I wonder how much internet policy is decided by internet organisations. Or how much war stuff is decided by war people. Or medical policy by medical people.
Perhaps in some contexts, but that doesn't negate the fact that the IMF, World bank and other financial players use the media indirectly to set the political stage for their goals, misinforming the populous and otherwise breaking what would be a well informed marketplace.
No. Deflation is even worse for economy than inflation is. That's why gold was abandoned. In fact, ancient China had a long history of struggling in awful situations caused by lacking copper/silver/gold for producing enough coins to feed the booming economy system, while the coins were either smuggled to neighbor countries or remelted by domestic speculators.
I propose a new digital currency be created according to certain eigenvectors[1] and allometry[2] features of trading network flows or simply the internet traffic flows.
The progress of Complex Network[3] theory may tell us more about how to build a solid algorithm for this kind of "evolving coins" to make them decentralized and evolve along with real economic activities.
I've been investigating the theory in part time and I dare say somebody with sufficient knowledge is able to figure out a model eventually.
IMO, bitcoin is the start of inventing a better currency, not the end.
Kind of interesting to think about his comment about the goal being to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.” Hmm...I wonder if there are any currencies which currently exist which fit the bill...
And then think about pg's point #3 about why a government would have created Bitcoin: "because they felt their currency would never become the standard reserve currency, and they felt it was better that no one's be if theirs couldn't be" (https://news.ycombinator.com/item?id=5547423).
It won't be proof that BTC came from China if China suggests using BTC as the reserve currency, but pg's point will be proven to me, at least.
No, the proof is the lack of trust of all world in the Wall street greedy and unstopable bankers.. and the mess they do in good economies all over the world(not only domestic) because they dont know when to stop.
If US want to keep them its a choice they make, the problem its that other countries cant do nothing about that, even if this stupid behaviour is affecting everybody else and burning down the middle class all over the world
Also, bitcoin is deflationary by design. It will effectively run out at some point, if I understand the situation. I believe its proponents consider this a feature, but I suspect it will prove to be a liability.
SO what? You can have tons of fractions of bitcoins, and that covers the needs of any micro-payment even if a single bitcoin becomes worth a million of dollars.
The issue is subtle. It has to do with the need for a currency supply to expand to match overall increases in production in absolute terms. I don't understand the matter in any detail, but I trust economists in their general aversion to deflation.
There have been tons of economies which worked before on the Gold standard, which has been the model for the bitcoin "mining" model. I know nowadays you have lots of Keynesian economists who tell you that going in debt to the death and inflating the money supply is a good thing, but you have to look at how things worked before and why it made sense to have a limited supply currency.
Nope, the new discoveries of gold were usually marginal vs the actual worldwide gold reserves. Bitcoin is following the exact same model. Mining will become marginal over time.
Because you think fiat currencies based systems are way better? How stable is your system going to be when you expand your credit line to the infinite just because you can print/create money which has no intrinsic physical value ? Fiat currencies hurt the future generations and not just the present ones.
you think gold has "intrinsic, physical value"? you think bitcoin has "intrinsic, physical value"?!
why have almost all currencies used throughout history had a significant fiduciary element? why has the world constantly cycled between bullion and fiat currencies? why do you think bullion currencies are more common during times of warfare?
when are countries incentivized to "expand their credit line to the infinite"?
would you rather have a currency that can modify its inflation/deflation rate based on any number of relevant factors, or a currency whose inflation/deflation rate is tied to the rate of mining of some rocks in the ground?
Gold has physical value, yes, because it is relatively rare on Earth and has interesting chemical and physical properties that can be used in several ways. And on top of that, it's dense, can be melted, and does not corrode over time. Therefore making is a good tool to represent "money".
> why do you think bullion currencies are more common during times of warfare?
Because inflation runs crazy during warfare and therefore people trying to save their earnings go for gold, silver and others in order to avoid losing the face value of their fiat currencies. And by the way, the Gold standard was abandoned in History mainly to fund the war in Europe during the 1st world war, and then later in the 20th century because of the expenses of the US military policy during the Cold war.
> when are countries incentivized to "expand their credit line to the infinite"?
Look at the current situation in the US. Everyone knows they will never pay their debt, yet it keeps growing. You can expect things to crash hard down the road.
> would you rather have a currency that can modify its inflation/deflation rate based on any number of relevant factors, or a currency whose inflation/deflation rate is tied to the rate of mining of some rocks in the ground?
The later, obviously, because Gold is neutral and does not belong to any government. The US Dollar, the Euro and other fiat currencies are all controlled by different central banks with different agendas. I have no control over what they can do in the future. But Gold is tangible, and there's not much Gold being extracted nowadays to change the face value of it.
Why do you think China is building a huge Gold reserve currently, and buying Gold as much as they can from all over the world? Do you think they are just plain stupid ?
You nailed it actually. Yeah, you can delve deeper, but the bottom line is one of basic supply and demand.
As the world continues to output more (i.e. increased production), the same Bitcoin will be competing for more goods (or, it can be said that more goods are competing for the same Bitcoin).
So Bitcoin's value can be said to increase accordingly. In other words, deflation.
Now, whether this is a bad thing is subject to debate. Here's an article that discusses this, specifically WRT deflation not being a bad thing with Bitcoin:
The more you learn about economics, the less you will trust economists. They have trouble predicting economic growth one quarter ahead[1] and there are tons of competing schools and models on the macro level that endlessly bicker without coming to agreement (not one of which is very good at predicting the future). They have like, degrees and shit, so the world considers them experts. But take them with a grain of salt.
Divisibility helps to be sure, but there are other issues. Expectation of deflation discourages spending and investment, because the currency I would spend will itself be worth more tomorrow.
No, the currency would not appreciate much more if you keep it down the road, since bitcoin's value curve becomes almost flat when you reach that point, so there's no real value in hoarding your bitcoins when you reach that stage.
> since bitcoin's value curve becomes almost flat when you reach that point
What? The value of a currency is not only determined by how much of it there is, but by how much the economy needs to function. If the economy grows bitcoins will have to depreciate to allow smaller and smaller pieces to be traded. That's deflation, and it's bad. Divisibility isn't a feature, it's a bug that'll kill the currency in the long run because prices are sticky (people raise prices faster than they drop them) and the economy handles inflation far better than it handles deflation.
Hahah. Funny argument. Inflation is killing your economy, rather, because it encourages spending and frenetic consumption, this depleting the banks of the well needed savings that will be used for investment by private companies. Yeah, inflation works "so well", right.
Inflation encourages investment. If I can get a return sticking my money under a (literal or metaphorical) matress why would I take a risk with investing it? Funding your startup would be more expensive and more difficult in a deflationary world.
I don't see how it can encourage investment if inflation punishes savers. Savers are at the source of investment. If nobody saves where do you borrow money for your startup? Oh, let me guess, by borrowing from other creditor countries, where people actually save, like in China and Japan ?
Yeah, you are right, that worked pretty well for the US industry in the past 30 years to have a galoping inflation. Look where your industries went.
"I don't see how it can encourage investment if inflation punishes savers. Savers are at the source of investment. If nobody saves where do you borrow money for your startup?"
You're conflating all saving. Stashing money under my mattress (or in a vault) is not a source of investment. Saving is investment only if investing is how you save - investing is currently how you save partly because cash holdings lose value.
"Yeah, you are right, that worked pretty well for the US industry in the past 30 years to have a galoping inflation. Look where your industries went."
1) Inflation has not been "galloping" over most of the past 30 years. 2) I certainly don't assert that high levels of inflation are a good thing - low, controlled, stable, present seems to give the best results. 3) Nonetheless, yes, look where our industries went: mostly to countries with weaker currencies and more inflation.
And no, there has not been a "run for Gold" or things like that, Gold is not used as a currency anywhere a demand is still relatively low and stable.
So that gives you a sense of how much inflation you have been getting over the years. It's certainly faster than the official numbers. And anyone who has lived through the past 30 years should know very well that you could buy more commodities with a single dollar in the 80s than you can buy nowadays with the same amount.
Regarding savings -> you know most people do not get paid directly in cash, right? Most if not not all employers require de facto a bank account in order to pay salaries (we are not in the 60s anymore) and most of the savings go and stay there when you work. These savings become funds that the bank can use to emit loans and different financial services to private companies.
I looked at this in some depth a few months back and my conclusion was that the commodities which are up are up substantially over reported inflation primarily because of changes in supply and demand. I don't recall the details and do not have time right now to redo the analysis, but since my results match official results I think it's incumbent on you to make an actual case rather than relying on assertion.
Banks don't get most of the money they loan from deposits, they create it from fractional reserve banking via the money multiplier.
Continual low inflation is good for the economy, it encourages spending and investment and discourages hoarding cash. The purpose of money is not as a store of value, but as an enabler of economic exchange. If you want to store value, invest in assets of some sort. Money is not meant for saving, people with money know this, it's why they don't keep their fortunes liquid.
> they create it from fractional reserve banking via the money multiplier.
Yes, but they need cash in the first place in order to use the "multiplier" defined by regulators. They cannot create money ad vitam eternam without cash deposits. When there is a crisis, a bank low on real cash value will go bankrupt very easily. Have you already forgotten?
You tell me. By the way, you still have not explained why a zero inflation is not preferable to some low inflation. You said:
"it encourages spending and investment and discourages hoarding cash."
