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Author Topic: some thought about digital currency of the future  (Read 8982 times)
bytemaster
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August 04, 2010, 02:08:38 PM
 #21

Note my disclaimer about the conclusion at the end of the movie which I did not agree with.

That video is not my only source.  In fact the Federal Reserve even admits that they create FRN out of thin air to buy treasuries or other assets.  A court case has even been won where the defendant demonstrated that the bank put up no "consideration" when it issued new money based upon them signing an IOU.  If the bank was not creating "money from air" then how do you explain the increase in the money supply?  If every claim payable on demand were possible to fulfill then there would be no "bank runs" and thus no fraud.   How do you explain a bank run unless each individual *thought* their money was payable on demand?   If their money was lent for a specific period of time then they could not RUN to the bank because the debt was not yet due.   Finally, if a bank note represents the debt of a bank then why in the world does it not pay any interest like all other negotiable debt instruments?  Are people really stupid enough to give the bank a 0% loan by holding a FRN and not immediately taking it to the bank to get the supposed gold that the note promises to pay?

Let us assume for a second that the Federal Reserve *was* gold backed like when it started.  Initial depositors are given 1 FRN per 1/20 oz of gold.  Then the bank issues 10x the FRN while maintaing their reserve ratio.  All of this credit money requires payment at (lets say) 5% interest because it was created based on loan demand.   Thus if the bank issued 1000 FRN and 900 of them were not backed then after one year the bank would need to collect 945 FRN from a system with only 1000 notes.  Net result is that the bank (which started with 0 capital of its own, all capital came from the initial depositors) would gross 45 FRN in interest.  Lets say the bank was generous and paid depositors 5% interest  (no spread) at a cost of 5 FRN.  The bank made 40 FRN from nothing.  Note that 40 FRN represents a supposed claim to 40% of all gold in existence! 

If there was NO FRAUD in the current banking system then why did the banks default on their promises to pay gold?  How can there be more gold notes than actual gold if there are only 90 notes for every 100 oz deposited? 


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falkenberg
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August 04, 2010, 02:25:43 PM
 #22

Where bank promises to pay you gold?? Gold is just like any other goods, the price for the gold is set by market. Money is the money, their role is to represent the value of the total economic and be exchange media for making the deals.
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August 04, 2010, 03:40:08 PM
 #23

Gold *was* money initially.  The original FRN note promised to pay gold "on demand".  Then they "outlawed" owning gold in 1933 (a bank bailout essentially making it illegal to cash your promise) and in 197? they stopped redeeming FRN for gold for foreign central banks.   So yes, the *system* defaulted on promised gold.

We are left with FRNs which are in demand because people had debts and taxes to pay.  But the fundamental scam is still growing until it all crashes in hyperinflation.

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August 04, 2010, 03:56:42 PM
 #24

I think what people fail to consider is that US silver and gold certificates were always denominated in DOLLARS not ounces. See for yourself.

http://dollardaze.org/blog/posts/2006/November/12/1/usdollarcomparison.jpg

A one dollar silver certificate is worth exactly the same amount of silver or gold as a one dollar federal reserve note. Always has been. Always will be.

By the way which weighs more a pound of lead or a pound of feathers? 

There were silver dollars made from silver, also some dimes and quarters. And $50 gold pieces made from gold. You can still buy some gold and silver commemorative coins. They are still denominated in dollars but cost more than their gold value. Those are what you want.

The coins are no longer made from these metals because the metal value is worth more than the denomination value.

Even pennies are no longer made of copper, because people were melting them for their copper value.

----

You should take this up with the British whose money IS called Pound Sterling!!  Go try changing their coins for a pound if silver.
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August 04, 2010, 04:36:16 PM
 #25

Are you saying the FED creates money and the banks just help hand it out? I completely agree that separate "banks" are just office fronts of the FED.

If you don't think the FED creates money then where does it come from at all?

Really now, this is all getting quite silly. Isn't this on wikipedia?

