Jason's or the LP's stance on money creation

[Bomb#20]

People can use barter or bitcoin ir whatevee they want.

That would only be true in El Salvador.

In the US the federal government requires taxes be paid only by US currency.

It's their money, and their taxes.

Why should they accept anything else in payment of their taxes?

Because if people don't pay their back taxes the IRS seizes their property. So if you do all your economic activity in Snickers instead of in dollars, so when the IRS comes to collect they find you own nothing but a giant pile of Snickers, they're pretty much going to have to accept payment in Snickers.

 

[laughing dog]

People can use barter or bitcoin ir whatevee they want.

That would only be true in El Salvador.

In the US the federal government requires taxes be paid only by US currency.

Checks (which are not currency) are accepted, as are electronic transfers. You can even pay by credit card. None of those payment forms are US currency. One of those is not even money. All have to be in US currency.

But mone

 

[Swammerdami]

... I've only just now heard of El Salvador's BitCoin experiment. But what is it, really?

Wiki suggests that U.S. dollars were the money in El Salvador 2001-2021. Is that correct? I assume prices are still shown in dollars? Are we waiting to see how many contracts are revised to measure money in BitCoin? Do they have a (dollar/bitcoin) bimetalism ?!! as major western powers had (with gold/silver) during much of the 19th century? It seems safe to assume that they do NOT hope to maintain a fixed exchange rate between these two "metals"! The El Salvadoran government could go through its reserve quite quickly, if it committed itself to paying BitC while still collecting dollars in taxes and tariffs.

I'll need to see details before I agree that they've replaced their old money (USD?) with BitCoin-as-money.

For that's what "money" is all about -- defining a unit of money which can be specified in contracts. Are employment contracts, house/auto sales still defined in dollars in El Salvador? When, if ever, might we expect that to change?

Although I ONLY read the Wiki article, I do NOT think El Salvador has switched to BitCoin as money in any real sense.

In legal documents, people depend on clear definitions for words like "meter" and "month." And a unit for money is absolutely essential in most contracts. If, for example, that unit is "U.S. Dollar", the definition of the dollar will be very important. For example, in a very large purchase agreement negotiated between the governments of U.S.A. and France in 1803 we see

Article 3: It is agreed that the Dollar of the United States Specified in the present Convention shall be fixed at five francs 3333/100000 or five livres eight Sous tournois. ...

In the "Libertarian" scenario where dozens of new moneys arise and compete for attention, how will contracts be written? If one party insists on "mollars" while the other wants "zollars" will a fixed-exchange rate be built into the contract? Rightly or wrongly, "might makes right" and I think most will prefer to work with whatever money the relevant government mandates.

If an El Salvadoran wants to pay his tax in BitCoin instead of dollar, what would he do exactly? If some form of BitCoin becomes the active currency, I suppose it would be "bank-created" with central bank or treasury managing this money. Surely interactions with the blockchain would be avoided due to costs and latency.

You would pay your tax the same way you pay anyone else who accepts bitcoin. And unlike a conventional currency the receiver who accepts bitcoin knows instantly real money has made it to their account, unlike a check or money order that still has to clear through a third party. Bitcoin is its own central bank. So if everyone adopted bitcoin there would be far less costs and latency due to no third party handlers.

You speak hypothetically. I think El Salvador still operates with dollars, period.

And if a cryptocurrency DOES become a country's currency, I recommend against pure BitCoin: the costs and latency associated with the BlockChain are built in -- "third-party handlers" are useful for REDUCING cost and latency.

The idea that people can invent, and widely agree on a successful new sort of money by themselves seems unlikely to me. Except for the invention of precious-metal money 5000 years ago, and other intrinsic-worth money (e.g. tobacco) I don't think there has EVER been a successful invention of money. (Here I set aside fiat moneys which led to rampant inflation, and bank-created money which evolved naturally rather than being "invented.")

Of course if it arises spontaneously, it won't be my people sitting around in a meeting. At first there may actually be 179 different flavors, but ultimately a few will win out over the others. It wasn't because daddy said so that the kids wound up choosing mini-snickers as their medium of exchange during candy trading. Nor was it because they all sat down and said "okay, which of these will we use to decide how to trade candy?" It just evolved during the trading as it was noticed that there were enough of them to facilitate trading and most kids liked this particular candy.

