I zoned out at Section II ("The Central Banking Narrative Has Collapsed") because every single paper he cites is written by him (and in fact so are 18 of the 20 publications he cites in the entire article)
Weirdly, some of the organizations and theories he's attacking are also his own (he was the lead author on the [weak] Positive Money paper which proposed making the Bank of England directly control the money supply he's now insinuating is some central banker astroturfing campaign, and the unconventional recommendation central banks broaden their remit to tackle Japanese economic stagnation by taking on some of the asset purchase and lending roles of the commercial banking sector which he now appears to consider to be a road to "Orwellian totalitarianism" is literally how he made his name)
Extraordinary claims require slightly better evidence than someone darkly hinting that one of the organizations whose policy objectives he helped shape "appears well funded in the country of its founding (the UK), and it seems suggestive that its members have appeared at national and international events and conferences together – and apparently singing from the same hymn sheet – with the Bank of England and the George Soros (Gyorgy Schwartz)-funded INET (‘Institute for New Economic Thinking’)" whilst failing to acknowledge he was its most reputable contributor and disavowing the policies he's advocated in various capacities for quarter of a century before that only implicitly (whilst continuing to cite other parts of the papers anyway).
Feels like the whole argument is going on inside his own head, and whilst I've heard economists conclude policies they used to advocate wouldn't work before, I've never seen them handwave their earlier beliefs away as "totalitarian" without even acknowledging they actually used to hold them.
I also noticed that, and it raises concerns. However, the intro, the questioning of the fundamentals when faced with evidence that contradicts the assumptions, is long overdue.
When interest rates entered negative territory, something deemed formally impossible a decade earlier, a huge alarm should have sounded in Economics. Instead, we got some after-the-fact explanations that are untestable, and continue applying the same old models.
Science is about constant questioning of assumptions, and I have the feeling Economics fails at this crucial step.
No economist believed that negative interest rates were formally (or informally for that matter) impossible. You might find arguments that real rates (nominal rate minus inflation) should never be negative, but in a deflationary environment nominal rates can go below zero without violating that.
Yes, of course, in a deflationary environment, rates can be negative. We are in an inflationary environment, though. Zero was thought to be a hard limit -- in terms of interest rate efficacy as a lever to act on the economy.
Now, the mantra is that near zero negatives are still within the efficacy envelope. It was not predicted, but stated after the fact. This is, to me, a clear sign that the model is wrong, and should be reviewed with no barriers to questioning basic assumptions.
I suspect most researchers fear that mining this particular vein would be career suicide. Prof Werner seems likely, based on his bio, to have made a lot of money in the financial industry - he can probably afford not to give a damn.
I'm surprised that the obvious isn't mentioned even by the "opponents" of the current banking system. What increases the risk is that banks create investments without safety backups and what destroys economic growth is the huge bonuses they take out of these investments.
Maybe it's because I played poker in the past that I can intuitively see it? In poker usually players play against each other in a zero sum game. The best takes the biggest piece of the cake. But when you play in a Casino it will take a "rake", meaning a tax from big payouts. Usually on higher stake games that doesn't matter much, but on lower level stakes the average percentage of rakes is so high, that even the best players can't make a profit. Everybody will lose, no matter his skill.
And since the banking system got more and more deregulated they paid themselves higher and higher bonuses. That means even if you are the best investor today, as long as you pay banking fees it's likely you are paying all your profit plus some more, considering a normal 5-digit yearly income.
Sometimes I wonder if in fact in this system the best approach is to borrow a lot of money that you know you can't pay back and hope that for some lucky coincidence you are not put into private bankruptcy, maybe keeping yourself afloat by borrowing more money to pay off fees/interest on old debt.
Yes, the last paragraph is pretty much the system every country uses. Look at the UK, for example, where the national debt continues to rise - there is no real plan to pay it off - the system is designed in such a way that overall debt issuance must rise in order to service older debt. It's a horribly unstable system, but unfortunately we seem to have embraced it across the world.
Suppose all the sovereign debt defaults and is restructured to be 5% of
the original. Who loses?
Mostly the holders of treasuries. Holders of other assets would seem to be fine!
So it seems to me to be like any other default, except on a larger scale. Price the sovereign debt risk into the calculation and diversify into real assets.
The problem is that a sovereign default increases the cost of capital for pretty much everyone in a nation. This generally results in a decrease in lending, and kills any markets that are dependent on lending (housing being a big one).
Basically, once the bankers have inflated financial bubbles everywhere, the impending crash is bad for the common man, UNLESS you're one of the lucky individuals that somehow became cash rich during the bubble, and can use the cash to buy up while the market/lending falls to pieces. Funnily enough, the cash rich ones seem to be the bankers, who, laden with bonuses from the bubble days, buy up property which they can rent to plebs to get a comfortable 6-10% pa return.
In the United States, defaulting on Sovereign Debt would basically guarantee the death of social security. If you're in the USA, by far the best way you can insulate yourself against sovereign debt is by:
1) organizing your life's expenses so that you can retire (or at least continue to live) with $0.00 from social security.
2) Ensuring that you don't rely on any federal pension (including military retirement).
Of course, that isn't possible for most people. So in the USA, the answer to "who loses?" is "old people".
3) Ensuring you will have be able to afford healthcare in old age without medicare.
So lets the the economy has $X trillion (nominal) of real assets. You privatize social securities $Y trillion assets with the stroke of a pen. You now have $(X+Y) trillion chasing the same real assets.
The rate of return on those assets will decline in proportion to the new money chasing them. On the margin, (and more so over time) new productive opportunities will occur as the cost of capital to business declines, but in the short run all you are doing is inflating a bubble.
SS and other entitlement/retirement programs hold a monstrous amount of the total federal debt. I doubt the federal gov't could divest even a small fraction of those securities without destroying market for them.
The problem with sovereign debt is that it is likely to be inflated away instead of getting restructured. As a result, all lenders lose, borrowers win, all holders of risky assets lose as risk premiums go up. To make things worse, inflation makes its way through the economy unevenly, distorting prices and leading to misallocations of resources.
Bankers do not intend to increase risk without safety backups. In the financial crisis banks were incompetent just as much as unethical -- they had risk models that told them they had a safety net, but their models were wrong
They also generally don't operate like a casino. They have customers, and sell products. The securitized RMBS products at least in theory offered social benefit: decreasing cost of housing without increasing risk. The idea was that by pooling mortgages you could reduce risk through diversification. Risk reduction through diversification is a very well established phenomenon. So buying mortgages, bundling them to reduce risk and selling them in theory (and in practice, til the bust) enabled more people to get mortgages and own homes
The bad stuff happened 1) when realty diverged from their models and 2) the market evolved into a complex beast with a massive snowball of people doing unethical stuff (inside and outside of banks).
So in theory and in reality before the bust, rmbs provided a benefit to investors who got products that provided them a good financial return and lowered the cost of owning a home. Greed played a role in popping the bubble but so did incompetence
Not sure what your investing situation is but your second to last paragraph isn't true. The rise of ETFs has enabled average investors to invest with very low fees and many banks offer commission free trades. If you're the "best investor today" you probably have a lot of money and thus get decent deals from banks. If you are losing money it's bc too much competition from other investors due to easy money rather than banks squeezing you
> Bankers do not intend to increase risk without safety backups. In the financial crisis banks were incompetent just as much as unethical -- they had risk models that told them they had a safety net, but their models were wrong
I agree that what you describe covers most bankers. But you only need one person to come up with something like a CDO secured by credit default swaps. And you only need one person at the top of one of the biggest banks to promote this strategy. Then everybody else needs to follow suit, because profit is not just the source of their bonusses, it's also their protection against predatory competitors. So the number of people who need to start this is quite small, and I still claim that these few people knew exactly what they got us into, and they also knew that they could get away with it.
