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There's not much difference between an inflation rate of 440000% and 880000%, it just means that the bolivar doesn't work anymore. Money is a purely social con

There's not much difference between an inflation rate of 440000% and 880000%, it just means that the bolivar doesn't work anymore. Money is a purely social construct. It's only worth something when people collectively believe and trust that it's worth something. It's a popular idea that dollars and euros derive their value because taxes are paid in that currency, or because it's backed by the state's military power. Venezuela shows that neither of these are the source of the currency's value. Collective belief is a pretty fragile foundation to build an economy on, hard to build and easy to destroy. Another term for "collective belief" is "consensus". We're witnessing a disintegration of political and economic consensus not only in Venezuela, but also in the US. What happens to the dollar when public consensus, trust and collective belief is weakened? This is why I find the decentralized, trustless consensus of cryptocurrencies to be especially attractive at this moment in history.

qaq 9y ago
How is this a valid argument against "because it's backed up by the state's military power"? In relation to USD US can and does project military power globally to protect and or advance it's economic interests. How Venezuela's case is a valid precedent to prove this premise wrong is very hard to see.
- realusername 9y ago
  The day Americans stop believing in the dollar, the exact same thing could happen (However I don't see how that would be the case now).
  - otakucode 9y ago
    It wouldn't make sense for Americans to stop believing in the dollar most likely... but if they were to do so, I'm sure those insurgent terrorists would find out exactly what military might is backing the dollar in short order. Also, don't see how it would be the case that Americans or others lose faith in the dollar? Imagine tomorrow that it is revealed that the most core systems in the financial and banking industry were hacked 10 years ago and have been extensively manipulated by, say, Goldman Sachs. Or Walmart. Or whoever. Basically, any bank who says "there are 2 billion dollars in that account" fundamentally can't prove it. What then? When Walmart says 'we made $5 billion last year' and the rest of the world says 'prove it, and no we don't trust your funny-money IT systems'... what do we do then?
  - qaq 9y ago
    The cynical view on this is your currency to an extent is not only backed by your economy but also by economic resource you can take by force which in case of US is ... I obviously do not want to simplify this to a single factor of mil. power but it's definitely an important aspect.
    - realusername 9y ago
      If people believe there's a currency crisis and that the currency will crash, it becomes a self-fulfilling prophecy. They would instantly convert dollars to another type of currency or goods they think would retain value. They would take their entire paycheck every month and buy any possible physical good they can the same day to try to keep the value. You can have the largest military in the world, the currency would still crash like a rock, trust is everything for a currency.
ieiieuiuer33 9y ago
> Collective belief is a pretty fragile foundation to build an economy on, hard to build and easy to destroy. This, IMO, is what economic bubbles are predicated upon. It's hard to build value in our economy as more people are pushed to the side, so let's give away home loans and tether people in with good feelings, based upon poor reasoning! It started with an arbitrary collective belief; we all just want nuclear family type lives in these all-services included by nearby strip mall, burb communities. Which is ... patently untrue. But people need a home so if that's where the action is! And some quaint or wonk starts to see through this with data, and invents credit default swaps. It's a crappy example; I'm tired, no coffee, and this is HN, not some economic summit, the kernel of truth I believe is there is this: Bubbles are the result of pushing social norms into the purview of utilitarian decision making for the species as a whole.
crdoconnor 9y ago
All Venezuela shows is that a currency is backed by taxes, military power and the power of the economy behind it. It wasn't a fleeting belief that caused Venezuela's hyperinflation, it was dutch disease wiping out most of their industry followed by oil prices plunging while demand for real goods and services remained static. The level of spending outstripped the economy's ability to deliver, because the output of that economy is largely oil and oil suddenly wasn't worth very much any more (for reasons that had very little to do with venezuela). Venezuela would be fucked for this reason with or without hyperinflation. Hyperinflation is simply a side effect of what they're going through. Gold-link their currency and people would be in just as much poverty thanks to their main export tanking - quite possibly even more.
maxerickson 9y ago
The consensus valuation of Bitcoin is a whole lot shakier than the consensus valuation of the dollar. (An interesting lesson to take from the incredible energy consumption of Bitcoin is just how much trust is worth)
- buckthundaz 9y ago
  https://www.coindesk.com/microscope-real-costs-dollar/ https://www.coindesk.com/microscope-real-costs-dollar/
dude01 9y ago
I agreed with everything you wrote, until near the end where you said "but also in the US". Forget about politics, but economically the US dollar is still the strongest and most stable currency in the world. It has competitors (which is good!) but I have seen no signs of problems in the US dollar. Inflation has been low in the US for long, probably way too long.
- xiphias 9y ago
  Tell this to all the people in the US who can't even afford renting a home. At this point I use that at the main source of computing inflation, as it's the most important cost for most people.
- panarky 9y ago
  > until near the end where you said "but also in the US" I'm not talking about inflation, I'm talking about political stability. As we see in Venezuela, runaway inflation and economic collapse is the result of political instability and a collective loss of trust in leadership, not the cause. US influence and power has been in decline since before 9/11, and the Iraq war showed that the US is on the wrong side of the inflection point. This chart [0] demonstrates that the G-Zero [1] trend is accelerating. [0] Global Leadership https://pbs.twimg.com/media/DT1e0feVoAA8Qd0.jpg:large https://pbs.twimg.com/media/DT1e0feVoAA8Qd0.jpg:large [1] G-Zero World https://www.foreignaffairs.com/articles/2011-01-31/g-zero-world https://www.foreignaffairs.com/articles/2011-01-31/g-zero-wo...
  - dude01 9y ago
    Thanks for the detailed response. I'm hoping that the downward trend in the Global Leadership Approval chart that started in 2016 will reverse itself after the US political situation changes this year (fingers crossed!). If not, well then yes I guess the US dollar would be going down. Of course, all good things come to an end eventually, and the US dollar hegemony really started after WW2. Crazy to think that a Soviet spy/asset (Harry Dexter White) helped setup the Bretton Woods accord which positioned the US dollar as the strongest in the world [0]. [0] "How a Soviet spy outmaneuvered John Maynard Keynes to ensure U.S. financial dominance" https://www.washingtonpost.com/news/wonk/wp/2013/03/14/how-a-soviet-spy-outmaneuvered-john-maynard-keynes-and-ensured-u-s-global-financial-dominance/?utm_term=.dc435d7ea441 https://www.washingtonpost.com/news/wonk/wp/2013/03/14/how-a...
