9 ms·

Probably not. I suspect the Austrian school of economics will be proven right about money and credit eventually.

by yasp 8y ago

dogma1138 8y ago
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).
- yasp 8y ago
  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.
- brian_cloutier 8y ago
  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.
  - dogma1138 8y ago
    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.
    - brian_cloutier 8y ago
      That's not really true though. For one: > supported by current mainstream cryptos 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/ https://saltlending.com/ I wouldn't necessarily trust https://www.bitbond.com/ https://www.bitbond.com/ with _my_ bitcoin, but theoretically I could, and this is starting to look a lot like fractional reserve.
      - dogma1138 8y ago
        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.
        brian_cloutier 8y ago
        > 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.
  - throwaway8121 8y ago
    You can't do that with Bitcoin as the interest rate they'd have to pay on deposits would kill the bank, and the interest rates on loans would make the loans undesirable.
  - QML 8y ago
    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. [1] https://en.wikipedia.org/wiki/Sybil_attack https://en.wikipedia.org/wiki/Sybil_attack
    - brian_cloutier 8y ago
      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.
      - mseebach 8y ago
        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?
nfoz 8y ago
What does that mean? 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?
- yasp 8y ago
  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] [0] https://mises.org/library/economic-science-and-austrian-method https://mises.org/library/economic-science-and-austrian-meth... [1] https://mises.org/library/man-economy-and-state-power-and-market https://mises.org/library/man-economy-and-state-power-and-ma...
  - dragonwriter 8y ago
    > 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.
- dragonwriter 8y ago
  > 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.
Marazan 8y ago
Brilliant. Continually proven wrong again and again and again but sure to be right eventually. Damn those irrational actors. Why can't everyone be as rational as an Austrian.
- yasp 8y ago
  Rationality and efficient markets are never mentioned once, to my knowledge, in Man, Economy, and State.
  - chiaro 8y ago
    if ME&S represents the sum of Austrian economics, then it has little hope indeed.
a008t 8y ago
What do you mean by "eventually"? 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?
Frondo 8y ago
Okay, but when? 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.
- yasp 8y ago
  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.
  - a008t 8y ago
    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?
    - arethuza 8y ago
      It does mean that you can never be demonstrated to be wrong! Edit: I changed "proved" to "demonstrated" ;-)

Probably not. I suspect the Austrian school of economics will be proven right about money and credit eventually.

by yasp 8y ago

Probably not. I suspect the Austrian school of economics will be proven right about money and credit eventually.

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).

yasp 8y ago
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.
brian_cloutier 8y ago
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.
- dogma1138 8y ago
  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.
  - brian_cloutier 8y ago
    That's not really true though. For one: > supported by current mainstream cryptos 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/ https://saltlending.com/ I wouldn't necessarily trust https://www.bitbond.com/ https://www.bitbond.com/ with _my_ bitcoin, but theoretically I could, and this is starting to look a lot like fractional reserve.
    - dogma1138 8y ago
      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.
      - brian_cloutier 8y ago
        > 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.
- throwaway8121 8y ago
  You can't do that with Bitcoin as the interest rate they'd have to pay on deposits would kill the bank, and the interest rates on loans would make the loans undesirable.
- QML 8y ago
  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. [1] https://en.wikipedia.org/wiki/Sybil_attack https://en.wikipedia.org/wiki/Sybil_attack
  - brian_cloutier 8y ago
    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.
    - mseebach 8y ago
      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?

nfoz 8y ago

What does that mean? 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?

yasp 8y ago
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] [0] https://mises.org/library/economic-science-and-austrian-method https://mises.org/library/economic-science-and-austrian-meth... [1] https://mises.org/library/man-economy-and-state-power-and-market https://mises.org/library/man-economy-and-state-power-and-ma...
- dragonwriter 8y ago
  > 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.
dragonwriter 8y ago
> 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.

Marazan 8y ago

Brilliant. Continually proven wrong again and again and again but sure to be right eventually. Damn those irrational actors. Why can't everyone be as rational as an Austrian.

yasp 8y ago
Rationality and efficient markets are never mentioned once, to my knowledge, in Man, Economy, and State.
- chiaro 8y ago
  if ME&S represents the sum of Austrian economics, then it has little hope indeed.

a008t 8y ago

What do you mean by "eventually"? 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?

Frondo 8y ago

Okay, but when? 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.

yasp 8y ago
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.
- a008t 8y ago
  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?
  - arethuza 8y ago
    It does mean that you can never be demonstrated to be wrong! Edit: I changed "proved" to "demonstrated" ;-)