> in theory offered social benefit: decreasing cost of housing without increasing risk.
That is a foolish idea. The only way you can reduce your own risk is by putting the risk on other people's shoulders. You cannot make risk go away.
> The rise of ETFs has enabled average investors to invest with very low fees
Yes, but google what ETFs will mean at some point for the economy? Normal value creation becomes less and less fruitful. So in the end the whole market goes down and again the small time investors will lose while the big whales get bail outs and eat the smaller fish in the sea.
Also just because the fees in passive management are lower doesn't mean they can't be higher compared to the provided value. McDonalds is cheaper than a really good burger with really good fries, but you also get machine produced blurb in exchange, and in the end McD probably makes a bigger profit than your average, family owned burger shop.
I agree that its really easy for a system like the mortgage finance system to be transformed by a small group of influential people, but think its probably hard to predict or control how / how much that transformation will impact stuff downstream. I dont think the bankers who invented CDOs knew how real estate investors in socal or mortgage lenders in florida would respond, at least not the extent of the response. Of course that's just my opinion, maybe they did know. But they probably just saw this was a way to create a product that customers would buy and stopped there. A lot of banks had massive amounts of the securities on their balance sheets, if they knew exactly what they were doing their risk models would have been better
I agree that thinking you can "magically" decrease risk is probably foolish, but some really smart ppl believe that they can model risk better than anyone, and with they deploy a lot of money based on that conviction. Sometimes they're ultimately right, but if they're wrong for long enough they still lose everything (see LTCM)
It's interesting to think about how the role of central banks might change in the age of crypto currencies.
Governments can print Euros and Dollars. But not Bitcoin and Ethereum. Popular theory is that governments have a good grip on currency usage because they can decide which currencies they accept for tax payments. And because they can force merchants to accept certain currencies. It will be interesting to see if this grip holds up.
Since there is no fractional reserve and the blockchain ensures that you have the equivalent of fully correspondent banking with each node in the network there is no need for a central bank on the other hand the blockchain itself can be viewed as is the central bank with the large mining pools acting as its board of directors.
That said since no blockchain currently offers a credit system it’s not really possible to test this out fully since there is no true equivalency.
A better question would be not if we need central banks but rather should the economic system be based on credit and interest or not.
Bitcoin exchanges certainly can "print more bitcoin" in the same sense as fractional reserve banking - the exchange doesn't have to have a stash of coins that exactly corresponds to the sum of bitcoin-denominated customer accounts. Mtgox blew up by being a fractional reserve "bank" destroyed by a "bank run".
Heck, bitcoin exchanges can even print ""dollars"" in the form of USDT.
> should the economic system be based on credit and interest or not
This is almost unavoidable - remember that every not yet paid invoice is a form of credit.
Ofc they can’t which is why I said that the crypto needs to support it for it to work properly otherwise the only thing you are left with is some odd options based scheme or a MtGox type ponzy racket.
With most cryptos, there is really a strict pre-established monetary policy baked into the algorithm with really no flexibility at all.
"A better question would be not if we need central banks but rather should the economic system be based on credit and interest or not."
I think a better way to say it: "Do we need monetary policy or not" - and I think the answer is 'yes' - so whether it's crypto or not ... there will have to be some kind of group/committee making those rules, and that's de-facto the central bank.
There is a cosensus protocol that can be used to propose and approve a change the crypto, this is no more difficult than changing a monetary policy it’s just different.
The code changes isn’t the hard part the policy itself is.
There's no fundamental reason why Bitcoin shouldn't also have fractional reserve. I mean, cash also has a fixed supply! (from the Bank's POV) It's not like Chase Bank (or whatever non-central bank) can just print more dollars.
If you just sit on your Bitcoin it collects 0% Bitcoin-denominated interest. Maybe you'd prefer to make a loan to a bank and have them pay you interest. For the term of the loan that money isn't sitting in an address you control, it's been given to the bank and they're consequently free to lend it out to other people. Viola, Bitcoin have been created, just not on-chain.
EDIT: I was referring to physical dollars. As in, dollar bills and actual coins. I'm aware that Chase creates money, but it cannot literally print money.
>It's not like Chase Bank (or whatever non-central bank) can just print more dollars.
Yes, it can, that's what fractional reserve means. Banks create (most of) the money they lend. This is regulated by the central banks but carried out via ordinary retail banking. When you swipe your credit card, buy a car, etc. money is being created out of thin air. The universe remains balanced because it corresponds to your obligation to repay; as you do, the money ceases to exist.
I don't think you understand what I was trying to say. I'm well aware that they create money, but they're literally not printing dollars. They do not cause M0 to increase.
Nobody but the Treasury can cause physical dollars to be created, but that doesn't prevent fractional reserve from occurring.
So, anybody who claims Bitcoin doesn't support fraction reserve based solely on the fact that banks can't create new Bitcoin is incorrect.
Easy. As an exchange almost all your volume is “off chain” transactions between two traders. And since you aren’t audited or beholden to any financial regulation there is nothing stopping you from having one side of the trade be your own bot. All that bot does is sell newly created fake bitcoin and keeps the dirty USD fiat for the exchange owner. Again since the system isn’t audited, the exchange can have massively more “bitcoin” in its database than it actually has on the blockchain. The system (Er, scam) can work just fine until a bunch of folks start withdrawing bitcoin.
Since virtually all of the exchanges are unaudited, sketchy “businesses” I wouldn’t be surprised if they all run this way. It might come to pass the almost all of the exchange volume consists of trading fake bitcoin that is backed by almost no real bitcoin.
sure but these "off chain" transactions are not really Bitcoin, but the exchange's promises of Bitcoin (or whatever cryptocurrency under discussion). As long as custommers succeed in end-to-end conversion the distinction is moot, until they fail to succeed in this end-to-end conversion.
So still a commercial bank can not fractional reserve bank BTC, only fractional reserve bank promises for BTC. For a while people may fall for such a scheme but players learn...
Say the reserve requirement is 10%. Wikipedia states [1]:
> The minimum reserve is generally determined by the central bank to be no less than a specified percentage of the amount of deposit liabilities the commercial bank owes to its customers.
If someone gives Chase $100, Chase is allowed to loan out up to $90 of it, and must keep the remaining $10 in reserve.
What is created is an IOU. A bank says that hay, I will pay 1 usd to you. And you can transfer that IOU to the coffee shop. Now, there is literally nothing stopping the "bank"[1] to make a bitcoin IOU and you to transfer that to the coffee shop owner. In that case you have increased the monetary supply of "bitcoins", as it is irrelevant for the coffee shop owner if he is receiving a bitcoin or an IOU of one bitcoin from a credible institution. There is no difference to the case where it is irrelevant if you get a dollar bill or a IOU from a bank. Both are called dollars for a very good reason, and if you just swap dollar to bitcoin, both can be called bitcoin.
