I would have deleted this thread long ago except that I've wanted to "correct" it by posting a follow-up. ...but it's a truly dull topic that doesn't really fit with my blog, so I've not been motivated to write that follow-up, but until I do I won't feel right deleting the thread, as that would leave the topic on what I feel is the wrong conclusion.
So here's the follow up. It's a long wall of boring text, so don't feel you have to read it. I only post it because it means that six months from now when I spot this topic on my blog again, I can feel good about deleting it since it has been brought to its conclusion.
...of course, now that I've gone through and added some section headings, it doesn't seem so terrible anymore. So, I dunno, maybe read it if you're bored. Just don't expect it to be wonderful. I'm mostly pulling it out of my ass.
Years ago, Slashdot was running daily articles on Bitcoin. Now I personally think Bitcoin is stupid, but in being prompted to think about how it might work every day, I came to learn some shit about how real money works.
In the comments on one of these daily Bitcoin stories, there was some argument over what the actual value of Bitcoin was, which prompted me to think about that question for a while.
Obviously it's "worth" whatever someone will pay for it, and that's a combination of how badly one person wants to acquire some of it and how badly someone else wants to exchange some of it for something else of value. So Bitcoin's value is in Bitcoin's demand.
The problem there is that demand is hardly a constant, but people want money to be a constant value. No one wants to receive a paycheck in some currency that, by the time they spend it, might be worth half of what it was when they were paid.
So what affects Bitcoin's value?
1. If Bitcoin becomes more popular, the limited supply of Bitcoin will have to be divided among more people. This will create more demand, which will increase Bitcoin's value until its value is sufficient that everyone who wants Bitcoin can get as much "value" of Bitcoin as they want.
2. Similarly, if Bitcoin becomes less popular, the limited supply now has to be divided among fewer people, so everyone can have more of it. This will cause it to lose value until, once again, its value is at equilibrium with the "value" of Bitcoin that everyone who is using it needs.
There's a problem here, which is semi-obvious. It's obvious that these effects can lead to positive feedbacks, causing the currency's value to swing wildly. However, it's less than obvious why that would happen, which leads to a lot of Bitcoin supporters failing to see the problem.
The more common argument presented to the Bitcoin supporters is that as the currency becomes more popular, it becomes more valuable, and that increase in value makes it more popular. Similarly, if it becomes less valuable, it will become less popular, which will make it less valuable.
The Bitcoin supporters rightfully point out that a currency's value isn't in its present value, but in its usefulness as an exchange of value. As long as it is relatively stable, it doesn't matter if the value goes up or down over time, as it still works as a currency. For that reason, increasing value shouldn't make the currency more popular and decreasing value shouldn't make it less popular.
However, that argument ignores the actual problem: Bitcoin investors.
When Bitcoin's value is constantly going up, it's an attractive investment. So people buy it. ...and they don't use it, they just keep it. The result of this is that there's now less Bitcoin to be used by those who are actually using it. This causes it to further increase in value. This brings in more investors. The price of Bitcoin goes up and up and up.
So what happens when that price starts to go down? Well, a few of those investors decide it has hit its peak and it's time to cash out. This puts more Bitcoin out there for everyone to use, and that lowers the price. This causes a few more investors to cash out. This repeats until every investor is out of the market, lowering the value of Bitcoin to only that which is justified by its actual use.
That's obviously a horrible property for a currency to have.
One solution to that problem would be to vary the amount of Bitcoin in existence such that the price remains stable. As more people want it, create more of it. As fewer people want it, destroy some of it. ...but, of course, Bitcoin can't do that.
So, you know how we just print money in response to people wanting loans? Well, as best I can tell, that's why we do it. ...and because Bitcoin can't do that, Bitcoin will never store value as well as the U.S. dollar.
When the value of the dollar is increasing, we can lower interest rates, prompting people to simply get a loan rather than exchange a larger value for a dollar, preserving the dollar's original value. Similarly, when the value of the dollar is is decreasing, we can simply raise interest rates, prompting people to avoid loans, which shrinks the money supply as the old loans are repaid, which increases the value of the dollar.
