10 ms·

A little secret that will make the world fall apart

89 points by soundsop 18y ago

dylanz 18y ago
Great synopsis. Who grows food anyhow? Most people have lost this skill, and it's pushed over to "specialists (farmers)". Have you ever tried eating money for lunch? It tastes horrible.
DenisM 18y ago
The dollar is backed by taxing power of the US government - there are 300 million people who must pay taxes to US gov and the latter only accepts dollars. These 300m people will do anything to stay out of jail so they will trade whatever they have for dollars, thus insuring continuous demand year after year. Money is not worthless.
- mjnaus 18y ago
  What you just said means absolutely nothing: "backed by the taxing power of the US government". First and far most, when everybody comes running to the US government to cash in on their dollars, there is no taxing power between heaven and earth powerful enough to satisfy all the creditors. And what do you imagine the government paying them with? For regular folks your statement is even more airy; when they start to figure out that their precious greenback has nowhere to go but down; are they gonna call their local representatives and ask them to change the dollars into gold (oops, no can't do, no more gold standard!) or euros/yen/whatever? Face it; the dollar is backed by NOTHING! And thank god most people don't realize this because we would be in a much deeper hole then we are now.
  - pg 18y ago
    Have you acted on these convictions you seem to feel so strongly? Have you e.g. bought options to buy gold in the future at a price much higher than the present one?
    - mjnaus 18y ago
      Yes, I have. I have placed certain bets against the dollar. There is not a single doubt in my mind that the dollar will keep loosing it's value - with some minor exceptions in the short term. With all the billions of fresh created money (created out of thin air) being pumped into the US economy at the moment, the real devaluation of the dollar will pick up speed.
      - pg 18y ago
        Interesting; what kind of bets?
        mjnaus 18y ago
        Next to buying small amounts of gold and silver, I have made a couple of lucrative forex transaction. Since I receive my income in euros in Europe and live in Thailand (baht rate is connected to the dollar), I have been able to increase my income quite a bit when the dollar hits new lows.
        yters 18y ago
        I'm probably missing something. If the dollar is worthless because it isn't backed by real goods, why are gold and silver valuable? Just because of common consent, i.e. most throughout history have considered gold and silver to be exchangeable for goods? If that's your reasoning, then the same applies to the dollar, except on a lesser scale.
        gaius 18y ago
        Well, quite. Tell that to Gordon Brown who flogged off the UK's gold reserves at 1/3 of the current price (he even announced weeks in advance that he was planning to dump a load of gold on the market which further drove down the price).
        mjnaus 18y ago
        Common consent doesn't have much to do with the real value of precious metals. The reason why gold and silver are "valuable" and the dollar is not, lies in the fact that gold and silver can not be created "out of thin air". This was exactly the reason why, in better days, currency was backed by gold or silver, thus transferring the intrinsic value of precious metals onto the currency.
  - utnick 18y ago
    Is gold really any less arbitrary than paper money? Couldn't advances in technology create cheap alternatives to gold that would destroy its value?
    - likpok 18y ago
      Indeed. This is the point that gold-standard people don't seem to get. Gold is just as arbitrary as anything else. More so, even, because it is absolutely /useless/ in any aspect except as a valuable. It's too soft to do anything with. Furthermore, it has issues with being a finite supply that is occasionally moved around (no control over the monetary supply). Steel. Now /that's/ what we should back our money with. Everybody needs steel. At least until carbon nanotubes get popular...
      - mjnaus 18y ago
        It is actually its finite amounts that make it valuable. Anything that can be produced at will not hold up as a currency.
        potatolicious 18y ago
        But we do create more of it (or dig it out of the ground and refine it, as it were), there's simply a practically finite rate at which we can grow the gold supply. So the value of gold should in fact deflate over time, as we produce more and more of it.
        mjnaus 18y ago
        No, we don't. No matter how you look at this, gold is not "created". Cold is extracted from gold mines, the only thing humans can do it try to find, but they simply can not create it. Key here is that the total amount of gold on this planet is finite - not the production or extraction rate - making it truly valuable. Same thing applies to other natural resources such as oil, natural gas and diamonds.
        18y ago
  - jerf 18y ago
    'What you just said means absolutely nothing: "backed by the taxing power of the US government".' Money is recursive. The US government's acceptance of dollars is the base case. The US Military, Police, and various other force-directing agencies are the induction step. It isn't entirely worthless, nor is its worth entirely intrinsic. It lives in the middle. Glib generalizations that put it on one end or the other are wrong.
    - mjnaus 18y ago
      I never stated that the dollar would be completely worthless, I only stated that it's backed by absolutely nothing. For all the same reasons, it does not matter that the US government accepts dollars. It matters what you will get back for those dollars. When, if ever, people will come to collect en masse, the US government will have no means what so ever to pay of those creditors, in other words, the government becomes insolvent and the dollar plunges.
      - bokonist 18y ago
        Currencies do not need to be backed by anything. They are simply intermediary goods, valuable because of a coordination game. There is no "collecting in mass". The dollar is the final good. The U.S. has no debts outstanding in anything other than dollars ( which is quite a nice situation to be in).