mrec 9y ago
Cryptocurrencies aren't remotely trustless. You may not need to trust that the central bank won't fire up its printing press, true. But you're absolutely trusting that someone somewhere will want to exchange your bitcoins for something other than bitcoins, and there's no inherent reason why they would.
- oreo81 9y ago
  Well yes, that's obvious...any interaction with someone else require you to 'trust' that they'll do what they say. I think you misunderstanding the context of trust-less in regards to bitcoin though.
  - mrec 9y ago
    Maybe, but I think you're missing my point. When you buy Bitcoin (or whatever) you're betting that someone will want to trade you something else for it in the future. That "someone else" isn't a concrete entity, and "they" haven't given you any assurances of any kind. I was replying to an argument that cryptocurrencies are superior to state-issued fiat because they don't require trust. IMO this is nonsense. Using anything with zero intrinsic value as a store of value is a gigantic leap of faith.
miketery 9y ago
The same trust/consensus is needed with Crypto. The only thing crypto has over USD is that we can be certain of its issuing policy (but even then a fork could change that). I trust USD issuing, the federal reserve, and American military for the most part (so does wall St, EU, Japan, and China).
- otakucode 9y ago
  That works for cash. In case you haven't noticed, cash isn't common any longer. What about about electronic dollar? The money that never exists in any form other than on some computers managed by systems built and maintained as cost centers that need to have every single possible corner cut? Do you trust those systems to accurately reflect what the Fed actually issued? If so, why? They certainly can't provide even reasonable evidence for it, much less proof. The best they can do is "but the computer says" and point to a machine slapped together by an inexperienced technician and running software maybe cobbled together from outsourced components, poorly documented, and rush out 6 months before the developers on the project thought it was actually ready for use. They're just getting ready to take that system down to patch the WannaCry vulnerabilities, so you might want to check it quickly. They're not sure how long until they're back up.
  - miketery 9y ago
    You definitely make good points and I agree the cut corners are a big issue. However I'm under the impression that there are ledgers that are meticulously kept which track all balances, debt, and cash issuance which need to balance out at every level (from the Gov/Fed to small banks); otherwise the institution would fall. Why do I trust it? Because it continues to work, can it fail? Sure, but there is little incentive for those in power to mess around as it would jeopardize the system. > The money that never exists in any form other than on some computers I'm not going to get into how money works - but your statement could be said about crypto, it only exists on some computer right? Just because it never existed before doesn't mean it won't have utility. I think the legal system is the real place to fix things - there are certain mechanisms which influence how wealth works its way through the system. At the moment its misbalanced. It has little to do with the USD (well I benefit from USD, perhaps little countries elsewhere have a gripe with it).
adventured 9y ago
> It's a popular idea that dollars and euros derive their value because taxes are paid in that currency, or because it's backed by the state's military power. The USD derives its value from an extraordinarily productive and innovative economy, that has led the world for a century, and has been the world's largest economy since the 19th century. The US economy has been highly functioning, and remarkably consistent on an averaged out basis, for approaching 200 years, more so than any other major economy. Venezuela's problem is precisely that their economy ceased to function properly, and its currency followed in line. The US military exists solely because of that successful economy. One must inherently go before the other. US wealth and economic primacy did not originate from military strength, it originated overwhelmingly from trade, commodities, industry, invention during the 19th century. The US military was barely a third rate power when the US economy became the world's largest circa ~1890. If military power played an outsized role in determining economic outcomes today, North Korea would be rich. Saddam's Iraq would have been incredibly affluent. Soviet Russia would have ruled the world economically. And Canada today would be bankrupt, as would Norway, Finland and Sweden. Japan would have wilted after WW2, instead they witnessed one of the greatest economic recoveries and booms in world history, almost entirely sans military; their boom wasn't because of Japan's ability to project military power. The US economy would not wilt if the US spent $450 billion (~2.3% of GDP) instead of $700 billion (~3.4% of GDP) on its military - the economy would benefit in fact, by redirecting resources to superior productive uses. > What happens to the dollar when public consensus, trust and collective belief is weakened? That has been a fantasy premise for about 3/4 of a century now. The Yen was going to crush the dollar. The Euro was going to overtake the dollar. The Yuan is going to crush the dollar. Meanwhile, dollar dominance is as strong as it has ever been. The US economy chugs forward, adding $600 to $800 billion a year in new economic output, still one of the core leaders in innovation and productivity. Venezuela's failure was one of State corruption and oppression, destroying any semblence of a functioning economic system, it's not because they needed a bit more military might to project with.
jvm 9y ago
I'm surprised nobody has mentioned that they are printing money to pay for government expenses. That actually works okay on a small scale (economically, it's roughly equivalent to deficit spending), but if you do it too much the currency loses all value. Crypto actually proves that money doesn't need to be backed by anything. It simply achieves value by being a) useful for transactions and b) scarce. The US dollar's scarcity is carefully handled by the Federal Reserve which is why it has stable value. In Venezuela, the government simply prints money to spend without a thought to managing scarcity, and hyperinflation is the natural result. Collective belief is important, yes, but it's simply a belief about the future scarcity of the currency.
- vilmosi 9y ago
  >>> Crypto actually proves that money doesn't need to be backed by anything. Well no, since it's not used as currency in any meaningful scale.
jbob2000 9y ago
Cryptocurrencies require just as much consensus and trust as regular currency. If I don't believe that bits and bytes on a hard drive are worth anything, then cryptocurrency is as good as tulips.

