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Why Tether's Collapse Would Be Bad For Cryptocurrencies (wired.com)
Yesterday, Bloomberg reported that the U.S. Commodity Futures Trading Commission sent subpoenas last week to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it's pegged to the dollar. Wired's Sandra Upson explains why Tether's collapse would be bad for the entire cryptocurrency market: Unlike bitcoin and its many siblings, tether is what is called a stablecoin, an entity designed to not fluctuate in value. With most cryptocurrencies prone to wild swings, tether offers people who dabble in the market the option of buying a currency that its backers say is pegged to the U.S. dollar. The root of the controversy is whether the company behind it, also called Tether, is telling the truth when it claims that every unit in circulation is matched by a U.S. dollar it holds in reserve. If the company has a dollar for every tether, that means in theory any holder can sell tethers back to the company for an equal number of dollars at any time. This belief keeps the value of a tether pegged to a dollar.
If tethers are not backed by a matching number of dollars, then Tether can print an arbitrary amount of money. (Other cryptocurrencies, by contrast, create new tokens according to strictly prescribed, predictable rules.) Other problems ensue, including suspicions that Tether is timing the release of new tethers to coincide with drops in the price of bitcoin and then using those tethers to scoop up bitcoins. Some observers fear that these purchases are artificially inflating the price of bitcoin. If traders lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also cause some exchanges to topple, wiping out billions of dollars of investments overnight and potentially undoing much of the public's growing interest in new technologies like bitcoin.
If tethers are not backed by a matching number of dollars, then Tether can print an arbitrary amount of money. (Other cryptocurrencies, by contrast, create new tokens according to strictly prescribed, predictable rules.) Other problems ensue, including suspicions that Tether is timing the release of new tethers to coincide with drops in the price of bitcoin and then using those tethers to scoop up bitcoins. Some observers fear that these purchases are artificially inflating the price of bitcoin. If traders lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also cause some exchanges to topple, wiping out billions of dollars of investments overnight and potentially undoing much of the public's growing interest in new technologies like bitcoin.
"Some observers fear that these purchases are artificially inflating the price of bitcoin."
Any purchase inflates the value (not price) of Bitcoin. It is extremely difficult to mine new bitcoins, and this creates scarcity.
But yes, if Tether is indeed lying about their dollar pegging methodology, it would crash its value and send earthquake waves in the cryptoworld, which is a good thing in the long run. Once all bad apples are removed, we'll end up with the good apples.
I personally am betting on ASIC-resistant, mineable coins.
...gis sdrawkcab (usually not responding to ACs; don't bother posting as AC)
You mean like a bank?
bursting the bubble more like,.
Nope. Banks can trade with money they don't yet have.
...gis sdrawkcab (usually not responding to ACs; don't bother posting as AC)
Nope. Banks can trade with money they don't yet have.
That's not quite true. Banks just don't phyiscally "have" every penny that the sum total of account balances would lead one to believe they "have." They loan out a large percentage. But that number is lower than the sum total of account balances. The delta is called "reserves," and this amount is mandated by law. At least in the US.
Some observers fear that these purchases are artificially inflating the price of bitcoin. If traders lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also cause some exchanges to topple, wiping out billions of dollars of investments overnight and potentially undoing much of the public's growing interest in new technologies like bitcoin.
So what you're saying is, if the public figures out Tether is artificially inflating the price of Bitcoin, they're going to abandon both of them?
Say it isn't so!
Sounds awfully complicated. I take my chance with a conventional rocket.
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
"If tethers are not backed by a matching number of dollars, then Tether can print an arbitrary amount of money..."
Print an arbitrary amount of money? Oh you mean what we call Quantitive Easing? TARP? TALF? LTRO? How ironic we're worried about Tether doing this when the very currency that provides their stability has been doing it for years.
Worried about Tether being backed? Then audit them. Just don't go expecting that simple answer to work for everyone. Congress has already proven it would take an Act of God to execute an audit of the US Federal Reserve. The USD would fall on its proverbial sword before that would ever be allowed to happen.
Uhm... unless I am misreading you, you appear to be very incorrect... (large) US banks are only required to hold 10% in reserve at any one time... That is 10% of the account balances NOT the account balances + 10%.
