The Casino-Chip Society

https://brettscott.substack.com/p/casino-chip-cashless-society

by Gigamouse • 4 years ago

208 154 4 years ago

brettscott.substack.com

alexb_4• 4 years ago

This is a fantastic post - I'm 100% going to start using the term "Casino-Chip Society" whenever I talk about "cashless" society.

There is another reason that cashless society is awful that was not talked about in this article, but I think is just as important - a digital dollar means that you have a dollar where it is impossible to commit crime. While that sounds like a good thing (who wants crime?), it very much stops being a good thing as soon as you bump up with laws that go against your morals. Designing systems with the assumption that we will always have democratic and free government is a horrendous idea, allowing the government to have a complete record and log of every single transaction you ever make, as well as having the ability to stop you using digital money, makes it so easy for fascists.

uoaei3• 4 years ago

it very much stops being a good thing as soon as you bump up with laws that go against your morals

A pretty explicit part of the fascist ideology per se is that laws are merely morals that are written down and enforced. The idea is that people adopt their moral code from the central government who defines how people "should" perceive the world in order to make citizens obedient to the dogma of the state. Willing fascists do everything they can to dissolve any notion of personal choice in the matter, for themselves and for others, and by their very constitution cannot conceive of morals existing outside of a system of authority.

SQueeeeeL2• 4 years ago

Wait, so does that mean the "War on Drugs" wasn't making me more free??? The US Government would never do anything fascist so obviously you're wrong.

Karellen• 4 years ago

What else are laws - even in a democracy - if not "merely morals that are written down and enforced"?

akira25012• 4 years ago

a digital dollar means that you have a dollar where it is impossible to commit crime

Maybe. You'll probably just be able to convert it to some other form of value at a loss and then continue from there. Plenty of governments have envisioned the end of the "black market" only to be shown how utterly impossible that idea is.

bombcar2• 4 years ago

That's the thing that wasn't explicit in the article; that each time you "switch layers" you often incur fees - if you're going down or back.

You can deposit cash at a bank and get it back, but that's almost an exception.

Once you get into layer 3 it is harder and harder to get back to layer 1 or 2 without losing "some value" - gift cards being the most obvious example.

knowaveragejoe• 4 years ago

The history of civil rights progress is characterized by marginally deviant behavior(for the time) slowly becoming more accepted and mainstream. Take LGBT rights or marijuana for example. If you disallow even the slightest level of deviance than you potentially neuter the ability of money to participate in that process.

bruce5113• 4 years ago

So let's say I have lots of level 2 money.

I go to various banks and trade in the level 2 for level 1.

I take my billions of level 1,and stick it in a warehouse. Maybe one day I even set it on fire.

What does this mean? Does the fed recognizes the loss, and just print more? Have I in effect just shrunk the economy? My level 2 money is still in the system, its just the paper has vanished.

By extension, say every person loses one $10 bill every year, in an unrecoverable (by anyone) way. Presumably that's factored into the money supply?

Is changing the paper (as in the UK this year) a way of "cleaning the balance sheet" - effectively preventing some truly monster hoard from suddenly appearing?

So many questions...

galaxyLogic• 4 years ago

What I'm wondering is .. when you own stocks of companies it is like having one type of currency, one per company or fund. (right?). Now when the stock-market goes down I lose money. And so do most people who own stocks. Where does that lost money go?

Everybody lost a lot in the most recent downturn and (most) nobody gained. We simply have less "value" now. Where did that value go? How could it have just vanished?

misja111• 4 years ago

My level 2 money is still in the system,

No it is not, when you exchanged it for level 1 you removed it from level 2.

Does the fed recognizes the loss

When your level 1 money went up in flames, it just meant a profit for the fed.

thelamest2• 4 years ago

Yes. If the (overall) nominal money flows decrease but (overall) real economy size stays the same – to the extent that it’s going to change prices for no “real” reason – people and central banks are likely to notice and may react.

