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`Credit Expansion Fallacy`
- **Credit Expansion Fallacy**: Credit expansion occurs when credit is multiplied against money through lending, giving the appearance of inflation. It's often mistakenly attributed to banking, with a theory suggesting Bitcoin could eliminate this effect.
- **Savings**: Encompasses hoarding (consumption via depreciation) and investing (lending for production), with no economic distinction between debt and equity.
- **Hoarding vs. Investment**: Hoarded money is fully controlled by its owner, while lent money isn't, despite being considered savings. Both lenders and borrowers need liquidity, leading to a cycle of lending until all capital is hoarded.
- **Reserves**: The term "reserve" in this context refers to the owner's hoard, not to be confused with reserve currency. Fractional reserve banking refers to the ratio of a bank’s hoard to its issued credit.
- **U.S. Dollar Circulation**: M0 includes tangible and intangible currency, with M3 being M0 plus all bank account money, showing significant credit expansion.
- **Credit Expansion Ratios**: The total ratio of money to credit in the U.S. is ~3.46%, with bank credit expansion at 9.0x money, and other financial instruments at 48.0x money.
- **Eliminating Credit Expansion**: Would require eliminating credit, halting production. The theory that Bitcoin can eliminate credit expansion is invalid as Bitcoin can also be lent.
- **Risk of Credit**: All credit carries default risk. The idea of bank credit being risk-free stems from state intervention, not banking itself.
- **Money Market Fund (MMF) vs. Money Market Account (MMA)**: MMFs adjust unit prices to reflect investment losses, while MMAs absorb losses with reserves, potentially leading to bank runs if reserves are insufficient.
- **Fungibility and Risk**: Bank credit isn't truly fungible due to settlement risks. Credit expansion and money substitutes will persist under free banking based on people's preferences.
- **Time Preference**: Determines whether individuals hoard or invest, influencing the economic interest rate and credit availability. Infinite time preference would end all production.
- **Lending in Bitcoin**: Bitcoin lending doesn't limit credit expansion; lending rates are determined by time preference, not the nature of the currency.
- **Consequences of Eliminating Credit Expansion**: Equivalent to infinite time preference, leading to no capital for production or products for consumption. Legal restrictions on credit lead to alternative investment forms or cessation of production.
**Cryptoeconomics by [Erik Voskuil](https://github.com/evoskuil).**
*The book can be found on [GitHub](https://github.com/libbitcoin/libbitcoin-system/wiki/Cryptoeconomics).*
The rest of the summarized chapters are at https://expatriotic.me