Economics Discussion Thread
- Thread starter Yinko
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Yinko
Well-known member
Do you think that if we introduced a larger denomination (something bigger than a dollar or euro) to try to deal with the problem of inflation that it would actually lead to more inflation? I mean, if you said that now there was a Super Dollar that was worth 100 USD, then that would make sellers want to round up to the nearest super-dollar, or near enough. Which would seem to accelerate the problem to my mind.
On the other hand, historically most daily transactions were done in cents, and a dollar was a lot of money (prior to the Great War). Further, my understanding is that that has generally been the case through history, that there are always larger denominations that are not used in day-to-day transactions. So our current system of fiat currency has broken that balance and heavily encourages inflation in return for easier loans and faster economic growth.
The more I look at fiat currency, the dumber it seems and the more downsides it has. However, those downsides are only important in a society that does not consider economics as the prime virtue of society, as all western societies have in living memory.
On the other hand, historically most daily transactions were done in cents, and a dollar was a lot of money (prior to the Great War). Further, my understanding is that that has generally been the case through history, that there are always larger denominations that are not used in day-to-day transactions. So our current system of fiat currency has broken that balance and heavily encourages inflation in return for easier loans and faster economic growth.
The more I look at fiat currency, the dumber it seems and the more downsides it has. However, those downsides are only important in a society that does not consider economics as the prime virtue of society, as all western societies have in living memory.
Inflation is about 2 things. One is the actual amount of money that's been printed/is in circulation. The other, more important thing, is people's belief in the currency. Your approach might affect the second, but I don't know how.
As for fiat, I wouldn't be so harsh on it. It's better than it's predecessor (commodity backed currency), because there was still arbitrary inflation or deflation, but it was entirely uncontrollable, which lead to a lot of problems. Fiat currency being manipulated by a tightly bound central authority (the fed has a dual mandate to keep both inflation and unemployment low, and is somewhat politically independent) isn't honestly the worst thing by a long shot.
Now, crypto is better, because we can actually enforce rules and have truly controlled creation of new currency without relying on a central authority, but fiat currency was and is a very useful technology.
Val the Moofia Boss
Well-known member
Crypto has too many problems to ever really catch on and become a widely used currency for the common man.
- It can't be used as a part of the fraction-reserve banking system due to how the hashing work. If you are going to do that, there is nothing to stop crypto from working like fiat money which can be pulled out of thin are, which defeats the point of cryptocurrency (in that it's supposed to be like gold in that there is a a stable, limited supply and it's not supposed to really be inflated).
- If there's ever a state of emergency, it's not useful. If the power goes out and you need to buy food, you can still walk down the street and take a metal coin out of your wallet and buy food. You can't use bitcoin.
- Dollars/Pounds/Euros/Yen/etc are already the accepted standards of currency. Crypto isn't going to supplant those standards of currency; it's just going to join a long list of other standards hardly anyone uses. We already see this problem with Crypto where now there are dozens of different standards of cryptocurrencies.
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- People are hopping on the bitcoin bandwagon not because they're going to use bitcoin as a currency - nobody does - but because they want to make dollars. The whole point is to mine crypto and then sell it for dollars, because dollars is what people use. Hardly anyone actually intends to turn their dollars into crypto and then keep it as crypto and buy stuff with crypto.
- Modern states only exist if they can tax the money supply. If you do not have control over the money supply, you do not have an effective state. A sign of a failed state today is if people aren't using the national currency within state borders, like in Venezuela, where there is so much inflation that the people exchange literally anything else except Venezuelan dollars. They are using World of Warcraft and Runescape gold. You don't want that happening in the US, where people are widely using something besides the dollar, because then the government can't tax it, and then the government can't function. If it looks like crypto starts taking off and common people start actually using it, cryptocurrency will be outlawed for this reason, because it poses a threat to governments.
Bear Ribs
Well-known member
This (only this part, I think the rest of your points are good) Imma disagree with. There's a significant number of successful nations that do not use their own national currency but are not failed states. Panama uses the US Dollar and doesn't ever mint its own currency, f'rex, as do several several nations in Micronesia, Ecuador, Timor-Leste, Palau, and Zimbabwe after their own attempts at printing money crashed and burned. Nothing in particular stops a state from taxing a currency they don't print themselves.
So this is very much untrue. It would be created out of thin air the same way that cash now is created out of thin air. People wouldn't hold actual crypto in their banks, just like people don't own actual cash in their banks now. Instead, they'd hold promises to acquire crypto on demand, just like right now, people own promises that money would be provided to them on demand. And this of course would allow money to be created in the same exact way as before, with many promises being exchanged like actual money. Now the promises wouldn't be quite as valuable as the actual stuff, but it could be done.
As for a more in depth dive than my offhanded speculating, the Fed has actually considered this:
Fractional Reserve Cryptocurrency Banks
Notes from the Vault considers the potential for cryptocurrency banks: LINK #AtlantaFed
www.atlantafed.org
And points out that banks are in no way going to die because of crypto.