"A depository institution's reserve requirements vary by the dollar amount of NTAs held by customers of that institution. Effective November 17, 2015, institutions with net transactions accounts:
Of less than $15.2 million have no minimum reserve requirement;
Between $15.2 million and $110.2 million must have a liquidity ratio of 3% of NTAs;
Exceeding $110.2 million must have a liquidity ratio of 10% of NTAs.[8]
"
Sources: https://en.wikipedia.org/wiki/Reserve_requirement#United_States
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
I've often seen tether (USDT) selling for anywhere from 99 cents to $1.05 (and looking on coinmarketcap's history, it has ranged from $0.91 to $1.08), so I'm not exactly sure how that qualifies as pegged to the dollar. Maybe $1 is the suggested value, but I wouldn't say "pegged".
Perhaps I misunderstand, but it sounds like you are missing the point of fractional reserve banking. That means the bank can loan out more than it receives in deposits, with only a fraction of the total outstanding actually in the vault. That's the reserve percentage mandated by the US government.
This posting is provided 'AS IS' without warranty of any kind, implied or otherwise.
And I just reread the post after finishing my coffee and I DID misread your text, apologies...
Hail satan
Anyone notice that when there's a bad or potentially-bad story on Bitcoin or cryptocurrencies that Slashdot uses the Bitcoin "coin" logo?
On other stories that are moderately good or outright great, they use a medley of Dollar icons or other nonsense.
Keep it classy, Slashdot.
Correct me if I'm wrong, but those billions of dollars of investment are already traded, right? Somebody took that money in exchange for btc that was generated... ex nihilo. What's the system net value (over all investors) being lost here? Just the hardware and energy investment that would be nullified? Is the money changing hands like this going to cause significant net economic damage over all investors?
It's a curious model system because unlike stocks or other commodities, it's backed by absolutely nothing but people's belief in its value (like all modern money) yet it has (apparently) no major economic players that can influence its valuation or stability at a high level and are motivated to do so by necessity.
This is not true at all. Banks can loan up to 10x what they have in reserve. Eg for every $1,000,000 of their customer's money they're holding onto, they can loan out $10,000,000. The system itself is called a fractional reserve. It works for the same reason insurance works - because most people, most of the time, don't need to be bailed out of a bad situation.
That's why a lot of banks offer incentives for people who leave large sums of money sitting around doing nothing (ie savings accounts, checking accounts, etc). They're not giving "free" checking accounts out of the goodness in their hearts, or because you're such a good person that you deserve a free checking account. They do it because giving a "free" checking account grabs customers, and the average customer will have $X sitting in their account. They can then loan out $(10 * X) which will accrue interest (perhaps 2% for car loans, 3-5% for home loans, etc).
That's also why Bank of America went back to their roots recently and are forcing customers to either pay a monthly fee or maintain a minimum balance for a checking account. This is how 100% of all checking accounts used to work, before they were all "free". It's just that things are changing, and the move back to the old way of doing it probably suggests their average customer wasn't good at keeping a minimum balance that allowed them to do the volume of loans they wanted to do.
Once to fall bad apple have been removed, you get the harder to fall bad apple. There is nearly always never good apple. By now "idealist" have long been removed from the cryptocurrency ecosystem, leaving only the pure capitalist. And as human mostly base our capitalist endeaviour on pure greed and have as much as possible. That means that without rules you have only bad apple managing to stay afloat, because their advantage over good apple is too great.
Heck you can see something similar with banks : remove rules and they try to do incredibly unethical but legal stuff. Sometimes they do it *even* with the rules on. So as long as there is no governmental rules on cryptocurrency, it will stay a wild west where ONLY bad apple & a lot of hacking and fraud occurs, comapred to traditional money processing.
C. Sagan : A demon haunted world:
http://www.amazon.com/gp/product/0345409469/
visit randi.org
Penis are not operating like a normal bank. Penis are operating more like a central bank, issuing new currency. Making sure the whole crypto community is blessed with increasing prices. Everything to the moon!
What we do is:
1. Print USDP (Penis), an asset we pinky swear is backed by USD.
2. Exchange Penis for crypto currencies, pumping the price of the crypto currency.
3. Sell the crypto currency for fiat currency.
4. Place fiat in bank account. Hey look we back our Penis with fiat, we're totes legit.
Also spoofing, wash trading, selling Penis cheap to buddies in exchanges, killing puppies etc.
Anyone in the inner circle will have an endless supply of Penis, to manipulate the market any way needed. Join Penis now!
HODL PENIS!
Yay! Not the mamma! Again! AGAIN!
