Bitcoin Fractional Reserve Banking: An Austrian Perspective by Washington Sanchez

If you think I am going to provide proof that Bitcoin is or is not in a bubble, then you will be disappointed. In fact, I think it is almost impossible to say at this stage whether Bitcoin is in a bubble because there are just so many variables involved. The parabolic Bitcoin:USD exchange rate has certainly prompted many to say that it is in a bubble, purely because the shape of the curve is scarily up and to the right.

But like most things, if you want to get a true sense of how the price of any good or service is changing, you need to compare it against a commodity like gold or silver (the price of which adjusts to the level of monetary inflation)... which cannot be created ad infinitum, unlike US dollars or other 'old world fiat currencies'.

So let's take a look:

The Historical Gold:BTC Ratio

Short-term Gold:BTC Ratio

The Historical Silver:BTC Ratio

Short-term Silver:BTC Ratio

Gold:USD Ratio

So what can we conclude from these charts? Well the change in the price of Bitcoin as a multiple of US dollars, gold or silver is about the same. If the price of Bitcoin was entirely fueled by a dramatic loss in the value of the US dollar, one would expect to see the Gold/Silver to Bitcoin ratio to be flat, and the Gold:USD ratio to be parabolically up and to the right (like Bitcoin is).

Despite this, given that: 1) there is manipulation of the gold and silver exchange ratio on the market from the likes of JP Morgan (search for this on ZeroHedge), 2) stocks are reaching new highs much like they did before the crash (a symptom of Cantillion effects if ever there was one), and 3) the demand for Bitcoins is ever increasing with exposure (distribution of knowledge within the market) while the supply is predictably limited, we cannot rule out that we have a perfect brew of speculation, hedging and market price equilibrium taking place. Also, by market price equilibrium  I mean the search for a relatively stable price reflecting steady demand and supply (enter speculators), don't worry I haven't gone monetarist on you.

Post your analysis in the comments and shed light on this fascinating chapter of monetary history!

These charts were provided by: Political Metals

Bitcoin donations:12drtm2MmnKGdaASFFM6CUG8Lh3pMJC1aV

My long awaited article examining whether fractional reserve banking is fraud is finally complete.

I have embedded the lengthy article below via Scribd because it would be far too long for the front page of the website. Briefly I want to say that I am writing a follow-up article discussing the economic implications of fractional reserve banking, but to include that part into this article would make it 20 pages instead of 10. Also, I think it is important that we can keep an open mind when discussing this critical issue, so that we look this case again from first principles rather than coming in with a predetermined point of view.

I originally believed that I would be writing an article condemning fractional reserve banking as a fraudulent banking practice. But after some careful and lengthy thought, I changed my position. As of yet, I have not found a convincing refutation of what I present below. If you think you have one, please post it in the comments so we can discuss it. If you convince me, I'll post up a correction. Just refrain from the ad hominems.

Disagree with me, we can chat about it at the Mises Seminar this Saturday in Sydney... buy your tickets now! 

Fraudulent Reserve Banking?

It's that time of the year again. The time where a passionate group of liberty-loving individuals gather together to learn, share and build a revolutionary intellectual movement in Australia. It is time for the Mises Seminar.

The Mises Seminar is the only conference in Australia to promote the Austrian school of economics and Rothbardian-Hoppe style libertarianism. The Mises Seminar is an uncompromising advocate of free market capitalism and private property rights. Keeping with this commitment, we're proud to announce that Professor Walter Block will be the keynote speaker for this year's seminar.

This year's full list of speakers include: Professor Walter Block, Dr Ben O'Neill, Dr Chris Brown, Dr Chris Leithner, Dr Brian Bedkober, Professor Sinclair Davidson, Mark Hornshaw, Konrad Graf, Vinay Kolhatkar, Dr Stephen Kirchner (who will be debating Professor Block on Austrian business cycle theory!), Benjamin Marks and Sukrit Sabhlok. A full schedule of the seminar topics can be found here.

The 2012 Australian Mises Seminar will be held over two full days, from 9am to 5pm on December 1st and 2nd, at the Establishment Ballroom (Lvl 2, 252 George St, Sydney). I encourage you to take the time and resources to attend the seminar as it is an invaluable experience and show of support to the liberty movement.

