The "excuse" is dead on.  When a peon country gets into trouble, the IMF will require austerity in exchange for bailouts.  (As opposed to a heavy-weight like the US, where policy will be aimed at soothing the pain.)

The poor country's leader can say "the IMF made me do it."  Focus public anger on a faceless, unelected bureaucracy, and it will go nowhere.  What an ingenious invention.

The different treatment for different countries is based on how best to protect the reputation of the global system of state-driven asset inflation.  Austerity and economic pain in a big, democratic country runs the risk of making people see the light about the system.  So they have to have as much comfort as possible.  For small, poor, or undemocratic countries, let them fight the bust by instituting austerity.  If they succeed, great.  If not, they are the only ones in pain and the world will see the crisis as their problem.  This is much better than accommodative policies which tend to bow to market forces, devalue, and inflate, because when investors see that promises are not being kept, they might realize the same promises from other countries are really not all that different in nature.

Greece is a good example of being on the receiving end of this system.

Now I know Karl Marx is not popular here, but some of the Marxian analysis on the ills of our so-called free market is dead on.  (More so than mainstream economics which is definitely trying to work with the elites and not rock the boat.)

If their cure is worse than the disease, we don't have to listen to it.

We should all read more Marxian economics.

Japan is famous for two companies buying each other's stocks and holding them, because the two bosses are friends.  They now both enjoy high stock prices.

This is really not essentially different from the international monetary system.  Both the IMF and central bank "swap lines" allow each country to be bailed out by other countries when its currency gets into too much trouble, provided that it belongs to the club of friendlies.  The international gold standard worked basically the same way.

The elites figured out long ago that collusion among themselves is much better than competition, for the purpose of extracting wealth from everyone else.  If this prolongs the bubble and makes the eventual crash worse, that's a problem for future generations.

Good stuff!  I look forward to reading part II, etc.

There is an even more generalized view of the parasitic condition: top politicians and banks get together and use state power to artificially inflate the values of financial assets (which include almost everything, even  stocks and real estate in an indirect fashion, via interest rate policy.)  The state contributes power, and the bankers contribute brains.  The state rewards banks mainly by using public money to guarantee their debt, etc.  The banks reward the state by helping to prop up money and public debt (by increasing demand for them.)

(As alluded just above, financial asset inflation benefits the elites not only because they issue some of the assets, but also by creating demand for other assets issued by the elites.  E.g. when interest bearing bank deposits are "safe guarded" by state power, you are less likely to go to gold and more likely to hold paper money which you give to banks.)

Fractional reserve banking deposits are one of the assets being propped up.  The general phenomenon has been around since the early 1600s (when the Bank of Amsterdam began to issue Europe's first paper money); Fractional reserve banking started somewhere near the end of the classical international gold standard, probably late-19th or early-20th century.

What this means is that, we, the public in democratic countries, are a crucial part of the problem, by allowing our elected politicians not only to allow the theft, but actively to form an alliance with banks to perpetrate it, by establishing the central bank, whose real purpose is to ensure the survival of the state-bank alliance by holding each party to its bargain.

The banks and the state are in alliance.  The terms are that both state and bank assets will be propped up by state power, one way or another, so both bankers and politicians can receive "free" power and wealth by issuing those assets (politicians by issuing public debt.)  The state provides power, and the banks provide financial innovation.  (Historically, the bank "deposit" was one of the classic innovations.)  The central bank holds the alliance together by having power to make sure neither side endangers the alliance by issuing too many assets.

The victims of this alliance are everyone else.

Hayek's "totally free banking" is an idealized system where the state does absolutely nothing to prop up the value of bank assets.  Taking away public support for banks removes a crucial pillar from the state-bank alliance, so, at least in Hayek's theory, the theft at the core of our society will disappear.  (I use the words "idealized" and "theory" to indicate my belief that, absent a public awakening to this theft, systems like this will probably never be realized, or realized enough.)

If you start form first principles, all economies beyond bartering require money, and gold is a major form of money (and so are silver, dollars and sterling, etc., throughout history.)

It's not surprising that people and states do evil things for money.  But you can't blame champagne and caviar for the things some people do to have this lifestyle.

I agree that Bitcoin holds several advantages over gold, as money.  But it also has disadvantages.  It requires electricity, and requires a certain literacy to understand.  And you can be sure that any small deficiency in this literacy on the part of the public will be fully exploited by some.