#DeleteFacebook
Who cares if the US disallows trade. It would only be bad if all countries would do the same - in all other cases there will always be a way to keep trade flowing
Several companies have tried doing this with gold coins. They don't exist anymore.
We had the money it's just we've been haaacked ... and we're really sorry. BUT WAIT we've found 10% of it so, after expenses, we'll be paying off everyone at 5 cents on the "dollar". See, it all turns out okay in the end. Meanwhile we're starting another coin, this one backed by PORN!!!
One of the best shows ever.
If you think I voted for Trump because of this post, you're wrong. I voted for Dr. Jill Stein of the Green Party. Again.
What are you talking about? How can a bank 'loan more than it receives in deposits'? Where does it get the money to loan?
Fractional reserve is what allows the banks to make loans. If you deposit $1, the bank can loan out 90 cents, but must keep 10 cents in reserve. The reserve is so they have the cash to give people who make a withdrawal.
And see if they can horde every last penny in their reserves.
Perhaps I misunderstand, but it sounds like you are missing the point of fractional reserve banking. That means the bank can loan out more than it receives in deposits, with only a fraction of the total outstanding actually in the vault. That's the reserve percentage mandated by the US government.
Fractional reserve means they only have to keep (reserve) a fraction of the deposits on hand. A bank still cannot print and loan money it doesn't have. The federal government and/or the federal reserve can but a normal bank can't.
The fractional reserve system is what allows banks to give interest to people who deposit money with them. The alternative to a fractional reserve system is where 100% of the money is always in the bank. Now days, that would be the equivalence of a safety deposit box. The money is yours and the bank isn't allowed to touch it just store it and keep it safe. Fractional reserve started out when some unethical safe operators realized that when multiple people all asked them to store their money for them that the chances of them all asking for it back at once was pretty much zero so they started skimming off the bottom. Today it is legal and that skimming is split and some of the interest is given to the depositor. And again, you can always opt out of the fractional reserve system by using a safety deposit box instead but regardless the bank still never loans out more than the total deposits.
And what do you think happens when that 90 cents is deposited into the bank? 81 cents of additional loans is created, for a total of $1.71 floating around with only $1 to back it. Then the 81 cents is deposited, and another 72 cents in loans is created. Now you have $2.43 floating around.
If you don't think banks create money out of thin air, you don't understand fractional reserve banking.
$1 deposited, $0.90 in loans distributed, which gets deposited, and then $0.81 in loans is created, which gets deposited, and then $0.72 in loans is created, which gets deposited, and then $0.64 in loans is created, which gets deposited, and then $0.57 in loans is created, ...
At this point, the bank had one real dollar deposited and used it to originate 5 different loans totalling $3.64, and it can keep going for some time.
Poof! Money creation!
Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account".
Populus vult decipi, ergo decipiatur...
"Force shits upon Reason's back." - Poor Richard's Almanac
If it were backed by dollars, meaning that for ever T there was a USD in reserve, that would NOT mean there is always someone willing to pay 1USD for it, and never anyone willing to pay more. The THEORETICAL value is always 1USD, if the company is telling the truth.
Mutual funds frequently trade a bit below or about above the value of their holdings. Over time, they'll always tend toward near that value as long as buyers trust the company.
No, you're confusing the money multiplier concept with fractional reserve. Large banks need to keep 10% of the value of money they loan out. So $100 becomes $90 loanable. But the loan is then deposited in lets say another bank or the same, then they can loan out $81 of the $90. As you do this you increase the money supply because every loan means more deposits so we're at $190, this continues until hundreds of dollars are created in loans with with slightly more deposited. You don't get to loan out 10X more money than you have received. You can loan out 90% (or more for smaller banks) than you have in deposits.
Fair enough, *on paper* the bank cannot loan more than it has. But all those deposits don't have to come from outside the bank, as the other commenters point out. An initial deposit of $100 could be loaned out multiple times by the bank, as long as it keeps the reserve requirement in the vault on each pass.
This posting is provided 'AS IS' without warranty of any kind, implied or otherwise.
"wiping out billions of dollars of investments overnight"
They have a magnificent imagination... These "Billions of Dollars of Investments" are fictional. They're not backed by something real like pigs that you can breed, grow and eat. The "investments" are a total fiction. Even the stock market is more real than this and the stock market is very not real.
