5 ms·

One of the weird things about our world is that money is central to everything, but it’s hard to understand how it works. There’s a great deal of handwaving aro

by dhosek 6mo ago

One of the weird things about our world is that money is central to everything, but it’s hard to understand how it works. There’s a great deal of handwaving around how, for example, dollars are created, much of which is, in fact, not correct at all (most dollars are created not by the government, or even the Federal Reserve, but by private banks, via a mechanism which I will not pretend to fully understand). The big flaw of Bitcoin, to my mind, is that it is an inherently deflationary currency. Deflation is one of those things that seems great on the surface: prices go down, not up, but when that happens it ends up creating an economic incentive to avoid spending since why buy something today if it will be cheaper tomorrow, and this ends up causing economic activity to slow down or stop entirely. A small amount of inflation, on the other hand creates an incentive to either spend money or invest it in something that will provide a better than inflation return, whether that’s putting it in a high-yield savings vehicle or making capital or financial investments. With deflation, you can just leave your funds in cash (where they will not provoke any economic growth) and get a return.

ballofrubber1 6mo ago
I’d argue that this is more of a feature than a bug. The assumption behind the “deflation is bad” argument is that spending itself is the goal. But spending is not automatically good. Productive spending and productive investment are good. Wasteful consumption, speculation, and forced risk-taking are not. If money holds its value, people become more selective. They still buy food, housing, tools, entertainment, experiences, and things they genuinely want. Humans have needs, preferences, status impulses, advertising pressure, and finite lives. Demand does not disappear just because money is sound. What disappears is some of the artificial urgency to spend before your cash loses value. The more important point is investment. In an inflationary system, holding money is punished, so everyone is pushed out onto the risk curve. You are not only investing because an opportunity is great; you are investing because the currency is being diluted and you need to escape it. That distorts the real cost of capital and makes mediocre investments look better than they are in nominal terms. With harder money, investment has to beat the return of simply holding the money. That is a healthy hurdle rate. Capital should have to prove that it creates real value. If an investment only makes sense because the denominator is being debased, or because everyone is forced into assets to avoid inflation, then maybe that investment was not as productive as it looked. This also matters for inequality. Inflation does not hit everyone equally. People with capital can protect themselves by owning stocks, real estate, ETFs, businesses, and other assets. They can diversify, borrow against assets, and ride asset inflation. Poorer people are more likely to hold wages and cash, so they are the ones whose purchasing power gets diluted first. Then they are told to “just invest,” but they are competing against people who already have capital, better access, better tax treatment, and more room to take risk. So inflationary money quietly forces the poor to compete with the rich on the rich person’s playing field: asset ownership. A broad ETF may look like a safe wealth-preservation tool for someone with money, but for someone living paycheck to paycheck, the need to buy risk assets just to avoid being diluted is itself a problem. A deflationary or hard-money system would probably reduce some marginal consumption and speculative investing. But that is not obviously bad. It may mean fewer bad investments, less artificial asset inflation, and more pressure for capital to flow only into things that genuinely outperform money itself. It would also be much more sustainable, not just economically but materially: if money no longer pressures everyone to consume and invest constantly just to outrun debasement, there is less incentive to waste real-world resources on unnecessary production, overconsumption, and short-lived goods. The fear is that nobody would spend. But people do not stop buying things just because they expect their money to hold value. They stop buying things that are not worth giving up good money for. That sounds like discipline, not economic failure.
- tardedmeme 6mo ago
  In a deflationary system, rich people just hold money, and earn more in interest from holding the money, than everyone else earns combined. They use that interest to buy things from the poor while not producing or investing themselves. Poor people realize if they switch currencies they can have more things because they don't have to give a percentage of everything to the rich. This makes the system unstable. Bitcoin might be approaching it. Spending shouldn't be the goal, but exchange of goods and services should be. Representation of real value should be a goal. If you can receive real goods and services as a consequence of holding numbers on a spreadsheet, instead of a consequence of providing real goods and services yourself, the economy has a problem. Maybe a system with zero inflation or very slight deflation can be stable, but the extreme deflation seen in Bitcoin is destabilising.
  - ballofrubber1 6mo ago
    This still does not work. “Holding money and earning interest from holding it” is a category error. Holding Bitcoin pays zero yield. No coupon, no dividend, no debtor, no tax stream, and no mechanism by which poor people pay holders a percentage. If someone earns interest, they are not merely holding money; they are lending it, which means they are taking risk and providing capital. The “numbers on a spreadsheet” objection is also just an objection to money itself. Money exists so someone can produce value today, save the claim, and exchange it later for real goods and services. That is not a bug. That is saving. A non-inflationary currency is actually a better representation of real value, because the unit is not constantly being diluted. Inflationary money lets nominal wealth rise even when no real value was created. Hard money makes the test harsher: did you actually create value, or did the measuring stick just get worse? And no, people would not “just sit on Bitcoin.” People still eat, rent, travel, build, compete, seek status, start companies, buy homes, and take risks to outperform others. The only thing that changes is the hurdle rate: an investment has to be better than