        mjnaus 18y ago
        In my world, goods and services I purchase are the final goods, not the money I need to purchase them. About "collecting en masse", I guess time will tell. You might be right, for those holding large amounts of dollars (China for example) a "run on the US government" would be a bad thing, they're better off unloading their less valuable currency gradually and exchanging them for something with intrinsic value such as gold and silver. And in the mean time, the dollar will keep on loosing it's value.
      - eru 18y ago
        When the creditors come, they will get back what they have borrowed: Dollars. Why should that be a problem? Remember: The US is indebted primarily in Dollars. Not in cars, gold or Euros. They can not go bankrupt for lack of their their own currency.
  - Xichekolas 18y ago
    Actually what he described is the basis for Fiat money systems everywhere. As long as the government demands that all entities doing business pay a tax in dollars, the dollars will be worth something to those entities. (It's worth freedom to do business.) From Wikipedia: http://en.wikipedia.org/wiki/Fiat_currency http://en.wikipedia.org/wiki/Fiat_currency The unifying feature of all fiat money is its (typically exclusive) acceptability to the government for payment of taxes. And yet again: http://www.absoluteastronomy.com/topics/Fiat_currency http://www.absoluteastronomy.com/topics/Fiat_currency Therefore the integrity of the financial system requires that there be a different ultimate form of backing, such as the acceptability of the fiat currency in payment of tax.
  - DenisM 18y ago
    You missed my point: US citizens will always accept your dollars because they want to stay out of jail. This means they will give up whatever they have and give it to you. The entire sum of non-dollar poessions(goods and labor) of all US citizens are backing US dollar.
- pg 18y ago
  More generally, you can/have to use dollars for any transaction with the government. E.g. buying oil leases, grazing rights, etc.
  - mhartl 18y ago
    And this applies not just to transactions with the government, but to any (U.S.) transactions whatsoever. You can see evidence of this on every dollar bill: "This note is legal tender for all debts, public and private [emphasis added]". It's illegal to refuse dollars, even for private debts. Threatening people with imprisonment to force them to accept dollars should seem fishy, though, and it's a hint that there's something rotten about fiat currency. Unlike commodity money, whose supply is limited by physical scarcity, fiat money can be expanded without limit, and the result is both sad and predictable. Consider: (1) monetary expansion benefits debtors, who can repay debt in inflated dollars; (2) U.S. monetary policy is set by the Federal Reserve, whose officials are appointed by the U.S. Federal Government; (3) the U.S. Federal Government is the world's largest debtor. It doesn't take a rocket scientist to figure out what is going to happen in this scenario.
    - DenisM 18y ago
      While no one can legally refuse dollars to settle debt, it's perfectly legal to refuse any other dollar transaction. If I trade my chickens for fish and fish only there is nothing illegal about this.
- jhancock 18y ago
  if you do not make any money, your tax is zero. therefore, no jail time and no need for dollars.
  - bokonist 18y ago
    If you do not make money, you starve. Also, it's not just taxes - there are tens of trillions of dollars of outstanding dollar denominated debt. Millions of people and corporations have contractual obligations to deliver dollars. If they renege on those obligations, their creditors will seize very real assets (buildings, houses, etc).
    - jhancock 18y ago
      no one that participates in this forum is in danger of starving due to lack of income. you could make zero money in the next year and not starve. someone will feed you. it is also highly improbable that anyone that reads HN would find themselves without a roof over their head by making zero dollars within the next year. these fears are highly overrated. the fears are real for others. and to build an economy around solving these problems is interesting.
      - bokonist 18y ago
        Stop being pedantic. At some point everyone must trade their labor for goods other people produce. This transaction incurs taxes that you must pay in dollars, or you go to jail.
        jhancock 18y ago
        not pedantic at all. I have not made a net income to be taxed in years (yes local governments have profited from transactional taxes; sales taxes). As a consequence, I have not starved to death (obviously) and am not writing this post from jail. However, I have provided much value to my community in terms of goods and services. If you were to come to my community and ask about me, you will find many that value my contributions to our local society. I believe now is a great time to think about alternate economies instead of holding steadfast to rules that govern the current domain.
- corentin 18y ago
  I think you may be confusing two things here. The federal debt indeed is backed by the taxing power of the US government. That is, if you lend it 100 dollars today, you can have some confidence that you will get them back plus interests in the future. But the dollar isn't backed by much; it's backed by trust, which itself depends on the acts of the Fed (i.e. it really depends on what the Fed does). If you can buy two widgets for 100 dollars today, you don't have much confidence that you'll be able to buy them in the future. In either case, there's nothing to guarantee your purchasing power. With gold, your purchasing power isn't 100% protected either (because new gold is digged every day) but at least you're much safer from arbitrarily high inflation. But you are obviously correct when you say that money isn't worthless.
- cellis 18y ago
