The fatal flaw of Real Bills Doctrine

[johnyj]

John Law's Real Bills Doctrine says that banks can create fiat money backed by his assets

Originally, if a bank have one ounce of gold, then they are able to issue fiat money of corresponding value. The fiat money have the same purchase power as one ounce of gold, since they can redeem the gold at bank anytime

However, John Law went one step further, saying that if the bank have one acre of land, then they can issue fiat money of corresponding value, since they are backed by the value of that land

Adam Smith pointed out, this increased money supply will cause large inflation and will not help economy. However, his view is too academical, since the money creator will not be so foolish to use their new money to buy goods for daily consumption to trigger inflation, they will use those money to buy assets


Consider such a scenario:

The bank would start with a small amount of asset, say one acre land. They issue the money worth of one acre land, then bank can use those money to buy one more acre land. After they get the new land, they could issue money worth one acre land again, and use those money to buy another acre land...

After a while they have bought so much land and now the price of the land has increased, they can issue more money based on higher worth of their lands. They could keep doing this until they bought up most of the land in the country

And since the land price is not showing up in inflation statistics, they can keep buying like this for many years

To make it more aggressive, now they purchase not only land, but also debt, which is in fact future products and services. And purchasing debt is even better than purchasing land, since a high level of debt will put a downward pressure on consumption, so inflation will not be a problem no matter how much land they purchase


What does this mean?

If the money creation is based on the backing of assets, then money creator can acquire almost all assets if he just scale up his operation, without doing any meaningful work or giving anything valuable in return



On the contrary, gold or bitcoin is totally different, you can not issue money based on backing of anything, you must put real valuable resource to get it, this created an equal ground for value creation

[twiifm]

Bitcoin is made by Chinese computer farms.

Yeah this sure is more real than govt bonds.  Let's see who I'd trust more the ENTIRE tax base of the USA or some crappy Chinese business.  Him difficult choice

[odolvlobo]

It only works if the value of the land rises. If the value falls then the bank will fail if there is a run.

Also, it will cause inflation even if the money is used to buy assets.

[johnyj]

Bitcoin is made by Chinese computer farms.

Yeah this sure is more real than govt bonds.  Let's see who I'd trust more the ENTIRE tax base of the USA or some crappy Chinese business.  Him difficult choice

At least bitcoin miners put real resources in making bitcoin, while fiat money is just a promise

The entire tax base of the nation won't give you anything in return, that promise is not payable, e.g. you can not get your money to FED to exchange the bond that backing them. Only FED will decide when should they sell assets, and it seems that they will never sell assets, only buy

And the government's tax income is not enough to pay back their old debt + interest

[johnyj]

It only works if the value of the land rises. If the value falls then the bank will fail if there is a run.

Also, it will cause inflation even if the money is used to buy assets.

In modern fiat money system, the fiat money holder do not have the right to redeem the land, so banks will keep buying land using this trick and the available land will get less and less, thus the price will rise forever. The land price only drops if there is no new money inflow, but just look at what FED did, they printed 5x more money to buy those lands to support the price of them, actually the best time for them to buy the land is during an economy crisis

And it will not cause inflation if they purchase equal amount of national debt at the same time. A high ratio of debt will cause austerity, which reduce the consumption on daily goods, counter the inflation tendency of money printing

It's amazing that on one hand, they keep buying properties using printed money, on the other hand they keep buying debts using printed money and charge interest. The inflation effect of property purchase is negated by the deflation effect of more debt for the whole nation, how genius  

[twiifm]

It only works if the value of the land rises. If the value falls then the bank will fail if there is a run.

Also, it will cause inflation even if the money is used to buy assets.

In modern fiat money system, the fiat money holder do not have the right to redeem the land, so banks will keep buying land using this trick and the available land will get less and less, thus the price will rise forever. The land price only drops if there is no new money inflow, but just look at what FED did, they printed 5x more money to buy those lands to support the price of them, actually the best time for them to buy the land is during an economy crisis

And it will not cause inflation if they purchase equal amount of national debt at the same time. A high ratio of debt will cause austerity, which reduce the consumption on daily goods, counter the inflation tendency of money printing

It's amazing that on one hand, they keep buying properties using printed money, on the other hand they keep buying debts using printed money and charge interest. The inflation effect of property purchase is negated by the deflation effect of more debt for the whole nation, how genius  

Please cite source where the FED is buying land.  I call mythbusters in this claim

[criptix]

http://pages.stern.nyu.edu/~JStroebe/research/pdf/EstimatedImpactFederalReservesMortgage-BackedSecuritiesPurchaseProgram.pdf

[twiifm]

http://pages.stern.nyu.edu/~JStroebe/research/pdf/EstimatedImpactFederalReservesMortgage-BackedSecuritiesPurchaseProgram.pdf

Thats not buying land or real estate.  They're called securities.  As in Mortgage Backed Securities.  LOL

[Q7]

Problem is when they issue more money, the general common people's wealth get diluted. So in effect, indirectly we are working to pay off the land purchase but the difference here is that we don't own any share of the land.