[1] Well, except current regulators, but they obviously do not exist in bitcoin economy...
This is mostly correct but you have one thing backwards. When you pay the coffee shop (with a debit card) you're not giving them an IOU, you're giving them the same kind of dollars which you originally deposited into the bank.
The system does include IOUs but those don't move around. When you give your hard cash to the bank it creates an IOU, that's what the balance you see when you login is. Your bank then lends out the hard cash to other people.
When you pay with your credit card the bank is still giving the merchant real money, the merchant would receive actual on-chain Bitcoin, but you're simultaneously creating a Bitcoin IOU which you promise to pay the bank.
I am quite confident I do not have this backwards. (I may be bad at communicating this, though...)
When I pay coffee shop with a debit cards, exactly what happens is that the bank just tells me that hey, we owe you now less, and we owe the coffee shop a bit more. At that point there is nothing else happening. I am definitely not giving any "real" dollars because I do not have them left, but I have lent them to the bank so that I have only the IOU from the bank left.
What you see in your bank account is at the same time real money (as usually talked about), but really really nothing but a bank's promise to pay you some later day real real dollars.
And because it is so convenient, most people are perfectly happy with moving around these IOUs, the coffee shop owner can then walk to the bank and request that the bank actually pays the dollars (or bitcoins) that the bank owes, but it is quite rare that happens - and that is the whole point of fractional reserve banking.
Okay, I'm not a banker so there's a good chance I'm the one who's wrong, and I bet the answer changes depending on the specific transaction.
> What you see in your bank account is at the same time real money (as usually talked about), but really really nothing but a bank's promise to pay you some later day real real dollars
We completely agree on this part.
> When I pay coffee shop with a debit cards, exactly what happens is that the bank just tells me that hey, we owe you now less, and we owe the coffee shop a bit more
I don't think this is true. Or, I don't think this is always true.
I can see it being true as a special case: If both you and the merchant use the same bank then sure, probably all that happens is two different IOU tallies are updated.
But I'm currently visiting Turkey, and when I swipe my card Chase definitely does not "owe the coffee shop a bit more", Chase has absolutely no relationship with the Turkish coffee shop I'm sitting in.
And maybe a temporary IOU is created between Chase and whatever Turkish bank the coffee shop is using, but I expect that IOU to be quickly resolved in a few days, when settlement happens. Real money is moved from your bank to the acquiring bank, and an associated IOU shows up in the bank account of the merchant.
> But I'm currently visiting Turkey, and when I swipe my card Chase definitely does not "owe the coffee shop a bit more", Chase has absolutely no relationship with the Turkish coffee shop I'm sitting in.
Admittably I made some shortcuts. Obviously chase does not likely have a relationship with that Turkish coffee shop, but it does have a relationship (which may be complex, involving visa, mastercard etc.) with the bank of that coffee shop.
So practically Chase says that now that you paid your coffee in turkey, we owe you a bit less, but at the same time we as a bank have agreed to owe that amount of dollars to the Turkish bank, who the on owes to the coffeeshop owner some turkish lira. (and someone makes also the currency conversion there). The banks have between themselves some credit/limit arrangement that they do not need to actually start moving "real" central bank money [1] every time I buy a coffee. At the end of the day, most of the time the customer payments should not have a systematic drift (if there were, it would be called bank run), so banks just work within these credit limits.
It may sound like turtles all the way down, but that is exactly what the modern financial system is. Credit all the way down. There is very little else than credit in the system.
[1 ]which the turkish bank does not even have access but that is one more complexity layer I ignore here...
Okay, I've done some more research and I'm much less sure than I previously was. I mean, I'm now pretty sure you're right: at the time of the transaction the only thing which is transferred is an IOU.
It still seems to me, however, that at the end of the day there's a net settlement process which happens at the central bank and moves real central bank money between the banks as a result of your transaction. (I'm can't figure out what the international equivalent is but assume there is one)
Do you have any links I could read which say otherwise?
> At the end of the day, most of the time the customer payments should not have a systematic drift (if there were, it would be called bank run)
I don't think this would constitute a run, I think it just results in the banks shipping central bank money to each other to settle the difference.
I'm finding it surprisingly difficult to Google this, would love any pointers you can give.
> It still seems to me, however, that at the end of the day there's a net settlement process which happens at the central bank
There is a daily settlement process via central bank, but you do not need to settle daily. Imagine only transaction today was me sending 10 bucks to your bank account. Your bank would likely say that hey, pay that 10 bucks (plus interest) some day later when there is a bigger payment coming. And by tomorrow someone from your bank paid to my bank 10 bucks, so then there was no need to do transfers. Banks do run credit lines against each other. Obviously, if I were to send one hundred million bucks, your bank would cough and say that okay, let's see when the money is at our central bank account....
> I don't think this would constitute a run,
If there is a long term systematic and significant outflow of money from a bank, that is definitely a bank run. Banks can't create central bank money, so if my bank needs to send daily money to your bank and is not receiving anything back, it needs to start liquidating some of the assets.
> I'm finding it surprisingly difficult to Google this, would love any pointers you can give.
Unfortunately I have found very little good information on money, these thoughts are just based on lots of thinking on the fascinating thing called money... Most sources belong to two camps:
1. Basic , naive economics that is saying that money is created when I deposit money and then bank lends it to you so that you have the cash in hand and I have the money in the account so the amount of money is doubled in society
2. The ones who think they are smart and say that hey, that naive theory is false. Actually banks just create money with double accounting wizardy and loans. Or something like that.
The first one fails to capture the technical details of money creation and the second ones fails to capture the economics.
I didn’t say it should or shouldn’t I said that currently they do not offer any sort of a built-in credit system.
And if you do fractional reserve off the blockchain then your crypto isn’t currency but rather closer to say what gold was during the gold standard era.
And yes Chase can “print” dollars that’s what the fractional reserve system means for every dollar they store in the central bank they can loan X dollars.
When you ask for a mortgage Chase essentially creates most of those dollars out of thin air.
Well, every crypto currency has it's own characteristics. And therefore different USPs. I don't expect currencies that involve blockchains to be the dominant payment channels of the future. For payments, I expect simpler constructs. Lightning Network already handles most transactions without blockchain interaction. And Iota is a completely blockchainless currency that got traction already.
I think there will be many more approaches before one becomes the 'everyday' crypto currency.
We have been dealing with exactly these issues at the Intercoin project (https://intercoin.org)
Credit is a voluntary thing. Both sides can agree to create credit lines (trustlines) out of thin air without any third party ledger or permission. (Well maybe except Usury laws.)
Now the problem with credit is that you don’t know how solvent the debtor is and many debts they have. Credit agencies have sprung up to try to address this somewhat.
But the whole POINT of value based money is to introduce a third party representation of real assets, and that real world scarcity requires solving the double spend problem.
So the whole thing with every technology is remembering that A paid B, and not forgetting it (eg make collusion really infeasible).
Many blockchains are just append only databases stored on every node. They elect a leader based on PoW or PoS and it’s horribly inefficient. There are far better ways.
But anyway back to credit. Money is a social phenomenon that benefits from a network effect. A casino’s chips are worthless as a medium of exhange outside the context of the casino and the same goes for JPY, EUR etc.