In your scenario, all contracts would need to be rewritten, and elaborate money-changing mechanisms would be needed.

I devoted time and effort to the History of money, 20th century and earlier thread to show how rare changing to a new system of money actually was (setting aside devaluations). In ancient Sumeria silver was used as money 5000 years ago, and this remained the standard until gold became the standard in the 18th and 19th centuries. Bank-created money was irrelevant to the pure definition of money: it was denominated simply as silver or gold. The world's monetary systems were weaned from precious metal in a TWO-step process (1933, 1971) but central banks were powerful and respected so the severance from gold caused little trouble. The 38-year transition (Bretton-Woods) probably was responsible for the smoothness of the change.

Libertarians generally cite INFLATION as the reason they oppose the Fed. In fact the inflation rate averaged over the FRB's 111-year history is 3.15%, not far from what many economists view as optimal. Because of compounding, this means that today's dollar has the buying power of just 3.2¢ in 1913 money. SO WHAT? Some YouTubes pretend that this was a 96.8¢ loss to ordinary people. But in fact the losers were just those who buried their banknotes in 1913 and waited 111 years to spend them.

(If someone wants to review Inflation Regimes and Inflation Expectations please offer us an explanation of "unit root" and its relation to inflation rate.)

 

[laughing dog]

Libertarians generally cite INFLATION as the reason they oppose the Fed. In fact the inflation rate averaged over the FRB's 111-year history is 3.15%, not far from what many economists view as optimal. Because of compounding, this means that today's dollar has the buying power of just 3.2¢ in 1913 money. SO WHAT? Some YouTubes pretend that this was a 96.8¢ loss to ordinary people. But in fact the losers were just those who buried their banknotes in 1913 and waited 111 years to spend them.

The mix and quality of products today is much different than those of 1913. There really is no way to make any sort of meaningful comparison. Yes, bread and movies were cheaper in 1913. Bread was probably of much higher quality than it is now. On the otherhand,. movies were silent and in black and white. There were no computers or cellphones back then. Getting the flu or leukemia meant a much higher risk of death. Air conditioning was non-existent and travelling anywhere took much longer. And those are just a few things that come to mind.

 

[RVonse]

Libertarians generally cite INFLATION as the reason they oppose the Fed. In fact the inflation rate averaged over the FRB's 111-year history is 3.15%, not far from what many economists view as optimal. Because of compounding, this means that today's dollar has the buying power of just 3.2¢ in 1913 money. SO WHAT? Some YouTubes pretend that this was a 96.8¢ loss to ordinary people. But in fact the losers were just those who buried their banknotes in 1913 and waited 111 years to spend them.

3.15% inflation is horrible. Our currency is almost unusable because of what you view as acceptable inflation. We now have the penny in circulation that are so worthless they can't buy anything. Our nickels, dimes, and quarters that used to buy sodas will now almost buy nothing. Just a simple transaction like paying $1500 rent is difficult because we don't have a $1000 dollar bill which means a big wad of hundreds has to be carried. Back in the 1920's you would have easily paid your rent without having to haul around a huge wad of paper.

Other huge issues because of this inflation:

1. The cantillion effect - redistributes power to a select class of people who always benefit first in the money supply.

2. Misallocation of scarce resources

3. Lack of incentive to save causing insufficient capital for manufacturing and production.

4. Inability to plan retirement. How large does the nest egg need to be when you can't determine what the nest egg is really worth?

 

[Swammerdami]

Libertarians generally cite INFLATION as the reason they oppose the Fed. In fact the inflation rate averaged over the FRB's 111-year history is 3.15%, not far from what many economists view as optimal. Because of compounding, this means that today's dollar has the buying power of just 3.2¢ in 1913 money. SO WHAT? Some YouTubes pretend that this was a 96.8¢ loss to ordinary people. But in fact the losers were just those who buried their banknotes in 1913 and waited 111 years to spend them.