qaq 9y ago

How is this a valid argument against "because it's backed up by the state's military power"? In relation to USD US can and does project military power globally to protect and or advance it's economic interests. How Venezuela's case is a valid precedent to prove this premise wrong is very hard to see.

realusername 9y ago
The day Americans stop believing in the dollar, the exact same thing could happen (However I don't see how that would be the case now).
- otakucode 9y ago
  It wouldn't make sense for Americans to stop believing in the dollar most likely... but if they were to do so, I'm sure those insurgent terrorists would find out exactly what military might is backing the dollar in short order. Also, don't see how it would be the case that Americans or others lose faith in the dollar? Imagine tomorrow that it is revealed that the most core systems in the financial and banking industry were hacked 10 years ago and have been extensively manipulated by, say, Goldman Sachs. Or Walmart. Or whoever. Basically, any bank who says "there are 2 billion dollars in that account" fundamentally can't prove it. What then? When Walmart says 'we made $5 billion last year' and the rest of the world says 'prove it, and no we don't trust your funny-money IT systems'... what do we do then?
- qaq 9y ago
  The cynical view on this is your currency to an extent is not only backed by your economy but also by economic resource you can take by force which in case of US is ... I obviously do not want to simplify this to a single factor of mil. power but it's definitely an important aspect.
  - realusername 9y ago
    If people believe there's a currency crisis and that the currency will crash, it becomes a self-fulfilling prophecy. They would instantly convert dollars to another type of currency or goods they think would retain value. They would take their entire paycheck every month and buy any possible physical good they can the same day to try to keep the value. You can have the largest military in the world, the currency would still crash like a rock, trust is everything for a currency.