simply holding money. That is not economic failure. That is discipline. The fair criticism of Bitcoin is volatility and unequal distribution, not this imaginary mechanism where holders magically receive interest from the poor by owning spreadsheet entries. That mechanism does not exist. EDIT: The rich/poor angle is almost backwards. In an inflationary system, holding money is a guaranteed loss, so ordinary people are forced to become amateur investors just to avoid being debased. Rich people are already positioned for that: they own assets, businesses, real estate, equities, and can borrow cheaply against them. In a non-inflationary or hard-money system, simply holding money is not a guaranteed losing strategy. You keep your share unless you voluntarily take risk to increase it. That is a very different game. The rich can still get richer, but they have to outperform by allocating capital well, not merely by being closest to the asset-inflation machine. Same with wages. Under inflation, your employer can cut your real salary without saying anything: they just give you a raise below inflation, or no raise at all. You have to fight constantly just to stay even. Under hard money, that hidden pay cut is much harder. If prices are falling or money is appreciating, keeping the same nominal salary can mean your real wage rises. To reduce your real compensation, the employer has to make the cut explicit or offset it with benefits. That is a completely different power dynamic. So no, inflation is not obviously pro-poor. Very often it is a quiet tax on people least able to escape cash and wages.
newsy-combi 6mo ago
I thought private banks create money the moment they take out a credit from the central bank. The central bank's job is to set the interest rate for those loans, et viola.
- jimmydorry 6mo ago
  That's one method, but consider what happens when someone deposits a million dollars at a bank. This million dollars can be lent out to another person as a mortgage, and guess where that person accepts that money? That's right, a bank. That same 1 million dollars could be lent out to 10 different people, expanding the supply of money many times over. The only limit to this are the capitalisation ratios legislated and enforced by government (the bank must retain some % of total outstanding liabilities as capital it can move immediately). There are a few other ways I understand (and probably many more I dont) that the monetary supply can be expanded via, but that is the simplest one to conceptualise.
  - neilwilson 6mo ago
    "This million dollars can be lent out to another person as a mortgage" It can't. It isn't. And it never has been. What banks do is provide liquidity against your collateral. You sell them a charge over your house (for example), and they give you a credit for it. That credit can then be passed on to other people. Banks are in the business of discounting. They don't take anything in and give it out to other people. [0] [0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
    - jimmydorry 6mo ago
      [dead]
nout 6mo ago
Allen Farrington makes a solid case in this essay [1] about deflation being the more effective mode of economy. [1]: http://x.com/i/article/2045147796752175104 http://x.com/i/article/2045147796752175104
matheusmoreira 6mo ago
> most dollars are created not by the government, or even the Federal Reserve, but by private banks, via a mechanism which I will not pretend to fully understand Fractional reserve banking. Basically, bankers start getting very anxious when they see the masses of people depositing mountains of cash into them. They look at the cash hoard they have suddenly amassed and think, we can't just leave this pile of cash here doing nothing, we have to efficiently allocate all of this capital. So they lend it out to people who need cash, charge interest and pay account holders their yields. Deposit $100. Bank loans out $90, and $10 sits in its reserves. Your account still says $100, even though the bank is now leveraged against loans to third parties. Guy who took the $90 loan pays some bills, and that $90 ends up deposited right back into the same bank. So it keeps $9 and loans out $81. There is now $100 + $90 + $81 in circulation, but only that $100 is real money, the rest are all made up. They only become real when loans are repaid. So, the $81 gets spent, deposited back into the bank, and so on, and so forth, expanding the money supply like a fractal until the amounts become too infinitesimal to track. Thus $1,000 easily becomes $100,000 literally overnight. Government could run its presses 24/7 and it would not be able to outcompete the banks when it comes to inflating the money supply. Banks are the financial call stacks of society. Better hope there aren't any exceptions (defaults), or the whole thing unwinds and comes crashing down. It's like a society wide financial version of ISP oversubscription. The assumption is nobody is going to stress test the system by saturating the link 24/7. Everything breaks the second the invariants are violated. Banks similarly assume that not everybody will need all of their dollars immediately, which lets them "efficiently allocate" all of those dollars. Entire government systems exist just to bail out the banks where this assumption fails to be load bearing.
- neilwilson 6mo ago
  It's amazing this myth continues when the Bank of England debunked it in 2014. [0] [0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
  - matheusmoreira 6mo ago
    So it's no longer "reserves", it's "capital requirements", "liquidity coverage ratios" or whatever else. Banks inverted the technical language. They don't literally loan out deposits anymore, now they just create loans out of nowhere. Except they still can't create loans out of thin air unless they have actual equity to back at least a fraction of those loans. They still can't create money unless they have... reserves...? And what do you know... Deposits just happen to be the the easiest way to fund that equity account..? Yep. Not a single change to the moral calculus here. Banks want to be as leveraged as possible. They want to risk it all: their own assets, and other people's money. And they want that risk to be subsidized by society itself. And society allows it because it's addicted to cheap credit. Loans are so thoroughly wired into people's finances at this point that weaning them off it is actually dangerous, not just politically inconvenient. So we'll keep building up and unwinding financial call stacks, and the godlike oligarchs observing and programming the system will keep profiting from the peaks and valleys while everybody else just keeps getting rekt. Nothing new here.