Inside a community currency where everyone began to accept it, you can have the ability to print more money same as a Harvard Facebook has the ability to add features you don’t like but you keep using it. The only difference is that these decisions can be done democratically. So like living in a city whose policies you don’t all agree with.
They can use this money for Basic Income and other things like public infrastructure.
They can peg to an outside currency AND print/dilute it gradually to redistribute wealth in a voluntary way that even anarchco capitalists will accept.
Algorand's solution is in fact pure genious, however there is no implementation yet (that I know of, if someone knows of an implementation, please let me know!).
The fact that proof of work is proven unnecessary to perform sortition/rate limiting the right to propose blocks, even without needing to resort to an interactive protocol, i.e. player-replacability.
At best you can say that people become interested in the same sort of circumstances they're they're interested in conducting transactions in foreign reserve currencies rather than their own.
If you have multiple competing cryptocurrencies that seems pretty equivalent to a system of free banking[1] which, well, worked pretty well in Scotland before the Bank of England took over.
Bitcoin so far doesn't scale. Not only in terms of transaction fees and processing times... but also at the most basic of levels.
What will happen when the blockchain doesn't fit in a median harddrive?
The decentralization narrative will go away. Only a few people will have enough storage for the blockchain and you will go back to having to trust someone.
> The decentralization narrative will go away. Only a few people will have enough storage for the blockchain and you will go back to having to trust someone.
With a pruning client you only need to store a small subset of the blockchain and there are no major changes in regards to trust. Your client still verifies every single transaction, but it removes data from the chain that it won't need anymore in the future (e.g., an old transaction that already has been spent).
With a SPV client your client only stores the chain headers and then only requests the required data from a server. SPV clients need a small amount of resources and can run on mobile phones. At the same time most of the important functionality (transaction signing, transaction verification, ...) happens still locally and the level of trust that you need to put into the servers is quite small.
Even beyond simple pruning, there are techniques that currently don't seem to be in use yet and should make chain-size a non-issue for the near future. If written about it in another comment here before[0].
That depends if the Bitcoin blockchain size is growing at a faster rate than the storage available on a median hard drive.
The blockchain is currently at 160~GB, and I believe it will grow around <60GB a year. [1] In 10 years it may be ~760GB, but the median hard drive shouldn't be too far from this.
Yes, but accepting a foreign currency as your defacto currency is IMO insane. US sets monetary policy for the US and the US only. So if US raises interest rates to combat inflation that is occurring in the US. Georgia by default accepts this position regardless of what is actually happening in Georgia. If Georgia has deflation occurring, then this is bad for Georgia.
If you want to be a "Big Boy" country, you have to have your own monetary policy and currency. The problem is, managing your monetary policy and currency is really difficult. Countries that experience hyper-inflation are usually ones where monetary policy isn't done right. The other side of it is, when you do have the right monetary policy and currency controls, it allows to survive and possibly thrive in the financial world.
"No country has adopted a foreign currency to make their central bank impotent."
There are a number of countries who's currencies are pegged to the US dollar at fixed exchange rates. Notably Hong Kong, as well as gulf states such as the UAE, Saudi Arabia, Qatar, etc.
This means their central banks have very limited scope to control domestic money supply and interest rates via monetary policy.
Several small countries have "dollarised". Ireland for decades ran an "independent" currency that had the same value as the pound and decimalised on the same day.
Ugh. Yes, we need central banks, if for no other reason than that distributed systems are hard. Central banking helps prevent things like double-spends and creating currency out of thin air. Yes, technically cryptocurrencies "solve" the same problem, but at 1000x the energy expenditure and with no guarantee of avoiding a 51% attack by a coordinated network of rogue actors.
It's almost like cryptocurrency zealots don't know shit about system design or something.
Central banking doesn't prevent creation of currency out of thin air. It just ensures that only the governing body of the central bank can do it.
And the governing body of a central bank will likely have an agency problem. There is a significant incentive to capture some of the growth in the markets that use the currency via manipulation of the money supply. The market would prefer that nobody be in a position to capture that growth, because then everybody wins in an expansion, but then the downside is that everybody loses in a contraction. But then again, the market also prefers a currency with a stable value.
The fixed coin-creation schedule in Bitcoin was intended to remove any central authority for currency creation. But as it turns out, it's really hard to predict the demand for a currency that far into the future.
For a long time, the old standard, gold, was mined, refined, and coined at roughly the same rate as economic growth. The world economy grew by 2-3% per year, and the total gold supply grew by 2-3% per year. So gold was a very stable currency. It took large movements of metal, such as Mansa Musa going on Hajj, or the exploration and exploitation of the Americas, to push the markets out of tolerance.
Central banks have the capability to replicate that stability. But they do not. They skim off the top with monetary inflation that outpaces economic growth, to make currency that is held slowly lose its buying power, and prices slowly rise over time. The public justification is that currency that appreciates in value is spent less frequently, but that buying power has to go somewhere. It doesn't go to the people already holding currency. It goes to the one that creates the new money.
I'm not certain that cryptocurrencies have the ability to mint new coins at exactly the rate of economic growth and also distribute the new coins fairly. At the least, spends within the system could be gamed to simulate growth that does not actually exist, and at the worst, someone could figure out how to profit from that.
> Ugh. Yes, we need central banks, if for no other reason than that distributed systems are hard.
I can't count how many people there are who assume that because the problem is too hard for them, they need the government to intervene.
> but at 1000x the energy expenditure and with no guarantee of avoiding a 51% attack by a coordinated network of rogue actors.
Was double-spending a major problem prior to 1917? No, because there were assets that couldn't be double spent to move around (cash) as well as a somewhat decentralized trust-based system between banks that didn't fail just because the government wasn't there to hold your hand. We don't need cryptocurrencies for decentralized banking transactions, but they could definitely optimize the system and bridge the gap for the modern world, where money moves to the other side of the world frequently (not v0 Bitcoin-based protocols like you are familiar with, but assets which use a combination of proof-of-stake and master nodes which prioritize reputation in the system over computational power -- Dash is one example, although not yet good enough for this purpose). I suspect the environmental/economic cost of maintaining such a network would be much less than physically moving cash or gold around for backbone transactions.
One somewhat useful (although still not without controversy) function central banks perform (and really, it's mostly the US Fed for most of the world's financial system) is indeed clearing bulk transactions between banks worldwide. However, the true value is the ability to reverse "mistakes" or theft -- for a VERY short time, we should note -- although this is also a negative if you are on your government's naughty list. Cryptocurrencies enable both more autonomy (the Saudi government wouldn't necessarily be able to freeze the assets of a dissenting citizen who is trying to escape, for example), and less ability to reverse mistakes, so I am torn on whether or not any existing cryptos would be ideal for this role, although I'm sure emerging cryptos/upgrades will continue to be better suited. In any case, it's kind of a tangent to the whole central bank discussion.
+1 on those thoughts. I'd add that there are a lot of other things that central banks do that keep the banking system(s) in check and closer to honest. Setting interest rates for example.
Not all crypto attacks the same problem; they should not be all lumped together.
Bitcoin's transation rate and energy use are a big deal.
But Bitcoin does solve the problem of the central bank itself creating too much money, which has been an issue in the past and is generally recognized to be a big temptation on the part of governments in general.
I'm not saying it's going to replace any major currency, just that there is a goal Bitcoin is meeting not mentioned above.
