Show #14: Bitcoin, Gold and the Cashless Society

Niall

Administrator
Administrator
Moderator
FOTCM Member
Show #14: Bitcoin, Gold and the Cashless Society

This week we’re taking a look at the recent hits taken by gold and ‘Bitcoin’ – a so-called ‘virtual currency’. Touted as a solution to people’s concerns with online privacy and protection from overbearing and centralized fiscal authorities, Bitcoin has steadily risen in popularity and value since its launch in 2008… until a couple of weeks ago when its dollar value suddenly plummeted.

What happened to make people suddenly lose interest? Or more sinisterly, was the digital currency attacked by financial speculators? What makes prices rise and fall anyway? Speculation, hype and ‘pump-and dump’ schemes certainly play a role in making or breaking products on the markets or manipulating the value of states’ currencies, but are there forces at work here that extend beyond human influence?

And what about paper money? Do you still use it? Will it soon become a thing of the past? Is a cashless society, where all purchases are made with digital transactions, really on the cards?

Everyone knows that ‘money doesn’t grow on trees’, but where then does money come from? Why is there never enough of it for most of us and far too much of it for the 1%? Is this era of record wealth disparity between rich and poor unique in history? Or do we have historical precedents to compare it with?
 
S

Scribblenauts

Guest
Well this might not answer all of the questions, but I have this idea that money is after all energy (a material form of energy of course), we exert ourselves, in this age, to transform our energy into a material form called money for many reasons, but those in control squeeze us to the limit to transform as much of our energy as possible into matter (money), then they store it in banks, and they encourage us to do the same with any money left with us.
so it is only us, our energy, ourselves, that is stored there, so whatever happens to that money there, happens to us here.
and what happens to that money there?, they gamble with it of course, playing all kinds of games causing all these wars, problems and suffering we see and hear around the world.
but this will end once we decide to take back control of our energy and detach our money, our energy, our selves from any gambling or games, when our energy remains within us we are in control of our security and freedom
 

foofighter

Jedi Council Member
Vulcan59 said:
Unfortunately the above misses one of the biggest point of a cash-less society, because it will have a huge impact on the inflationary forces of the monetary system. I thoroughly recommend the book "Mystery of Banking" by Murray Rothbard (from the Austrian economic school of thought), which explains in quite some detail how the banking system started (and which is how most people think of banking still), and then evolved to the fraudulent counterfeit industry it is now, and how central banking makes it worse.

The point about cashlessness is that it essentially changes how banks have to deal with fractional reserves. Let's say a bank has $100, and the reserve ratio is 1/10, meaning the bank can loan out $90, thus increasing the money supply to $190. With physical cash, if depositors (which really legally speaking are creditors, because the bank owns the "deposited" currency) withdraw $50 from the bank, then the bank is forced to reduce the amount of loans in order to reach the reserve ratio again, which is deflationary. This is Good as it becomes a check n balance on the banking system.

Without physical cash this goes away, and it becomes very hard for depositors to have any say in how much the currency supply is inflated. So it will be inflated to its maximum, at all times, which benefits money institutions and hurts savers and pensioners due to the price inflation that follow.

The book is available online as a PDF here: http://mises.org/Books/mysteryofbanking.pdf

Another relevant book is the recently published Currency Wars by Jim Rickards, which explains how governments try to inflate their currency in order to promote exports, eventually causing a systemic collapse of the entire system. Also recommended in order to understand how our current monetary system really works, and what is in store for us.

Virtual currencies like BitCoin are interesting because they don't really allow this kind of "inflation by policy", but there are quite a lot of issues with BitCoin from a technical point of view, including privacy concerns.
 

jonspock

Padawan Learner
foofighter said:
Vulcan59 said:
Unfortunately the above misses one of the biggest point of a cash-less society, because it will have a huge impact on the inflationary forces of the monetary system. I thoroughly recommend the book "Mystery of Banking" by Murray Rothbard (from the Austrian economic school of thought), which explains in quite some detail how the banking system started (and which is how most people think of banking still), and then evolved to the fraudulent counterfeit industry it is now, and how central banking makes it worse.

The point about cashlessness is that it essentially changes how banks have to deal with fractional reserves. Let's say a bank has $100, and the reserve ratio is 1/10, meaning the bank can loan out $90, thus increasing the money supply to $190. With physical cash, if depositors (which really legally speaking are creditors, because the bank owns the "deposited" currency) withdraw $50 from the bank, then the bank is forced to reduce the amount of loans in order to reach the reserve ratio again, which is deflationary. This is Good as it becomes a check n balance on the banking system.

