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Bizarre Shadowy Paper-Based Payment System Being Rolled Out Worldwide (ledracapital.com)
293 points by user_235711 1393 days ago | hide | past | web | favorite | 315 comments



Satire works when you hold folly up to ridicule. Central banking is possibly the greatest human invention since sanitation. The U.S. central banking system ranks among the finest of its kind.

Bitcoin handles 7 transactions a second on a good day, has no reliable institutional actors, and I can neither pay taxes nor satisfy court judgments with it. It is an impressive proof-of-concept for decentralized trust in cryptosystems, but it is hardly a currency.


> Central banking is possibly the greatest human invention since sanitation. The U.S. central banking system ranks among the finest of its kind.

How did you come to that conclusion? Is this a common viewpoint?

EDIT: I am genuinely curious. It doesn't strike me as a great invention, but I could be wrong. I'd love to be convinced otherwise, for example by reasoned arguments of how things were before central banking and why things were so much better after and compared to all other alternatives, as well as what sets U.S. central banking system apart from the rest of the central banking systems in the world. Do you have any links to this type of reasoning?


I came to this conclusion after spending a significant fraction of my too-short lifespan studying how money works.

I am hardly an expert. But I (apparently) know a lot more than the average Joe. Seeing the rash of "end the fed" madness on the internet makes me very sad.


From my experience people who defend central banking usually are actually only defending US central banking, or Western superpower central banking. That's fine, but its at least a little troubling that good banking seems to correlate to some degree with having a strong military presence around the world.

In other words, I think the arguments against why Bitcoin is needed in the US are interesting and all, but ultimately miss the point (in my opinion). As someone who came from a country where the central banks were anything but amazing, and there is essentially a 5/10 year cycle that inevitably leads to hyperinflation, I can attest that these problems are in fact very real -- not scary stories told by crazy libertarians -- even if they don't happen to take place in the richest nations on earth. As such, Bitcoin provides a very interesting new hope to solving these problems in these areas, as opposed to yet another unfair loan from the IMF or exploitative foreign investments.

It's kind of like laughing at how silly filtering water bottles are because we have great water sanitation in America, while ignoring that this is a real issue in Africa.


> Even if they don't happen to take place in the richest nations on earth.

Germany 1930s - hyperinflation; Argentina 1990s - hyperinflation; USA 2010s - quantitative easing.

These can also be real problems even for the richest nations.

As you correctly mention - Iraq [1] & Libya [2] were essentially currency invasions and NOT oil invasions. Millions of innocent lives lost to keep the USD propped up. Wars that would make no sense under BTC.

[1] http://content.time.com/time/magazine/article/0,9171,998512,... [2] http://www.thenewamerican.com/economy/markets/item/4630-gadh...


It is true that QE has tremendously increased the money supply. Inflation remains around 1%. Inflation and money supply do not have a simple or linear relationship.

The oil thing is nonsense. All oil sales are enumerated in USD for historical reasons only. Dictators who face embargo by the U.S. would rather sell oil for other currencies in order to evade the embargoes.

Iran is trying to sell oil on their own private oil bourse right now. It is an operating concern, today, in 2014. They are perfectly free to sell oil for other currencies, but they are not finding a lot of buyers.


I realize you may not want to name your country, are you from Zimbabwe? The next most recent country going by the list on WP is Zaire (1998) and it wasn't repeating there.


Also have a read of David Graeber's "Debt: The first 5000 years". This "central banking" was invented way before sanitation, and is older than the currency itself.


But that same book also has a very succinct and useful definition of money - remember the scenario wherein thieves are stealing from you and you need a token to show to the thieves to prove you've already been stolen from that day ?

And then those tokens become valuable themselves ?

I thought that explanation was quite interesting but was unsure of its value in describing the real world. BUT THEN, I remember the description in Zinns _Peoples History of the United States_ wherein he describes exactly that scenario:

Columbus wanted gold out of Haiti. There was none. They told the natives to get it anyway, and gave them copper necklaces to indicate that they had fulfilled their gold tribute. "Indians found without a copper token had their hands cut off and bled to death."

So ... to whatever degree this picture of money is accurate, and it appears that it is more accurate than I thought after simply reading "Debt", and to whatever degree central banking is a continuation of that process ... I would have to look askance at central banking, yes ?

[1] http://www.thirdworldtraveler.com/Zinn/Columbus_PeoplesHx.ht... (see paragraph that begins "But too many of the slaves died in captivity")


Hm, those tokens appear in Terry Pratchett Diskworld books.. so there is a historical foundation to it. Interesting.


Imagine that, successful artists being well grounded in the lessons of the past...


Given that he wrote this in that book:

"The greater the need to improvise the more democratic the cooperation [within companies] tends to become. Inventors have always understood this, start-up capitalists frequently figure it out, and computer engineers have recently rediscovered the principle … Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other’s garages."

I wouldn't trust any part of anything in the book.


Obviously, just because you study something intently doesn't mean you understand it


But it certainly raises the priors. Corollarily, if you haven't studied something intently it is actually quite probable that you don't understand it.


My study of magic has rendered me no more magical than the rest. I wish economists would be as honest.


I can't hear you over the sound of your filthy and oppressive fiat currency rattling in your pockets.


That's an unnecessarily mean-spirited way to say "I disagree", along with no explanation as to why you think parent is wrong. Here, have a downvote.


I didn't interpret it as mean (but I see why someone could) but it raises a point different from 'I disagree'. "I studied this stuff intently" is a simple appeal to authority and does not make an argument credible. In this case, it does not tell anyone why central banking is the best idea since sanitation which is a very strong claim that needs some better support.


I agree that studying doesn't automatically make one an authority, and comes across as an appeal to authority. OTOH, prefacing the statement I replied to with "Obviously..." just came across to me as "it's obvious, because you don't know what you're talking about". Maybe I'm just reading too much into it.


I think OP is trying to say, studying golf does not make a golfer.


What the purpose of studying something then, if at the end you still don't understand it?


Just the fun of it?

Learning other stuff in the process?

Gaining a better idea of what the thing you study entails, even if you don't understand it fully yet?


I don't even know how to argue with that...can't do anything against bad faith I guess


Huh? Where's the bad faith?

What I mean is, you can study something even if you know that you won't understand it at the end of your studies. There's even stuff that you can have a full career in and still not understand completely, like Quantum Mechanics.

It's not a guarantee that by studying something you'll understand it, but learning more about it can be valuable in itself.

For example I can study some X technique in a language, e.g Monads, and know when to apply it and what it does, and be quite productive with it, even if I don't yet understand it (or never get to understanding type theory).


this comment seemed unnecessarily mean :(


[deleted]


While one might argue that the comment about Fox appears intended as ad hominem, the link to Wikipedia is clearly an argument from authority.


The link to wikipedia was referential, not the basis for an argument.

Unless of course, you're challenging that informal fallacies even exist.


>> Central banking is possibly the greatest human invention since sanitation. The U.S. central banking system ranks among the finest of its kind.

> I came to this conclusion after spending a significant fraction of my too-short lifespan studying how money works.

Alright, I'll bite. Please educate me by answering these questions:

    1) How are central banks "ranked"? What makes one better 
       than another?
    2) What is the benefit of a central bank?
    3) What makes fiat currency valuable?
    4) Why is governments' ability to print limitless
       amounts of fiat currency not a problem 
       with regard to its value?
    5) .. and if it is, why are we all using fiat currency anyway?
I guess that's enough for now. Having spent years studying how money works, you should be able to breeze through these questions with satisfactory answers, right?


I do indeed have answers. I doubt they will satisfy you.

1. Central banks are ranked on two measures: a.) How independent are they? Are they easily swayed by politicians? b.) How well do they meet their mandates? The U.S. Fed is universally well-regarded in terms of its independence. It does less well on its "dual mandate."

2. Central banking systems make cash and checking possible. Without central banking, your bank-denominated money (whether "checking" or cash) is valued only to the extent that a third party trusts your bank. Your twenty dollar bill printed in Philadelphia becomes valueless in New York, 100 miles away. Fixing this problem makes business transactions, particularly lending, easier and more efficient.

3. Broadly, fiat currency is valuable because other people deem it to be so. Specifically, even if no other person on earth wants it, the IRS and the courts will accept it. Being able to pay my taxes and satisfy court judgments against me in fiat currency places a floor on its value. (It is interesting to observe fiat systems where you de facto can't pay your taxes in the fiat currency: north korea, cuba, zimbabwe, etc)

4. Ability is not action. It is a problem when and if they do happen to do so. (returning to the ranking question, the central bank that printed limitless amounts of currency would be very poorly ranked, since they would fail to meet inflation mandates) Secondly, we want the money supply to rise and fall with the economy. It is very important that the printing of money is not limited artificially, or else we encounter liquidity crises, bank runs, etc. The ancient demons of inflation and deflation.

5. Because the prior standard for currency, precious metal, was dangerously uncontrollable. The very word "dollar" comes from a place in Germany where silver was unexpectedly found, causing an economic crisis across Europe as cheap silver flooded the market.


You're right, your answers don't satisfy me, for example because your whole post is full of bullshit/misdirection. Not that it comes as a surprise.

> 1. Central banks are ranked on two measures: a.) How independent are they?

Central banks are never independent, because they're extremely central in governments' control of their money supplies.

> Are they easily swayed by politicians?

Of course they are. They exist to serve politicians (especially the shadowy figures behind the scenes), and massive financial corporations with first access to "free" (0% interest) money, with which to buy real, productive assets.

> b.) How well do they meet their mandates? The U.S. Fed is universally well-regarded in terms of its independence.

Universally, huh? We must live in different universes. Sure, it's supposedly a "private" entity, but obviously married to the government, buying treasuries like there's no tomorrow.

> It does less well on its "dual mandate."

The Fed's "dual mandate" is supposedly to control interest rates and employment. Too bad it can't create jobs - the best it can do is stop fucking with the economy and let businesses create jobs. Interest rates have been zero (or near it) for years, in an attempt to maintain and create bubbles to keep that inflation going, to lighten the government's debt load etc, and to maintain the illusion that the US economy is not in shambles. It is.

> 2. Central banking systems make cash and checking possible

Oh, right. Because gold wasn't used as "cash" for millennia before central banks entered the picture? Money is just a medium of exchange, and gold was used as one exactly because its properties make it suitable for it.

> Without central banking, your bank-denominated money (whether "checking" or cash) is valued only to the extent that a third party trusts your bank

No, without central banking, my medium of exchange works just fine. That's why it's a medium of exchange - because it can be exchanged for stuff.

> Your twenty dollar bill printed in Philadelphia becomes valueless in New York, 100 miles away. Fixing this problem makes business transactions, particularly lending, easier and more efficient.

I'm not sure how to decipher this.

> 3. Broadly, fiat currency is valuable because other people deem it to be so.

Almost. Fiat currency is valuable because other people are willing to accept it in exchange for goods and services.

> Specifically, even if no other person on earth wants it, the IRS and the courts will accept it.

In fact, they will downright demand it. Governments will forcefully confiscate a percentage of what you earn, and strangely enough, they all want to get it in a specific fiat currency. Go figure.

> Being able to pay my taxes and satisfy court judgments against me in fiat currency places a floor on its value

Being forced to pay taxes in it does that. This, incidentally, was my point earlier, as I suspect you knew all along.