But inflation discourages savings (as I said, critical for the banking system, and therfore impacting investment), and hoarding cash would be anyway discouraged in case you have zero inflation, because you would be able to place your money in portfolio to gain more than 0 on yearly returns (dividends at least). So there would be no net return in hoarding cash. Or are you saying you need inflation to have growth ? In that case you would be mistaken, there was ample growth even when the markets were following the Gold standards...
So I am not really sure where you come from to recommend "low inflation". Besides, who can ensure the inflation remains low, and who can control that there is no dumping of cash on the market when there is a central bank in charge, serving the current political agenda ?
Again, what's good with Bitcoin and Gold is that they are both neutral and relatively free of political control (well, at least for Bitcoin).
Don't conflate "zero growth of the money supply" with "zero inflation". Unless the population and amount of goods and services produced stays constant, these two won't correspond. With zero growth of the money supply, a growing population with a growing economy will experience deflation, which is what worries me.
> Why does deflation worry you? It's a good thing.
You haven't actually studied modern economics if you don't understand why deflation is worrisome and why the monetary policy we have now exists to prevent deflation to achieve this stability: http://upload.wikimedia.org/wikipedia/commons/2/20/US_Histor....
Try reading your own link, "It's important to note that this fallacy should not be used to dismiss the claims of experts, or scientific consensus.". You are trying to do exactly that. Pointing out that you are in conflict with basic economic knowledge is not an appeal to authority. You asked why he was worried about deflation, I showed you why, I wasn't making an argument, I was giving you the information you asked for. Ignore it if you like, I'm not interested in arguing with you.
It really seems to me you haven't studied economics at all. Zero inflation/deflation would be great, but it's simply not achievable in practice, the economy is not fixed in size. To maintain zero inflation/deflation would require the money supply to fluctuate at exactly the same rate as the wealth in the economy it represents, can't be done.
Inflation is not a measure of just the money supply, it's a measure of the size of the money supply to the size of wealth in the market, fixing the size of the money does not fix the size of the wealth it represents.
Wealth expands and contracts constantly and if the supply of money doesn't change accordingly you get either inflation or deflation. Well it turns out that doesn't work so well, the economy reacts much better and quicker to inflation than to deflation because prices rise easier than they fall. While on the gold standard the swings in the market were wild and depressions happened often.
Fiat money fixed that by allowing the supply of money to be managed to match the need for money in the economy. Money is just a tool after all, it is not wealth, just a means of trading wealth. By continually slightly inflating the money supply, the natural swing from inflation to deflation was pushed over to the inflation side avoiding deflation and all its ills. Since fiat money took over the economy became much more stable and those cyclical depressions under gold became cyclical recessions. Inflationary policy with fiat money simply works better.
Inflation does not discourage saving, it discourages saving cash, big difference that you keep ignoring. Bitcoin is doomed as a currency for the same reason gold died, it's vulnerable to continual and inevitable deflationary pressure. Every sudden jump in real wealth in the market will force bit coin into a deflationary period; this is very bad. It dries up the money supply and encourages hoarding of the tool meant for exchanging. Money is not wealth, it is not meant for saving, it's meant for spending. Treating it like wealth, and hoarding it, reduces the supply that's necessary to keep liquidity in the market and forces traders to trade with lesser amounts forcing suppliers to reduce prices, aka deflation.
Those who ignore history are doomed to repeat it. If the money supply cannot be rapidly expanded to meet the needs of increased wealth being created in the market, then the currency will suffer deflation and fail as a currency. There a reason the nations of the world have moved to fiat currencies, they simply make better more functional currencies.
The idea of "conflating all saving" is itself wrong.
Saving is a matter of time preference, specifically, preferring to consume in the future. That implies carrying forward surplus value from today to be spent tomorrow. Let's say you have a choice of how to go about it: G, or W.
Strategy G is to stash gold in a mattress. Strategy W is to buy stock of Webvan/Amazon.
Let X = present value to save
T = timestamp at present
d = value delta
t = time delta
Now at time T+t you want to have X+d value where d=0 is okay, but (d < 0) is unacceptable.
Now the choice between G and W is as follows: W has to offer you a higher rate of return than merely holding the gold in strategy G.
Gold will increase in value (price) if more produce is offered in exchange at time T+t, assuming stock of gold is constant (which it is, to an approximation).
So what Webvan/Amazon must offer a rational investor is a better return than the rest of the aggregate efforts of human-kind. They must have high productivity.
This is precisely what makes capitalism and free-floating interest rates so efficient, capital is allocated to the most productive enterprises.
The ratio between spending preferences now and in the future determines the interest rate. A high interest rate implies that only higher-credit (in the sense of faith in their success) companies will get money.
The highly risky investments will simply not happen. There won't be any bubble mania.
In your conception, the idea that stashing gold is not productive is merely another way of saying "gold stashers don't fund Webvan" when looked at through this lens.
But it is good they don't! Everybody should have the right to sit on the side-lines and watch.
When the word "unproductive saving" and "hoarding" are used, they usually refer to this leave-me-alone strategy.
In periods of hard-money we saw great advancements in the standard of living of peoples around the world [ref Thiel?].
The free market always beats a planned economy. It doesn't matter if the planning is overt like the Soviet model or merely a plan to distort time preferences.
> Now at time T+t you want to have X+d value where d=0 is okay, but (d < 0) is unacceptable.
> ... a better return than the rest of the aggregate efforts of human-kind
If a venture produces a lower return than the rest of human kind, 'd' will be negative. Knowing whether d will be positive or negative
let alone by how much is difficult.
> The highly risky investments will simply not happen. There won't be any bubble mania.
The high risk investments will absolutely happen but only if the rewards are commensurate. The issue with monetary policy is the skewing of risk/reward.
Here is how inflation encourages investment. Imagine a simplified world, wherein you are choosing whether or not to invest in a company. The company is able to produce 5000 utils of value later, with your investment, and is willing to give you 10% of the proceeds in exchange for your investment of $300 now.
If the going rate for utils is $1/util now, consider the following situations and strategies.
Situation 1) Later, the market is clearing $0.50/util:
Strategy a) Stick money under a mattress:
You keep your $300 now.
It becomes $300 later, and can buy you 600 utils.
Strategy b) Invest in the company:
You give your $300 now to the company.
The company produces 5000 utils later.
The company sells the 5000 utils for $2500.
You get 10%, or $250, which can buy you 500 utils.
2) Later, the market is clearing $1/util:
a) Mattress:
$300 now -> $300 later -> 600 utils.
b) Invest:
$300 now to company
5000 utils later (for company) -> $5000 later (for company)
10% is $500, which can buy you 500 utils.
3) Later, $2/util:
a) Mattress:
$300 now -> $300 later -> 150 utils.
b) Invest:
$300 now to company
5000 utils later (for company) -> $10000 later (for company)
10% is $1000, which can buy you 500 utils.
As you can see, in the setup given - which is clearly a crude abstraction but shares some dynamics with reality - when there is sufficient deflation you would do better not to invest in the company, whereas with no inflation you do a little better to invest, and with inflation you do a lot better to invest. That's how inflation motivates investment. The key point is that investing now translates into some amount of value created that doesn't (in most cases) change with prices, so when you turn it back into money at the later rate (by selling what was produced) its relative value compared to not investing is lessened.
You're not taking risk into account, the company is not guaranteed to produce 5000 utils of labour, it could produce less or worse go bankrupt and produce nothing.
With no inflation, my risk free investment of money under a mattress produces no return. My risky investment with the company has the probability of a positive or a negative return.
With inflation, I'm forced to make a risky investments to break even. True, I can no longer keep my money under a mattress but I'm still an unsophisticated investor and choose to park my labour in houses for example which inevitably leads to a housing bubble.
With deflation, I agree, people would rather not invest in a business producing a lower return than the rate of deflation but why would that deflation occur? One reason could be more goods chasing the same amount of money implying real economic growth.
The problem I have with the current inflationary system is the distribution of new money, if all currency held and prices denominated in that currency increased by the same factor. It would result in a nominal increase in prices. No one would be richer or poorer after the increase. The current system distributes new money to people who directly interact with the central bank, rewarding them at the expense of everyone else.
I didn't take risk into account because it simplified things. Run the numbers with risk and you'll see it doesn't change things substantially - it effectively just changes what percentage I expect to get from the company.
Your point about unsophisticated investors bearing more of that risk is a good one, but doesn't change the fact that inflation motivates investment and deflation motivates hoarding - it points out one negative consequence of motivating investment.
Regarding your last point, we're discussing potential problems with bitcoin. A criticism of the current system - well founded or not - doesn't amount to an endorsement of a particular policy in an alternative system. Do you object to bitcoin mining distributing new money to miners? If not, would you object to it continuing to do so through expansion of the bitcoin supply rather than switching over to paying miners more entirely through transaction fees? My broader point is simply and entirely that the cap on the number of bitcoins presents some long term risk to an economy using bitcoin as currency.
A venture with a 75% chance of providing 5000 utils of value is not the same as a 100% chance of producing 3750 utils.
Put another way, inflation motivates gambling and deflation motivates saving - it points out a serious consequence of forced spending, namely a flight to other, less abstract stores of value.
I would like your views on what deflation represents in an economy, I understand people are saving/hoarding money but by never spending it don't they remove themselves from the system? On the other hand, wouldn't an increase in productivity lead to the same amount of money buying better/more goods?