Without physical cash this goes away, and it becomes very hard for depositors to have any say in how much the currency supply is inflated. So it will be inflated to its maximum, at all times, which benefits money institutions and hurts savers and pensioners due to the price inflation that follow.

I don't think that is true. Banks hold very small amounts of actual cash. Just try to make a large withdrawal late in the day on a Friday. The amount of cash in circulation is closer to 1% than 10% and the % has been shrinking while money supply had been increasing. In recent years in the US, banks have been shoring up their reserves while previously they often lent out more than their reserve limits hoping to backfill later.
Although what is used for currency may have an impact on the whole banking system, I think we should separate the topics of currency vs fractional-reserve banking. For me, the latter is the biggest cause of inflation.

What cash does still allow though is anonymous payments for goods and an ability to more easily bypass taxes that would be due other wise. Cashlessness also means that banks or governments can potentially freeze all of your assets and lock you out of the system. Bitcoin may also be susceptible to this. Look forward to hearing this discussion!
 

foofighter

Jedi Council Member
jonspock said:
I don't think that is true. Banks hold very small amounts of actual cash. Just try to make a large withdrawal late in the day on a Friday. The amount of cash in circulation is closer to 1% than 10% and the % has been shrinking while money supply had been increasing.
Those are different percentages. What I referred to was the fractional reserve ratio, i.e. how much of deposited currency must be held at any given time. In the US it is indeed 10%, as you can see on this Federal Reserve page: _http://www.federalreserve.gov/monetarypolicy/reservereq.htm

jonspock said:
In recent years in the US, banks have been shoring up their reserves while previously they often lent out more than their reserve limits hoping to backfill later.
Although what is used for currency may have an impact on the whole banking system, I think we should separate the topics of currency vs fractional-reserve banking. For me, the latter is the biggest cause of inflation.
I don't see how you can keep the two apart, since currently the currency supply is almost exclusively driven by fractional reserve banking principles. If the show is to talk about currencies, i.e. mediums of exchange and stores of value, then it is vital to talk about fractional reserve banking. Most people claim to be interested in money, and yet I have met very very few people who actually understand how it works. You can't complain about or discuss money and the alternatives without first understanding how it works.
 

jonspock

Padawan Learner
foofighter said:
jonspock said:
I don't think that is true. Banks hold very small amounts of actual cash. Just try to make a large withdrawal late in the day on a Friday. The amount of cash in circulation is closer to 1% than 10% and the % has been shrinking while money supply had been increasing.
Those are different percentages. What I referred to was the fractional reserve ratio, i.e. how much of deposited currency must be held at any given time. In the US it is indeed 10%, as you can see on this Federal Reserve page: _http://www.federalreserve.gov/monetarypolicy/reservereq.htm

jonspock said:
In recent years in the US, banks have been shoring up their reserves while previously they often lent out more than their reserve limits hoping to backfill later.
Although what is used for currency may have an impact on the whole banking system, I think we should separate the topics of currency vs fractional-reserve banking. For me, the latter is the biggest cause of inflation.
I don't see how you can keep the two apart, since currently the currency supply is almost exclusively driven by fractional reserve banking principles. If the show is to talk about currencies, i.e. mediums of exchange and stores of value, then it is vital to talk about fractional reserve banking. Most people claim to be interested in money, and yet I have met very very few people who actually understand how it works. You can't complain about or discuss money and the alternatives without first understanding how it works.

If people stop using 'cash' as in paper money + coins, then the system would continue exactly as it is. That is, we'd still have fractional reserve banking if everyone just paid via electronic forms of money (or checks) instead of cash. That is why it is potentially a separate issue. When we fold in Bitcoin though, there would be no fractional reserve based lending if it was the exclusive form of money. Fractional reserve banking did exist though when currencies were backed by gold. And it would appear again unless banks were not allowed to loan out money they didn't have.
In my opinion although Bitcoin has major flaws at the moment, potentially it is better than gold. Gold price seems heavily driven by speculation. What if there was a huge discovery in the oceans somewhere and the supply quadrupled? Plus isn't most of it held already by a relatively small group?
 

Mariama

Ambassador
Ambassador
FOTCM Member
jonspock said:
What cash does still allow though is anonymous payments for goods and an ability to more easily bypass taxes that would be due other wise. Cashlessness also means that banks or governments can potentially freeze all of your assets and lock you out of the system. Bitcoin may also be susceptible to this. Look forward to hearing this discussion!

