Bitcoin Forum

Mario Draghi (new #1 of the ECB) just handed the European banks an unlimited credit line for the next 3 years. This means that the party will go on for another 3 years or so and that the hangover will be much worse.

Incidentally, 3 years has been the amount of time the government needed to prepare for currency reform here in Germany in the past (introduction of the Deutschmark from 1945-1948 and introduction of the Euro 10 years ago).

Looks like the timing of Bitcoin is perfect. Another 3 years for ppl to realize that the time of fiat money is over before getting bitten once more.

http://www.taiwannews.com.tw/etn/news_content.php?id=1792434
http://www.spiegel.de/wirtschaft/unternehmen/0,1518,804969,00.html

So true.

As that article about FED pointed out, although central banks can print as much money as they will, it will only come out in loan's form, either a loan for the bank, or a loan for the government. And a loan means that you have to payback it some time, this is still something confusing

For example, on an island with only 2 people and one central bank, the central bank loan out 1 billion euro to A and 1 billion euro to B, both A and B will have some cash to spend, and when the loan matures, they both need to payback 1 billion euro. But the total amount of euro on the island is only 2 billion euro, no matter what they do with their money, they can't payback the loan with extra interest, the interest must come from some where else...

not true. the interest comes from other loans made in the meantime.
central banks never stop loaning money

A and B could help to clean the floors in the bank and get paid (with money from their earlier loan repayments). A and B can therefore use this newly earned money to pay the interest.

I'm not saying that the current monetary system is sound, but those "2 people on an island" examples are a bit oversimplified IMHO.

It's indeed very simple from central bank point of view, but they could not use that money to buy any products or service, this is essential in current fiat money system, I think ThomasV have a good point

And interest rate is always in some percentage of loaned money, so volume of loaned money has to grow exponentially. When it can't (unsustainable debt, limited resources), the system is broken and we need a reset. It's unavoidable!

A and B could create (using the capital supplied by the bank) something that the bank wants.  Then when the bank wants to purchase that something, A and B could negotiate a reduction in the debt in exchange.

The money on the island would still be 2 million euros, but the debt would be less than 2 million euros.  Ta, da; welcome to capitalism functioning as it should.

One might even argue that the 2 million euros are then worth more than they were -- forcing other prices on the island lower.

"Aghhhhh, no, no, deflationary spiral.  Things are cheaper!"

Good point, I think this is typical refinancing, and that is exactly what banks are doing now: Borrowing new money from central bank to payback the interest of the old loans and debts

Suppose interest rate is 1%, A and B each borrowed 1 billion euro first year. Next year, they have to borrow 1.01 billion euro each to do the same business and 0.01 billion euro is used to payback the interest. Therefore, the amount of money supply is expanding in 1% per year although the whole economy scale keeps the same

Sounds quite reasonable and consistent

Exactly, loaned money will grow exponentially, but that do not necessarily cause problem, as long as A and B can borrow money to payback their debt, they do not need to worry about the debt, it is almost free, since those money are produced almost without any cost

The only problem is fairness, because we all know only banks and government can get these free loans. The result is, those who do not have such privilege get kicked out from their home and those who have the privilege get year-end-bonus

Well, let's suppose central bank on the island is just a machine 8)

Actually in real world, people seldom can impress central bank, since those bankers already have everything they want, and there are only a handful of central bankers, they would never create enough consumption for the whole economy

In the real world, money-creating is money-stealing-from-savers. When savers loose confidence and start dumping money, the cycle is broken. A and B can borrow and repay, but the value behind will be lost. Borrowing and repaying worthless paper. Not entirely worthless though, you can burn it or use as a toilet paper.

Sounds crazy, but borrowing and repaying worthless paper is what those banks doing daily, even worse, only numbers on the account. But, if you have ever played <fallout 3> or any kind of similar RPG game with merchants who have limited amount of coin, you will understand if a merchant are running out of coin, then most of the business activities will come to a halt if you do not have the item that specific merchant wants

In an island with only 2 people, it is easy to see that both A and B could not have any savings (Their loan must be paid back, if one of them get more than 1 billion euro thus save the extra money, then the other one can not pay back the loan)

This is actually what happened in reality: While some people managed to get some saving, other people will accumulate debt. Of course there is a belief that those who save the money will eventually spend their saving at a later time, thus bring the system back into balance some time in the future

I'm in china for vacation and studying their way of spending "Junk Money"

They put 20% increase each year for income for government employee and retirees (with government debt which is financed through central bank),  thus increase the general purchasing power of these people

Their purchasing power changed the pattern of consumption: Many of these people could have 3-4 babysitters to take care of their baby, those babysitters typically are private service provider without government background and earn 1/10th of income compared with those government employee

I don't know how well this scheme works in long run, but in china, government is above central bank, so it is only accountable for itself, they could keep spending junk money as long as there are enough production/service made by the lower income class

China can afford such mistakes for now because they can always compensate with economic growth. There is still a large number of ppl outside the real economy. They can grow by simply including them.

