5 ms·

The thought has crossed my mind that the answer is, it is impossible to have a long-term gold-backed system (or any other commodity), for all the various reason

by jerf 5y ago

The thought has crossed my mind that the answer is, it is impossible to have a long-term gold-backed system (or any other commodity), for all the various reasons that doesn't work, and it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency. There is no guarantee that there is a long-term stable monetary system, after all. They may form a bistable pair together. Proponents of either state can easily read history as vindicating their claims that one or the other is superior, because look at how often the other failed, but I submit that if history vindicates anything at all it may actually be this position.

alexb_ 5y ago
> it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency. And this is why the US government isn't directly involved in the process, nor is it given the power to print money arbitrarily. Money is "printed" via a combination of loans and fractional reserve banking, and banks are incentivized to figure out the optimal interest rate to both produce the most amount of money for themselves while keeping a stable currency.
- laurencerowe 5y ago
  Aren’t interest rates set by the Fed? Banks then charge a rate based on the Fed base rate + risk premium.
  - alexb_ 5y ago
    The fed is largely controlled by the Federal Reserve banks, which are independent entities and are run as private businesses.
- throw0101a 5y ago
  > Money is "printed" via a combination of loans and fractional reserve banking Fractional reserve banking is not a thing. Tobin called that "The Old View" in 1963: * https://cowles.yale.edu/sites/default/files/files/pub/d01/d0159.pdf https://cowles.yale.edu/sites/default/files/files/pub/d01/d0... It is a convenient crutch to get a '101' level understanding, but people end up continue to think it's real and so the teaching of money multiplier should really be stopped: * https://research.stlouisfed.org/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier https://research.stlouisfed.org/publications/page1-econ/2021... Several countries haven't even had reserve requirements for decades: * https://en.wikipedia.org/wiki/Reserve_requirement#Canada https://en.wikipedia.org/wiki/Reserve_requirement#Canada Roche published a good intro to how the modern monetary system works: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
  - deleted 5y ago
    [deleted]
eru 5y ago
You are portraying a false dichotomy here: Why would the government need to be involved in your currency at all (commodity based or otherwise)?
- notafraudster 5y ago
  Because the backing of a state provides a veneer of credibility to the currency that your own say-so doesn't. Like, barter economies built on trust still exist and if that's what you want, knock yourself out. But at some point you want to pin down how many chickens your bedroom dresser is worth, which means you need a token to represent a value, which means you need someone or something to provide backing for the trust placed in the tokens. Unless this is a coy way to argue we should replace our currency with crypto (in which case the controllers of the consensus mechanism and/or the person(s) who designed the particular algorithm for ensuring inflation/deflation/stability are the "government" just as surely as the Fed are the government in the real world)
  - eru 5y ago
    States actually have a very hard time giving credibility to their currency. You see, the problem is that governments are too powerful: they can not make promises that they can't break. In contrast, private companies have it much easier. They can use plain old contracts to bind themselves. Eg Amazon could issue physical notes and promise to redeem then in eg USD on demand. (Wal-Mart could issue tokens they promise to redeem in gold. Etc.) Amazon doesn't have to have one dollar on hand for each note they issue. As long as the overall balance sheet of Amazon is strong, they can sell assets to serve a sudden spike of redemption requests. (Historically, note-issuing banks in Scotland also had a tool to deal with situations where they were solvent but not liquid. The contracts that governed their notes gave them the option to delay redemption requests in return for paying a punitive interest rate. That way they could take a few days or weeks to liquidate assets as necessary.) Keep in mind that USD or gold or whatever provides the unit of account here, but not the backing. The notes would be (and historically were) backed by the whole balance sheet of the issuing banks. Scottish banks typically financed themselves with about 2/3 debt (bonds and deposits) and 1/3 equity. That's a rather thick equity cushion by today's standards, but it's what customers demanded. About crypto: if you really wanted to, Amazon could also denominate their notes in bitcoin. I don't think that's necessarily a good idea. (But I do think that _if_ bitcoin or crypto is going to ever become the underpinning of the global financial system, it will have to look a bit like what I just described.)
ItsMonkk 5y ago
I'm not so sure that this is true, but I do agree that as of this moment it is so. The key thing you are looking at is (capital goods at time 1 / currency at time 1 ) / (capital goods at time 2 / currency at time 2). Under a gold standard, mostly this means deflation with some periods during a gold rush rapidly going the other way. It becomes better to hoard gold and do nothing, and as you hoard the value rises further. This leads to economic stagnation because we don't actually encourage innovation. Under a Fiat currency scheme, the reverse happens. The value of the currency is constantly dropping. So what you see is people hoarding capital goods. What makes this worse is that we are incorrectly treating land as a capital good. So this is what we see today, people buy shares or land, that value appreciates as the money is printed, and they earned nothing. And as people learn of this, we get crazy things like 401k's that invest in everything in order to grab a piece of this appreciation. We get crazy things like companies taking out bonds, then using those bonds to buy their stock, never actually using it to become more productive, because productivity doesn't pay. More economic stagnation. If this rate is changing over time, we get speculation. We get rent-seeking. But if we were to introduce a system that forced this rate to never change, we could get through. Of course, the leading power would never allow that, because it's the leading power that is speculating on the assets that are appreciating.
- chii 5y ago
  > So what you see is people hoarding capital goods. owning capital goods isn't hoarding, since that implies you are not making use of it (like a squirrel would "hoard" nuts, which over time would rot). Capital goods are doing something productive - or the capital is misallocated and is losing you money. Too much misallocation would indeed cause problems, but every owner of capital is incentivized to allocate their capital to the highest returning task they can accept a risk for. Those who do not own capital will sell their labour. Any excess they earn apart from their sustenance would be spent on acquiring capital. In this way, everyone who produce more than they consume would accumulate capital, and partake in the economic growth. As for why land is treated as capital good - land is required for a lot of things, and the properties of land is not any different from any other capital good. The problem may be that there are some gov't interventions on land use that prevent it from being used for the most productive purpose - this should be corrected, but i have no idea how as vested interests are preventing it from happening.