By itself, just expanding and contracting the money supply according to demand isn't sufficient to combat the problem of currency investors. The reason is that achieving a perfectly constant value is hard. Imagine that, over a few years, the value of the dollar accidentally increases. Anyone who notices this will begin hoarding money in order to spend it at a later date when it is worth more than it is now. This hoarding will create more demand for the smaller number of dollars remaining in circulation, which would prompt lower interest rates, providing even more money to be hoarded away. Eventually, when this unintentional increase in the value of the dollar is halted, these investors will decide to spend their hoarded money, creating a sudden increase in the number of dollars available, which will create a sudden drop in the value of the dollar. Since the only way to increase the value is to simply not issue new loans and wait for old loans to be repaid and those dollars destroyed, this is a problem that can't be quickly solved.
So as it turns out, the ideal approach is to aim for a low but deliberate rate of inflation. In this way, even if by accident the rate of inflation isn't as high as is being aimed for, it's still inflation, and so people still won't want to hoard their money. Thus the problem of sudden and severe inflation due to currency hoarders spending their hoards is traded for the minor problem of a constant but slow rate of inflation.
...and that's quite interesting. Being something that everyone complains about, it seems strange to think of inflation as a feature. ...and it isn't necessarily a bad one, assuming everyone knows that it will happen. While it means that you can't store value long-term in cash, the simple fact is that storing value in any form long-term is unnatural, so why must money be an exception, especially when it can't be since that will make it unstable?
Anyway, think about what the long-term result of this economic policy is: As more people are born, more money is needed to maintain a certain value to the dollar. Indeed, even more is needed because that value must constantly decrease at the rate of inflation. Since the only means to introduce this new money into the economy is loans, this means that as any loan is repaid, that amount plus a little extra must be borrowed. Thus, even though the economy may start out with most of the money having not originated from loans, over the long term this is going to change to where the majority of the money in the economy is loaned money.
So then think about what I wrote near the top of the first post in this thread:
We're presently in debt to the sum of $46,630 per person, or $130,042 per taxpayer.
Well, of course we are. Essentially all of the money in our economy is borrowed money, and what's the average amount of money a person has? Yeah, I don't know anyone who has $100,000 in cash, but there are some rich people with a lot of money, so that does seem like a plausible average. ...and since the majority of money that exists comes from loans, when one person has $50,000 in their bank account, someone else is $50,000 in debt.
Indeed, as it turns out, money doesn't represent value, it represents debt. It's essentially an "i.o.u." that you give someone when they give you something, and they can either give it back to you later when you repay that debt by giving them something, or they can pass your debt along to someone else who can later pass it back to you. So it makes sense that it can be created out of nothing, because debt itself can be created out of nothing.
Just because Alice and Bob don't have a dollar between them doesn't mean that Alice can't do something for Bob, and when that happens, they need a dollar to represent that debt. So Bob gets a loan, the federal reserve prints up a dollar to make that loan, and Bob gives that dollar to Alice. Later, Bob does something for Clyde, and earns a dollar in the process, and uses it to repay his loan, at which point that dollar is destroyed, Clyde is no longer owed a debt and so that dollar is no longer needed to represent that debt.
...and none of that causes inflation or deflation. Indeed, if Alice and Bob had to take a dollar out of the existing economy to represent the debt between them, then that would deflate the value of a dollar in that economy, as there would now be fewer dollars representing the same amount of debt. It similarly doesn't cause inflation either. This is most easily shown if you just imagine that the dollar never leaves Alice and Bob because Bob later does something for Alice and Alice pays him with that dollar which he then uses to repay his loan, but it also true even if the dollar does enter the rest of the economy since that means that another dollar must eventually come back to Bob so that he can repay his loan, and for that to happen, Bob has to do something for someone out there in that economy, and so when that economy gained that dollar, it also gained the value of a dollar, so there's no inflation.