> 4. Ability is not action. It is a problem when and if they do happen to do so.

Oh? Does "QE" ring a bell? .. What about QE2? Or perhaps you're familiar with the still on-going QE3 they're talking about "tapering" to something like "only" 75 billion dollars per month in freshly created thin-air money?

You're so full of shit it stinks all the way to Finland. Again, not a surprise.

> Secondly, we want the money supply to rise and fall with the economy.

Who's we? And no, "we" don't. In fact, in a free market, the rising and falling of the money supply would be negligible because whatever would be used as currency could not be manipulated by anyone (by, say, pressing a button and conjuring 666 trillion quatloos into your account).

No one actually wants to use fiat currency, because it's manipulated at will by governments.

> 5. Because the prior standard for currency, precious metal, was dangerously uncontrollable.

Being uncontrollable is one of the fundamental reasons why gold was used as currency, and it's a fundamental reason for why Bitcoin has become so popular. Here in the real world, we really want our currencies to be uncontrollable by anyone.

For someone who's studied "how money works" for years, you sure are clueless about it. Of course, you might just be a government shill, out to mislead people.


If you use gold as your currency, your money supply is determined by the vagaries of the gold-mining industry vis a vis the economy.

When the economy is booming, if not enough gold is being mined to satisfy the need, you will have a tight money supply and all of the ugly consequences one associates with an excessively tight monetary policy. Credit becomes scarce. Growth slows. Prices fall.

If a few rich veins are discovered, and gold pours onto the market, you effectively have an excessively loose monetary "policy." Far too much gold chases too few goods. Prices rise. Bubbles inflate.

This is equally true of, say, Bitcoin. There is a fixed number being mined. A variable number are lost. Economic growth varies every year. If you were to use BTC as a national currency, your nation could be forced into an ugly monetary situation because you have put money supply outside your control. The money supply will grow and shrink for its own reasons, independently of your economy.

In any case, money supply is still a problem for businessmen. You have just surrendered human control of the supply to the natural environment (gold) or to a computer algorithm that doesn't account for your economic status in its inputs (BTC).


> Credit becomes scarce. Growth slows. Prices fall.

You got one of those right, Mr. Money Expert. I'll let you try and figure out which one.

> If a few rich veins are discovered, and gold pours onto the market, you effectively have an excessively loose monetary "policy."

The thing is, there's no need for a monetary "policy", and effecting one requires coercion. People will use whatever is the most suitable for a medium of exchange. It needs to be durable, easily divisible, valuable, and something that can't be just conjured up in massive quantities. Gold was used because it has these characteristics.

Other than that, you just leave people alone, and let them produce real wealth.

> your nation could be forced into an ugly monetary situation because you have put money supply outside your control

No, that would be a beautiful monetary situation, and "YOU" here can only be the government - some kind of central monopoly on violence that can force people to use its currency instead of whatever had emerged as a reliable medium of exchange.

You're still spewing bullshit. In a way, I hope you actually are a government shill whore puppet, instead of someone who wasted several years of his life on a completely clueless economics education.


You have a de facto monetary policy imposed on you whether you like it or not. It is "coercion" only in the sense that it is outside your personal control.

This can be the blind "coercion" of a computer algorithm, the unintentional "coercion" of precious metals mining, or it can be the careful determination of a council of bureaucrats and businessmen.

Removing people from the equation is an option, but it doesn't remove the market forces.


> You have a de facto monetary policy imposed on you whether you like it or not. It is "coercion" only in the sense that it is outside your personal control.

No, it's coercion because I'm forced to pay taxes in a fiat currency of the government's choosing, and alternative currencies are shut down (by force, of course): https://en.wikipedia.org/wiki/Liberty_Dollar

> This can be the blind "coercion" of a computer algorithm, the unintentional "coercion" of precious metals mining

See above. Not that you're being sincere.

> Removing people from the equation is an option, but it doesn't remove the market forces.

I haven't talked about removing people from the equation.

It wouldn't make sense either, because "market forces" consist of people's actions in the market. What else could it be? It's very simple once you grasp even the very basics of how money and economies work.


If you rely on precious metals as money, they make a perfectly good medium of exchange. Unfortunately, the money supply will still change.

Imposing a fixed amount of money on the world does not somehow imply that there is a fixed supply of money. This was a central problem in European economies for thousands of years.

You hate the central banks. Great. What's your solution? Chaining your economy to precious metals or a computer algorithm is an unpleasant alternative.

(An interesting historical option: rather than precious metals, Chinese accounts were historically backed by the productive capacity of the land. i.e. capital was defined in terms of rice. This had its own ugly side-effects. Still, it was, in many ways, less ugly than relying on precious metals, since money supply was at least somewhat correlated with economic activity)


Do you even know why the US went off the gold standard? If gold is such a panacea, then why did the US get off it? You should really understand history before you start spouting nonsense.


#4 Why is governments' ability to print limitless amounts of fiat currency not a problem with regard to its value?

Having the ability and using it are two completely different things.

"Competent economic management" (which establishes trust in a currency) is the answer to #2, #3. #1 - They are ranked by their primary objective which is slow stable growth.

#5 - because that is what has worked best.


Only one simple question.

Did you read Rothbard's "What has government done to our money?"

If not, do so, and come back to tell us how your mind changed, for good or bad.


Frankly, Rothbard's book is not particularly likely to change the mind of anyone with a good grasp of economics or finance because it's basically an extended political pamphlet which doesn't actually address the arguments economists make against the gold standard. Economists, for example, believe that hoarding is detrimental to investment because [some more] individuals will be rationally inclined to hoard rather than invest in a noninflationary environment, resulting in fewer real goods and services being produced. Rothbard manages to write an entire chapter claiming that "hoarding never brings any loss to society" without any reference to investment, or the effects of expected zero inflation (or deflation) on propensity to invest. He even describes the beginning of a credit crunch "suppose, for whatever reason--perhaps growing apprehension--people's demand for cash balances increases" as a good thing which it would be a "positive social benefit to satisfy"! Let them eat coins! What happens to the people who want to make stuff to sell at a profit and face both increasing borrowing costs and decreasing prices isn't discussed...


There is a practical example where the incentive to hoard has not stopped transactions: the technology industry. Since the dawn of computers and personal electronics, the purchasing power of the dollar for technology products increases drastically year-by-year, and yet transactions continue to occur.

If a currency or commodity accumulates value, the seller's incentive to acquire it is mathematically equal to the buyer's incentive to hoard it. Eventually, they meet in the middle and find a mutually agreeable price, because people will always want goods and services.


I have not, and I will not in the future.

Just as one does not read alchemical texts for insight into modern chemistry, I have not spent very much of my life reading the Austrian school.

There is certainly a great deal of historical interest for students of philosophy, but that isn't in line with my personal interests. Broadly speaking, the Austrian school has little relevance to the study of economics or finance.


A preference for some economic texts over others seems more like a preference for some alchemical texts over others than a preference for chemistry texts over alchemical texts.


This is all I need to know. Now I am absolutely sure you don't know what you're talking about.


Thanks, I just bought that for the Kindle for a few dollars. Another book in a similar vein is "The Currency Wars" which I really enjoyed, and then shared with my family. TLDR: the financial system is rigged to make the rich richer; getting off a fiat currency would in general (and long term) help 99% people. BTW, it still blows my mind that so many friends think the US economy is so great right now, ignoring the $3 trillion in money created out of nothing in the last few years; sure stock and home prices were maneuvered higher.


You can't talk about central banking authorities as a single type of homogenous system. There have been and are many different kinds of central banks over time and across borders. Each are run and incentivised very differently. Each operate with different levels of competency and available data. Each can be motivated radically differently - e.g. some are basically run by the government and are prone to political pressure whereas some are run by relatively independent committees (such as Canada, UK, New Zealand).

But Central Banks have the ability to make a huge difference in the quality of life/standard of living in a country depending on its competency and understanding of the economy. If you take the US as an example and compare the response to the 2 greatest financial crashes in the last century. The Fed in 1923 operated under poor information and took the exact wrong course to mitigate a financial crash by contracting monetary supply. Contrast with the Fed in 2008 to date (despite complaints) - its steps in producing massive quantitative easing was the exactly right thing to do. Given their likely responses, there are many more jobs and more economic output today than would have existed had we swapped the 1923 and 2008 federal reserve - I don't think many economists will disagree on that point.

With a decentralised currency like Bitcoin, my understanding is that monetary factors cannot be controlled. So you'd lose a very important tool when it comes to regulating the economy/applying course corrections over economic cycles.


Looking at the actions of the Fed after the crises is only evaluating half of the situation. For example, the Financial Crisis Inquiry Commission, hardly a libertarian group, blames the Fed and its chairmen for enabling the crisis to happen in the first place.


http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/f...

"The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not."

Ah, but the crisis would have happened in the absence of the Federal reserve. In fact, one could easily argue that the Fed was lobbied heavily, HEAVILY to do less by external forces and those forces succeeded. You cannot come to the conclusion that a lack of a Fed would have made markets more stable.


I think the broader point is that financial bubbles will happen with or without supposed regulation. The question remains what can be done when it happens?

Without a centralised monetary authority you lose an important tool to manage a crash.


>You can't talk about central banking authorities as a single type of homogenous system.

Actually you can. The modern central banking system is all part of the same homogenous system, coordinated by the Bank for International Settlements (BIS) in Switzerland, the umbrella bank for all central banks in the world.

http://www.bis.org


> Central banking is possibly the greatest human invention since sanitation.

The greatest human invention since sanitation is that a tiny elite can control the value of money (and money over time)?

Is that a joke? Are you joking?

Edit: Really...? Really? You know the devaluation of currency over time and the resulting increase in the cost of goods disproportionately affects the poor and middle class, as well as retirement savers who's interest rates can't keep up, right?

Is that also a feature?


Damn right it's a feature. Otherwise there'd be no incentive to invest, people would just hoard assets instead of putting them to productive use. There's a reason countries abandoned the gold standard: deflation and bank runs are harder problems to manage than inflation.


But for whom are they problems? People who are trying to get by in life or rich people looking to get richer?

Regular people invest when investing makes sense, when the creation of a thing like a restaurant or a farm or what have you has significant value in and of itself. NOT because they value money, and the value of their money will decrease if they don't invest

Having the power to control inflation to force people to invest is tantamount to setting their mattresses on fire to get them out of bed in the morning so they'll go to work. People will get out of bed--and invest--when it's right for them, and they don't need people like you to goad them into it.


Deflation hurts anyone who has a mortgage or any other kind of debt. Theoretically it rewards savers, but if prices are falling then wages then to do so as well, consumption and production go into a downward spiral.

Anyone who thinks defaltion is a good idea is essentially thinking that their small cash pile will magically grow to be worth more without them doing anything, which seems enormously attractive because it's a) easy and b) there isn't any of that unpleasant risk that comes with investment, and which makes it so hard to decide what to invest in. So everyone who has money stuffs it under the metaphorical mattress, and people who don't have any can't get any because the supply of credit has vanished. Economic growth slows way down.


Deflation is terrible. Who would buy a computer today when one twice as good can be had for the same price in less than two years?


That's not deflation, that's a drop in real cost, which is only created by investment.

Under deflation the same computer would cost half as much 2 years later, and you would only have half as much income to spend on it.