Central banks are tasked with stabilizing price levels. (Why? Predictability helps people make decisions and plans, and get rewarded for them. Caveat: price changes that originate in changes to real economy convey valuable information about real scarcities and surpluses. This one, kinda, doesn’t.) Prices are closely related to the ways money circulates in the economy – so CBs keep a close eye on these stats. (Why? In short, it’s a big factor in the simple monetary formula, MV=PQ, that is: overall amount of money * money velocity = price level * quantity of real consumption.) The fact you froze or burned a lot may influence how that looks, in turn possibly influencing CB decisions to put the finger on this or that scale.

Of course, the CB doesn’t know what you did exactly, it’s playing an aggregate game. Right now it would appreciate that you counteracted inflation – made everything a bit cheaper by not spending or loaning your billions for others to spend.

bombolo• 4 years ago

Designing systems with the assumption that we will always have democratic and free government is a horrendous idea

I wonder if that's why germans are so against anything that is privacy invading while swedish people are quite happy to have their home address publicly known.

badpun• 4 years ago

a digital dollar means that you have a dollar where it is impossible to commit crime.

This is overly definitive. For example, in Poland, it's illegal to run a private online poker site and yet there's plenty of operators doing it. They offer digital money transfers via payment processors which specialize in skirting the law, such as Neteller, Payza etc. The Polish state doesn't care enough about its own laws regarding online gambling to clamp down on such practices and so people are happily commiting crimes using the "digital dollar".

akiselev• 4 years ago

The GP phrased that way too much like an allegory from under a rock and not enough like an internet comment.

(I think) He means that digital currencies remove plausible deniability.

The Polish government can both claim to crack down on gambling to its conservative supporters and at the same time avoid investing too many resources in pointless anti-vice enforcement. The second they have a digital ledger of all transactions in the country, they either have to get real with their conservative supporters who will vote them out or really go after all the people gambling whose bookies will drag them out from their beds.

Politics is a balancing act.

quickthrower23• 4 years ago

With better surveillance tech (no cash being an example of this) you can pave the way for future governments to exercise that power in bad ways even if the current one is lenient.

mymythisisthis• 4 years ago

In Canada, casinos are used to wash money, https://www.cp24.com/news/mystery-shoppers-sent-to-ontario-c... The government makes too much from casinos, and doesn't care.

jrm43• 4 years ago

This is so good. I was in another thread suggesting that, even if you hate crypto, it's still valuable to understand and accept the "fiat is all made up" idea, even if it's often badly stated and argued.

I have a degree in economics, but I confess I really didn't understand the whole thing until much later in life, when I was able to look at it through the lens of e.g. video game design. Which is to say, there are real consequences and real effects of actions -- but the economy still isn't something like "nature" or "scientific" despite what many would have you believe. It's much more like a designed game who's rules can be tweaked, sometimes arbitrary, etc.

anon291• 4 years ago

This post said nothing about fiat other than that people trust it.

Fiat is not the L2 in this system. It is the L1 state issued currency.

Bitcoin is analogous to fiat in the crypto world and the exchanges/custodial wallets the L2

igorkraw• 4 years ago

But in the real world, bitcoin and indeed all of crypto is a/are token/s without an army behind it or any form of legal promises except those conferred to them by $L1. Unless you want to go to El Salvador or that one other nation that made it legal tender, Bitcoin is L2 (and a shitty one at that looking at stability, fees and speed)

somethoughts• 4 years ago

I'd throw out that if attempting to make analogies to crypto - as I understand it - the standard US bank has pretty specific rules, reporting and audits w.r.t. how high the ratio of L2 to L1 can go and to whom/how/what uses the L2 money can be the loaned out.

The crypto exchanges do not have any such rules, reporting or auditing requirements and can self-report as L2 but in fact be some custom self-defined push the boundaries of acceptability Layer (a la FTX advertised as L2 but loaning the customer balances to its Alameda Research "hedge fund" partner).

akira25012• 4 years ago

If money only exists in the mind of people, how could there truly ever be a "science" of it? It strikes me, from a somewhat cynical point of view, that "economics" is a somewhat confused and lower resolution study of "psychology," which I think offers a the workable explanation for your final sentence.

mattnewton• 4 years ago

economics" is a somewhat confused and lower resolution study of "psychology,"

Maybe sociology, since money matter because it can be exchanged between people, but personally I don't think you'd be wrong for thinking about economics as a narrow but important branch of sociology/psychology, in the same way you might think of biology as a narrow but important branch of chemistry and physics.

plsbenice34• 4 years ago

It's like game theory. Once you set rules and laws you can mathematically model and analyse players' behaviour in reaction to those incentives. Assuming players follow a selfish strategy can be a useful approximation of the psychology sometimes. Since it's 'just made up' societies can modify the rules.

felix318• 4 years ago

Numbers also only exist in our minds but that doesn't make mathematics a branch of psychology. There is a rational side to economics because money can be measured and the measurements are reliable.