Maybe we have to go back to the old system where people invest their surplus in land and animals. Or golden jewellery, as some people in India, China, Arab and African countries still do. I suspect that people will start bartering more, when our society becomes cashless. But that is an assumption.

foofighter said:
Those are different percentages. What I referred to was the fractional reserve ratio, i.e. how much of deposited currency must be held at any given time. In the US it is indeed 10%, as you can see on this Federal Reserve page: _http://www.federalreserve.gov/monetarypolicy/reservereq.htm

But whether this is true?? Ten percent seems like a lot, given the greed of these banks.

ff said:
I don't see how you can keep the two apart, since currently the currency supply is almost exclusively driven by fractional reserve banking principles. If the show is to talk about currencies, i.e. mediums of exchange and stores of value, then it is vital to talk about fractional reserve banking. Most people claim to be interested in money, and yet I have met very very few people who actually understand how it works. You can't complain about or discuss money and the alternatives without first understanding how it works.

AFAICT more and more information on fractional reserve banking is to be found on the internet. Over here we even had a small wannabe political party that was against this practice. That would have been unheard of a couple of years ago, OSIT.

jonspock said:
If people stop using 'cash' as in paper money + coins, then the system would continue exactly as it is. That is, we'd still have fractional reserve banking if everyone just paid via electronic forms of money (or checks) instead of cash. That is why it is potentially a separate issue. When we fold in Bitcoin though, there would be no fractional reserve based lending if it was the exclusive form of money. Fractional reserve banking did exist though when currencies were backed by gold. And it would appear again unless banks were not allowed to loan out money they didn't have.
In my opinion although Bitcoin has major flaws at the moment, potentially it is better than gold. Gold price seems heavily driven by speculation. What if there was a huge discovery in the oceans somewhere and the supply quadrupled? Plus isn't most of it held already by a relatively small group?

FWIW, China has recommended its population to buy gold. It is not just the central banks that are hoarding/buying gold ATM.
The gold price is indeed driven by speculation, but they can't drive the price down forever. OSIT. And if people bought some gold early enough in the cycle they would make a nice profit. :)
 

Mikey

The Living Force
Excellent & well worth watching: A short animated documentary film by Paul Grignon about the monetary systems practiced through modern banking:

Money As Debt
http://www.youtube.com/watch?v=YS88F7Bw2AQ
 

jonspock

Padawan Learner
Data said:
A short animated documentary film by Paul Grignon about the monetary systems practiced through modern banking:

Money As Debt
http://www.youtube.com/watch?v=YS88F7Bw2AQ

Yes! A good resource. I would also recommend people to read the blogs of Mish Shedlock, Web of Debt (Ellen Brown), and Steve Keen's Debtwatch. They don't all agree with each other, but do provide both information and viewpoints beyond the mainstream and for helped clarify some of the myths of how the system really works, especially in terms of the fractional reserve system and so called 'money printing'.
 

jonspock

Padawan Learner
Other promising money option.
"Hour money" see www.hourmoney.org, www.ithacahours.com
Money equivalent to one hour of work. Too early to comment on how well this will work but of course it also has some obvious flaws
 

foofighter

Jedi Council Member
jonspock said:
If people stop using 'cash' as in paper money + coins, then the system would continue exactly as it is. That is, we'd still have fractional reserve banking if everyone just paid via electronic forms of money (or checks) instead of cash. That is why it is potentially a separate issue.
But that was not my point, and really avoids the question of how cashlessness influences the existing fractional reserve banking system. With the same system, whether people use physical cash or not DOES make a difference when it comes to the inflationary forces. Let me quote directly from "Mystery of Banking" which elaborates on this poin (p. 143 and onwards)t:
Now let us assume that the public wishes to draw down its
demand deposits by $2 billion in order to obtain cash. In order to
obtain cash, which we will assume is Central Bank notes, the
banks must go to the Fed and draw down $2 billion worth of their
checking accounts, or demand deposits, at the Fed. The initial
impact of this action can be seen in Figure 10.2.