The mix and quality of products today is much different than those of 1913. There really is no way to make any sort of meaningful comparison. Yes, bread and movies were cheaper in 1913. Bread was probably of much higher quality than it is now. On the otherhand,. movies were silent and in black and white. There were no computers or cellphones back then. Getting the flu or leukemia meant a much higher risk of death. Air conditioning was non-existent and travelling anywhere took much longer. And those are just a few things that come to mind.

Yes. Of course.
This is all the more reason why any focus on an inflation rate in a 3% ballpark, is focus wasted.

Perhaps Jason or RVonse can say what they consider the big problems with the FRB to be.

Mentioned perhaps more often than inflation is capital misallocation. (I think large purchases of fiber optic cable in the late 1990's, which then lay fallow for several years, is a go-to example of such misallocation.)

I personally think a much BIGGER problem of misallocation arose especially under Bush-43 and Trump. To WIT, failure to invest in public infrastructure, but rather pushing up asset prices (partly due to liberal money-creation) and allowing new rent-collectors instead. BUT if a NEW system (abolishing the FRB) is to be used to define the U.S. Dollar, we'll need specifics from the anti-FRB clique as to HOW it works and WHY it would be expected to improve on the system based on a (post-Roosevelt) central bank.

 

[bilby]

Yes, bread and movies were cheaper in 1913. Bread was probably of much higher quality than it is now.

That was far from universally true. The best bread in both eras was of similar quality; The worst bread widely available in 1913 was of such poor quality it would kill your children, and make you very unwell indeed.

https://www.bbc.com/news/uk-25259505.amp

 

[bilby]

3.15% inflation is horrible. Our currency is almost unusable because of what you view as acceptable inflation.

That's absurd. Hundreds of millions of people use US dollars daily; It's about as far from "unusable" as you can get.

We now have the penny in circulation that are so worthless they can't buy anything.

That's a good argument for abolishing it. Here in Australia, our smallest coin is 5¢, and this doesn't seem to be a problem beyond the occasional confused tourist.

Our nickels, dimes, and quarters that used to buy sodas will now almost buy nothing.

Yes. So? I am not seeing how that's a problematic consequence of inflation, and not just a reiteration of the fact that inflation has occurred.

Just a simple transaction like paying $1500 rent is difficult because we don't have a $1000 dollar bill which means a big wad of hundreds has to be carried.

Nonsense. Carrying very large sums in cash has been dangerous and foolish for a long time, and large cash transactions tend to be frowned upon, as they represent a significant risk of theft or robbery. There are plenty of ways to pay $1,500 rent without anyone touching a single banknote - you can write a check, or have your bank issue one; You can buy a money order; You can transfer the money electronically, directly from one bank to another (or between accounts in the same bank).

Cash is rapidly becoming obsolete here; I haven't used it at all for years, other than on overseas trips.

Our largest banknote ($100AUD) was almost never seen in regular transactions, even back in the days when most retail transactions were in cash. The majority of AU$100 bills circulate in the black economy.

Back in the 1920's you would have easily paid your rent without having to haul around a huge wad of paper.

It is even more easy to do so today.

 

[Elixir]

3.15% inflation is horrible. Our currency is almost unusable because of what you view as acceptable inflation.

That's absurd. Hundreds of millions of people use US dollars daily; It's about as far from "unusable" as you can get.

We now have the penny in circulation that are so worthless they can't buy anything.

That's a good argument for abolishing it. Here in Australia, our smallest coin is 5¢, and this doesn't seem to be a problem beyond the occasional confused tourist.

Our nickels, dimes, and quarters that used to buy sodas will now almost buy nothing.

Yes. So? I am not seeing how that's a problematic consequence of inflation, and not just a reiteration of the fact that inflation has occurred.

Just a simple transaction like paying $1500 rent is difficult because we don't have a $1000 dollar bill which means a big wad of hundreds has to be carried.

Nonsense. Carrying very large sums in cash has been dangerous and foolish for a long time, and large cash transactions tend to be frowned upon, as they represent a significant risk of theft or robbery. There are plenty of ways to pay $1,500 rent without anyone touching a single banknote - you can write a check, or have your bank issue one; You can buy a money order; You can transfer the money electronically, directly from one bank to another (or between accounts in the same bank).