The unpredictable side of economics is of course the behaviour of the various economical agents, and regarding this I think economics is closer to astrology than to psychology.

adamsmith143• 4 years ago

Economics, flawed as it is, was never the science of money but the science of markets.

nonrandomstring2• 4 years ago

how could there truly ever be a "science" of it?

There isn't. There's a practice and set of local "crafts pertaining to". That's why it's econom(ics). [-ikos, -ique]

Like electronics, acoustics, politics...

As opposed to being econom(ology), a more systematic science [-logy (logos)] being a branch of knowledge.

Even hardcore economists aren't keen to raise it to the level of a "science".

jrm43• 4 years ago

That's exactly correct. It cannot much be a science.

MrBuddyCasino• 4 years ago

In that case, this might blow your mind: https://graymirror.substack.com/p/the-inflation-economy

guelo• 4 years ago

I think the article would have been better if it used standard money supply definitions M0, M1, M2, and M3 instead of the "Layer" terminology. That way the reader would be able to carry that knowledge to other conversations. But an advantage of his terminology is that it keeps the layers separate while the standard definitions are nested, so M1 includes M0, M2 includes M1, M3 includes M2. With his layered model he is able to highlight some of the power struggles more easily.

teddyh3• 4 years ago

I also liked this JWZ blog post: (https://www.jwz.org/blog/2016/08/like-regular-money-but-more...)

HN link: https://kilobytely.com/sh6vk9ync1qf4tzod2rg5uj8xmb0ti7wlazod...

jimmaswell• 4 years ago

So I'm paid in casino chips, pay my mortgage and credit cards with casino chips, pay my taxes with casino chips, and only ever use real money at the laundromat. Seems like the chips are more "real" and relevant at this point than the pieces of paper with no intrinsic value.

IntFee588• 4 years ago

That's not what he's saying. The "digital money" can be real if it is put into circulation by the central bank, by buying assets. There is no inherent connection to paper currency.

You may feel like you're above this, but this excess leverage in the economy affects everyone who has a mortgage, works a job, or participates in the traditional economy in any way. For instance, businesses regularly draw on their credit facilities to make pay, and even well-run businesses usually hold debt. The artificially set price of these "chips" has a massive effect on all sectors.

Semaphor• 4 years ago

But they are still the same, just more convenient. The state gives the money value, be it paper or digital. They could even create a third currency, literal plastic chips, and they’d also be the same. The articles goes from condescending to their conclusion, but they just fake explaining anything, they don’t actually.

teddyh3• 4 years ago

The funny thing is, what he calls “Layer 1 cash” is not the lowest layer. Most cash currencies were issued as tokens which could themselves be reimbursed for gold or silver by the issuing state or bank. The current level of cash (which he tries to defend) is already one level removed from what was originally valued. One could see where gold bugs and silverites get their thinking from.

But, one could argue, if most people really think there’s only one type of money, isn’t that by then by definition, true? I.e. if other people value a “layer 2 digital chip” as much as “layer 1 cash”, aren’t both worth the same to me, since I can get the same worth from them both? And, therefore, why should we care anything about any shift from layer 1 to layer 2, since the shift from layer 0 to layer 1 seems to not be a problem now?

This is a limited view, and is true solely if you look only at the two forms’ notional “value”. Hovever, the differences between the two lie instead in the technical limitations in how they can be used. If layer 1 cash cannot be used by, say, online retailers, or in certain shops, that form might have less value for me, if I want to buy something online or in those shops. On the other hand, if layer 2 digital chips cannot be used without the bank (and state) getting and keeping a permanent log of all my transactions, and also makes it impossible to send money to what either the government or the credit card companies deem to be unsuitable destinations, then I might value that form less.