The Bureau of Engraving and Printing makes the bills. The U.S. Mint makes the coins. The Federal Reserve orders the money from the BEP and acts as HOARD.

This is all a mistaken notion.  Yes, the U.S. Mint coins the money and the Bureau of Printing and Engraving prints up the actual bills, but that doesn't describe where the money comes from in the first place.

When a local bank wants to get some money, they place an order to the local Federal Reserve branch bank (there is one in nearly every state in the USA) based upon the funds they have "electronically" deposited with the Fed.  They also ship money back from time to time, which either goes back into circulation or gets destroyed (with the bills being too old or having other problems).

That still doesn't deal with where the value of the money came from in the first place.  With fiat currencies like the U.S. Dollar, it comes quite literally out of nothing, where "The Fed" controls the money supply in a most direct manner.  The number of dollars that you or I have in a local bank is irrelevant in terms of how much money is actually on hand at that bank in a physical form, and frankly most transactions done today rarely even use physical money any more.  For ordinary consumers they use things like credit or debit cards, or make some other kind of electronic purchase (like a gift card, etc.).  Those federal agencies involved with making the physical money have absolutely nothing to do with these "virtual" money exchanges.

"The Fed" can and does create large amounts of money out of whole cloth that they in turn "lend" to member banks.  The amount they will lend varies proportionally by the amount of money that bank has "in reserve" with "The Fed", but it can and usually does exceed by more than 100% of the deposits in that bank.

For example, there has been a whole bunch of complaints about the $1 trillion USD that went to banks in the form of TARP funds and the additional trillion or so in "economic stimulus funds" that all came from the U.S. Congress.  What hasn't been widely reported (but it has been reported on sources like 60 Minutes and other "mainstream" news outlets) is that "The Fed" has created approximately $15-$20 trillion USD and offered that money to its member banks.... over the past year and a half alone.  How do you think the U.S. government is able to afford these kind of programs?

The really "cool" trick here is that "The Fed" is "loaning" out money to major banks at insanely low rates.... something like about 1% APR right now.  The banks are then buying up federal treasury bills, earning interest at 3%-4%.... pocketing the difference with basically no risk at all except for the potential that the United States of America is not going to exist due to foreign invasion or a coup d'etat.  At that point U.S. dollars would be worthless anyway, so it is a moot issue, and even that isn't 100% certain in that extreme situation.  Frankly I'd love to get in on a deal like that myself and make a few billion dollars "financing" the U.S. federal debt with play money that somebody else gave me.  None of that involved physical money, but rather just a few electronic transfers with some keyboard strokes and "The Fed" making an accounting of the whole thing in their server farm.

BTW, follow the money trail and note that more than a few members of congress are in on that money train too.  Who do you think finances most of the elections for federal office?  I'm talking mainly incumbents here.

Supposedly from time to time "The Fed" does take money back from all of these banks that they've lent money to, and have made attempts to "buy back" (in dollars of course) the money they've lent out.  In the meantime they've hyperinflated the currency and have caused other huge problems.

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RHorning
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August 04, 2010, 04:50:05 PM
 #26

I think what people fail to consider is that US silver and gold certificates were always denominated in DOLLARS not ounces. See for yourself.

http://dollardaze.org/blog/posts/2006/November/12/1/usdollarcomparison.jpg

A one dollar silver certificate is worth exactly the same amount of silver or gold as a one dollar federal reserve note. Always has been. Always will be.

Originally the dollar was defined as so many grains of silver, in minted form.  Silver certificates were obtained from banks that took those silver dollars of that specific weight and value and issued the certificate.... where most people who received those certificates presumed that they would get the silver coins back at a future date if they requested them.  Yes, they were denominated in dollars, because dollars were denominated in silver.

The problem came when the law passed that debased the currency and removed the silver==dollar conversion rate, and instead replaced that with Federal Reserve Notes.  Even now, if you have a silver certificate, you can go to any bank and exchange the silver certificate.... for a federal reserve note.  BTW, don't do that..... the silver certificates are worth more as collector items than as real money or by people who feel that the debasing of the currency was unconstitutional or illegal.