As you are there, let me ask OT: Is the lack of young women from selective abortion really so extreme that many angry young men may disrupt society?

What happens in reality is that now both A and B owe money with interest, and they devote their lives to "succeeding" - meaning, A tries to exploit B, and B hopes to get rich fast by screwing A up. One of them succeeds, pays back that old loan with interest, the other one is screwed and bankrupt. Bankers are happy. They were sitting on their asses, and got the money for nothing. More loans at interest are given in the meantime.

Ta, da; welcome to capitalism functioning as it should.

You can't have capitalism with fiat money. Capitalism assumes ownership and individual rights, not theft and monopoly control of power through exploitation of the monetary system.

Aye, that's where a sane person goes 'what the buck?'

The tl;dr of it is that additional loans they continue to hand out means there will always be more money in the system to pay the orginal loans. The problem with that is, they need larger and larger loans to cover the interests from the earlier loans. Its an excellent system when used in conjunction with some level of deflation, so less money is needed to pay back the orginal 'value'. This rarely happens though, as the rate of inflation form new money is greater than the ability of the system to deflate. Which I suspect would not be as big of an issue if they stoped giving 0% to large banks and stoped financial institutions from creating junk assets, credit swapping and defaulting without penalty..  Let a citizen try any of those things and they would find themselves behind bars for a long, long time.

cheers

Fiat money itself is not the problem, it's the way it is created ...as Debt.

A non debt fiat system would be much better in my opinion, or perhaps a Hybrid.
Let's say the ruling party decided how much money to print and spend directly to purchase labour etc.
If inflation goes through the roof you know who NOT to vote for next time.

Who voted for the leaders of the central banks?

This a trick question? They are on a 10year(cit?) rotation and appointed by the Board of Directors.

Honestly I can't quote it from memory. You can however read how them and the Board of Governors that controls the fed are appointed from the Federal Reserve site.
Without reading it; President appoints to FR Board of Governors. Board of Governors appoints to Board of Directors for the FR Banks and branches. Board of Directors appoints the 12 FR Bank presidents.
I can't recall what all the term lengths are off hand.

Here we are, this publication should have everything one could care less to know in it.
http://www.federalreserve.gov/pf/pf.htm

So give the politicians the power to create fiat money and spend it directly? How is that different from taxation? oh I know, it's easier.

It would be a form of taxation, of course, as value of currency drops due to inflation. It is, however, very different from creating money by borrowing at interest from the banks.
 

Mostly agreed, but its worse than that; if governments would take those free loans, it would be fine. After all, assuming a functional democracy, government==people. The reality is that its only the banks getting the virtually free loans, while the governments are lending from those banks at substantial interest rates. So think about it, EU governments allow the  ECB to create the money and lend to banks at 1%, then those very same governments lend from those very same banks at 3,4, or if you are Italy, 7+%. Now that is insanity. Or genius if you will, but its definitely how you transfer wealth from the poor to the rich.

They didn't allow the ECB, they ordered them. And changed half the board to put puppets in who would obey those orders. The govt is like an addict - they'd do anything for a shot. And every day they promise that they'll stay clean from tomorrow on.

The printing of money is happening anyway. I just wanna cut out the middle man and get schools, hospitals and roads instead of wall street super bonuses and private jets.
In addition this would minimize "business cycles" since debt and inequality is not buildt into the system.
Then 100dollars in your hand is actually 100dollar worth of "value" and not just a receipt of debt burdening some other guy.

If the government spends the money wisely there should also be a productivity increase preventing your dollar from losing purchasing power. (ie not tax)
If you instead see your cost of living climb higher and higher you know exactly who is to blame and what to do.

Did I just see people in favor of centralized control of a fiat currency posting on a bitcoin forum?

What the hell are you even doing here?

It's called exchange of ideas. And yes, better in plain view without a debt-element than the current system. But indeed, letting the market sort it out itself would be my favorite.

If I were you, I would worry about the quality of these schools, hopitals and roads if those are built by just printing money on pieces of paper.


That's a huge "if".  The thing is that government is not wiser than free people.  Most of the time it just wastes the money into stupid things.