[twiifm]

Problem is when they issue more money, the general common people's wealth get diluted. So in effect, indirectly we are working to pay off the land purchase but the difference here is that we don't own any share of the land.

Poor logic.  It dilutes anything denominated in USD including banks assets.

What is this land crap you are talking about.  If land belongs to the state then it belongs to the people of that state collectively.  As in PUBLIC. 

Stop being a whiny selfish prick and think somehow you are owed anything.  Or your share of taxes contribute more than the next guy

[johnyj]

http://pages.stern.nyu.edu/~JStroebe/research/pdf/EstimatedImpactFederalReservesMortgage-BackedSecuritiesPurchaseProgram.pdf

Thats not buying land or real estate.  They're called securities.  As in Mortgage Backed Securities.  LOL

As usual, banks will never tell you what they are actually doing, but you can get the concept step by step

From a higher level of abstraction, MBS is some kind of asset that has value, it does not matter it is gold or land or debt, they are all something with value. Issuing money backed by valuable asset is the spirit of Real Bill's Doctrine, MBS is the Real Bill here

From the name, MBS is a kind of security: A tradable financial asset, similar to bond. Bond is debt, backed by the promise of repay in future. So MBS is also backed by the promise of repay in future, but with one exception: It has a mortgaged house behind it. If the borrower defaults, bond becomes worthless, but when that mortgage defaults, MBS owner would take over the property as a compensation

So MBS is not only debt, but also a debt backed by the land. During a financial crisis this debt have a high rate of default (foreclosure), as a result the property will belong to MBS owner

FED purchased huge amount of MBS, because when house price crashed, many of these securities get defaulted and leave the banks with house. If banks sell these house on open market, they will crash the house price further and trigger a total melt-down of everything

So FED was actually buying these houses to prevent a house sell-off, but FED greatly benefited from this move and now all those houses are listed on the asset side of FED's balance sheet

[johnyj]

Problem is when they issue more money, the general common people's wealth get diluted. So in effect, indirectly we are working to pay off the land purchase but the difference here is that we don't own any share of the land.

Poor logic.  It dilutes anything denominated in USD including banks assets.

What is this land crap you are talking about.  If land belongs to the state then it belongs to the people of that state collectively.  As in PUBLIC.  

Stop being a whiny selfish prick and think somehow you are owed anything.  Or your share of taxes contribute more than the next guy

What is this "land belongs to people of that state collectively" you are talking about, is it a communist country?  

As I know, some western state governments are selling their property little by little to those bankers, due to that they can not afford to repay the loan

[grendel25]

So bitcoin needs a "made in China" stamp?  ha, makes sense

[johnyj]

So bitcoin needs a "made in China" stamp?  ha, makes sense

Strange logic, how did you reach this conclusion? Chinese miners are not cheap anymore

[twiifm]

Problem is when they issue more money, the general common people's wealth get diluted. So in effect, indirectly we are working to pay off the land purchase but the difference here is that we don't own any share of the land.

Poor logic.  It dilutes anything denominated in USD including banks assets.

What is this land crap you are talking about.  If land belongs to the state then it belongs to the people of that state collectively.  As in PUBLIC.  

Stop being a whiny selfish prick and think somehow you are owed anything.  Or your share of taxes contribute more than the next guy

What is this "land belongs to people of that state collectively" you are talking about, is it a communist country?  

As I know, some western state governments are selling their property little by little to those bankers, due to that they can not afford to repay the loan

I'm only talking about public land.  It belongs to the state.  The state is an entity that is comprised of the people belonging to that state.  The govt is elected by the people.  It's not communism.

If you think it's communism then you need to review junior high school civics class.

If the state auctions public property (like airwaves) to private enterprise then the money goes to the public coffers.  That money gets spent on public works which is to benefit all constituents of the state.

Gaawd why is it you don't know this?  If you don't like it vote for different representative or move out.  It's that simple

[dinofelis]

I'm only talking about public land.  It belongs to the state.  The state is an entity that is comprised of the people belonging to that state.  The govt is elected by the people. 

