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I don't care for Schiff, but central banking and the modern monetary system is fundamentally problematic. Just because we haven't experienced a black-swan event

I don't care for Schiff, but central banking and the modern monetary system is fundamentally problematic. Just because we haven't experienced a black-swan event doesn't mean that it's not possible, whether that be a market crash or a pandemic. Some cycles take longer than decades to play out. Some things take hundreds of years. First principles thinking (and common sense) tells us that no party should be able to create money out of thin air, it almost breaks physics, but it doesn't because the value comes from diluting every else's money. It breaks the social contract by taking from others without consent or transparency. And so no one complains because they don't notice it happening; my accounts stand as complete as they were yesterday. A powerful tool that over time, inevitably gets abused and mismanaged.

bin_bash 5y ago
> Just because we haven't experienced a black-swan event doesn't mean that it's not possible. That’s going to be true for any kind of economic system. No reasonable person would argue that a black swan event wouldn’t be possible.
- coralreef 5y ago
  The more complexity introduced into a system, the more likely the event of failure. This is true for airplanes, fission reactors, and monetary systems. Humans are the ultimate complexity, and indeed central banking relies on the decision making of a powerful few. Will the interest rate go up or down? Will a flood of money buy bonds and mortgages? Those decisions are made for us.
SantalBlush 5y ago
These issues, like "it almost breaks physics" and "it breaks the social contract," are pretty vague.
- coralreef 5y ago
  If I was able to create new energy out of nowhere in my bare hands, you would be astounded. Of course this is not possible. Energy must come from somewhere else. When you create new money, you have seemingly "new energy" in your hands, except the value of that "new money" came from everyone else's money, the existing base. Their money became worth less (inflation). The government is constantly creating more money, which is why we consistently have inflation year after year. They do it in the name of stimulating the economy. They've done it so much, that many governments now have 0 or negative interest rates on their bonds. This is when things start getting very confusing, because saving money should yield you a positive return. Your savings account should pay you interest, but instead you pay the bank to store your money (doesn't actually happen at the retail level, banks eat the cost to keep you in their business). The "social contract" aspect is that if you want something, you ask for it. Raise taxes? Lower taxes? At least there is representation at some level with a vote. Going to war in Iraq? Needs congressional and senate approval. Creating $100b of money you don't have and buying government bonds every month? Fed does this, and nobody blinks.
  - SantalBlush 5y ago
    I'm aware of how money works, and it is nothing like energy. This analogy doesn't work at all. Money is not the same thing as economic output; it just divides that economic output. The explanation here about "new energy" is quasi intellectual gibberish. Moreover, most monetary expansion is caused by private banks through lending; they don't need a central bank to do this. The central bank uses tools like reserve requirements and bond purchases/sales to raise and lower the money supply in response to macroeconomic trends. Without a central bank, the money supply can still be expanded.
    - NoItsznot 5y ago
      Registered just to comment I found the energy explanation of money very insightful. Not sure who you are or why you get to be a judge of intellect but that sentiment was not quasi intellectual gibberish, it was actually a highly nuanced and great visual representation of how money flows and is used. Stop gate keeping.
    - coralreef 5y ago
      > Money is not the same thing as economic output; it just divides that economic output. The explanation here about "new energy" is quasi intellectual gibberish. Money stores the value of that economic output. We used to use gold as money because it was hard to inflate. No one can create gold without doing work, therefore it evolved over time to be valuable because of its rarity. That makes it a strong store of value over time, unlike say apples or oil, which would be poor money. Fiat currency can be created without work; it is not rare, you are at the whims of whoever has the power to create it. If you had to store value over 100 years, you would not keep it in cash or bonds. You'd buy land, gold, or possibly stocks, because those things are much harder to create. > Moreover, most monetary expansion is caused by private banks through lending; they don't need a central bank to do this. The central bank uses tools like reserve requirements and bond purchases/sales to raise and lower the money supply in response to macroeconomic trends. Without a central bank, the money supply can still be expanded. Private banks implement whatever the central bank tells them. Who sets the interest rate? Does a lower interest rate increase private lending or decrease it? Why can't private banks hold 0% in fractional reserve?
- legolas2412 5y ago
  Not OP, but let me present my opinion. Interest rates have been on a downward trend for the past few decades. This is a new thing, that has not happened before. The Fed seem hell bent on making sure that there are no deflationary recessions anymore, and i think that is the true cause of the long term decline in interest rates. One of the results of this trend is the hyper growth in asset prices. Reduced interest rates dictate a reduced time value of money, and higher valuations. This rewards the owner class with increased wealth, and doesn't do anything (and well actually harms) the rentee class, which pays the same rent for a home. The problem is that this is not sustainable. I'm not sure if you agree, but we cannot keep decreasing interest rates forever. It would have to slow down and stop one day. What that means is that some future (or present) generation would not be rewarded with increased wealth that past generations have enjoyed. Essentially in order to fight deflation, the Fed has borrowed immensely from the future to openly gift wealth to the present, making the future less rosy.
  - SantalBlush 5y ago
    I agree with most of what you say here, but in spite of the shortcomings of the Fed, I'm not convinced that its entire existence is problematic. I just think it shouldn't have lowered interest rates so aggressively for so long.
    - cinquemb 5y ago
      Either way, whether one think their existence is problematic or not, to me, it does seem like the federal reserve system and CB's in general, are in the process of "jumping the shark" wrt to CBDC's… they are already behind. Like you acknowledged in another comment, most money created now is through private banks lending and exchanging future cash flows with one another (some subset of which are also the private share holders of the different FRB's in the US), and arguably this is the system being threatened now with new crypto entrants (uncollateralized lending in defi is just getting started, stable coin fixed income is just getting started, uncollateralized and decentralized stablecoins are also on the horizon, etc) and increasingly looking to attract fixed income cashflows from tradfi (i.e TBTF banks who have been publicly outspoken against crypto for years, being forced by some of their HNW/institutional clients to get exposure), who are solving the lack of trust and market structure issues between counterparties without the regulatory overhead (which in practice is used to serve the primary dealer banks interests, so self-serving just like any other random defi protocol at its worse).

