Yup, at best a variant digital payment system. but IMO oversold as an alternate currency or worse yet as a hedge against sovereign currencies.Phrazemaster said:
Bordering on a pyramid or ponzi scheme, where early adopters profit nicely while late comers will be left holding the bag (or bits). They argue that the total number ever made will be limited so future value will appreciate, but this assumes consistent growing demand. There is no fundamental reason for this, and the people behind bitcoin are probably quietly counting their "real" money that they exchanged bitcoins for.
Yes, fractional reserve banking is based on a confidence game of sorts, where depositors "trust" that they can get their money back from banks on demand. This is true as long as they all don't want it back at the same time. We saw what can happen, like in Cyprus when there is a run on the banks and not enough money in the till.
There is a real benefit from fractional reserve banking, where a finite amount of capital gets multiplied several times and can generate faster economic growth from the lending activity, than if all 100% was sitting in bank vaults doing nothing. The faster economic growth is a double edged sword, while growth is generally good, the higher rate of growth comes with increased volatility, so we see boom/bust cycles. Even this is not all bad as capitalism utilizes "creative destruction" to remove dead wood, economically weak players from the private sector to be replaced by new stronger players. (Government bail-outs interfere with this creative destruction keeping weak players alive. The government recently took a $10B loss selling off the last of their GM stock. Since the government does not have their own money we taxpayers lost the $10B on GM).
Central banks have tried to manage these boom/bust cycles, and have enjoyed the appearance of limited success modulating the interest rate of this fractional reserve lending, to heat or cool the economy. My opinion is that they are drinking too much of their own kool aid and their ability to micro manage growth is an illusion.
I am not sure exactly what trading nothing is. The last major economic collapse that we are still recovering from was caused by selling "stuff" (bundled low quality mortgages) that clearly were not worth as much as they were represented to be. As long as there was an adequate supply of new fools to sell the funny investment to the music played on. but as happens with all bubbles, the music stops eventually.
I am not sure about the motives behind bitcoin. I suspect it is a very profitable enterprise for the secretive founders.
The old saying that you should only buy things that hurt when you drop them on your foot has some resonance. Commodities should be a no brainer, but in my experience fluctuations in the value of our home currency can upset commodity valuations.
I remain hopeful that our central bankers are smarter than they look, and we will find out in the next few years. Just like fractional reserve banking contributes to faster economic growth (generally a good thing), modest currency inflation goes hand in hand with managing this delicate if slightly chaotic relationship. Since I put a small fraction (1%) of my investment portfolio in gold as a kind of doomsday hedge against the dollar's value, I have seen the price of gold drop 36.6% (I just looked at it). The good news for me, is that the other 99% of my portfolio in dollars has gone up.
A couple elephants in the room that don't seem to get much notice in the media is A) our slow/low inflation. Deflation that can trigger a deflationary spiral could be an even worse economic situation than our current lethargic low growth. It is harder to measure actual inflation as the government has changed their definition for how it is officially measured and often reverse out volatile factors (like energy costs). B) the other elephant is the size of Bernanke's (soon to be Yellin's) purchased debt portfolio. The fed has been buying some $85B a month of new debt to keep bond rates artificially low. Bernanke's last official announcement was that he has started the dreaded "tapering" reducing the monthly buying to $75B. While the market has swooned in the past at any mention of tapering, this time the move was adequately telegraphed and markets actually rallied on the news. But what nobody is thinking about is the $4.5T of this debt on the Fed's balance sheet that they ultimately need to unload (for perspective our annual budget deficit is running around $1T, our total sovereign debt is around $16T, and our total GDP for 2012 was $15.6T.) So far they have been able to get away with this extraordinary monetary experiment because the velocity (how fast money changes hands) in the economy is still unusually slow, but this next couple years will be interesting. Hopefully the two elephants in room are not a male and female, which could result in more economic elephants. ;D
JR
PS: Speaking of something for nothing, the EC is trying again to implement a transaction tax. Looking for ways to raise revenue is what bureaucrats do, but this is a direct tax on economic activity so will slow economic activity. I wish these politicians would study some economics, particularly unintended consequences from economic incentives. The good news is this was delayed again, because EU banks are still hurting to much that they require all the focus now, but wait for it, it's coming. :'(