It's also difficult for poor people to acquire as well, which is why any use as a currency will likely be crypto-backed (which also saves on electricity) instead of crypto, or at least not the only means of exchange.
This is 'just' a network effect (those are pretty big though), which can go away or be created. A nation with no trust from it's people might start using crypto because it guarantees that it can't inflate the value, for example, or crypto might be more and more accepted, as we see with bit pay.
Crypto is young. What you have here is what people do with Crypto now. In the future, this could change. Also, look at Bitpay.
Modern states don't tax money supply, they tax income. This is just as doable with crypto as it is with other currencies (if not more so with a psuedononymous currency like Bitcoin, which is much more trackable than cash).
Terthna
Professional Lurker
One thing I think should be pointed out about Crypto, is that they're massively over-inflated in value right now, thanks to the Chinese latching onto them as one of their few choices for investment; alongside a real estate market that has been poised for collapse any day now for years. I can't see that ending well in the near future, whatever the long term potential of cryptocurrencies ends up being.
There's also a lot of states that do print their own currency, but back it's value using USD or peg the value to the dollar, leaving the ultimate control over their currency in the hands of the US.
Bear Ribs
Well-known member
Zimbabwe has dramatically improved over the past few years, though still not exactly rock solid it's gone down the list of fragile nations many positions. Getting rid of their horrifically inflationary currency and replacing it with another nation's has helped them tremendously.
LordsFire
Internet Wizard
Yes, they're on the road to recovery. That doesn't change the fact that their failure to handle their own currency responsibly, is part of what made them a failed state, which they are now trying to recover from.
Bear Ribs
Well-known member
Yes... which is why pointing to them as an example of a country that doesn't handle its own currency is a reasonable thing, giving up having a national currency stabilized the nation hence they belong on the list.
The US government only accepts payment in US dollars, only borrows in US dollars, and will only pay (at least at any kind of scale/as general policy) in US dollars. That sets an inherent floor on the value of the dollar that no other currency has.
If you are a US company then you are going to need dollars, if only to pay your taxes. If you have a US employee then you are going to have to pay them in dollars (at least to some extent), if only so that they can pay their US taxes.
If you are doing business with the US government then you either need to accept dollars or be the sole source supplier of something of such critical need that the US government is willing to bend its policies (hint, these do not exist at scale). This means that you need something to use dollars on and thus the pressure gets exerted down the supply chain.
If you have lots of money and you want to store it, then you are looking at T-Bills and that means that you need dollars (because the US government does not borrow except in dollars, nor does it repay in anything but dollars).
Now get into the practical realities of things. Say you are a Japanese company and you are selling some goods to a company in Brazil. Neither of you has or wants the other sides national currency, so the transaction is done in dollars. Every time that happens, the dollar becomes more valuable as a medium of exchange.
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BitCoin (or any of the current crypto currencies) has value because Chinese citizens can produce BitCoin, sell it outside of China for dollars, and then use that USD to buy assets outside of China. The only actual economic use (s) BitCoin has are 1) avoiding currency controls and 2) purchasing illegal goods and services via a manner that avoids the banking system.
If you are a US company then you are going to need dollars, if only to pay your taxes. If you have a US employee then you are going to have to pay them in dollars (at least to some extent), if only so that they can pay their US taxes.
If you are doing business with the US government then you either need to accept dollars or be the sole source supplier of something of such critical need that the US government is willing to bend its policies (hint, these do not exist at scale). This means that you need something to use dollars on and thus the pressure gets exerted down the supply chain.
If you have lots of money and you want to store it, then you are looking at T-Bills and that means that you need dollars (because the US government does not borrow except in dollars, nor does it repay in anything but dollars).
Now get into the practical realities of things. Say you are a Japanese company and you are selling some goods to a company in Brazil. Neither of you has or wants the other sides national currency, so the transaction is done in dollars. Every time that happens, the dollar becomes more valuable as a medium of exchange.
---
BitCoin (or any of the current crypto currencies) has value because Chinese citizens can produce BitCoin, sell it outside of China for dollars, and then use that USD to buy assets outside of China. The only actual economic use (s) BitCoin has are 1) avoiding currency controls and 2) purchasing illegal goods and services via a manner that avoids the banking system.
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Yinko
Well-known member
I'm only aware of one instance of massive inflation while people were using commodity currency, that being the Spanish. Maybe there were lesser instances when dealing with colonial style mercantilism, but not enough to crash the economy. The other huge difference between then and now is that we have a far better understanding of economics (if you trust what economists say anyway), so by manipulating the flow and availability of various commodities you should be able to manipulate the inflation rate as well.
