customdesigned on May 09, 2012, 11:26:35 pm
with the fradulent introduction of excess money. Nor does it explain how these
cycles came about back in the days when countries were still on the gold
standard and fradulent introduction of excess money was consequently
impossible.

I'll help you out on that one small point.  A gold standard does not
prevent inflation when you allow unsecured debt.

Here is the evolution:

1) Carrying gold around is inconvenient, so people bring it to a bank
   where it is stored in a vault.  They get a piece of paper proving
   their ownership of X units of gold in the vault.

2) People accept the pieces of paper as payment, since going to the
   vault to retrieve the actual gold is inconvienient.

3) The bank will lend gold at interest, offering either actual gold
   or the paper.  The paper is far more convenient.

4) The bank realizes that they can loan gold that belongs to depositors.
   People rarely come for the real gold, so no one is the wiser.
   This practice doubles the amount of paper representing gold - inflation.

The evolution continues to fiat currency, where a bank creates currency by simply printing/entering in the computer an IOU and there is never any material currency.   But you get the idea.  Debt inflates the money supply when the paper IOU is negotiable.

Scott on May 10, 2012, 08:55:47 am
That's a pretty fair summary. The practice you outline in Point 4 is called "fractional-reserve banking" by economists, as the banks only have a fraction of their deposits in the bank at any given time, with the balance going to borrowers. This is not so much a problem for time deposits, so long as the borrowers pay their notes on time, but when banks lend out their on-demand deposits they gamble that customers won't withdraw from their accounts more money than the banks have on hand. From time to time those gambles go bad as customers lose confidence, start withdrawing all their demand-deposit funds, and the banks experience a ruinous "run."

macsnafu on May 10, 2012, 09:11:27 am

4) The bank realizes that they can loan gold that belongs to depositors.
   People rarely come for the real gold, so no one is the wiser.
   This practice doubles the amount of paper representing gold - inflation.

The evolution continues to fiat currency, where a bank creates currency by simply printing/entering in the computer an IOU and there is never any material currency.   But you get the idea.  Debt inflates the money supply when the paper IOU is negotiable.

That's why you want a good auditing system in place.  In free banking, maybe the customers want to be reassured that the bank is actually holding their demand deposits and not loaning them out.  So banks could submit to auditing from some reputable firm and makes the results of the audit publicly available.
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

Aelar on May 10, 2012, 10:13:58 am

4) The bank realizes that they can loan gold that belongs to depositors.
   People rarely come for the real gold, so no one is the wiser.
   This practice doubles the amount of paper representing gold - inflation.

The evolution continues to fiat currency, where a bank creates currency by simply printing/entering in the computer an IOU and there is never any material currency.   But you get the idea.  Debt inflates the money supply when the paper IOU is negotiable.

That's why you want a good auditing system in place.  In free banking, maybe the customers want to be reassured that the bank is actually holding their demand deposits and not loaning them out.  So banks could submit to auditing from some reputable firm and makes the results of the audit publicly available.


Banks do submit to auditing which verifies they aren't loaning out more than $9 for every $10 deposited. (Well, that's a simplification).

Without fractional reserve banking, the supply of loanable funds would be greatly reduced. Most economists believe this would be a bad thing for investment.

How would we have appropriate liquidity with full-reserve banking?

myrkul999 on May 10, 2012, 10:23:00 am
How would we have appropriate liquidity with full-reserve banking?

Your project would have to have merit, which would encourage investors to actually put down real money to get it going. I think Kickstarter is a good example of how such a system might work.

macsnafu on May 10, 2012, 10:26:20 am

4) The bank realizes that they can loan gold that belongs to depositors.
   People rarely come for the real gold, so no one is the wiser.
   This practice doubles the amount of paper representing gold - inflation.

The evolution continues to fiat currency, where a bank creates currency by simply printing/entering in the computer an IOU and there is never any material currency.   But you get the idea.  Debt inflates the money supply when the paper IOU is negotiable.

That's why you want a good auditing system in place.  In free banking, maybe the customers want to be reassured that the bank is actually holding their demand deposits and not loaning them out.  So banks could submit to auditing from some reputable firm and makes the results of the audit publicly available.


Banks do submit to auditing which verifies they aren't loaning out more than $9 for every $10 deposited. (Well, that's a simplification).

Without fractional reserve banking, the supply of loanable funds would be greatly reduced. Most economists believe this would be a bad thing for investment.

How would we have appropriate liquidity with full-reserve banking?

Full-reserve banking only refers to demand deposit accounts, where people are free to "demand" their money at any time.  Time deposit accounts, like savings accounts and certficates of deposit, are specifically for loaning out--that's why they pay interest, to encourage people to put money in them.  That's also why they generally have restrictions on withdrawals, precisely because the money is loaned out.   The market rate of interest is based on the demand for borrowing money in relation to the supply of saving money, i.e., deferred consumption.