  If you really want to know what the dollar is backed by, you should read Confessions of an Economic Hitman.Yes, some may take what was said in the book for hyperbole, but i firmly believe that the dollar is backed by the power of the U.S. Military.But what the dollar is backed by is irrelevant. Currency values will rise and fall with the general prevailing theories of economists;in the end all modern monetary systems are simply backed by the belief in the system.For the US dollar, that belief stems largely from the network effects of the dollar, as well as the relative ease of doing business and fair regulation in the U.S. Pearls to swine, people will continue to lose money shorting the dollar. Its like Microsoft...you can love it or hate it, but its not going away.
  - icefox 18y ago
    Well for the past year Microsoft stock has continued to slide down.
- helveticaman 18y ago
  I suspect the only kind of passive income that works is slavery.
yters 18y ago
There are two kinds of goods: consumable and capital. There are two kinds of capital: direct and indirect. Money is indirect capital, but it is still capital, as long as the financial infrastructure exists.
DenisM 18y ago
I entirely agree with the author's main point: there may simply be not enough important things to do to keep everyone busy If people only bought what's truly needed then only a tiny fraction of the world population would be employed. I for one am very glad that people keep inventing iPods and other stuff to keep everyone productively occupied.
- bsaunder 18y ago
  I think there are plenty of important things for people to do (automation, biotech, energy). Unfortunately, I think they are getting harder and harder to do (and ergo fewer and fewer people have the skills necessary to do them (retraining at the local community college, just won't do)). The other problem seems to be that they are longer term problems with much lower success rates. Businesses, and I get the feeling VCs, are focused on the sure thing with a high return in a short time period. I don't think "important things" fit in that group. Ultimately I think we will all be enjoying a lot more free time, but it think it will take a painful transition to a different social structure to get there.
- debt 18y ago
  Making useless clutter is not productive.
  - DenisM 18y ago
    By "productively occupied" I mean "people do something that they think is useful". This in contrast to watching TV where people are occupied but do not have illusion of doing anything. I believe this distinction is important to the well-being of those people and the community they are in - prolonged idleness has negative effects.
  - bwd 18y ago
    Who decides what is useless? If I compare the enjoyment that I receive from having an iPod and being able to listen to any song I own at pretty much any time I feel like it against the amount of labor that I performed in order to acquire it, I feel like I came away with a pretty good deal. I expect that there is an item or an experience that you value which could only be purchased with labor via money that I would consider useless. That is the whole point of having markets, so that people can make their own decisions about what is and isn't useful to them.
lionhearted 18y ago
I believed this when I was younger, but now I've amended my position. Paper money isn't worthless - it has no inherent value, which is true. But if we all agree upon it as a means of exchange and set fair rules on how it's made and spread, then we're good. The issue isn't with paper money, it's with making the rules excessively complicated or unfair, or just outright breaking the money rules. Paper money is conducive to that though - any currency specialists have an idea for creating a better way? I've always wondered about a private (non-government) diversified commodities-backed currency floating against international currencies, with liquid electronic and paper notes - and simple yet rigid rules and governance on how to absorb new purchases into the system and buy assets with it, and what reserves to keep for people cashing out. This is one of those things I sit and think about, but I reckon it'd be hard to do. Thoughts?
- Raphael 18y ago
  Sounds good. A penny mutual fund with zero commission trades could be a good alternative to traditional money.
- bokonist 18y ago
  You would need to back up the currency with commodities that have 1) minuscule storage costs and 2) a very high stocks to flow ratio. Also, all commodities used must have identical stocks to flow ratio, or the pricing between the commodities will be very unstable. As a result, using a single commodity is ideal. As luck has it, such a currency exists. Simply log into your brokerage account and buy the GLD ETF. It's only been around for four years, it will be very interesting to see how it does versus the dollar in the long term. If I was a Fed chairman, I would be worried.
- DenisM 18y ago
  my thought is: "counterparty risk".
ken 18y ago
While I usually don't think of it in such terms, I've found a good litmus test for me is whether, if I was Phil Connors, something would be of any use to me. Anything that Phil would lose at night, it's possible for anyone to lose, and thus I probably will lose it at some point. My activities tend towards acquiring knowledge, universal skills, and doing things that scare me. A couple of businesspeople have explained to me that every part of building a business is about reducing risk. They talk about diversification, but then only apply it to money. As personal investments go, money (in any form) looks like one of the riskiest! It's much harder to forget a foreign language, or how to play a musical instrument, than it is to lose money. I'm trying to reduce risk by diversifying my assets to the point where money is a relatively small portion. After all, the happiest people I know don't tend to be those with the most money.
bokonist 18y ago