How do you distinguish the two in general? If over some period of time technological improvements reduce the cost of almost all goods (and also therefor the value of the human labor involved in the more traditional ways of producing the goods), what has happened is just drops in real cost, but it has also decreased people's income and probably created unemployment. If we calculate deflation using a basket of goods and don't print exponential amounts of money, it also caused deflation.


Purchasing power parity. You're conflating a drop in the factor of human labor with a drop in the vlaue of that labor, but they're not the same thing. For example it may take me only 1 hour to do in Excel what would take me 3 hours to do with pen and paper, but the value of an hour of my work has not dropped; it's probably risen due to the greater complexity of accounting tasks I can perform and my increased technical knowledge. I spend 3x less time on each client, but I can handle 3x more clients. My wafes ought to stay the same in real terms, or even rise depending on how well I can operate Excel. Your cost to get your books done may have fallen in real terms thanks to my doing it faster with Excel, but my hourly rate has not.

Under deflation, though, everyone has less money so I have to keep cutting my rate to stay competitive. Now even though I'm more productive I'm getting a lower return on my productivity. Arguably,this is a problem currently facing much of the labor force in the US.


It's terrible from the producer's point of view, which is why there are so few participants in the chip market. The thing is, technology is not the whole economy, and is far from being there for many years to come (ie Star Trek type replicators).

Any economic situation can be good for individuals who are positioned to take advantage of it, but in macro you need to consider the economy as a whole, through to food and extractive industries etc.


> But for whom are they problems? People who are trying to get by in life or rich people looking to get richer?

The Great Depression was pretty bad for people trying to get by in life, no?


The Dust Bowl was what hurt people. The deflation of the Great Depression was not what hurt people.


Don't buy into the propaganda. Bank runs only happen in fractional reserve systems, which central banking facilitates and encourages.

Deflation isn't bad either, it encourages saving, which rather than living paycheck to paycheck as most do today.


Deflation encourages hoarding, and results in inescapable debt slavery for anyone who doesn't have a surplus. Falling prices cause producers to exit the market, leading to shortages.

Your solution to the problem of inflation is the abolition of credit.


It should be noted that Bitcoin doesn't prevent fractional reserve banking; the currency is fairly irrelevant, as long as your depositors and regulations allow you to only keep a percentage of the deposits with immediate liquidity.


Heavens forbid a normal person ever be able to take out credit or anything. (Hint: Without fractional reserve banking credit would get VERY expensive).


Deflation rewards people with surplus income, which has little effect on those living paycheck-to-paycheck. The two bottom quintiles in the US do not have the ability to save; they won't magically start saving just because inflation goes away.

If inflation encourages those with surplus income to make riskier investments, and riskier investments benefit those living paycheck-to-paycheck (say by increasing demand for their labor) then inflation is to the benefit of those living paycheck to paycheck.

On the other hand, the upper-middle-class to wealthy do benefit from deflation, since they have excess income. If inflation doesn't benefit the less well off, then perhaps there is little reason to punish the wealthy with inflation. Those that would save more in a deflationary economy are already saving though.


Yes, because the "Centralized Bank" in 1929 caused the bank runs.

Oh wait, centralized banking didn't exist back then? Fractional Reserve Systems didn't happen back then? And yet you have a decade of the greatest bank-runs of US History?

And ever since the fractional reserve system was invented, there hasn't been a national-scale bank run in the US for nearly 100 years?


You might want to check your dates. From wikipedia[1]:

"The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907."

[1] http://en.wikipedia.org/wiki/Federal_Reserve_System


The Federal Reserve came into existence in 1913, and fractional reserve banking was absolutely being practiced in 1929.

If you're going to act all exasperated about something, at least get your facts right.


Fractional reserve banking dates back to at least the 1600s, practiced by goldsmiths in a time when currencies where privately issued.


Living paycheck to paycheck is not the converse of saving.

When I save money, I invest it in productive enterprise. Thus, I have less in my checking account. You could even consider (gasp) that I'm living pay check to pay check!


Without a central regulatory authority, what would prevent any private bank from lending out all its deposits? Nothing. And in fact fractional reserve banking predates the modern central banks by hundreds of years, and is one of the economic risks that central banks exist to manage.


>Damn right it's a feature. Otherwise there'd be no incentive to invest, people would just hoard assets instead of putting them to productive use.

So? Why should they put it to "productive use"? Who deems what use is better than another?


It's not, but what: the financial market provides a mechanism for people to choose between asset classes with varying risks and rates of return. Bond issuers offer notes that pay out at a premium to the interest rate over a fixed period, stocks are issued with the possibility of a dividend or appreciation in value.

Didn't you notice what happened during the recent financial crisis? Capital markets dried up, credit was unavailable to many small and mid-size businesses, and many of them shut down for lack of cash flow during a period of limited demand, rather than any fundamental flaw in their business organization.


One could argue that the fundamental flaw in their business organization was a reliance on credit in order to survive. It's a different way of thinking about the world to be sure, but that doesn't mean it's wrong.

Ultimately I don't really like living in a society that has so little slack in it. I'd prefer (not that anyone gives a shit what I prefer) one where most businesses have large equities built into them rather than debts. A business which owns outright the building it occupies is more likely to weather a storm than one which rents or is still paying a mortgage on. That's because it can afford to accept lower yields (not paying an extra $X per month in rent-equivalent to the owners/investors/etc) in the short term for the benefit of still being around.

Slack isn't efficient on any time scale that economists or MBAs care about but over 50 years I think it's quite a good idea. I'd rather own a business which lasts 50 years even if 10 of those 50 years don't pay the kinds of returns I'd like than one which makes better returns for 12 years and then folds.


The thing is that many businesses are cyclical by necessity - agriculture being the most obvious example, but cycles of various kinds pervade business just as they natural systems like wildlife populations and so forth.

If most businesses had large equities rather than debts, you'd have a significant opportunity cost. It's not a matter of what MBAs care about (often not what economists care about), but one of what could have been achieved with money that was otherwise sitting idle. The approach you describe often leads to zombie companies that are not actually productive but are able to cannibalize their own assets while making it difficult for more efficient producers to enter the market.


Maybe or maybe not. It depends on what you're trying to optimize for. One man's opportunity cost is another man's ability to weather a funding crisis that eliminates his competitors and provides him with a large opportunity once the business cycle is back on the upswing.

Equity means having control over your destiny, debt means the bankers decide your fate. Choose accordingly.


With words like "invest" and "hoard", you're using language that short-circuits critical thinking. Surely, for example, you agree that not all investments are good? But "invest" has an undeniable positive connotation, so in order not to prejudge the outcome let's replace "invest" with "spend". Then, instead of the inflammatory word "hoard", let's use the word "save".

With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: currency dilution is good because it encourages spending and discourages saving. There's no doubt about the factual claim—dilution does indeed encourage spending and discourage saving). But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that currency dilution transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give dilution the benefit of the doubt.

Regarding the so-called "gold standard", the historical evidence is not nearly as clear-cut as you've been led to believe. Though flawed in many ways, What Has Government Done to Our Money? by Murray Rothbard is a good place to start: http://mises.org/money.asp


I picked my terms carefully. Investment and spending are absolutely not the same; investments can certainly go bad (although even bad investments generate some economic activity), just as spending can be misappropriated. But the main difference is that while you may get some utility from spending, you do not anticipate any kind of future return.

As for saving and hoarding, those are not the same either. If someone saves they typically do so via a savings account or a CD at an institution engaged in fractional lending but (within the US and within limits) a government backstop to prevent loss of savings. Hoarding is putting your money under the mattress where it's absolutely not doing anything.

The fact that your argument requires redefining basic economic terms should be a clue that there is something terribly wrong with your priors.


I looked into it, and you're right; I was sloppy in my terminology, and will be more careful in the future. I appreciate the correction.

In this light, let's consider four activities: spending, investing, saving, and hoarding. Currency dilution encourages the first two and discourages the second two. It also systematically transfers purchasing power from savers/hoarders to spenders/investors. Can you build a case that the benefit from dilution outweighs the costs? Dilution certainly encourages "economic activity" (for certain values of "activity"), which you seem to regard as axiomatically good. What is your justification for this?


I am absolutely not joking, and the fact that the value of money can be controlled by a central authority is a feature not a bug.


[deleted]


>>It is in fact a major bug that you effectively lose just by holding.

Not taking sides here, but I think it could be argued that devaluation is good because it encourages economic activity (i.e. spending) instead of mindless hoarding.

I mean, money is supposed to be a medium of transfer, not an investment/saving mechanism. We don't want people hoarding cash in a bank account. We want them to invest that cash in actual assets that can then be developed.


>Not taking sides here, but I think it could be argued that devaluation is good because it encourages economic activity (i.e. spending) instead of mindless hoarding.

So would threatening to execute anyone who spends less than n% of their take-home pay, but people don't advocate that, do they?

Before you object to the comparison, I know: "That's different: the costs would vastly exceed the benefits!"

Right, but there would be costs! There are costs any time you force people to spend (commit to purchases) earlier than they would like to -- whether you do it by inflation or the sword.

One cannot simply say, "well, economic activity [that we measure] went up, so that must have been a good idea!" But anytime someone brings up the "encourages economic activity" argument for inflation, they rarely offer any way to model the cost of moving up purchases like this, nor do they even realize it's necessary to do so!

(Edited to avoid excessive attribution of the argument.)


Inflation is a tax on assets held as dollars. That tends to make it highly progressive as savings tends to increase faster than income once you pass a certain inflection point.

The government already taxes other things (both to generate income and to alter behavior), so looking at inflation that way makes it easier IMO to make sound policy decisions rather than comparing it to executions.


Yes, you can replay another standard argument for inflation. It's still not enough: the question is how to model the cost of making people spend sooner than they otherwise would, so you can compare to the benefit thereof. Mentioning executions was just to show what happens when you ignore costs and only talk about policy benefits.

For those "taxes of other things", you still need to model its social cost to know whether it outweighs the benefit. You can't just dismiss the point as "this isn't execution".

Edit: Important thing to note: in most discussion of taxation, the theme is "how to avoid the deadweight loss", i.e. how to write the tax in a way where it just transfers money without inducing changes in behavior. Advocating inflation as a behavior-changing tax is a sharp deviation from this, requiring a very different justification and model than traditional taxation.


> in most discussion of taxation, the theme is "how to avoid the deadweight loss"

This is certainly not true for e.g excise taxes. Inflation as a tax on dollars-held is similary intended to alter behavior by encouraging those with wealth to take riskier investments (alternatively stated, to discourage long-term holding dollars, similarly to how excise taxes are intended to discourage consumption of particular goods).


I think you mean Pigovian, not excise, taxes, and you'd still need a way to model the relative benefits vs costs of hoarding. With e.g. carbon taxes, one can estimate the harms of global warming (rising sea levels, lost biodiversity) and find the social cost of an emission, then levy a tax so that people only do those carbon emissions whose welfare gain exceeds the environment-driven welfare loss (which exist, despite the rhetoric from the fiercest advocates).

When someone proposes n% inflation as a way of "taxing" hoarding, what's the corresponding model? What's the "rising sea level" there?

In cases of a ~100% "inflation tax" (aka hyperinflation), we see the harms clearly: people have to spend money almost the second they get it. They have to move up purchases and otherwise arrange their lives in ways that are extremely welfare harming, and which probably outweigh the benefits of the greater economic activity it induces.

