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deanclkclk Anyone here who's a money manager? I want to ask something about fractional reserve banking. Or anyone here who understand franctional reserve banking.
mircea_popescu Go ahead.i
deanclkclk Well just looking at a t account..how can fractional reserve banking be inflationary what is loan out (asset to the bank) is always equal to it's liability (deposit)?
mircea_popescu You'll have to phrase that question better. What's your definition of "inflationary" ?
deanclkclk If the depositor withdraws money ..it comes from the bank reserves. Inflationary..rising prices.
mircea_popescu That'd be rising prices. Traditionallyii inflation is defined as that state where the monetary mass increases. If in 2010 the total volume of payment instruments is 5, and in 2011 it's 6, then you've had 20% inflation.
deanclkclk But, let me ask you this. In an investment bank...one which the depositor can't withdraw from his account because, he knows the bank doesn't have it (it's loan out)..that's isn't inflationary. But, it is said in a fractional reserve bank...the depositor still has access to his deposit even though it's loan out that doesn't make any sense, because if deposit is 9 == loan 8 + reserve 1.
mircea_popescu Well, you've constructed it so it doesn't make any sense. Take a better example : say I run a whorehouse and you bring me your wife.iii Then one day you want to have sex. Just because I've sent her to work the streets of Mexico doesn't mean you can't have sex, I'll just hook you up with some other dude's wife. Am I running fractional reserve whorehouse ? No.iv Do you still get to have sex, even if your own wife is out ? Sure.
deanclkclk If the depositor withdraws from his account ...how would that show on the T account? Says all his 9 dollars.
mircea_popescu IB just takes a liquidity loan.
mircea_popescu Myeah. Best I can tell, you've painted yourself in a corner trying to understand this and now nothing makes sense. Time to re-examine your priors.
deanclkclk I understand your whorehouse analogy. If someone can show me how that would reflect on a T account..it would make a whole lotta sense. I'm just wondering how that would show. banks == liability (deposit $10) and assets (loan $9 & reserve $1), that balances.
mircea_popescu Okay, fair enough. Central bank creates 10 bucks. Pushes 2 each to 5 commercial banks. The banks loan out 20 bucks each, on the grounds that they are required by CB to keep 10% in reserves. Now, the monetary mass at the Central Bank level is 10, and the monetary mass at the Commercial Bank level is 100. That's a 1`000% inflation.
deanclkclk Yeah but, just listen.
deanclkclk Just an simple example in this illustration banks == liability (deposit $10) and assets (loan $9 & reserve $1). That's their T account right. They loan out $9. So what if..the depositor wants to withdraw his 10 dollars, how would that show on the banks T account?
mircea_popescu This is a purely accounting q, but : step 1 : deposit 10, loan 9, reserve 1 ; step 2 : withdraw the 10 : deposit 0, loan 9, reserve 1, owed 10 to liquidity provider. This bank now owes the 10 it owed before, except not to its original depositor. Nothing much changed. Note that accounting generally is just a convention, and it may be uniquely adequate or uniquely inadequate to resolve any factual problems. In some formulations inflation is opaque to accounting, in some others quite transparent.v This doesn't make inflation go away, even if it's very tempting for all governments historically to pretend so.vi
deanclkclk Ok. Hmmm. Yes I know mircea_popescu but, I'm just wondering how would that show on the account. But, with a deposit being 0...wouldn't that cause the T account to not be balanced? Liabilties are greater than an asset.
mircea_popescu Nope. You still owe 10, but not to depositors anymore, to liquidity provider instead. Just as balanced as it was. It goes from "liabilities 10 (depositors)" to "liabilities 10 (government)" or w/e.
deanclkclk Ohh so the liquidity provider funds the 10 dollars to pay back the depositor?
mircea_popescu Well yes. Someone will have to, as the 9 loaned out are loaned on terms and can't (in this example we use) be recalled. In practice obviously some mix will be implemented.
deanclkclk Liquidity provider in this case will be the central bank.
mircea_popescu It isn't the central bank in a functioning economy. This is why the LIBORvii originally existed : so banks can liquidify each other. The interest they settled on becoming the "fair" interest for everyone, smaller players.
deanclkclk Ohh ok.
mircea_popescu If it is the central bank you have by any sensible definition a central command economy like the soviets, and even discussing "banks" is just a masquerade.
deanclkclk Ok. But, if the banks are funding themselves..would that not increase the total stock of money?
mircea_popescu Well, how ?
deanclkclk Because, if bank A give to Bank B...bank A is decreasing it's money stock and giving it to Bank B...