This always hurts my head a little bit. It seems like being a bank is literally a license to create money. This is ludicrously profitably, right? A bank could borrow $x at i interest from depositors and loan $x at that same i interest to n borrowers.
profit = interest collected - interest paid
profit = nix - ix
profit = ix(n-1)
-Dave
The summary makes it sound like exchanges are holding Tethers as part of their reserves.
Why would they do so? What advantage is there to holding a cryptocurrency pegged at $1, to just holding dollars, especially since when your clients cash out, they are also asking for dollars?
Side note, it shouldn't be that difficult to get and audit done to make sure they have sufficient backing for the currency they issued. Just a quick print out of a bunch of bank statements, or perhaps brokerage statements showing T-Bill holdings is all it would take.
If traders lose faith in tether...
Any system trading in hundred of billions of dollars (or even ones that don't) are at perilous risk if the depend on people's faith in a private company, that was just recently created, and operates without significant oversight.
Starships were meant to fly, Hands up and touch the sky - Nicky Minaj
So a Tether shill is worried about a cryptocurrency most of us never even heard of until 2 minutes ago, and is trying to deceive us into thinking that a crackdown on Tether which claims real cash reserves, for the reason that it claims having equal cash reserves, would have any bearing whatsoever on most cryptocurrencies which do not make such a claim.
Laughable. No it doesn't matter what happens to Tether, your pet cryptocash can burn the ground without affecting anything else.
If you want to get in on the cryptocurrency mining scene, you need a good motherboard that allows for multiple GPUs: ASRock H110 Pro BTC+, ASUS B250, Biostar TB350-BTC, and GIGABYTE GA-H110-D3A.
As has been pointed out above, this is not actually how banks work these days. Yes, they are required by law to hold 'reserves' - which are determined as a percentage of their loan values - but they do not create their loans from deposits. When you take out a loan from a bank they actually create that money (from thin air) by creating a deposit in your account.
This is a fact, which makes it very worrying that even economists are still taught the myth of 'fractional reserve banking'
I've also started a new cryptocurrency, and it's called "Bridgecoin".
Each coin is backed by a share of ownership in a bridge in Brooklyn.
All current crypto currencies are scams. They are either a scam by individuals to get money from you or they are a scam by the central banks to indoctrinate you into accepting them.
Eventually, lawmakers will outlaw crypto currencies and offer their own, at which time everybody will be a slave to those that run it.
It's far too much power in far too few hands. As many have said, "Revolution is REQUIRED if that happens."
No. In the modern age a bank doesn't wait until it has enough deposits to enable them to lend more money. They create the money for your loan from nothing - simply by depositing it in your account (electronically - no cash needed). Now that they have created the money for your loan they check that they have enough in the reserves to cover their legal requirements, if they don't they borrow what they need in the form of inter-bank loans (at much lower interest rates than you or I would ever get).
The point being, deposits have no bearing on how much a bank can lend - this is a myth. Banks create money when they issue loans. Banks borrow money when they need to top up their reserves. At no time does a modern bank take your deposit and lend it to someone else.
There's no profit because they create same amount of debt at the same time. Debts + assets remain zero.
> Fractional reserve means they only have to keep (reserve) a fraction of the deposits on hand. A bank still cannot print and loan money it doesn't have
Reserve ratios are just a cap on exactly how much money they can print. If loans get repaid, they can create a theoretically infinite amount of money. Likewise, if a loan is forgiven, the limit is also easily broken, because the destruction mechanism is skipped and the loaned amount becomes permanent.
I've been holding off building a computer for my son because I can't get a hold of a video card. As such, I'm all for a cryptocurrency bank run. It is all a speculation bubble anyways.
I think nearly everyone who is excited about crytocurrency accepts that "hacking and fraud" will happen at the user level (i.e. people can be tricked into giving away their keys) and that this is the case for both cryptocurrencies any anything else that is accessed by computer. We're ok with things that can be compromised by computer compromises, because we think we protect our computers better than laymen do. If you wanna call that arrogance, fine, but I have a perfect track record since I got on the Internet in 1991, so far.
Second, it is (by now) very clear that the other aspect of hacking and fraud involves exchanges. If your use of cryptocurrency requires conversion to other currencies, then exchanges are a convenient approach, but apparently nearly every exchange has suffered "hacking and fraud" such that I cannot think of any exchange that I would be willing to use. But it's important to note that "The Vision" for using this stuff, involves extremely infrequent conversion. Maybe you have to use an exchange initially to get some of the currency, but as long as you're both spending and selling, you might never need to get dollars and euros involved. Just like how a dollar user can easily get through life without ever bothering with euros (and vice versa) if a cryptocurrency gets sufficiently popular, it could theoretically be used that way as well. (And honestly, that's pretty much the only use case that I think is interesting.)