I'm not so much arguing that commodity based currencies are a good way, but rather that every system that has been tried has sucked for various reasons and that it's at least par for the course and mostly gets a bad rap for being the previous system and having been popular during an exceptionally long period of profound ignorance. Of course, what people ignore is that if the Spanish had been using fiat currency, or crypto (magically), then they would have crashed their economy even harder then they did when there were arbitrary material limitations to their expenditure.
It's not just hyper inflation one must be worried about though. For example, because the dollar was pegged to gold, it lead to massive problems come the Great Depression. The Fed was forced by it to pursue the exact opposite policy of what they should have done: raising interest rates on already hurting banks. And that's not the only problem. Backed currencies have significant problems. Even simply pegged currencies can lead to problems (see: the Eurozone crisis, Black Wednesday), and a backed currency is just one that is pegged to a commodity along with a promise (you can swap this dollar for so much gold) to back up the promise.
The problem with a commodity backed currency is always the same as the problem with a pegged currency: You lose control over monetary policy, which means one can't respond to crises nearly as easily. At least with a currency pegged to a major currency, one expects that the controller of that currency, suffering similar problems, will also have a somewhat likeminded monetary policy, lowering rates for depressions, raising in the good years. But a gold backed currency in a world where gold is also used by people in other countries as a hedge against inflation will do the opposite,
As for manipulating the flow/availability of commodities, that's mostly outside the power of the country. The price doesn't stay the same, and prices in the future are always nearly impossible to predict reliably. It's not a stable strategy when unexpected stuff happens (see again, black wednesday, eurozone crisis, Great Depression)
No, commodity based currencies have just always failed and constantly led to strategically stupid wars. Not to mention that no commodity exists today that could actually back a global currency at a useful scale and consistency.
Fiat currencies have issues, but the relative issues of fiat vs. commodity favor fiat.
Especially in the case of the USD. Full faith and credit of the US Government really isn't anything to sneer at and when the currency is the only currency that the world's single largest economic actor (the US government) is willing to transact in, you guarantee a certain degree of stability.
Bear Ribs
Well-known member
Commodity currencies don't usually have hyperinflation but have frequent bouts of deflation, which can be really bad. When currency deflates everybody tends to not buy anything because "it will be even cheaper next week." This stifles the economy and can lead to a death spiral where nobody's buying, so prices drop more to attract buyers, so the currency deflates more, so people buy even less, so prices drop more...
Deflation is, to some extent at least, a solvable problem. If nothing else you use a commodity peg for a fiat currency and then just change the peg.
The ultimate issue is that as a currency is successful you will inevitably end up with more and more demand for that currency. That, in turn, means you have an ever increasing demand for the commodity in question. If the commodity has no real inherent value on its own (which is pretty much what you need to use for a currency if you want any kind of stability) then that means the state will need to secure an ever increasing supply of a worthless commodity. Since good commodities for a currency are naturally rare, this leads to strategically stupid decisions.
And even then, it still fails. Between the two World Wars, the US acquired something like 90% of all of the gold that humanity had mined & refined in its entire history; and it still didn't have enough to keep the dollar pegged to gold within a generation.
Gold and Silver are, in most respects, far better currencies when transport & communication are limited. Fiat currency requires a strong central power and, really, the ability to have a banking system (as opposed to a series of independent banks) to be viable.
I've somewhat long looked for an explanation of what Modern Monetary Theory actually is. The concrete points made often seem to be relatively basic bitch econ stuff, but there seems to be some mumbo jumbo that happens between the concrete but non-controversial stuff which then suddenly jumps to "therefore we can print infinite money" which they also claim is not what MMT means, but seems to be how everything they say MMT allows acts as though.
The closest to an understandable program I get from it is treating the cash itself directly as the credit, which makes some sense: instead of selling bonds, you print money.
That however seems like it would require either a gently deflationary momentary policy (for example, a target of 1% deflation long term, or at least a net 0% deflation) which has to be creditably maintained, or your "borrowing" ability is going to be fairly limited to something close to the growth rate: if GDP grows at 3%, you can print/borrow about that much, about $600 billion. And of course, if your economy shrinks, you need to remove money from the system and induce deflation to preserve the value of the money.
Now, as someone who's more Austrian sympathetic, I don't fear deflation as much as the mainstream and think it many situation it might be a good thing, MMT people do not seem to operate that way.
The closest to an understandable program I get from it is treating the cash itself directly as the credit, which makes some sense: instead of selling bonds, you print money.
That however seems like it would require either a gently deflationary momentary policy (for example, a target of 1% deflation long term, or at least a net 0% deflation) which has to be creditably maintained, or your "borrowing" ability is going to be fairly limited to something close to the growth rate: if GDP grows at 3%, you can print/borrow about that much, about $600 billion. And of course, if your economy shrinks, you need to remove money from the system and induce deflation to preserve the value of the money.
Now, as someone who's more Austrian sympathetic, I don't fear deflation as much as the mainstream and think it many situation it might be a good thing, MMT people do not seem to operate that way.