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Author Topic: Real money vs debt, and the value of bitcoin. (Mitchell-Innes credit theory)  (Read 6786 times)
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September 20, 2013, 05:22:24 PM
Last edit: September 20, 2013, 05:47:56 PM by bitcoinBull
 #1

tldr: The value of bitcoin comes most directly from trust in exchanges (or trust in the ability to sell bitcoin at a certain price).

What would Mitchell-Innes think? This excerpt from "Debt: the first 5,000 years" by David Graeber, is enlightening:

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Mitchell-Innes was an exponent of what came to be known as the Credit Theory of money, a position that over the course of the nineteenth century had its most avid proponents not in Mitchell-Innes's native Britain but in the two up-and-coming rival powers of the day, the United States and Germany. Credit Theorists insisted that money is not a commodity but an accounting tool. In other words, it is not a "thing" at all. You can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter. Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before the use of any particular token of exchange.

The obvious next question is: If money is a just a yardstick, what then does it measure? The answer was simple: debt. A coin is, effectively, an IOU. Whereas conventional wisdom holds that a banknote is, or should be, a promise to pay a certain amount of "real money" (gold, silver, whatever that might be taken to mean), Credit Theorists argued that a banknote is simply the promise to pay something of the same value as an ounce of gold. But that's all that money ever is. There's no fundamental difference in this respect between a silver dollar, a Susan B. Anthony dollar coin made of a copper-nickel alloy designed to look vaguely like gold, a green piece of paper with a picture of George Washington on it, or a digital blip on some bank's computer. Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one's head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value.

...

What credit theorists like Mitchell-Innes were arguing is that even if Henry gave Joshua a gold coin instead of a piece of paper, the situation would be essentially the same. A gold coin is a promise to pay something else of equivalent value to a gold coin. After all, a gold coin is not actually useful in itself. One only accepts it because one assumes other people will.

In this sense, the value of a unit of currency is not the measure of the value of an object, but the measure of one's trust in other human beings.

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September 20, 2013, 07:10:18 PM
 #2

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form.

How could money (gold) be credit in this example?
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September 20, 2013, 08:37:26 PM
 #3

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form.

How could money (gold) be credit in this example?

To simplify, let's also assume that we're the last two people on earth.

The only reason I'm willing to accept an ounce from you, in exchange for my knife, is because I trust that you won't kill me with the knife and take back your shoes. If I thought that you would use the knife to kill me, I would never trade it for gold, and therefore the gold would be worthless (there's nobody else on earth we can use it to trade with).

So let's assume I trust you, first and foremost that you won't kill me. But I also trust that in the future, I can use the gold to haggle with you and trade it for something else you might have. If I didn't expect that I could use it to pay you in the future (say for some of the meat you hunted with your new knife), it would have no value and I would never have accepted it from you as payment for the knife.

So the gold is only credit, and its value is strictly limited by how much we trust each other to use it for trades.

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September 20, 2013, 10:58:14 PM
 #4

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form.

How could money (gold) be credit in this example?

To simplify, let's also assume that we're the last two people on earth.

The only reason I'm willing to accept an ounce from you, in exchange for my knife, is because I trust that you won't kill me with the knife and take back your shoes. If I thought that you would use the knife to kill me, I would never trade it for gold, and therefore the gold would be worthless (there's nobody else on earth we can use it to trade with).

(It was me to accept an ounce of gold for half the exchange value of my pair of shoes, but never mind: taking your slightly modified example instead...) If the "only reason" for you to accept my ounce of gold in return for your knife were your trusting me, than you would be just as willing to accept anything else instead. Anything else would be as good as gold: your trust in me would enable me to declare anything as money. Clearly, that trust is not the only reason for you to accept my gold (as you pointed out yourself right after saying this): trust cannot constitute a motivation for you to accept my gold but rather is just a requirement for it.