In short, depositors demand $2 billion in cash; the banks go
to the Central Bank to buy the $2 billion; and the Central Bank,
in exchange, prints $2 billion of new notes and gives them to the
banks.
At the end of Step 1, then, the money supply remains the
same, since demand deposits have gone down by $2 billion but
Central Bank notes outstanding have increased by the same
amount. The composition of the money supply has been changed
but not yet the total. The money supply is still $65 billion, except
that there is now $2 billion less of demand deposits and $2 billion more of Central Bank notes in the hands of the public.
But this is only the first step, because the crucial fact is that
bank reserves have also gone down by $2 billion, by the same
amount that Central Bank notes in the hands of the public have
increased.
But since reserves have gone down, and the banks keep fully
loaned up, this means that banks must contract their loans and
demand deposits until the new total of deposits is again brought
down to maintain the legal reserve ratio. As a result, bank loans
and investments must contract by another $8 billion, so that the
fall in reserves can be matched by a fivefold fall in total deposits.
In short, the $2 billion drop in reserves must be matched by a
total of $10 billion drop in demand deposits. At the end of the
completed Step 2, therefore, the balance sheets of the banks and
of the Central Bank look as follows (Figure 10.3).

The eventual result, then, of an increased demand for cash by
the public is a drop in demand deposits of $10 billion, resulting
from the drop of bank reserves of $2 billion. The total money
supply has gone down by $8 billion. For demand deposits have
fallen by $10 billion, and cash in the hands of the public has risen
by $2 billion, making a net drop of $8 billion in the supply of
money.
Thus, an increased demand for cash causes an equal drop in
bank reserves, which in turn has a money multiplier effect in
decreasing total demand deposits, and hence a slightly less intense
effect in cutting the total amount of money.
If the public’s demand for cash drops, on the other hand, and
it puts more of its cash in the banks, then the exact reverse happens. Suppose we begin with the situation in Figure 10.1, but now
the public decides to take $2 billion out of the $15 billion of Central Bank notes in its possession and deposits them in exchange
for checking accounts. In this case, demand deposits increase by
$2 billion, and the banks take the ensuing extra cash and deposit
it in the Central Bank, increasing their reserves there by $2 billion. The $2 billion of old Central Bank notes goes back into the
coffers of the Central Bank, where they are burned, or otherwise
retired or liquidated. This situation is shown in Figure 10.4.

In short, the immediate result of the public’s depositing $2
billion of cash in the banks is that, while the total money supply
remains the same, only changing the composition between
demand deposits and cash, total bank reserves rise by $2 billion.
Receiving the new reserves, the banks then expand credit,
lending new demand deposits which they have created out of thin
air. They pyramid deposits on top of the new reserves in accordance with the money multiplier, which in our stipulated case is
5:1. The final result is depicted in the balance sheets in Figure
10.5.

Thus, the public’s depositing $2 billion of cash in the banks
increases reserves by the same amount; the increase in reserves
enables the banks to pyramid $8 billion more of deposits by
increasing loans and investments (IOUs) by $8 billion. Demand
deposits have therefore increased by $10 billion from the reduction in the public’s holding of cash. The total money supply has
increased by $8 billion since Central Bank notes outstanding have
dropped by $2 billion.

In short, the public’s holding of cash is a factor of decrease of
bank reserves. That is, if the public’s holding of cash increases,
bank reserves immediately decrease by the same amount, whereas
if the public’s holding of cash falls, bank reserves immediately
increase by the same amount. The movement of bank reserves is
equal and inverse to the movement in the public’s holding of
cash. The more cash the public holds, the greater the anti-inflationary effect, and vice versa.

Do you see the point now? Banks are on a fractional reserve, and that reserve is specifically to deal with people withdrawing cash from the bank. So if they do that, in order to maintain the fraction the above happens. With no cash withdrawals ever being made, but only transfers from one bank to the other electronically, there is no way for depositors to influence the pyramiding effect, and no way to do a bank run. The fear that banks have of bank runs, effectively, is gone.
 

Eboard10

The Living Force
FOTCM Member
foofighter said:
In short, the public’s holding of cash is a factor of decrease of
bank reserves. That is, if the public’s holding of cash increases,
bank reserves immediately decrease by the same amount, whereas
if the public’s holding of cash falls, bank reserves immediately
increase by the same amount. The movement of bank reserves is
equal and inverse to the movement in the public’s holding of
cash. The more cash the public holds, the greater the anti-inflationary effect, and vice versa.

Do you see the point now? Banks are on a fractional reserve, and that reserve is specifically to deal with people withdrawing cash from the bank. So if they do that, in order to maintain the fraction the above happens. With no cash withdrawals ever being made, but only transfers from one bank to the other electronically, there is no way for depositors to influence the pyramiding effect, and no way to do a bank run. The fear that banks have of bank runs, effectively, is gone.