Using a stupidly simple model, if the total productivity of a society using Bitcoin remained constant would there be any deflation? What if the total productivity fell?
We should discuss the implications of mining in another post :)
Inflation encourages a flight to other stores of value, houses for example, the problem is you're not encouraging investment based on ROI, its simply a drive to preserve value.
All you end up with is another monetized good which isn't actually constrained in the same way as gold or bitcoin leading to overproduction (tulips/houses) and a crash.
Actually it seems to be your assumptions that need questioning: the
idea of "conflating all saving" is itself wrong.
Saving is a matter of time preference, specifically, preferring to
consume in the future. That implies carrying forward surplus value
from today to be spent tomorrow. It matters not whether you stash gold
in a mattress of buy stock of Webvan: you merely hope to have X+delta
at T+t time where {X, T} represent the present and {d,t} represent
increments and can be zero.
In order for you to then invest your gold in Webvan, said company has
to offer you a higher rate of return than merely holding the gold.
Gold will increase in value if more produce is offered in exchange
at time T+t; assuming stock of gold is constant (which it is, to an
approximation). Of course, I prefer the word price since gold has
no intrinsic value.
So what Webvan has to offer you (a sane investor) is a better return
than the rest of the aggregate efforts of human-kind, assuming of
course, that said aggregate efforts are barter-able with gold (that
is, can be bought with gold).
This is precisely what makes unbridled capitalism and free-floating
interest rates so wonderfully efficient. That damn company cannot get
away with peddling something that doesn't improve all our lives. It
has a high return on investment barrier to cross in a hard-money
economy (defined in this case as a fixed supply of gold).
Conversely, when Greenspan is pumping money, it's pets.com's time to
shine! And of course, what most don't seem to realize is that the
current crop of startups is mostly just Bernanke's easy money that
needs a place to park itself. That's why VCs just can't get enough
flow and bitch about deal-sizes.
Another way to phrase the 'investment barrier' is to say that the
ratio between spending preferences now and in the future determines
the interest rate. A high interest rate implies only higher-credit
(in the sense of faith in their success) companies will get money. The
highly 'speculative investment' in pet-dating will simply not happen.
Note again, I don't like the word investment, savings is just fine as
a word for deferment of consumption, and speculation itself is not bad.
Here 'speculative investment' is a synonym for unproductive stupid shit
money's being spent on.
Nor will houses be given to bad-credit home-buyers, incidentally, which
really troubles some. But ask yourself -- if Bob-the-builder built a house and the
home-buyer promised him ten apples, and couldn't pay him dem apples,
would Bob in hindsight have wanted to build that house for him? If he
defaults on Bob, Bob is impoverished. If the Fed bails him out (or
actually bails the home-builder out) all of us are impoverished
(currently above 50K USD per person in the USA approx). Charity is
fine, forced-labor is not.
In your (and Krugman's, and most of mainstream (read tenured)
economics') conception, the idea that stashing gold is not productive
is merely another way of saying "gold stashers don't fund Webvan" when
looked at through this lens.
Damn well they don't! Everybody should have the right to sit on the
side-lines and watch. It is almost Gandhian in its non-participation
(excepting grand-nieces, but that's another story).
That is precisely what stashing your savings under the mattress in a
hard-money economy does, allows you to step away from the pets.com
frenzy.
Wall Street has another way to say it: While the music's playing, you've
gotta get up and dance. If a bank didn't take the bail-outs it would
have gotten bought out, lock, stock & barrel by one that did. While
Ben's fiddling, you've got to join the orgy. It doesn't matter if the
country burns in the meanwhile.
So the problem with this inflationary money supply is simply that it
distorts interest rates, thereby funding unproductive
enterprises. The Webvan's get funded, Facebook & Twitter IPO, a...
What you wrote here seems to be much more ranting and cheering than logic. I'll re-read at some point and see if I can pick out anything of value, but if you can tighten it up that'd be appreciated - I can't tell whether your points coherent or not.
That's not an argument, it's simply how the economy works.
> Inflation is killing your economy
No it isn't.
> rather, because it encourages spending and frenetic consumption
Our economy is based on consumption, like it or not.
> this depleting the banks of the well needed savings that will be used for investment by private companies.
You don't really know how banks work do you.
> Yeah, inflation works "so well", right.
Actually yes, it does. You should educate yourself a bit on how the economy actually works, you sound like someone with little more than a high school understanding full of misconceptions and bad ideas.
So, the economy is growing, with the same number of bitcoins chasing more goods (or actually, fewer and fewer bitcoins chasing more goods, as some get lost or destroyed) and (as you pointed out) people deal with this in part by splitting the bitcoins smaller in terms of what they actually spend. That obviously leads to the currency becoming more valuable as you can exchange the same amount of currency for more other stuff, right?
It's worse than that, because expectation of deflation means people hoard rather than spending, which means still fewer coins actually in circulation.
The problem is (an expectation of) fewer bitcoins chasing more goods. Removing bitcoins while adding labor doesn't counteract that dynamic, it adds to it. (It's also not true that that's the only way bitcoins are removed from circulation - some have already been lost/destroyed - but given my previous point that's simply an aside).
It's a problem because of what money is. It's not an asset to be held as store of value, it's a medium of exchange to make trade work better. If everyone is refusing to spend their bitcoins because they expect them to be more valuable tomorrow, bitcoin is not being a currency and people have to use other currencies to get things done or things aren't getting done, either of which is an issue for bitcoin-as-a-currency (and the latter an issue for everyone). Arguably bitcoin could continue to serve as an asset anyway, but I don't understand that to be the vision.
None of this is to say that I am confident this will be sufficiently an issue that things stop working, but I definitely see it as a risk.
The primary function of bitcoin is as a store of value, its utility as medium of exchange comes after that.
The only reason people choose to store their labour in bitcoin today is that they predict the same amount of bitcoin will buy the same or greater labour in the future less the costs of converting to/from bitcoin (transaction costs). The only reason they'd store their labour in any other way is if they were getting a better deal.
Said another way, if bitcoin's primary use was as a currency the silkroad shutdown should have lowered the price of bitcoin proportionally. People using bitcoin as a currency could convert into it at the last possible minute instead of holding it. You need people treating it as a store of value for it to have a price tomorrow.
Over time, we've decided that focusing on something that works optimally as a medium of exchange and sufficiently as a store of value is better than the alternative. As I've said, I'm not convinced this is devastating, but it's a concern, and is orthogonal to divisibility.
Who 'we'? And why do they feel its better than the alternative? I can see why the digital dollar trumps gold, the transaction costs are way lower but I don't think bitcoin has the same problem.
It will be interesting to see how this plays out, store-of-value > medium-of-exchange or the other way around. Darwinism in all its glory.
It's certainly the case that gold has problems that bitcoin does not.
It will indeed be interesting to see how things play out, though interesting isn't always good. It might also not be a very good experiment. Path dependence is huge, and the store-of-value role seems likely to play a bigger role in trying to shape expectations around an otherwise ephemeral digital currency while bootstrapping, yet a focus on it might nonetheless wind up ham-stringing us in the long run...
Which, to be sure, is very much like Darwinism has played out in many other contexts.
The protocol handles that pretty well by automatically adjusting every 2016 blocks to target one block every 10 minutes. There have been many "breakthroughs" in mining, from CPU to GPU to FPGA to ASIC (see https://en.bitcoin.it/wiki/Mining_hardware_comparison for comparisons).
Or are you talking about breaking the crypto primitives like ECC and SHA256? If there's adequate warning (months? years?) then it's possible to transition to new algorithms, otherwise, yeah, that could be a problem.
I was primarily meaning the crypto primitives. (see http://valerieaurora.org/hash.html for a neat chart of past and present hash functions and their lifetimes.)
Migrating over to "bitcoin-B" or some other variant would be possible, but I would imagine it would be unavoidably chaotic if both currencies stay fully decentralized throughout the process, regardless of whether the primitives break outright or over time.
That seems similar to that strategy that says you need to commoditize your competitor's products and cash cows (especially if such a move doesn't affect you in a big way).
The dollar is a sort of "proprietary currency" owned by one "monopolistic" country now. The goal of a "competitor" would be to create an alternative that is very open and decentralized (anyone can use), to disrupt that country's power and control over the world through its currency.
If bitcoin becomes "a thing," then it'll be on a newly generated blockchain mined all to hell by a private party or government before being released to the public. Then you'll trade your cash for approved bitcoin (not using that name either) on that specific blockchain.
It can even split out multiple ways (think: one currency per company instead of per country/region). Pay your AT&T bill with AT&T Fun Bucks which have an exchange rate against Apple Awesome Bucks which have an exchange rate with Euros which have an exchange rate with Safeway Safe Way to Pay Coins.
The current bitcoin madness is just an experiment in how many ways you can say "THIS PAPER HAS VALUE," sign it, rip it into bits, then make people think each piece is a valuable part of the whole (which had imaginary value in the first place derived only out of scarcity—bitcoin isn't even shiny).
You see how easy it is to make fun of Americans? :-)
It is like Putin deciding to give Snowden asylum. Free poke at the gorilla, look he can't reach over here and hit back.
Of course a more open dialog is good, but nobody, especially the Russians or Chinese actually want a world government. That would take all the fun out of being a dictator.
World government and world currency are not the same. The Chinese government wouldn't really want either though, given the games they play with the Renminbi.