Mencius Moldbug describes it best: "Money is the bubble that doesn’t need to pop. As long as there is demand for indirect exchange, at least one asset will be stockpiled by hoarders, hence experience demand that is not a consequence of any direct utility, hence be overvalued. As long as the storage cost for this asset is zero and the supply in existence is fixed, you have a perfect Nash equilibrium - using any other asset as a medium of indirect exchange provides no advantage, and runs the risk of buying into a bubble which will subsequently pop as punters revert back to the stable standard." (source: http://www.interfluidity.com/posts/1233118501.shtml http://www.interfluidity.com/posts/1233118501.shtml) The story of the past ten years is that people started trading dollars for substitute stores of value ( houses, stocks, oil futures, etc). But those substitutes were not stable Nash equilibriums. In the long run, supply of housing is elastic and bubble prices cannot be sustained. Prices crashed, and people rushed back to using dollars as a store of value. When demand for dollars increases, it becomes harder to trade goods and labor for dollars, so the price of goods and labor in dollars decreases ( deflation). However, employment contracts and debts are denominated assuming a higher price level. Thus businesses are unable to meet payroll and pay creditors. Businesses fire workers or go out of business. That's the stage we are at now. The solution is to simply renominate the currency by mailing everyone checks, in order to restore/maintain the 2007 price level. This eliminates the frictional problem without creating massive transfers of resources from the private sector to the government.
- eru 18y ago
  Nice theory. Though the existence of other currencies complicates the picture.
ewiethoff 18y ago
"[T]here may simply be not enough important things to do to keep everyone busy." More and more these past few years I think of a favorite old science fiction story by Frederik Pohl called "The Midas Plague." All production is done by robots. Production has become so, uh, productive that humans spend all their effort just wearing out everything made by the robots. "Poor" people must live in giant mansions with several robots and wear out more stuff than "well-to-do" people, who live in small cottages with few to no robots and enjoy leisurely, intellectual and social pursuits. Comically (or tragically), it's illegal to get a robot to wear something out for you. I think I'll reread it today.
- ewiethoff 18y ago
  Addendum (since I can no longer edit): I reread the story. Never mind the above reference to illegality.
  - gdee 18y ago
    Totally OT but I'll try. You don't also happen to know the name of a SF novel about some project Australia. Somewhat resemblant to what you describe. Physical work unneeded, robots doing everything, energy problem solved, people VR'ing with some spinal implants. Whole thing started as a corp. venture witch sold stocks at a dollar the unit?
deleted 18y ago
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pshc 18y ago
Man, Hacker News is full of UW students, eh? I see people reading it in class all the time, this article is just more evidence...
myth_drannon 18y ago
Larry Smith is amazing guy, he is a legend in UW. Although he is an economist, he is particularly fond of computer science nerds :) and encourages them to be bold and creative. See one of his lectures called "Creating Killer Applications" http://csclub.uwaterloo.ca/media/Larry%20Smith:%20Creating%20Killer%20Applications http://csclub.uwaterloo.ca/media/Larry%20Smith:%20Creating%2...
known 18y ago
3 years back I realized that I am also directly are indirectly responsible for poverty in the world.
- Devilboy 18y ago
  you bastard
edu 18y ago
money is not useless, simply it's more comfortable to carry and trade with a set of coins/papers than a cow.
known 18y ago
I petitioned govt to give rice freely to people Below Poverty Line (BPL), an economic indicator of standard of living, used in India. Since rice is Indians staple food, I assumed that it will have a cascading effect on remaining food items and will help in reducing their prices and inflation. But to my surprise BPL people started buying exotic products and services with the money saved because of free rice.
- anamax 18y ago
  > But to my surprise BPL people started buying exotic products and services with the money saved because of free rice. Did this experience teach you that you really don't know much about human behavior and should stay away from activities where such knowledge is important? Or, did you double down and keep at it, perhaps with "I'm a good person so what I want is good."?
  - known 18y ago
    I'd say both wrt http://en.wikipedia.org/wiki/Perverse_incentive http://en.wikipedia.org/wiki/Perverse_incentive
Jem 18y ago
If you liked this post, you'd enjoy Terry Pratchett's Making Money.
nihilocrat 18y ago
But oh no! My job was producing those useless goods and services! And if people don't buy my useless goods and services, I won't be able to make money, which means I won't be able to buy food, which means I'll starve! PLEASE, SOMEONE, STIMULATE THE ECONOMY SO I DON'T STARVE! The depressing thing about the great depression of the 1930s, as well as the current potential one, is that there may simply be not enough important things to do to keep everyone busy. This seems to be the entire premise of the society present in "A Brave New World".
raheemm 18y ago
The US dollar gets some of its value from the awesome US military. Worse comes to worse, we can take stuff from others regardless of how poor we are. Its a self-destructive mode of operation and would be used as a means of last resort. (North Korea is an extreme example - the world pays them not to go crazy with their nukes) A more positive source of the dollar's strength is the US economy and its resourcefulness and innovation (ie hackers:)
gills 18y ago
Despite this being sort of a doomer rant, I really got a chuckle from the snarky bit at the end: "I mean, we can't just give people food for free. That would be ridiculous."
Allocator2008 18y ago
Everyone in this forum is stupider for having read this. I award you no points, and may God have mercy on your soul.
redsymbol 18y ago
I'm almost done reading "The Creature from Jekyll Island", by Griffin. Having had little background in finance or economics, much of what's been happening in the financial markets the past several years was just a mystery to me, and about a year ago I decided I wanted to understand how it worked. CFJI has helped quite a bit. It's not an easy read, even though it's well written, simply due to the subject matter (I had to read ch. 10 three times). It nevertheless does a great job of explaining how modern fiat currency systems work, and the mechanisms used by nations' central banks today.
deleted 18y ago
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89 points by soundsop 18y ago