Sorry, I don't understand.  Why do miners matter to the currency value?  If they all stop mining, why should it have an adverse effect on the bitcoins in existence?

Why not just print?  They need to keep the system credible (as much as possible, anyway) so the elites can continue to benefit from it.

Borrowing, rather than printing, gives the impression that the government will shape up and pay back.  The fact that, in practice, the repayment will never really happen will only slowly dawn on people.  By that time the original leaders have already made out nicely.

Also, by keeping public debt and money separate, the elites keep open the option that they will support faith in money but abandon public debt (and in fact supporting money *by* abandoning public debt,) in a crisis.  They are hoping that the threat of this will keep the government less wasteful, and thus prolong the system's lifespan.

That said, the Fed does print a little from time to time and give it to the government.  Quantitative easing is one example, loosening monetary policy with "open market operations" (printing money to buy government debt to influence interest rates) is another.  But the Fed remains a minority holder of Treasuries, for the above reasons, at least for the time being.

Right or not, he is one guy who should know better, and so he is essentially saying "we have the power, and you can all go play with yourselves."

But it's true that, ultimately, the world will not be put right until at least the educated portion of the populace understand the disease of state money.

As for the short to medium term future of Bitcoin, he is just spin-doctoring for the elites.  In the state-bank alliance, as in most others, it's the junior partner who plays the role of attack dog.  What this shows is that the elites could actually be scared of the rapid rise of Bitcoin recently.

Remember this is just a prediction.  I have a hard time believing that, even if the IMF decides for whatever reason to add the yuan into its Special Drawing Rights basket (thus making it "officially" a reserve currency,) this will be anything close to earth shattering, on the ground.

Investor trust is the real criterion.  If you think the US has printed and borrowed too much money, you haven't seen China.  The huge pile of official dollar reserves is impressive, but all those dollars are backing yuans already issued, much of it at a much higher rate of yuans per dollar than today.  The economy is simply flooded with money and debt.  (There is a reason Chinese citizens like gold and Bitcoin!)

It's true that a lot of this capital is controlled by the state, so capital flight can be controlled more easily.  But that's also part of the problem, since state capital tends to slow down growth, and growth is the only thing that can really cure financial pollution.

People like the greenback, sterling, euro and yen because they can get out of them easily.  For this reason the issuers of these currencies also tend to be careful not to create too much money and debt.  (The financial pollution is evident only looking across decades.)  Yuan transactions are under all kinds of state control, and there's no telling when the Chinese Communist Party will decide to issue a massive amount of assets to save its own skin.

Ultimately, finance and money are a highly political issue, despite all the economic spin that the elites put out to justify this or that action.  The yuan's problem is that it's dictatorship money.

Is a "blockchain standard" coming to major currencies?

This is based on the recent news that IBM is exploring with the Fed and other central banks how to tie currencies to a blockchain, plus the recent article in The Economist praising the trust-building value of blockchains.

To me, it makes perfect sense.  If currencies are suffering a post-crisis debt overhang with no real economic growth in sight, central banks will have to do something soon to get growth and inflation going again.  The most painless path would be to peg currency against limited-quantity assets like gold, Bitcoin, or a new blockchain designated as the global monetary reserve.

Peg it at a high enough price, and the central banks would have financial stability while pursuing aggressive stimulus, and finally get the world out of this funk.  Current holders of fiat debt and money would eventually lose most of their asset values, but that might just be too bad, from the authorities' point of view.

If that is done with cryptocurrency, I am guessing the following:

- There would be a single, global blockchain for all the world's currencies to peg against -- this is analogous to the gold standard, where eventually all countries jumped on gold and not silver.

- The blockchain would function exactly like Bitcoin (if it's not Bitcoin itself.)  This would be the only way to build trust among savers -- a totally public ledger with a guaranteed limited supply of money and proven trustworthiness.

- Somehow, the world would have to trust the blockchain as the basis of money.  This might take time, but it would mean the authorities would keep Bitcoin's value stable, if not growing, for the foreseeable future.  (BTW, if today's price doesn't go up, the Fed could buy up the entire supply of bitcoins with $6B (21 million X $300) which is loose change on the Fed's balance sheet -- so Bitcoin price manipulation by the Fed is feasible.)

- If the authorities could buy up enough Bitcoin, they would use Bitcoin (after all, they want their currencies to be backed by something that people want, and a new blockchain has no proven track record in this regard.)  If not, they would use a new blockchain where they mine more than half the coins before going public.

