You might have noticed the world has been facing a bit of a fiscal and monetary problem of late. Bitcoin devotees are certainly aware of this as it has been the search for solutions which has stoked much of the recent interest in Bitcoin.
Indeed, Bitcoin can help solve some of those problems. Some though persist despite the virtues of Bitcoin.
The major Bitcoin advantage lies in remedying the threats of fiat currency and the inevitably ensuing inflation . Inflation is the great and secret impoverisher. Under its burden we see the purchasing power of our money gutted. Not all suffer equally, though. The well placed and politically connected (think big banks and their favored customers) profit handsomely by receiving first issuance of this money-from-nowhere. They can therefore purchase goods at pre-inflated prices, prosper immensely, and leave the rest of us to bear the burden of inflated prices that only come after they've made out like bandits.
Bitcoin is a helpful remedy to this problem. Where fiat currency's value is determined by the issuer (i.e., government), through monetary supply and interest rate control, Bitcoin's value is decided by the market. A real, rather than fiat, currency is evaluated by the market for benefits, such as providing a reliable medium of exchange or store of value.
Here, Bitcoin shines. Since no individual(s) or organization can arbitrarily decree the Bitcoin supply, it is not subject to the self-serving manipulation characteristic of government's use of fiat currency. Consequently, Bitcoin effectively resists inflationary pressures.
Fiat currency though isn't the only problem contributing to the present problems of the world economy. Another is fractional reserve banking. This is the practice by which banks magically multiply the amount of money in the economy.
Banking black magic though it may be, fractional reserve banking practices are ubiquitous. You know that banks make loans. Have you considered from where they get the funds to do so? They're drawn of course from the savings placed in the bank by depositors. In principle this isn't a problem, and the interest payments made possible will be attractive to many depositors. The problem is banks wanting to have their cake and eat it too. Thus, they perpetuate the illusion that the depositor's money is still available to be withdrawn at will. (Otherwise, far higher interest payments would likely be demanded, if people couldn't access their own money.) Obviously, though, the funds cannot be simultaneously in the depositor's account and in the hands of the borrower.
This bit of financial magic is defended, with some justification, as fuelling the economic machinery: it certainly increases monetary liquidity, and entrepreneurial benefits may result. There are tradeoffs to everything though and costs of fractional reserve banking can be immense.
a) It contributes to inflation. It's really not that different from what the government does: money is created out of thin air. In the process, though, an illusion is perpetuated about saving levels. b) Growing directly out of this latter deception, business cycles are created. The ephemeral money supply increases create the false impression of higher tendencies to saving, which mislead entrepreneurs to borrow at the resulting artificially suppressed interest rates. Those rates, though, are sending false signals, which the borrowers discover too late. The result is recession - possibly depression. c) Borrowers are not the only direct victims of these practices. If depositors come to recognize these banking practices as the Ponzi scheme they are, they demand return of their deposits. The problem with that, of course, is that the money isn't really there.
Bitcoin offers no solution to fractional reserve banking, though, as demonstrated by the suspension of Bitcoin withdrawals at a Tokyo-based exchange called Mt. Gox. For some time now it has been the global leader among exchanges of U.S. dollars and Bitcoin. However, despite being formally an exchange, clients do set up account and Mt. Gox has been exercising fractional reserve lending practices. Now, the Bitcoin depositors are finding they cannot withdraw their funds.
Mt. Gox's official explanation has been to blame a recent moratorium on withdrawals on technical malfunction. The problem with this spinning of the matter is that Mt. Gox has engaged in a low profile, high volume convertibility suspension for the last year. Multiple ruses have been deployed over that time. It appears, though, the gloves are now off.
What we're seeing with Mt. Gox is the first ever digital bank run. And the response has been the same as that of banks through history: bar the door! It's now looking doubtful whether those with Bitcoin accounts at Mt. Gox will get all - or possibly even any - of their money out.
A truly, market based currency like Bitcoin has huge social and personal advantages, which should not be underestimated. It is though no panacea for ill-considered investment decisions. The interest earning appeal of deposits in fractional reserve banking institutions have real allure. Turning a blind eye to their danger, though, can prove costly. Bitcoin's virtues do not include a financial do-over.
Indeed, Bitcoin can help solve some of those problems. Some though persist despite the virtues of Bitcoin.