Cash is rapidly becoming obsolete here; I haven't used it at all for years, other than on overseas trips.

Our largest banknote ($100AUD) was almost never seen in regular transactions, even back in the days when most retail transactions were in cash. The majority of AU$100 bills circulate in the black economy.

Back in the 1920's you would have easily paid your rent without having to haul around a huge wad of paper.

It is even more easy to do so today.

You don't know - Vonse may well work a job that only pays cash tips, and maybe he can't afford - or doesn't want to afford - the transaction fees that banks charge. And if he gets paid in nickels, well, you just have to feel sorry for the guy lugging heavy bags of metal with no intrinsic value around. God forbid he should need to buy a car; he'll first need to buy a truck to haul his cash to the dealer.
In any event, it's another terrible thing about Biden.

 

[Swammerdami]

3.15% inflation is horrible.

I think many economists agree that 2% inflation is more useful than Zero %. If you find fault with that, please start a new thread to focus on that particular misconception.

In a post in the other thread I linked to a paper discussing "expected inflation." But we don't need the technical details to know that when inflation is PREDICTED, it has little adverse effect.

Labor expects prices to rise. --> They won't sign long-term wage contract without COLA.
Bankers know they'll be repaid in dollars worth (2% per annum) less. --> They'll add that 2% to the interest rate they charge.
Ordinary citizens who HOARD money will suffer, in effect, a 2% per annum tax. --> This ENCOURAGES their search to put capital to work; it rewards entrepreuners. Money hoarders will learn to put the money back to work quickly -- buy a new clothes washer or vehicle before the price goes up.

Our currency is almost unusable

I advise you to rephrase this if called to testify when an oath against perjury is taken.
The Almighty Dollar, while waning perhaps, is still the Beaconing Paragon of Money throughout the world! Far cry from "almost unusable." In fact it is the default money in several foreign countries including El Salvador.

... because of what you view as acceptable inflation.
We now have the penny in circulation that are so worthless they can't buy anything. Our nickels, dimes, and quarters that used to buy sodas will now almost buy nothing.

I propose to get rid of the penny, and replace the nickel with an ugly largish zinc 5-cent piece. Sign on?

Just a simple transaction like paying $1500 rent is difficult because we don't have a $1000 dollar bill which means a big wad of hundreds has to be carried. Back in the 1920's you would have easily paid your rent without having to haul around a huge wad of paper.

Here in Chiang Mai almost everybody pays for almost everything by just showing their iPhone/Androids to each other.

Other huge issues because of this inflation:

1. The cantillion effect - redistributes power to a select class of people who always benefit first in the money supply.

Is this not an artifact of money creation rather than inflation?

2. Misallocation of scarce resources

Examples please.

3. Lack of incentive to save causing insufficient capital for manufacturing and production.

Are cash-like "money market funds" in common use today in U.S.? Honest question; I don't know.
Availability of capital in today's U.S. is not the problem, right? Unless you conflate this issue with the alleged misallocation.

4. Inability to plan retirement. How large does the nest egg need to be when you can't determine what the nest egg is really worth?

Remember: We're distinguishing PREDICTED inflation from UNEXPECTED inflation. The line may be fuzzy, but it's clearly important.

The 3.15% average inflation would be much less if certain specific outliers are excluded: 1916-20 (partly reversed 1921-22), 1941-43, 1946-48, 1973-81 (Opec shock), 2021-2023 (Covid shock). There was also a major DEFLATIONARY shock 1930-33.

 

[Bomb#20]

Just a simple transaction like paying $1500 rent is difficult because we don't have a $1000 dollar bill which means a big wad of hundreds has to be carried.

Nonsense. Carrying very large sums in cash has been dangerous and foolish for a long time, and large cash transactions tend to be frowned upon, as they represent a significant risk of theft or robbery. There are plenty of ways to pay $1,500 rent without anyone touching a single banknote - you can write a check, or have your bank issue one; You can buy a money order; You can transfer the money electronically, directly from one bank to another (or between accounts in the same bank).