They kind of are, the same that is. A reserve currency (such as the one called out here in the article) is a sort of 'place holder' currency. But to be a valid place holder it has to have some structure against which to balance, a connected monetary policy if you will.
Look no further than the Euro to see how challenging it is to manage a currency. And note that the countries in the EU are co-operating. Imagine how hard it would be if Greece or Spain was actively trying to siphon money out of Germany because of treaty obligations. If a recipe can be figured out for managing the Euro, then there will be a call for doing the same thing world wide, but until then its just a free poke at the US for being stupid.
Of course, I'm sure any military actions regarding Taiwan, the Spratly islands, etc, isn't going to need any kind of UN approval since they're already Chinese territory that has been unjustly annexed by foreign powers.
* The US also provides safe assets in the form of US Securities.. by going into debt.
* Treasury notes and bills are widely used as collateral and upon maturity they turn into reserve currency cash.
* China, the oil producers run budget and trade surpluses and don't have a history of providing safe assets, like the US, Japan and some EU countries.
* Having a reserve currency causes your currency to appreciate, which isn't good for exporters.
* On the flip side too much spending will cause inflation, which plagues developing countries, but not the developed.
* So they cannot afford to spend as much, without their CB raising interest rates to fend-off inflation, which causes.. currency appreciation and trade deficits.
Which country will provide reserves AND safe assets? And what will China do to back this organization in these circumstances?
The Chinese are making incendiary comments because the U.S.-centric world order has done well for them. The U.S. Navy patrols the world's seas and so protects global marine trade routes. The U.S. military provides security guarantees which liberate a large chunk of global demand, e.g. Japan, Korea, Singapore, and the EU, for consumption. And the U.S. financial system lubricates the global flow of capital, goods, and services.
I agree that the global economy has put too much faith in the U.S. political and financial system. Diversification would encourage competition as well as increase systemic resilience. The present situation, where a U.S. default literally means the implosion of the current world order, is encouraging previously taboo debate to come out into the open.
A collapse of the U.S. dollar today shakes up a world in which China is ascending. I'd get mad if someone threatened to flip the game board just as I started getting ahead, too.
I would like to see Obama start to feel out the possible response in the international financial community to unilaterally raising the debt ceiling so this idiocy could be done for good. Just knowing he was doing it would probably cause Republicans to cave so they don't have to admit not authorizing their own expenditures is devoid of all logic.
"If the debt ceiling isn't raised, simply prioritize what the country's money is going to be spent on."
1. That could be a form of default. Not on the U.S. debt, but on its contracts.
2. Cash flows are lumpy - that's part of why we have government debt. Even reducing all non-debt payments to zero, the U.S. Treasury will have to default at some point before mid-November. There simply isn't enough money in the U.S. Treasury's account at the Federal Reserve to keep its cheques from bouncing.
You don't buy the furniture out of a burning house. A fire sale of a country's public assets in the midst of a political and financial meltdown isn't going to find much real demand.
The US certainly has assets that other would be willing to buy. As an obviously inflammatory/terrible example: I am sure many corporations or nations would leap at the chance to buy the mineral rights of national parks. How much would the Chinese give us for the right to stripmine Yosemite? A lot I bet. (Obviously that is a horrible idea, we should never stripmine our national parks...)
You own Blackberry stock. It's your largest holding. You've seen it lose 90% of its value in the last 5 years. The CEO asks if you'd like to buy a cafeteria pass, good for free meals at the company cafeteria for the next 50 years.
Most investors would say no. If a company is selling its cafeteria food to stay afloat, chances are (a) there won't be a company tomorrow or (b) it will find some way to repudiate inconvenient contracts, e.g. go bankrupt.
Some very smart people bought into an Argentinian oil and gas deal. Then the friendly government became less friendly and their deeds were worthless pieces of paper.
Obama should sell start selling indulgences. Every non-violent federal offender has a one-time opportunity to have their case dropped for $100,000. I'm pretty sure lots of people could pony up the cash through friends and family, if necessary. As a bonus, save costs on the Justice Department.
Perhaps more to the point, Obama doesn't have the legal authority to prioritize certain payments. If he doesn't pay something, then he would be in violation of the law. He can't just unilaterally not pay bills. This isn't some little technical problem, it's a real constraint. If the debt ceiling isn't raised, Obama is both (1) required by law to spend certain monies and (2) not allowed to borrow to spend that money. This could provoke a very real constitutional/legal crisis with no clear resolution.
Have you ever considered that in the last 15 years more people have died as a result of the actions of the US government than are prevented from starving to death by the US government?
If you want to contribute something constructive to this conversation, then I suggest that you put together some sort of report/study to demonstrate your thought that over the last 15 years more people have died as a result of US government actions than would die in the ensuing chaos around the fall of western civilization.
It's been spelled out like 6 times in this thread that this crisis creates contradictory legal obligations for the executive branch that are logically impossible to fulfill.
If you're really not understanding that, perhaps you should consider rephrasing your objection as a humble question.
And then what? The vice president would become the president, and he would have the exact same problem. The executive branch can't just miraculously disappear, even if congress is acting like a schizophrenic moron.
The most likely outcome, if the executive branch has no legal course of action, is to choose the "least illegal" course of action [1]. The linked article from the Columbia Law Review has a detailed analysis of the three options. Here's the most plausible picks:
- Selective repayment. Pick and choose which payment obligations to discharge. There's obvious political issues here. Who gets paid, and who doesn't? Social security over Medicare? Military contractors over NASA?
- Increase taxation without the authorization of congress. Again, many inherently political questions. Who do we increase taxes on? In many ways, this is a mirror image of option #1.
- Issue new debt not authorized by congress. The biggest issues here are market factors, not political questions. How will the market react to this unauthorized debt? If it refuses to buy at low interest rates, this option is not likely to solve the underlying problem.
Several humerous non-options are also debunked in [1], to illustrate what "more unconstitutional" looks like:
- Sell Alaska back to the Russians. Use the proceeds to buy time.
- Mint coins, and by fiat appraise them for massive amounts. Sell them to the fed, and pay off the debt with the new funds.
Just read the article. It's a bit biased, but its analysis of options appears on the whole quite reasonable (I am not a constitutional scholar).
> The debt ceiling has nothing to do with meeting ones obligations to creditors.
yes, it completely does. the US does not have the cash on hand to continue paying out to its creditors. to continue to pay its creditors, it must borrow more money.
The debt ceiling has everything to do with meeting obligations to creditors, and that is why it should be raised. Start with false premises, end up with false conclusions.
Obama met with the large banks on 2 October, telling them it might be worse than they expected [1].
Wall Street was pretty chill through the middle of last week [2]. Once it started calling it became apparent that there was little it could do [3].
The expectation appears to be that Obama will prioritise payments after 17 October to avoid a default. Once a critical point is reached he will use "creative accounting," in the IMF's words, to come up with a solution. Him failing at that, the expectation is the Federal Reserve will find a way to credit the U.S. Treasury's account. All these options, it should be noted, involve the selective suspension of the rule of law - the lesser of the evils.
Nobody outside of the US cares about what's legal (in this instance), they just want assurances the inmates aren't running the asylum and the house of cards won't come tumbling down.
Of all of the unconstitutional things Obama has been alleged of doing, blatantly disregarding the Constitution's allocation of the power of the purse to the House and unilaterally raising the debt ceiling to placate the "international financial community" would undoubtedly be the most egregious. It would effectively be a coup d'état and the right's hand-waving about Obama being a dictator will have become a self-fulfilling prophecy.
It's not about "placating" anybody, it's about standing up and walking away from the table instead of playing Russian roulette with your crazy, drunk, suicidal uncle.
So you're a lawyer, right? Politically I get what you're saying but legally, with the 14th amendment and all, he has to either illegally prioritize or illegally ignore the debt limit. Maybe ignoring the debt limit has more constitutional standing than reprioritizing the congressional budget. No idea on my end.
Personally, if we're prioritizing, I think he should do some math where they pay all treasury bonds, on time and 100%, and then just cut every other expenditure in half (or whichever % works out), across the board. Social security checks, contractor payments, gov't worker payments, etc. Anybody refuses to do work, send the half-paid national guard after them and order them, since we're in crazytown anyways. And tell them to write their congressman.
That's possibly the "least illegal" option, and certainly the most politically palatable, as far as respecting congress's self-contradictory legal orders in this mess.
The fact that the 14th amendment prohibits reneging on the public debt does not mean that the President is empowered to ignore the other provisions of the Constitution in order to avert a Constitutional breach by Congress. Section V of the 14th amendment clearly gives Congress the power to enforce the other provisions of the amendment.
As for the illegality of prioritizing payments, as far as I can tell, out of the mandatory expenditures only a small amount is Constitutionally required (specifically, judges' salaries). The rest is only statutorily mandatory. As you correctly perceive, it seems preferable to commit a statutory violation to avoid a Constitutional one.
Believe it or not, lawyers deal with conflicting laws all the time. There's a few general principles, the most important "rule of thumb" is :
Constitution trumps amendments (but only in certain high-up courts), which trumps normal law, which trumps contracts (written "generally" before oral ones), which trumps common sense ("what a good house father would do"). The sum total of all these things form "the law" as viewed from the perspective of a person (so yes, you are legally obligated to "generally be good" even when the law doesn't explicitly require it (e.g. help people involved in accidents))
Basically since the government debt obligations are contracts, while the debt ceiling is a law, Obama has no choice in the matter : any lawful payments (like medicare, ...) have to be fulfilled before any contract is paid. So barring a new law (the "agreement" the news talks about), on Okt 17, the US should default. Maybe Obama can delay it a few days, but certainly no more.
