4 ms·

Step-by-step, in plan English: (1) China sells stuff to US buyers, who pay with US dollars. (2) A US dollar is essentially a made-up financial instrument "bac

by cs702 13y ago

Step-by-step, in plan English: (1) China sells stuff to US buyers, who pay with US dollars. (2) A US dollar is essentially a made-up financial instrument "backed by the full faith and credit" of the US -- it has value only because US laws make it so -- that is, by government fiat. (3) China could easily sell all those dollars, but if it did that, the dollar would depreciate, making Chinese products more expensive for US buyers! Chinese manufacturers would not like that. So what does China do with all those US dollars? (4) China buys US treasury bonds -- another made-up financial instrument, issued by the same government, that pays interest in the form of more dollars. Effectively, China exchanges one made-up instrument that pays no interest for another one that does. It's not an "investment" in the traditional sense of the word. -- PS. If you find all of this mind-boggling, you're in good company. When asked about the value of money two centuries ago, Nathan Mayer Rothschild -- a member of the famous banking dynasty -- reportedly said that only two people in the world really understood it, but they disagreed with each other. And things were a lot simpler back then!

JVIDEL 13y ago
The way I see it its actually quite simple: the intrinsic value of X, anything from a piece of code to a building, needs a standard expression, and that expression is fiat currency. Currency has a value as long as someone is willing to trade something for it; the papiermark was worthless because nobody was willing to trade with it, the moment that happens with the US dollar it will become worthless as well. The reason we use these standards is simple: convenience. We can discuss forever how many lines of code you would have to write to pay for your rent, and what if your landlord doesn't needs any code? then you have to find someone who needs code and is willing to trade it for something your landlord needs and its also equivalent to your rent. Fiat currency in this case is like the metric system: it works (nearly) everywhere.
- Friterie 13y ago
  It's strange you say it works because it happens that every case of hyperinflation in history has occurred under a fiat, paper system. Paper is very easy to debase, but if you want you can go to the "best" "schools" in the world and they can tell you why it's such a good idea... and maybe one day you can pick up a job at a central bank. And if you're really lucky your peers will prefix your name with a sobriquet of high honour as cool as "helicopter".
  - kamjam 13y ago
    It's strange you say it works because it happens that every case of hyperinflation in history has occurred under a fiat, paper system. So what, we go back to the bartering system? It's difficult to trade my skills as a programmer for food directly. Not sure what the rest of your statement is saying...
    - bradleyjg 13y ago
      I'll give you a hint: it involves a pretty undistinguished metal from any practical standpoint that for some reason right wing nutjobs are totally obsessed with.
      - Friterie 13y ago
        Oh I'm sorry, you must inhabit that parallel universe where central bankers and their web of oligarchs are public-spirited socialists, and where in the words of Blankfein actually are "doing God's work". Did it never strike you as odd that when the robber barrons were deposed by the class of disenfranchised oligarchs they were awarded the Federal Reserve as compensation.. Yes they were quite pleased.
      - kamjam 13y ago
        Sure. But gold, and diamonds and other pretty shiney things only have as much value as we place on them, the same as paper money. @21echoes covers everything else I wold add on this. The US currency used to be backed by gold up until 1934 [1], as did several other countries[2]. But as times have moved on, there are several other minerals which have become more important, I think it would become too difficult to rely on just a single precious metal these days. [1] http://www.federalreserve.gov/faqs/currency_12770.htm http://www.federalreserve.gov/faqs/currency_12770.htm [2] http://en.wikipedia.org/wiki/Gold_standard http://en.wikipedia.org/wiki/Gold_standard
        Zancarius 13y ago
        > Sure. But gold, and diamonds and other pretty shiney things only have as much value as we place on them, the same as paper money. Whenever I come across the argument that we return to a gold-backed economy, this is among one of the first things that comes to mind. Gold is worth so much because it's considered a precious metal and has numerous uses in industry. But besides the extensive history of its worth throughout the ages (which probably maps well to its chemical attributes, such as malleability), there's nothing that suggests it won't eventually become worthless if civilization values something else (salt, platinum, clean drinking water). I used to think I was a little crazy whenever I'd have such an argument with my inner monologue, but now that I see the same point raised by others, I'm not so sure. Maybe I still am crazy.
tedunangst 13y ago
When asked about calculus three centuries ago, Isaac Newton reportedly said that only two people in the world really understood it, but they disagreed with each other.
- pessimizer 13y ago
  But mostly about who came up with it:)
pessimizer 13y ago
>[A US dollar] has value only because US laws make it so Or more specifically, because US taxes must be paid in dollars, and dollars must be used to buy US financial instruments.
DanielBMarkham 13y ago
The only thing I'd add here is this: when faced with spending more money than it has in the treasury, the U.S. has come upon a simple solution. Make up more imaginary money! More money for the Chinese, more money to build houses, more money for jobs. It's all good. If there is any consensus among economists, which I doubt, my guess is that they would say that this is a good thing, except when too much imaginary money is created. Then the Chinese and other bond holders start asking for more interest, and the entire thing spins out of control. [Insert long argument here about when, exactly, that might happen or if it has already happened and we're just the walking dead right now] Try explaining this to your grandmother. She'll think you've been smoking crack.
nunb 13y ago
A lot of people understand money today. The Chinese certainly do. Unfortunately, most of HN doesn't seem to. Moldbuggery is a good introduction.