(Contrary to a lot of talk on hyperinflation, I don't see the chief problem as being volatility; even with stable, predictable hyperinflation you have the problem of losing the main benefit of money, which is that you don't have to know what you'll ultimately be buying in order to produce something for sale.)

So likewise, to justify a Pigovian argument for inflation, you would likewise need a model, or otherwise gauge the magnitude, of the "costs of making people move up purchases [when they'd rather save and decide later]" -- the costs that become extreme in the case of hyperinflation. And yet virtually everyone enamored of the "we need to encourage economic activity" argument for activity has nothing in the way of this. Hence my frustration with it.

(The analog of hyperinflation in carbon taxes would be a ban, or absurdly high tax, on burning of fossil fuels, and has the corresponding welfare harm that the avoided fuel usage -- or costs in evading the ban -- far exceed the welfare harm of the emissions themselves.)


If you talk about small amounts of inflation, then the amount of inflation from the time I get my paycheck, to the time I can convert it to other assets is negligable. I don't need to purchase anything with it.

I haven't seen any evidence that convinces me that modest inflation causes people to spend money sooner (If you have any I would be very interested to see it).

I think that easy access to credit definitely affects people's spending behavior, but I don't have a lot of data to back that up.


But you were just saying (or relaying the point that) the inflation tax is good because it changes people's behavior in the way of spending sooner. If "there's no evidence that modest inflation causes people to spend money sooner", then it fails by the very metric you suggested.

You can't have it both ways: either inflation (of a certain rate) is good because it makes people spend sooner, or it doesn't change behavior.

Edit: or there's some other way in which you operationalize the goal of "increased economic activity" that's orthogonal to "spending earnings sooner than you otherwise would".


Perhaps because I am using my terms loosely. My apologies.

By spending I intended "purchasing depreciating (or disposable) assets"

Purchasing equities as an inflation hedge is not what I meant. Inflation does encourage riskier investments, as merely holding currency is insufficient to maintain capital.

I agree that it's an open question whether or not that's a good thing: some would argue that encouraging riskier investments encourages malinvestments which becomes a net negative; others argue that the increased activity caused by risky investments outweighs the damage done by malinvestments; I've even run into many who claim that even malinvestments are good, since moving money around is good no matter the reason.

If that last point of view is true, I'm giving up on economics, but the first two both seem reasonable to me.


Depreciating vs investment assets is orthogonal; both lose value more slowly than money in a hyperinflationary situation.

And yes, there are trade offs, one of which is the malinvestments from spurring people to hold non cash. My point was that this, plus the individual welfare loss of the hoarder from having to commit to purchase sooner, must be weighed against the purported benefits of (what you got people to do via) inflation -- and (as I said at the beginning) that most people who make that argument for inflation (even economists) don't offer a way of modeling those relative benefits.

It's like arguing for an apple subsidy on the basis that apples are good, without even thinking about the costs of such a subsidy (ie diversion from non-apple production).


With phrases like "economic activity" and "mindless hoarding", you're using language that short-circuits critical thinking. You're on the right track, though, with your parenthetical note, so let's start by replacing "economic activity" with "spending". Then, instead of using the inflammatory phrase "mindless hoarding", let's use the word "saving".

With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: devaluation is good because it encourages spending and discourages saving. There's no doubt about the factual claim—devaluation does indeed encourage spending and discourage saving. But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that devaluation (currency dilution) transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give devaluation the benefit of the doubt.

And yet, so far as I can tell, devaluation is always given the benefit of the doubt by the mainstream. Doesn't that seem odd?


>>We can recast the claim as follows: devaluation is good because it encourages spending and discourages saving.

No, you can't. In fact, it is interesting that you blamed me for attempting to short-circuit critical thinking, and then turned around and suggested something so asinine as this.

The reason it is asinine is because not all forms of saving are equal. A grandma stashing cash under the mattress does not help anyone else but the grandma, which is why it makes sense to discourage it using devaluation mechanics built into the economy. But if she invested that cash into a value-generating asset (e.g. a company, a piece of real estate, a public project, etc.), both her and the asset developer/owner would benefit: it would be possible to develop and maintain the asset, and she would reap greater returns. And just so we're clear, it's not like we're forcing grandma to take insane risks. Government bonds have historically been incredibly safe. So devaluation exists as a mechanic to say to grandma, "instead of mindlessly hoarding your money under the mattress, buy bonds with it. As a result, we (the government) will be able to fund public projects and you will be shielded from devaluation."

It is difficult to argue that this configuration is less optimal than one in which money never loses value.


I see what you mean now by "mindless hoarding". This requires a more detailed discussion; happily, Henry Hazlitt has provided it:

http://steshaw.org/economics-in-one-lesson/chap24p3.html

See also Murray Rothbard's discussion:

http://mises.org/money/2s9.asp

You may not agree with their analyses, but at least they can serve as a counter-narrative to the mainstream views you evidently support.

By the way, your comment can be improved by removing everything before "not all forms..." In that case, it would simply make a cogent point (though one with which I still take exception). As it stands, your comment comes across as petty and unrefined. Stay classy—it's nicer, and it's also more likely to persuade.


"Ultimately though, if money were represented directly by time or something I think that would be far more ideal as it would be guaranteed to be stable."

I'm not sure what that means. Jokes about relativity aside, time doing what? If you mean individual's labor (which has been tried a few times, see http://en.wikipedia.org/wiki/Ithaca_Hours), then that seems unlikely to even be fungible, much less stable.


It's still early days of allowing independent (i.e. apolitical) monetary policy committees from controlling money supply/interest rates, but we are and have been in a unprecedented period of relatively low inflation for the past couple of decades. This is despite the greatest financial crash since the great depression.

I'd say there is good grounds for saying this is a great human invention - although probably not on a par with sanitation.

No the system isn't perfect - it is structurally flawed like all other systems - but it has worked well and the negative side-effects can be managed


  > This is despite the greatest financial crash since the great depression.
Inflation isn't necessarily a problem when you have a depression or recession (unless inflation is the cause of the pain). During the Great Depression we experienced deflation, IIRC, as the money supply contracted (a shrinking number of dollars chasing a more-slowly shrinking number of goods). So while I'm not saying you're right or wrong, the absence of inflation during an economic crisis really isn't evidence of anything in particular.


The rate of inflation is how modern central banks are graded on their performance. In countries like the UK or New Zealand, it is the primary benchmark and the main metric that is targeted. The story is a bit different in the US where the Fed is mandated to watch over prices AND output + employment.

Although its not the same as economic output - having stable prices is important to support growth or a recovery. Deflation prolongs a depression - this was the major motivator for quantitative easing in the last financial crash.

I should correct myself - I should have said "low + positive + stable" inflation and not just "low inflation"


Inflation favors the debtors, meaning the poor and middle class.


Historically, the largest debtors are governments followed by corporations, the rich, the middle class, and then the poor. You may be thinking of net worth as the poor and middle class are more likely to have negative net worth due to debt than the upper classes. However, this makes inflation even worse for the lower classes as the assets owned by the upper classes which offset their debt are rising in price due to inflation, further benefiting them. As well, the upper classes have greater access to investments that allow them to protect their wealth from inflation unlike the lower classes. In addition, the lower classes tend to have less bargaining power with which to keep their real wages from falling in an inflationary environment.

Inflation most definitely favors the upper classes relative to, if not at the expense of the lower classes.


People who wouldn't be debtors if the game weren't rigged to destroy their savings.


What savings?


Indeed.

If you have a mortgage, it is likely that your net worth is negative. In such a case, inflation greatly helps your networth.

Credit card debt, mortgages, student loans, payday loans... this is the reality of the lower and middle class. If you're making less than $45,000 / year, you're likely in debt in the US.

At which point, inflation helps greatly, by reducing the value of your debt. A (former) student who has $100,000 in debt isn't "losing money" to inflation... the student is instead "losing debt" to inflation.


My point was that it's not written in stone anywhere that the middle class is a debtors class. People didn't used to have credit cards and car loans. Some would have mortgages, but nowhere near what we have today, and it wasn't about investing in the "value" of the home, given that there is no such thing, besides it being a roof over your head.

This system in which the middle class is by default considered the debtor class is a result of decades of manipulation.


And the middle class is free to live without credit cards, mortgages, and student loans.

Its hard to call it "manipulation"... although I'd argue it is widespread ignorance that has caused this problem. It is clear to me that swaths of people do not understand the concept of debt until it is too late. There is clearly a problem in the education system.

Too many people are getting too much into debt. Not on someone else's choice, but on their own choice.


Right, you really expect someone to pay for an 80 - 150K degree all on their own without student loans? That's usually the catalyst there. Once you graduate college, then you need to start paying off that debt. You need to get a job, pronto, and that often means buying a car to drive there.


Nope. I expect less people to get an $80,000 degree. I got a degree in engineering at a State University for $30,000. I have friends who got cheaper degrees by going to community college for two years.

There is also the option of not getting a degree at all, one which is rarely discussed. It turns out that the US Job can't subsume all of the college-level jobs anyway. A degree in Library Science is surely hard stuff, but its relevance in the modern workforce is questionable.

I dare say, its better to just get a job out of High School and start climbing the corporate ladder at Target or Costco, than to waste 4 years of your life on a dead-end degree. (And no offense to "dead-end degrees" either. Lawyers for instance, are contracting. They're currently a dead-end degree, despite the extreme difficulty and prestige associated with the field. But it is surprisingly difficult to get a job now as a fresh Law Grad IIRC).

Nevertheless, those who are $100,000+ in debt benefit from inflation. There are plenty of people in this unfortunate situation and the country should do more to support them. (the counrty should have done more to prevent them from getting into that situation... but that is another story)


Would that former student not also be losing some of his/her ability to pay off said debt? In other words, if his/her salary is not increasing to match inflation, isn't it just a wash?


Which is why unions and a minimum wage attached to inflation are important.


How does (steady, predictable) inflation help you as a debtor? If the banks expect to lose, say, 3% to inflation, isn't the logical action to increase the nominal interest rate to maintain the same real rate?

I can understand why unexpected inflation would help debtors, but that's not what people argue for.


Logical, yes. But in practice, no. Interest rates have fallen while inflation has remained steady.

Consider that 20 years ago in 1994, the Mortgage rate was 9.17%, while today Mortgage rates are roughly 3.9%... it is clear that the market for interest rates is rather more complicated than you mention.

http://www.freddiemac.com/pmms/pmms30.htm

-------------------------

Second, you're right. It really doesn't matter how high or low inflation is, if it is consistent... then it is something the market will easily take into account.

So a steady rate of inflation is perfectly fair to both sides. Which is why the Federal Reserve wants to peg inflation at 3%.


Well, of course inflation is not the only thing they take into account, so it's no wonder that rates don't match up to it, but that wasn't my point.

So a steady rate of inflation is perfectly fair to both sides.

But it wasn't claimed that it was fair, it was claimed that it was good for debtors, which is what I find hard to believe.


I would wager that having a mortgage is positively correlated with net worth, and that credit card debt, student loans and surely payday loans(!!) are negatively correlated with net worth.


I would hope so.

But with the number of "underwater" homes, subprime mortgages, and so forth that were handed out through the early 2000s, it is clear to me that mortgage holders probably have negative net worth, especially if they were lower or middle class families.