Anyway, with "money is debt" in mind, let's look at something else I said:
If the economy were based on wealth, then even with a completely broken economy, some farmer could still use some of his wealth (what land and seeds and machinery he has) to grow some food. Other people could use their wealth (materials they have on hand) to make clothing or build houses. Then everyone could trade what they have for what they need. Thus, economy failure should be impossible.
Well, the problem here is, once this farmer grows his food, how is he going to be paid for his efforts. As soon as he gives food to someone, that debt needs to be represented in some way. So with what? A pile of clothes? ...and will those making the clothes be happy to be paid with a pile of corn? Sure, that stuff has value, but it isn't of much use if what you need right now is something else.
...and, it's easy to imagine that, maybe in this wealth-based economy, part of that farmer's wealth is a large bank account, and everyone else similarly has some wealth-based money rather than debt-based money. However, if that's the case, then we're back to the Bitcoin problem: Hoarding that wealth will cause it to increase in value, so you get a period of deflation followed by some rapid inflation when everyone decides to "cash out" their hoard of cash. So you might think "well, we can have wealth-based money, we just need to supplement it with debt-based to keep it stable." ...but then we need to be sure it has inflation to make sure it's truly stable, and then as time goes on, more and more of the money in the economy is debt-based, so we end up exactly where we are.
So it would seem that the reason we do things the way we do them is because it actually makes sense to do them that way.
Unfortunately I'm not one to read history books, so my knowledge of the past is limited, but it's my understanding that the whole reason we ended the practice of a dollar being worth a certain amount of gold was that it had, through sudden periods of inflation due to currency investors deciding to "cash out," caused two major depressions, thus proving itself to be a less-than-ideal solution.
...and apparently since then, though we can't manage our money perfectly, we've yet to cause anything worse than a recession, so we're at least better at controlling the value of money than gold is.
...but I think it's a bit strange that I don't recall being taught any of this in school, as it seems like stuff that everyone should know, but every time history came up it was always a re-hash of 1700s & 1800s America. It seems like the history of how we ended up with the economic policies we have would be useful knowledge.
I even had an elective economics class that I somehow ended up in despite not choosing it, and while I don't actually remember anything that the class covered aside from a particularly humorous crossword puzzle, I don't think it covered any of this.
...and speaking of shit I wish I'd been taught in school, I've come to realize that loans do actually have a legitimate use: When getting the loan leaves you with more money after you repay the loan than you would have had had you not taken the loan.
The easy example of this is a mortgage. After you pay it off, you have a house. ...or you don't get a mortgage, pay rent for 30 years, and have no house. Obviously getting the loan is the smart choice.
As for other things, it's harder to say. Education might be a good idea, assuming you're paying for an education that is actually going to be useful. In that case you're looking at either getting the education now and earning a higher salary just 4 years from now vs. saving up for that education while you work a lower-paying job for 8 years, then getting the education and starting the higher-paying job 4 years after that. Given the right circumstances, if you calculate where you'll be 12 years from now, you'll find that getting the loan will put you further ahead at that time than not getting the loan, despite the interest, as you gain more from getting the higher-paying job sooner than you pay in the form of interest.
Unfortunately, that's just one more thing that school never taught me. School was just all about "here's how to calculate an interest rate" and "if you pay off your credit card bill each month, you'll get a good credit score." Loans were always presented as something you either did or didn't get depending on whether you wanted money or not and whether you felt like paying for it via the interest. The idea that a loan might be more valuable than what it costs never came up.
Instead, loans were presented as merely a luxury: Do you want your big-screen T.V. now, or do you want it two years from now after you've saved up for it? ...and it's in that regard that I learned to see loans as always being a bad idea. They're essentially a "fuck you" to your future self, in that your future self now has to pay for this T.V. whether he wants it or not. If you delay the purchase, then your future self, after having spent two years saving up $50/month, might have a whole new idea of what $1200 is worth, and might decide that a big-screen T.V. really isn't a good use of that money. With a loan, however, you've already spent that money for him, so, sucks to be him I guess.
...but, as it turns out, loans aren't always a "fuck you" to your future self. Used correctly, they can actually be a gift, in that your future self will have more than he would have if you don't take a loan.