The state is not "the people" but a select group of people (politicians and high public office holders: aristocrats) that live good lives on the production of the rest of the people.

Elections is the joke that has been invented to make the rest of the people think they have something to say.  They do, in fact.  They can now choose, every so many years, WHO will be the clan that will be extorting you.   Elective aristocracy instead of hereditary aristocracy.
And yes, that does have positive effects: the elective aristocracy uses lies instead of violence to stay in power, and sometimes it even happens that it is simpler for them to do really something good instead of making it up.  But these are rare occasions.

[dinofelis]

John Law's Real Bills Doctrine says that banks can create fiat money backed by his assets

Originally, if a bank have one ounce of gold, then they are able to issue fiat money of corresponding value. The fiat money have the same purchase power as one ounce of gold, since they can redeem the gold at bank anytime

However, John Law went one step further, saying that if the bank have one acre of land, then they can issue fiat money of corresponding value, since they are backed by the value of that land

Adam Smith pointed out, this increased money supply will cause large inflation and will not help economy. However, his view is too academical, since the money creator will not be so foolish to use their new money to buy goods for daily consumption to trigger inflation, they will use those money to buy assets


Consider such a scenario:

The bank would start with a small amount of asset, say one acre land. They issue the money worth of one acre land, then bank can use those money to buy one more acre land. After they get the new land, they could issue money worth one acre land again, and use those money to buy another acre land...

After a while they have bought so much land and now the price of the land has increased, they can issue more money based on higher worth of their lands. They could keep doing this until they bought up most of the land in the country

And since the land price is not showing up in inflation statistics, they can keep buying like this for many years

To make it more aggressive, now they purchase not only land, but also debt, which is in fact future products and services. And purchasing debt is even better than purchasing land, since a high level of debt will put a downward pressure on consumption, so inflation will not be a problem no matter how much land they purchase


What does this mean?

If the money creation is based on the backing of assets, then money creator can acquire almost all assets if he just scale up his operation, without doing any meaningful work or giving anything valuable in return
On the contrary, gold or bitcoin is totally different, you can not issue money based on backing of anything, you must put real valuable resource to get it, this created an equal ground for value creation

Indeed.  That's the trick of ANY form of fiat money.  Seigniorage.  It goes somewhere.  It is even the case with bitcoin.  It isn't the case any more with gold (except for a few gold mines).

Seigniorage is the fundamental problem of any issuing of money, other than a genuine asset which has a large "usage" value: the one issuing it, gets buying power in return for nothing.  That is then taken on the back of those acquiring the new money.

The one who can issue money, can of course buy up the whole economy in the end.  Whether this is by "backed" money, or "thin air" money doesn't really matter.  The only advantage of "backed" money is that there will always be some finite supply of it, if the backing asset is a collectible, such as land or gold.

The one issuing money can use his seigniorage to make assets rise and fall and go against speculation and investment at will.  If the central bank buys up gold with newly printed money, it increases the gold price and makes in fact the seigniorage go partly to those already holding gold.  Later, they can dump that gold (they don't mind losing money as they can print it).  If the central bank buys X or Y asset, they make rich those holding those X or Y assets before.  

In this way, central banking (and some phone calls) is the perfect way to make "the friends of the state" hugely rich on the back of the people producing value.  Central banking is the ultimate state theft of value and production.

The only "fair" forms of seigniorage are:
- the seigniorage that has been historically diluted (gold has had its seigniorage already millennia ago)
- the seigniorage that is in one or other way equally distributed (everybody can print his own amount of money)
- the seigniorage that is randomly distributed (like in bitcoin with very high volatility, long inflation period, and so on).

[twiifm]

John Law's Real Bills Doctrine says that banks can create fiat money backed by his assets

Originally, if a bank have one ounce of gold, then they are able to issue fiat money of corresponding value. The fiat money have the same purchase power as one ounce of gold, since they can redeem the gold at bank anytime

However, John Law went one step further, saying that if the bank have one acre of land, then they can issue fiat money of corresponding value, since they are backed by the value of that land

Adam Smith pointed out, this increased money supply will cause large inflation and will not help economy. However, his view is too academical, since the money creator will not be so foolish to use their new money to buy goods for daily consumption to trigger inflation, they will use those money to buy assets


Consider such a scenario:

The bank would start with a small amount of asset, say one acre land. They issue the money worth of one acre land, then bank can use those money to buy one more acre land. After they get the new land, they could issue money worth one acre land again, and use those money to buy another acre land...