by jerf 5y ago

alexb_ 5y ago

> it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency. And this is why the US government isn't directly involved in the process, nor is it given the power to print money arbitrarily. Money is "printed" via a combination of loans and fractional reserve banking, and banks are incentivized to figure out the optimal interest rate to both produce the most amount of money for themselves while keeping a stable currency.

laurencerowe 5y ago
Aren’t interest rates set by the Fed? Banks then charge a rate based on the Fed base rate + risk premium.
- alexb_ 5y ago
  The fed is largely controlled by the Federal Reserve banks, which are independent entities and are run as private businesses.
throw0101a 5y ago
> Money is "printed" via a combination of loans and fractional reserve banking Fractional reserve banking is not a thing. Tobin called that "The Old View" in 1963: * https://cowles.yale.edu/sites/default/files/files/pub/d01/d0159.pdf https://cowles.yale.edu/sites/default/files/files/pub/d01/d0... It is a convenient crutch to get a '101' level understanding, but people end up continue to think it's real and so the teaching of money multiplier should really be stopped: * https://research.stlouisfed.org/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier https://research.stlouisfed.org/publications/page1-econ/2021... Several countries haven't even had reserve requirements for decades: * https://en.wikipedia.org/wiki/Reserve_requirement#Canada https://en.wikipedia.org/wiki/Reserve_requirement#Canada Roche published a good intro to how the modern monetary system works: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
- deleted 5y ago
  [deleted]

eru 5y ago

You are portraying a false dichotomy here: Why would the government need to be involved in your currency at all (commodity based or otherwise)?