It all depends on what you, yourself, value, or (by extension), what freedoms and/or conveniences you want society as a whole to have. He chooses to defend “the balance of power” between the two. We must all make our own choices here, and remember that all our actions will affect the balance.

Nursie5• 4 years ago

I'm not sure why you're being downvoted here, this is all good sense - if "Layer 2" casino chips are actually more useful to me, and interoperate seemlessly with "layer 1", there seems no particular reason to care about the power struggle the author frames, or even paint it in terms of a struggle.

AFAICT there is no war between the Bank of England and the banks in the UK over who gets to issue the money, no conflict, just the system running as it is designed with various participants in their niche.

The author likes to paint proponents of cashless societies as naive, but to me it looks like they have decided there's a moral component and a battle where it seems really there is none, or at least it is a political/idealogical viewpoint they are superimposing on the situation.

teddyh3• 4 years ago

IMHO, if you value financial privacy as an important civic right, the total abandonment of layer 1 cash (which has it) for layer 2 chips (which notoriously lacks it), really is a political and moral issue.

EGreg2• 4 years ago

As of 2020, the Federal Reserve lowered reserve requirements to ZERO. And in Canada too. That means banks can now issue money without being required to back it by L1 money.

Those trillions “printed” and given out to people as PPP loans were originated by banks. But the loan forgiveness comes from where? Who pays the liabilities these banks have to each other?

Technically, the banks can simply cancel liabilities they have to each other. If Bank A issues a loan or credit card and it is redeemed for credits in Bank B, while Bank B does the same for bank A, then the banks can simply cancel out their debt to each other when they settle their balances periodically using the Automated Clearing House (ACH) system that is also run by the Federal Reserve.

So banks can issue a ton of money to spur economic activity, and then cancel the debts to each other and take it out of circulation.

I started https://intercoin.org to making an alternative way to the banking system, allowing cities and other communities to issue their own currency (eg Berkshares, Bristol Pounds etc.), give it out as a UBI and then tax it back to remove money from circulation (fiscal policy). The fiscal policy can then be used to mitigate negative externalities like pollution etc. So the monetary and fiscal policies are managed by the people. The businesses are getting money from people spending money on things they actually want, rather thank bank underwriters trying to guess whether there will be a lot of demand for the business’s services 5 years later.

Crypto has been captured by ponzi schemes and nonsense. But the real value is in communities. Real goods and services by people accepting the local currency is what backs the local currency. The other stuff (“redeemable for gold, etc.”) are just mostly fictions to get a critical mass of adoption in a community.

Nursie5• 4 years ago

As of 2020, the Federal Reserve lowered reserve requirements to ZERO

Because it's no longer the favoured mechanism. Large banks in the US still have capitalisation requirements, and there are various other measures, they're just no longer required to keep a certain percentage specifically in a federal reserve account.

https://www.federalreserve.gov/supervisionreg/large-bank-cap...

EGreg2• 4 years ago

Seems to me the main constraint in the decentralized world is that the bank will have to pay higher interest to other banks, if their own loans start to default at a greater rate than the money being deposited with them. If people stop depositing with that bank, or withdraw their money, or their loans start to default, then the bank's balance sheet will become lopsided and they'll have to pay higher interest to other banks.

Is this what LIBOR is basically?

cmeacham983• 4 years ago

This article is bad, and contains several falsehoods, but the worst one is about fractional reserve banking:

banks are able to issue out far more digital chips than they have in a state money ‘behind the counter’
Imagine a person arriving a casino with no money but requesting chips nevertheless - this is pretty much what happens when someone approaches a bank and asks for a loan.

This is just completely wrong - banks only loan out money they have. If you go to a bank and get a loan the bank didn't just edit a database entry - they had that money. Banks loaning out money they don't have is extremely illegal.

The reason that banks ""create"" money is because when you loan money it ""duplicates"" it. You don't have to go through a bank to see this in action: Alice loans Bob $20 and then Bob goes and loans $20 to Charlie. The world now has $40 "more" in it, and remains that way until the loan is settled. Banks just do this process with your money and pay you interest for the privilege.