So let's assume I trust you, first and foremost that you won't kill me. But I also trust that in the future, I can use the gold to haggle with you and trade it for something else you might have. If I didn't expect that I could use it to pay you in the future (say for some of the meat you hunted with your new knife), it would have no value and I would never have accepted it from you as payment for the knife.

So the gold is only credit, and its value is strictly limited by how much we trust each other to use it for trades.

According to this logic, the prospect of having exchange value in the future would turn anything into credit.

Just like gold, my knife will also have an exchange value in the future. Does that make it credit? Perhaps only money becomes credit just for having an exchange value in the future. Yet if so, then what makes it money? Let us assume it must be credit in order to be money. Then, how can money be the only thing to become credit for having an exchange value in the future (if it must already be credit)?

All this mess vanishes once we remember that credit is merely the promise of repaying someone else's money after some time, so money must already exist in order for credit even to be possible (this requires a whole new level of trust going far beyond not being killed: it requires trusting the borrower to repay the loan).
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September 20, 2013, 11:50:56 PM
 #5

So let's assume I trust you, first and foremost that you won't kill me. But I also trust that in the future, I can use the gold to haggle with you and trade it for something else you might have. If I didn't expect that I could use it to pay you in the future (say for some of the meat you hunted with your new knife), it would have no value and I would never have accepted it from you as payment for the knife.

So the gold is only credit, and its value is strictly limited by how much we trust each other to use it for trades.


According to this logic, the prospect of having exchange value in the future would turn anything into credit.

And you would be absolutely correct. Otherwise, how can you explain that throughout history, everything from sea-shells to tally sticks to little green pieces paper, have all been able to act as a currency.

Just like gold, my knife will also have an exchange value in the future. Does that make it credit?

No, because the knife actually has a use-value. The knife has use-value regardless of whether or not I trust you, because I can use it to kill and skin animals, etc.. The knife's value (in this scenario) does not derive from our trust relationship whatsoever. So the knife is not credit (in this scenario).

(if it were a ceremonial knife made of precious metal, then we could assume it would have additional exchange value above and beyond its cutting utility, and the scenario would be different).

Perhaps only money becomes credit just for having an exchange value in the future. Yet if so, then what makes it money? Let us assume it must be credit in order to be money. Then, how can money be the only thing to become credit for having an exchange value in the future (if it must already be credit)?

See, presuming that money and credit are different things gets you into a circular paradox. It is resolved quite elegantly when you realize that money and credit are the very same thing.

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September 21, 2013, 01:57:17 AM
 #6

tldr: The value of bitcoin comes most directly from trust in exchanges (or trust in the ability to sell bitcoin at a certain price).

What would Mitchell-Innes think? This excerpt from "Debt: the first 5,000 years" by David Graeber, is enlightening:

Quote

Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one's head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value.


True, to be more precisely, a paper note or a piece of gold are both used to present the valuable things that back them, e.g. you can always exchange them for such amount of goods. It means, if you have valuable things, you could always issue money of equivalent value

However, you can just write a paper note, while you must work a lot to produce a piece of gold. This is the fundamental difference between paper notes and gold

Overtime, the valuable things that back the paper note/gold will be consumed or depreciated and eventually disappear from the economy. So, those issued money will lose their value, since there is no corresponding valuable thing behind these money now

But this is not true for gold, since the gold itself is a result of work, thus itself contains value

The counter argument is that work does not decide value, supply and demand do. But it is the same, if nothing is backing the paper note and gold, the demand for paper note will be 0 and the demand for gold still exists, as industry material and jewelry(a significant demand in certain countries like India)


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September 21, 2013, 02:03:44 AM
Last edit: September 21, 2013, 02:38:38 AM by mirelo
 #7

So let's assume I trust you, first and foremost that you won't kill me. But I also trust that in the future, I can use the gold to haggle with you and trade it for something else you might have. If I didn't expect that I could use it to pay you in the future (say for some of the meat you hunted with your new knife), it would have no value and I would never have accepted it from you as payment for the knife.

So the gold is only credit, and its value is strictly limited by how much we trust each other to use it for trades.