bin_bash 5y ago

> Just because we haven't experienced a black-swan event doesn't mean that it's not possible. That’s going to be true for any kind of economic system. No reasonable person would argue that a black swan event wouldn’t be possible.

coralreef 5y ago
The more complexity introduced into a system, the more likely the event of failure. This is true for airplanes, fission reactors, and monetary systems. Humans are the ultimate complexity, and indeed central banking relies on the decision making of a powerful few. Will the interest rate go up or down? Will a flood of money buy bonds and mortgages? Those decisions are made for us.

SantalBlush 5y ago

These issues, like "it almost breaks physics" and "it breaks the social contract," are pretty vague.

coralreef 5y ago
If I was able to create new energy out of nowhere in my bare hands, you would be astounded. Of course this is not possible. Energy must come from somewhere else. When you create new money, you have seemingly "new energy" in your hands, except the value of that "new money" came from everyone else's money, the existing base. Their money became worth less (inflation). The government is constantly creating more money, which is why we consistently have inflation year after year. They do it in the name of stimulating the economy. They've done it so much, that many governments now have 0 or negative interest rates on their bonds. This is when things start getting very confusing, because saving money should yield you a positive return. Your savings account should pay you interest, but instead you pay the bank to store your money (doesn't actually happen at the retail level, banks eat the cost to keep you in their business). The "social contract" aspect is that if you want something, you ask for it. Raise taxes? Lower taxes? At least there is representation at some level with a vote. Going to war in Iraq? Needs congressional and senate approval. Creating $100b of money you don't have and buying government bonds every month? Fed does this, and nobody blinks.
- SantalBlush 5y ago
  I'm aware of how money works, and it is nothing like energy. This analogy doesn't work at all. Money is not the same thing as economic output; it just divides that economic output. The explanation here about "new energy" is quasi intellectual gibberish. Moreover, most monetary expansion is caused by private banks through lending; they don't need a central bank to do this. The central bank uses tools like reserve requirements and bond purchases/sales to raise and lower the money supply in response to macroeconomic trends. Without a central bank, the money supply can still be expanded.
  - NoItsznot 5y ago
    Registered just to comment I found the energy explanation of money very insightful. Not sure who you are or why you get to be a judge of intellect but that sentiment was not quasi intellectual gibberish, it was actually a highly nuanced and great visual representation of how money flows and is used. Stop gate keeping.
  - coralreef 5y ago
    > Money is not the same thing as economic output; it just divides that economic output. The explanation here about "new energy" is quasi intellectual gibberish. Money stores the value of that economic output. We used to use gold as money because it was hard to inflate. No one can create gold without doing work, therefore it evolved over time to be valuable because of its rarity. That makes it a strong store of value over time, unlike say apples or oil, which would be poor money. Fiat currency can be created without work; it is not rare, you are at the whims of whoever has the power to create it. If you had to store value over 100 years, you would not keep it in cash or bonds. You'd buy land, gold, or possibly stocks, because those things are much harder to create. > Moreover, most monetary expansion is caused by private banks through lending; they don't need a central bank to do this. The central bank uses tools like reserve requirements and bond purchases/sales to raise and lower the money supply in response to macroeconomic trends. Without a central bank, the money supply can still be expanded. Private banks implement whatever the central bank tells them. Who sets the interest rate? Does a lower interest rate increase private lending or decrease it? Why can't private banks hold 0% in fractional reserve?
legolas2412 5y ago
Not OP, but let me present my opinion. Interest rates have been on a downward trend for the past few decades. This is a new thing, that has not happened before. The Fed seem hell bent on making sure that there are no deflationary recessions anymore, and i think that is the true cause of the long term decline in interest rates. One of the results of this trend is the hyper growth in asset prices. Reduced interest rates dictate a reduced time value of money, and higher valuations. This rewards the owner class with increased wealth, and doesn't do anything (and well actually harms) the rentee class, which pays the same rent for a home. The problem is that this is not sustainable. I'm not sure if you agree, but we cannot keep decreasing interest rates forever. It would have to slow down and stop one day. What that means is that some future (or present) generation would not be rewarded with increased wealth that past generations have enjoyed. Essentially in order to fight deflation, the Fed has borrowed immensely from the future to openly gift wealth to the present, making the future less rosy.
- SantalBlush 5y ago
  I agree with most of what you say here, but in spite of the shortcomings of the Fed, I'm not convinced that its entire existence is problematic. I just think it shouldn't have lowered interest rates so aggressively for so long.
  - cinquemb 5y ago
    Either way, whether one think their existence is problematic or not, to me, it does seem like the federal reserve system and CB's in general, are in the process of "jumping the shark" wrt to CBDC's… they are already behind. Like you acknowledged in another comment, most money created now is through private banks lending and exchanging future cash flows with one another (some subset of which are also the private share holders of the different FRB's in the US), and arguably this is the system being threatened now with new crypto entrants (uncollateralized lending in defi is just getting started, stable coin fixed income is just getting started, uncollateralized and decentralized stablecoins are also on the horizon, etc) and increasingly looking to attract fixed income cashflows from tradfi (i.e TBTF banks who have been publicly outspoken against crypto for years, being forced by some of their HNW/institutional clients to get exposure), who are solving the lack of trust and market structure issues between counterparties without the regulatory overhead (which in practice is used to serve the primary dealer banks interests, so self-serving just like any other random defi protocol at its worse).