by dhosek 6mo ago

ballofrubber1 6mo ago

I’d argue that this is more of a feature than a bug. The assumption behind the “deflation is bad” argument is that spending itself is the goal. But spending is not automatically good. Productive spending and productive investment are good. Wasteful consumption, speculation, and forced risk-taking are not. If money holds its value, people become more selective. They still buy food, housing, tools, entertainment, experiences, and things they genuinely want. Humans have needs, preferences, status impulses, advertising pressure, and finite lives. Demand does not disappear just because money is sound. What disappears is some of the artificial urgency to spend before your cash loses value. The more important point is investment. In an inflationary system, holding money is punished, so everyone is pushed out onto the risk curve. You are not only investing because an opportunity is great; you are investing because the currency is being diluted and you need to escape it. That distorts the real cost of capital and makes mediocre investments look better than they are in nominal terms. With harder money, investment has to beat the return of simply holding the money. That is a healthy hurdle rate. Capital should have to prove that it creates real value. If an investment only makes sense because the denominator is being debased, or because everyone is forced into assets to avoid inflation, then maybe that investment was not as productive as it looked. This also matters for inequality. Inflation does not hit everyone equally. People with capital can protect themselves by owning stocks, real estate, ETFs, businesses, and other assets. They can diversify, borrow against assets, and ride asset inflation. Poorer people are more likely to hold wages and cash, so they are the ones whose purchasing power gets diluted first. Then they are told to “just invest,” but they are competing against people who already have capital, better access, better tax treatment, and more room to take risk. So inflationary money quietly forces the poor to compete with the rich on the rich person’s playing field: asset ownership. A broad ETF may look like a safe wealth-preservation tool for someone with money, but for someone living paycheck to paycheck, the need to buy risk assets just to avoid being diluted is itself a problem. A deflationary or hard-money system would probably reduce some marginal consumption and speculative investing. But that is not obviously bad. It may mean fewer bad investments, less artificial asset inflation, and more pressure for capital to flow only into things that genuinely outperform money itself. It would also be much more sustainable, not just economically but materially: if money no longer pressures everyone to consume and invest constantly just to outrun debasement, there is less incentive to waste real-world resources on unnecessary production, overconsumption, and short-lived goods. The fear is that nobody would spend. But people do not stop buying things just because they expect their money to hold value. They stop buying things that are not worth giving up good money for. That sounds like discipline, not economic failure.