According to this logic, the prospect of having exchange value in the future would turn anything into credit.

And you would be absolutely correct. Otherwise, how can you explain that throughout history, everything from sea-shells to tally sticks to little green pieces paper, have all been able to act as a currency.

If merely having an exchange value in the future made anything money, then we could only buy or sell things that lacked future exchange value: otherwise, those things would be the money with which we buy them or for which we sell them, rather than what we buy with money or sell for it. Many things have once represented money, but not only because of their future exchange value (otherwise, almost anything would always be money, leaving us just a few, quite uninteresting things to buy - and serious problems in choosing the money to buy them with).

Just like gold, my knife will also have an exchange value in the future. Does that make it credit?

No, because the knife actually has a use-value. The knife has use-value regardless of whether or not I trust you, because I can use it to kill and skin animals, etc.. The knife's value (in this scenario) does not derive from our trust relationship whatsoever. So the knife is not credit (in this scenario).

It was you to say that merely having a future exchange value made anything money.

Still, gold also has a use value independently of being money, as does cattle, silver, and salt. They are also useful "regardless of whether or not I trust you," and even so they can be - as once were - money.

(if it were a ceremonial knife made of precious metal, then we could assume it would have additional exchange value above and beyond its cutting utility, and the scenario would be different).

So its metallic utilities would make it useless, then credit, hence money?

Perhaps only money becomes credit just for having an exchange value in the future. Yet if so, then what makes it money? Let us assume it must be credit in order to be money. Then, how can money be the only thing to become credit for having an exchange value in the future (if it must already be credit)?

See, presuming that money and credit are different things gets you into a circular paradox. It is resolved quite elegantly when you realize that money and credit are the very same thing.

It is not a matter of just "presuming" things, but rather of explaining how things are the way we "presumed" them to be: the circularity arises from trying to explain, by using your own argument, how money and credit could be the same.
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September 21, 2013, 02:10:04 AM
 #8

Credit is always risky, since there is always a risk of future. You can promise me to make a $1M house to back the value of your issued $1M money, but what if that house's market price drops to $500K after it is constructed? It means that the value of all your issued money will be cut by half

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September 21, 2013, 02:19:39 AM
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True, to be more precisely, a paper note or a piece of gold are both used to present the valuable things that back them, e.g. you can always exchange them for such amount of goods. It means, if you have valuable things, you could always issue money of equivalent value

However, you can just write a paper note, while you must work a lot to produce a piece of gold. This is the fundamental difference between paper notes and gold

Overtime, the valuable things that back the paper note/gold will be consumed or depreciated and eventually disappear from the economy. So, those issued money will lose their value, since there is no corresponding valuable thing behind these money now

But this is not true for gold, since the gold itself is a result of work, thus itself contains value

The counter argument is that work does not decide value, supply and demand do. But it is the same, if nothing is backing the paper note and gold, the demand for paper note will be 0 and the demand for gold still exists, as industry material and jewelry(a significant demand in certain countries like India)

Money does not necessarily (and should not) represent its own exchange value: rather, it necessarily represents the exchange value of all commodities it can buy.
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September 21, 2013, 05:21:29 AM
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If merely having an exchange value in the future made anything money, then we could only buy or sell things that lacked future exchange value: otherwise, those things would be the money with which we buy them or for which we sell them, rather than what we buy with money or sell for it. Many things have once represented money, but not only because of their future exchange value (otherwise, almost anything would always be money, leaving us just a few, quite uninteresting things to buy - and serious problems in choosing the money to buy them with).

Not just commodities can be bought and sold, money can be bought and sold too. That's why there's a giant market of currency exchange. You're creating another false dichotomy that money and commodities are always entirely separate things (sometimes they are, but not always). The other false dichotomy is that money and credit are separate things. In reality, its blended together on a spectrum: pure credit/currency on one end, and commodities with no exchange-value on the other.

It was you to say that merely having a future exchange value made anything money.