Great synopsis. Who grows food anyhow? Most people have lost this skill, and it's pushed over to "specialists (farmers)". Have you ever tried eating money for lunch? It tastes horrible.

DenisM 18y ago

The dollar is backed by taxing power of the US government - there are 300 million people who must pay taxes to US gov and the latter only accepts dollars. These 300m people will do anything to stay out of jail so they will trade whatever they have for dollars, thus insuring continuous demand year after year. Money is not worthless.

mjnaus 18y ago
What you just said means absolutely nothing: "backed by the taxing power of the US government". First and far most, when everybody comes running to the US government to cash in on their dollars, there is no taxing power between heaven and earth powerful enough to satisfy all the creditors. And what do you imagine the government paying them with? For regular folks your statement is even more airy; when they start to figure out that their precious greenback has nowhere to go but down; are they gonna call their local representatives and ask them to change the dollars into gold (oops, no can't do, no more gold standard!) or euros/yen/whatever? Face it; the dollar is backed by NOTHING! And thank god most people don't realize this because we would be in a much deeper hole then we are now.
- pg 18y ago
  Have you acted on these convictions you seem to feel so strongly? Have you e.g. bought options to buy gold in the future at a price much higher than the present one?
  - mjnaus 18y ago
    Yes, I have. I have placed certain bets against the dollar. There is not a single doubt in my mind that the dollar will keep loosing it's value - with some minor exceptions in the short term. With all the billions of fresh created money (created out of thin air) being pumped into the US economy at the moment, the real devaluation of the dollar will pick up speed.
    - pg 18y ago
      Interesting; what kind of bets?
      - mjnaus 18y ago
        Next to buying small amounts of gold and silver, I have made a couple of lucrative forex transaction. Since I receive my income in euros in Europe and live in Thailand (baht rate is connected to the dollar), I have been able to increase my income quite a bit when the dollar hits new lows.
        yters 18y ago
        I'm probably missing something. If the dollar is worthless because it isn't backed by real goods, why are gold and silver valuable? Just because of common consent, i.e. most throughout history have considered gold and silver to be exchangeable for goods? If that's your reasoning, then the same applies to the dollar, except on a lesser scale.
        gaius 18y ago
        Well, quite. Tell that to Gordon Brown who flogged off the UK's gold reserves at 1/3 of the current price (he even announced weeks in advance that he was planning to dump a load of gold on the market which further drove down the price).
        mjnaus 18y ago
        Common consent doesn't have much to do with the real value of precious metals. The reason why gold and silver are "valuable" and the dollar is not, lies in the fact that gold and silver can not be created "out of thin air". This was exactly the reason why, in better days, currency was backed by gold or silver, thus transferring the intrinsic value of precious metals onto the currency.
- utnick 18y ago
  Is gold really any less arbitrary than paper money? Couldn't advances in technology create cheap alternatives to gold that would destroy its value?
  - likpok 18y ago
    Indeed. This is the point that gold-standard people don't seem to get. Gold is just as arbitrary as anything else. More so, even, because it is absolutely /useless/ in any aspect except as a valuable. It's too soft to do anything with. Furthermore, it has issues with being a finite supply that is occasionally moved around (no control over the monetary supply). Steel. Now /that's/ what we should back our money with. Everybody needs steel. At least until carbon nanotubes get popular...
    - mjnaus 18y ago
      It is actually its finite amounts that make it valuable. Anything that can be produced at will not hold up as a currency.
      - potatolicious 18y ago
        But we do create more of it (or dig it out of the ground and refine it, as it were), there's simply a practically finite rate at which we can grow the gold supply. So the value of gold should in fact deflate over time, as we produce more and more of it.
        mjnaus 18y ago
        No, we don't. No matter how you look at this, gold is not "created". Cold is extracted from gold mines, the only thing humans can do it try to find, but they simply can not create it. Key here is that the total amount of gold on this planet is finite - not the production or extraction rate - making it truly valuable. Same thing applies to other natural resources such as oil, natural gas and diamonds.
        18y ago
- jerf 18y ago
  'What you just said means absolutely nothing: "backed by the taxing power of the US government".' Money is recursive. The US government's acceptance of dollars is the base case. The US Military, Police, and various other force-directing agencies are the induction step. It isn't entirely worthless, nor is its worth entirely intrinsic. It lives in the middle. Glib generalizations that put it on one end or the other are wrong.
  - mjnaus 18y ago
    I never stated that the dollar would be completely worthless, I only stated that it's backed by absolutely nothing. For all the same reasons, it does not matter that the US government accepts dollars. It matters what you will get back for those dollars. When, if ever, people will come to collect en masse, the US government will have no means what so ever to pay of those creditors, in other words, the government becomes insolvent and the dollar plunges.
    - bokonist 18y ago
      Currencies do not need to be backed by anything. They are simply intermediary goods, valuable because of a coordination game. There is no "collecting in mass". The dollar is the final good. The U.S. has no debts outstanding in anything other than dollars ( which is quite a nice situation to be in).
      - mjnaus 18y ago
        In my world, goods and services I purchase are the final goods, not the money I need to purchase them. About "collecting en masse", I guess time will tell. You might be right, for those holding large amounts of dollars (China for example) a "run on the US government" would be a bad thing, they're better off unloading their less valuable currency gradually and exchanging them for something with intrinsic value such as gold and silver. And in the mean time, the dollar will keep on loosing it's value.