People were buying homes they couldn't afford. In these cases, inflating their debt away is only a benefit.


Looking at various real estate indices over the years, it looks to me like we've recovered through much of the crash, and the FTSE NAREIT price value was higher in 2006 than now, but not in any other year.

Combining that with the fact that many mortgage holders would have bought before 2003, suggests to me that the overwhelming majority of mortgage holders are not underwater, which takes nothing away from the pain of those who are, but numerically, they are a minority. Perhaps half of all mortgages relate to purchases (original purchase date, not most recent finance date) prior to 2003, and I'd wager that well more than half (probably 75+%) of purchases since then have mortgages that are not underwater.

Sure, mortgage holders from lower class families are more likely to have a negative net worth. But that's almost the definition of lower class, not because they're a mortgage holder. Lower class families with last names starting with "S" are also more likely to have negative net worth than average families; has nothing to do with their name...

Totally agree that inflation is the friend of a fixed coupon debtor. I'd be hard pressed to decide to pay off my house even if I had the free cash to do so. It will be much cheaper to pay it off with massively devalued 2024 and 2034 dollars.


Only about 13% of mortgages are underwater[1], so it's definitely not true that mortgage holders probably have a negative net worth. It's a common situation, but far from being the situation a majority of mortgage holders are in.

[1] http://www.forbes.com/sites/erincarlyle/2013/12/17/6-4-milli...


Unless banks are able to think ahead far enough to factor inflation into the loan rates.


i guess the word you meant was "deflation".


Nope, deflation hurts people who owe money by increasing the value of the debt they owe. Under deflation, nominal wages go down, and since debt (especially the principle) is nominal, that means the debt-income ratio rises, making the debt harder to pay off.


No - he means inflation. It erodes the value of the balance that is owed making it easier to pay off


But the banks know there will be inflation, and therefore they can price that in at the moment the contract is signed, raising the nominal rate to counterbalance inflation, no?


Under normal circumstances - I don't think Banks directly price for inflation unless it's a financial instrument specifically linked to a certain measure of inflation.

I worked in a bank for a few years - doing credit risk in both consumer (cards, personal loans, etc) and investment banking (bonds). When it comes to consumer loans, like cards, mortgages, personal, etc, the basic formula is the cost of funds plus a margin that reflects the risk (i.e. card loans more risky than mortgages).

Cost of funds relates to how much it costs for the bank to obtain those funds - its an aggregate of various wholesale market rates, the composition of its deposit base, and a bunch of other things.

Inflation risk is something I never had to factor - but it could have just been because I wasn't working in a time with a major inflationary shock


The cost of funds figure (whether LIBOR, prime or other base rate) IS the reflection of the cost of expected inflation.


Actually it's related to a theoretical "zero-risk" investment. Mortgages come with some risk, therefore they need to be priced above the returns for a zero-risk investment. In an inflationary economy, the theoretical "zero-risk" investment is typically something better than just holding the cash, but it can be smaller than inflation (meaning there is no way to gain money without accepting some amount of risk), or it can be larger than inflation. It has varied over time in a way that does not match up with inflation, which disproves your statement.

Side note:

In a deflationary economy, then "zero-risk" would be just holding on to the cash. Of course, that's still not risk-free since you might have been wrong about the economy being deflationary.


I genuinely can't tell if you understand what I said or not. (It isn't my finest work, but if you read my reply in the context of the post to which I was replying, it will make more sense.)

I'm well aware that there's a risk-spread over the base rate for mortgages. My point was that the GP said he worked in a bank pricing credit and never had to figure anything to do with inflation; he only had to deal with a cost of funds figure and therefore banks don't price inflation into credit products.

My point was that cost of funds figure WAS the inflation figure.

Now, if you're arguing that there isn't 100.000% correlation between the various cost of funds rates and the various measures of inflation, I'll agree, but posit that the correlation is high, just not perfect.


I think the correlation is very weak. We've had very high cost of funds in times of low-inflation. All the bankers care about is if they can make more money lending it out as a mortgage than they can putting it somewhere else (after factoring in risk). If there is no low-risk inflation hedge, then they could very well lend out money at rates below inflation (after factoring in their risks), since that could still be a higher return than any available lower-risk investment.


No. Inflation.


I've given up on being disillusioned with these kind of things anymore. It takes too much time and energy. You know what's an awesome substitute for it? Climbing a tree.


nate, don't even try. they've been bought and paid for by the creature of jekyll island. just look at how well they're doing. they say they are educated, have great intellect, are smart, bring the human race forward with whatever startup they're working for.

greed, illusion and disinformatuon has sucked their common sense. one can't win against zombies.

edit: 4 downvotes on this. point proven.


The article isn't ridiculing the central/fractional banking system. It's ridiculing the response to bitcoin.


For the satire to work, the parodied criticisms have to make sense when applied to central banking systems. But they don't.

When satire doesn't work, the author looks sillier than your target. I don't think this was a goal.


Criticisms like "perfect for criminals" and "no consumer protection" do make sense. Cash is great for money laundering and has no reversibility. The whole point is that these weaknesses are 100% real--and yet not necessarily a barrier to adoption or successful use.


Cash sucks for serious money laundering. It's fairly anonymous in small quantities but start talking about millions/ billions and it's bulky enough to be hard to transport across borders and each bill is tracked by serial number which means spending it involves a lot of leg work. Gold is way better than cash when it comes to money laundering.

PS: Drug kingpins have been known to dump small denomination bills as not worth the hassle.


I thought that was the main use of the $100 bill. Supposedly 2/3 of the $100 bills circulate outside the US [1], presumably for money laundering type activities.

[1] http://en.wikipedia.org/wiki/United_States_one_hundred-dolla...


US Cash is often used for Legal transactions outside the US. Basically, people often trust USD more than there local currency's. Either from inflation concerns or simply there ability to spend it outside of there home country.


Someone mentioned this in a bitcoin thread but money laundering is harder with cash than bitcoin for the simple fact that at one point somebody needs to take the physical bills.

A seller of an object must expose himself when he tries to collect his cash. With bitcoin, he can simply give a wallet.


Just the opposite. They can't make sense when applied to the current banking system because the idea is to show that criticism of bitcoin also misses the point.

So the flaws of cash listed in the article are superficially plausible but we know they weren't much of a barrier to wide adoption.


Cash was "adopted" because it is backed by the United States Federal Reserve System. It is legal tender. It is fungible: every checking account is equal. It is issued by regulated institutions, people who sue you are obliged to accept it, and the IRS will take it as payment.

This was not always the case.

Before the advent of central banking, cash was just as dodgy as Mt. Gox internal transactions. You were unlikely to be able to use cash more than five miles from the bank that issued it. Balance statements were purely arbitrary because you had no insight into your (unregulated) bank's books. In the 19th century, transactions across long distances looked more like hawala than anything the modern man would recognize as banking.

This satire was written by someone who does not understand what he or she is attempting to satirize.


Since you're aware of the history of the US central bank, you are also no doubt aware that its invention was the subject of highly contentious debate that lasted decades. It was by no means an easily accepted invention and many, many people ridiculed and mocked it along the way.

Perhaps the author understands what they're satirizing a bit more than you're giving them credit for.


There was a lot of (justified IMHO) controversy around the formation of the Euro union as well. I'd say it's a little crazy for one country to have 40+ currencies -- and apparently so did a lot of people -- but it certainly is a tool for independence (which is why I think the Euro was a bad idea and the Dollar was a good idea).


The fact that bitcoin is not legal tender is not an argument that the article parodies. Just because there are real arguments against bitcoin does not mean that the others cannot be parodied.


Parodying only the convenient criticisms is an important editorial choice by the author.


Being legal tender means a group of thugs who regularly rob me accept this currency but not others. If we must tolerate being regularly robbed by thugs, this is a desirable feature in a currency, but it would be better to not be robbed by thugs at all.


You heard it here, first, folks.

A citizen being asked to pay his legal due in taxes is exactly the same as being repeatedly robbed by thugs.


>You heard it here, first, folks.

Something something monopoly on violence.


Our current systems evolved slowly over the course of thousands of years. They weren't dreamed up one night in some nerd's basement. They were formed over time through public debate and useful exchange of value. Farmers aren't using Bitcoin. Bridge builders aren't using Bitcoin. Armies aren't using Bitcoin. This isn't some situation like where we're choosing between two Ruby libraries that do S3 uploads. This is a situation where we have the institutions that evolved over time vs. some dudes with a new idea on the Internet. Ya'll be ignorant.


Quite. Bitcoin has built-in authentication, which is a key feature of a traditional currency, and scarcity as well. But as long as it's not any kind of legal tender, there's no guarantee that any transaction or payment of debt offered in Bitcoin will be accepted, and that introduces considerable friction into its use as a currency. Also, the scarcity is arguably deflationary; nobody goes into solo mining any more because it's obviously not worth it, and the more coins that are mined the lower the incentive to go into mining. This means holding bitcoin results in appreciation proportional to population growth, even though no useful economic activity is taking place when someone sits on top of a pile of cash. The whole point of inflation is to reflect the natural rate of economic growth and to discourage economically inefficient hoarding. Runaway inflation is of course a bad thing, but no inflation at all, or deflation, is just as bad in economic terms.


>The whole point of inflation is to reflect the natural rate of economic growth and to discourage economically inefficient hoarding. Runaway inflation is of course a bad thing, but no inflation at all, or deflation, is just as bad in economic terms.

Consider where that initial cash came from. You worked your ass off between 18 and 60 and you got a bunch of cash in exchange. Some you spent on consumption, some you saved for use later. In fact, cash is just 'tokens for exchange later' where later is a time window that varies from 1 hour (hand-to-mouth) to 50+ years (surplus productive capacity people).

Wouldn't it be great if you could use your tokens for their promised exchange-value through your retirement and see those years of hard work payoff? In fact, multiply, because as you said the population grows, more goods are produced, and your cash tokens buy more and more of those goods.

It's a great way to retire. Unfortunately for the retired, they are on fixed incomes (pensions) in an inflationary world: those people get SCREWED to the extent where they can't afford heating in some US States.

These are people who worked hard all their lives and just wanted to live off the proceeds, the surplus they had generated.

Think of the chi^H^H^H grandparents!


> even though no useful economic activity is taking place

Saving is a useful economic activity. Why should I let some filthy money lender touch my money? It's my money!


The evolution is not always slow: the Banking Act of 1863 transformed American currency very rapidly, for example[1]; as did the foundation of the Bank of England in 1694 for the pound.

Of course, your underlying point is correct - both these examples are coterminous with vast transformations in the two societies (the civil war and the Glorious Revolution), which equally were not dreamed up by a nerd in a basement.

[1] James McPherson's Battle Cry of Freedom has some interesting material on this.


Not all of the satire works, but enough works that I found it to be damn clever. The "perfect for criminals" part was especially enjoyable, given that it's easier to trace the history of bitcoin payments than cash transactions if you aren't marking bills.


As hapless said, the author's defense of Bitcoin is intertwined with a critique of the central banking system.

Consider lines like this one:

"...it would be hard to recommend that the average consumer or merchant becomes involved in what is still today a very buggy [central banking] system, filled with risk, inconvenience, high transaction costs, and possible disease transmission."