ieiieuiuer33 9y ago

> Collective belief is a pretty fragile foundation to build an economy on, hard to build and easy to destroy. This, IMO, is what economic bubbles are predicated upon. It's hard to build value in our economy as more people are pushed to the side, so let's give away home loans and tether people in with good feelings, based upon poor reasoning! It started with an arbitrary collective belief; we all just want nuclear family type lives in these all-services included by nearby strip mall, burb communities. Which is ... patently untrue. But people need a home so if that's where the action is! And some quaint or wonk starts to see through this with data, and invents credit default swaps. It's a crappy example; I'm tired, no coffee, and this is HN, not some economic summit, the kernel of truth I believe is there is this: Bubbles are the result of pushing social norms into the purview of utilitarian decision making for the species as a whole.

crdoconnor 9y ago

All Venezuela shows is that a currency is backed by taxes, military power and the power of the economy behind it. It wasn't a fleeting belief that caused Venezuela's hyperinflation, it was dutch disease wiping out most of their industry followed by oil prices plunging while demand for real goods and services remained static. The level of spending outstripped the economy's ability to deliver, because the output of that economy is largely oil and oil suddenly wasn't worth very much any more (for reasons that had very little to do with venezuela). Venezuela would be fucked for this reason with or without hyperinflation. Hyperinflation is simply a side effect of what they're going through. Gold-link their currency and people would be in just as much poverty thanks to their main export tanking - quite possibly even more.

maxerickson 9y ago

The consensus valuation of Bitcoin is a whole lot shakier than the consensus valuation of the dollar. (An interesting lesson to take from the incredible energy consumption of Bitcoin is just how much trust is worth)

buckthundaz 9y ago
https://www.coindesk.com/microscope-real-costs-dollar/ https://www.coindesk.com/microscope-real-costs-dollar/

dude01 9y ago

I agreed with everything you wrote, until near the end where you said "but also in the US". Forget about politics, but economically the US dollar is still the strongest and most stable currency in the world. It has competitors (which is good!) but I have seen no signs of problems in the US dollar. Inflation has been low in the US for long, probably way too long.

xiphias 9y ago
Tell this to all the people in the US who can't even afford renting a home. At this point I use that at the main source of computing inflation, as it's the most important cost for most people.
panarky 9y ago
> until near the end where you said "but also in the US" I'm not talking about inflation, I'm talking about political stability. As we see in Venezuela, runaway inflation and economic collapse is the result of political instability and a collective loss of trust in leadership, not the cause. US influence and power has been in decline since before 9/11, and the Iraq war showed that the US is on the wrong side of the inflection point. This chart [0] demonstrates that the G-Zero [1] trend is accelerating. [0] Global Leadership https://pbs.twimg.com/media/DT1e0feVoAA8Qd0.jpg:large https://pbs.twimg.com/media/DT1e0feVoAA8Qd0.jpg:large [1] G-Zero World https://www.foreignaffairs.com/articles/2011-01-31/g-zero-world https://www.foreignaffairs.com/articles/2011-01-31/g-zero-wo...
- dude01 9y ago
  Thanks for the detailed response. I'm hoping that the downward trend in the Global Leadership Approval chart that started in 2016 will reverse itself after the US political situation changes this year (fingers crossed!). If not, well then yes I guess the US dollar would be going down. Of course, all good things come to an end eventually, and the US dollar hegemony really started after WW2. Crazy to think that a Soviet spy/asset (Harry Dexter White) helped setup the Bretton Woods accord which positioned the US dollar as the strongest in the world [0]. [0] "How a Soviet spy outmaneuvered John Maynard Keynes to ensure U.S. financial dominance" https://www.washingtonpost.com/news/wonk/wp/2013/03/14/how-a-soviet-spy-outmaneuvered-john-maynard-keynes-and-ensured-u-s-global-financial-dominance/?utm_term=.dc435d7ea441 https://www.washingtonpost.com/news/wonk/wp/2013/03/14/how-a...

mrec 9y ago

Cryptocurrencies aren't remotely trustless. You may not need to trust that the central bank won't fire up its printing press, true. But you're absolutely trusting that someone somewhere will want to exchange your bitcoins for something other than bitcoins, and there's no inherent reason why they would.

oreo81 9y ago
Well yes, that's obvious...any interaction with someone else require you to 'trust' that they'll do what they say. I think you misunderstanding the context of trust-less in regards to bitcoin though.
- mrec 9y ago
  Maybe, but I think you're missing my point. When you buy Bitcoin (or whatever) you're betting that someone will want to trade you something else for it in the future. That "someone else" isn't a concrete entity, and "they" haven't given you any assurances of any kind. I was replying to an argument that cryptocurrencies are superior to state-issued fiat because they don't require trust. IMO this is nonsense. Using anything with zero intrinsic value as a store of value is a gigantic leap of faith.