    - eru 18y ago
      When the creditors come, they will get back what they have borrowed: Dollars. Why should that be a problem? Remember: The US is indebted primarily in Dollars. Not in cars, gold or Euros. They can not go bankrupt for lack of their their own currency.
- Xichekolas 18y ago
  Actually what he described is the basis for Fiat money systems everywhere. As long as the government demands that all entities doing business pay a tax in dollars, the dollars will be worth something to those entities. (It's worth freedom to do business.) From Wikipedia: http://en.wikipedia.org/wiki/Fiat_currency http://en.wikipedia.org/wiki/Fiat_currency The unifying feature of all fiat money is its (typically exclusive) acceptability to the government for payment of taxes. And yet again: http://www.absoluteastronomy.com/topics/Fiat_currency http://www.absoluteastronomy.com/topics/Fiat_currency Therefore the integrity of the financial system requires that there be a different ultimate form of backing, such as the acceptability of the fiat currency in payment of tax.
- DenisM 18y ago
  You missed my point: US citizens will always accept your dollars because they want to stay out of jail. This means they will give up whatever they have and give it to you. The entire sum of non-dollar poessions(goods and labor) of all US citizens are backing US dollar.
pg 18y ago
More generally, you can/have to use dollars for any transaction with the government. E.g. buying oil leases, grazing rights, etc.
- mhartl 18y ago
  And this applies not just to transactions with the government, but to any (U.S.) transactions whatsoever. You can see evidence of this on every dollar bill: "This note is legal tender for all debts, public and private [emphasis added]". It's illegal to refuse dollars, even for private debts. Threatening people with imprisonment to force them to accept dollars should seem fishy, though, and it's a hint that there's something rotten about fiat currency. Unlike commodity money, whose supply is limited by physical scarcity, fiat money can be expanded without limit, and the result is both sad and predictable. Consider: (1) monetary expansion benefits debtors, who can repay debt in inflated dollars; (2) U.S. monetary policy is set by the Federal Reserve, whose officials are appointed by the U.S. Federal Government; (3) the U.S. Federal Government is the world's largest debtor. It doesn't take a rocket scientist to figure out what is going to happen in this scenario.
  - DenisM 18y ago
    While no one can legally refuse dollars to settle debt, it's perfectly legal to refuse any other dollar transaction. If I trade my chickens for fish and fish only there is nothing illegal about this.
jhancock 18y ago
if you do not make any money, your tax is zero. therefore, no jail time and no need for dollars.
- bokonist 18y ago
  If you do not make money, you starve. Also, it's not just taxes - there are tens of trillions of dollars of outstanding dollar denominated debt. Millions of people and corporations have contractual obligations to deliver dollars. If they renege on those obligations, their creditors will seize very real assets (buildings, houses, etc).
  - jhancock 18y ago
    no one that participates in this forum is in danger of starving due to lack of income. you could make zero money in the next year and not starve. someone will feed you. it is also highly improbable that anyone that reads HN would find themselves without a roof over their head by making zero dollars within the next year. these fears are highly overrated. the fears are real for others. and to build an economy around solving these problems is interesting.
    - bokonist 18y ago
      Stop being pedantic. At some point everyone must trade their labor for goods other people produce. This transaction incurs taxes that you must pay in dollars, or you go to jail.
      - jhancock 18y ago
        not pedantic at all. I have not made a net income to be taxed in years (yes local governments have profited from transactional taxes; sales taxes). As a consequence, I have not starved to death (obviously) and am not writing this post from jail. However, I have provided much value to my community in terms of goods and services. If you were to come to my community and ask about me, you will find many that value my contributions to our local society. I believe now is a great time to think about alternate economies instead of holding steadfast to rules that govern the current domain.
corentin 18y ago
I think you may be confusing two things here. The federal debt indeed is backed by the taxing power of the US government. That is, if you lend it 100 dollars today, you can have some confidence that you will get them back plus interests in the future. But the dollar isn't backed by much; it's backed by trust, which itself depends on the acts of the Fed (i.e. it really depends on what the Fed does). If you can buy two widgets for 100 dollars today, you don't have much confidence that you'll be able to buy them in the future. In either case, there's nothing to guarantee your purchasing power. With gold, your purchasing power isn't 100% protected either (because new gold is digged every day) but at least you're much safer from arbitrarily high inflation. But you are obviously correct when you say that money isn't worthless.
cellis 18y ago
If you really want to know what the dollar is backed by, you should read Confessions of an Economic Hitman.Yes, some may take what was said in the book for hyperbole, but i firmly believe that the dollar is backed by the power of the U.S. Military.But what the dollar is backed by is irrelevant. Currency values will rise and fall with the general prevailing theories of economists;in the end all modern monetary systems are simply backed by the belief in the system.For the US dollar, that belief stems largely from the network effects of the dollar, as well as the relative ease of doing business and fair regulation in the U.S. Pearls to swine, people will continue to lose money shorting the dollar. Its like Microsoft...you can love it or hate it, but its not going away.
- icefox 18y ago
  Well for the past year Microsoft stock has continued to slide down.
helveticaman 18y ago
I suspect the only kind of passive income that works is slavery.

yters 18y ago

There are two kinds of goods: consumable and capital. There are two kinds of capital: direct and indirect. Money is indirect capital, but it is still capital, as long as the financial infrastructure exists.