Again, that's just making fun of the way the press misrepresent bitcoin.

In fact, the fact that these 'critiques' don't actually apply to central banking is what makes this piece so funny.


Actually, the critiques do apply to bitcoin. Perhaps if:

- bitcoin's biggest user wasn't a douchebag who thinks its ok to hire hitmen to kill people - mtgox didn't have so much trouble staying online - the currency wasn't so volatile - there was some way of storing bitcoin with a guarantee that you'll get fully refunded if it gets stolen

...then perhaps this satire would make some sense. As it is, the 'satire' is just making the authors look like idiots.


Satire works when most people get the joke and a few write scathing condemnations of why it's not funny.


Actually, you can pay the government in Bitcoin: http://www2.egovlink.com/press-release-bitcoin.cfm

Also, the ~7 transaction per second limit is completely artificial: https://github.com/bitcoin/bitcoin/blob/master/src/main.h#L3...

Institutional actors: http://allthingsd.com/20131212/bitcoins-biggest-bet-andreess...


To address these one by one:

1. My local government can choose to accept anything they want. The IRS, however, will want cash. They are not obligated to talk to your broker-of-choice about BTC.

2. Yes, "completely artificial." I just have to convince 51% of the distributed net to accept my patches, and then I can change any parameter I wish!

3. What does a VC investment have to do with anything?


I think you've missed the point which is to ridicule the criticism of crypto-currencies, not cash. Also the article talks about the properties of cash in general, not central banking.


I do not know where you hail from but if you are a US taxpayer you can apparently pay the IRS using Bitcoin:

https://www.joinsnapcard.com/

More: http://pando.com/2014/01/15/pay-your-taxes-in-bitcoin-snapca...


No, you can pay a 3rd party that claims it will remit your bitcoin payment in the form of USD to the IRS. The IRS doesn't accept Bitcoin.


Pretty sure that's how most people pay their taxes; they don't usually carry wads of cash to the IRS building, they use a third-party (a bank).


My impression is that you completely misunderstood. (I only skimmed the article.)

The folly that is being held up to ridicule are the objections to bitcoin.

The means by which it is held up is to show that bills as a medium of exchange can be attacked just as strongly. People still use it. Nobody is going to make you go to the bank to give them $5 back, they use bills. And if you only have a $10 note, they'll make change for you.

This is directly what's being compared to bitcoin (for example) - by pointing out that whatever objections anyone might have against bitcoin (theft, etc), could be made - ridiculously - against paper currency.

The reason it is ridiculous is because the benefits of paper currency far outweigh the inconvenience stemming from using it.

Likewise, bitcoin can have tons of problems - but the benefits far outweigh them. That is the point being made.

"It is folly to criticize bitcoin".


I don't think bitcoin is usable as a currency (because of the scarcity mainly) but if we had to judge every potential currency by whether institutionnal actors accept it we might never accept anythig as currency until the end of the world.

I would think of a currency as anything that has recognized value while being transferable.

Let's imagine starbucks prepaid point card get's accepted in some drugstore also, the. Some super markets, gas station, theaters, airports. It really explodes and you can start paying with them at millions of stores, and you are allowed to exchange them with other people via some procedure. The starbucks point system becomes a currency IMO. You'll never pay your taxes with it, but you can use them for exchange and commerce purpose.


Central banking is possibly the greatest human invention since sanitation.

No, that's either packet switching, internal combustion, penicillin, or sliced bread.


I'd opt for the slinky.


Are we looking at the same article? It's satirizing paper vs digital money -- the focus is on money transfer tech, not monetary policy. The central bank stuff is about two paragraphs out of thirty.

Also, whether bitcoin is a "true" currency is orthogonal to the (satirical) point of the article, which is that paper currency would look weird if it weren't the traditional way and we were going to it from digital money. Whether Bitcoin currently handles 1, 7, or a trillion transactions per second is irrelevant here.


Don't forget the Egyptian Obelisk standing in the middle of the Vatican. Obelisks are a tribute to the Egyptian Sun god Ra, they are also a phallus symbol read Shaft of Baal. http://en.wikipedia.org/wiki/Obelisk Picture proof http://en.wikipedia.org/wiki/File:Vatican_Piazza_San_Pietro_...

Really tired of central banks and banks stealing 97% of the peoples wealth through inflation of FIAT currency backed by nothing than debt out of nothing. Here is a graph of median income vs GDP(average income), note that it diverges in the 1975, when by coincidence the dollar was decoupled from the gold by Nixon. http://lanekenworthy.net/2008/09/03/slow-income-growth-for-m...


Let's not forget fractional reserve banking, and how this fuels investment. Bitcoin's current design can't do this. Maybe some other crypto-currency will win the war by having this monetary mechanism in mind.


Nothing about bitcoin's design prevents fractional reserve banking. You just have to place an inordinate amount of trust in your BTC bank (perversely misnamed "exchanges")

Central banking and fractional reserve banking are orthogonal concepts. One could, in theory, accomplish one without the other. (but I do not see why one would wish to do so.)


where do i talk about central banking?

on "You just have to place an inordinate amount of trust in your BTC bank (perversely misnamed "exchanges")"

my understanding of Bitcoin is that no same Bitcoin can be in two accounts at the same time. How is this a "trust" issue vs a design one?


Right now a huge amount of bitcoin is stored in accounts in exchanges. Just as you exchange cash for bank-denominated currency ("checking"), you exchange BTC for MtGox-denominated "currency" (your MtGox balance)

MtGox just as easily operate a fractional reserve system on that MtgOX-denominated balance as a bank does on cash.

This is how all banks worked before the advent of central banking. As with MtGox, in the world before central banking, exchanging real money (coinage and federal certificates) for bank-denominated money (checking) was a risky choice.


> This is how all banks worked before Yes, before the 19th century. I didn't live back then, but I'm guessing we've come a long way since then: the credit card, online banking, security, etc.

Can you please explain to me how can a BTC exchange can run fractional reserve banking with the current design of Bitcoin? Because I can't.


You give your BTC to MtGox. At this point, you no longer hold your BTC. You have exchanged BTC for a MtGox-denominated currency that is ostensibly convertible to BTC.

At that point, nothing stops MtGox from operating a fractional reserve bank. Or just stealing your deposits.

Substitute any other "exchange" name for MtGox. The principle is the same.


that's is not fractional reserve banking. on top of that, yo required another currency (another risk), a requirement you don't need with the current system


It just has to make some loans.

If it has 1 bitcoin of deposits and writes 0.5 bitcoin of loans, it can't cover the deposits anymore.


fractional reserve banking != loans


Yes it does.

I think maybe you are talking about the money creation that a central bank can do. That involves more than just fractional reserve banking, but it often is done in the context of fractional reserve banking.


> Yes it does.

Wow. Information/knowledge is one click away. I highly advise Google.


I searched out this:

https://www.khanacademy.org/economics-finance-domain/core-fi...

It would be useful for you to explain how 'making loans of deposits' is not a reasonable simplification of that.

Of course actual banking practice is more complicated, but the core meaning of fractional reserve banking is to make loans (or investments, but that is a reasonable thing to leave out in a simplification) out of (demand) deposits (the difference between a deposit and a demand deposit is just a technical matter, for btc the lending institution and depositor would have to work out how immediately available the deposited coins would have to be).


Im not a fan of bitcoin. But it cannot be in two wallets at the same time. If you deposit money in a bank it no longer is in your wallet but starts being a number on a screen. You transfer the money to the banks wallet. Then the bank can lend it to others by transferring it to their wallets.

I think the biggest obstacle for bitcoin is that it is not a legal tender and it will not be because it comes with one to many sacrifice. You lose ability to have independent monetary policy while not getting benefits of a fixed currency.


> Let's not forget fractional reserve banking, and how this fuels investment.

s/investment/bubbles/


SMBs live in a space where equity financing (like VC money) or bonds are not available. I've yet to see a bubble driven by excessive/greedy/etc lending to SMB.

Or are you implying that Bitcoin should only be used by large corporates, speculators, money managers and so on?


The satire was not of money or central banking, it was of the public reaction to a new form of it.

Also, if you think that central banking is the greatest invention since sanitation, I think you may have your priorities slightly skewed, though that is only an opinion.

As to whether bitcoin is a currency. It is a currency when it is used as one. Sometimes it is and then it is a currency, mostly it is a speculative investment vehicle. This is why I think dogecoin is more of a currency than bitcoin at the moment.


Satire: "the use of humour, irony, exaggeration, or ridicule to expose and criticize people's stupidity or vices".

What is being held up to ridicule are the various criticisms of bitcoin, not central banking. For example the article quotes an economist saying that paper money is evil, satirising Krugman's article about bitcoin. Quite entertaining!


slow clap I am genuinely impressed with how many people were trolled by your well-placed satirical comment.


You can't fault a relatively new cypto-currency for having limitations in terms of adoption rates. For now, it's still a proof of concept and improvements are constantly being made.

The article is not making fun of cash, but making fun of people who mock the concept of bitcoins.


"The U.S. central banking system ranks among the finest of its kind." I'll take it as a fine example of satire. The Fed officials' conflict of interest, the financial crisis, using it as a tool to achieve political goals internationally, you name it.


> The U.S. central banking system ranks among the finest of its kind.

I agree...

> Central banking is possibly the greatest human invention since sanitation.

This is a most deceptive and inherently political statement. Sanitation is a great invention for everyone. Central banking not so much.

Central banking and centralised control of the money supply serve to concentrate the greatest opportunity for skimming the surplus generated by vast productive populations into the hands a very few people to direct as they wish. Whether this process is controlled democratically or not (and in the US it most certainly is not) is not the point.

The way this is done in the US is no different in principle to the way it is done by elite in more obviously "corrupt" countries. In the US, it is more sophisticated and over the last century it has attained the patina of established respectability. In the US they have managed to set this system up without killing the goose that lays the golden eggs. (the surplus-producing population)

The skimming in the US is accomplished first through powerful central taxation which requires centralised record keeping and control of the banking sector. Secondly wealth and accumulated surplus is skimmed (redistributed upwards) through the control of credit extended by banks to generally expand and potentially to "contract" the money (credit) supply. Inflation generally rewards large debtors and punishes savers.

Skimming is also accomplished by helping to grow and trade in government debt (granting incredibly valuable concessions to favoured dealers), assisting in managing capital flows into and out of the country, extending vast credits to powerful interest groups (mostly bankers) thereby helping powerful private borrowers to lean on the public credit for private gain, and most importantly and tragically to make possible and in fact encourage wars of choice which are clearly to the benefit of private interests and clearly not of any benefit to the general public. Is it any wonder that the Fed was created by bankers and war financiers, for the benefit of bankers and war financiers? This goes back to Morgan and others and their intimate involvement in the financing of Britain and France and subsequent agitation for American entry into WWI.

Central banking is most convenient and necessary for anyone wishing to control or direct economic activity and hence the lives of others. That is why it appeals to statists of all persuasions who perceive it as powerful lever or tool they hope employ in their fantasies of control. Prominent early communists saw state-controlled central banking as an essential step for converting a capitalist system to a communist one. That is also why most "crazy libertarians" find their way to a stance opposing central banking. Central banking is anathema to Liberty. Jefferson killed the first Bank of the United States and exposed it as an agent of foreign interests. (The capital for the first bank was created by an early scam which had people talk down the debts of the continental congress and buy up the IOUs from the poor soldiers who fought for the revolution for a few pennies on the dollar, and then lobby successfully for the debts to be assumed and honored at face value by the new constitutional government. This was a similar scam to the way the oligarchs in Russia convinced newly enriched peasants to sell their shares in state assets for cheap.) Jackson killed the Second Bank of the United States for much the same reasons as Jefferson had a generation before. Seventy years later, a true, well documented conspiracy of financiers, gave the US its third central bank.