After a while they have bought so much land and now the price of the land has increased, they can issue more money based on higher worth of their lands. They could keep doing this until they bought up most of the land in the country

And since the land price is not showing up in inflation statistics, they can keep buying like this for many years

To make it more aggressive, now they purchase not only land, but also debt, which is in fact future products and services. And purchasing debt is even better than purchasing land, since a high level of debt will put a downward pressure on consumption, so inflation will not be a problem no matter how much land they purchase


What does this mean?

If the money creation is based on the backing of assets, then money creator can acquire almost all assets if he just scale up his operation, without doing any meaningful work or giving anything valuable in return
On the contrary, gold or bitcoin is totally different, you can not issue money based on backing of anything, you must put real valuable resource to get it, this created an equal ground for value creation

Indeed.  That's the trick of ANY form of fiat money.  Seigniorage.  It goes somewhere.  It is even the case with bitcoin.  It isn't the case any more with gold (except for a few gold mines).

Seigniorage is the fundamental problem of any issuing of money, other than a genuine asset which has a large "usage" value: the one issuing it, gets buying power in return for nothing.  That is then taken on the back of those acquiring the new money.

The one who can issue money, can of course buy up the whole economy in the end.  Whether this is by "backed" money, or "thin air" money doesn't really matter.  The only advantage of "backed" money is that there will always be some finite supply of it, if the backing asset is a collectible, such as land or gold.

The one issuing money can use his seigniorage to make assets rise and fall and go against speculation and investment at will.  If the central bank buys up gold with newly printed money, it increases the gold price and makes in fact the seigniorage go partly to those already holding gold.  Later, they can dump that gold (they don't mind losing money as they can print it).  If the central bank buys X or Y asset, they make rich those holding those X or Y assets before.  

In this way, central banking (and some phone calls) is the perfect way to make "the friends of the state" hugely rich on the back of the people producing value.  Central banking is the ultimate state theft of value and production.

The only "fair" forms of seigniorage are:
- the seigniorage that has been historically diluted (gold has had its seigniorage already millennia ago)
- the seigniorage that is in one or other way equally distributed (everybody can print his own amount of money)
- the seigniorage that is randomly distributed (like in bitcoin with very high volatility, long inflation period, and so on).

This theory is bunk.  I'd like to see just one historical example where this has happened. 

[dinofelis]

This theory is bunk.  I'd like to see just one historical example where this has happened.  

On the contrary.  Central Banks (FED) sell gold when it is cheap, and buy gold when it is expensive, which makes them make "losses" which don't matter as they print the money.

As such, they amplify the prices in the markets, to go against the speculators/investors gains (except for those in the knowing).

Gold exchange funds buying gold:
1997 0
1998 0
1999 0
2000 0
2001 0
2002 3
2003 39
2004 133
2005 208
2006 260
2007 253
2008 321 <- buying at low prices
2009 617 <- buying at low prices
2010 367.7 <- buying less at somewhat higher prices
2011 154.0 <- even more
2012 279.1 <- again somewhat more
2013 -880 <- selling
2014Q12 -42.5 <- selling at even higher prices


FED:

1997 $330.98 326 selling at low prices
1998 $294.24 363 selling at low prices
1999 $278.88 477
2000 $279.11 479
2001 $271.04 520
2002 $309.73 547
2003 $363.38 620
2004 $409.72 47
2005 $444.74 663
2006 $603.46 365
2007 $695.39 484 selling at low prices
2008 $871.96 235 speculators try to buy, so let's sell less too to counter them
2009 $972.35 34
2010 $1224.53 -77 higher prices, so let's buy instead of selling.
2011 $1571.52 -455  even higher prices, so let's buy even more.
2012 $1668.98 -544.1 peak buying
2013 $1411.23 -409.3 speculators start selling, so we shouldn't buy: lowering buying.
2014Q12  $1294.64 -242.1 counter the speculators trying to sell by buying less.

FED does identical movement as speculators and hence counter-acts them, increasing prices when they try to buy, and lowering prices when they try to sell.

Gold in metric tons.

[johnyj]

If the state auctions public property (like airwaves) to private enterprise then the money goes to the public coffers.  That money gets spent on public works which is to benefit all constituents of the state.

Gaawd why is it you don't know this?  If you don't like it vote for different representative or move out.  It's that simple

Thanks, I don't even know that I collectively own some airwaves  

I pay tax to government, like an expensive insurance, and then what they do with that money is their business, but just don't say that their properties are owned partially by me, I don't even get a dividend on those returns (if there is any)