Very interesting foofighter and I agree with the quote. Moving to a purely electronic currency system would remove the fear of bank runs. However, IMO we are far from seeing a cashless society. The way I see it playing out is that once events such as the plague et al will come to pass, the effects on the global economy will be so heavy that we will very likely witness a deflationary crisis much bigger than the '08 credit crunch and even the Great Depression. Bank runs will ensue as many banks will go bankrupt possibly leading to an almost complete collapse of the financial system as the central bankers will be powerless to fight the debt deleveraging trend caused by negative public sentiment. TPTB will then blame the crash on cash and propose a cashless society as the only viable solution. However, I am still of the opinion that their attempts at imposing such a system will fail due to the coming earth changes.

Session Date 12 December 2010
Q: (L) Our next question is about Julian Assange and Wikileaks. Is Wikileaks what it presents itself to
be? A grassroots, document leaking organization formed by a bunch of activist hackers and so forth?
A: It was briefly.
Q: (L) You say it was briefly; that means it was probably co‐opted fairly early on. So, can you tell us if
Julian Assange is an agent?
A: This is a question that you have already answered.
Q: (L) What I mean is, is he consciously an agent?
A: To some extent, yes. But remember programming of both the human and 4D varieties.
Q: (Perceval) Is it true that he had that meeting with the Israelis to agree that he would not release
damaging documents about them?
A: Yes.
Q: (L) And what is the objective of this Sideshow?
A: You guessed it this afternoon; preparation to accept global control. Or so it is planned.
Q: (L) I guess that means it may or may not turn out the way they expect?
A: It will get close. But remember the ”X” factor.
Q: (L) What is the X factor?
A: Earth changes.
 

jonspock

Padawan Learner
Eboard10 said:
foofighter said:
In short, the public’s holding of cash is a factor of decrease of
bank reserves. That is, if the public’s holding of cash increases,
bank reserves immediately decrease by the same amount, whereas
if the public’s holding of cash falls, bank reserves immediately
increase by the same amount. The movement of bank reserves is
equal and inverse to the movement in the public’s holding of
cash. The more cash the public holds, the greater the anti-inflationary effect, and vice versa.

Do you see the point now? Banks are on a fractional reserve, and that reserve is specifically to deal with people withdrawing cash from the bank. So if they do that, in order to maintain the fraction the above happens. With no cash withdrawals ever being made, but only transfers from one bank to the other electronically, there is no way for depositors to influence the pyramiding effect, and no way to do a bank run. The fear that banks have of bank runs, effectively, is gone.

Very interesting foofighter and I agree with the quote. Moving to a purely electronic currency system would remove the fear of bank runs. However, IMO we are far from seeing a cashless society. The way I see it playing out is that once events such as the plague et al will come to pass, the effects on the global economy will be so heavy that we will very likely witness a deflationary crisis much bigger than the '08 credit crunch and even the Great Depression. Bank runs will ensue as many banks will go bankrupt possibly leading to an almost complete collapse of the financial system as the central bankers will be powerless to fight the debt deleveraging trend caused by negative public sentiment. TPTB will then blame the crash on cash and propose a cashless society as the only viable solution. However, I am still of the opinion that their attempts at imposing such a system will fail due to the coming earth changes.
OK, I see one of your points. That is, if people pull money out of the banks in the form of cash, it does have a deflationary effect. This effect is multiplied by the fractional reserve ratio. I believe most of the current cash though is in existence for convenience reasons and not because people are storing it. It quickly circulates and is likely to be <1% of total 'currency'.
Even without cash there could still be bank runs. All it takes is for people to move their deposits out of one bank into another. If too much is removed from one bank, it becomes insolvent and collapses (while receiving bank benefits from a more healthy reserve ratio). If for example everyone in Greece moves all of their deposits to Swiss banks, I'd consider that a bank run. The withdrawals don't need to be in cash, they can be electronic transfers. The difference without cash is that perhaps the whole system won't collapse because the deposits will just move around without having the deflationary effect that cash would have. So I guess I still disagree. At least for any one individual bank, the reserve is not "specifically to deal with people withdrawing cash from the bank."
The overall money supply is not simply the total cash in circulation times the reserve ratio. I believe as far as the banks are concerned (in the US), US treasuries as considered cash and it is the treasuries that are considered as the 'base' money supply upon which all lending is based on and not the amount of cash in circulation
 

Mariama

Ambassador
Ambassador
FOTCM Member
I am not hearing anything. :/

Now I can hear you, missed the first minutes.
 
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