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I’m not really sure I understand your primary question. The scenario I seem to understand you posit as a backdrop to your question is logically inconsistent: ha

by qubex 9y ago

I’m not really sure I understand your primary question. The scenario I seem to understand you posit as a backdrop to your question is logically inconsistent: having some deflationary assets is not equivalent to having a deflationary baseline (currency). You must remove the option of escaping inflation by holding riskless cash, otherwise everybody will exert the choice to avoid (risk-adjusted inflation). Regarding your other questions, I strongly recommend Where Does Money Come From? as providing a solid, albeit somewhat polemic, introduction to how the fiat currency/fractional reserve currency system works in general (and the GBP in particular). Spoiler alert: there is general agreement that topologically it would be more robust if the central bank interacted more directly with non-bank entities, but regulatory capture by incumbents and practical considerations places a damper upon this. EDIT: ah, noticed you have re-numbered your questions, boarding a plane right now, will get back to you.

opportune 9y ago
Sorry I keep deleting things and editing them, I'm trying to be precise in how I word things. Given a deflationary currency X and an inflationary currency Y trading at AX = Y, why would I not prefer to hold all currency as X and only exchange back to Y exactly when I want to purchase something valued in Y? I understand that a gold-backed currency wouldn't be stable compared to a US-backed currency. However, gold is only unstable insofar as it is tied to the USD; conversely, the USD would not be stable compared to a gold backed currency. My impression is that fiat currency is a local optimum, in the sense that any reason (as an individual) to continue using USD instead of gold is due to network effects. If the network effects were even between the two currencies, unless I owned a bank, there wouldn't seem to be a reason to hold the USD. I know about the fiat/fractional system at (what I think is) a decent enough level, sorry if I wrote something that suggested otherwise. I didn't know that economists actually thought exclusively interacting with central banks was not desirable, though.
- qubex 9y ago
  Liquidity. You can rely on anybody to want fungible money but not to want the particular stock you own, much less your spare apartment. The alternative, of course, is what is known as ”financial repression” whereby a state forced its citizens to operate almost exclusively on national financial assets. As regards to the various network topologies, it gets pretty ornery: forcing all banks to transact through a central bank, that acts as the guarantor, would eliminate counterparty risk. Allowing everybody to transact amongst themselves instead means you cannot keep track of who has what and so you cannot rely on ”netting” out debts and credits. The various systems available worldwide represent a kind of path-dependent compromise that favours the incumbent actors.

by qubex 9y ago

opportune 9y ago

Sorry I keep deleting things and editing them, I'm trying to be precise in how I word things. Given a deflationary currency X and an inflationary currency Y trading at AX = Y, why would I not prefer to hold all currency as X and only exchange back to Y exactly when I want to purchase something valued in Y? I understand that a gold-backed currency wouldn't be stable compared to a US-backed currency. However, gold is only unstable insofar as it is tied to the USD; conversely, the USD would not be stable compared to a gold backed currency. My impression is that fiat currency is a local optimum, in the sense that any reason (as an individual) to continue using USD instead of gold is due to network effects. If the network effects were even between the two currencies, unless I owned a bank, there wouldn't seem to be a reason to hold the USD. I know about the fiat/fractional system at (what I think is) a decent enough level, sorry if I wrote something that suggested otherwise. I didn't know that economists actually thought exclusively interacting with central banks was not desirable, though.

qubex 9y ago
Liquidity. You can rely on anybody to want fungible money but not to want the particular stock you own, much less your spare apartment. The alternative, of course, is what is known as ”financial repression” whereby a state forced its citizens to operate almost exclusively on national financial assets. As regards to the various network topologies, it gets pretty ornery: forcing all banks to transact through a central bank, that acts as the guarantor, would eliminate counterparty risk. Allowing everybody to transact amongst themselves instead means you cannot keep track of who has what and so you cannot rely on ”netting” out debts and credits. The various systems available worldwide represent a kind of path-dependent compromise that favours the incumbent actors.