The fatal flaw of Real Bills Doctrine

[johnyj]

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.

My analysis shows that backed money is indeed "out of thin air": As long as you have some spare asset, you can always issue money backed by them to buy more asset, and once you get more asset, you can issue more money, so the quantity of money that you can issue is only limited by the total available asset that you can buy in the whole world

To stop this kind of madness, it should be illegal to issue money backed by assets. If money can only be created by work or paying equal amount of valuables (for example exchange electricity for mining bitcoin), then that money will not create seigniorage

[aantonopoulis]

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.

My analysis shows that backed money is indeed "out of thin air": As long as you have some spare asset, you can always issue money backed by them to buy more asset, and once you get more asset, you can issue more money, so the quantity of money that you can issue is only limited by the total available asset that you can buy in the whole world

To stop this kind of madness, it should be illegal to issue money backed by assets. If money can only be created by work or paying equal amount of valuables (for example exchange electricity for mining bitcoin), then that money will not create seigniorage

I agree with you 100%.  "Backed" is a word which simply means "I am lying to you".  Even if well intentioned, it is an unverifiable, unstable, and a sure-to-fail situation.  Perhaps we should look to various alt-coin producers who are showing us the truth about this kind of language. 

[twiifm]

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)

The root of the problem is you don't understand what a state is.  So you don't understand public vs private.  And you don't know what a govt is designed to do.

Who do you think capitalised the iinternet infrastructure and where that capital came from?

[twiifm]

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.

Why is this considered buying up the entire economy?

[johnyj]

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.

My analysis shows that backed money is indeed "out of thin air": As long as you have some spare asset, you can always issue money backed by them to buy more asset, and once you get more asset, you can issue more money, so the quantity of money that you can issue is only limited by the total available asset that you can buy in the whole world

To stop this kind of madness, it should be illegal to issue money backed by assets. If money can only be created by work or paying equal amount of valuables (for example exchange electricity for mining bitcoin), then that money will not create seigniorage

I agree with you 100%.  "Backed" is a word which simply means "I am lying to you".  Even if well intentioned, it is an unverifiable, unstable, and a sure-to-fail situation.  Perhaps we should look to various alt-coin producers who are showing us the truth about this kind of language. 

This trick can even be practiced on gold and I believe that is how those banks accumulated huge amount of gold during a century. But since the amount of gold is limited, once they have bought most of the gold available on market, they could not create more fiat. So they eventually shifted the target to assets, then they could continue with their wealth accumulation at a much faster pace

[amspir]

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)

You don't find it useful that if some asshole down the street uses a spark gap generator to disrupt communications over your wi-fi or cell phone won't face some consequences?

 

[twiifm]

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.

My analysis shows that backed money is indeed "out of thin air": As long as you have some spare asset, you can always issue money backed by them to buy more asset, and once you get more asset, you can issue more money, so the quantity of money that you can issue is only limited by the total available asset that you can buy in the whole world

To stop this kind of madness, it should be illegal to issue money backed by assets. If money can only be created by work or paying equal amount of valuables (for example exchange electricity for mining bitcoin), then that money will not create seigniorage

I agree with you 100%.  "Backed" is a word which simply means "I am lying to you".  Even if well intentioned, it is an unverifiable, unstable, and a sure-to-fail situation.  Perhaps we should look to various alt-coin producers who are showing us the truth about this kind of language. 

This trick can even be practiced on gold and I believe that is how those banks accumulated huge amount of gold during a century. But since the amount of gold is limited, once they have bought most of the gold available on market, they could not create more fiat. So they eventually shifted the target to assets, then they could continue with their wealth accumulation at a much faster pace

If you've discovered this secret why aren't you out there rasing venture capital to start a bank?

[johnyj]

If you've discovered this secret why aren't you out there rasing venture capital to start a bank?

This is not a secret, John Law practiced this 300 years ago. Commercial bank do not have right to create money, only central banks can. Just look how FED and other central banks' balance sheet exploded while they acquire large amount of assets since 2008

[criptix]

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

U should try to read the whole thread again and also understand it.
all you posts display alot of non understanding of this topic

[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

U should try to read the whole thread again and also understand it.
all you posts display alot of non understanding of this topic

Nope.  Sorry bud I've yet to see any evidence that the Fed buys land or real estate.  And who cares if they do? 

