super-secure, ultra-safe servers. What? Is it real bitcoins? Um...I'll have to check with my manager....but I"m going to go with....yes?" Thus, the bank can prevent a run by a matter of policy - essentially admitting that people cannot take out all of their money at once, but its not because the bank doesn't have it (which they don't). Instead, its because the bank wants to protect you....

Thus, the banks eliminate even the *possibility* that people demand large sums in cash. I'm not sure if this is the present policy with dollars - I'm tempted to drive to the bank tomorrow and ask someone. I know that its the current policy with ATMs - most accounts have a $500 or $1000/day limit, to prevent this scenario at the ATM). However, as this eliminates the possibility of a run on the bank, the only option left is that people don't trust the banks. As mentioned before, legal tender laws force people to use the bank credit, whether they trust it or not, protecting the entire system and leaving the only alternative as anarchy.

As you say, this system cannot, and does not, perpetuate eternally. Not even today. Today, banks continued to give backless loans, and they ran analyses to guarantee that if people continued to make their mortgage payments or houses were reposed at current house prices, then they'd be fine. Of course they couldn't provide enough dollar bills, but they could cover their debts.People did not pay their mortgages, because markets crashed, companies lost money, and laid off employees. "Fine," say the banks. "Repo." Because with a repossession at the current market price of the house, they could cover their debts. But there were so many repossessions that supply and demand drove down the cost of a house, and the banks couldn't cover their debts.

Cue the Fed.

The problem with bitcoins resolving this situation (which otherwise, they would), is that you can easily have a Bitcoin-Fed which issues fake, backless bitcon loans. Even if people figure out that its a sham, the legal tender laws prevent them from doing anything about it. As bitcoin does not address these laws, it is not inflation-proof.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I also think you made the same case yourself, in your answers above. Let's look at our "stupid" bank scenario again:

Our wealthy depositor deposits 100,000 BTCs at a bank which engages in aggressive fractional-reserve banking. They tell him that the funds are available anytime, but in reality they keep some in reserves. There are 500,000 deposits total. In order to avoid being busted out by a single reserve, they decide that they need to keep at least 150,000 BTCs in reserve.

Let's say that our banking system continues to give backless loans, which are used to make new deposits, which are then being used to create ever more loans.

Let's say that our wealthy depositor is one of these guys. He takes out a 100,000 BTC loan from another bank, and deposits them at his bank. We must also assume that his bank will accept credit from another bank in place of actual Bitcoins.

What happened then? The depositor now has 200,000 BTCs at the bank, but the bank still only has 150,000 BTCs in reserve. If they don't want to be "stupid", then they must somehow acquire additional BTCs. Since it turns out that the amount of real BTCs in the economy is fixed, this might lead to trouble for the bank.

You're assuming the investor would be able to get a second loan. In fact he wouldn't - Experian, TransUnion, and Equifax take care of that. You're right, though, that if there were no cartel elements and banks could not determine how much the man had outstanding, this would crash them. Unfortunately, they can and do see all outstanding obligations. If somehow they were prevented from doing so, they would probably cease giving loans entirely - and while I don't like fractional-reserve banking or backless loans, its undeniable that an economy with no loaning institutions would stagnate at best.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

The alternative is that we end up denominating the depositor's account in the form of two currencies: 100,000 in BTCs, and 100,000 in (private bank) quasi-BTC currency. They would not be the same currency, since the second one would not be redeemable for actual BTCs but would merely be "BTC-backed". We then end up with an exchange rate between the two, and it is possible that that bank's currency will go bust.

This is true, provided that legal-tender laws to not require that the two be equated. My central point of contention now is that they would, as they do today. Therefore, to make users "safe" from banking practices the use of bitcoins must somehow abolish these laws, which it does not.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

Without legal tender laws forcing people to accept private credit as equivalent to actual BTCs, or confiscation of actual BTCs in exchange for paper credit (much like what happened with gold in the 1930s), there is simply no way that such a system could perpetually inflate ad infinitum.