This is the reason that banks are sometimes required to keep some percentage of their money in reserve (and thus where the name fractional reserve banking comes from), because otherwise the same money could be loaned out forever and the maximum money supply would be infinite.

=======

EDIT: Because everybody seems to be ready to link the same Bank of England paper.

Yes, this is an simplified and slightly incorrect model of how it works in real life. In reality, this process is asynchronous: the government gives banks permission to loan out the money _now_ and figure out the backing cash later.

They don't have to keep track of who's money is loaned out to who as long as the balance sheet works out at the end of the day, and some percentage of assets are kept in liquid form (I believe it's something like 4%-5% in the US).

In the end, the point is the same: the government controls the creation of money, even if banks are the agents by which they do so.

The analogy the author has of a casino just going into debt by creating chips out of thin air is inaccurate and extremely misleading.

If everybody were to claim their chips, the casino would go bankrupt. If everybody were to simultaneously pay off their loans and withdraw their money from the banks, the banks would be fine (and have the interest payments they collected left over).

lifty2• 4 years ago

Loan creation doesn’t work like that for many many years. These days banks don’t even have a reserve requirement. They just create the money and balance the books later.

Edit: to make my point clearer, banks don’t need your deposits to create new money. They just do.

cmeacham983• 4 years ago

Loan creation doesn’t work like that for many many years. These days banks don’t even have a reserve requirement. They just create the money and balance the books later.

I glossed over it because it isn't really relevant to my point, but yes, the reserve requirement in the US is currently zero: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Edit: to make my point clearer, banks don’t need your deposits to create new money. They just do.

This is not true. Like I said, banks only lend out money they have. The only way banks "create" money is because the same money can be lent out multiple times (Bank lends out Person A's money to Person B; Person B deposits their money at a bank; Bank lends out Person B's money to Person C; etc)

cowthulhu3• 4 years ago

I work at a bank in the US, your statement is false for almost all non-federal banks. There’s some complexity to it, but in general banks are required to have roughly 5% of deposits liquid at the close of every businesss day. There’s some wiggle room, but banks are never allowed to go below 0%. If it looks like they’re going to risk going below 0% they can borrow money from other banks with too much cash through the repo market, but this is expensive and regulators don’t like it so banks will strictly avoid this. This actually explains why different banks will have different loan/share rates from each other. You’d expect in an efficient market they’d all be the same, but banks deliberately make their offerings less competitive if it’ll leave them with too much cash/debt. In short, banks do not just create money in the US. They are heavily regulated, and any bank that started cooking the books and lending more than they have would be swiftly taken under management by its regulatory body.

One point that might make this clearer - the government serves as the lender of last resort for a bunch of banks. Lending more than you have would be incredibly risky - why would the institution that has to eat the potential loss allow you to do so?

mason552• 4 years ago

banks don’t need your deposits to create new money. They just do.

Yes, exactly. The key phrase here is

loans create deposits

When you take out a loan, the bank conjures the casino chips from thin air and increases the numbers in your bank account.

Eventually the bank's reserves at the central bank need to be a percentage of their liabilities

onlyrealcuzzo• 4 years ago

Not really.

The bank has money, it lends it to you, and then shortly after it bundles that loan up into an MBS and sells it to the Fed (for a profit).

Repeat step 1.

The Fed - for the last 15 years - usually "expanded its balance sheet" to buy MBSes.

williamcotton4• 4 years ago

Alice loans Bob $20 and then Bob goes and loans $20 to Charlie. The world now has $40 "more" in it, and remains that way until the loan is settled.

Alice has $30 to spend. Bob and Charlie each have $10. After the loans you described Alice and Bob have $10 and Charlie has $30. That’s the same.

lesuorac6• 4 years ago

There's only $50 physical dollars sure.

But if they take all of their money out of the bank then Alice has $30, Charlie has $30 and Bob has $30 which adds up to $90 (aka $40 more). Charlie and Bob still owe $40 combined but the point is not the net amount of dollars change its that the assets/liabilities increased by $40.

motohagiography• 4 years ago

The maximum money supply is infinite, and the marginal value of dollars approaching an infinite number is zero, and every levered loan, derivative contract, and rehypothecated asset creates new hot money out of risk.