[twiifm]

If you've discovered this secret why aren't you out there rasing venture capital to start a bank?

This is not a secret, John Law practiced this 300 years ago. Commercial bank do not have right to create money, only central banks can. Just look how FED and other central banks' balance sheet exploded while they acquire large amount of assets since 2008

Oh yes they do, Commercial banks create credit money. 

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

So what if their balance sheet expanded?  Still has nothing to do with them "buying the economy"

[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.

Why is this considered buying up the entire economy?

This is not "buying up the entire economy", this is "distributing seigniorage to friends" and causing volatility in the gold market (so that it can serve less as a safe store of value).

There is absolutely no good reason for a central bank to *increase* asset volatility, if it isn't to have "friends" profit from it, an to render the asset less secure as a store of value.

[dinofelis]

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.

My analysis shows that backed money is indeed "out of thin air": As long as you have some spare asset, you can always issue money backed by them to buy more asset, and once you get more asset, you can issue more money, so the quantity of money that you can issue is only limited by the total available asset that you can buy in the whole world

To stop this kind of madness, it should be illegal to issue money backed by assets. If money can only be created by work or paying equal amount of valuables (for example exchange electricity for mining bitcoin), then that money will not create seigniorage

EVERY issuing of money causes seigniorage, it is unavoidable. 

In fact, at first sight, the asset-backed method isn't so bad.  It is when analysed deeper that there is a serious problem with it.

What happens actually with an asset-backed fiat, is that the asset is taken out of the economy, and stored in some safe, and that the corresponding value is issued in fiat.  The trick of "buying more and more" can only happen if the asset against which the money is backed, is confiscated in some way, and then, the taking actually happens at that moment, and not at the moment of issuing the money.

What this procedure tries to establish, is a seigniorage-less monetizing of an asset.  It isn't (at first sight) as stupid as it is presented here.

Suppose that people possess gold.   Some have a lot of gold, other have less gold.  Now suppose that the fiat-issuer (call it "the state") wants to monetize that gold, by issuing fiat backed by gold.

The state can now print a certain amount of fiat money, and BUY the gold from different people (giving them the money in return).  As such, the gold that was in the hands of the people, is now in the central bank, and the fiat money that was printed by the central bank, is now in the hand of the people.  The state cannot spend it a second time.  The state now has gold, which serves as "backing" of the fiat money, and has taken that gold out of the economy.

At first sight, the state just monetized gold, and nobody got any seigniorage.  People who got the fiat bills, gave their gold in place.

The state now has the gold, but doesn't have the fiat any more.    There has just been an exchange of gold against fiat money.

However where this goes wrong is that the very fact of buying up the gold has increased enormously the price of gold.  People who had gold before, had less buying power, than when they sold their gold for fiat, because the demand for gold, with this buying up by the state, has increased enormously over the normal demand of gold.  So there HAS been a lot of seigniorage, and it went in the hands of those that possessed gold (which they acquired at a lower price than when they sold it at the state).

I took gold as an example, but you can take any valuable asset.  You can take land, you can take shares in companies, just anything that has some value.  By "buying up the asset with fiat" you *apparently* avoid generating seigniorage.  In reality that's not true, because the increased demand (by the state) of the asset increases its price, and the seigniorage hence goes into the hands of those holding the asset when the state decides to buy it up.

Suppose that the state suddenly buys up Beanie Babies for freshly issued fiat.  Beanie Babies which were at $ 50.-, will, due to this increased demand, go to, say, $ 300.- and people that had spend $ 50 on it, will make a 6x benefit which is the seigniorage.  If the price would remain at $ 50.-, there wouldn't be any seigniorage, because for every $50.- fiat issued, $50.- of Beanie Baby will have been taken out of the economy.

The problem with asset-backed fiat is that the asset that is taken, increases in price.  This is a disaster for the USE of the asset - so you better have an asset that has no use (but then, has no value!).

What the state does with that action, is to force a certain asset indirectly to become a monetary asset, but transfers the monetary value to its fiat counterpart.