Please note that congress is doing exactly what it was designed to do. Congress, whether you agree with it or not, represents the will of the people of the united states and Obama is ignoring it, refusing to do so much as negotiate (or so claims congress, and I see no reason to doubt their claims). He knew years in advance that this was coming and gambled. Every executive who has fought congress on this has failed, again something Obama is perfectly aware of (it featured prominently in his education for one thing, hell, it's one of the main forces that brought us democracy in the first place).
In case someone doesn't know this : Obama's a lawyer. Lawyers tend to be lawyers first, people second. And he has a history of this sort of thing : expect him to follow the law over common sense.
> Please note that congress is doing exactly what it was designed to do. Congress, whether you agree with it or not, represents the will of the people of the united states and Obama is ignoring it, refusing to do so much as negotiate (or so claims congress, and I see no reason to doubt their claims). He knew years in advance that this was coming and gambled. Every executive who has fought congress on this has failed, again something Obama is perfectly aware of (it featured prominently in his education for one thing, hell, it's one of the main forces that brought us democracy in the first place).
The Affordable Care Act was passed through normal legislative processes and defended by the judicial system. It has also survived an almost constant legislative assault since then.
Shutting down the government and threatening default over a piece of legislation you don't like is not part of the normal legislative process. It's radical. And you can even argue that with cute little last minute rule changes like HR 368 that it's borderline undemocratic as well. The American people may have mixed opinions on the Affordable Care Act, but I highly doubt they wanted the federal government shut down over it.
Congress is not doing what it was 'designed' to do. The Hastert Rule (http://en.wikipedia.org/wiki/Hastert_Rule) was only introduced in the last 30 years or so, and has never been followed as dogmatically as Boehner is following it now.
By refusing to bring a bill to a vote unless a majority of his party openly supports it, Boehner is explicitly preventing compromise.
That's not what I mean. Congress is refusing to finance a government whose actions it doesn't support. Which is exactly what it's supposed to do, and is in fact one of it's core functions.
Days later, congress voted to finance the government. They collectively decided it would be easier to build a better government on an economy that isn't in a nosedive.
Constitution trumps laws trump contracts, but this particular contract is specifically blessed ("shall not be questioned") in a way no other contracts or laws are.
I'm thinking that looking at this Constitutional conflict is a lot like when you know you're about to execute latent untested paths in your production codebase. Except that, of course, you're not just crashing a webserver in this case...
Bullshit. Congress has been exercising the power of the purse all along, passing budgets with deficits. Congress does not have the power to default on our obligations. The executive taking corrective action is worse than the congress doing so, but it's the congresses fault for failing to do their jobs not any sort of power grab.
It might be unconstitutional for Congress to default on our obligations, under the 14th amendment. At the same time, by the terms of the 14th amendment itself, Congress is the one entrusted with enforcing that requirement. The Constitution does not require that for every possible violation by one branch, some other branch be able to cure that violation.
Laws in violation of the Constitution are not laws. If the Congress sets up a situation where the only legal option is default some component of that setup is not law. The fact that Congress is granted powers to make laws that enforce the article doesn't mean the article only has effect through actions of Congress.
> At the same time, by the terms of the 14th amendment itself, Congress is the one entrusted with enforcing that requirement.
Yeah, but Article II charges the President with taking care that the laws be faithfully executed. To quote Lincoln (in a different context, certainly), "are all the laws but one to go unexecuted and the Government itself go to pieces lest that one be violated?" Obama would be on solid legal ground in saying that he has to reconcile conflicting congressional mandates by ignoring the debt ceiling.
(On the other hand, I read today that any debt that was issued above the debt ceiling would be a lot more costly because buyers would insist on premium interest rates to compensate for the increased legal risk that the debt would be held invalid.)
The US isn't preparing for war with China, except in the most general sense of "preparing". The Pentagon does see China as a military threat, and has prepared plans for war (I'm sure someone will point out that the Pentagon has plans for war with Canada, too).
The phrase the US seems to be preparing for war against China implies that there is political will behind the idea of actually putting plans into practice and going to war.
That isn't the case, and I find it extremely unlikely that will change in current environment.
>there is political will behind the idea of actually putting plans into practice
It's well beyond a contingency plan, like plans for war with Canada is.
"“the Air-Sea Battle concept has prompted Navy officials to make significant shifts in the service's FY2014-FY2018 budget plan” towards exactly the sorts of electronic, cyber, and anti-submarine weapons systems that the war plan for China calls for.”"
"ASB Concept, coordinated
through the ASB office, is designed to develop the force over the long-term, and will continue to inform institutional, conceptual, and programmatic changes for the Services for years to come."
"The U.S. military provides security guarantees which liberate a large chunk of global demand, e.g. Japan, Korea, Singapore, and the EU, for consumption. And the U.S. financial system lubricates the global flow of capital, goods, and services."
You don't actually believe that? The sole function of the US military is to protect US interests - no one else's! How would you feel if the Chinese navy parked itself in the Gulf of Mexico claiming to protect the free flow of global commerce? You would correctly proclaim that to be nonsense. Some goes for the US military. Don't believe the propaganda...
That's true, however the US has a huge interest and 65 year track record supporting global free trade, which is a system that other countries can get on board with.
Certain oil-producing nations aside, this isn't mercantilism, and if the EU and East Asia had a problem with our military presence then we'd probably hear more than token protests about it.
> The U.S. Navy patrols the world's seas and so protects global marine trade routes.
One of the most active navies in anti-piracy operations off the Horn of Africa is.. the People's Liberation Army Navy. They have had a presence on-station since December 2008.
It would be interesting to see how the Chinese envision an international currency. Essentially fiat currencies regard tax payers as asset-backed securities, and create value by issuing government backed bonds. With no tax payers and no central body (or a joint venture with unconstructive bickering) you'd run into some fundamental issues. You could: 1) peg existing currencies to it (good luck getting buy in)
2) peg the currency to physical goods (gold, oil, etc). Fiat currencies have distinct advantages which make it optimal for modern trade.
3) use treaties to regulate government sovereign bonds with the global currency
Something which occurred to me - a bit without precedent but possibly legal...
Congress has the power, with a 2/3 vote, to expel a member. How about, instead of playing chicken with the world economy and our jobs, they put their own jobs on the line: scrap the existing debt limit and replace it with a rule of procedure in both houses that says if the House and Senate can't prevent breach of the debt ceiling (moved as they feel is necessary) they're all expelled.
Obviously it'd need to be worded such that a veto couldn't force out congress, but that sounds doable.
I don't think they'd wind up being expelled. The mainstream republicans are supporting this because they fear primary challengers. If the choice is "possibly lose your job vs. definitely lose your job", one obviously dominates.
150 comments
[ 3.4 ms ] story [ 202 ms ] threadI could tediously go on...
I propose a new digital currency be created according to certain eigenvectors[1] and allometry[2] features of trading network flows or simply the internet traffic flows.
The progress of Complex Network[3] theory may tell us more about how to build a solid algorithm for this kind of "evolving coins" to make them decentralized and evolve along with real economic activities.
I've been investigating the theory in part time and I dare say somebody with sufficient knowledge is able to figure out a model eventually.
IMO, bitcoin is the start of inventing a better currency, not the end.
[1]http://en.wikipedia.org/wiki/Centrality [2]http://www.nature.com/scitable/knowledge/library/allometry-t... [3]http://en.wikipedia.org/wiki/Complex_network
And then think about pg's point #3 about why a government would have created Bitcoin: "because they felt their currency would never become the standard reserve currency, and they felt it was better that no one's be if theirs couldn't be" (https://news.ycombinator.com/item?id=5547423).
It won't be proof that BTC came from China if China suggests using BTC as the reserve currency, but pg's point will be proven to me, at least.
If US want to keep them its a choice they make, the problem its that other countries cant do nothing about that, even if this stupid behaviour is affecting everybody else and burning down the middle class all over the world
How sure are you that there won't be any significant breakthroughs in bitcoin-mining math/tech over the next 30 years? 100 years?
https://en.bitcoin.it/wiki/Controlled_supply
I think 17th century Portugal and others would have something to say about how "stable" commodity monetary systems are over long periods of time.
why have almost all currencies used throughout history had a significant fiduciary element? why has the world constantly cycled between bullion and fiat currencies? why do you think bullion currencies are more common during times of warfare?
when are countries incentivized to "expand their credit line to the infinite"?
would you rather have a currency that can modify its inflation/deflation rate based on any number of relevant factors, or a currency whose inflation/deflation rate is tied to the rate of mining of some rocks in the ground?
> why do you think bullion currencies are more common during times of warfare? Because inflation runs crazy during warfare and therefore people trying to save their earnings go for gold, silver and others in order to avoid losing the face value of their fiat currencies. And by the way, the Gold standard was abandoned in History mainly to fund the war in Europe during the 1st world war, and then later in the 20th century because of the expenses of the US military policy during the Cold war.
> when are countries incentivized to "expand their credit line to the infinite"? Look at the current situation in the US. Everyone knows they will never pay their debt, yet it keeps growing. You can expect things to crash hard down the road.