Still, gold also has a use value independently of being money, as does cattle, silver, and salt. They are also useful "regardless of whether or not I trust you," and even so they can be - as once were - money.

Its having a future exchange-value based on trust which makes something a currency. Not "future exchange-value based on use", which is a total misuse of the term exchange-value. future exchange-value (the gold) is a separate thing from future use-value (the knife).

But we do agree, having a use-value does not preclude something from also functioning as money. Commodities can have a dual-function as both currency and as commodity (again, in the real world, its a complex blend). The point is that, as a currency, its exchange-value is derived separately from its use-value. The exchange-value comes from the network of trust among people who will accept it as payment, even if have absolutely no intention of using it themselves (just an intention to exchange it again in the future).

(if it were a ceremonial knife made of precious metal, then we could assume it would have additional exchange value above and beyond its cutting utility, and the scenario would be different).

So its metallic utilities would make it useless, then credit, hence money?

No, its ceremonially-precious quality would give it exchange-value (derived from the trust and agreement that it is precious). That is entirely separate from its utility as a cutting tool (its use-value).


It is not a matter of just "presuming" things, but rather of explaining how things are the way we "presumed" them to be: the circularity arises from trying to explain, by using your own argument, how money and credit could be the same.

Okay, credit/IOUs have value based on trust, that should be obvious (an untrusted IOU is worthless). Money/currency have value based on exchange. And that exchange-value is always in flux, clearly, the price of gold and bitcoin are constantly changing. Changing based on what? Based on the trust that it can be taken to the market and exchanged at x price in the future, in other words, that it can serve as a "good-as-gold" "buyer-owes-u" x in the future. If that trust collapses, the price collapses.

Physical gold is just a token which measures the credit backing by the gold market. So instead of an "i-owe-u" its a "gold-market-owes-u". And obviously a "gold-market-owes-u" is only as valuable as the collective trust in the gold market.

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September 21, 2013, 05:37:14 AM
 #11

Credit is always risky, since there is always a risk of future. You can promise me to make a $1M house to back the value of your issued $1M money, but what if that house's market price drops to $500K after it is constructed? It means that the value of all your issued money will be cut by half

And what if the market price of gold drops by half? Then the value of my gold is also cut in half. So in practice, a piece of gold is just another way to hold a quantity of credit.

Good example, thank you.

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September 21, 2013, 12:08:32 PM
Last edit: September 21, 2013, 12:58:05 PM by mirelo
 #12

If merely having an exchange value in the future made anything money, then we could only buy or sell things that lacked future exchange value: otherwise, those things would be the money with which we buy them or for which we sell them, rather than what we buy with money or sell for it. Many things have once represented money, but not only because of their future exchange value (otherwise, almost anything would always be money, leaving us just a few, quite uninteresting things to buy - and serious problems in choosing the money to buy them with).

Not just commodities can be bought and sold, money can be bought and sold too. That's why there's a giant market of currency exchange. You're creating another false dichotomy that money and commodities are always entirely separate things (sometimes they are, but not always). The other false dichotomy is that money and credit are separate things. In reality, its blended together on a spectrum: pure credit/currency on one end, and commodities with no exchange-value on the other.

Let me give you an example from my book Representational Monetary Identity (http://omniequivalence.com/money-as-multiequivalence/):

Quote
Let us imagine three owners A, B, and C of commodities x, y, and z, respectively, of whom A wants y, B wants z, and C wants x. Direct exchange cannot give those three owners their desired commodities, none of which belongs to whom (x to B) wants the commodity owned by whom (z by C) wants it (wants x).

The monetary solution to this problem consists in a fourth commodity becoming money so those three owners can exchange their other three commodities. In that exchange, only one commodity can perform the role of money at a time: the monetary function excludes the commodity function.

To understand what does it mean for us to buy or sell money itself, you must begin by understanding this.

It was you to say that merely having a future exchange value made anything money.

Still, gold also has a use value independently of being money, as does cattle, silver, and salt. They are also useful "regardless of whether or not I trust you," and even so they can be - as once were - money.