Cash is rapidly becoming obsolete here; I haven't used it at all for years, other than on overseas trips.

Our largest banknote ($100AUD) was almost never seen in regular transactions, even back in the days when most retail transactions were in cash. The majority of AU$100 bills circulate in the black economy.

Back in the 1920's you would have easily paid your rent without having to haul around a huge wad of paper.

It is even more easy to do so today.

Check your privilege. What you describe is great for those of us rich enough that banks can make a profit by selling us financial services, and for those of us in countries like Australia that still have postal banking; but the decline of the cash economy has been a big problem for the poor in the U.S.. Our postal banking system was shut down back in the 1960s when having to use cash all the time instead was still relatively feasible. Nowadays it's typically hard to get your boss to pay you in cash, so the poor often have to use check cashing services, which is one of the reasons "It's expensive to be poor." People keep introducing bills in Congress to turn postal banking back on, but unfortunately they never seem to go anywhere.

 

[Bomb#20]

I think many economists agree that 2% inflation is more useful than Zero %. If you find fault with that, please start a new thread to focus on that particular misconception.

Not presuming to offer an opinion on which inflation rate is more useful; but that's not why the FRB targets a 2%ish inflation rate. They do it because targets are hard to hit. A random uncontrollable inflation rate probably somewhere between 4% and 0% is less risky than a random uncontrollable inflation rate probably somewhere between 2% and -2%, because deflation screws up an economy worse than inflation does.

The 3.15% average inflation would be much less if certain specific outliers are excluded: 1916-20 (partly reversed 1921-22)

Case in point. That 1921-22 reversal, caused by Allied governments' attempts after WWI not just to restore the gold standard, but to restore the gold standard at prewar exchange rates, was highly ill-advised and probably contributed to setting up the conditions for the Great Depression.

 

[laughing dog]

I think many economists agree that 2% inflation is more useful than Zero %. If you find fault with that, please start a new thread to focus on that particular misconception.

Not presuming to offer an opinion on which inflation rate is more useful; but that's not why the FRB targets a 2%ish inflation rate. They do it because targets are hard to hit. A random uncontrollable inflation rate probably somewhere between 4% and 0% is less risky than a random uncontrollable inflation rate probably somewhere between 2% and -2%, because deflation screws up an economy worse than inflation does.

Actually, the 2% target was publicly justified because it was thought due to data collection constraints, improvements in quality, and a few other issues, CPI overstated the effects of inflation by 2%. Operationally, your point spot(?) on.

 

[laughing dog]

Libertarians generally cite INFLATION as the reason they oppose the Fed. In fact the inflation rate averaged over the FRB's 111-year history is 3.15%, not far from what many economists view as optimal. Because of compounding, this means that today's dollar has the buying power of just 3.2¢ in 1913 money. SO WHAT? Some YouTubes pretend that this was a 96.8¢ loss to ordinary people. But in fact the losers were just those who buried their banknotes in 1913 and waited 111 years to spend them.

3.15% inflation is horrible. Our currency is almost unusable because of what you view as acceptable inflation. We now have the penny in circulation that are so worthless they can't buy anything. Our nickels, dimes, and quarters that used to buy sodas will now almost buy nothing. Just a simple transaction like paying $1500 rent is difficult because we don't have a $1000 dollar bill which means a big wad of hundreds has to be carried. Back in the 1920's you would have easily paid your rent without having to haul around a huge wad of paper.

Other huge issues because of this inflation:

1. The cantillion effect - redistributes power to a select class of people who always benefit first in the money supply.

2. Misallocation of scarce resources

3. Lack of incentive to save causing insufficient capital for manufacturing and production.

4. Inability to plan retirement. How large does the nest egg need to be when you can't determine what the nest egg is really worth?

What is your source for these issues?
I ask, because the Cantillon effect has resided in the dusty halls of economic thought for decades.

Inflation should not make rational planning for saving or more difficult - plenty of people have no trouble whatsoever with either decisions.

I worry for you. Your views appear tainted by inaccurate information.

 

[RVonse]

Inflation should not make rational planning for saving or more difficult - plenty of people have no trouble whatsoever with either decisions.