Or math, computer science, finance, politics, government, sociology, scaling, economics or seemingly. Crypto zealots have truly drunk the kool aid and have shut off their critical thinking.
But this is one of the main things central banks do. They have a monopoly to counterfeit money. And in conjunction with their affiliated government people are forced to use it to pay taxes.
In addition, it's not clear how to keep a currency's value stable without some kind of central authority. It may not even be possible to do in a distributed fashion.
Historically a big purpose of central banks or at least a rich institution was to be a buyer of last resort and prop up the economy in times of panic. Doesn't always have to be a central bank, but needs to be an institution big enough and independent enough to save markets. A decentralized system would almost by definition not have this, and probably result in disaster if there was a panic.
Don't have an exhaustive list of financial panics offhand, but for ex:
Panic of 1837 was thought to be as bad as it was in part bc central banks weren't strong enough to step in
American economy recovered from Great Depression in part due to increased govt spending in ww2
Panic of 1907: Rockefeller and J.P. Morgan acted as financial backstop
2008 financial crisis response led largely by central banks
China's stock market is managed very tightly by central bank
This is a highly problematic article because the basis of his claims revolve around two iffy concepts:
1) That interest rate movements follow the economy, not the other way around. This is false if you simply consider a different time frame for action. If you look at the graphs next to one another it may appear that his theory is correct, but if you consider a longer term causality ... then he's wrong and the bankers are right.
2) More disturbingly - he basically looks at post-war China, German, Japan and Korea as examples of where you can achieve 'high growth' without the neoclassical market liberalism type approach.
This is ridiculous. It's very difficult to find value creating projects in mature economies. When your country is flat on it's back after a war - it's dam easy - especially if that country needs to 'rebuild what was already there' after a war (i.e. social/governmental institutions intact) - as opposed to 'building what was never there on the back of nothing' i.e. African countries.
Heyzeus everyone knows this. Germany had no factories for gosh sakes. Maybe build some factories? Some roads? Power stations? etc. etc..
Most civilized nations rebounds sharply after disaster and it can be done with 'government intervention' because the investments needed are generally fairly obvious and lend to that governmental kind of stuff anyhow, i.e. infrastructure.
So basically, his primary claims are false, the second one, surely so.
Surely there are other options than having Central Banks - and they could feasibly operate more mechanically etc. - and surely we could just have stricter rules about money ... but if we want monetary policy of some kind, well then there's going to be a 'Central Bank' however you want to call it, 'committee' or whatever. Even if we go crypto, if there is flex in that crypto, then someone will have to decide how that algorithm works and evolves, and that team will effectively be 'the central bank'.
TLDR: Banks regularly collapsed and not just because of fraud, but started to collapse less as they got regulated more. The system functioned (for certain values of "functioned"), but shockingly enough the man on the street did not turn out to be better at evaluating a bank's solvency than central banks. They were of course also less able to bail themselves out if they misjudged a bank's solvency.
A major problem with the comparison is that many of the regulations on free banking, particularly that against banks operating in multiple regions, greatly limited the ability of banks to absorb regional and concentrated shocks in the economy. If you can only have bank branches in Kansas by law, and Kansas crops have a really awful year, your bank is screwed in a free banking system. Without that artificial limit, free banking is much more robust.
If you consider fractional reserve banking as fraud (banks should only be allowed to lend out funds that you have lent to the bank for a period of time, not funds that you are merely storing in your checking account; a bank run in this context is when account holders want to withdraw their money and it is not there), the system should be fairly stable without a "lender of last resort".
I don't really see why fractional reserve banking is necessary.
If you want full-reserve banking then (i) that's a different thing from free banking in practice and (ii) full reserve banking would result in interest rates wildly fluctuating because currency reserves are fixed in the short term, and the business sector's need to borrow for cashflow reasons varies. Wildly fluctuating short term interest rates deters longer term investments => slower growth
Also, since most full reserve proposals don't ban credit creation altogether (i.e. you can still issue and exchange IOU notes), but simply restrict credit creation and acceptance by institutions calling themselves banks, you end up with the economy relying on an unregulated shadow banking system even more prone to booms and busts to fulfil credit needs.
It is if you want passive interest rates above negative. Storing money without touching it at all costs money. Worst of all to society the value is nill or negative compared to investing it in something and collecting dividends. There was even an ancient parable about that involving a lord giving money to peasants for safekeeping for a few years. He scolded the one who buried it and praised the one who used it for investments and started collecting the profits.
Theoretically if it is that much of an anathema one could have a 1:1 reserve and explicit money market style transactions for everything but the question is what would be gained? The liquid cash would be "safe" from bank runs at the cost of guaranteed losses to depreciation and storage fees. Keeping it insured and interest generating is a winner as an option.
You are right - this will be a strong incentive to keep as little as possible in a checking account, and either lend or invest the rest. There are two main differences from the current system:
1. Depositors will have to explicitly give up/lock their funds for a set period of time if the funds are to be lent out and they are to earn interest. Early withdrawals come with a significant fee. This makes bank runs very unlikely, eliminating the need for a central bank. The longer you want to lend the money for, the higher the interest. But you can also lend money overnight.
2. No money creation, leading to proper alignment of time preferences of investors/consumers and businesses. Interest rates correctly reflect this time preference. If money represents a claim on real resources, then a business can only use as many of these resources for investment as consumers are willing to forego consuming. Interest rates reflect the actual supply and demand of resources/consumption at different time horizons and do not get artificially "set" or otherwise manipulated.
Because of these two properties, the boom-bust leverage cycle is greatly dampened, if not completely eliminated.
(1) Because maturity transformation is no longer permitted, every time somebody wishes to take out, say, a mortgage, the bank has to find somebody who has >$200k they're not even going to consider spending for quarter of a century. As a result, costs of borrowing go massively up, which is bad for everybody except for a small proportion of rentiers sufficiently wealthy to be entirely unworried by liquidity. Joe Sixpack proves to be even less adept at managing an overnight lending portfolio than full time professional bankers, and loses money as a result.
(2) The money supply is artificially "set" at a particular level on the basis of the unambiguously false assumption that real resources do not change over time rather than being allowed to fluctuate and grow to properly align itself with creditworthy borrowers' growth projections in a way commensurate with price stability. The boom bust cycle is replaced by permanent bust.
1. Could maturity transformation not be done by the markets? E.g. if you want a mortgage, you essentially issue a bond; lenders may then decide to hold the bond for a short period of time and then sell it on the secondary market. With regards to consumer products, I am sure the market would come up with something user-friendly. But I see your point.
2. The money supply could grow predictably, e.g. like Friedman's proposal of replacing the Fed with a computer that expands the money supply in a predictable manner.
1. Banks are a market solution to maturity transformation (it's just that doing maturity transformation without frequent liquidity crises needs access to more short term borrowing facilities than private capital markets can offer). Treating mortgages as tradable financial products instead of obligations the issuer should be happy to keep on their balance sheet was the cause of the bad underwriting that led to the financial crisis, not the solution to it.
2. Friedman's k% rule is better than a fixed money supply, but it's still every bit as arbitrary and further removed from the relevant market indicators of resource constraints (creditworthy borrower demand and price inflation) than the current system.
The purpose of central banking is to protect private banks from bank runs. Free banking operated prior to the introduction of central banking and it was less stable. In free banking a bank either had the capital to pay its depositors or it didn't, and if it didn't it failed. Although this was a less stable situation it meant that credit couldn't expand indefinitely because each time one of the periodic bank failures occurred it would would reduce the money supply.