Some thing just work better if the motivation is not short term financial profit for a few, but long term advantages for the entire society. Public transport, healthcare and education are some examples of that. There are enough countries where this does works properly, Ive not seen one where a free market properly addresses it.

Of course, that doesnt mean anything if you have government which has no interest in advancing society at large, because it doesnt represent the will of the people, but is beholden to special interests on which its entirely dependent for election and finance (even on an individual level, particularly after a political career). This is the problem in the US imo; not that a government would be doing these things, the problem is your government is no longer representative, so no matter what it does, its not designed to benefit you.  The solution is not replacing government by corporations (to a large extend, you already have that!). Fix your electoral system first, and then worry about what thing are best  achieved by profit only motives.

Corporations don't steal my money.
They do not put me in jail if I don't buy their products.


Corrected.

That's not a question of organizational form, it's a question of power. Have a look at the East India Company. But then, they would indeed not have wasted their time with jailing you - there are other ways to treat you more cheaply. Shareholder value!

I could not get that deep into everyone's private life, but I'm sure there are many young people who simply do not want to find a partner and have children :D

And, as the same as economy, they could always shift the potential partner to next generation if they could not find one in the current generation :D

So you would buy long-term bonds on the government of Italy below 7% interest? Then, by all means, do it. ::)

It is not a good idea to construct any kind of money-printing feedback to government debt. How do you think the hyper-inflations happened? It was people constructing exactly this kind of genius plan, getting deadlocked into a position that produces ever-increasing amounts of paper with funny numbers on it.

The ECB model before 2008 was good. Don't go blame it for the "government==people" crew who considers creating trillions of dollars of debt a good plan. IMO, the ECB should cease buying bonds and return to doing its job. The people should focus on keeping public order and let the crappy governments implode. They are guilty of this debt crisis, not the banks or the Euro, and no amount of fancy blaming changes that.

Edit: before anyone starts screaming, I am aware some banks will disintegrate in the crisis, and I consider that acceptable. If the defaults are properly executed, people should still get a decent fraction of their accounts' contents.

Let's make a case for some stupid things :)

On an island with only 2 people and one central bank, both A and B loaned 1 million dollar at the start of the day, the loan have 0 interest but must be returned at day end

A paid B 1 million dollar for B to sing a song, and B paied A 1 million dollar for him to dance in the court

A and B will be able to return the loan at day end. We could say that both A and B were doing stupid things but as long as they are doing it together, there will be no problem

What if only A paid 1 million for entertainment but B do not order 1 million entertainment from A? Then A will not be able to return the loan and B will have some saving, and B think A is a stupid guy: paying 1 million for a song

It's a typical "race of thrift", if one of them can live a low standard life by spending much less than the other, he will accumulate money and put the other into debt

This is what happened when US is doing business with China: Chinese can live a lower standard life by spending much less compared with US worker, this put US consumer/government into deep debt and chinese government into high surplus

I won't scream nor claim I understand how it all works in detail. However I fail to see how banks/euro don't have  a large responsibility here.  The Euro as an "instrument" makes it possible for "lesser" governments to rack up huge debts without inflation to their currency. This also makes it possible for the productive/rich parts of the euro zone to sell tons of stuff to the countries  taking on tons of debt.  So what happenes? the rich , mostly companies, are left with all the money while the poor/stupid are left with all the debt.

When this imbalance becomes too large it threatens the stability of the whole system..
Enter taxpayers money to save the banks etc. What you see now is a scramble by the rich to keep their investments and the value of their money ( money which are somebody elses debt )

How can Greece accumulate this amount of debt without help from the Banks? My argument is that it's the Banks job NOT to lend tons of money to hobos who can never pay it back. If they do this they deserve to take huge losses and even fail.
That's what we have banks for, they are supposed to be the expert at knowing who to give loans to at what interest etc.
If they get bailed out they will never learn and just give out more loans. This feedback helps to keep them in check but it's now broken.

Euro as a system is doomed to fail too. Sure you can have Euro accepted at stores etc in all the EU countries, but each sovereign country must have it's government budget (and taxes) in their own currency. If they spend too much, the value of their own currency will fall and they can't but lots of stuff from abroad. At the same time their own industry becomes more competitive.  Another nice feedback loop providing stability which the Euro simply short circuits.

And why do they make systems undermining stability mechanisms? Well some people make tons of money, and a crisis is always good for those at the top.  While the weakest people have to take the austerity. Sure you could say it's their own damn fault for electing stupid representatives but a system designed for instability and inequality is pure evil.