Banks pre-2008 were loaning out 30x the cash they had on hand. That is what creates the money. The loan creates it. This is not loaning out money they in fact have at all, it's pure risk compensated for by the rate of interest. The rest about fractional reserve is mostly accurate, but that fraction of reserve they keep and lever up 10-50x, and then charge fees, interest and commissions back on - together these make the bank a dynamical system whose failure mode requires exogenous recapitalization. Banks are just government backed hedge funds with airs.

The challenge with the article is that if you stop believing in the integrity and base reality of fiat (layer 1 capital), apprehending the consequences of what else has (or doesn't have) meaning is a bit much to ask of most people who work really hard just to align to their norms and are very personally invested in them. Cryptocurrencies were a forcing function on a critical theory of money, and that's more radical than mere 20th century radicals were willing to go, imo.

milderworkacc• 4 years ago

This is just completely wrong - banks only loan out money they have. If you go to a bank and get a loan the bank didn't just edit a database entry - they had that money. Banks loaning out money they don't have is extremely illegal.

I'm afraid to say that this is completely wrong. Commercial banks do in fact create money via lending! The 101 textbook explanation offered here is at best outdated and at worst misleadingly perpetuates a myth that simply must die.

The Bank of England's note on money creation in the modern economy [0] is the place to start - and more or less reflects the explanation in the article.

[0] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

lesuorac6• 4 years ago

Page 19 seems to show that the newly generated money has to be backed by somebody's deposit and not just minted though. Like for any situation that doesn't involve you taking a loan from a bank to use that money at the bank the BoE paper calls out that the bank needs to get deposits from where you're sending the loan.

So, you buy a house using say Chase and the seller has Wells Fargo then Chase "mints" say 1M the money for your loan but then solicits 1M of deposits from Wells Fargo. like why does it matter if the 1m for your loan came from Chase depositors or Wells Fargo depositors? The point is that it's backed 1:1 by cash that came from a person which BoE example shows.

thewanderer1983• 4 years ago

I don't mean to be rude. I really like Hacker news. It's a great place to get a wide range of interesting posts with a technology focus, and great talking points from people who have specialization within these areas. It reminds me of the early days of slashdot and even digg. However, it frequently falls short when it moves into areas outside of this. Especially when it's finance or fintech related fields. I think too many people here are well regarded in their tech field and think whatever thoughts they have on areas outside their lane is wisdom, even if they haven't spent much thinking of or gaining much knowledge in said field.

anigbrowl• 4 years ago

You don't have to go through a bank to see this in action: Alice loans Bob $20 and then Bob goes and loans $20 to Charlie. The world now has $40 "more" in it, and remains that way until the loan is settled.

The world now has $40 debt in it, it still only has $20 of spending power. Suppose both Alice and Bob sell their debt to Donna, sight unseen (ie only the amount is known). Bob still owes $20, but now to Donna, effectively canceling out the $20 he received for Charlie's note.

halpmeh4• 4 years ago

In your example, there is still $20 in the economy after Bob lends Charlie $20. Alice has $20. She loans it to Bob. Alice has $20 in assets (the loan), Bob has $20 in assets (the money) and $20 in liabilities (the loan). The net amount is still $20. If Bob loans Charlie his $20, the net is still $20.

Banks do create money via lending, but the money creation comes from the interest charged. For example, if Bob lends Charlie $20 for a year and charges 10% interest to Charlie, he'll have $22 after one year. Where did the $2 come from?

HWR_14• 4 years ago

Where did the $2 come from?

Charlie

MrPatan• 4 years ago

Boy do I hate that BoE paper.

bondarchuk2• 4 years ago

What exactly is wrong with it? Is it really unequivocally dead wrong, or is there some subtle point of contention I'm missing? I'm having a hard time trusting MrPatan and cmeacham98 over the Bank of England.

thelamest2• 4 years ago

It’s not a closed system or a zero sum game. The average loan has positive expected value in terms of new, real goods and services being created – so it can be accompanied with an increase in nominal amount of money. The casino analogy falters here, because gambling is associated with, at best, only intangible entertainment value creation, and at worst, value destruction. Banks are somewhat free to create money, because they enable making new real value, and carry much of the risk for bad calls.

miohtama• 4 years ago

Regading CBDCs:

There was a Bitcoin hostile article published by European Central Bank today. I was wondering why ECB even bothers to write about Bitcoin. Turned out, the author is a fan of CBDCs and taking cash away so that ECB could enforce negative interest rates.