by cs702 13y ago

JVIDEL 13y ago

The way I see it its actually quite simple: the intrinsic value of X, anything from a piece of code to a building, needs a standard expression, and that expression is fiat currency. Currency has a value as long as someone is willing to trade something for it; the papiermark was worthless because nobody was willing to trade with it, the moment that happens with the US dollar it will become worthless as well. The reason we use these standards is simple: convenience. We can discuss forever how many lines of code you would have to write to pay for your rent, and what if your landlord doesn't needs any code? then you have to find someone who needs code and is willing to trade it for something your landlord needs and its also equivalent to your rent. Fiat currency in this case is like the metric system: it works (nearly) everywhere.

Friterie 13y ago
It's strange you say it works because it happens that every case of hyperinflation in history has occurred under a fiat, paper system. Paper is very easy to debase, but if you want you can go to the "best" "schools" in the world and they can tell you why it's such a good idea... and maybe one day you can pick up a job at a central bank. And if you're really lucky your peers will prefix your name with a sobriquet of high honour as cool as "helicopter".
- kamjam 13y ago
  It's strange you say it works because it happens that every case of hyperinflation in history has occurred under a fiat, paper system. So what, we go back to the bartering system? It's difficult to trade my skills as a programmer for food directly. Not sure what the rest of your statement is saying...
  - bradleyjg 13y ago
    I'll give you a hint: it involves a pretty undistinguished metal from any practical standpoint that for some reason right wing nutjobs are totally obsessed with.
    - Friterie 13y ago
      Oh I'm sorry, you must inhabit that parallel universe where central bankers and their web of oligarchs are public-spirited socialists, and where in the words of Blankfein actually are "doing God's work". Did it never strike you as odd that when the robber barrons were deposed by the class of disenfranchised oligarchs they were awarded the Federal Reserve as compensation.. Yes they were quite pleased.
    - kamjam 13y ago
      Sure. But gold, and diamonds and other pretty shiney things only have as much value as we place on them, the same as paper money. @21echoes covers everything else I wold add on this. The US currency used to be backed by gold up until 1934 [1], as did several other countries[2]. But as times have moved on, there are several other minerals which have become more important, I think it would become too difficult to rely on just a single precious metal these days. [1] http://www.federalreserve.gov/faqs/currency_12770.htm http://www.federalreserve.gov/faqs/currency_12770.htm [2] http://en.wikipedia.org/wiki/Gold_standard http://en.wikipedia.org/wiki/Gold_standard
      - Zancarius 13y ago
        > Sure. But gold, and diamonds and other pretty shiney things only have as much value as we place on them, the same as paper money. Whenever I come across the argument that we return to a gold-backed economy, this is among one of the first things that comes to mind. Gold is worth so much because it's considered a precious metal and has numerous uses in industry. But besides the extensive history of its worth throughout the ages (which probably maps well to its chemical attributes, such as malleability), there's nothing that suggests it won't eventually become worthless if civilization values something else (salt, platinum, clean drinking water). I used to think I was a little crazy whenever I'd have such an argument with my inner monologue, but now that I see the same point raised by others, I'm not so sure. Maybe I still am crazy.

tedunangst 13y ago

When asked about calculus three centuries ago, Isaac Newton reportedly said that only two people in the world really understood it, but they disagreed with each other.

pessimizer 13y ago
But mostly about who came up with it:)

pessimizer 13y ago

>[A US dollar] has value only because US laws make it so Or more specifically, because US taxes must be paid in dollars, and dollars must be used to buy US financial instruments.

DanielBMarkham 13y ago

The only thing I'd add here is this: when faced with spending more money than it has in the treasury, the U.S. has come upon a simple solution. Make up more imaginary money! More money for the Chinese, more money to build houses, more money for jobs. It's all good. If there is any consensus among economists, which I doubt, my guess is that they would say that this is a good thing, except when too much imaginary money is created. Then the Chinese and other bond holders start asking for more interest, and the entire thing spins out of control. [Insert long argument here about when, exactly, that might happen or if it has already happened and we're just the walking dead right now] Try explaining this to your grandmother. She'll think you've been smoking crack.

nunb 13y ago

A lot of people understand money today. The Chinese certainly do. Unfortunately, most of HN doesn't seem to. Moldbuggery is a good introduction.