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- Don't ask to ask. Just ask. [↩]
- Once the organised thieves started their attack on prosperity, inflation was redefined to "mean" something meaningless, to wit "a disparity between the increase in means of payment and the increase in available goods and services". This is poppycock, primarily because if on a wharf somewhere there's ten yachts which each cost one million, then you and your nine friends are THE ten people with yachts. If tomorrow the wharf is chock-full, sporting one hundred yachts, the fact that the monetary inflation is matched by corresponding inflation of yacht volumes doesn't help you any : you're now stuck with ninety more fuckwits on your wharf, and yachting shall never be the same. This is definitely inflation. [↩]
- This is not me being exotic, this is me giving what's indeed a very good example. It's common parlance to consider "the bitter fate of women" in those olden times when they were property in terms of "you know, just like some item the husband owned, so he owned his wife". This happens to be factually incorrect, it's not that the wives were property like any item, it's that all items hence are property just like the wives were property back then, because woman was the first property of man in the flow of history. And since ownership of woman is a lot more akin to ownership of real estate than chattel, what with her rich valleys and luscious pastures one can't nor does one want to put in his pocket but nevertheless does want to control access to, it'd be reasonable to expect real estate ownership was codified much before, and to much more of a complex degree than chattel ownership. Which expectation is, of course, solidly borne by an examination of the history of law and commerce, and which line of consideration gives the ridicule to those to this day speaking of "chattel" slaves. They're real estate, not chattel, dears.
Moreover, people are wired a certain way, let's call it "ancestral memory" and leave it at that, which makes them eminently more capable to correctly follow ownership when the object owned is their own wife than when the object owned is a can of coke or some metal rounds. Consequently, MP's whorehouse is an excellent example you're more than welcome to use whenever the intricacies of trade and the complexities of ownership give you trouble. Just send your wife over to me for a space and everything will miraculously clear up, I promise. [↩]
- Obviously there can never be such a thing as a fractional reserve brothel, in the sense that I can only send out women which I've actually taken in, I can't make some out of craftily arranged pillows and lampshades. [↩]
- One of the best examples of inflation being transparent is the percentile system, such as Bitcoin enforces. So, if one day I own 1% of all the goods in the world, and the next day I only own 0.5% of all the goods in the world, my position has factually erroded, and this means there was an inflation of goods in the world. This is the subtle meaning of owning say one thousand Bitcoins : you know that come Hell or high water, you will still own 1/20`000 of everything that there is. No matter what happens, you've got your 0.005% stake of everything. Of everything. If today that means you own five women out of ten billion people and tomorrow they manage to find better ways to pack the species up like sardines and the population jumps to 100 bn, that means your own harem headcount will also jump to 50. Just so, and just by itself - you won't have to do anything whatsoever. Just sit there and it just comes to you, by virtue of you being the modern equivalent of an aristocrat, and all new good things that happen have to be given to you in proportion to your aristocracy. Jus Primae Noctis is no joke, it's a policy as far as Bitcoin goes.
Now conversely, in a fiat system, where there's no fixed relation between the mass of money and the world itself, having any sum of money simply means you have to keep running, or else you're getting erroded by those still willing to run. And even if you do keep running, you'll still be erroded, by all those running faster - or, what's worse, by all those running smarter. For instance if you're the sort of idiot that runs the hard track of trying to get value out of reality you're in for a sore beating at the hands of those who know the most productive sort of running is running to mommy government to bitch and whine. So mommy prints money, diluting your ownership of the world, to give it to these guys that are apparently smarter than you, because instead of beating reality into submission they coddle and compliment mommy to orgasm.
Obviously the first system has the disadvantage that it encourages serenity (you know what Pascal said) and ossifies society, whereas the second has the disadvantage that it encourages activity. Or pollution. Either make the atmosphere unbreathable, to be frank. In any case, it's all about progress, which is to say the constant degradation of the quality of life on the wharf by constant import of filthy, unworthy louts that have to also be fed and clothed and given yachts. So wouldn't you make do with a small rowboat instead, this way a hundred thousand more idiots you never met and never would care to meet can also have their own boats, and be cool just like you ? We'll issue you yacht certificates for your boats, of course, so nobody can say you don't own a yacht anymore. We'll even make it illegal for anyone to laugh at how stupid you are. Deal ? [↩]
- Only in electoral systems. Otherwise, governments imposed by the aristocracy in spite of the hopes and aspirations of the mob are extremely finely and acutely aware of inflation. [↩]
- You know, that Central Bank run fraud. [↩]