Its having a future exchange-value based on trust which makes something a currency. Not "future exchange-value based on use", which is a total misuse of the term exchange-value. future exchange-value (the gold) is a separate thing from future use-value (the knife).

Neither trust nor utility can give anything an exchange value, whether monetary or not: trust is merely a requirement for social interaction in general, and utility, for exchange value in general and monetary value in particular.

But we do agree, having a use-value does not preclude something from also functioning as money. Commodities can have a dual-function as both currency and as commodity (again, in the real world, its a complex blend). The point is that, as a currency, its exchange-value is derived separately from its use-value. The exchange-value comes from the network of trust among people who will accept it as payment, even if have absolutely no intention of using it themselves (just an intention to exchange it again in the future).

Exchange value is never "derived from" utility: although a commodity must be useful to have exchange value, its exchange value does not originate from its utility. Likewise, although we must trust each other to buy from and sell to each other, the exchange value of our commodities and money does not come from our trusting each other (otherwise, the more we trusted each other, the more valuable our commodities and money would become).

(if it were a ceremonial knife made of precious metal, then we could assume it would have additional exchange value above and beyond its cutting utility, and the scenario would be different).

So its metallic utilities would make it useless, then credit, hence money?

No, its ceremonially-precious quality would give it exchange-value (derived from the trust and agreement that it is precious). That is entirely separate from its utility as a cutting tool (its use-value).

The question was: how its metallic properties could enhance its exchange value? In your terms: why those properties would affect our "agreement" on its exchange value? Do not objective properties affect the exchange value of things? Otherwise, would it not be just a coincidence that some things are consistently more expensive than others?

It is not a matter of just "presuming" things, but rather of explaining how things are the way we "presumed" them to be: the circularity arises from trying to explain, by using your own argument, how money and credit could be the same.

Okay, credit/IOUs have value based on trust, that should be obvious (an untrusted IOU is worthless). Money/currency have value based on exchange. And that exchange-value is always in flux, clearly, the price of gold and bitcoin are constantly changing. Changing based on what?

Now we are talking. Take more time on the question before trying to answer it: this is not an easy one.

Based on the trust that it can be taken to the market and exchanged at x price in the future, in other words, that it can serve as a "good-as-gold" "buyer-owes-u" x in the future. If that trust collapses, the price collapses.

In my example above, those three owners can choose a fourth commodity to represent money just in the context of that particular exchange. In this case, money would need not be valuable in the future: the only trust required would be that of the owners in each other (that they would not kill - or steal - each other, etc).

Physical gold is just a token which measures the credit backing by the gold market. So instead of an "i-owe-u" its a "gold-market-owes-u". And obviously a "gold-market-owes-u" is only as valuable as the collective trust in the gold market.

So the more we trust gold to have an exchange value in the future, the more valuable it will be?

One thing is to trust more on the future monetary value of gold; another is to trust on more monetary value of the future gold.
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September 21, 2013, 12:51:03 PM
 #13

Credit is always risky, since there is always a risk of future. You can promise me to make a $1M house to back the value of your issued $1M money, but what if that house's market price drops to $500K after it is constructed? It means that the value of all your issued money will be cut by half

And what if the market price of gold drops by half? Then the value of my gold is also cut in half. So in practice, a piece of gold is just another way to hold a quantity of credit.

Good example, thank you.

If the assets that back the currency disappeared, then paper note will lose all of its value, while gold still keep some of its value, since the demand for gold still exists

If the value of gold drops by half, things will get complex. Because gold still have some assets that back it, its exchange value might still be stable for a while, like paper notes. Of course eventually it will impact the exchange rate of its underlying assets, otherwise you can get same amount of asset with less value

In this case we suppose that the underlying assets is the measurement of value, but in reality it is more likely the value of gold is the standard (we say the value of asset appreciated instead of gold value dropped), because it is scarce, have universal equivalence and always have a demand (That demand will never disappear, because of the existing of women Smiley)

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September 21, 2013, 01:08:58 PM
 #14

Credit is always risky, since there is always a risk of future. You can promise me to make a $1M house to back the value of your issued $1M money, but what if that house's market price drops to $500K after it is constructed? It means that the value of all your issued money will be cut by half

And what if the market price of gold drops by half? Then the value of my gold is also cut in half. So in practice, a piece of gold is just another way to hold a quantity of credit.