Another way to prevent credit expanding indefinitely would be to eliminate fractional reserve lending. But that wouldn't work out well for governments who often borrowed from banks to finance wars and other actions that were not supported by their citizens.
It is difficult for me to see how fractional reserve lending could be eliminated given the current level of technology and economical incentives there are for fractional reserve lending. I mean, of course, you could say that regulated financial institutions are not allowed to do fractional reserve banking, but only result of that would be unregulated shadow banking institutions doing the same.
(Which, as a side note, is something I would be more than curious to know from cryptocoiners, how they are going to stop fractional reserve banking to flood crypto currency supply, as for sure there is no regulator that is going to stop that.)
Fractional reserve banking doesn't exist anymore. Banks lend against their loss-absorbing capital, not their reserves. Reserves are just used for inter-bank settlement.
Frances Coppola [0] has written fairly extensively on this topic, as has the Bank of England [1]
Coppola (and most other people claiming to "reveal" something profound of financial system when they tell that banks do technically not lend deposits forward) is confused in my humble opinion.
There is no need for double entry accounting trickery nor loans to create money. All bank needs to do is to say that they owe me money and they have created money at that very moment.[1] Simple as that. And they do create money without lending all the time! It is nothing special. When a bank "pays interest" to your account, do you think there exist some new loan that is needed for that money to exist? Nope. Bank just decides that now it is time to add some more money to your account. That's it. Or when bank pays salaries to the personnel or dividends to the shareholders? Nope. No lending associated whatsoever. Just money added to their bank accounts. (for simplicity's sake, I assume that the stakeholders have their bank accounts in the same bank)
[1] Which to me implies that there is not that much interesting happening at that point. I mean, a bank could enter a few centillion dollars to my account, and technically the money would be created. But in practice that is laughable. Nobody in their right mind would imagine a second that the bank would be solvent and actually be able to pay me the money, so in reality that money does not exists (no credit...). So even if the traditional model of banks lending deposits forward is technically even more wrong than the banks create money from double entry accounting trickery, in reality that describes much better what actually economically is happening in the financial industry. But that is just my opinion...
Where are you getting this information from? Surely interest on deposits is accounted for as a funding cost and is paid out of the bank's revenues (same for staff costs).
I don't know why you're calling double accounting "trickery". It's literally the way a bank operates. I mean, it's enshrined in law for god's sake. A public company has to publish accounts every year, and the double-entry analysis you see in most discussions of money creation shows where assets are entered on the balance sheet.
Mainly my own personal thinking. No other sources.
> Surely interest on deposits is accounted for as a funding cost and is paid out of the bank's revenues (same for staff costs).
Of course. But before those are paid, they do not (need to) exist anywhere (but in the profit account if you want to take an accounting view)
> I don't know why you're calling double accounting "trickery".
Because that's what these people claim that double entry accounting is some magic wand that is needed to create money. You could operate a bank without double entry accounting that would not change the economics of the bank operations anyhow. You do not need to have double entry accounting to make a loan nor write an IOU. I Can write you an IOU that says that beefield will pay 10 bucks to the holder of this paper and you could use that as a money to buy stuff at least from me and my mom. Not sure if anyone else would trust that... No lending, no double entry accounting needed.
> Mainly my own personal thinking. No other sources.
I'd suggest reading a summary of the Basel rules before contributing to a discussion on money creation and banking. Wikipedia has a halfway decent one.
> (Which, as a side note, is something I would be more than curious to know from cryptocoiners, how they are going to stop fractional reserve banking to flood crypto currency supply, as for sure there is no regulator that is going to stop that.)
There will for sure be a regulator to stop that. In fact, there are already numerous regulators to stop it. If you want to hold deposits for your customers who happen to be California residents, then you are a bank and will need a banking license from the California Department of Business Oversight. California does not care what currency those deposits are denominated in. I expect this to be true everywhere else in the world, cryptocurrency is not some alternative universe where the old rules won't apply.
Financial engineers are quite talented in figuring out ways to create things that look like a duck, swim like a duck, and quack like a duck, but definitely are not ducks in a regulatory sense.
And I am not familiar with Californian regulations, but I think there may be some challenges in trying to enforce the regulations if a californian makes a bitcoin deposit to a remote chinese "bank"?
Banks runs may be part of the origin story of central Banks, but it's definitely not the only or main reason they exist. That's what deposit insurance is for, and in the case of the U.S., bank runs continiued for decades after the Federal Reserve was created.
Central Banks exist to be a monopoly creator of money and credit for the purposes of manipulating the market. They exist to execute macroeconomic policy.
This is a good paper and presents some really good arguments. For those that want an easier summary of the situation, i interviewed an expert on banking and economics in the middle of last year where he explained how inflation was a tax on the people and a real crime and that it was created by the banks.
It's a long article and I admit to not heaving read it in its entirety, but...
> There are overcapacities in the banking sector of some countries” in the Eurozone. Which country could he have been talking about? Germany boasts by far the largest number of banks – about ten times as many as the global centre of international finance, the UK.
Same here in Austria. Per capita, the people employed in the banking sector is significantly higher than in other countries.
I work in this sector, and the overcapacity is notable. To question this is basically a statement of ignorance.
> 80% of these banks in Germany are local, not-for-profit community banks, which do not pay bankers’ bonuses, and which serve ordinary people and small firms, creating a strong SME sector (the main employer in most countries).
Without knowing the German banking sector that well, this is almost certainly hyperbole.
I believe he is talking about Genossenschaftsbanken, Raiffeisen et al. There's a historical reason why these banks have most of the banking licenses issued (the 80% he alludes to), but that reason is no longer relevant. It's also misleading, since most of these banks are tiny, basically your typical savings & loan.
> Why is the ECB taking policies that are killing the majority of banks in the Eurozone – the beneficial not-for-profit community banks – while helping big banks with its asset purchases?
Because it's an anachronism. There was a time in Austria when we had the saying "A Raika (Raiffeisen Bank) and Post in every village", regardless of the village size. This is where the insane 80%-number comes from!
This is horribly inefficient. It might have been a valid approach at a time when everything was rural and a village was effectively a microcosm, but in today's world with online banking and such, it's horribly outdated.
Operating these banks costs money. These costs are passed on to the customers. Reducing the banking sector size is therefore in the interest of the customers.
> Central banks have proposed the abolition of cash
No, they haven't. Some guys employed there might have toyed with the idea as a thought experiment, but nobody even close to policy-making has proposed such nonsense, not that it would work anyway.
> Central banks have proposed the introduction of central bank cybercurrency
I'd trust a central bank far more than Coinbase or any other of the centralized controllers of currently-so-popular cybercurrencies.
I've spotted numerous other smells in the article, but the above were the easiest to point out.
Many co-op banks are merging into bigger ones these days, they are still local banks which are owned by members of the co-op which are usually people from the region. There are also several bigger co-op banks or rather supra-regional banks. But even small and medium sized banks need regulations and that is what the central bank can really do.
> Same here in Austria. Per capita, the people employed in the banking sector is significantly higher than in other countries.
Yet it's usually a hassle to find an ATM in Austria (which is the most important thing related to banking that I can't do online), because ATMs are usually only located at banks.