A central bank that maintains a monopoly on the production of money and deliberately injects new money into the economy to change the interest rates is thus interfering with the market and the market rate of interest, thus skewing the incentives for both saving and borrowing.  At lower rates of interest, there is a greater demand for borrowing, but fewer people will want to save, or defer their present consumption.  Thus, the more new money is injected, the more they have to continue to inject new money.  

However, since less saving (deferred consumption) is occurring, the resources that the borrowers need to complete their projects aren't available--which eventually leads to an economic bust of misallocation and unfinished projects.
« Last Edit: May 10, 2012, 11:06:16 am by macsnafu »
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

customdesigned on May 10, 2012, 10:29:55 am
There have also been times of hyper inflation on gold and silver standards - even with full reserve banking.  For instance, in the hey day of King Solomon, he collected tribute in the form of gold and silver from surrounding nations (interestingly, without conquering them - tribute was brought voluntarily to secure his favor, or hear his wisdom).  Despite being so all fired wise, he spent too much of the tribute in the local economy (as opposed to making gold shields for the palace and such) causing hyper inflation.  According to the Biblical description "silver was used for paving stones".  Not too different from using Continentals for toilet paper.  Now imagine that in the EFT universe someone discovers a large asteroid that is mostly gold/silver/platinum/other metallic currency.

myrkul999 on May 10, 2012, 10:43:43 am
There have also been times of hyper inflation on gold and silver standards - even with full reserve banking.  For instance, in the hey day of King Solomon, he collected tribute in the form of gold and silver from surrounding nations (interestingly, without conquering them - tribute was brought voluntarily to secure his favor, or hear his wisdom).  Despite being so all fired wise, he spent too much of the tribute in the local economy (as opposed to making gold shields for the palace and such) causing hyper inflation.  According to the Biblical description "silver was used for paving stones".  Not too different from using Continentals for toilet paper.  Now imagine that in the EFT universe someone discovers a large asteroid that is mostly gold/silver/platinum/other metallic currency.

Another way is to debase the actual currency, by "clipping" coins, or alloying them and re-minting. Both have been used historically to make money out of thin air.

An asteroid would have to be very large, and very pure, in order to destabilize the economy, even the Gold Rush only put a little dip in the relative value of gold.

myrkul999 on May 10, 2012, 07:53:51 pm
Sunny: What if Seamus invented a fabrication machine that could create gold/silver/platinum/other metallic currency from hydrogen, for the (present day) cost of a dollar a kilo. Jupiter has a mass of 1,900,000,000,000,000,000,000,000,000 kilos; you could manufacture 1,000,000,000,000 (a trillion) kilos a year for 190,000,000,000,000 (190 trillion) years before you'd even consume 10% of its mass. (That assumes an efficiency of 100% which probably wouldn't be possible, but what the heck!)

Well, there's always Bitcoin.

myrkul999 on May 10, 2012, 08:30:46 pm
If we assume that all the gold available as currency in the EFT universe is 165 million kilos,

That... is a bad assumption. Even a few years of mining will turn up a couple of big finds... which is the point of going up there to mine in the first place. And even if gold is as common as water, well, up in space, water is a pretty precious commodity. Fuel, air, and, of course, it's original purpose. Maybe the economy will be based on water, and not a precious metal.

myrkul999 on May 10, 2012, 09:10:58 pm

Well, there's always Bitcoin.

Sunny: Interesting.

http://en.wikipedia.org/wiki/Bitcoin

While we're not quite clear on how bitcoins are "mined", we see a potential problem. For now, there is a limit to how much can be mined based on computing cycles, electricity usage, and how much heat a processor can stand, but any technology that increases the speed and efficiency of processors, such as superconductance or quantum technology, could flood the market with bitcoins, unless artificial constraints are placed on the network to prevent that. Which wouldn't be much different different from the artificial constraints that might be used to prevent the production of too much fiat currency.

Bitcoins are mined by solving very hard math problems. If too many are mined, the math gets harder. If someone brought a quantum computer online, they'd soon be the only one getting the coins, but still at the same slow, steady - and steadily decreasing - rate. It's built into the protocol.

As for the gold, it honestly doesn't matter what the currency is based on (one of the potential currencies in the belt in EFT is Cokens - valued in liters of Coca-Cola), just so long as there is some limit other than the number of times you can hit the enter key to the production of the backing material.

J Tunks on May 10, 2012, 10:59:43 pm
Hold the gun, remember that we are fixing the gold mining rate & limiting the imports still. Using just gold will inevitably introduce some additional issues.