For example, Dyson and Hodgson (2016) argue that “if digital cash is used to completely replace physical cash, this could allow interest rates to be pushed below the zero-lower bound.” Rogoff (2016) develops this argument in detail. By allowing to overcome the zero-lower bound (“ZLB”) and therefore freeing negative interest rate policies (“NIRP”) of its current constraints, a world with only digital central bank money would allow for – according to this view - strong monetary stimulus in a sharp recession and/or financial crisis. This could not only avoid recession, unemployment, and/or deflation but also the need to take recourse to non-standard monetary policy measures which have more negative side effects than NIRP. Opponents of NIRP will obviously dislike this argument in favor of CBDC, and will thus see CBDC potentially as an instrument to overcome previous limitations of “financial repression” and “expropriation” of the saver.
In sum: it seems that the remuneration of CBDC is per se neither necessary to clear a market, nor to control inflation, in analogy with the case of banknotes, which also cause none of these issues8. However, still, the ability to remunerate CBDC, in contrast to banknotes, is a privilege that has a number of advantages. It allows shifting the interest rate on CBDC in principle in parallel to monetary policy rates, such as to avoid that the relative attractiveness of CBDC relative to market- and central bank policy rates depends on the absolute level of interest rates, as it is the case for banknotes. Indeed, the fact that the remuneration of banknotes stands at zero regardless of whether short-term risk-free rates are at 10% or at -0.5% (as currently in the euro area) may be perceived as an anomaly, which becomes increasingly problematic when the zero lower bound is being approached or passed. Moreover, a negative remuneration of CBDC also allows addressing the possible danger of a run into CBDC in case of a systemic banking crisis (as also noted by Kumhof and Noone). As shown in section 4, in the 2008 banking-, and 2011/12 euro area debt crises, a run into banknotes played only a rather minor role, relative to the run from perceived weak to perceived strong banks – despite the fact that the remuneration of banknotes remained at zero, and that the level of short term risk free rates quickly approached this level after the Lehman default, reducing the opportunity costs of holding banknotes. Nevertheless, since a run into CBDC would be easier, it would be recomforting to have as extra tool the ability to impose negative rates on CBDC.

This kind of money tinkering sits at the opposite of the political spectrum of Bitcoin, regardless if you like Bitcoin or European Central Bank.

https://deliverypdf.ssrn.com/delivery.php?ID=779068125074119...

redeyedtreefrog• 4 years ago

The vast majority of the money supply created by central banks is digitally created. I am entirely at a loss as to why this supposed introduction to how money works consistently implies money created by the state approximately equals cash, and that cash is particularly special. That's not how it works. And because that's not how it works, a cashless society is nothing like as radical change as the article implies. Cash is already of only limited importance.

DavidPiper• 4 years ago

This has generated surprisingly divisive interest for a blog about how money works. Maybe it was the reference to stablecoins.

Highly recommend watching https://www.youtube.com/watch?v=PHe0bXAIuk0 before reading this article if you're coming in without much context.

cortesoft• 4 years ago

Digital chips for borrowers: they issue Layer 2 chips to borrowers, in exchange for a loan agreement in which the customer promises to return a larger amount of Layer 1 money to them in future than what the chips promise to them now (in a sense, the bank ‘buys’ a higher-value long-term promise by issuing lower-value short-term promises, but exposes itself to risk in the process).

This is not true. I pay layer 2 chips to pay off my mortgage. I am not sending cash to the bank, they transfer layer 2 chips from my bank account every month.

Not only that, but the central bank never touches layer 1 money either. They also just transfer layer 2 money into banks.

globalreset3• 4 years ago

When you pay off your mortgage with L2 chips, your bank settles in lower layer with other banks, so they do actually get L1 chips. Not actually with "cash" but with chips tracked by Fed account for banks. (It's really chips all the way down).