Please visit the website and register asap so you don't miss out on this event!

One thing I have noticed while researching Port Hedland is how much BHP Billiton, the world's largest miner, depended on Government support to get where it is today. This is from Helen Hughes's The Australian Iron and Steel Industry 1848-1902 (1964, p.192):

The Broken Hill Proprietary’s monopoly position has inevitably influenced its decision making, not in the direction of unduly high prices or profits as the proponents of [sic] nationalization feared, but rather in its failure to promote an adequate rate of growth, its failure to take risks and to show enterprise. Yet in this respect the company has been far from unique in the Australian setting; rather it has shown a reliance on government support and a reluctance to leave the safe havens of the domestic market which is a heritage of a hundred years of government assistance and tariff protection.

Even as the Commonwealth Government put an embargo on iron ore exports from 1938 BHP showed no concern, given that their position was safe: they had ample reserves thanks to monopoly licencing from the State Government, their existing export contracts for iron ore and pig iron were not affected and – most importantly – all potential export competitors had been eliminated overnight. The BHP case is just another in the long list of reasons why business should never be relied upon to defend free markets. They will always look for an opportunity to jump into bed with Government if the institutional structure allows it no matter how badly it hurts everyone else; they will only defend competition and the market place when it suits their interests.

The desire for further government protection of any private enterprise – or lack of protest when it is proposed – is especially true when the corporation in question is already dependent on the State for preserving its position by artificially restricting competition, such as BHP was. For this is the only way a monopolist can maintain their market position over time without being so efficient as to deter competition; as Baumol (1982, p.14) demonstrated, even for natural monopolies once you factor time into the equation, "the heroes are the (unidentified) potential entrants who exercise discipline over the incumbent, and who do so most effectively when entry is free".

The policy implications of this are clear: "when entry and exit are completely free, efficient incumbent monopolists and oligopolists may in fact be able to prevent entry. But they can do so only by behaving virtuously, that is, by offering to consumers the benefits which competition would otherwise bring. For every deviation from good behaviour instantly makes them vulnerable to hit-and-run entry".

Whenever the Government goes around proclaiming that they have the support of "business", it would be wise to first look at why "business" is supportive before blindly assuming it is good for the economy as too many pundits do.

Everyone can find a problem with our roads if they look hard enough, from pot-holes to construction during rush hour down to congestion due to overcrowding. Then there is the cost of fuel, not to mention road taxes and licencing fees that are all unavoidable costs we must pay if we want to enjoy the privilege of operating a private vehicle. But does it have to be like that? Why are roads funded in such a convoluted way? Why is it we are happy to pay for how much we use of other products (roads are, after all, an economic good) but not for roads?

Roads are largely paid for with the fuel excise tax, where petrol is taxed in the form of an excise from the Federal government which is then redistributed to the States according to the decision made at the Premiers' Conference using various relativities agreed by the Conference such as population and kilometres of road. Then there is 'special funding' for major projects such as highways, where the States have to make their case. Local roads are largely funded by private developers as a condition of approval and then ceded to the local authority for maintenance and management.

As of 2010/11, the fuel excise tax (plus GST) was 38% of the total cost or roughly 50c per litre of petrol at the pump. This is going to increase in the next few years thanks to the carbon tax, to be somewhere in the region of 60c per litre by 2015.

But how much of that is actually hypothecated to roads? A study by Access Economics in the NRMA submission to the 2009/10 Federal budget found that only 25.7% of the fuel excise tax is actually allocated to road funding and maintenance. 25.7%. For a tax that was imposed to "fund road infrastructure", it sure looks like politicians have failed on that front.

The increased reliance on federal funding for roads has created an increasing disconnect between those who use the roads and those who pay for the roads. Federal financing of road infrastructure creates little incentive for recipients of it to innovate, correct mistakes, or respond to changing conditions in how consumers use infrastructure. A better system of road funding would be some form of variable pricing system similar to the one used by utility companies around the world.

Excise taxation veils the true costs of road use to consumers, redirects decision making away from locals towards bureaucrats in Canberra and causes a lot of the problems that politicians love promising to solve with more intervention.