bitcoin and the fed

[Randall Twede]

i wont give either the honor of capitalizing their names. i don't understand bitcoin at all. people with powerful computers solve problems to receive bitcoins. i guess its better than the fed just printing them whenever they want, and lending them to our government, with us paying the interest, which they dictate. my advice would be to not count on currency of any kind.

[Pat Farrell]

what makes it better (or worse) than any other money? Sure, in the US, the Fed just invents money. In the olden days, they had to run printing presses, buying ink and paper. Now they just decide it exists and change a few zeros and ones, and voila, money. Before the US existed, Kings would decree money.

Bitcoin is IMHO a cool idea, a prototype, that reflects fresh thinking. The blockchain idea is far more interesting to me than bitcoin itself, and there are lots of other block-chain based moneys.

I'm always amazed that folks complain that if you lose your bitcoin wallet, you lose all your money. That is true of US cash as well. Lose your wallet with a bunch of $20 bills and they are gone.

I guess since most modern money is just zeros and ones floating thru the cloud, people have different expectations.

[Campbell Ritchie]

Pat Farrell wrote:. . . Before the US existed, Kings would decree money. . . .

Until about 100 years ago, money was backed by tangible assets; if the Bank of England wanted to have 1,000,000 £20 notes printed, they had to have £20,000,000 worth of gold stashed away somewhere. The King, if he decreed anything, didn't so much decree money as decree taxes to raise the money, which meant somebody else had to have the gold.

Things have changed since then.

[Pat Farrell]

Campbell Ritchie wrote:Until about 100 years ago, money was backed by tangible assets; if the Bank of England wanted to have 1,000,000 £20 notes printed, they had to have £20,000,000 worth of gold stashed away somewhere. The King, if he decreed anything, didn't so much decree money as decree taxes to raise the money, which meant somebody else had to have the gold.

If you sprinkle the word "usually" and "approximately" thru that, I'll agree. It was rare for money to be backed up 100%. Google "Seigniorage"
the king could also mix in base metals to devalue the coins.  The history and the topic itself are not quite as black and white as a lot of folks think

[Paul Anilprem]

I read the original paper on bitcoin technology and then several other articles a while back. My understanding is that it is very very cool. It has the power to take away the power of printing money from the govts. I have no doubt in my mind that if and when it gains wide spread usage, govts will leave no stone unturned to ban it or get rid of it someway or the other.

Minting of bitcoins is a small part in the whole scheme of things. Its power comes from the fact that it cannot be inflated or deflated by any one. Second, it has no dependency on banks.

It has nothing to do with interest as such. However, due to the fact that it cannot be inflated or deflated, interest rate on bitcoins will always be market driven. Govt. cannot decree interest rates on bitcoins.

[Pat Farrell]

Paul Anilprem wrote:Minting of bitcoins is a small part in the whole scheme of things. Its power comes from the fact that it cannot be inflated or deflated by any one. Second, it has no dependency on banks.

I can't understand why we still have banks. It is not clear to me what they do. I have one for two things: I have a safety deposit box for keeping critical paperwork like my marriage documentation, deed to my house, heirloom jewelry, etc. and they accept cash deposits. My broker-checking account doesn't offer those two services. Other than that, I don't see any value in what they do.

I also do not understand why the US has so many banks. Back when I worked with banks a lot, in the late 20th century, we had about 10,000 banks in the US (bank brands, not offices) while all of Canada had six. So if six is enough for Canada, its hard to see why we need more than say 100 in the US. Why do we have a hundred times that many? What unique offerings do they bring to the marketplace?

[Paul Anilprem]

Pat Farrell wrote:

Paul Anilprem wrote:Minting of bitcoins is a small part in the whole scheme of things. Its power comes from the fact that it cannot be inflated or deflated by any one. Second, it has no dependency on banks.

I can't understand why we still have banks. It is not clear to me what they do. I have one for two things: I have a safety deposit box for keeping critical paperwork like my marriage documentation, deed to my house, heirloom jewelry, etc. and they accept cash deposits. My broker-checking account doesn't offer those two services. Other than that, I don't see any value in what they do.

Banks are the interface between the public and the govt. In other words, banks are the agents of the govt. Govt manipulates the money market through the banks. The recent demonetization drive in India is a very good example of this.
You simply cannot have paper currency without a bank.

Bitcoin is free of this.

I also do not understand why the US has so many banks. Back when I worked with banks a lot, in the late 20th century, we had about 10,000 banks in the US (bank brands, not offices) while all of Canada had six. So if six is enough for Canada, its hard to see why we need more than say 100 in the US. Why do we have a hundred times that many? What unique offerings do they bring to the marketplace?

Well, nothing wrong with having more number of banks. Whatever work banks do, they are paid for that work by the customers. More banks means more competition for that work and therefore better rates.

[Mohamed Sanaulla]

I still don't understand how the bitcoin value changes? I read that its value increases the greater it is transacted in the market.

@Paul Do you have the link to the original paper?  