Yes, the silver certificates issued in the 1930's looked almost identical to the Federal Reserve Notes.  That was by design as the Fed notes wouldn't have been recognized or accepted otherwise.  The difference is that a Federal Reserve Note doesn't require the bank to give you anything other than another Federal Reserve Note.  A Silver Certificate in theory could require the bank to give you a hunk of silver worth a dollar.... a dollar as defined by federal law and not the commodity metal market.

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falkenberg
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August 04, 2010, 05:37:28 PM
 #27

Things have changed since this time, RHorning. I just wonder why do you think the gold/silver based currency is better then the one used right now? I still did not get the point, why? The value of money shall reflect the current status of the economy IMHO. The more economy grows the more money are needed. Isn't it?
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August 04, 2010, 05:59:20 PM
 #28

if money is perfectly divisible then as the economy grows the size of the units shrinks.  Thus you get more "parts" instead of increasing the size of the pie.   

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August 04, 2010, 06:14:06 PM
 #29

if money is perfectly divisible then as the economy grows the size of the units shrinks.  Thus you get more "parts" instead of increasing the size of the pie.   
=> deflation. And deflation is BAD.
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August 04, 2010, 06:22:02 PM
 #30

=> deflation. And deflation is BAD.

Woot!  LOL!  :-)
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August 04, 2010, 06:28:23 PM
 #31

if money is perfectly divisible then as the economy grows the size of the units shrinks.  Thus you get more "parts" instead of increasing the size of the pie.   
=> deflation. And deflation is BAD.

Beautifully argued...  Here's some counterarguments:

http://mises.org/daily/1583

http://mises.org/books/deflationandliberty.pdf
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August 04, 2010, 06:46:28 PM
 #32


Beautifully argued...  Here's some counterarguments:

http://mises.org/daily/1583

http://mises.org/books/deflationandliberty.pdf

Interesting. Thanks for the references. But anyway, even if they are completely right, the deflation makes the growth speed lower. And this is worse then a faster speed, isn't it? So, why do we need deflation? if the inflationary economy works better?
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August 04, 2010, 08:06:21 PM
 #33


Beautifully argued...  Here's some counterarguments:

http://mises.org/daily/1583

http://mises.org/books/deflationandliberty.pdf

Interesting. Thanks for the references. But anyway, even if they are completely right, the deflation makes the growth speed lower. And this is worse then a faster speed, isn't it? So, why do we need deflation? if the inflationary economy works better?

Is it better for me to work this hour or to take a break? Working might grow the economy, but that doesn't mean it's better. And there's no way to know if working this hour will even grow the economy more over a long time period than taking a break. If I work straight from this point until I collapse, short term growth will be larger, long term  will suffer very much.

You could prop me up for a while by paying $100/hr, then $200/hr, eventually 10k/hr, then bust. Your goal ought not be too keep me working constantly, but to determine how much my labor is worth to you and offer no more than that. That gives me accurate info about how needed my work is and I'll determine the best amount to allocate.

So no, more growth now is not always better. EVEN IF all you care about is growth, because of long term consequences of cramming growth into the current period.

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falkenberg
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August 04, 2010, 08:19:16 PM
 #34

So no, more growth now is not always better. EVEN IF all you care about is growth, because of long term consequences of cramming growth into the current period.

It makes sense. Thanks for your view. But anyway, this is just a hypotheses that deflation is not so bad for the economy. To be on the safe side the monetary system shall reflect the total value of the economy and stimulate trading. IMHO
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August 04, 2010, 09:49:25 PM
 #35

It makes sense. Thanks for your view. But anyway, this is just a hypotheses that deflation is not so bad for the economy. To be on the safe side the monetary system shall reflect the total value of the economy and stimulate trading. IMHO

To the extent that inflation or deflation is predictable, willingness to loan or spend in the present should not be affected since then relating the value of money at different times is trivial, all other things being equal.