Agreed, at least provided that people realize that bitcoin-credit is not bitcoins. However, legal tender laws will not be abolished, so the theoretical situation varies from the practicality, in which the only way to resolve inflation is honest politicians (heh) or drastic measures which would destroy the economy anyway.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

What I would like to know is how the government is going to force people to accept a quasi-BTC currency in place for the real thing.

They force people to accept quasi-bitcoins by the following manner. Assuming that fake bitcoins are legal tender...
1)A bank issues fake-bitcoin credit. No one wants it, so the bank issues it to its CEO. He'll still take it.
2)The CEO owes his power bill, grocery bill, etc. He offers legal-tender bitcoin-certificates (digital, I'm assuming), which he got in exchange for the bank loan. These, like the loan, are not backed by anything.
3)The power company and grocer politely tell him that they will not accept it, as it is not bitcoins.
4)He takes them to court. The law invalidates his debt to them, since he offered legal tender and it was not accepted.
5)His friends see that they can pay their bills in worthless credit, not sacrificing any bitcoins. After all, Mr. CEO did!
6)The businesses are left with three options - 1)Accept credit, 2)Go bankrupt because all of their accounts are declared null and void when people try to pay with credit and they reject, and 3)Rebel, which leads to jail or getting shot.
7)One of the three options happens. Number 2 leads to massive depression or anarchy as businesses close en-masse. Number 1 puts the banks back in power like today. Number 3 scares all the other business owners (they don't want to go to jail), and thus leads to number 1.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I have already shown how it is impossible for the banking system to expand BTC credit without hitting a wall somewhere.

Agreed, wthout legal tender laws.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I don't think the government can go and confiscate BTCs and/or force people to accept quasi-BTCs in place of the real thing.

They did it once. Wilson said "We're off the gold standard, guys," and suddenly everyone had to accept quasi-valuable paper. Not that gold is inherently valuable, but neither are bitcoins. Through legal tender laws, they could force us to accept whatever they wanted. As far as confiscating bitcoins, they wouldn't have to. As soon as quasi-btc were legal tender, then 1BTC=1Q-BTC, and as the number of Q-BTC increases, a real BTC becomes less valuable, and thus is subject to all the problems of Q-BTC.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

A government would have to be totalitarian to have that kind of reach, especially in the digital sphere. Where the trouble lies is at the Bitcoin boundary with fiat currency, the physical world, and government regulation.

Yes and yes.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

BTC's don't need to replace the entire system, they just need to be good enough to compete with it

Currency monopoly is not desirable IMO.

Honestly, I would like the entire system to be replaced with something that is inflation-proof, but again, the whole issue there is legal tender laws. However, I agree that this is the best solution. Hopefully, bitcoins will become a big deal while still remaining "under the radar." Most likely, this will be the case, as the USD isn't going anywhere any time soon. That way, legal tender laws for BTC will not exist, and if anyone is stupid enough at some point to accept a backless Q-BTC (if anyone would ever issue those...), we can just reject it.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I have come to the belief over time that the only moral system of contract for humans is a voluntary contract, and the most efficient economic system is one that is based on such voluntary contracts and subjective value. All involuntary impositions are a form of servitude, to one degree or another. I don't think we're ready to live in a world without government and taxes, yet, but I believe now is a good time as any to increase the competitive pressure on government and to increase the choices out there.

Agreed. Bitcoins are, for the time being, a nice way to enable a contribution to a future voluntary order. The issue arises, of course, when those with the current control (who of course don't want to give it up), realize that this uninflatable, very difficult to tax currency is a thorn in their side, and they employ their mastery (through legal tender laws) to screw up the ideal.

Quote from: Bitcoiner on July 18, 2010, 04:40:01 AM

I've enjoyed this conversation with you; thanks for the good discussions so far!

And I. Its good to know that there are people who both understand and are willing to hash out the details of our current...predicament.