[Pat Farrell]

Paul Anilprem wrote:Well, nothing wrong with having more number of banks. Whatever work banks do, they are paid for that work by the customers. More banks means more competition for that work and therefore better rates.

I strongly disagree with this. Sure, in a pure market world, more competitors means better rates. But banks don't compete on rates. And consumers have no clue what they are buying or how to compare costs. US banks are essentially an appearance of a market, with a 10,000 leg octopus, each leg having a sign indicating that its unique. But its more of a Borg.
There is next to zero innovation in US banking. They are all sheep, doing what the other banks do

[Paul Anilprem]

Pat Farrell wrote:

Paul Anilprem wrote:Well, nothing wrong with having more number of banks. Whatever work banks do, they are paid for that work by the customers. More banks means more competition for that work and therefore better rates.

I strongly disagree with this. Sure, in a pure market world, more competitors means better rates. But banks don't compete on rates. And consumers have no clue what they are buying or how to compare costs. US banks are essentially an appearance of a market, with a 10,000 leg octopus, each leg having a sign indicating that its unique. But its more of a Borg.
There is next to zero innovation in US banking. They are all sheep, doing what the other banks do

You are mixing two things. Banks deal in moving money. Money, which is produced by the govt. Innovation in money (manipulation i.e.) is the domain of the govt. Banks don't and can't do that. But they definitely do innovate in how that money touches people.

Banks surely don't compete on rates because rates are driven by the govt. But they do compete with each other on providing that money to the people. Rate received by the people is basically the rate determined by the govt + the costs incurred by the banks in moving money. Banks compete on "cost of moving money". They can compete only if they innovate. ATMs, wire transfers, mobile payments, financial markets, loans, and so many other things are indeed innovations done by the banks.

They are all sheep, doing what the other banks do

Well, obviously, after one bank does something innovative, others will follow. Not all the banks came up with the idea of an ATM at the same instant. There must have been one bank that did it first. Whoever did it first, did in fact innovate. Like every business, innovations happen in banking as well.

[Paul Anilprem]

Mohamed Sanaulla wrote:I still don't understand how the bitcoin value changes? I read that its value increases the greater it is transacted in the market.

@Paul Do you have the link to the original paper?  

Bitcoin intrinsic value doesn't change. Bitcoin's exchange rate changes. Bitcoin is like a commodity in that respect. Like gold or wheat. Its price in dollars depends on supply and demand. Since the exchange market is very small, the variations are huge.

No, I don't have a link to the paper. Just google (sorry   ).

[Pat Farrell]

Paul Anilprem wrote:You are mixing two things. Banks deal in moving money. Money, which is produced by the govt. Innovation in money (manipulation i.e.) is the domain of the govt. Banks don't and can't do that. But they definitely do innovate in how that money touches people.

Banks don't move money, computers move money. I worked at CyberCash, we invented internet commerce. We made instant movement of money between merchants and consumer banks happen. The banks hated it, because they took 3 to 7 days to "move" the money, charging interest all along the way. While CyberCash is long go, PayPal is here. Most folks pay by electron, my house pays nearly all bills automatically, there is no need for human interaction at all.

What do you mean about how money touches people? I see zero innovation in banking at all. Woweezowee, US banks added smartchips to credit cards in the past year or so, something Euro banks had last century.

Please be specific, I am not following your generalized claims of innovation

[Paul Anilprem]

Pat Farrell wrote:

Paul Anilprem wrote:You are mixing two things. Banks deal in moving money. Money, which is produced by the govt. Innovation in money (manipulation i.e.) is the domain of the govt. Banks don't and can't do that. But they definitely do innovate in how that money touches people.

Banks don't move money, computers move money.

By that logic, farmers don't produce food, plants do. Hence farmers don't innovate?

Pat Farrell wrote:
I worked at CyberCash, we invented internet commerce. We made instant movement of money between merchants and consumer banks happen. The banks hated it, because they took 3 to 7 days to "move" the money, charging interest all along the way. While CyberCash is long go, PayPal is here. Most folks pay by electron, my house pays nearly all bills automatically, there is no need for human interaction at all.

And you don't see that as innovation in moving money?

I see zero innovation in banking at all. Woweezowee, US banks added smartchips to credit cards in the past year or so, something Euro banks had last century.

Please be specific, I am not following your generalized claims of innovation

I did mention a list of innovations - ATMs, wire transfers, mobile payments, financial markets, loans, and so many other things are indeed innovations done by the banks.

[Randall Twede]

would you work at your job in exchange for bitcoin? you cant go to the supermarket or fill up your tank can you? that's the only problem i have with it.

[Paul Anilprem]

Randall Twede wrote:would you work at your job in exchange for bitcoin? you cant go to the supermarket or fill up your tank can you? that's the only problem i have with it.

and that is why govts are letting it exist...for now. if it gains wide spread acceptance, its game over for the govts.