And what is up with the legal system, seems a whole too much like our own...

myrkul999 on May 10, 2012, 11:44:14 pm
Sunny: Okaaaaay. That makes sense as an analogy to gold mining. As the easiest gold is removed, it becomes harder to mine the rest. However, eventually you run out of gold, whereas theoretically you can never run out of bitcoins, being as there is no limit to the number of math problems.

Again, it's built into the algorithm that there's a hard limit of 21 million Bitcoins ever. The miners will continue to get rewards, but progressively smaller ones. It really is brilliant.

Quote
As for the gold, it honestly doesn't matter what the currency is based on (one of the potential currencies in the belt in EFT is Cokens - valued in liters of Coca-Cola), just so long as there is some limit other than the number of times you can hit the enter key to the production of the backing material.

We're not sure we understand that last part, after the parentheses, but a hard currency based on a manufactured good seems to us even worse. At least with gold it has to be located, mined, processed, transported and made into currency, naturally limiting its introduction into the market, whereas Cokens (for example) can be massed produced more easily and quickly. A manufacturer could gradually produce and build up a store of Cokens to ten times the amount "in circulation", then dump it on the market to devalue it. Of course the same thing could happen if some prospector drags home a trillion metric ton solid gold asteroid.

The point is, we don't see any mechanism in place to prevent this. The situation just seems to be based on the hope that it won't happen.

Of course, you can put in external controls that would force limits on how much of a vast new quantity of a commodity is introduced to prevent devaluation, but you could use the same controls to limit how much fiat currency is introduced to prevent hyperinflation. In fact, under these circumstances it seems that a commodity currency can become a fiat currency.

The Cokens are currency, backed by Coca-Cola. Each one is valued in an actual fluid unit of Coke. Sure, you could mass produce them, and flood the market with them, but when people tried to cash them in... It wouldn't end well. One side effect of caffeine withdrawal is crankiness. Rather elaborate way to commit suicide, if you ask me. Cokens, or the like, may be one of the most stable currencies in the belt. The point here is, something like a miner striking it rich with a huge nugget of gold, or a solid diamond asteroid, or whatever, is not the same as maliciously inflating a currency by hitting, as one person I know says, Ctrl-P. Even coin clipping, as bad as that is, is limited by the amount of coins that pass through your hands.

myrkul999 on May 11, 2012, 12:48:10 am
Sunny: Yeah, you're right, we forgot about that. But if the amount of bitcoins can never increase, then it can't expand with the economy. As the economy expands and more goods are produced, the purchasing power of bitcoins steadily decreases. At least with gold you can increase the currency in circulation to keep with production, assuming you have the extra gold.

Ah. But Bitcoins are also nearly infinitely divisible. Right now, I think the technology allows for 8 digits after the decimal point. That's more than enough to allow for expanding economy.

Quote
Not sure we're following you here. What we're talking about is the potential harm to a commodity-backed economy from flooding the market with a huge supply of the commodity, unless external (outside the market) controls are put in place to prevent the market being flooded. It doesn't much matter what the commodity is or how it's made.

But that doesn't sound any different from the harm that printing more fiat money would cause (except that the former results in hyper-deflation while the latter in hyperinflation).

Have you ever considered the logistics of "flooding the market" with Coca-Cola? That's a lot of sugar, water, and other ingredients. Especially a couple of AUs from earth. Even without the "shoot yourself in the foot" of devaluing your own product, that's a lot of delta-v to expend on a hair-ball scheme.

customdesigned on May 11, 2012, 07:29:07 am

We're not sure we understand that last part, after the parentheses, but a hard currency based on a manufactured good seems to us even worse. At least with gold it has to be located, mined, processed, transported and made into currency, naturally limiting its introduction into the market, whereas Cokens (for example) can be massed produced more easily and quickly. A manufacturer could gradually produce and build up a store of Cokens to ten times the amount "in circulation", then dump it on the market to devalue it. Of course the same thing could happen if some prospector drags home a trillion metric ton solid gold asteroid.

With a manufactured commodity, it actually costs something to make it.  If the current value of the commodity as currency is so vastly higher than the cost of manufacture (and raw materials) that such a scheme looks attractive, then it *needs* to be devalued.  Users of the currency will prefer a gradual devaluation, and in general that will happen.  As the currency value starts to rise above actual cost, a few people will try to make money on the difference, bringing it down again.  Look at todays currency exchange market.

To *really* screw things up with sudden huge devaluation, you need a government stepping in to, for instance, ban or regulate production of coca-cola.  That would provide the incentive for stockpiling and dumping.  Whenever the US government talks about "speculators" causing oil (or whatever) prices to rise excessively, it is a sure bet that the market is compensating for government interference (e.g. banning local production of oil).