> would you rather have a currency that can modify its inflation/deflation rate based on any number of relevant factors, or a currency whose inflation/deflation rate is tied to the rate of mining of some rocks in the ground?
The later, obviously, because Gold is neutral and does not belong to any government. The US Dollar, the Euro and other fiat currencies are all controlled by different central banks with different agendas. I have no control over what they can do in the future. But Gold is tangible, and there's not much Gold being extracted nowadays to change the face value of it.
Why do you think China is building a huge Gold reserve currently, and buying Gold as much as they can from all over the world? Do you think they are just plain stupid ?
As the world continues to output more (i.e. increased production), the same Bitcoin will be competing for more goods (or, it can be said that more goods are competing for the same Bitcoin).
So Bitcoin's value can be said to increase accordingly. In other words, deflation.
Now, whether this is a bad thing is subject to debate. Here's an article that discusses this, specifically WRT deflation not being a bad thing with Bitcoin:
http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-d...
[1] http://www.zerohedge.com/news/2013-10-10/not-world-youre-hop...
What? The value of a currency is not only determined by how much of it there is, but by how much the economy needs to function. If the economy grows bitcoins will have to depreciate to allow smaller and smaller pieces to be traded. That's deflation, and it's bad. Divisibility isn't a feature, it's a bug that'll kill the currency in the long run because prices are sticky (people raise prices faster than they drop them) and the economy handles inflation far better than it handles deflation.
Yeah, you are right, that worked pretty well for the US industry in the past 30 years to have a galoping inflation. Look where your industries went.
You're conflating all saving. Stashing money under my mattress (or in a vault) is not a source of investment. Saving is investment only if investing is how you save - investing is currently how you save partly because cash holdings lose value.
"Yeah, you are right, that worked pretty well for the US industry in the past 30 years to have a galoping inflation. Look where your industries went."
1) Inflation has not been "galloping" over most of the past 30 years. 2) I certainly don't assert that high levels of inflation are a good thing - low, controlled, stable, present seems to give the best results. 3) Nonetheless, yes, look where our industries went: mostly to countries with weaker currencies and more inflation.
http://goldprice.org/charts/history/gold_all_data_o_usd.png
And no, there has not been a "run for Gold" or things like that, Gold is not used as a currency anywhere a demand is still relatively low and stable.
So that gives you a sense of how much inflation you have been getting over the years. It's certainly faster than the official numbers. And anyone who has lived through the past 30 years should know very well that you could buy more commodities with a single dollar in the 80s than you can buy nowadays with the same amount.
Regarding savings -> you know most people do not get paid directly in cash, right? Most if not not all employers require de facto a bank account in order to pay salaries (we are not in the 60s anymore) and most of the savings go and stay there when you work. These savings become funds that the bank can use to emit loans and different financial services to private companies.
Banks don't get most of the money they loan from deposits, they create it from fractional reserve banking via the money multiplier.
Continual low inflation is good for the economy, it encourages spending and investment and discourages hoarding cash. The purpose of money is not as a store of value, but as an enabler of economic exchange. If you want to store value, invest in assets of some sort. Money is not meant for saving, people with money know this, it's why they don't keep their fortunes liquid.
Yes, but they need cash in the first place in order to use the "multiplier" defined by regulators. They cannot create money ad vitam eternam without cash deposits. When there is a crisis, a bank low on real cash value will go bankrupt very easily. Have you already forgotten?
"it encourages spending and investment and discourages hoarding cash."
But inflation discourages savings (as I said, critical for the banking system, and therfore impacting investment), and hoarding cash would be anyway discouraged in case you have zero inflation, because you would be able to place your money in portfolio to gain more than 0 on yearly returns (dividends at least). So there would be no net return in hoarding cash. Or are you saying you need inflation to have growth ? In that case you would be mistaken, there was ample growth even when the markets were following the Gold standards...
So I am not really sure where you come from to recommend "low inflation". Besides, who can ensure the inflation remains low, and who can control that there is no dumping of cash on the market when there is a central bank in charge, serving the current political agenda ?
Again, what's good with Bitcoin and Gold is that they are both neutral and relatively free of political control (well, at least for Bitcoin).
I would like my healthcare to get cheaper and better over time just as my Android phone does.
> Don't conflate "zero growth of the money supply" with "zero inflation".
Inflation is always and everywhere a monetary phenomenon, according to Milton Friedman.
You haven't actually studied modern economics if you don't understand why deflation is worrisome and why the monetary policy we have now exists to prevent deflation to achieve this stability: http://upload.wikimedia.org/wikipedia/commons/2/20/US_Histor....
Inflation is not a measure of just the money supply, it's a measure of the size of the money supply to the size of wealth in the market, fixing the size of the money does not fix the size of the wealth it represents.
Wealth expands and contracts constantly and if the supply of money doesn't change accordingly you get either inflation or deflation. Well it turns out that doesn't work so well, the economy reacts much better and quicker to inflation than to deflation because prices rise easier than they fall. While on the gold standard the swings in the market were wild and depressions happened often.
Fiat money fixed that by allowing the supply of money to be managed to match the need for money in the economy. Money is just a tool after all, it is not wealth, just a means of trading wealth. By continually slightly inflating the money supply, the natural swing from inflation to deflation was pushed over to the inflation side avoiding deflation and all its ills. Since fiat money took over the economy became much more stable and those cyclical depressions under gold became cyclical recessions. Inflationary policy with fiat money simply works better.
Inflation does not discourage saving, it discourages saving cash, big difference that you keep ignoring. Bitcoin is doomed as a currency for the same reason gold died, it's vulnerable to continual and inevitable deflationary pressure. Every sudden jump in real wealth in the market will force bit coin into a deflationary period; this is very bad. It dries up the money supply and encourages hoarding of the tool meant for exchanging. Money is not wealth, it is not meant for saving, it's meant for spending. Treating it like wealth, and hoarding it, reduces the supply that's necessary to keep liquidity in the market and forces traders to trade with lesser amounts forcing suppliers to reduce prices, aka deflation.
Those who ignore history are doomed to repeat it. If the money supply cannot be rapidly expanded to meet the needs of increased wealth being created in the market, then the currency will suffer deflation and fail as a currency. There a reason the nations of the world have moved to fiat currencies, they simply make better more functional currencies.
Saving is a matter of time preference, specifically, preferring to consume in the future. That implies carrying forward surplus value from today to be spent tomorrow. Let's say you have a choice of how to go about it: G, or W.
Strategy G is to stash gold in a mattress. Strategy W is to buy stock of Webvan/Amazon.
Let X = present value to save T = timestamp at present d = value delta t = time delta
Now at time T+t you want to have X+d value where d=0 is okay, but (d < 0) is unacceptable.
Now the choice between G and W is as follows: W has to offer you a higher rate of return than merely holding the gold in strategy G.
Gold will increase in value (price) if more produce is offered in exchange at time T+t, assuming stock of gold is constant (which it is, to an approximation).
So what Webvan/Amazon must offer a rational investor is a better return than the rest of the aggregate efforts of human-kind. They must have high productivity.
This is precisely what makes capitalism and free-floating interest rates so efficient, capital is allocated to the most productive enterprises.
The ratio between spending preferences now and in the future determines the interest rate. A high interest rate implies that only higher-credit (in the sense of faith in their success) companies will get money.
The highly risky investments will simply not happen. There won't be any bubble mania.
In your conception, the idea that stashing gold is not productive is merely another way of saying "gold stashers don't fund Webvan" when looked at through this lens.
But it is good they don't! Everybody should have the right to sit on the side-lines and watch.
When the word "unproductive saving" and "hoarding" are used, they usually refer to this leave-me-alone strategy.
In periods of hard-money we saw great advancements in the standard of living of peoples around the world [ref Thiel?].
The free market always beats a planned economy. It doesn't matter if the planning is overt like the Soviet model or merely a plan to distort time preferences.
If a venture produces a lower return than the rest of human kind, 'd' will be negative. Knowing whether d will be positive or negative let alone by how much is difficult.
> The highly risky investments will simply not happen. There won't be any bubble mania.
The high risk investments will absolutely happen but only if the rewards are commensurate. The issue with monetary policy is the skewing of risk/reward.
If the going rate for utils is $1/util now, consider the following situations and strategies.
As you can see, in the setup given - which is clearly a crude abstraction but shares some dynamics with reality - when there is sufficient deflation you would do better not to invest in the company, whereas with no inflation you do a little better to invest, and with inflation you do a lot better to invest. That's how inflation motivates investment. The key point is that investing now translates into some amount of value created that doesn't (in most cases) change with prices, so when you turn it back into money at the later rate (by selling what was produced) its relative value compared to not investing is lessened.With no inflation, my risk free investment of money under a mattress produces no return. My risky investment with the company has the probability of a positive or a negative return.
With inflation, I'm forced to make a risky investments to break even. True, I can no longer keep my money under a mattress but I'm still an unsophisticated investor and choose to park my labour in houses for example which inevitably leads to a housing bubble.
With deflation, I agree, people would rather not invest in a business producing a lower return than the rate of deflation but why would that deflation occur? One reason could be more goods chasing the same amount of money implying real economic growth.
The problem I have with the current inflationary system is the distribution of new money, if all currency held and prices denominated in that currency increased by the same factor. It would result in a nominal increase in prices. No one would be richer or poorer after the increase. The current system distributes new money to people who directly interact with the central bank, rewarding them at the expense of everyone else.