I agree with other posters, that one must look at the actions and histories of many different central banks in different countries to understand the nature of the beast. The US is only the most competent in obfuscating its nature, purpose and origin. It has "won" at the central banking game for almost 100 years. Your praise of the US's central bank comes at the zenith of its power. I suspect over the next 10 years, it will resemble its cousins in less competent regimes and juridictions more and more.

The US central bank, aka the Fed, is a brilliant creation. It is a brilliant creation of the fevered minds of oligarchs to defend and advance their oligarchy. It has lasted 100 years. I hope it will not last another 100. With Idiocracy increasingly fast upon us, the prospects for change are not good. Bitcoin to the moon.


> Central banking is possibly the greatest wealth confiscation technique since taxation.

FTFY


hmm, I do not think you understand currency..

For example, if we post on HN an offer to do something in return for something..what currency are we using and is that said currency some sort of fiat system?


I don't think it will get popular. It needs too much infrastructure for emission and tracking. You will need to manually find a way to get to the right amount using such a restricted set of values [1]. Additionally, you cannot make backups and it is very easy for lose or destroy some of these "bills". It's a nice idea, but there is not a chance it will gain value. I don't think it's worth investing any real money in it.

[1] https://en.wikipedia.org/wiki/Change-making_problem


I think you've got it wrong. The appeal of those pieces of paper is that they hold their value long term.

You can keep them in storage, and in 100 years they'll only have lost a mere 97% of their value.


Currency is not meant to hold value; it is not an asset. Currency is a means of transacting. It needs only to hold its value in the short term and change value at a stable and predictable pace.


Currency isn't meant to do anything, it just is. The reason you (and others) think it's supposed to lose value is because you've been fed a set of lies meant to deplete your wealth.

Try this thought experiment: Let's say the Federal Reserve invented two sets of currencies in 1913: The Dollar, and The DeflataDollar. Both are protected by Legal Tender Laws, both are acceptable for paying taxes, and both are basically accepted everywhere. The only difference is that the supply of Dollars increases every year (as it does now) whereas the DeflataDollar has a constant supply. If your employer offers to pay you in either of these two currencies, which one do you choose? Any rational actor would of course choose to be paid in the currency that won't lose 97% of its value every hundred or so years.

The only way to maintain an inflationary currency is to enforce its usage through laws and taxation. Otherwise free individuals will choose something else to trade with.


But your boss isn't going to offer you the same wage in each - they will be able to offer you more Dollars than DeflataDollars after adjusting for inflation, because he needs to take into account the expected value when he's liable to trade the currency for something else, not just the relative values now. If you want to trade for things immediately (say, buy some groceries on the way home from work) you might very well prefer the Dollars. If you plan on keeping your wages under your mattress for 20 years, obviously you should prefer the DeflataDollars, but that's not what most people do.

"Any rational actor would of course choose to be paid in the currency that won't lose 97% of its value every hundred or so years."

Right, because that time horizon is totally what is relevant when I'm being paid today and turning that money into other things tomorrow.


The point of the thought experiment, if followed through to its logical conclusion, is that in such a world The Dollar wouldn't even exist, only the DeflataDollar would. No one would accept a currency that's losing value (even the grocery vendor on your way home from woek) if they had the choice to accept something that will hold its value. It doesn't matter if the rate of value loss is slow or fast, it's inferior to something that holds its value.


And that point is just wrong. Anyone with a short enough time horizon would prefer the depreciating currency, because they can get it at a discount from those with a longer time horizon.


> Anyone with a short enough time horizon would prefer the depreciating currency, because they can get it at a discount from those with a longer time horizon.

Exactly, the inflationary currency would be sold at a discount. And the amount of the discount would increase over time until the value of the currency fell to zero.


I think you are confusing the real and the nominative. The currency would be sold at a real discount, which means a real premium on my labor if I am exchanging it for dollars instead of DeflataDollars, so that's what I'd prefer to accept if I will be holding it for a short time.

"And the amount of the discount would increase over time until the value of the currency fell to zero."

The exchange rate would change over time; that's unsurprising. I'm not sure the discount (in real terms) would change if the rate of inflation was constant. It is apparent that the value of the currency would fall toward zero - that's basically our premise; it is not apparent that it would fall to zero. You'll have to support that if you want to stand by the claim.


I agree that the rate of the discount would likely be constant over time if the rate of the increase in money supply was also constant. If you sold your labor for InfltaDollar's, you'd likely get paid a premium. However, when you go to the grocery store to buy stuff with your InflataDollars, the grocer will also expect the same discount for the InflataDollars they buy.

> It is apparent that the value of the currency would fall toward zero

I'm glad we agree on this.

> it is not apparent that it would fall to zero. You'll have to support that if you want to stand by the claim.

Fair enough. If graphed out, the value of the InflataDollar would only approach zero asymptotically. However, we're not just dealing with an abstract math equation. At a certain point, the market would lose confidence in the currency with a consistently falling value, and no one would be willing to accept it unless forced to.

I do admit that I could be wrong - predicting the behavior of humans is always imperfect. However, I am excited to see these experiments playing out in the cryptocurrency space. We have Bitcoin, which has a fixed supply of currency, and we also have Freicoin, a cryptocurrenty with demurrage (a form of currency devaluation) built into it. It will be interesting to see the futures these currencies have.


Given the existence of a choice between deflating and a hypothetical alternative of a universally accepted stable risk-free store of value, it would be rational to prefer to receive the latter. It is still however, in my rational interest to prefer the latter to not exist at all. Being one of the large majority of people who aren't the unproductive uber-rich, I prefer that those that have far more dollars than me are more inclined to circulate them, creating far more opportunity for me to grow my share of national wealth (and absolute national wealth) than would exist if dollars were to be spent only when absolutely necessary. The corollary of your argument is that if we frame it the other way round, with StableDollar and other non-depreciating capital holders tending to hold more bargaining power than the general labour supply, they will be able to get away with paying only InflataDollars to the point where the level of StableDollars actually circulating in the economy will tend towards zero asymptotically...

In our actual system the ability to deposit InflataDollars into accounts with fixed risk-free positive returns (backed by expected and potential supplies of InflataDollars), the government keeping inflation low, and the government requiring you to pay tax on 30-40% of your income solely in InflataDollars ensures the demand for InflataDollars will never approach zero. In fact, it's much less likely to reach zero than the demand for Bitcoins, Freicoins or tulip bulbs, none of which anybody is obliged to use in any circumstances (at least not until Bitcoin-denominated debts become widespread and readily enforceable. If I wanted to design a cryptocurrency I'd focus on that aspect)


You are obliged to use bitcoins if you want to put something in the blockchain (and no one will do it without a transaction fee). If you aren't using bitcoins otherwise, there is not presently any reason to put something in the blockchain. That could potentially change.

I'm not sure whether or not that is meaningfully different from "you are obliged to use tulip bulbs if you want to grow. tulips." I am inclined to think that it could be.


"However, when you go to the grocery store to buy stuff with your InflataDollars, the grocer will also expect the same discount for the InflataDollars they buy."

Hm. Partly true, but only if their time horizon is the same as your boss. It definitely gets complicated here - we probably need rigorous models and/or simulation.


Where are people getting DeflataDollar? You've pitched it as a nearly constant-yield zero-risk investment. Circulation quickly falls to nearly 0, and we're back to having just Dollars (plus people who could afford DeflataDollars are watching their net worth grow without the shared economic benefits of a normal investment).


how does the company get their deflataDollars? If the supply of your currency is constant, and there's economic growth in some other sector, then the company will (proportionately) collect less, and you'll end up with less deflataDollars in your hands year on year. It's basically the same as inflation.


Meant? Meant by who? The people that use currency certainly don't want it to lose value. That's a cost to them. Something that loses value is never going to catch on.


Thats assuming they don't rot in the process! Now Gold people can trust because that doesn't rot and can last 100 years in a damp jar. You'll never get the public away from the gold standard.


These 'bills' do have a nice physical feel to them, though. Like bars of gold. It's not as fleeting as digital money. I can see it being used as a means of restricting your budget; after all, most digital money can be spent until it's gone. Adding a boundary like having to go to a conversion point (digital to cash) to get your daily or weekly budget may lead to less spending.


I wouldn't barter any of my cats for this. It is just easier to exchange kittens for services.


US coin and bill denominations are designed to make the change making problem easy. You just take the most of the largest denomination without going over. Repeat till change is made. The outcome is always optimal given the set of US currency denominations.

https://en.wikipedia.org/wiki/Change-making_problem#Greedy_m...


The article is idiotic and disingenuous. Paper money didn't attempt to replace coin in one fell swoop. Paper money evolved from letters of credit which make perfect sense, and bitcoin fundamentally relies on similar concepts anyway.

You can't buy something online by just anonymously transmitting credits into an account -- who gave us the money? what do they want? You fill in an order form, a bunch of stuff happens, you get a receipt and a product and money gets transferred at some point. Very little of that is the currency transaction. You needed to generate a letter that said I want X and I'll pay you Y, then you paid Y and sent confirmation of the money transfer, and so on.

The bitcoin bulls think that Credit Cards are a terrible way to buy things because they charge too much for what they do (and their security sucks). This may be true, but bitcoin is only solving the easiest part of the problem. Banks can already transfer money around cheaply and securely. Indeed even market transactions are so fast and inexpensive that high speed trading is now a huge economic force.

The fact is that credit cards (a) let you buy stuff on credit, (b) provide transactional support allowing commerce to proceed smoothly, and (c) already work. A credit card is merely automated checking with overdrafts, which is a direct descendant of the letter of credit (from which cash evolved), which is in fact a more fundamental method of trading than barter. (Tracking people's accounts is the reason writing was invented.)


Ever since POS hacks on Target and other retailers I've completely switched to cash only. Not only can't you be tracked, something I'm not sure I care about, but it reduces the chances of somebody stealing your card info.

And I only use wells fargo ATMs, because they have a nice green glowing card input, so you know nobody put a malicious card scanner on the ATM.

It's a complete reversal from a few years ago where I wouldn't carry cash and wouldn't go anywhere that was cash only. Going cash only also reduces the fees for stores where you buy things.

Cash is the way to go, despite all of our technology.


Many people are responding that you're making a mistake because cash is useful after having been stolen. Clearly this is true. But it is a mistake. Multiply the probability of being mugged in a year by the amount of money you carry. That's the expected loss over that year. Is your privacy worth that? If so, carry cash.

As for "chargeback insurance", I'd recommend taking responsibility for your own actions. If you buy crap from a merchant, that's between you and the merchant. Argue with him; don't buy more from him. The bank isn't a party to that argument. That should be enough to discourage such behavior. Additionally, they may have to pay the merchant and you. That's what the fees are for.


Sweet, now you have no insurance and you carry about significant quantities of money I'm sure you're much safer.


