Quote from: Red on August 05, 2010, 02:58:56 AM

Quote from: Bitcoiner on August 05, 2010, 12:34:21 AM

Given that I actually agree with you up to that point, how is my line of reasoning bunk? My point still stands. The supply if Bitcoins is limited: The banking system in aggregate cannot find enough Bitcoins if it loans its on demand deposits out! Why should the depositor accept quasi-bitcoins in the form of banking credit instead of the actual thing? On demand deposits simply cannot be loaned out if a banking system is to ultimately remain stable. Sure, some banks can try to do it, but then they better not call them "on demand deposits". Some might get away with it, but sooner or later, someone will find themselves between a rock and a hard place. Deposits can be loaned out, but not with a guarantee of redemption. That is simply impossible as Bitcoins cannot be created out of thin air.

So supposing that there exist bankers that take on-demand deposits of BTC and make sound-loans of BTC that pay interest in BTC. What I'm saying is no fraud or scamming by bankers. And no hedging on my part, these are fractional reserve banks. They lend out any 90% of depositor's BTC and keep 10% on hand as easy "cache".

What you are proposing (and I hear proposed by others as if it were a common case) is a run on all banks at the same time of all "on-demand" BTC deposits.

No need for a full bank run; only 10% would be necessary in this case. I already went through all of this in my previous posts, though. What exactly is it that you believe is a myth or bunk? Money cannot simultaneously be lent out and kept as an on demand deposit. If one bank lent out too many BTCs and has a deposit call, then another bank has to have correspondingly greater reserves in order to lend that bank BTCs. The banking system cannot in aggregate practice fractional reserve banking to a significant degree and remain stable over time. The market will determine where that point is, but I doubt it is as high as 90%.

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Now if "good banking" is going on and there is no BTC in-house, then all the BTC is out on BTC interest producing loan and is backed by collateral. That makes these loans nice low risk "BTC income producing properties". So at that point the banks can sell these nice low risk BTC income producing properties to other investors willing to pay BTC now in exchange for more BTC later. If there is a default the investor claims and sells the collateral.

Sure they can. What they can't do is simultaneously create such a paper and let the depositor withdraw the capital backing said paper! That would hollow out the bank. In order for a bank to create a paper and remain honest, what it needs to do is this:

Bank receives 100 BTCs from A. Bank gives A a paper in return, only redeemable at a future date.
Bank lends those 100 BTCs out to other people as loans.

What it cannot do is this:

Bank receives 100 BTCs from A. Bank credits A with 100 BTCs at its bank which can be withdrawn, spent, or transferred at any time.
Bank lends 90 BTCs out to other people as loans.
A withdraws his 100 BTCs <-- They no longer exist.

It cannot do this unless it sells the 90BTC of loans to another party in return for real BTCs which it can then use to back its deposits. It cannot back its deposits with paper, because the depositor does not want paper, he wants BTCs. That's what he agreed to and that's what the bank promised.

Yes, the bank can now borrow BTCs from another bank in order to pay out the depositor, but a banking system cannot do so in aggregate. Loans need to be backed by savings.

To summarize:

It is fraud to place two property claims on the same BTC. To say that the depositor owns a physical BTC at the same time as a lendee owns that same BTC, while telling the depositor that the BTC is solely and wholly his and can be withdrawn, spent, or transferred at any time, is fraud.

It is NOT fraud to give the depositor a paper which represents future BTCs and tell him that he no longer owns any physical BTCs, because he gave them up in return for the paper. It is furthermore not fraud to then lend these BTCs out, since they no longer belong to the depositor but they belong to the bank. This is otherwise known as the depositor purchasing a certificate of deposit or bond with the bank.