Your point about unsophisticated investors bearing more of that risk is a good one, but doesn't change the fact that inflation motivates investment and deflation motivates hoarding - it points out one negative consequence of motivating investment.
Regarding your last point, we're discussing potential problems with bitcoin. A criticism of the current system - well founded or not - doesn't amount to an endorsement of a particular policy in an alternative system. Do you object to bitcoin mining distributing new money to miners? If not, would you object to it continuing to do so through expansion of the bitcoin supply rather than switching over to paying miners more entirely through transaction fees? My broader point is simply and entirely that the cap on the number of bitcoins presents some long term risk to an economy using bitcoin as currency.
Put another way, inflation motivates gambling and deflation motivates saving - it points out a serious consequence of forced spending, namely a flight to other, less abstract stores of value.
I would like your views on what deflation represents in an economy, I understand people are saving/hoarding money but by never spending it don't they remove themselves from the system? On the other hand, wouldn't an increase in productivity lead to the same amount of money buying better/more goods?
Using a stupidly simple model, if the total productivity of a society using Bitcoin remained constant would there be any deflation? What if the total productivity fell?
We should discuss the implications of mining in another post :)
All you end up with is another monetized good which isn't actually constrained in the same way as gold or bitcoin leading to overproduction (tulips/houses) and a crash.
Saving is a matter of time preference, specifically, preferring to consume in the future. That implies carrying forward surplus value from today to be spent tomorrow. It matters not whether you stash gold in a mattress of buy stock of Webvan: you merely hope to have X+delta at T+t time where {X, T} represent the present and {d,t} represent increments and can be zero.
In order for you to then invest your gold in Webvan, said company has to offer you a higher rate of return than merely holding the gold.
Gold will increase in value if more produce is offered in exchange at time T+t; assuming stock of gold is constant (which it is, to an approximation). Of course, I prefer the word price since gold has no intrinsic value.
So what Webvan has to offer you (a sane investor) is a better return than the rest of the aggregate efforts of human-kind, assuming of course, that said aggregate efforts are barter-able with gold (that is, can be bought with gold).
This is precisely what makes unbridled capitalism and free-floating interest rates so wonderfully efficient. That damn company cannot get away with peddling something that doesn't improve all our lives. It has a high return on investment barrier to cross in a hard-money economy (defined in this case as a fixed supply of gold).
Conversely, when Greenspan is pumping money, it's pets.com's time to shine! And of course, what most don't seem to realize is that the current crop of startups is mostly just Bernanke's easy money that needs a place to park itself. That's why VCs just can't get enough flow and bitch about deal-sizes.
Another way to phrase the 'investment barrier' is to say that the ratio between spending preferences now and in the future determines the interest rate. A high interest rate implies only higher-credit (in the sense of faith in their success) companies will get money. The highly 'speculative investment' in pet-dating will simply not happen. Note again, I don't like the word investment, savings is just fine as a word for deferment of consumption, and speculation itself is not bad. Here 'speculative investment' is a synonym for unproductive stupid shit money's being spent on.
Nor will houses be given to bad-credit home-buyers, incidentally, which really troubles some. But ask yourself -- if Bob-the-builder built a house and the home-buyer promised him ten apples, and couldn't pay him dem apples, would Bob in hindsight have wanted to build that house for him? If he defaults on Bob, Bob is impoverished. If the Fed bails him out (or actually bails the home-builder out) all of us are impoverished (currently above 50K USD per person in the USA approx). Charity is fine, forced-labor is not.
In your (and Krugman's, and most of mainstream (read tenured) economics') conception, the idea that stashing gold is not productive is merely another way of saying "gold stashers don't fund Webvan" when looked at through this lens.
Damn well they don't! Everybody should have the right to sit on the side-lines and watch. It is almost Gandhian in its non-participation (excepting grand-nieces, but that's another story).
That is precisely what stashing your savings under the mattress in a hard-money economy does, allows you to step away from the pets.com frenzy.
Wall Street has another way to say it: While the music's playing, you've gotta get up and dance. If a bank didn't take the bail-outs it would have gotten bought out, lock, stock & barrel by one that did. While Ben's fiddling, you've got to join the orgy. It doesn't matter if the country burns in the meanwhile.
So the problem with this inflationary money supply is simply that it distorts interest rates, thereby funding unproductive enterprises. The Webvan's get funded, Facebook & Twitter IPO, a...
Tightened version has been put in the right place: https://news.ycombinator.com/item?id=6553774
That's not an argument, it's simply how the economy works.
> Inflation is killing your economy
No it isn't.
> rather, because it encourages spending and frenetic consumption
Our economy is based on consumption, like it or not.
> this depleting the banks of the well needed savings that will be used for investment by private companies.
You don't really know how banks work do you.
> Yeah, inflation works "so well", right.
Actually yes, it does. You should educate yourself a bit on how the economy actually works, you sound like someone with little more than a high school understanding full of misconceptions and bad ideas.
It's worse than that, because expectation of deflation means people hoard rather than spending, which means still fewer coins actually in circulation.
The buyer who converted his labour into bitcoin has, in effect, provided free labour unless he converts the bitcoin back.
That's a strong empirical statement made without evidence.
> Any bitcoins held can only have an effect if they are spent.
Kind of. But bitcoins (or fractions thereof) being removed from circulation has an effect. And the expectation that that will happen has an effect.
On another note why would this a problem?
It's a problem because of what money is. It's not an asset to be held as store of value, it's a medium of exchange to make trade work better. If everyone is refusing to spend their bitcoins because they expect them to be more valuable tomorrow, bitcoin is not being a currency and people have to use other currencies to get things done or things aren't getting done, either of which is an issue for bitcoin-as-a-currency (and the latter an issue for everyone). Arguably bitcoin could continue to serve as an asset anyway, but I don't understand that to be the vision.
None of this is to say that I am confident this will be sufficiently an issue that things stop working, but I definitely see it as a risk.
The only reason people choose to store their labour in bitcoin today is that they predict the same amount of bitcoin will buy the same or greater labour in the future less the costs of converting to/from bitcoin (transaction costs). The only reason they'd store their labour in any other way is if they were getting a better deal.
Said another way, if bitcoin's primary use was as a currency the silkroad shutdown should have lowered the price of bitcoin proportionally. People using bitcoin as a currency could convert into it at the last possible minute instead of holding it. You need people treating it as a store of value for it to have a price tomorrow.
It will be interesting to see how this plays out, store-of-value > medium-of-exchange or the other way around. Darwinism in all its glory.
It will indeed be interesting to see how things play out, though interesting isn't always good. It might also not be a very good experiment. Path dependence is huge, and the store-of-value role seems likely to play a bigger role in trying to shape expectations around an otherwise ephemeral digital currency while bootstrapping, yet a focus on it might nonetheless wind up ham-stringing us in the long run...
Which, to be sure, is very much like Darwinism has played out in many other contexts.
Or are you talking about breaking the crypto primitives like ECC and SHA256? If there's adequate warning (months? years?) then it's possible to transition to new algorithms, otherwise, yeah, that could be a problem.
Migrating over to "bitcoin-B" or some other variant would be possible, but I would imagine it would be unavoidably chaotic if both currencies stay fully decentralized throughout the process, regardless of whether the primitives break outright or over time.
The dollar is a sort of "proprietary currency" owned by one "monopolistic" country now. The goal of a "competitor" would be to create an alternative that is very open and decentralized (anyone can use), to disrupt that country's power and control over the world through its currency.
Sounds good to me.
I expected your next word to be "gold."
It can even split out multiple ways (think: one currency per company instead of per country/region). Pay your AT&T bill with AT&T Fun Bucks which have an exchange rate against Apple Awesome Bucks which have an exchange rate with Euros which have an exchange rate with Safeway Safe Way to Pay Coins.
The current bitcoin madness is just an experiment in how many ways you can say "THIS PAPER HAS VALUE," sign it, rip it into bits, then make people think each piece is a valuable part of the whole (which had imaginary value in the first place derived only out of scarcity—bitcoin isn't even shiny).
And even if a large number of people use AT&T's blockchain, it ceases to belong to them once they sell their coins.
It is like Putin deciding to give Snowden asylum. Free poke at the gorilla, look he can't reach over here and hit back.
Of course a more open dialog is good, but nobody, especially the Russians or Chinese actually want a world government. That would take all the fun out of being a dictator.
Look no further than the Euro to see how challenging it is to manage a currency. And note that the countries in the EU are co-operating. Imagine how hard it would be if Greece or Spain was actively trying to siphon money out of Germany because of treaty obligations. If a recipe can be figured out for managing the Euro, then there will be a call for doing the same thing world wide, but until then its just a free poke at the US for being stupid.
* Treasury notes and bills are widely used as collateral and upon maturity they turn into reserve currency cash.
* China, the oil producers run budget and trade surpluses and don't have a history of providing safe assets, like the US, Japan and some EU countries.
* Having a reserve currency causes your currency to appreciate, which isn't good for exporters.
* On the flip side too much spending will cause inflation, which plagues developing countries, but not the developed.
* So they cannot afford to spend as much, without their CB raising interest rates to fend-off inflation, which causes.. currency appreciation and trade deficits.
Which country will provide reserves AND safe assets? And what will China do to back this organization in these circumstances?