DenisM 18y ago

I entirely agree with the author's main point: there may simply be not enough important things to do to keep everyone busy If people only bought what's truly needed then only a tiny fraction of the world population would be employed. I for one am very glad that people keep inventing iPods and other stuff to keep everyone productively occupied.

bsaunder 18y ago
I think there are plenty of important things for people to do (automation, biotech, energy). Unfortunately, I think they are getting harder and harder to do (and ergo fewer and fewer people have the skills necessary to do them (retraining at the local community college, just won't do)). The other problem seems to be that they are longer term problems with much lower success rates. Businesses, and I get the feeling VCs, are focused on the sure thing with a high return in a short time period. I don't think "important things" fit in that group. Ultimately I think we will all be enjoying a lot more free time, but it think it will take a painful transition to a different social structure to get there.
debt 18y ago
Making useless clutter is not productive.
- DenisM 18y ago
  By "productively occupied" I mean "people do something that they think is useful". This in contrast to watching TV where people are occupied but do not have illusion of doing anything. I believe this distinction is important to the well-being of those people and the community they are in - prolonged idleness has negative effects.
- bwd 18y ago
  Who decides what is useless? If I compare the enjoyment that I receive from having an iPod and being able to listen to any song I own at pretty much any time I feel like it against the amount of labor that I performed in order to acquire it, I feel like I came away with a pretty good deal. I expect that there is an item or an experience that you value which could only be purchased with labor via money that I would consider useless. That is the whole point of having markets, so that people can make their own decisions about what is and isn't useful to them.

lionhearted 18y ago

I believed this when I was younger, but now I've amended my position. Paper money isn't worthless - it has no inherent value, which is true. But if we all agree upon it as a means of exchange and set fair rules on how it's made and spread, then we're good. The issue isn't with paper money, it's with making the rules excessively complicated or unfair, or just outright breaking the money rules. Paper money is conducive to that though - any currency specialists have an idea for creating a better way? I've always wondered about a private (non-government) diversified commodities-backed currency floating against international currencies, with liquid electronic and paper notes - and simple yet rigid rules and governance on how to absorb new purchases into the system and buy assets with it, and what reserves to keep for people cashing out. This is one of those things I sit and think about, but I reckon it'd be hard to do. Thoughts?

Raphael 18y ago
Sounds good. A penny mutual fund with zero commission trades could be a good alternative to traditional money.
bokonist 18y ago
You would need to back up the currency with commodities that have 1) minuscule storage costs and 2) a very high stocks to flow ratio. Also, all commodities used must have identical stocks to flow ratio, or the pricing between the commodities will be very unstable. As a result, using a single commodity is ideal. As luck has it, such a currency exists. Simply log into your brokerage account and buy the GLD ETF. It's only been around for four years, it will be very interesting to see how it does versus the dollar in the long term. If I was a Fed chairman, I would be worried.
DenisM 18y ago
my thought is: "counterparty risk".

ken 18y ago

While I usually don't think of it in such terms, I've found a good litmus test for me is whether, if I was Phil Connors, something would be of any use to me. Anything that Phil would lose at night, it's possible for anyone to lose, and thus I probably will lose it at some point. My activities tend towards acquiring knowledge, universal skills, and doing things that scare me. A couple of businesspeople have explained to me that every part of building a business is about reducing risk. They talk about diversification, but then only apply it to money. As personal investments go, money (in any form) looks like one of the riskiest! It's much harder to forget a foreign language, or how to play a musical instrument, than it is to lose money. I'm trying to reduce risk by diversifying my assets to the point where money is a relatively small portion. After all, the happiest people I know don't tend to be those with the most money.