It's time the debates on tv etc was about the monetary/financial system itself. It was invented in 1694.. I think we can do better today.

imho partly suboptimal. ECB accepted all government bonds as collateral and this without any limits (as long as the rating was ok)
and this was wrong.

ecb did not distinguish between bonds from countries with low interests (i.e. germany) and higher interest (spain, greece) and since the risk was the same (both accepted by ecb) money went south. easy (not as cheap as in germany but still easy) credit for the governments and there you go, ECB was part of the problem all the time.

really?


If you live in the US, there is a huge chance your jails are run by for profit corporations, and those very same corporations are bribing your government to get as many customers as possible. No country in the world has a higher % of its population behind bars.

Apparently, it is easy to get into the private prison system in the USA.
http://www.buzzfeed.com/daves4/man-could-get-75-years-in-prison-for-recording-pol

Since 911, I am no longer wondering why Holocausts etc happen. Too many good men doing nothing....

China is another extreme. Chinese central bank is controlled by government, so their government will surely get free loan at the first place, thus increased purchase power for state-owned enterprises and organizations. But that does not necessary mean low efficiency, Chinese GDP is increasing by almost 10% per year

I think government can spend money more efficient than private corporation, since they have influence at much higher level, they can set higher and higher ISO standards, thus drive the quality of living forward. Chinese now can take high speed trains travel around in the country cheaply, due to government's investment in infrastructure

Money is a tool for cooperation.  If B can not buy anything to A then the money he owns worths nothing.  So there is no problem.

Are you suggesting that A and B must borrow again to pay interests ? If THEY are not borrowing, then interests cannot be repaid without money coming from elsewhere.
In other words, if the bank does not organize a shortage of money, then all of a sudden we can think about another way of making decisions for our future..

BTW, on this topic, its worth visiting this site: metacurrency.org (http://metacurrency.org)

When the ECB realizes it can leverage at 250%+ of the total Eurozone's GDP for decades without any reprecussions whatsoever (the upper leveraging limit for an entity as big as the Eurozone is very high, even higher than Britain's 200%+ GDP leverage for more than two decades), I will be a very, very rich man and you guys are going to lose everything betting the wrong way.  Anyone not long equities and financials is going to get the biggest hole they've ever experienced blown in their portfolio.  Call me crazy.  Save this post and put a reminder on your calendars to look at it in ten years.

:)

In reality, since there are billions of people, even B won't buy equivalent worth of products from A, A might still be able to sell something to C, so the reduction in consumption from B will not be felt directly. But anyway, increased spending from C will require increased sale from C, thus B has to buy something from C to keep the whole system in balance

Besides, both A and B usually have high incentive to hold a little extra money, because they regard money as "wealth", they even want to give this "wealth" to their children and grandchildren...

Therefore, money supply does not only need to fulfill the requirement for transaction, it also need to fulfill the requirement for saving, that's the reason in a financial crisis, the money supply must increase dramatically, since lot's of people's behavior changed, they started to save more and spend less

Take an extreme example, in the first year, A and B took loan to trade foods: A made fish pie and B made apple pie.  The next year, A will create boats and B will create new cottages, they need to take much larger loan to facilitate the trading of those high-valued products. Then, their interest payment from the first year can be ignored comparing with their loan from the second year, they will gladly payback their interest without even think about it


As shown in the example above, it is not the bank organized the shortage of money, it is the productivity and consumption increase caused the shortage of money

Of course it is an interesting thought that if we could just keep the economy scale constant and never make any new improvement, then we do not need to produce new money (In case the number of people stay unchanged). But I doubt it, since most of the people never spend everything they earned, they always want to save some of their income, and that saving action will dry out the liquidity eventually

Same example but only allow saving:

First year, A and B trade foods: A made fish pie and B made apple pie. Second year, A will create boats and B will create new cottages, so they have to save enough food for second year's consumption so that they do not need to worry about food production in second year

In such a case, A and B must find a buyer (in this case the bank) who are willing to purchase and store their food until next year. And if the bank knows these food is going to store for one year, they will lower the purchase price, since they have to take risk

After A and B sold those extra food and accumulated some saving, their second year's spending will be limited to their saving, suppose all those food worth 100 shells, then their spending can never be larger than those 100 shells next year. Actually those 100 shells were used to buy back their saved food for supporting their daily life, anything they created newly like boats and cottages will still need extra money to be able to trade. If loan is not allowed, then banks will have to create money and purchase A and B's products, and sell them to each other to get the money back, just acting as a merchant

So, saving in fact have the same effect as loaning, new money still needs to be created from somewhere - the bank