The major Bitcoin advantage lies in remedying the threats of fiat currency and the inevitably ensuing inflation . Inflation is the great and secret impoverisher. Under its burden we see the purchasing power of our money gutted. Not all suffer equally, though. The well placed and politically connected (think big banks and their favored customers) profit handsomely by receiving first issuance of this money-from-nowhere. They can therefore purchase goods at pre-inflated prices, prosper immensely, and leave the rest of us to bear the burden of inflated prices that only come after they've made out like bandits.
Bitcoin is a helpful remedy to this problem. Where fiat currency's value is determined by the issuer (i.e., government), through monetary supply and interest rate control, Bitcoin's value is decided by the market. A real, rather than fiat, currency is evaluated by the market for benefits, such as providing a reliable medium of exchange or store of value.
Here, Bitcoin shines. Since no individual(s) or organization can arbitrarily decree the Bitcoin supply, it is not subject to the self-serving manipulation characteristic of government's use of fiat currency. Consequently, Bitcoin effectively resists inflationary pressures.
Fiat currency though isn't the only problem contributing to the present problems of the world economy. Another is fractional reserve banking. This is the practice by which banks magically multiply the amount of money in the economy.
Banking black magic though it may be, fractional reserve banking practices are ubiquitous. You know that banks make loans. Have you considered from where they get the funds to do so? They're drawn of course from the savings placed in the bank by depositors. In principle this isn't a problem, and the interest payments made possible will be attractive to many depositors. The problem is banks wanting to have their cake and eat it too. Thus, they perpetuate the illusion that the depositor's money is still available to be withdrawn at will. (Otherwise, far higher interest payments would likely be demanded, if people couldn't access their own money.) Obviously, though, the funds cannot be simultaneously in the depositor's account and in the hands of the borrower.
This bit of financial magic is defended, with some justification, as fuelling the economic machinery: it certainly increases monetary liquidity, and entrepreneurial benefits may result. There are tradeoffs to everything though and costs of fractional reserve banking can be immense.
a) It contributes to inflation. It's really not that different from what the government does: money is created out of thin air. In the process, though, an illusion is perpetuated about saving levels. b) Growing directly out of this latter deception, business cycles are created. The ephemeral money supply increases create the false impression of higher tendencies to saving, which mislead entrepreneurs to borrow at the resulting artificially suppressed interest rates. Those rates, though, are sending false signals, which the borrowers discover too late. The result is recession - possibly depression. c) Borrowers are not the only direct victims of these practices. If depositors come to recognize these banking practices as the Ponzi scheme they are, they demand return of their deposits. The problem with that, of course, is that the money isn't really there.
Bitcoin offers no solution to fractional reserve banking, though, as demonstrated by the suspension of Bitcoin withdrawals at a Tokyo-based exchange called Mt. Gox. For some time now it has been the global leader among exchanges of U.S. dollars and Bitcoin. However, despite being formally an exchange, clients do set up account and Mt. Gox has been exercising fractional reserve lending practices. Now, the Bitcoin depositors are finding they cannot withdraw their funds.
Mt. Gox's official explanation has been to blame a recent moratorium on withdrawals on technical malfunction. The problem with this spinning of the matter is that Mt. Gox has engaged in a low profile, high volume convertibility suspension for the last year. Multiple ruses have been deployed over that time. It appears, though, the gloves are now off.
What we're seeing with Mt. Gox is the first ever digital bank run. And the response has been the same as that of banks through history: bar the door! It's now looking doubtful whether those with Bitcoin accounts at Mt. Gox will get all - or possibly even any - of their money out.
A truly, market based currency like Bitcoin has huge social and personal advantages, which should not be underestimated. It is though no panacea for ill-considered investment decisions. The interest earning appeal of deposits in fractional reserve banking institutions have real allure. Turning a blind eye to their danger, though, can prove costly. Bitcoin's virtues do not include a financial do-over.
About the Author:
Anyone hoping to be benefiting from the Bitcoin revolution in global finance, you need to stay abreast of events by getting the scoop at the Bitcoin Profit Calculator site. Wallace Eddington has been storming the blogosphere with his recent analysis. See particularly his popular article on Bitcoin exchange trading funds .
0 comments:
Post a Comment
Don't use active link, spamming, phising or making chaos