I think having a central authority attempt to fix some arbitrary price level only adds an extra layer of uncertainty.  If they have some sort of secret knowledge (AFAIK they don't, aside from their planned market manipulations), then why not simply publish it and let everyone act accordingly?

One must also consider the negative effects of arbitrary purchasing power redistribution and interest rate manipulation that most monetary management schemes entail.  This is why ideally I prefer a fixed money supply over even some kind of predictable monetary inflation or deflation.
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August 05, 2010, 12:07:20 AM
 #36

Things have changed since this time, RHorning. I just wonder why do you think the gold/silver based currency is better then the one used right now? I still did not get the point, why? The value of money shall reflect the current status of the economy IMHO. The more economy grows the more money are needed. Isn't it?

I didn't say that one particular kind of currency was any better or worse, but it is merely mis-representing the facts that the currency issued by the U.S. Treasury has always been "dollar-backed" without reference to metals and based on a "hard currency".

And no, the "more the economy grows" more money isn't always needed.  A real question that should be asked..... who gets to decide where the allocation of "new money" comes from if such a move is in theory needed?

Metal-backed currencies are for various reasons influenced by external events that may or may not be to the national interests of governments that are involved.  The Comstock Lode in Nevada certainly had a huge influence in the value of the U.S. Dollar for most of the late 19th Century, as did the California and some subsequent "gold rushes" in North America.  Certainly there was some local inflation that got as high as having eggs sell for $2 each and haircuts for $100... in the 1850's.  All of that money did eventually flow into the larger national economy as well over time.

The problem with a currency shortage is what to do when the smallest denomination has a value so large that you can't "make change" with it.  This was a problem with money early on in at least North America, where the local money supply was so tight that people couldn't really use things like metal coins for ordinary trade like for food, clothing, or shelter.  In Quebec, the supply of money was so short in the late 1600's that the government in one province confiscated all of the playing cards, had them signed by the governor and turned into money for day to day transactions.  This is a real issue in regards to a shortage of money, and something that Bitcoins does not suffer from.

As long as there is sufficient divisibility of the currency to be able to pay for ordinary items like a gumball or a single music download, it can be presumed that there is sufficient money supply to take care of basic needs in that society.

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August 05, 2010, 12:21:30 AM
 #37

+1BTC RHorning.   You hit the nail on the head.

Inflation/deflation is not a concern as long as the currency is divisible and the share of "ownership" remains constant and all contracts adjust as well. 

Whether you have 1 BTC and everyone gets issued a 2 for 1 then you get inflation, but the economy is fine as long as contracts and debts also adjust accordingly.

Divisibility provides a nice automatic way of adjusting the price system.   If the number of goods grows 10 fold then things that use to cost 0.01 will now cost 0.001.  You could "inflate" fairly by giving everyone 10 for 1 and thus the price will return to 0.01 but it wouldn't change a thing!

Always ask the question "who gets the new money".   As long as the answer is "me" then I am all for it.  If the answer is you or anyone else... HELL NO!


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August 05, 2010, 04:37:58 AM
 #38

I didn't say that one particular kind of currency was any better or worse, but it is merely mis-representing the facts that the currency issued by the U.S. Treasury has always been "dollar-backed" without reference to metals and based on a "hard currency".

OK so you have a point! ;-)  However, in my defense, let me explain what I was alluding to.

The initial silver Dollar was defined as the average amount of silver that is in the equivalent Spanish silver coin at the time. Those were the common trading currency of the time. The dollar needed parity if the coins were going to be interchangeable at that time.

But the common lament is "Oh, if I could take my 2010 FRNs to the Federal Reserve and demand a 1800 Silver coins I'd be rich! They've stolen all that value from me."

But even with the original silver coins, the commodity value of the silver was always less than the monetary value of the coin. That makes perfect sense if you think about it. A silver nugget has to be assayed, smelted, and pressed into coin. Part of the value of the coin is silver. The other part of the value is confidence in the "token" itself.