[Randall Twede]

[Norm Radder]

 Innovation in money (manipulation i.e.) is the domain of the govt. Banks don't and can't do that.

I think banks do create money in the sense that they give mortgages.  The value of the mortgages a bank issues is greater than the number of fed notes it has in its vaults.

[Paul Anilprem]

Norm Radder wrote:

 Innovation in money (manipulation i.e.) is the domain of the govt. Banks don't and can't do that.

I think banks do create money in the sense that they give mortgages.  The value of the mortgages a bank issues is greater than the number of fed notes it has in its vaults.

That is incorrect.

The one who gets the mortgage, gets actual cash. The bank must have that cash before it can give it to the person. A bank that has no cash on its books cannot dole out mortgage to anyone. Number of notes in its vaults is irrelevant because nobody wants to carry a hundred thousand dollars in bills. But the total amount of mortgages given by a bank is always equal to the cash that bank had on its books.

Note: I am using the term cash in the following sense:
From http://www.investopedia.com/terms/c/cash.asp

Although cash typically refers to money in hand, the term can also be used to indicate money in banking accounts, checks or any other form of currency that is easily accessible and can be quickly turned into physical cash.

[Norm Radder]

Having read this, I'm still confused: http://positivemoney.org/how-money-works/advanced/the-money-multiplier-and-other-myths-about-banking/

[Paul Anilprem]

Check out the answer by Joseph Wang here: https://www.quora.com/Can-a-bank-lend-more-money-than-it-has
That is basically how it works.

[fred rosenberger]

Paul Anilprem wrote:
That is incorrect.
The bank must have that cash before it can give it to the person.

This is not technically true - at least in the U.S. The Fed sets a minimum cash reserve. So if a bank has say a total of $100 in deposits, it only has to keep $10 cash on hand.  As a simple example, lets assume there is only one bank and everyone uses it.

So the bank has loaned out the $90 it can, which lets it keep the 10% reserve on hand.  That $90 goes out to new people, who then deposit it into the bank.  The bank now has $190 in deposits. It has to keep $19 on hand, and loans out $171, which gets depositied, giving the bank $362 in deposits...and so on...

Yes, this is an oversimplified example, but my point is that a bank actually CAN loan out more money than what it has on hand.

[Jesper de Jong]

Randall Twede wrote:would you work at your job in exchange for bitcoin? you cant go to the supermarket or fill up your tank can you? that's the only problem i have with it.

No, but not for the reason you mention. I wouldn't want to be paid in bitcoin because at the moment it is too volatile. I don't want my main income to be in "money" that can tomorrow suddenly be worth only half as much as what it was when I got it.

[Paul Anilprem]

fred rosenberger wrote:

Paul Anilprem wrote:
That is incorrect.
The bank must have that cash before it can give it to the person.

This is not technically true - at least in the U.S. The Fed sets a minimum cash reserve. So if a bank has say a total of $100 in deposits, it only has to keep $10 cash on hand.  As a simple example, lets assume there is only one bank and everyone uses it.

So the bank has loaned out the $90 it can, which lets it keep the 10% reserve on hand.  That $90 goes out to new people, who then deposit it into the bank.  The bank now has $190 in deposits. It has to keep $19 on hand, and loans out $171, which gets depositied, giving the bank $362 in deposits...and so on...

Yes, this is an oversimplified example, but my point is that a bank actually CAN loan out more money than what it has on hand.

Sorry, but that analysis is incorrect.

>"So the bank has loaned out the $90 it can, which lets it keep the 10% reserve on hand."
You are starting from the middle. How did it get $90 in the first place. That is important. I will show how.

Lets say a bank starts with $100 of seed money (say, it came from owners equity). It loaned out 90$ out of that 100. Now, if the person who got the loan does not deposit anything back, the bank can still give out another loan of $10.  

Now, if the person deposits $80 back with the bank, the bank now has $90 cash in hand but its assets are still at $10 cash + $90 loan. $80 is a liability on which it has to pay x% interest. It can give $10 + 90% of $80 = $82 of new loan. But logically, $72 of that loan is not from the bank but from the person who made that deposit. If you sum all of the assets and liabilities of Bank, Person 1, and Person 2, they will always be different by $100.

Bank: Assets = $90Loan + $82 Loan + $8 Cash ($180), Liabilities = $80
Person 1: Assets = $80 Deposit, $10 cash, Liabilities = $90 Loan
Person 2: Assets = $72 Cash, Liabilities = $72 Loan

Total Assets = $342, Total Liabilities = 242$

Difference = $100, which is same as the original equity, with which the bank started.

The point is that the bank did not generate any money. It is only involved in circulating the money that existed in the system. Had new money been generated, Assets would have risen.

[fred rosenberger]

i'm going to have to look at this later...it requires more brianpower than i can currently spare while at work...

[Liutauras Vilda]

Randall, Cowgratulations, your topic has been published in our July's Edition Journal.

[Randall Twede]

well, i'm still as confused as fred
wait, you said cowgratulations! where is my cow?