100% of the "hacking and fraud" that has happened with exchanges, is already illegal and nobody has ever suggested or thought of a single regulation that might possible improve it. The oldest law of trade, "Caveat emptor" is still the best. If an exchange doesn't prove itself trustworthy (and AFAIK to-date not a insgle one has) then you know you're taking a risk. If you have an idea, let's hear it, but please first ask yourself "does this protect against something that's already illegal?"
As for "hacking and fraud" on the system itself, though, AFAIK the only problem I have heard about yet, is the 51% attack. And that sucks, but you can't fix that with laws. But make no mistake: the big vision is that cryptocurrencies can be designed where we think users can win. Bitcoin just might not be it. We'll see.
Regardless, I think that additional laws cannot possibly help this stuff in any way. All they can do is interfere with non-fraudulent uses, because the laws would almost certainly be intended not to protect against fraud, but to return control to governments in order to restrict trade, and denying this power to governments is a big part of the point, to many of us. I will happliy give up any fraud-protection laws (especially since nobody has any reason to suspect they would help prevent fraud anyway) to keep government from being able to prevent cryptocurrency transfers.
I think no government can ever possibly become as trustworthy as a well-vetted design. You people are still trying to learn how to make a trustworthy government after thousands of years of trying, and you've never exceeded "laughably horrible." Cryptocurrencies are only about ten years old and they've nearly caught up. Twenty years from now, I think I know which approach will have been proven superior.
"In the absence of regulation profit maximisation has no ethical or moral constraints. "
Indeed : externalities. Without rules and EPA, guess who would polute and reject all their waste in the local river ? If there is no rules, then profit maximization occurs, ethics be damned.
C. Sagan : A demon haunted world:
http://www.amazon.com/gp/product/0345409469/
visit randi.org
I read the article and it didn't say why a Tether collapse would be bad for cryptocurrency. The closest it came was this:
Let's say that happens. So what? I don't care if the weirdos who invest in cryptocurrencies lose their shirts. That's not what cryptocurrency is for. All that users want is long-term stability, and it seems that speculators have been the enemy of that goal, having fucked things up for regular users who just want a convenient and interference-resistant way to transact business.
I almost think a collapse would be good for cryptocurrencies, because it would get the weirdos out so things could finally get back to "normal."
Disagree? Answer me this: do you invest in dollars?
(I'll presume no.) Suppose there was a recent fad where fuckwits were "investing" in dollars so there were wild swings in what a dollar buys. A loaf of bread was $1 one day, then $0.20 the next, then $3 next week. How would you feel if the greedy asshole dollar speculators all got screwed and then went away, poorer, unhappy, and forever-after afraid of dollars? Would that ruin the dollar in your opinion, or would that save the dollar, so that you could go back to using it again?
BTW, Tether will collapse. Their fear of auditors tells you enough. It's a scam and you're dealing with assholes and criminals. The sooner they're gone, the better for everyone else.
Thanks.
Does the Federal Reserve collect the interest on that debt?
-Dave
Is the dollar really backed by the might of the US government? I have seen inflation all my life. I don't even get to point my finger at a one particular party or president (unless I once again just lump 'em into "Republicrats").
If the US government has the power to protect the dollar, it hasn't been using it. So it effectively doesn't exist.
Not that I'm really complaining about dollars (it happens to be my most-convenient, favorite currency), but I think most of dollars' utility is coming from its users' faith. And if the US government is playing a role, it's in opposition to the dollar, and they're the ones who are generally responsible for inflation!
"Believe me!" -- Donald Trump
Normally I'd pile on and call you a fucking moron, but the banking system is so fucked I wouldn't expect anyone to believe it could operate that way it does until they were explicitly made aware of how absurd it is.
The entire US economy's size is inflated many times over because of shit like this.
Penis
I'm a good cook. I'm a fantastic eater. - Steven Brust
Sorry everyone, my Tourette's is acting up again.
APK
Do you think money is only real when it is printed?
"The entire US economy's size is inflated many times over because of shit like this."
So, if a non-shit banking reduced the economy by a factor of 5----hmm, I think I'm all for scatological finance.
if lending creates money, customers defaulting on the loan and the bank writing it off destroys money. That's why in a recession/depression the central bank attempts to encourage money creation---to counteract money destruction.