If the commodity value of the metal is ever more than the monetary value of the coin, it is rapidly taken out of circulation. Not by governments, but by individuals and traders. If I can pay one-dollars worth of corn for a coin, but melt it down into one-dollar and ten cents of silver, poof, they disappear. Simply sell the silver back for another dollar coin and start again. 10 times and you have a free dollar.

The point of the gold and silver standard was for trade between countries. It was less important for intra-country trade.
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August 05, 2010, 05:46:20 AM
 #39

Always ask the question "who gets the new money".   

New money as a credit go to someone who can afford this credit. To the one who satisfy market requirements better then others, the one who can pay back the credit. They are the propelling power of the economy.
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August 05, 2010, 03:31:24 PM
 #40

Always ask the question "who gets the new money".   

New money as a credit go to someone who can afford this credit. To the one who satisfy market requirements better then others, the one who can pay back the credit. They are the propelling power of the economy.

I wish this really were the case, but in the case of the current global economy and especially those who have assets in U.S. Dollars or in Euros, that is not really true.

For this latest recession, I'm not really certain who would have been the big losers had the governments simply had a "hands off" approach to monetary policy and let the major banks collapse due to their horrible loans and lack of judgment of credit worthiness.  Certainly many of the collaterallized mortgage obligations that brought about this current world-wide recession were based upon loans that were treated as AAA value loans when they should have recieved "junk" status instead.  There were some very wealthy people who were at the brink of losing all of their money (likely Warren Buffett and a few others) and a few prominent pension funds, but beyond some of those retirement funds it didn't really impact most ordinary people.

I could go on, but the point here is that the government is picking winners and losers all of the time, and doing that through fiscal policies that are allocating money to some individuals as a matter of law and arbitrary whim that has little or nothing at all to do with fiscal capacity or any other metric other than access to those in positions of political power and who gave the most in terms of political campaign donations in the past.  If a politician is given a billion dollars because they were able to in turn give ten billion to some banker or "investor", that doesn't sound like a good kind of monetary allocation system that is healthy in the long run for a representative democracy.  Similar kinds of actions are also happening in Europe, so don't think this is strictly an American or North American issue either.

There have also been numerous examples given regarding people receiving loans to build houses who were not particularly wealthy or with any sort of logic on the basis of credit worthiness but rather using values such as ethnicity and physical location of the property being the more significant factors involved.  When somebody working part-time at minimum wage was able to "afford" a half million dollar home, something was seriously out of whack.  Some sanity has returned to this particular market where it is now much harder to get a home loan (for a good reason), but it is the kind of largess that has been artificially inflating currencies like the Euro and the Dollar in huge ways and handing out "new money" that most ordinary people should object to.

For myself, if there is a need to inflate the currency (and that I'm not entirely certain is ever really true), it is better done by simply putting it in the hands of ordinary people and letting them decide what to do with it.  When the TARP program was originally proposed, it was suggested that perhaps everybody with a home mortgage would get a check from the federal treasury for the amount of approximately $150,000.  In terms of the money spent, it would have been pretty much a wash in terms of its impact on the federal treasury in the USA for the initial outlay.  In terms of economic activity and income returned to the federal government, arguably that sort of program would have caused the U.S. economy to roar back to life in a huge way that the next trillion dollar outlay has only dreamed about doing as well.  It also would have "solved" the CMO crisis in a way that those "junk" loans would have been paid off.  Almost all of that is "new money".  The question that should be asked...... who got it?  I'm talking trillions of dollars in "new money", not merely billions, and it is money that is currently in the global monetary markets right now.

For Bitcoins, I like the idea that at least those who are participating on the network and passing transaction information between one another are also at random intervals getting some of that "new money" from time to time.  It is more like the home owners getting that fat check from the government instead of bank executives.  You don't receive newly generated bitcoins due to political access or even based upon how much money you have... other than in a very loose manner in terms of how much CPU power you are putting into the network.  Any new monetary system does need to define where "new" currency is coming from and who is responsible for it.  This egalitarian and decentralized system of monetary allocation is something I really admire about Bitcoins and for me is one of its major strengths.

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