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It's not strictly deflation in terms of a shrinking money supply which is the nasty case. In principle a bitcoin currency would provide a constant supply of "mo
by neffy 9y ago
It's not strictly deflation in terms of a shrinking money supply which is the nasty case. In principle a bitcoin currency would provide a constant supply of "money" - which since it is something that has never really existed, does raise interesting questions about how the financial system would behave if it did.
However, that presupposes that nobody starts performing fractional reserve lending using bitcoin as a currency. If that is allowed, then we're back to the existing banking system and it's varying supplies of money in proportion to banking debt. Nothing has really changed except that we have slightly more efficient inter-bank exchange mechanisms...unless we get a proliferation of alt-currency lending models, in which case we're back in the US wildcat banking era (circa 1840's) - a period that was not exactly renowned for its financial stability.
Alternatively, in the hypothetical world (because it's really quite hard to stop) where there is no bank lending any more... then we have the problem of how is a modern economy going to work without banking debt? As you say, lots of interesting questions on the economics side.
- solotronics 9y agoit is literally impossible to do fractional reserve lending with Bitcoin. each coin has chain of custody back to the inception by mining reward (blockchain) so you can't send BTC you do not own. an altcoin could be built for fractional reserve lending where the coins are created by some form of consensus by a group of authorities. you could trade BTC and this theoretical altcoin but really we already have digital fiat currency for this purpose.
- EGreg 9y agoThat's not how fractional reserve lending works. Banks issue their own credit lines backed by Bitcoin. And you can't stop them from doing that.
- solotronics 9y agoI would argue that it's not really backed by Bitcoin since it isn't on the block chain. Who is backing the lending by sending real Bitcoins? The bank would never do that they would get scammed constantly.
- PeterisP 9y agoFractional reserve lending of bitcoin would happen in the same manner as fractional reserve lending of gold coins. E.g. a bank attracts deposits of bitcoin (i.e. the bank gets the bitcoin, the customer gets an IOU/note in legal records saying that the bank owes them a bitcoin), lends these bitcoins out, some of the lent bitcoin get deposited in another bank and re-lent, etc. In this manner the on-chain bitcoins travel around faster, and the total money supply (bitcoin + all bitcoin-denominated IOU's) can easily grow.
- deleted 9y ago[deleted]