The fractional reserve and the loanable funds theories of banking are both wrong.
How Do Banks Create Money?
JohnnyCalcutta is correct, someone mod him up.
in the USA:
The US Treasury and other government and quasi-government agencies, (GNMA, FHLB are Federal, GNMA/FNMA are semi-Federal) not the Federal Reserve, issues debt.
The Fed does buy up some of this debt and issues cash. It increases the balances in the Federal government's "checking account" by computer. Cash has been created. US government uses it for operations. The Fed owns the debt, and the US government is obligated to pay interest and principal upon maturity on that debt which the Fed collects, by transferring money out of the accounts the US Treasury have with the Fed. (The Fed is the banker to the Federal government). The Fed also pays the US Mint for physical currency.
The interest on owned securities is a gross profit to the Fed. The net profit of the Fed, after costs---paying economists, administrators and regulators---is gifted to the US Treasury by law and not distributed to management or shareholders.
BTW, this makes it clear that the Federal Reserve is de facto a government, not a private, institution even though private banks nominally own shares in it. Unlike a private company it was created by a Federal law, it has powers and responsibilities not given to private companies, and the management are controlled by the US government, and the government owns all profits. Control over management and ownership of profits is ownership.
in which case dollars in 'not a regulated bank' are more valuable.
We've been told that "fiat currencies" are bad because a government can print more money whenever they want, deflating the money people already hold. You can't trust it to keep its value. The solution is cryptocurrency! The supply is strictly controlled by an algorithm, so you can trust it to hold its value.
And what happens in practice? Cryptocurrencies are incredibly volatile. You can't rely on them at all. So instead someone creates a "stablecoin" that really does hold its value. And the way they do that is... by tying it to a fiat currency.
The irony is just incredible.
"I'm too busy to research this and form an educated opinion, but I do have time to tell everyone my uninformed opinion."
Banks absolutely create money out thin air, but if you re-read GP, his complaint is with a bank 'loan[ing] more than it receives in deposits.'
When you deposit that 90 cents and make 81 cents more available to loan, I imagine GP is considering the 90 cents to be a deposit. (If not, and he doesn't understand fractional reserve banking, the following still holds true.)
$1 backing
$1 + $.90 in the bank as deposits
$1 + $.90 + $.81 "on paper"
$.90 + $.81 as loans
$1 + $.90 (deposits) is still more than $.90 + $.81 (loans). This continues to work even if you turtle the loans all the way down to infinitesimal fractions of a cent.
Perhaps I misunderstand, but it sounds like you are missing the point of fractional reserve banking. That means the bank can loan out more than it receives in deposits, with only a fraction of the total outstanding actually in the vault. That's the reserve percentage mandated by the US government.
Fractional reserve means they only have to keep (reserve) a fraction of the deposits on hand. A bank still cannot print and loan money it doesn't have. The federal government and/or the federal reserve can but a normal bank can't.
The fractional reserve system is what allows banks to give interest to people who deposit money with them. The alternative to a fractional reserve system is where 100% of the money is always in the bank. Now days, that would be the equivalence of a safety deposit box. The money is yours and the bank isn't allowed to touch it just store it and keep it safe. Fractional reserve started out when some unethical safe operators realized that when multiple people all asked them to store their money for them that the chances of them all asking for it back at once was pretty much zero so they started skimming off the bottom. Today it is legal and that skimming is split and some of the interest is given to the depositor. And again, you can always opt out of the fractional reserve system by using a safety deposit box instead but regardless the bank still never loans out more than the total deposits.
Not bad to be honest but a few caveats:
1) A bank never loans out more than the total deposits but it does loan out more than it has in a sense in that it engages in unsound banking. A modern banks assets do not balance its liabilities.
2) Today it is legal (arguable) but, to be clear, this does not diffuse your earlier point that the practice is unethical. Banks effectively engage in fraud as they knowingly allow their customers to think that the customer has "money in the bank" when in fact they just have a complex legal agreement with the bank which involves a figure which corresponds to some money the bank may give them under certain circumstances.
3) It is misleading to suggest that the opposite of a fractional reserve system is one in which lending cannot take place. It is valid to lend money to a financial institution and earn money on the interest but this would necessarily mean forgoing instant access to the money lent. Further, such a system would admit non-fraudulent analogues of modern banking: interest-like schemes where you can give money today and call on money in the future with a chance of getting more money, but this wouldn't be banking so much as gambling.