Insurance against what? I don't carry boatloads of cash on me.


Insurance against theft, fraud, any transaction based deception you are now unprotected against. Once you have handed over cash, it'll take a herculean effort to get that back.

On the other hand, when someone mugged me for my card, I cancelled it a few minutes later and had a replacement within 2 days. I lost nothing but my pride and my wallet.


Science proves that you tend to spend less money when you pay with cash, especially on unplanned and/or impulse purchases. I guess the psychology of actually handing something over then having less of it afterwards makes people think twice about if they really need to spend the money. Also getting extra cash when you over budget has an extra step (trip to bank/ATM) so you're probably more likely to stay in budget or to rethink if you really need that over budget purchase.

You'll probably save in the long run.

http://www.livescience.com/2849-study-credit-cards-spending....

http://www.investopedia.com/articles/pf/08/pay-in-cash.asp

http://seekingalpha.com/article/20333-guide-to-credit-cards-...

http://business.time.com/2013/08/08/turns-out-you-only-think...

I especially think this is interesting:

>McDonald's found that the average transaction rose from $4.50 to $7 when customers used plastic instead of cash


I don't have any comment on this really. I expect it's down to personal psychology too. I just wanted to thank you for the interesting links.


But your risk exposure is much much higher. When a mugger steals $70 from me, my maximum exposure is $70. There is no way that mugger can use those bills to extract any more money from me or as a launchpad for fraud. When a mugger steals my card (and then commits a little fraud) my maximum exposure is my bank account + overdraft + other accounts I have with the same bank + whatever loans they could get.


When a mugger steals my card (and then commits a little fraud) my maximum exposure is my bank account + overdraft + other accounts I have with the same bank + whatever loans they could get

Your practical maximum exposure is zero, if you follow the correct process. Call your bank and report the stolen card. Any transactions will be undone and the bank will take the hit, in the name of keeping the public's faith in the banking system. This is an ordinary business day for the bank.


As someone who was just caught up in the Target breach through his debit(gasp!) card, and had a random Londoner or Londoners go on an $1400 internet shopping spree for designer jeans and hair extensions, I was liable for exactly $0.00 of it.

It was annoying to rearrange my automatic bill paying, but that's what I get for only having one checking account.


My card requires a second factor they didn't have. A credit card is not sufficient ID for a loan or withdrawl.

They got nothing from it.


"A credit card is not sufficient ID for a loan or withdrawl"

Not completely no. A little fraud is normally necessary. A little social pressure, just one person not following proper security procedures. Note how Jeremy Clarkson published his credit card number to prove that leaking credit card numbers wasn't a security issue, and someone promptly withdrew £500 from his account (http://news.bbc.co.uk/1/hi/7174760.stm). I understand that the bank takes the hit in cases like that, but in the meantime you are out of pocket of far more money than you were carrying in cash.

My point is there is a non-0 (albeit small) risk that they do get something from it. And then its a hassle to sort it out (check statements carefully for the next few months, phone bank on any suspicious items). I realize I ought to be doing that anyway, but it normally falls so low on the priority list I end up checking once every 3 or 4 months.


Clarkson did not publish his credit card number afaik, he published his bank account number and is a public personality where his personal details are easy to find.

That's not really relevant, and you don't check statements, you phone them and they send you an entirely new card and deactivate the old one.


You aren't on the hook for any of that.


Last time I was robbed of cash - never. You're dramatically overplaying that risk.


Last time I was a victim of credit card fraud: never.


Yes but now there is a record of every single thing you've ever bought. Of course for most people this probably doesn't matter too much. But some people do value privacy.


You could go half-way and leak a very biased sample of data. Some people are terrified that there might come a day where our health insurers monitor the junk food we buy via our credit card purchases. But why not just buy junk food with cash and healthy food with a credit card.


How much would you pay for insurance that covered up to a $200 loss which is likely to happen at least once every 15-20 years?

Being robbed is not a financial worry for people who aren't living check to check. It's a worry about getting shot, and I don't think bitcoin protects you from that.


Chargebacks can come in handy when someone screws you.


I've never done a chargeback. The convenience of cash is immediate, the need to a chargeback, probably insignificant.


Cash is also great for when you want to lose that debt addiction. A good practice is to approximate your cash needs for a week and withdraw the according amount. If you really spend everything before the week is over, you will feel it. I did this 5 years ago and I've never been in debt since.

Cash == Freedom


Personally I think I'd prefer to be attacked digitally and have some protection about unauthorised transactions from my credit card company. Identity fraud however is not pleasant.

But I would rather that than to be mugged at knife-point because people holding large amounts of cash is a quick win for criminals.


Muggers don't have x-ray vision. They can't see that you don't have cash. They're going to mug you no matter what. I don't walk around with a ton of money. If I get mugged I lose a few bucks. If you get mugged you have to go cancel your cards and go without them until you get new ones or go to your bank and deal with all kinds of hassles.


To the muggers it's all about return of investment. If everyone carries cash, muggers will find more people with cash and find it worth the risk. If no-one carried cash, they'd probably give up and try to steal bank card details from large retailers instead.

The same goes for smartphones and tablets. If they are easy to sell on after stealing, crime will go up. Making the items useless if stolen removes the incentive.

http://appleinsider.com/articles/13/05/02/nyt-article-accuse...


I have been mugged. I lost all the cash that was in the wallet. I phoned up my card company and they immediately cancelled the cards and replaced them within a couple days.

Cash cost me money, cards cost me nothing.


...because the credit card companies have ALREADY charged you. They don't absorb the fraud for nothing - its all been rigged into the prices.

So cards are a form of insurance - in that they spread around the risk.


They typically charge the retailers a few %. That few % is also represented in the cash price as very few places these days have surcharges for credit card payments.


I'm unlikely to get mugged where I live, so I guess my advice doesn't work if you live in Gotham City.


The vast majority of the world is dangerous. Please don't assume you are the rule, not the exception. There are half a million or more robberies every year in the USA.


Lot's of exaggerating claiming going on there in your posts. Then you position into some kind of analysis of what I'm assuming and finish with some kinda point totally lost way down five posts later in this argument. I'm guessing you like using cards. You go use them. I'm gonna use cash. I've been buying stuff at target all year and I didn't have to go cancel my credit card or worry about it having charges I had to dispute.


I don't mind cards, I don't mind cash. I'm simply pointing out that cards have benefits and cash can be more risky at times.


Someone steals your physical money, good luck finding them. ATM steals your money, you know where he lives. Complain to the bank, get your money back.


This article is entertaining, interesting and relevant. Humans are exceptionally good at rationalizing their biases, especially if they involve trust, and interest is required to alter those biases in a positive way. The biggest challenge for cryptocurrencies today is raising interest and trust in the general population. We can best effect that by working hard to raise interest in cryptocurrencies in a positive way.

This is more commonly known as "marketing".


Perhaps if there were legitimate complaints.

For example, the article claims that Cash is loved by Libertarians. As far as I'm aware, Libertarians would prefer privatized currencies, akin to the mid-1850s banking system. A centralized institution creating a centralized currency is much different from what the libertarians would like.

They miss the basics of the politics involved here. BTC (apparently) represents decentralization, freedom, etc. etc. At least according to libertarians.

The complaint about the lack of tracking and anonymity is also ironic, because BTC "marketing" has been filled with misinformation and lies. Fortunately, the article seems to take the correct stance. (BTCs are tracked, the ledger is public, it is far easier to be anonymous with Cash than it is with BTC).

Finally, there are systems in place because Cash has a 200+ year long history. It is impossible to ignore the "momentum" of cash. FBI has ways of tracking and marking bills. Secret Service actually keeps track of those Serial Numbers.

--------------------

Besides, BTC is but the first popular poof-of-work cryptocoin. I don't think BTC is perfect for many reasons... I think DOGE is going in a better direction.

The article fails to mention any of _my_ complaints. The extremely long transaction time (10 minutes minimum, if you are willing to trust a 1-block confirmation), the deflationary nature (block chain rewards halving every couple of years). The hard cap at 21 million (DOGE has no cap on coins fyi).

You know, the legitimate complaints about BTC, the ones that people are trying to solve with alt-coins.


Bitcoin is not ready to be marketed to and trusted by the general population as a general currency, since it's so unstable, while i've seen ideas on how to solve this, they kill the currency's appeal as an investment tool, which would seriously hurt adoption.


There's a beautiful irony there, the best thing that bitcoin has going for it is the very same thing that's keeping it from being useful as an actual currency.

Maybe the speculative "hold to hoard/invest/speculate" thing is just a phase.


There is no lack of irony when you are dealing with cognitive dissonance!

We have ton of unstable events going on in credit card land, but the vast majority of individuals filter those events from their fears because they are bored with that type of news. With Bitcoin, it's interesting, so you pay attention. Once you start paying attention, it's not hard to be surprised about something happening within the movement. If anything happens that causes a concern (fear) you get people going "Oh my gosh! Look at how awful this Bitcoin thing is because it's so unstable! It's gonna fail, for sure!".

Wait a few minutes. The hive mind will find something else to become surprised/fearful about soon enough. Boredom will kick in and everyone will settle down and forget their fears. By then they'll wonder how they lived without it.


>> The biggest challenge for cryptocurrencies today is raising interest and trust in the general population.

I would actually say its getting the general public informed. 75% of the US population are aging baby boomers. They can barely work an iphone, how the heck do you think they're ever going to accept cryptocurrency? Even with a ton of marketing, this is something that is completely foreign to 85% of the general population.


>> "I would actually say its getting the general public informed. 75% of the US population are aging baby boomers. They can barely work an iphone, how the heck do you think they're ever going to accept cryptocurrency? Even with a ton of marketing, this is something that is completely foreign to 85% of the general population."

You're saying 75% of the US population cannot work an iPhone? Or 75% are baby boomers?? Just so you're more informed next time you make up stats, less than 15% of the US population would be considered baby boomers.

Source: http://quickfacts.census.gov/qfd/states/00000.html and http://en.wikipedia.org/wiki/Baby-Boom_Generation


"Baby Boomers make up 35% of the American adult population (Scarborough)."

"By 2015, those aged 50 and older will represent 45% of the U.S. population (AARP)."

http://www.immersionactive.com/resources/50-plus-facts-and-f...

Ok so not exactly 75%, but I was a lot closer than the 15% you mentioned.


If we take your first figure of 35% I am closer. If we take your second figure of 45% we are each 30% off. So yet again - stop making things up, you are not a lot closer.

Also "By 2015, those aged 50 and older..." Some of those people wouldn't be considered baby boomers as that generation ends in 1964.


I agree, but I think in practice it will be quite simple. Most people have phones which can be used as wallets. I already pay for my coffee at Peet's with my Nexus 5 using NFC. Assuming most drip into a spending wallet, and are OK with that spending wallet's security model, this leaves the challenge of implementing savings wallet security.

Banks are already set up to provide these services and when they decide to jump in, adoption will take off pretty quickly. Those services could come in the form of cash exchange at ATMs, wallet hosting, compromised savings wallet insurance (if they host your wallet), best practices around passwords/etc., loans, and cold storage security via fireproof lockboxes.

This will (obviously) require the banking industry to wrap their heads around these new models. How long that takes is anyone's guess.


Don't make up statistics to bolster your point, it detracts from it. Every number you mentioned is wrong.

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