I agree that the global economy has put too much faith in the U.S. political and financial system. Diversification would encourage competition as well as increase systemic resilience. The present situation, where a U.S. default literally means the implosion of the current world order, is encouraging previously taboo debate to come out into the open.
A collapse of the U.S. dollar today shakes up a world in which China is ascending. I'd get mad if someone threatened to flip the game board just as I started getting ahead, too.
I hate politics.
The debt ceiling has nothing to do with meeting ones obligations to creditors.
If the debt ceiling isn't raised, simply prioritize what the country's money is going to be spent on.
1. That could be a form of default. Not on the U.S. debt, but on its contracts.
2. Cash flows are lumpy - that's part of why we have government debt. Even reducing all non-debt payments to zero, the U.S. Treasury will have to default at some point before mid-November. There simply isn't enough money in the U.S. Treasury's account at the Federal Reserve to keep its cheques from bouncing.
Most investors would say no. If a company is selling its cafeteria food to stay afloat, chances are (a) there won't be a company tomorrow or (b) it will find some way to repudiate inconvenient contracts, e.g. go bankrupt.
Some very smart people bought into an Argentinian oil and gas deal. Then the friendly government became less friendly and their deeds were worthless pieces of paper.
Even if you buy assets from a government in turmoil...
what is the likelihood that any new government emerging from that turmoil will allow you to keep the assets you purchased?
Historically... the odds have not been favorable to investors.
it would not be Obama who has a Constitutional/Legal crisis...
it would be the United States.
It would be, quite literally, US Law mandating the violation of ...
US Law.
OK... let's walk your suggestion through.
The President resigns.
The Vice-President succeeds.
The Vice-President is now the President.
Now the NEW President is obliged by US Law...
to violate US Law.
So we enact your solution again...
The NEW President resigns...
This time the Speaker succeeds...
The Speaker is now the President.
Now THAT new President is obliged by US Law...
to violate US Law.
So we enact your solution again...
Do you see the problem yet?
If you're really not understanding that, perhaps you should consider rephrasing your objection as a humble question.
The most likely outcome, if the executive branch has no legal course of action, is to choose the "least illegal" course of action [1]. The linked article from the Columbia Law Review has a detailed analysis of the three options. Here's the most plausible picks:
- Selective repayment. Pick and choose which payment obligations to discharge. There's obvious political issues here. Who gets paid, and who doesn't? Social security over Medicare? Military contractors over NASA?
- Increase taxation without the authorization of congress. Again, many inherently political questions. Who do we increase taxes on? In many ways, this is a mirror image of option #1.
- Issue new debt not authorized by congress. The biggest issues here are market factors, not political questions. How will the market react to this unauthorized debt? If it refuses to buy at low interest rates, this option is not likely to solve the underlying problem.
Several humerous non-options are also debunked in [1], to illustrate what "more unconstitutional" looks like:
- Sell Alaska back to the Russians. Use the proceeds to buy time.
- Mint coins, and by fiat appraise them for massive amounts. Sell them to the fed, and pay off the debt with the new funds.
Just read the article. It's a bit biased, but its analysis of options appears on the whole quite reasonable (I am not a constitutional scholar).
1. http://www.columbialawreview.org/wp-content/uploads/2012/10/...
yes, it completely does. the US does not have the cash on hand to continue paying out to its creditors. to continue to pay its creditors, it must borrow more money.
Wall Street was pretty chill through the middle of last week [2]. Once it started calling it became apparent that there was little it could do [3].
The expectation appears to be that Obama will prioritise payments after 17 October to avoid a default. Once a critical point is reached he will use "creative accounting," in the IMF's words, to come up with a solution. Him failing at that, the expectation is the Federal Reserve will find a way to credit the U.S. Treasury's account. All these options, it should be noted, involve the selective suspension of the rule of law - the lesser of the evils.
[1] http://www.reuters.com/article/2013/10/02/us-usa-fiscal-obam...
[2] http://dealbook.nytimes.com/2013/10/09/complacency-on-wall-s...
[3] http://www.nytimes.com/2013/09/04/business/economy/business-...
Personally, if we're prioritizing, I think he should do some math where they pay all treasury bonds, on time and 100%, and then just cut every other expenditure in half (or whichever % works out), across the board. Social security checks, contractor payments, gov't worker payments, etc. Anybody refuses to do work, send the half-paid national guard after them and order them, since we're in crazytown anyways. And tell them to write their congressman.
That's possibly the "least illegal" option, and certainly the most politically palatable, as far as respecting congress's self-contradictory legal orders in this mess.
See: http://www.volokh.com/2013/10/03/14th-amendment-option-table.
As for the illegality of prioritizing payments, as far as I can tell, out of the mandatory expenditures only a small amount is Constitutionally required (specifically, judges' salaries). The rest is only statutorily mandatory. As you correctly perceive, it seems preferable to commit a statutory violation to avoid a Constitutional one.
Constitution trumps amendments (but only in certain high-up courts), which trumps normal law, which trumps contracts (written "generally" before oral ones), which trumps common sense ("what a good house father would do"). The sum total of all these things form "the law" as viewed from the perspective of a person (so yes, you are legally obligated to "generally be good" even when the law doesn't explicitly require it (e.g. help people involved in accidents))
Basically since the government debt obligations are contracts, while the debt ceiling is a law, Obama has no choice in the matter : any lawful payments (like medicare, ...) have to be fulfilled before any contract is paid. So barring a new law (the "agreement" the news talks about), on Okt 17, the US should default. Maybe Obama can delay it a few days, but certainly no more.
Please note that congress is doing exactly what it was designed to do. Congress, whether you agree with it or not, represents the will of the people of the united states and Obama is ignoring it, refusing to do so much as negotiate (or so claims congress, and I see no reason to doubt their claims). He knew years in advance that this was coming and gambled. Every executive who has fought congress on this has failed, again something Obama is perfectly aware of (it featured prominently in his education for one thing, hell, it's one of the main forces that brought us democracy in the first place).
In case someone doesn't know this : Obama's a lawyer. Lawyers tend to be lawyers first, people second. And he has a history of this sort of thing : expect him to follow the law over common sense.
The Affordable Care Act was passed through normal legislative processes and defended by the judicial system. It has also survived an almost constant legislative assault since then.
Shutting down the government and threatening default over a piece of legislation you don't like is not part of the normal legislative process. It's radical. And you can even argue that with cute little last minute rule changes like HR 368 that it's borderline undemocratic as well. The American people may have mixed opinions on the Affordable Care Act, but I highly doubt they wanted the federal government shut down over it.
By refusing to bring a bill to a vote unless a majority of his party openly supports it, Boehner is explicitly preventing compromise.
The power of the purse is allocated to the house.
Yeah, but Article II charges the President with taking care that the laws be faithfully executed. To quote Lincoln (in a different context, certainly), "are all the laws but one to go unexecuted and the Government itself go to pieces lest that one be violated?" Obama would be on solid legal ground in saying that he has to reconcile conflicting congressional mandates by ignoring the debt ceiling.
(On the other hand, I read today that any debt that was issued above the debt ceiling would be a lot more costly because buyers would insist on premium interest rates to compensate for the increased legal risk that the debt would be held invalid.)
http://yalejournal.org/2013/06/12/who-authorized-preparation...
The phrase the US seems to be preparing for war against China implies that there is political will behind the idea of actually putting plans into practice and going to war.
That isn't the case, and I find it extremely unlikely that will change in current environment.
It's well beyond a contingency plan, like plans for war with Canada is.
"“the Air-Sea Battle concept has prompted Navy officials to make significant shifts in the service's FY2014-FY2018 budget plan” towards exactly the sorts of electronic, cyber, and anti-submarine weapons systems that the war plan for China calls for.”"
http://thediplomat.com/2013/09/03/air-sea-battle-a-dangerous...
"ASB Concept, coordinated through the ASB office, is designed to develop the force over the long-term, and will continue to inform institutional, conceptual, and programmatic changes for the Services for years to come."
http://www.defense.gov/pubs/ASB-ConceptImplementation-Summar...
That's Pentagon code for "fighting terrorists doesn't let us buy aircraft carriers and F22s. We need a bigger enemy to show we need more money"
You don't actually believe that? The sole function of the US military is to protect US interests - no one else's! How would you feel if the Chinese navy parked itself in the Gulf of Mexico claiming to protect the free flow of global commerce? You would correctly proclaim that to be nonsense. Some goes for the US military. Don't believe the propaganda...
Certain oil-producing nations aside, this isn't mercantilism, and if the EU and East Asia had a problem with our military presence then we'd probably hear more than token protests about it.
One of the most active navies in anti-piracy operations off the Horn of Africa is.. the People's Liberation Army Navy. They have had a presence on-station since December 2008.
And the UN has no moral authority at all.
2) peg the currency to physical goods (gold, oil, etc). Fiat currencies have distinct advantages which make it optimal for modern trade.
3) use treaties to regulate government sovereign bonds with the global currency
Congress has the power, with a 2/3 vote, to expel a member. How about, instead of playing chicken with the world economy and our jobs, they put their own jobs on the line: scrap the existing debt limit and replace it with a rule of procedure in both houses that says if the House and Senate can't prevent breach of the debt ceiling (moved as they feel is necessary) they're all expelled.
Obviously it'd need to be worded such that a veto couldn't force out congress, but that sounds doable.
The problem isn't the people in congress, its the people they represent.