Compare that to the US where every other shop as a private ATM that you can use. They usually charge $2 or something like that, but (better) banks usually refund those fees at the end of the month.
On the other hand, as soon as banks become really big, they loose interest in ordinary customers.
In Switzerland the services of big banks like Credit Suisse or UBS are getting worse while getting more expensive at the same time.
This causes people to switch to smaller local banks because they can better tend to their needs and are more willed to grant them loans.
We are running out of topsoil, fresh water, fish, pollinators, oil... the oceans are becoming an acid mess full of plastic, species are going extinct, forests and the ecosystems they contain are disappearing.
And all of this has been done in the name of a dumb belief system we call modern economics. A better name for it is collective suicide, because that's what it is in the long term.
The idea that you can have a bunch of banks making infinite money to fund an endless amount of economic activities for infinite people has nothing to do with reality: a finite planet with finite resources with finite species that can only go extinct once, and a fragile ecosystem that needs to be taken care of and is beyond our means to repair.
Maybe we don't need central banks, but we need fucking reason governing our economy, not the greed of a few shortsighted apes.
I think the question of what is the optimum human population of a country, continent, planet that maximizes prosperity and welfare is an interesting one.
Yet, apart from the problem of humans still having to be in actual close physical proximity to each other for economic activity, which results in housing problems in major cities, I do not see the signs of overpopulation or too much economic activity in Western countries. If anything, the situation in terms of the ecology seems to be getting better, not worse.
Car emissions are dwarfed by industrial and agricultural emissions. Plus, before an electric car is used for the first time, it already generated more carbon than the dirtiest of non-electric cars during its manufacturing.
Then, if factories move from one country to another, with a higher carbon footprint, the global emissions don't go down. You are just moving [while increasing] emissions to somewhere else.
So, the "cleaner environment" is just a local phenomenon and a global level it is not the case.
Everyone here is trying to take a short break and learn and talk about current events. It's a lot more fun when we're not all yelling at each other.
There are a couple which apply here:
> Be civil. Don't say things you wouldn't say face-to-face. Don't be snarky. Comments should get more civil and substantive, not less, as a topic gets more divisive.
> Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.
> Please don't post shallow dismissals, especially of other people's work. A good critical comment teaches us something.
I find Austrian ideas very interesting. Yet the usefulness of an economic theory can be demonstrated in two ways:
1. How well the implemented ideas/policies work in practice. This is usually difficult to evaluate, as it involves counterfactuals (we never know what would have happened if other policies had been followed). Sometimes one may be able to draw a comparison between two similar economies/time periods that followed different paths, however.
2. How well the economic theory predicts the effect of certain policies / what is going to happen. The track record of the Austrian school is poor on this one; the most recent example being the prediction of the consequences of Fed's response to the "great recession" of 2009. As far as I know, both Austrian academics and practitioners (Robert Murphy, Peter Schiff) predicted that the Fed's actions would result in high price inflation, weak dollar, and would generally not be effective in promoting economic growth. Both have been wrong so far, and investors that have listened would have lost money.
Of course, you can say that the economic growth has been "malinvestment" that will need to be corrected, but without a time horizon such predictions are useless. It's been a decade now since 2009. Has the US economy been malinvesting since the abandonment of the gold standard in the 70s? At what point can we say that the Fed did a reasonably good job at stabilizing the economy and promoting economic growth?
That’s the gist of it the blockchain offers most of the “services” provided by the central banking primarily correspondent banking (well sort off since you don’t have to manage correspondent accounts as you have a single ledger) and it also offers a consensus forum (most of them do at least) which acts as the board of directors of a central bank.
The big difference is that unlikely most fiat currencies there is no credit and interest system built into any (mainstream) crypto currency that I am aware off, hence there is also no fractional reserve (outside of what shady exchanges may or may not do).
As I pointed out in another comment in this thread, fractional reserve is just as possible with Bitcoin as it is with cash, it's not like banks increase the money supply by printing cash.
If you give your money to a bank it won't be sitting in an account you have the key to, it'll be the bank's to control and they'll be free to lend it to other people.
This might even be a desirable state of affairs: money which you don't give to a bank collects 0% interest.
Talks about a credit system built upon a blockchain naturally transition to talks about an identity system; otherwise, how would you prevent Sybil attacks [1]?
However, I am unsure to how the latter will be solved without a central, trusted party. What is the digital analogue of a passport or driver's license, a piece of identification that is hard to forge?
To add on to why fractional reserve will be hard to implement with cryptocurrencies, another unexplained problem is the issue of collateral backed by a volatile asset.
If that underlying asset rises in value, then the effective interest rate would be equal to the original interest rate + % increase in value; if the opposite occurs, a decrease in value, the 'bank' in this scenario might lose money on that lend.
You might argue that a digital stable-coin is a possible solution. But a digital asset backed by a physical object is probably bound to encounter regulations; and the performance of a stable-coin backed by algorithms is currently unknown to work.
These are two hard problems that have to be solve before fractional reserve is viable on a blockchain.
Okay, I think I see where the misunderstanding is. I'm not imagining an on-chain and fully decentralized solution. You're right that that sounds difficult.
I'm imagining a contract with a bank. As in, you literally go and talk to Chase bank and draw up a contract and give them Bitcoin and they promise to give it back to you later plus interest.
Such a system is very possible today, and in that sense Bitcoin _does_ support fractional reserve. Fractional reserve is not a feature you explicitly add, it's an emergent property of a banking system, you really don't need to do very much to "support" it.
I'm with you so far, but the bit I don't understand is that for bitcoin to be said to support fractional reserve, don't you need to have the balance of your loan issued in bitcoin as well, so that you can pay other people for services in bitcoin, and they can use that to get a new loan etc? It doesn't seem fair to say that bitcoin works for a given purpose, if "working" presumes the presence of a trusted fiat money system?
It's true that today you would probably find it difficult to find someone who will take your Bitcoin and pay you Bitcoin-denominated interest with it. However, there's no fundamental reason why it couldn't happen.
The process is: You give your Bitcoin to a bank. It is put into a UTXO which they control, and you don't control. In exchange, you have a balance in the bank which you can withdraw when you choose. Your balance is "virtual bitcoin", but is still real money, because it represents your ability to ask the bank to pay people for things. (By swiping your debit card)
At the same time, the bank has the original on-chain Bitcoin, and is free to use it however it wants, probably by lending it out to somebody else.
In this way, there is now more Bitcoin than there were previously. Fiat currency is not involved in any way. I'm not an economist, but I'm pretty sure it's exactly the same as the difference between M0 and M1.
As I pointed out no where was stated that it’s not technically possible but that it’s not practiced or supported by current mainstream cryptos.
If anything some of the larger blockchains “naturally” move towards a “central bank” like model.
Say you have a blockchain that requires you to sync 100’s of terabytes if not petabytes of information to setup a new node and 100’s of gigabytes a day to keep it upto date.
It’s not going to be feasible for individuals to talk to it directly.
Now you already have exchanges that keep ledgers other than the blockchain and that already do most of their transactions off the blockchain these are your banks.
In this model the blockchain essentially offers only value store for the exchanges and keeps only the exchanges honest this is essentially your central reserve.
The blockchain offers also a consensus protocol where either the miners if it’s PoW or the exchanges if it’s PoS hold the important seats, that’s your board of directors.
