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His assertion here is that "Endless money-losing is a variant of counterfeiting". I just don't see how that claim stands up to any real scrutiny. Counterfeiting

by lwb 7y ago

His assertion here is that "Endless money-losing is a variant of counterfeiting". I just don't see how that claim stands up to any real scrutiny. Counterfeiting is a totally different thing. To your point about negative real returns: just because it's been that way in the past doesn't mean that it's not a tragedy or that it's not possible to have reliable assets that keep their value over time. This is an especially desirable quality in currencies, and why gold and now bitcoin are so important.

BenoitEssiambre 7y ago
>This is an especially desirable quality in currencies This is an especially UNdesirable quality in currencies. A deflationary currency cannot become mainstream without causing a huge amount of instability. Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity. When this trend becomes widespread enough, it causes global production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these very tokens. Eventually when token stashes become too big and seemingly valuable, there will be people who want to buy real things with their stock of tokens. These tokens will be chasing fewer goods which will mean prices for stuff will rise (tokens will lose value). This may happen suddenly when people with large stockpiles of tokens notice that value is dropping and see that there are tons of other tokens waiting on the sideline ready to make it drop even further. Hoarders are likely to rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This kind of drop brings the tokens closer to their natural intrinsic value of zero and resets the cycle, which can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility will keep the speculation wild and cryptocoins unstable. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market real returns (risk adjusted, liquidity adjusted,) compared to real productive investment will always fluctuate increasingly wildly as they get more popular.
- lwb 7y ago
  I'd love to hear some research on these claims. Especially this: > Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity. I am deeply skeptical of this claim. I would still rather invest in a real business than get a 0% return on my stash. If a free market for currency existed, no way in hell would I choose to store my wealth in a depleting asset. Plus, any argument about hoarding cash should consider the multitude of billionaires that exist and whose presence is not crashing economies around the world. (Yes, most billionaires have most of their wealth in business investments, but they still have bigger piles of cash than you or I can reasonably fathom.) What you're espousing seems to be standard Keynesian economics but you should know there are other schools of thought :)
  - BenoitEssiambre 7y ago
    Yes but what about the not so rare times explained in my original comment when returns on tangible private marginal assets become negative (on a risk adjusted, liquidity adjusted basis)? During the financial crisis of 2008, the tailor rule put the natural rate (a rate correlated with private marginal safe asset returns) at as low as -4%. In those conditions, having a currency that returns 0% risk free gets you way above market returns and blocks a lot of private market assets from existing. It's indirectly, a huge subsidy to people shutting down projects, laying off people and hoarding government paper instead. It's basically the government shielding savings from the private markets and causing untold economic damage through economic idleness and unemployment. It's a subsidy on job destruction. At least a private currency like bitcoin or gold will tend to become volatile in these conditions (which increases its risk and reduces its "risk adjusted" return). But if ever crypto coins were to become popular enough for governments to deem it worth it to use their powers to reduce their volatility, it could certainly put the economy into a gridlock like it did when they tried to artificially stabilize gold. The fact that crypto coins in a free market tend towards increasing volatility makes them not very good as a medium of account to negotiate contracts and conduct business. It makes them not useful as a currency.
    - lwb 7y ago

by lwb 7y ago

BenoitEssiambre 7y ago

>This is an especially desirable quality in currencies This is an especially UNdesirable quality in currencies. A deflationary currency cannot become mainstream without causing a huge amount of instability. Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity. When this trend becomes widespread enough, it causes global production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these very tokens. Eventually when token stashes become too big and seemingly valuable, there will be people who want to buy real things with their stock of tokens. These tokens will be chasing fewer goods which will mean prices for stuff will rise (tokens will lose value). This may happen suddenly when people with large stockpiles of tokens notice that value is dropping and see that there are tons of other tokens waiting on the sideline ready to make it drop even further. Hoarders are likely to rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This kind of drop brings the tokens closer to their natural intrinsic value of zero and resets the cycle, which can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility will keep the speculation wild and cryptocoins unstable. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market real returns (risk adjusted, liquidity adjusted,) compared to real productive investment will always fluctuate increasingly wildly as they get more popular.

lwb 7y ago
I'd love to hear some research on these claims. Especially this: > Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity. I am deeply skeptical of this claim. I would still rather invest in a real business than get a 0% return on my stash. If a free market for currency existed, no way in hell would I choose to store my wealth in a depleting asset. Plus, any argument about hoarding cash should consider the multitude of billionaires that exist and whose presence is not crashing economies around the world. (Yes, most billionaires have most of their wealth in business investments, but they still have bigger piles of cash than you or I can reasonably fathom.) What you're espousing seems to be standard Keynesian economics but you should know there are other schools of thought :)
- BenoitEssiambre 7y ago
  Yes but what about the not so rare times explained in my original comment when returns on tangible private marginal assets become negative (on a risk adjusted, liquidity adjusted basis)? During the financial crisis of 2008, the tailor rule put the natural rate (a rate correlated with private marginal safe asset returns) at as low as -4%. In those conditions, having a currency that returns 0% risk free gets you way above market returns and blocks a lot of private market assets from existing. It's indirectly, a huge subsidy to people shutting down projects, laying off people and hoarding government paper instead. It's basically the government shielding savings from the private markets and causing untold economic damage through economic idleness and unemployment. It's a subsidy on job destruction. At least a private currency like bitcoin or gold will tend to become volatile in these conditions (which increases its risk and reduces its "risk adjusted" return). But if ever crypto coins were to become popular enough for governments to deem it worth it to use their powers to reduce their volatility, it could certainly put the economy into a gridlock like it did when they tried to artificially stabilize gold. The fact that crypto coins in a free market tend towards increasing volatility makes them not very good as a medium of account to negotiate contracts and conduct business. It makes them not useful as a currency.
  - lwb 7y ago