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I totally agree with your sentiment, but I will say one thing. If there is some shock in the world economy crypto could be a way out. Imagine - A bank run whe

by craigc 8y ago

I totally agree with your sentiment, but I will say one thing. If there is some shock in the world economy crypto could be a way out. Imagine - A bank run where every bank goes under and it is not possible to easily bail them out - The government has to increase inflation and we far exceed the 2% target - The existing financial system gets hacked and records get destroyed Not saying any of this is likely, but it could happen. The US dollar has only been backed by nothing since 1971. That is a very short amount of time in the history of the world. You can see that in that same period of time debt has skyrocketed and production output vs. wages have diverged significantly. It would be somewhat presumptuous to assume that the existing system is going to last forever. That said, it doesn’t mean that crypto currencies are THE answer, but they are a possible answer. Finally “the most economically stable nation on the planet” is $21 trillion in debt. I think if something like Bitcoin does end up reaching mass adoption it won’t be because people CHOOSE to use it, it will be because they are FORCED to use it because no one wants to accept dollars anymore.

nradov 8y ago
That's not how economics or the banking system actually work. The Federal Reserve can issue effectively unlimited credit to solvent banks in case of runs. The government has no way to directly "increase inflation". Generally when bank runs occur it's because the bank has a lot of bad loans; when loans go bad it effectively removes money from circulation thus decreasing monetary inflation. There is no single central "financial system". Individual financial institutions get hacked all the time. It's not a major problem. Ultimately the US dollar (and other fiat currencies) are backed by something: a government with an effective monopoly on violence over a particular territory including all the people and assets therein. In the real world that's a lot more powerful than any cryptocurrency fantasies.
- craigc 8y ago
  Those were three separate ideas. A bank run would most likely be a result of deflation, yes, but it is not guaranteed that if that were to occur that the bank would be able to stay solvent. The inflation example can already be seen in Venezuela, where the people there have been using cryptocurrencies as a way to survive. > Ultimately the US dollar (and other fiat currencies) are backed by something: a government with an effective monopoly on violence over a particular territory including all the people and assets therein. Are you suggesting that the US military will use force to ensure that people use the dollar and that is its backing? I am not saying you are wrong, but that is not exactly a friendly thought. Sounds more like a dictatorship than a free market economy.
  - drewmol 8y ago
    >Are you suggesting that the US military will use force to ensure that people use the dollar and that is its backing? Not the OP, but the governments' 'monopoly on violence' usually refers to the fact that they hold position as the sole enforcement authority. Dollar is 'backed' by a reputation/record of US government fulfilling it's debt obligations. As the enforcement authority, they can/will use force to secure an operating revenue via tax collection. The specifics of what people use to transact, is more flexible. So the dollar is backed by US Government's ability to fulfill it's future debts. The method it uses to extract (something of value, payment is currently required in $ format) from it's citizenry to pay them is less important, but a 'monopoly on violence' sure helps with collection efforts ;-)
- 1996 8y ago
  This is exactly the point: the fed can conjure unlimited credit out of thin air. Cryptocurrencies can't. The limitation becomes a feature: debt can't be inflated way. We are one major crisis away from people preferring an asset that can't be inflated, or forcefully converted by executive order, under threat of confiscation. When that happens, you will be right: by Gresham law, people will prefer paying for stuff (including taxes) in fiat currency.
  - nradov 8y ago
    Of course cryptocurrency debt can be inflated away. Fork the blockchain, or switch to another one entirely. Who's going to force me to pay? It's just bits.
    - 1996 8y ago
      you assume people care about the fork. if people dont and only want the original, or if the smartcontract is not updated to allow the fork at a lesser rate, you're stuck But nobody ever forces you to pay- the goods and services just stop coming your way, or you lose your collateral. Inflating the debt is not a problem because of the small consumers, but the government. Seignorage tax affects the small consumers.

by craigc 8y ago

nradov 8y ago

That's not how economics or the banking system actually work. The Federal Reserve can issue effectively unlimited credit to solvent banks in case of runs. The government has no way to directly "increase inflation". Generally when bank runs occur it's because the bank has a lot of bad loans; when loans go bad it effectively removes money from circulation thus decreasing monetary inflation. There is no single central "financial system". Individual financial institutions get hacked all the time. It's not a major problem. Ultimately the US dollar (and other fiat currencies) are backed by something: a government with an effective monopoly on violence over a particular territory including all the people and assets therein. In the real world that's a lot more powerful than any cryptocurrency fantasies.

craigc 8y ago
Those were three separate ideas. A bank run would most likely be a result of deflation, yes, but it is not guaranteed that if that were to occur that the bank would be able to stay solvent. The inflation example can already be seen in Venezuela, where the people there have been using cryptocurrencies as a way to survive. > Ultimately the US dollar (and other fiat currencies) are backed by something: a government with an effective monopoly on violence over a particular territory including all the people and assets therein. Are you suggesting that the US military will use force to ensure that people use the dollar and that is its backing? I am not saying you are wrong, but that is not exactly a friendly thought. Sounds more like a dictatorship than a free market economy.
- drewmol 8y ago
  >Are you suggesting that the US military will use force to ensure that people use the dollar and that is its backing? Not the OP, but the governments' 'monopoly on violence' usually refers to the fact that they hold position as the sole enforcement authority. Dollar is 'backed' by a reputation/record of US government fulfilling it's debt obligations. As the enforcement authority, they can/will use force to secure an operating revenue via tax collection. The specifics of what people use to transact, is more flexible. So the dollar is backed by US Government's ability to fulfill it's future debts. The method it uses to extract (something of value, payment is currently required in $ format) from it's citizenry to pay them is less important, but a 'monopoly on violence' sure helps with collection efforts ;-)
1996 8y ago
This is exactly the point: the fed can conjure unlimited credit out of thin air. Cryptocurrencies can't. The limitation becomes a feature: debt can't be inflated way. We are one major crisis away from people preferring an asset that can't be inflated, or forcefully converted by executive order, under threat of confiscation. When that happens, you will be right: by Gresham law, people will prefer paying for stuff (including taxes) in fiat currency.
- nradov 8y ago
  Of course cryptocurrency debt can be inflated away. Fork the blockchain, or switch to another one entirely. Who's going to force me to pay? It's just bits.
  - 1996 8y ago
    you assume people care about the fork. if people dont and only want the original, or if the smartcontract is not updated to allow the fork at a lesser rate, you're stuck But nobody ever forces you to pay- the goods and services just stop coming your way, or you lose your collateral. Inflating the debt is not a problem because of the small consumers, but the government. Seignorage tax affects the small consumers.