tardedmeme 6mo ago
In a deflationary system, rich people just hold money, and earn more in interest from holding the money, than everyone else earns combined. They use that interest to buy things from the poor while not producing or investing themselves. Poor people realize if they switch currencies they can have more things because they don't have to give a percentage of everything to the rich. This makes the system unstable. Bitcoin might be approaching it. Spending shouldn't be the goal, but exchange of goods and services should be. Representation of real value should be a goal. If you can receive real goods and services as a consequence of holding numbers on a spreadsheet, instead of a consequence of providing real goods and services yourself, the economy has a problem. Maybe a system with zero inflation or very slight deflation can be stable, but the extreme deflation seen in Bitcoin is destabilising.
- ballofrubber1 6mo ago
  This still does not work. “Holding money and earning interest from holding it” is a category error. Holding Bitcoin pays zero yield. No coupon, no dividend, no debtor, no tax stream, and no mechanism by which poor people pay holders a percentage. If someone earns interest, they are not merely holding money; they are lending it, which means they are taking risk and providing capital. The “numbers on a spreadsheet” objection is also just an objection to money itself. Money exists so someone can produce value today, save the claim, and exchange it later for real goods and services. That is not a bug. That is saving. A non-inflationary currency is actually a better representation of real value, because the unit is not constantly being diluted. Inflationary money lets nominal wealth rise even when no real value was created. Hard money makes the test harsher: did you actually create value, or did the measuring stick just get worse? And no, people would not “just sit on Bitcoin.” People still eat, rent, travel, build, compete, seek status, start companies, buy homes, and take risks to outperform others. The only thing that changes is the hurdle rate: an investment has to be better than simply holding money. That is not economic failure. That is discipline. The fair criticism of Bitcoin is volatility and unequal distribution, not this imaginary mechanism where holders magically receive interest from the poor by owning spreadsheet entries. That mechanism does not exist. EDIT: The rich/poor angle is almost backwards. In an inflationary system, holding money is a guaranteed loss, so ordinary people are forced to become amateur investors just to avoid being debased. Rich people are already positioned for that: they own assets, businesses, real estate, equities, and can borrow cheaply against them. In a non-inflationary or hard-money system, simply holding money is not a guaranteed losing strategy. You keep your share unless you voluntarily take risk to increase it. That is a very different game. The rich can still get richer, but they have to outperform by allocating capital well, not merely by being closest to the asset-inflation machine. Same with wages. Under inflation, your employer can cut your real salary without saying anything: they just give you a raise below inflation, or no raise at all. You have to fight constantly just to stay even. Under hard money, that hidden pay cut is much harder. If prices are falling or money is appreciating, keeping the same nominal salary can mean your real wage rises. To reduce your real compensation, the employer has to make the cut explicit or offset it with benefits. That is a completely different power dynamic. So no, inflation is not obviously pro-poor. Very often it is a quiet tax on people least able to escape cash and wages.

newsy-combi 6mo ago

I thought private banks create money the moment they take out a credit from the central bank. The central bank's job is to set the interest rate for those loans, et viola.