miketery 9y ago

The same trust/consensus is needed with Crypto. The only thing crypto has over USD is that we can be certain of its issuing policy (but even then a fork could change that). I trust USD issuing, the federal reserve, and American military for the most part (so does wall St, EU, Japan, and China).

otakucode 9y ago
That works for cash. In case you haven't noticed, cash isn't common any longer. What about about electronic dollar? The money that never exists in any form other than on some computers managed by systems built and maintained as cost centers that need to have every single possible corner cut? Do you trust those systems to accurately reflect what the Fed actually issued? If so, why? They certainly can't provide even reasonable evidence for it, much less proof. The best they can do is "but the computer says" and point to a machine slapped together by an inexperienced technician and running software maybe cobbled together from outsourced components, poorly documented, and rush out 6 months before the developers on the project thought it was actually ready for use. They're just getting ready to take that system down to patch the WannaCry vulnerabilities, so you might want to check it quickly. They're not sure how long until they're back up.
- miketery 9y ago
  You definitely make good points and I agree the cut corners are a big issue. However I'm under the impression that there are ledgers that are meticulously kept which track all balances, debt, and cash issuance which need to balance out at every level (from the Gov/Fed to small banks); otherwise the institution would fall. Why do I trust it? Because it continues to work, can it fail? Sure, but there is little incentive for those in power to mess around as it would jeopardize the system. > The money that never exists in any form other than on some computers I'm not going to get into how money works - but your statement could be said about crypto, it only exists on some computer right? Just because it never existed before doesn't mean it won't have utility. I think the legal system is the real place to fix things - there are certain mechanisms which influence how wealth works its way through the system. At the moment its misbalanced. It has little to do with the USD (well I benefit from USD, perhaps little countries elsewhere have a gripe with it).

adventured 9y ago

> It's a popular idea that dollars and euros derive their value because taxes are paid in that currency, or because it's backed by the state's military power. The USD derives its value from an extraordinarily productive and innovative economy, that has led the world for a century, and has been the world's largest economy since the 19th century. The US economy has been highly functioning, and remarkably consistent on an averaged out basis, for approaching 200 years, more so than any other major economy. Venezuela's problem is precisely that their economy ceased to function properly, and its currency followed in line. The US military exists solely because of that successful economy. One must inherently go before the other. US wealth and economic primacy did not originate from military strength, it originated overwhelmingly from trade, commodities, industry, invention during the 19th century. The US military was barely a third rate power when the US economy became the world's largest circa ~1890. If military power played an outsized role in determining economic outcomes today, North Korea would be rich. Saddam's Iraq would have been incredibly affluent. Soviet Russia would have ruled the world economically. And Canada today would be bankrupt, as would Norway, Finland and Sweden. Japan would have wilted after WW2, instead they witnessed one of the greatest economic recoveries and booms in world history, almost entirely sans military; their boom wasn't because of Japan's ability to project military power. The US economy would not wilt if the US spent $450 billion (~2.3% of GDP) instead of $700 billion (~3.4% of GDP) on its military - the economy would benefit in fact, by redirecting resources to superior productive uses. > What happens to the dollar when public consensus, trust and collective belief is weakened? That has been a fantasy premise for about 3/4 of a century now. The Yen was going to crush the dollar. The Euro was going to overtake the dollar. The Yuan is going to crush the dollar. Meanwhile, dollar dominance is as strong as it has ever been. The US economy chugs forward, adding $600 to $800 billion a year in new economic output, still one of the core leaders in innovation and productivity. Venezuela's failure was one of State corruption and oppression, destroying any semblence of a functioning economic system, it's not because they needed a bit more military might to project with.

jvm 9y ago

I'm surprised nobody has mentioned that they are printing money to pay for government expenses. That actually works okay on a small scale (economically, it's roughly equivalent to deficit spending), but if you do it too much the currency loses all value. Crypto actually proves that money doesn't need to be backed by anything. It simply achieves value by being a) useful for transactions and b) scarce. The US dollar's scarcity is carefully handled by the Federal Reserve which is why it has stable value. In Venezuela, the government simply prints money to spend without a thought to managing scarcity, and hyperinflation is the natural result. Collective belief is important, yes, but it's simply a belief about the future scarcity of the currency.

vilmosi 9y ago
>>> Crypto actually proves that money doesn't need to be backed by anything. Well no, since it's not used as currency in any meaningful scale.

jbob2000 9y ago

Cryptocurrencies require just as much consensus and trust as regular currency. If I don't believe that bits and bytes on a hard drive are worth anything, then cryptocurrency is as good as tulips.