I worry for you. Your views appear tainted by inaccurate information.

You have to be kidding? The baby boomers should be invested in safe investments (bonds and cash) like they once could do in the past. Yet instead, these old people who should be out of risk are highly invested in speculative and risky stock securities. That is because most investment advisors correctly know that cash in the bank guarantees their loss of at least 2% of their nest egg.

Even the banks themselves do risky things merging their savings accounts with investment trading because of inflation.

You can NOT have any sort of inflation and know what your savings will be worth in the future because it is constantly under attack.

The people who pay for inflation are the poor and middle class. It is the US government and fed insiders are the ones who win by making the US debt worth less. They are in the club and you ain't.

 

[RVonse]

Just a simple transaction like paying $1500 rent is difficult because we don't have a $1000 dollar bill which means a big wad of hundreds has to be carried. Back in the 1920's you would have easily paid your rent without having to haul around a huge wad of paper.

Here in Chiang Mai almost everybody pays for almost everything by just showing their iPhone/Androids to each other.

What if you can not afford an iphone?

In the 1920's an apartment that costs $1500/mo today would have cost $90 or so back then. You would have gone to your landlord with (1) $50 and (2) $40 bills in your pocket (3 bills total). Today (at best) you would need (15) $100 bills. Much more cumbersome because the currency today no longer resembles what it once could buy.

They could correct this problem with different denominations if they wanted. But the simplest solution would have been to simply make the currency not inflate in the first place.

 

[RVonse]

Check your privilege. What you describe is great for those of us rich enough that banks can make a profit by selling us financial services, and for those of us in countries like Australia that still have postal banking; but the decline of the cash economy has been a big problem for the poor in the U.S.. Our postal banking system was shut down back in the 1960s when having to use cash all the time instead was still relatively feasible. Nowadays it's typically hard to get your boss to pay you in cash, so the poor often have to use check cashing services, which is one of the reasons "It's expensive to be poor." People keep introducing bills in Congress to turn postal banking back on, but unfortunately they never seem to go anywhere.

Yes. There are still many people who can not use the banks due to credit problems, lack of credit, or other issues. Cash is all they have.

 

[bilby]

But the simplest solution would have been to simply make the currency not inflate in the first place.

Spoken with the confidence of someone who has absolutely no idea how difficult it would be to make currency "not inflate".

 

[laughing dog]

Inflation should not make rational planning for saving or more difficult - plenty of people have no trouble whatsoever with either decisions.

I worry for you. Your views appear tainted by inaccurate information.

You have to be kidding? The baby boomers should be invested in safe investments (bonds and cash) like they once could do in the past. Yet instead, these old people who should be out of risk are highly invested in speculative and risky stock securities. That is because most investment advisors correctly know that cash in the bank guarantees their loss of at least 2% of their nest egg.

Even the banks themselves do risky things merging their savings accounts with investment trading because of inflation.

You can NOT have any sort of inflation and know what your savings will be worth in the future because it is constantly under attack.

The people who pay for inflation are the poor and middle class. It is the US government and fed insiders are the ones who win by making the US debt worth less. They are in the club and you ain't.

There has always been a tradeoff between risk and return.

No one can know what the future will bring. But planning for a constant rate of 2 or 3% rate of inflation can let anyone plan what they need. People have successfully planning for retirement and saving for decades.

What feeds your counterfactual beliefs and irrational arguments about money?

 

[Bomb#20]

The people who pay for inflation are the poor and middle class. It is the US government and fed insiders are the ones who win by making the US debt worth less. They are in the club and you ain't.

That's oversimplified. The people who pay for inflation are those among the poor and middle class who are keeping their heads enough above water to have savings, and also those among the rich who invest by lending at interest (as opposed to by buying stock or real estate). Those among the poor and middle class whose heads are underwater with debt benefit from inflation. If you look back at the whole Bryan vs. McKinley situation, underneath the silver vs gold argument the real issue was inflation -- letting people pay back their loans in smaller dollars is good for poor farmers and bad for rich bankers, which is why the farmers backed Bryan and the bankers backed McKinley.