Modern Money in A Nutshell

[BobK71]

I am the leader of a hundred ship-wrecked men on an island.  The men basically catch fish to stay alive, and I do a decent job of mediating disputes, having to enforce my judgment only occasionally.  I live nicely by collecting a small tax from each man.

Pretty soon, the men get efficient at catching fish, so half of them catch enough to support all the men.  Some men start growing fruit trees and rice crops.  Since all men want a more balanced diet, they devise a system using a certain horned seashell as money for trading the different foods.  The seashell is rare and durable enough to serve its purpose, and we are good.

Soon enough, though, it becomes clear that farming and fishing techniques will advance even faster.  I have a great idea.  I tell the people that we need a money whose supply is flexible enough to support a rapidly growing economy.  Only discretionary money, issued by me, will be up to the task.  It seems to make sense to everybody, so we abolish the seashell and use notes I sign.

Things work well at first.  No matter how many notes I sign, it seems, someone will always find some Next Big Thing to produce, whether it's clothing, huts, transport, what have you.  So my money is always in demand.  Prices of the basics remain constant, and prosperity is all around.

But, you can't blame me for being only human.  I create a few legal devices for issuing a few extra notes into my pocket -- they really are a drop in the economy's bucket.  And isn't it only natural that I have a few good friends whose company I enjoy, and who end up living off my gifts?  My wealth, and that of the other leading citizens who have benefited from the monetary injection into the economy, actually, have created industries that wouldn't otherwise exist.  Like the restaurant business, or the entertainment business.

My friend advises me not to get carried away and issue too many notes.  I assure him that nobody knows how many notes I issue.  For the sake of the economy, I can't afford to tell the people how much money I have promised to issue to various parties.  When confidence in the money collapses, savers will be holding devalued paper, and that would be a moral travesty that I won't allow to happen.

I really don't know how, but the news gets out -- too many notes have been issued.  The people are increasingly demanding payment in the seashell, and the value of my money is threatened with collapse.  I have no choice.  I announce a total halt to note issuance.  This dramatic act, backed by actual self-discipline, restores faith in my money.

But the economy is beginning to suffer.  I will be fine, since I have saved up a lot of notes, but my cook, my tailor, and my masseur have to go.  The restaurant and entertainment businesses are dead.  Everyone is saving notes for a rainy day since they can see the rain all around them.  Some people are actually starving.  To survive, many are selling luxury goods at deep discounts since no one wants them.  I'm smart enough to pick up a few.

While making absolutely sure that faith in my notes stays strong, I issue a few notes, but with great fanfare, to stimulate the economy a little and save the poorest men.  I hammer home the message that, if it were not for the discretionary issue of money, I would not be able to conduct this rescue operation.  My notes good, seashell bad!

You see, it's not that I don't want to bring the good old days back in full glory.  Heaven knows I would be the biggest beneficiary.  It's a different world now.  It's only the "fear of fear itself" that keeps people hoarding my notes and keeps prices low, for now.  (And it helps that people realize they don't really need all that luxury.)  People already know there are too many notes out there.  If I started issuing at full speed, my notes wouldn't get the benefit of the doubt again.  When their value collapsed, I, oops, I mean we, would lose all the benefits of monetary policy, and that would be the greatest of all tragedies.

No, better to sit back and wait.  Let the peasants argue and fight, and give in to their passions and visions of glory and hatred, all the while ignorant that I'm holding the one ring to rule them all.  Sooner or later, some cataclysmic event will happen that will allow me to do something so big that it can easily bury all the old rules and commitments in its dust.  Or at least allow me to slide some under the dust, at night.

[zimmah]

that was way more confusing to read than it should have been.

but nice attempt.

[OROBTC]

...

BobK71

You?  Oh, I thought you were talking about our .gov and the Federal Reserve...

Your man on the Island would be lucky that he was not hanged from a coconut tree.

With the relative rage we see in the USA (and, of interest now too, in Europe), the Western World equivalent may be Banksters swinging from lampposts...

[Bit_Happy]

...
No, better to sit back and wait.  Let the peasants argue and fight, and give in to their passions and visions of glory and hatred, all the while ignorant that I'm holding the one ring to rule them all.  Sooner or later, some cataclysmic event will happen that will allow me to do something so big that it can easily bury all the old rules and commitments in its dust.  Or at least allow me to slide some under the dust, at night.

Is your story the confession of an elite American overlord, or the fantasy of someone who wasn't born into the private club?
https://www.youtube.com/watch?v=H-PSCqhkWhg

[BobK71]

...