- It would be a brave new world of high inflation and high growth.  Young people and those with skills would do OK, since there would be plenty of jobs.  Stocks would do well.  Retirees who have invested mostly in cash and bonds would be paying the price.

- The move would not be announced until the last minute, and the move would be fast and irreversible.

- The entire process would amount to a cancellation of past debt and starting from scratch, from the point of view of national currencies.

It's really simple...  The US Mint simply wants to set a face value that is low enough that it's sure will never come into play.  (I.E. market gold price should never drop below $50/oz.)

If the market gold price ever drops below the face value, the US government would be subsidizing owners of these coins, something it probably really doesn't want to do!

When the market gold price is above the face value, the coin trades like it should, as gold, not legal tender.

Glad you brought it up.  These are key issues.

"Take wealth" would probably be a better phrasing than "strip wealth."

Assuming you're taking "capitalism" to mean free-market rather than command economies, the precise problem is the lack of capitalism.  We might think we live under free markets, but all markets are driven fundamentally by money and finance, which are centrally planned.  The problems with central planning, as with socialist real economies, are that it's too inflexible to respond to price signals, and that it benefits the few at the expense of the many, in practice, since the complexity of central planning defeats democracy.

It would be nice to remember what Reagan said, "government is not the solution; government is the problem."  There is no "managing" the tickets; the incentives are always to maximize the issuance while stability lasts -- so the system is unstable, almost by definition.

The only few modern examples of state-free finance (and/or money) were the Italian Renaissance and the Scottish free-banking era of the 18th century.  The economy did great in both cases.  Government simply needs to get out of money and finance, and let each financial asset (including monies) survive or die in the market place.

Obviously any rigorous analysis would be complicated, but voters can't and shouldn't have to understand the details of economic policy.  In practice, this means that democracy has broken down in economics and policies are thus not necessarily designed to promote the public good.

There are, of course, natural causes to inflation and deflation, as you state.  E.g. financial leverage *should* go up to support a rapidly growing real economy.  The key is not whether asset and consumer prices go up or down, but whether the price movement is driven by market forces or state and central bank action.   If I lend out a dollar in a totally voluntary manner, and the state is not guaranteeing the debt in any way, that dollar is more likely to drive real economic growth (since I'll lose it if it's invested poorly.)  Unfortunately, a huge amount of assets are not totally free capital, and that has been the cause, over the last centuries, of the boom and bust cycles with their economic pain.

What we have in money and finance is central planning rather than a free market.  Central planning claims to champion the interests of the average person, but a look at the unpayable national debts and the spectacular wealth of bankers tied into the state-bank alliance would tell you otherwise.

This is true of any financial asset, including stocks and real estate.

We know stocks and housing are artificially propped up by low interest rates dictated by central banks -- so they are over-valued, similar to government bonds that are over-valued when you look at the sheer amount of debt the government owes.  (Bonds are propped up by public institutions in multiple ways, one of which is central bank buying with freshly printed money.)  But people buy all these assets all the time.

Ultimately, buying these assets is a bet that the propping-up will succeed, at least until we sell the propped up asset.

The essence of the modern world system is that savers are robbed by having to gamble on whether financial asset manipulation by the elites will succeed during the time horizon under consideration.  The elites are much better positioned to win in this game, and one of the reasons is that they have much more detailed information about the chances of these bets.

Thank you.  I like the 1000-man island.  It captures nicely the incentives for the issuer of money to maximize the issue until it crashes.

I haven't looked into Monero, but I thought the discovery of new tribes was great.

It might add something to the parable if we say the new tribes are autocratically run, and it only takes bribing their chiefs to get entire tribes to be "willing" to exchange goods for our notes.  When one tribe doesn't want to play any more, for whatever reason, we find another tribe.

Sadly, that won't happen, since a sound, or sounder, monetary base (than Western currency reserves) won't benefit the ruling and banking elites of any country as much as today's system.

Today, countries other than the US are not only allowed to inflate the financial assets they issue faster than the US does, but encouraged.  All currencies are, one way or another, even less sound than the dollar.  That's how the US maintains its position.

In fact, if the elites of a country, for some reason, decide to have sound(er) money, they or their country are generally in trouble, one way or another.  In the 19th century China was punished by Britain in the Opium War for this reason (unless you believe the British official reasons for going to war.)  More recently Switzerland found itself priced out of most global markets, and ended up inflating its money anyway (by pegging to the euro to keep the franc down.)  There's a reason why these examples are rare.