It doesn't matter if it's not you that's paying for the electricity.
FYI, this is not new, the subpoenas were sent on Dec 6th, more that 6 weeks ago Bloomberg recently updated their article to indicate this fact.
Banks don't create money arbitrarily. They are required by law to have certain reserves, so they can create no more money than they have reserves for.
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes
Heck, mining with software written in Javascript and running on a browser can be profitable, as long as it's on somebody else's computer.
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes
Why are you spamming that same reply? If they have zero deposits they can't loan anything out (legally).
Other wise we have this
1 2 3 4 5
Everyone else is saying the three is in the middle, but you are saying it is third from the right.
Get over yourself.
$1 deposited, $0.90 in loans distributed, which gets deposited, and then $0.81 in loans is created, which gets deposited, and then $0.72 in loans is created, which gets deposited, and then $0.64 in loans is created, which gets deposited, and then $0.57 in loans is created, ...
At this point, the bank had one real dollar deposited and used it to originate 5 different loans totalling $3.64, and it can keep going for some time.
Poof! Money creation!
In theory this could work but who borrows money and deposits it back in a bank? The people borrowing are not generally the same people doing the depositing.
Do you think money is only real when it is printed?
No, I didn't mean to imply that. I was saying that a bank can't loan out or create money it doesn't have. Only the federal government and/or federal reserve can. Even without a reserve requirement, the maximum a normal bank can loan out is 100% of the money it has on deposit which would in theory create a maximum 200% of the money because it has $1M on deposit and $1M loaned out. The only way it could go above 200% would be if it started borrowing money from elsewhere against its own assets.
That's not how it works in practice (in the UK anyway and I've not reason to believe its different in the US). Yes, banks are required to have reserves based on a percentage of their lending, but they do in fact create money arbitrarily. Banks do not build up reserves and then lend money based on those reserves. Banks create loans first and then they ensure they have enough reserves to stay lawful. If banks need to create more reserves to cover loans they simply borrow the needed money using an intra-bank loan (mucho cheap, see LIBOR)
Why Tether's Collapse Would Be Bad For Cryptocurrencies
And I should give a flying fuck because ...?
I hope it is bad for cryptocurrencies. I also hope it takes down the tulip bulb cartels, too.
Anyone else here old enough to remember the .com bubble v1.0? Companies like JDS Uniphase? And those companies actually had products. What the fuck value add is there to a cryptocurrency that should result in it's founders becoming billionaires?
Pop goes the bubble.
Yeah I'm holding off on buying a good video card until I can pay a non-inflated price for one. I'm not holding my breath, though. I think this whole race will get a lot weirder before it gets better. On the good side, the next generation of cards might push down the current generation enough to be usable. Game developers can no longer rely on a reasonable amount of people to have the new cards. So their "High" settings will have to be a generation older than usual, and the "Ultra" setting had better run at least well on this generation in 4k.
Sooner or later ASICS will cause the difficulty of Etherium and other alt coins to skyrocket too. So maybe at that point the used video cards will dump onto eBay and after a few months of not selling at dumb prices there might actually be decently priced ones.
I'm guessing I'll buy a nice 1080 by about 2020.
There may be intermediaries, but the money almost always ends up back in a bank account somewhere. So you borrow money to build a house, then you pay the contractors and hardware stores, then they deposit the money in their bank. They then pay their people and suppliers, who deposit the money into their banks. Then they buy goods and services from stores who put the money into their banks. Pretending there is only one bank involved in the process makes it easier to describe, but it doesn't fundamentally change the dynamics of money creation.
And that money the bank borrows to cover their loans? That money is loaned out on the same fractional reserve. You are playing semantic games, but not describing a process that is fundamentally different from that which I described.
No, you are just missing the point. They don't count their reserves and then lend based on how much they have in reserve. They don't borrow money and then lend out a certain percentage. They don't take deposits and lend it out whilst keeping a certain percentage. They don't consider reserves at all when they lend/make money. They can make as much money as they want, so long as they have customers to lend it to - without any consideration of what 'reserves' they have.
For each loan they simply make an entry in their books and a similar entry in your account. Then, at the end of the each period they figure out what reserves they need and any shortfall in their reserves is put in via an intra-bank loan. They lend without consideration of reserves (e.g how much money they currently have) hence it is arbitrary. The whole idea of reserves is like Trumps hair - it looks good as long as you don't look to closely.