notafraudster 5y ago
Because the backing of a state provides a veneer of credibility to the currency that your own say-so doesn't. Like, barter economies built on trust still exist and if that's what you want, knock yourself out. But at some point you want to pin down how many chickens your bedroom dresser is worth, which means you need a token to represent a value, which means you need someone or something to provide backing for the trust placed in the tokens. Unless this is a coy way to argue we should replace our currency with crypto (in which case the controllers of the consensus mechanism and/or the person(s) who designed the particular algorithm for ensuring inflation/deflation/stability are the "government" just as surely as the Fed are the government in the real world)
- eru 5y ago
  States actually have a very hard time giving credibility to their currency. You see, the problem is that governments are too powerful: they can not make promises that they can't break. In contrast, private companies have it much easier. They can use plain old contracts to bind themselves. Eg Amazon could issue physical notes and promise to redeem then in eg USD on demand. (Wal-Mart could issue tokens they promise to redeem in gold. Etc.) Amazon doesn't have to have one dollar on hand for each note they issue. As long as the overall balance sheet of Amazon is strong, they can sell assets to serve a sudden spike of redemption requests. (Historically, note-issuing banks in Scotland also had a tool to deal with situations where they were solvent but not liquid. The contracts that governed their notes gave them the option to delay redemption requests in return for paying a punitive interest rate. That way they could take a few days or weeks to liquidate assets as necessary.) Keep in mind that USD or gold or whatever provides the unit of account here, but not the backing. The notes would be (and historically were) backed by the whole balance sheet of the issuing banks. Scottish banks typically financed themselves with about 2/3 debt (bonds and deposits) and 1/3 equity. That's a rather thick equity cushion by today's standards, but it's what customers demanded. About crypto: if you really wanted to, Amazon could also denominate their notes in bitcoin. I don't think that's necessarily a good idea. (But I do think that _if_ bitcoin or crypto is going to ever become the underpinning of the global financial system, it will have to look a bit like what I just described.)

ItsMonkk 5y ago

I'm not so sure that this is true, but I do agree that as of this moment it is so. The key thing you are looking at is (capital goods at time 1 / currency at time 1 ) / (capital goods at time 2 / currency at time 2). Under a gold standard, mostly this means deflation with some periods during a gold rush rapidly going the other way. It becomes better to hoard gold and do nothing, and as you hoard the value rises further. This leads to economic stagnation because we don't actually encourage innovation. Under a Fiat currency scheme, the reverse happens. The value of the currency is constantly dropping. So what you see is people hoarding capital goods. What makes this worse is that we are incorrectly treating land as a capital good. So this is what we see today, people buy shares or land, that value appreciates as the money is printed, and they earned nothing. And as people learn of this, we get crazy things like 401k's that invest in everything in order to grab a piece of this appreciation. We get crazy things like companies taking out bonds, then using those bonds to buy their stock, never actually using it to become more productive, because productivity doesn't pay. More economic stagnation. If this rate is changing over time, we get speculation. We get rent-seeking. But if we were to introduce a system that forced this rate to never change, we could get through. Of course, the leading power would never allow that, because it's the leading power that is speculating on the assets that are appreciating.

chii 5y ago
> So what you see is people hoarding capital goods. owning capital goods isn't hoarding, since that implies you are not making use of it (like a squirrel would "hoard" nuts, which over time would rot). Capital goods are doing something productive - or the capital is misallocated and is losing you money. Too much misallocation would indeed cause problems, but every owner of capital is incentivized to allocate their capital to the highest returning task they can accept a risk for. Those who do not own capital will sell their labour. Any excess they earn apart from their sustenance would be spent on acquiring capital. In this way, everyone who produce more than they consume would accumulate capital, and partake in the economic growth. As for why land is treated as capital good - land is required for a lot of things, and the properties of land is not any different from any other capital good. The problem may be that there are some gov't interventions on land use that prevent it from being used for the most productive purpose - this should be corrected, but i have no idea how as vested interests are preventing it from happening.