[johnyj]

The problem with asset-backed fiat is that the asset that is taken, increases in price.  This is a disaster for the USE of the asset - so you better have an asset that has no use (but then, has no value!).

What the state does with that action, is to force a certain asset indirectly to become a monetary asset, but transfers the monetary value to its fiat counterpart.

The focus is not on the price rise and fall of the asset, let's suppose the price never changes. For example, under a gold standard the gold price is fixed at $35 per ounce, you can always redeem one ounce of gold with $35 at FED

It is a double spending problem. When you spend your gold coin, when coin is gone, the ownership of the coin is also gone, you have nothing left. But when you issue fiat money that is backed by your gold coin, after you spend the paper money, the ownership of the fiat money is gone, but you still have the ownership of the gold, until someone redeem it. In fact if no one redeem it, you can spend that gold coin again, this makes it a double spending

In fact, by simply limit the possibility to redeem the gold, you can double the amount of your purchasing power by issuing fiat money. This double spending practice violates the very basic principle of fair trade

When Nixson officially ended the convertibility of gold and USD, all the outstanding USD should have lost their backing and became worthless. The reason they did not crash to zero is just because there is a consensus on USD's value in transaction. So the successful of a double spending really depend on the consensus of fiat money's value

In a game, if you discovered a bug that let you spend the same money twice, you will quickly buy everything you want by simply repeat the process. But in reality, this bug is utilized by central banks world around and it seems no one cares

[johnyj]

If you've discovered this secret why aren't you out there rasing venture capital to start a bank?

This is not a secret, John Law practiced this 300 years ago. Commercial bank do not have right to create money, only central banks can. Just look how FED and other central banks' balance sheet exploded while they acquire large amount of assets since 2008

Oh yes they do, Commercial banks create credit money. 

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

So what if their balance sheet expanded?  Still has nothing to do with them "buying the economy"

Commercial bank create large amount of checkbook numbers in their database, but they are not real money, when they run out of real money, they went down, together with your numbers in your accounts, which has never existed in reality until you do a full withdraw. Just like your bitcoin count on bitcoin exchanges, they are numbers in a database, not on blockchain

[dinofelis]

The problem with asset-backed fiat is that the asset that is taken, increases in price.  This is a disaster for the USE of the asset - so you better have an asset that has no use (but then, has no value!).

What the state does with that action, is to force a certain asset indirectly to become a monetary asset, but transfers the monetary value to its fiat counterpart.

The focus is not on the price rise and fall of the asset, let's suppose the price never changes. For example, under a gold standard the gold price is fixed at $35 per ounce, you can always redeem one ounce of gold with $35 at FED

It is a double spending problem. When you spend your gold coin, when coin is gone, the ownership of the coin is also gone, you have nothing left. But when you issue fiat money that is backed by your gold coin, after you spend the paper money, the ownership of the fiat money is gone, but you still have the ownership of the gold, until someone redeem it. In fact if no one redeem it, you can spend that gold coin again, this makes it a double spending

Strictly speaking, no, because that's fractional backing.  In full backing, you have to hold exactly the quantity of gold that you bought by issuing the fiat.  In other words: when you issue $35, you give those printed $35 to someone holding an ounce of gold, who hands over that ounce of gold in return for the $35.

Now, you (as a state, or central bank) have to hold that ounce of gold as long as these $35 are not returned (which comes down to redeeming it).  As such, the fiat is then just a "Mirror" of the gold in the safe of the central bank.

If applied strictly, that system is not entirely stupid.  The real problem with it, as I said, is the fact that this demand for gold will of course make the price of gold go up (there will be less in circulation because a big chunk of it has now been stored in the central bank vaults after it being bought with fiat).

In fact, by simply limit the possibility to redeem the gold, you can double the amount of your purchasing power by issuing fiat money. This double spending practice violates the very basic principle of fair trade

Yes, but that is then not "gold backed" fiat, but only partially backed fiat.

[twiifm]

If you've discovered this secret why aren't you out there rasing venture capital to start a bank?

