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> Arguably there already is a global dollar-denominated credit market, it's just highly intermediated. Correct. However, the fact that the Federal Reserve can

by runeks 7y ago

> Arguably there already is a global dollar-denominated credit market, it's just highly intermediated. Correct. However, the fact that the Federal Reserve can underbid everyone (with regards to interest) on short term credit causes a destabilization of interest rates (which is why they've been falling for the past ~40 years). There's no point in saving dollars when you can't protest against a too-low rate of interest -- a bank can always tap into the Fed's credit and underbid you. This can't happen with non-centrally produced money. So the "killer app" here is money for which no central party can control the interest/discount rate. > How does the economics of this work - you're claiming lower risk and higher return, but cryptocurrency does nothing to help with default risk? I'm not claiming lower risk. I'm claiming a higher return by not competing with a party (the Fed) that can always underbid you on short-term credit. The low risk comes from financing consumer goods in high demand sitting on the shelves of retail stores (ie. Bills of Exchange). Unless people suddenly stop eating food, you ought to get your money back (plus the prevailing discount rate).

pjc50 7y ago
> This can't happen with non-centrally produced money. As cryptocurrency investors keep finding out the hard way, you can create credit in bitcoin very easily, every exchange balance is a credit; what the lack of a central bank means is that when there is a bank run or "liquidity event" you definitely can't get your money back. The Tether people have been very effective at centrally producing decentralised money too. > I'm claiming a higher return by not competing with a party (the Fed) that can always underbid you on short-term credit. OK, so what does the other side of this equation look like: what's the advantage to the borrower in taking out more expensive credit? Even worse, they're taking out credit in a currency that's appreciating against the dollar?
- runeks 7y ago
  I'm not saying cryptocurrency-denominated debt doesn't exist. It clearly does, as you say. What I'm saying is that when the cryptocurrency in question is not centrally produced, there's no actor who's able to underbid everyone else on interest. With regards to bank runs, they are not a problem if the deposited money is invested in something sufficiently liquid (like the Bill of Exchange). After all, a bank run just means you sell into the market whatever instrument you've purchased for the deposited money, and this will only be a problem if this instrument isn't liquid enough. Bonds, for example, are not sufficiently liquid to sell into the market in case of a bank run. The lesson here is to not invest demand deposits in bonds (or anything else of insufficient liquidity). > OK, so what does the other side of this equation look like: what's the advantage to the borrower in taking out more expensive credit? The advantage to the retail credit borrower is that they don't have to compete with businesses who are good friends with the commercial banks (who have access to the Fed's cheap credit). All savers, world-wide, become lenders, instead of just a few huge banks, who don't really care to lift a finger unless there are huge profits in sight. Also, a reasonable, market-based 3% discount rate compared to, say, a cheaper Fed-funded 1% rate, is relatively insignificant in the context of retail credit with a maximum duration of three months. For goods that take three months to clear, the retail shop will pay three fourths of a percent instead of one quarter of a percent. That's a very small additional price to pay for widely available retail credit (ie. not having to rely on big banks to give you a credit line). > Even worse, they're taking out credit in a currency that's appreciating against the dollar? Taking out credit in a currency that's not stable against the dollar is only a problem if your income is dollar-denominated. After all, millions of people take out non-dollar denominated debt every day, which is fine since their income is denominated in that same currency.

by runeks 7y ago

pjc50 7y ago

> This can't happen with non-centrally produced money. As cryptocurrency investors keep finding out the hard way, you can create credit in bitcoin very easily, every exchange balance is a credit; what the lack of a central bank means is that when there is a bank run or "liquidity event" you definitely can't get your money back. The Tether people have been very effective at centrally producing decentralised money too. > I'm claiming a higher return by not competing with a party (the Fed) that can always underbid you on short-term credit. OK, so what does the other side of this equation look like: what's the advantage to the borrower in taking out more expensive credit? Even worse, they're taking out credit in a currency that's appreciating against the dollar?

runeks 7y ago
I'm not saying cryptocurrency-denominated debt doesn't exist. It clearly does, as you say. What I'm saying is that when the cryptocurrency in question is not centrally produced, there's no actor who's able to underbid everyone else on interest. With regards to bank runs, they are not a problem if the deposited money is invested in something sufficiently liquid (like the Bill of Exchange). After all, a bank run just means you sell into the market whatever instrument you've purchased for the deposited money, and this will only be a problem if this instrument isn't liquid enough. Bonds, for example, are not sufficiently liquid to sell into the market in case of a bank run. The lesson here is to not invest demand deposits in bonds (or anything else of insufficient liquidity). > OK, so what does the other side of this equation look like: what's the advantage to the borrower in taking out more expensive credit? The advantage to the retail credit borrower is that they don't have to compete with businesses who are good friends with the commercial banks (who have access to the Fed's cheap credit). All savers, world-wide, become lenders, instead of just a few huge banks, who don't really care to lift a finger unless there are huge profits in sight. Also, a reasonable, market-based 3% discount rate compared to, say, a cheaper Fed-funded 1% rate, is relatively insignificant in the context of retail credit with a maximum duration of three months. For goods that take three months to clear, the retail shop will pay three fourths of a percent instead of one quarter of a percent. That's a very small additional price to pay for widely available retail credit (ie. not having to rely on big banks to give you a credit line). > Even worse, they're taking out credit in a currency that's appreciating against the dollar? Taking out credit in a currency that's not stable against the dollar is only a problem if your income is dollar-denominated. After all, millions of people take out non-dollar denominated debt every day, which is fine since their income is denominated in that same currency.