Since the US receives the lion's share of the unearned benefits of this system, the elites of other countries are in effect collaborating with the imperial power and selling out their own people.  But as long as most people (and especially in poorer countries) don't understand how things work, this is by far the more beneficial choice for the elites.

Ultimately, things won't change unless people wake up.

Ten men are stranded on an island.  Some learn how to fish, others how to grow crops, and others how to find fruits.  We survive OK.

I come up with a brilliant idea.  Bartering with each other is so messy.  Why not use the tickets I issue in exchange for goods?

Somehow, I find myself owning a lot of tickets.  If a few people don't like this, I use a few tickets to get the popular guys to talk some sense into them.  Anyway, what big problem can arise, if only one man receives freely issued tickets for this innovative service to the community, and all others must earn theirs with real labor?

This system does make everyone more productive.  People spend less time planning and trading, and more time working.  So productive, that after I hire someone to cook my food, and someone to make me clothes, there is still more than enough food to go around, and everyone over-feeds himself.

By this time, I hear that there exist so many tickets around the island that people are beginning to trade goods for goods, fearing the tickets won't hold their value.  My plans must change.  I stop issuing tickets.  Hearing the news, people suddenly want those tickets again, and they begin to buy just enough to eat.  There is fear in the air and everyone has trouble selling things.  I will be OK since I have stored up so many tickets, but, for prudence's sake, I have to dismiss my cook and my tailor.  These men are in trouble, since they have sold their fishing gear and farm land, and have invested so much time learning their new trades.  They will barely survive, if they treat every ticket they own like their last.

In the meantime, I hear of a hut someone has built during the good times.  The man, having sold his land too, is trying to sell the hut to buy food.  I pick up the hut at a more than reasonable price.

The psychology that "tickets are valuable" thus firmly established, I start issuing them again.  This time, maybe I can get someone to sing for me while I eat!

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

This is not to capture the entire essence of the modern system (which would be pretty hard to do,) but only to showcase how the state-bank alliance uses *both* inflation and deflation to strip the rest of the economy of its wealth over time, using a process that seemed familiar to Thomas Jefferson.

One problem is embedded in the uncertainties of life: no one really knows how much saving is really needed for retirement, even if you knew exactly what you wanted to buy in retirement, and how much they would always cost.  So people chase money for security.

Money in the economy provides many benefits, including making division of labor possible, giving individuals the flexibility to make all kinds of personal tradeoffs, etc.

The real problem is that modern money isn't really market-based but centrally planned.  This central planning is advertised to stabilize the economy but is really designed to benefit the elites who receive "free" wealth and power by issuing money and related assets, and using state power to prop up their values artificially.  When the over-valued assets eventually crash, economic pain goes to everyone, and central planning is further justified as the only way to stimulate the economy and save everyone's jobs.

For this system to sustain itself, the elites must somehow make money valuable, for most people (or they would derive little power from issuing money and debt.)  This is a major side effect of the system and seems to be what you're mostly talking about.  The fundamental mechanism for "achieving" this was already noted by Thomas Jefferson, who said that, with a central bank in place, the elites would be able to exploit the public through both inflation *and* deflation.

I will admit that the US looks very different from the inside than from the outside.  (Looks better from the outside.)  Life is still not too bad for most people, but to have a good career these days, you basically need to be in finance, technology, or be lucky.  The strong dollar over the last few decades is pricing most other people out of global markets (and global products flooding into the US itself,) and the elites are *not* about to let the dollar decline (since they receive so many benefits from issuing financial assets) if they can help it.  (If this is sustained, it would be similar to the Dutch situation, below.)

We know the US will lose reserve currency status at some point.  Historically, life after loss of this status was OK for Britain, as US monetary power rose immediately after World War I and was happy to help ease Britain's monetary decline.  But I imagine the story must be different when this happened to the Netherlands (after about 1700.)  Life was good for the already-rich and the people who worked in a prosperous financial industry, but I imagine everyone else must have had a pretty tough downgrade in living standards.

For the US, the next ranking (eligible) power is China, which is not friendly.  The only hope for the US IMO is that the world bypasses China and give global reserve status to India in a few decades, but India is still far behind China economically.  My bet is still on a Dutch-style, not British-style transition for the US.