BobK71

You?  Oh, I thought you were talking about our .gov and the Federal Reserve...

Your man on the Island would be lucky that he was not hanged from a coconut tree.

With the relative rage we see in the USA (and, of interest now too, in Europe), the Western World equivalent may be Banksters swinging from lampposts...

Unfortunately, people still don't understand enough.  Americans might know the system is rigged, some way, somehow, but they are turning to a socialist and a <insert_your_superlative_here>.

The elites are creating just enough money and debt to keep the people calm.  If they really wanted to ease the pain, they could (in effect) make a huge devaluation of currency against gold and Bitcoin.  That would give them room to stimulate the economy to their heart's content, and would probably do the trick.  But they won't (or they will only as a last resort) since that would not be good for faith in their assets, long term.

[BobK71]

Is your story the confession of an elite American overlord, or the fantasy of someone who wasn't born into the private club?
https://www.youtube.com/watch?v=H-PSCqhkWhg

Believe it or not, there are people who actually aspire to joining the club.

The only way for things really to change is public awareness of how we don't really live under democracy and free markets.  Part of the imperial system is to numb people -- the more powerful, the more unearned benefits they receive, so it's in their interest not to know.  And this includes, to some degree, the entire population of the West, since they can at least elect their leaders.

The only reason why we now have half the American electorate choosing Trump or Sanders is that, after a severe financial crisis and four decades after the elites were forced to use totally fiat money, the contradictions of the system are visible on the surface, in the form of serious economic pain for much of the Western population.

[pereira4]

Is your story the confession of an elite American overlord, or the fantasy of someone who wasn't born into the private club?
https://www.youtube.com/watch?v=H-PSCqhkWhg

Believe it or not, there are people who actually aspire to joining the club.

The only way for things really to change is public awareness of how we don't really live under democracy and free markets.  Part of the imperial system is to numb people -- the more powerful, the more unearned benefits they receive, so it's in their interest not to know.  And this includes, to some degree, the entire population of the West, since they can at least elect their leaders.

The only reason why we now have half the American electorate choosing Trump or Sanders is that, after a severe financial crisis and four decades after the elites were forced to use totally fiat money, the contradictions of the system are visible on the surface, in the form of serious economic pain for much of the Western population.

People don't give a damn about the devaluation of the dollar or any of that. As long as their dollars keep being accepted pretty much everywhere and they can buy the buys and services that they want, nothing will change.

Our only hope is that once governments eliminate physical cash, people will wake up and use the only viable alternative (Bitcoin) therefore making pioners (anyone holding 10+BTC is) rich as fuck.

[BobK71]

People don't give a damn about the devaluation of the dollar or any of that. As long as their dollars keep being accepted pretty much everywhere and they can buy the buys and services that they want, nothing will change.

Our only hope is that once governments eliminate physical cash, people will wake up and use the only viable alternative (Bitcoin) therefore making pioners (anyone holding 10+BTC is) rich as fuck.

True, although the system is designed, eventually, to victimize most the people who trust it the most.  The earlier you wake up, the better off you are, even though no one should bet the farm on non-state-issued money, since you never know when the elites will come up with a new scheme to prop up their money and other assets.  The new lease of life can last past our lifetime.

The only reason dollars can still buy things cheap is that, for their own reasons, the regimes who run developing countries (most importantly China) have decided to keep their currencies cheap in dollar terms.  This works just fine for rich world elites, as they have done nothing over the last 20 years to stop it.  But like any other such scheme, it only postpones the inevitable and makes it worse.

[OROBTC]

...

Things do seem to be heating a bit.  Tomorrow Puerto Rico will default on some loans.  That is an issue than the MainStream Media is not covering very well.

Douche [sic] Bank is in trouble, now under being investigated by the UK regulators (LOL), they are up to their eyes in problems, including a huge derivatives holding.  German Justice Haas was just run out of a meeting by angry Germans unhappy w/ the Muslim Invasion.

Maybe we're closer to big problems, or maybe not.  I don't know.  But, there are plenty of scary events happening...

[The Arcitect]

This one is a nice story but does not make much sense to me. 

[Goms]

I think he is just trying to say that the economic strain we are experiencing at present, is due to the incompetence of a few power lords who do not want to let go of their puppet strings despite the problems on ground.

[The Arcitect]

I think he is just trying to say that the economic strain we are experiencing at present, is due to the incompetence of a few power lords who do not want to let go of their puppet strings despite the problems on ground.

But unfortunately, we are under control of the puppetmaster, if we want to admit it or not.

[BobK71]

...

