Cash vs Crypto: Which is the Best Ponzi Scheme? [Video]

Robert McCauley, a Boston College and Oxford scholar, says Bitcoin (BTC-USD) is worse than a Ponzi scheme as the cryptocurrency’s ultimate use case remains unknown, while high energy demand makes it a “negative-sum”. game” makes. †

McCauley wrote in the Financial Times that the roughly $20 billion invested in mining so far has “run out.”

According to him, the underlying structure of Bitcoin trading is very similar to a Ponzi scheme in that early investors are paid by latecomers and no economic value is created in between.

A second non-resident senior researcher from Boston University’s Global Development Policy Center has argued that in the long run, the Bitcoin (BTC-USD) system will destroy society because of the costs involved, especially in terms of consumption. .

“Every day, investors send money to miners. And most of them are flushed down the toilet every day. Most of it has been consumed by fire,” he said. “And that’s just the cost to the community as a whole. All this is a failure. †

An Oxford University professor, McCauley, found that some Ponzi schemes were able to recoup some of their losses even after they failed. The Bernie Madoff scam, which pays back about 70 cents on the dollar at the time, was used as an example to prove this point.

According to him, there would be no more assets to distribute to the surviving investors if Bitcoin went bankrupt.

On McCauley’s view on Bitcoin (BTC-USD), he said he was still waiting to establish its usefulness before changing his mind.

We’ve been waiting for the use case for a while, he admitted. “We’ll have to wait and see what the future holds, but new ideas are coming. However, we are still a bit on the edge. †

Banks use fractional reserve banking instead of mining.

Only a small percentage of bank deposits are covered by cash under this scheme.

This is the system that led to the 2008 financial collapse.

We can borrow money to buy houses, start businesses and move the world forward through the same system.

At the same time, it’s as if Dr. Jekyll and Mr. Hyde take care of your finances.

In fact, many people are annoyed by the whole situation, which is understandable.

Fractional reserve banking is one of Professor Murray N. Rothbard’s favorite topics, and he doesn’t hesitate to ponder the subject.

Like he says:

Ponzi scheme; sleight of hand or scam where false warehouse receipts are issued and distributed as if it were cash.

In other words, his complaint is that the banks are getting rich at our expense.

According to Rothbard, our banking system is a Ponzi scheme because it offers high returns without risk.

That’s how it all works.

We borrow money from the bank and pay a fee for the privilege of doing so. When a banker presses a button on a computer, the results are instant! – commercial money is created by the bank.

The bank, on the other hand, does not have the necessary monetary resources to guarantee the loan it has just granted.

Rothbard’s world is also here. The bank serves as a depository for the money. The “false warehouse receipt” is a commercial money transaction created by the computer. The banking system around the world uses this commercial money, but it cannot be backed by money that the bank didn’t need in the first place.

Rothbard is not alone in seeing a problem.

Mervyn King, the former governor of the Bank of England, had some thoughts on the issue of banks owing individuals money during the financial crisis. He quotes Winston Churchill in his book The End of Alchemy:

For the first time: “…never in terms of financial effort has so much been owed to so little – and with so few fundamental reforms”

For example, banks provided loans that borrowers could not pay. Little has changed. Unpaid loans can still be provided by banks.

Since fractional reserve banking has been proven to be a Ponzi scheme, why aren’t we doing anything about it?

It would be better if they kept 100% of the deposits they receive in cash and call them “reserves”.

The “100% Reserve Bank”, also known as the “Complete Reserve Bank”, was first proposed as part of the Chicago Plan in 1933. This idea was first launched as a result of the Great Depression, when banks relaunched. made headlines.

The full reserve bank is what many people think of when they think of banks. Having a big bank account like this is like having a safe deposit box.

When you deposit your money in the bank, it is kept safe. You can pick it up from the bank whenever you want. Since the bank does not lend it, you never have to worry about not being able to access it when you need it.

By depositing your money in a bank, you take it out of the general economy. As a result, the amount of money in circulation decreases while the demand deposits at the bank increase, resulting in a constant amount of money in circulation. The bank cannot take any risk with your money if this mechanism is in place.