So yes I don’t think that current crypto is incapable of mimicking the model of banking we currently use some already do it unintentionally to some extent.
But currently there isn’t a single crypto that offers a built in fractional reserve and credit system as part of its blockchain its off possible to implement it.
There's nothing that needs to be supported. Bitcoin already "supports" it, in the same way that cash does. All you have to do is find a counterparty and draw up a contract.
> it’s not practiced
That part's mostly true because with this kind of volatility who would risk owing you a bunch of bitcoin, but loans involving Bitcoin are starting to appear: https://saltlending.com/
I wouldn't necessarily trust https://www.bitbond.com/ with _my_ bitcoin, but theoretically I could, and this is starting to look a lot like fractional reserve.
Ofc it has to support it you can’t loan more bitcoins than you have unless you use some other tools like say options by even that isn’t straight forward unless you have a clear secondary settlement process.
If you want to do fractional reserve in say crypto you need to have a blockchain where the “bank” can print crypto like they do with current currency until then it’s off the books accountign or a ponzy scheme like MtGox.
> If you want to do fractional reserve in say crypto you need to have a blockchain where the “bank” can print crypto like they do with current currency until then it’s off the books accountign or a ponzy scheme like MtGox.
Okay, I think maybe what we're arguing about is definitions. I'm trying to say, "off the books accounting" is perfectly legitimate fractional reserve. It is not possible to create more on-chain Bitcoin, but something which looks exactly like fractional reserve is possible today and would end up creating "off-chain" Bitcoins, increasing the Bitcoin money supply without increasing the number of on-chain Bitcoin beyond 21 million.
Maybe you don't think that such a system should be called Fractional Reserve, I guess that's where we disagree.
> you can’t loan more bitcoins than you have
Fractional reserve isn't about loaning more than you have. In fact, kind of the the entire point is that you must loan less than you have: you loan out at most some fraction of your deposits and reserve the rest.
That’s not a fractional reserve since that one needs to be in the same unit of account if you are using two units of account that’s not a fractional reserve that is an exchange rate.
If you loan less than your total then again it’s not fractional lending it’s simply lending.
Okay, I'm not sure I should answer because it's starting to seem like you're trolling. Giving you the benefit of the doubt:
> if you are using two units of account that’s not a fractional reserve
The system I described only has one unit of account, Bitcoin. It doesn't matter whether they're on-chain or "virtual", they're both Bitcoin, and are worth the exact same amount.
> If you loan less than your total then again it’s not fractional lending it’s simply lending.
You have misunderstood fractional reserve banking. Banks are not allowed to give out more money than they have received in deposits. Here's Wikipedia:
> Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities.
Say the reserve ratio is 10%. Then, given $100, the bank is allowed to give out $90 and must keep $10 on hand.
>The system I described only has one unit of account, Bitcoin. It doesn't matter whether they're on-chain or "virtual", they're both Bitcoin, and are worth the exact same amount.
Ofc it matters because those bitcoins cannot be used as part of the bitcoin network they aren't bitcoins at point at best they are some weirdly defined bitcoin option.
As long as I won't be able to spend those bitcoins as bitcoins and as long as it's not enforced by the network itself this won't really be fractional reserve banking, or at least not what people consider FRB since CAR is an important part of it.
>You have misunderstood fractional reserve banking. Banks are not allowed to give out more money than they have received in deposits. Here's Wikipedia:
I think you misunderstood my point I should've been perhaps more clear about how money generation through fractional reserves works currently and how multipliers on deposits work: https://en.wikipedia.org/wiki/Money_creation
I assumed based on the topic we've discussed so far "creating new bitcoins" it was a given state.
Even forgetting about cryptocurrency: if each country had a constitutional amendment requiring that its currency be backed 100% with gold reserves (no bi-metalism; no fixed gold pricing), domestic custodianship, annual audits, and the elimination of fractional reserve banking, I suspect the world would be much better off.
I'm not versed in economics, and generally find it overwhelming to look into, because of deeply-set political opinions and implications buried in all of it. Is "economic school" a political choice (differing goals) or a choice of tooling/methodology?
> Is "economic school" a political choice (differing goals) or a choice of tooling/methodology?
That...depends on the “school”, and exactly the bounds of the “political”. The choice between the Austrian school and most of the rest of economics is between an interpretive framework that eschews empirical science as inappropriate for the field of economics (Austrian school) vs. various approaches that at least outwardly aspire to the norms of empirical science (most of the rest of economics.)
Among the schools espousing empiricism, confirmation bias (and thus political preconceptions) still plays a role between, say, neoclassical schools like Chicago and Keynesianism and it's offshoots, but that's at least in part because economics is hard due to confounding variables, and actually avoiding influence of confirmation bias in such circumstances is difficult even when intelligent people are acting in the best of faith.
The Austrian school overall disavows empiricism as the means by which to infer economic laws and instead views economics as a field closer to philosophy. For more information on the method I recommend the pamphlet Economic Science and the Austrian Method. [0]
Re: my previous comment, that, in short, money and credit are like any other markets.
If you're interested in a gentle introduction to the Austrian school of thought I recommend the book Man, Economy, and State. Skip the final section of the book entitled Power and Market. [1]
> The Austrian school overall disavows empiricism as the means by which to infer economic laws and instead views economics as a field closer to philosophy
Empiricism is a philosophical approach; Austrian economics isn't any closer to “philosophy” than empirical economics is, it just is closer to the particular (and widely rejected in most of modern Western philosophy though it survives in a form within some schools of Christian theology as well as Austrian economics) philosophical belief that claims about material facts can be justified a priori by deduction from axioms alone without reference to a posteriori knowledge.
I ask because I've seen this claim made about Austrian economics lots and lots, but haven't seen anything telling a consistent story -- just a lot of "it's coming, keep waiting".
Seriously interested in seeing these claims either supported by a real world narrative.
Most people that make predictions and call themselves Austrians are IMO in the business of selling something. Mises, who was perhaps the most influential Austrian economist, instead took the tack of demonstrating that if you wanted X that Y either would lead to it or would not lead to it (eg minimum price laws on supply of a good). He was against making value judgments and emphatically argued that they had no place in economics as a science. He also was against economics being construed as a science capable of making predictions about eg the macroeconomy. Modeling in general Austrians consider a fool's errand.
If Austrians cannot give one an idea of, for example, what the outcome of QE would be, then what is the value of this school of thought? Does that not make it merely an interesting abstract theory with no practical real-world applications?
The short answer is: Yes. The long answer is, that central banks are in my opinion a way to regulate banking and money supply so that it is useful for the economy and the people. His point that deregulation, liberalisation, and privatisation are bad ideas which are likely to fail is something I can agree on. Also his point that central banks are usually not really accountable for they do and that banking consolidation wasn't a good idea to begin with. I'm still glad to live in a country where they are a lot of local banks, which can help SME much better than big banks, which have only a little branch in town. It matters where decisions are made.
The central bank's job is still important, it is lender of last resort and it is an important regulatory body for the banking and financial sector. It is something we need if we want to prevent those financial crisis like in 2008.
I think most people who care have found that everything is better decentralized. Economy, Banking, Networking, Information, etc. But for some reason we humans don't stop creating centralized systems to then suffer from the bad consequences. This illogical points validates some discussion, I'd say.