This is not a secret, John Law practiced this 300 years ago. Commercial bank do not have right to create money, only central banks can. Just look how FED and other central banks' balance sheet exploded while they acquire large amount of assets since 2008

Oh yes they do, Commercial banks create credit money. 

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

So what if their balance sheet expanded?  Still has nothing to do with them "buying the economy"

Commercial bank create large amount of checkbook numbers in their database, but they are not real money, when they run out of real money, they went down, together with your numbers in your accounts, which has never existed in reality until you do a full withdraw. Just like your bitcoin count on bitcoin exchanges, they are numbers in a database, not on blockchain

Of course it's real money.  The entire global economy is built on this. 

They can't run out of money if they create it ex nihilo.  They can only run out of borrowers

[dinofelis]

Of course it's real money.  The entire global economy is built on this.  

They can't run out of money if they create it ex nihilo.  They can only run out of borrowers

Indeed, it is real money.  Money is "real money" if enough people think of it as "real money".
A bank account with a big number on it is seen, by most people, as "real money" so it IS real money.

You are willing to hand me over your house if I give you my bank account with a very big number on it.
That is what proves that it is "real" money.

The funny property of money is that money is money because enough people say/think so.

However, it is not because something is "real money" that it is WORTH A LOT.  The "price" of money depends essentially on how it is issued, how much is circulating, how much is (expected) to be circulating, and how confident people are in its ability to be a store of value (and are storing value in it for that reason).

If "real money" is too volatile, it will stop being considered as money by many, and hence it will stop being money.
(that's called hyperinflation).

[johnyj]

Of course it's real money.  The entire global economy is built on this.  

They can't run out of money if they create it ex nihilo.  They can only run out of borrowers

It is interesting to discuss what is REAL money

Many people thought that their bitcoins on MTGOX are real, since they could sell them for fiat and use fiat to buy them on MTGOX. But as long as they don't withdraw, those bitcoins are just numbers on MTGOX's database

In fact those coins might have disappeared as early as 2011, and MTGOX were just playing a game of mixed FRB and using new customers deposit to cover the old customer's withdraw

This is very similar to what banks are doing. Bank's settlement network can be regarded as a giant exchange similar to MTGOX, where every people put their fiat in and trading against each other (in fact their goods are not listed on this exchange, banks purely exchange numbers between different accounts)

When you withdraw fiat money on an ATM, you get real money (cash notes and coins). In a system of 100% backing, numbers on your bank account is backed by real money, but in reality, banks all run FRB. And when they are running out of money, they go to FED asking for new money to pay the old customer

Banks will never run out of borrowers, they borrow from each other, and that is their daily business. But since the aggregate real money is limited, no matter what kind of borrowing activity they carry out, they will run out of real money as a whole in a liquidity crisis (liquidity means real money's liquidity), without real money, they go bankrupt

I modify the dinofelis's word a bit here: Bitcoin is "real bitcoin" if enough people think of it as "real bitcoin". You will clearly see this is not true, bictoin is real bitcoin if you can see them on blockchain

Unfortunately, in today's fiat money system, there is no tools like blockchain to let people inspect the flow of real money, they can only believe what banks tell them, only exchange owners (e.g. banks) know how much real money they have.

That is the reason when the banks all had a liquidity problem, they will create a large shock in economy, just like MTGOX did. Unlike MTGOX, their scale is millions of times larger, if they failed, every one on this giant exchange will lose shirt, thus they must be bailed out by FED using real money, and FED's real money as discussed in RBD theory above are in fact created out of nothing, to make the whole scheme even more unreal

[dinofelis]

It is interesting to discuss what is REAL money

Real money is what many people accept as real money in exchange for goods and services.
It doesn't matter what is its form, who created it, how many there is of it.  As long as enough people believe it is real money, it IS real money.

Many people thought that their bitcoins on MTGOX are real, since they could sell them for fiat and use fiat to buy them on MTGOX. But as long as they don't withdraw, those bitcoins are just numbers on MTGOX's database

It was real money until it wasn't any more

There's no guarantee that anything that is "real money" at moment t0, is still real money at moment t1.

Real money is a kind of "speculative lock-in", a kind of meta-stable situation, which can last for centuries, or just for a week.