jimmydorry 6mo ago
That's one method, but consider what happens when someone deposits a million dollars at a bank. This million dollars can be lent out to another person as a mortgage, and guess where that person accepts that money? That's right, a bank. That same 1 million dollars could be lent out to 10 different people, expanding the supply of money many times over. The only limit to this are the capitalisation ratios legislated and enforced by government (the bank must retain some % of total outstanding liabilities as capital it can move immediately). There are a few other ways I understand (and probably many more I dont) that the monetary supply can be expanded via, but that is the simplest one to conceptualise.
- neilwilson 6mo ago
  "This million dollars can be lent out to another person as a mortgage" It can't. It isn't. And it never has been. What banks do is provide liquidity against your collateral. You sell them a charge over your house (for example), and they give you a credit for it. That credit can then be passed on to other people. Banks are in the business of discounting. They don't take anything in and give it out to other people. [0] [0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
  - jimmydorry 6mo ago
    [dead]

nout 6mo ago

Allen Farrington makes a solid case in this essay [1] about deflation being the more effective mode of economy. [1]: http://x.com/i/article/2045147796752175104 http://x.com/i/article/2045147796752175104

matheusmoreira 6mo ago

> most dollars are created not by the government, or even the Federal Reserve, but by private banks, via a mechanism which I will not pretend to fully understand Fractional reserve banking. Basically, bankers start getting very anxious when they see the masses of people depositing mountains of cash into them. They look at the cash hoard they have suddenly amassed and think, we can't just leave this pile of cash here doing nothing, we have to efficiently allocate all of this capital. So they lend it out to people who need cash, charge interest and pay account holders their yields. Deposit $100. Bank loans out $90, and $10 sits in its reserves. Your account still says $100, even though the bank is now leveraged against loans to third parties. Guy who took the $90 loan pays some bills, and that $90 ends up deposited right back into the same bank. So it keeps $9 and loans out $81. There is now $100 + $90 + $81 in circulation, but only that $100 is real money, the rest are all made up. They only become real when loans are repaid. So, the $81 gets spent, deposited back into the bank, and so on, and so forth, expanding the money supply like a fractal until the amounts become too infinitesimal to track. Thus $1,000 easily becomes $100,000 literally overnight. Government could run its presses 24/7 and it would not be able to outcompete the banks when it comes to inflating the money supply. Banks are the financial call stacks of society. Better hope there aren't any exceptions (defaults), or the whole thing unwinds and comes crashing down. It's like a society wide financial version of ISP oversubscription. The assumption is nobody is going to stress test the system by saturating the link 24/7. Everything breaks the second the invariants are violated. Banks similarly assume that not everybody will need all of their dollars immediately, which lets them "efficiently allocate" all of those dollars. Entire government systems exist just to bail out the banks where this assumption fails to be load bearing.

neilwilson 6mo ago
It's amazing this myth continues when the Bank of England debunked it in 2014. [0] [0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- matheusmoreira 6mo ago
  So it's no longer "reserves", it's "capital requirements", "liquidity coverage ratios" or whatever else. Banks inverted the technical language. They don't literally loan out deposits anymore, now they just create loans out of nowhere. Except they still can't create loans out of thin air unless they have actual equity to back at least a fraction of those loans. They still can't create money unless they have... reserves...? And what do you know... Deposits just happen to be the the easiest way to fund that equity account..? Yep. Not a single change to the moral calculus here. Banks want to be as leveraged as possible. They want to risk it all: their own assets, and other people's money. And they want that risk to be subsidized by society itself. And society allows it because it's addicted to cheap credit. Loans are so thoroughly wired into people's finances at this point that weaning them off it is actually dangerous, not just politically inconvenient. So we'll keep building up and unwinding financial call stacks, and the godlike oligarchs observing and programming the system will keep profiting from the peaks and valleys while everybody else just keeps getting rekt. Nothing new here.