bokonist 18y ago

Mencius Moldbug describes it best: "Money is the bubble that doesn’t need to pop. As long as there is demand for indirect exchange, at least one asset will be stockpiled by hoarders, hence experience demand that is not a consequence of any direct utility, hence be overvalued. As long as the storage cost for this asset is zero and the supply in existence is fixed, you have a perfect Nash equilibrium - using any other asset as a medium of indirect exchange provides no advantage, and runs the risk of buying into a bubble which will subsequently pop as punters revert back to the stable standard." (source: http://www.interfluidity.com/posts/1233118501.shtml http://www.interfluidity.com/posts/1233118501.shtml) The story of the past ten years is that people started trading dollars for substitute stores of value ( houses, stocks, oil futures, etc). But those substitutes were not stable Nash equilibriums. In the long run, supply of housing is elastic and bubble prices cannot be sustained. Prices crashed, and people rushed back to using dollars as a store of value. When demand for dollars increases, it becomes harder to trade goods and labor for dollars, so the price of goods and labor in dollars decreases ( deflation). However, employment contracts and debts are denominated assuming a higher price level. Thus businesses are unable to meet payroll and pay creditors. Businesses fire workers or go out of business. That's the stage we are at now. The solution is to simply renominate the currency by mailing everyone checks, in order to restore/maintain the 2007 price level. This eliminates the frictional problem without creating massive transfers of resources from the private sector to the government.

eru 18y ago
Nice theory. Though the existence of other currencies complicates the picture.

ewiethoff 18y ago

"[T]here may simply be not enough important things to do to keep everyone busy." More and more these past few years I think of a favorite old science fiction story by Frederik Pohl called "The Midas Plague." All production is done by robots. Production has become so, uh, productive that humans spend all their effort just wearing out everything made by the robots. "Poor" people must live in giant mansions with several robots and wear out more stuff than "well-to-do" people, who live in small cottages with few to no robots and enjoy leisurely, intellectual and social pursuits. Comically (or tragically), it's illegal to get a robot to wear something out for you. I think I'll reread it today.

ewiethoff 18y ago
Addendum (since I can no longer edit): I reread the story. Never mind the above reference to illegality.
- gdee 18y ago
  Totally OT but I'll try. You don't also happen to know the name of a SF novel about some project Australia. Somewhat resemblant to what you describe. Physical work unneeded, robots doing everything, energy problem solved, people VR'ing with some spinal implants. Whole thing started as a corp. venture witch sold stocks at a dollar the unit?

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pshc 18y ago

Man, Hacker News is full of UW students, eh? I see people reading it in class all the time, this article is just more evidence...

myth_drannon 18y ago

Larry Smith is amazing guy, he is a legend in UW. Although he is an economist, he is particularly fond of computer science nerds :) and encourages them to be bold and creative. See one of his lectures called "Creating Killer Applications" http://csclub.uwaterloo.ca/media/Larry%20Smith:%20Creating%20Killer%20Applications http://csclub.uwaterloo.ca/media/Larry%20Smith:%20Creating%2...

known 18y ago

3 years back I realized that I am also directly are indirectly responsible for poverty in the world.

Devilboy 18y ago
you bastard

edu 18y ago

money is not useless, simply it's more comfortable to carry and trade with a set of coins/papers than a cow.

known 18y ago

I petitioned govt to give rice freely to people Below Poverty Line (BPL), an economic indicator of standard of living, used in India. Since rice is Indians staple food, I assumed that it will have a cascading effect on remaining food items and will help in reducing their prices and inflation. But to my surprise BPL people started buying exotic products and services with the money saved because of free rice.

anamax 18y ago
> But to my surprise BPL people started buying exotic products and services with the money saved because of free rice. Did this experience teach you that you really don't know much about human behavior and should stay away from activities where such knowledge is important? Or, did you double down and keep at it, perhaps with "I'm a good person so what I want is good."?
- known 18y ago
  I'd say both wrt http://en.wikipedia.org/wiki/Perverse_incentive http://en.wikipedia.org/wiki/Perverse_incentive

Jem 18y ago

If you liked this post, you'd enjoy Terry Pratchett's Making Money.

nihilocrat 18y ago

But oh no! My job was producing those useless goods and services! And if people don't buy my useless goods and services, I won't be able to make money, which means I won't be able to buy food, which means I'll starve! PLEASE, SOMEONE, STIMULATE THE ECONOMY SO I DON'T STARVE! The depressing thing about the great depression of the 1930s, as well as the current potential one, is that there may simply be not enough important things to do to keep everyone busy. This seems to be the entire premise of the society present in "A Brave New World".

raheemm 18y ago

The US dollar gets some of its value from the awesome US military. Worse comes to worse, we can take stuff from others regardless of how poor we are. Its a self-destructive mode of operation and would be used as a means of last resort. (North Korea is an extreme example - the world pays them not to go crazy with their nukes) A more positive source of the dollar's strength is the US economy and its resourcefulness and innovation (ie hackers:)

gills 18y ago

Despite this being sort of a doomer rant, I really got a chuckle from the snarky bit at the end: "I mean, we can't just give people food for free. That would be ridiculous."

Allocator2008 18y ago

Everyone in this forum is stupider for having read this. I award you no points, and may God have mercy on your soul.

redsymbol 18y ago

I'm almost done reading "The Creature from Jekyll Island", by Griffin. Having had little background in finance or economics, much of what's been happening in the financial markets the past several years was just a mystery to me, and about a year ago I decided I wanted to understand how it worked. CFJI has helped quite a bit. It's not an easy read, even though it's well written, simply due to the subject matter (I had to read ch. 10 three times). It nevertheless does a great job of explaining how modern fiat currency systems work, and the mechanisms used by nations' central banks today.

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