Things do seem to be heating a bit.  Tomorrow Puerto Rico will default on some loans.  That is an issue than the MainStream Media is not covering very well.

Douche [sic] Bank is in trouble, now under being investigated by the UK regulators (LOL), they are up to their eyes in problems, including a huge derivatives holding.  German Justice Haas was just run out of a meeting by angry Germans unhappy w/ the Muslim Invasion.

Maybe we're closer to big problems, or maybe not.  I don't know.  But, there are plenty of scary events happening...

I am reading "The End of Alchemy" by the last governor of the Bank of England, Mervyn King.  He might have been a bit of a maverick anyway, but he is a core member of the elites and he is openly saying gold is a store of value.

I think he has a nice framing of the big forces confronting the elites right now.  The Western boom over the last couple of decades was based on people bringing future consumption forward.  (This was encouraged by low interest rates which discouraged savings.)  People thought the good times would last forever and their future incomes would justify consuming so much today.

But it became clear that people and companies would not have so much income in the future.  They have to cut back.  The central banks' continued low interest rates can only try to bring more future consumption to today, in order to prop up the current economy.  At some point, the future is squeezed totally dry (if not already.)  The future also becomes today, at some point.  So even if this policy worked, it would only do so temporarily.

[BobK71]

I think he is just trying to say that the economic strain we are experiencing at present, is due to the incompetence of a few power lords who do not want to let go of their puppet strings despite the problems on ground.

Incompetence is always a possibility, but the even bigger picture is that the contradictions at the core of the system will come to the surface, sooner or later.

The contradiction is that we think we live under basically free markets, but the central planning of money and finance eventually makes a mockery of this facade.  Central planning's incentives enrich the few at the expense of the many, even though we're told to believe the elites really have our best interest at heart.

Elite power may be a sad feature of all human societies since the beginning, but the unique thing about this one is that the elites have the incentives to destabilize their own system, on a long term basis.  I suppose it's a sort of modern progress that the average person is now allowed, at least, to profit from betting against the system (with moderation.)

[BobK71]

that was way more confusing to read than it should have been.

but nice attempt.

I tried to be as clear as possible and I'm sorry it didn't quite speak to you.

Please feel free to suggest any way it might have been improved, or further explained.

[OROBTC]

...

BobK71

I bought Mervyn King's book but have not started it yet.  It looks kind-of daunting, not the usual "Lite Fare" I like reading at night (I work during the day).  As King was a true insider, I hope to get some further understanding of how these guys think.

Yes, income is hard to get now.  Financial Repression is going full bore now.  This whole ZIRP/NIRP new paradigm *seems* to be built on central bank fantasy...  It is very alien & strange, and I see NO good result in the end.  Financial Repression is going to have ugly effects on all savers, especially those not saving enough.

Nice to see a member of The Elite admitting gold as a store of value.

Great thread!

[BobK71]

...

BobK71

I bought Mervyn King's book but have not started it yet.  It looks kind-of daunting, not the usual "Lite Fare" I like reading at night (I work during the day).  As King was a true insider, I hope to get some further understanding of how these guys think.

Yes, income is hard to get now.  Financial Repression is going full bore now.  This whole ZIRP/NIRP new paradigm *seems* to be built on central bank fantasy...  It is very alien & strange, and I see NO good result in the end.  Financial Repression is going to have ugly effects on all savers, especially those not saving enough.

Nice to see a member of The Elite admitting gold as a store of value.

Great thread!

Thanks!  I'm also not paid to read books, and even though I like reading this one, it's really the "who" rather than the "what" that's interesting.  I find that a certain amount of confusion is inevitable from an author in the mainstream economics and policy circles -- they can never admit that propping up money and debt with public power is at the root of our problems, so there's at least some "talking around" the issues.  King seems more candid than most.

FWIW, King is also against negative rates -- he thinks that it merely squeezes future consumption and investment further into the present, and doesn't address the core imbalance.  I agree but I'm not so sure it won't be "successful."  (His own ex-colleague Andrew Haldane seems to be vanguarding the negative-rates movement at the BoE.)  If they can abolish cash and make rates go deeply negative, just maybe, people with money will see no choice but to buy stocks and consume luxuries now, and this just might jolt the economy back into action.  But, as you say, I agree certainly no social good or longer term economic success can come out of this.

My favorite author is Philip Coggan (author of the Buttonwood column at The Economist, and books.)  He illuminated a lot of when he said our core problem is having too many paper claims to wealth compared to real goods and services, at current prices.  This was a big piece of the puzzle from a serious commentator.