There is no reason why your money is being used up by the bank. This does not mean that you will not be able to access your money if a bank run occurs, where a large number of people withdraw all their money at once.

A forced increase in the bank’s reserves to 100% would prevent a bank run. These false warehouse receipts also prevent the bank from making loans. It also prevents bankers from making dangerous investments with other people’s money and then selling them as low-risk options to their customers. (Remember the subprime crisis…?)

But…

Our small business loans, mortgages and other investments such as real estate and stocks are all rejected because the bank engages in dangerous transactions like this

There is no doubt that fractional reserve banking is the system that takes the risk to fund new investments, whatever those investments are. Our economy depends on it.

As long as people don’t withdraw all their money at once, our fractional reserve banking system will work – even if it’s an endless balancing act to keep track of deposits and withdrawals.

Bank deposits don’t sit still; they are put to work finding homes and businesses and incur other expenses (such as dangerous businesses by bankers seeking yield).

With a £100 bank account, the bank can borrow and deposit £50 into the account of someone who needs it for a small business loan. However, the bank still owes you £100.

As a result, the borrower has £50 and the bank owes you £100. In total € 150.00 is the final amount. As for real money, there is only £100 because the bank invented £50 for profit.

At any given time, only a fraction of the bank’s deposits or reserves are backed by cash and can be withdrawn.

Or, to paraphrase Rothbard, the bank issues warehouse receipts, which are then exchanged for the supposedly identical amount of money. Fractional Reserve Banking appears to be a Ponzi scheme in this light.

So what if people all want to get their money out of the bank at the same time?

If a bank doesn’t have enough cash to pay everyone, a bank run is possible.

When Michael asks the bank for his money, he doesn’t get it, and the bank closes for the day as chaos reigns, do you remember that scene?

It’s a lot like what happened during the 2008 financial crash, only much worse.

During the financial crisis, it was difficult for banks to tolerate losses on speculative “investments”. People and institutions were eager to get their money back on a bank run, which increased the chance of a stampede.

A liquidity crisis occurs when banks cannot get the money fast enough to pay off all the accumulated debt.

Rothbard’s term “false warehouse receipts” refers to this.

As “money warehouses”, banks lend money that is not backed by actual cash deposits.

If this happened to your business, you would go bankrupt and your creditors would come knocking on your door.

If a bank fails, the Central Bank (the Federal Reserve) acts as the last resort and rescues it when the government asks. The rules make it possible to generate money and print money for it.

People view the Central Bank’s bailout of bad banks as unfair – a risky move that can have unintended consequences. If the banks lose, the taxpayer pays for it.

It is not only the Central Bank that creates money, but also the Federal Reserve.

When private banks take out these loans, they do the same. Because debt has to be repaid at some point, some economists disagree. However, this is based on the assumption that they are, which is not always true.

Can you imagine being in charge of a bank during the financial crisis?

Debt reduction is necessary because you have borrowed too much money, but more money is needed because people and institutions are withdrawing their money.

Therefore, you need to increase your debt to get the money you need. There is a direct correlation between money creation and debt!

An intriguing point is made here: banks create money, but not wealth.

Simply put, taking out a loan means that you have more money at your disposal. You have more money at your disposal to buy everything you need.

This money is still owed to the bank. It won’t make you any more money. In addition, you must repay the bank for the privilege of borrowing from them. As a result, you are actually poorer because you now owe more money than before you got into this mess.

It is possible to build your equity by investing the difference between what you have borrowed and what you have earned.

No matter how much money you have, it has no intrinsic value. It’s just a way to facilitate a transaction. More importantly, banks simply speed up this process.

Everything is fine. In addition, “making money” by itself does not mean a Ponzi scheme.

It is possible that the procedure will result in a Ponzi scheme, because there is a greater chance that you will not be reimbursed. In other words, it’s a good idea to borrow money if the bank is confident it will be repaid with interest.

The bank, on the other hand, demands a higher return – more money – to provide a loan when the risk of not getting paid increases. And this is where things start to go wrong.

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