Good example, thank you.

If the assets that back the currency disappeared, then paper note will lose all of its value, while gold still keep some of its value, since the demand for gold still exists

There are no longer any assets backing most of the currency, only debt.

If the value of gold drops by half, things will get complex. Because gold still have some assets that back it, its exchange value might still be stable for a while, like paper notes. Of course eventually it will impact the exchange rate of its underlying assets, otherwise you can get same amount of asset with less value

Sheer gold money has no backing: it rather backs all its proxies.

In this case we suppose that the underlying assets is the measurement of value, but in reality it is more likely the value of gold is the standard (we say the value of asset appreciated instead of gold value dropped), because it is scarce, have universal equivalence and always have a demand (That demand will never disappear, because of the existing of women Smiley)

Gold was the monetary standard until 1971, and even then it was already just a partial standard: the other part was already just debt.
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September 21, 2013, 01:41:34 PM
 #15


There are no longer any assets backing most of the currency, only debt.


Debt simply means assets in the future, it is exchangeable with current assets, with a risk premium

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September 21, 2013, 02:05:42 PM
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There are no longer any assets backing most of the currency, only debt.


Debt simply means assets in the future, it is exchangeable with current assets, with a risk premium

An asset is anything non-monetary that we take as a monetary value, which is impossible without money. Debt is my obligation of repaying a sum of money to whoever loaned it to me. If I can choose to express a debt in assets, it is only because I can express those assets in money.
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September 21, 2013, 03:09:09 PM
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There are no longer any assets backing most of the currency, only debt.


Debt simply means assets in the future, it is exchangeable with current assets, with a risk premium

An asset is anything non-monetary that we take as a monetary value, which is impossible without money. Debt is my obligation of repaying a sum of money to whoever loaned it to me. If I can choose to express a debt in assets, it is only because I can express those assets in money.

Government bond and MBS are both assets. Given enough premium, you can payback your debt with some other assets like house/land/gold/bitcoin. When people default on their mortgage loan thus be free from debt, the banks get their house as a payment of debt

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September 21, 2013, 03:26:17 PM
Last edit: September 21, 2013, 04:19:17 PM by mirelo
 #18


There are no longer any assets backing most of the currency, only debt.


Debt simply means assets in the future, it is exchangeable with current assets, with a risk premium

An asset is anything non-monetary that we take as a monetary value, which is impossible without money. Debt is my obligation of repaying a sum of money to whoever loaned it to me. If I can choose to express a debt in assets, it is only because I can express those assets in money.

Government bond and MBS are both assets. Given enough premium, you can payback your debt with some other assets like house/land/gold/bitcoin. When people default on their mortgage loan thus be free from debt, the banks get their house as a payment of debt

Government bonds are the obligation the government has of repaying the face value of those bonds to their holders, with interest. It is only because government bonds are the promise of money that we can treat them as if they were already money. However, this can only be true as long as we believe on that promise.

Regarding houses or land (let us leave bitcoins out of this for a while), again: we could not treat them as money if they had no monetary value, which requires their expression in money that is just money (and not an asset).

Finally, we can only call a government bond an asset as long as we mistake the debt it represents for actual money to then mistake that money by a particular asset.
AndrewWilliams
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September 24, 2013, 05:41:22 AM
 #19

Mitchell-Innes theory could really apply to ASIC manufacturers and their consumers.

BFL is a great example :rolleyes:


IE:
I will only sell you my miner if I can make more than if I mined myself. :p
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September 24, 2013, 08:15:01 AM
 #20

Graeber is right. Debt is the only real money. All other goods are assets and valued in debt.
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