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Bonds are debt, but they are not "money" (and not seen as such by the general public). Also, such bonds could be required to have maturities that matched the ma

Bonds are debt, but they are not "money" (and not seen as such by the general public). Also, such bonds could be required to have maturities that matched the maturity curve of the assets/lendings (or slightly longer), which would help forestall a liquidity crunch. If more of the risk was carried by (lower priority) bonds, the central bank/government would not have to carry risks associated with a credit market crash. Central banks could still be lenders of last resort if there is a liquidity crunch, but only as long as the bank is well within its capital requirements. The main problem I see with the current system, is that it is so opaque to most people. Even if the system is not inherently corrupt using "fractional reserve banking", most people are not likely to be able to tell whether or not it is. If moving the risk to bonds (or all the way to bank stocks), it could hopefully shut down some conspiracy theories and also make it more difficult to resist various forms of moral hazard for regulators and bankers, as bond-holders would be more vigilant than most depositors.

hndamien 8y ago
What about Bitcoin? Is it not equity based money rather than debt based money?
- trashtester 8y ago
  Today, Bitcoin is probably not "money" at all. It is a store of value, but it is too volatile to be used as a unit of account, and borderline as a medium of exchange. Also, both of the criticisms of traditional currencies (ie "debt backed" and "fiat") are flawed, I think. For a stores of value, for some to be "debt backed" is probably a necessity. To "save" means to postpone consumption. The efficient way of doing that, is to let someone consume more than they produce today, so that you can consume more than you produce tomorrow. The main other alternative is to invest in assets with actual value (stocks, real estate, etc). But there is a limit to how much value can be stored in this way without creating dangerous bubbles and extreme volatility. Also, for a currency to be "backed by government fiat" is also an advantage. While the government may ban bitcoins tomorrow (as many already have), with traditional currencies, you have some degree of certainty that it will be legal tender for at least the medium term future, and you can also expect some degree of predictability for what the value will be. Both are critical for a currency to be used as a unit of account and means of exchange (particularly for time-shifted or recurring payments).
  - hndamien 8y ago
    Why should a store of value require debt backing? All that it requires is that it can have the same or more purchasing power (via exchange) in the future. Buying a house in a popular growing city without debt would likely fulfill this SoV requirement.
    - trashtester 8y ago
      3 reasons (covering only Bitcoin as a store of value, not other aspects as qualifying as money): 1) Generally it is difficult to make sure that anything maintains its purchasing power. Physical objects and materials will likely have some value in the future based in its utility (even if that value is very unpredictable). Immaterial items, such as traditional currencies or Bitcoin have no intrinsic value. All the value is the one attributed to it via social conventions. Bitcoin has the added disadvantage that it is not backed by a government, which means that the value can suddenly go away, and more easily than currencies. 2) Savings in Bitcoin yield no interest rate. In fact, unless you do all the work yourself, you have to pay for the storage. (And currently, even a risk of theft.) Of course, you may hope that the price goes up, but that is pure speculation, and it is also a zero-sum game at best, and a ponzi scheme at worst. 3) Some amount of lending is actually good for the economy as well as for individuals. Young people and people who want to start a business can have a net benefit from some lending/borrowing, even if they pay some interest. Combined with the previous point, this makes debt backed money a potential win/win solution. In sum, storing value through lending, if implemented correctly, reduces volatility and provides additional utility to both the lender and the borrower. Of course there are other good ways to postpone consumption, most importantly stocks and real estate. These are more volatile in the short term, but have some advantages in the long term, particularly if the demand for loans is low. But for your example, putting all your money into a single house can be more risky than you think. In 1968, Detroit was precisely a popular growing city. If you'd bought a house there then, all the value (+ taxes) would be lost now. It is really hard to predict what locations will be popular 30 years from now, and for the house itself, it will trigger property tax (in most places), it will maintenance, and 30 years from now it could be obsoleted by new construction methods, materials, etc. Personally, I split my saving about equally between my mortgage, the global stock index fund, while the pension savings from my employer goes mostly into bonds.

hndamien 8y ago

What about Bitcoin? Is it not equity based money rather than debt based money?

trashtester 8y ago
Today, Bitcoin is probably not "money" at all. It is a store of value, but it is too volatile to be used as a unit of account, and borderline as a medium of exchange. Also, both of the criticisms of traditional currencies (ie "debt backed" and "fiat") are flawed, I think. For a stores of value, for some to be "debt backed" is probably a necessity. To "save" means to postpone consumption. The efficient way of doing that, is to let someone consume more than they produce today, so that you can consume more than you produce tomorrow. The main other alternative is to invest in assets with actual value (stocks, real estate, etc). But there is a limit to how much value can be stored in this way without creating dangerous bubbles and extreme volatility. Also, for a currency to be "backed by government fiat" is also an advantage. While the government may ban bitcoins tomorrow (as many already have), with traditional currencies, you have some degree of certainty that it will be legal tender for at least the medium term future, and you can also expect some degree of predictability for what the value will be. Both are critical for a currency to be used as a unit of account and means of exchange (particularly for time-shifted or recurring payments).
- hndamien 8y ago
  Why should a store of value require debt backing? All that it requires is that it can have the same or more purchasing power (via exchange) in the future. Buying a house in a popular growing city without debt would likely fulfill this SoV requirement.
  - trashtester 8y ago
    3 reasons (covering only Bitcoin as a store of value, not other aspects as qualifying as money): 1) Generally it is difficult to make sure that anything maintains its purchasing power. Physical objects and materials will likely have some value in the future based in its utility (even if that value is very unpredictable). Immaterial items, such as traditional currencies or Bitcoin have no intrinsic value. All the value is the one attributed to it via social conventions. Bitcoin has the added disadvantage that it is not backed by a government, which means that the value can suddenly go away, and more easily than currencies. 2) Savings in Bitcoin yield no interest rate. In fact, unless you do all the work yourself, you have to pay for the storage. (And currently, even a risk of theft.) Of course, you may hope that the price goes up, but that is pure speculation, and it is also a zero-sum game at best, and a ponzi scheme at worst. 3) Some amount of lending is actually good for the economy as well as for individuals. Young people and people who want to start a business can have a net benefit from some lending/borrowing, even if they pay some interest. Combined with the previous point, this makes debt backed money a potential win/win solution. In sum, storing value through lending, if implemented correctly, reduces volatility and provides additional utility to both the lender and the borrower. Of course there are other good ways to postpone consumption, most importantly stocks and real estate. These are more volatile in the short term, but have some advantages in the long term, particularly if the demand for loans is low. But for your example, putting all your money into a single house can be more risky than you think. In 1968, Detroit was precisely a popular growing city. If you'd bought a house there then, all the value (+ taxes) would be lost now. It is really hard to predict what locations will be popular 30 years from now, and for the house itself, it will trigger property tax (in most places), it will maintenance, and 30 years from now it could be obsoleted by new construction methods, materials, etc. Personally, I split my saving about equally between my mortgage, the global stock index fund, while the pension savings from my employer goes mostly into bonds.