Similarly when you are sending your L2 chips thank bank created for when they granted you your morgage - from your bank to other places, they will want to settle L1 chips as well. The bank will use the value of of your debt to settle it (either sell the loan to someone, including FED or use as a collateral or whatever).

anonymouse0082• 4 years ago

Ok, now explain bad debt expense in this model? And the implication on taxes? How about the secondary market for debts and bankruptcy proceedings? And then capitalizing expenses?

This post just says the same thing everyone understands in the simple model with abstractions based on crypto that attempts to explain group behaviors. How someone goes about reading the incentives and behaviors with the simple model does not mean the model is wrong - multiple choice tests allow people to be right for different reasons.

Edit: and I forgot the softball, the FDIC insurance explains an insane amount about the inherent risks of the system. If you want to know the real “creation of money” if that number ever goes up, you’ll see some wild things.

mozey• 4 years ago

In reality, a cashless society is a type of enclosure, in which the only form of money in society becomes digital bank chips (a bit like being stuck in a network of casinos where you can no longer exit)

Quote from an interview with the author: "The State endorse a currency as a mean to pay taxes, but what ultimately gives money its power is the network effect: there is no opt out": https://www.ouishare.net/article/on-the-illusion-of-money-an...

The part about CBDCs is interesting: "The banking sector has been attacking the cash system for decades, but confidence in their Layer 2 chips depends on the public being able to redeem them for state money... In reality, Layer 1 CBDC has existed for decades, but it’s traditionally called ‘reserves’ and is only accessible to banks who use it between themselves"

"banks control the Layer 2 system, but see a future in which they might end up sandwiched by competition from a hypothetical Layer 1 CBDC and Layer 3 stablecoin systems (which admittedly plug into them). This is why banks are currently lobbying against CBDC to water it down (e.g. demanding limits upon its use), while demanding that stablecoins be regulated in the same way that banks are"

"The CBDC debate is really about whether access to digital state money should be extended to all of us"

bondarchuk2• 4 years ago

Ah, that's fantastic, now I finally have an answer to the question: "what's the big deal with CBDC's if almost all money is already digital?"

nyanpasu64• 4 years ago

I shudder to think of a day where the only way to spend and receive money offline is through banking and financial systems (Layers 2-3), which (likely due to today's KYC laws) inevitably require outing your deadname in order to send and receive goods and services. This is already largely the case for online payments, in bank transfers (which in their current dysfunctional state, not only reveal your legal name to the recipient directly, but require you send your order ID and legal name in an email side channel because the chip-transfer message doesn't carry enough information to tell the recipient what the money is for), and PayPal (PayPal business accounts do not actually hide your account-holder name from the money recipient, as I found out by being doxxed after creating one). I've only found a narrow exception where Privacy.com credit cards allow the use of a pseudonym once you've doxxed yourself to Privacy.com, and the small fraction of people on Citi can use True Name Mastercards to pay (and again not receive money).

zxcvbn4038• 4 years ago

There is an old trick in the US where after you obtain a credit card in your own name you can obtain a companion card with any name at all on it. It will not protect you if you do any nefarious activity, but if you just want to shop or dine without name recognition then it works just fine. I think I was only asked once to provide personal details for the companion card.

quickthrower23• 4 years ago

The problem with this article is it doesn’t point out that most money is bank deposits already, so taking the cash element away wont make much of a difference to the amount of bank IOU style money.

The bigger issues will be people used to not paying tax by using cash (usually working class) will suddenly be a lot poorer which could be a shock. The government may need to mitigate. And the surveillance aspect of it, where the bank system knows every last cent spent by every last citizen.

ajsnigrutin• 4 years ago

There are many many more issues in a cashless society.

Imagine a power outage (sadly, we're getting close to regular ones here in europe)... how will you pay for anything if POS terminals don't work?

Imagine protests like the ones in china now.. (and not that long ago in canada)... protesting.. hungry? Wanna buy a hotdog or noodles? No cash? Use some digital card/app.. there's a paper trail you were there and your account is locked.

Banks wanting to earn a bit more money? Some people spending more money at liquor stores than at fitness stores... that information would be valuable to insurance companies.

Want to buy an XXXL buttplug? Now there's a paper trail from a XXXL buttplug store... government changes (your leader doesn't want to use dolars anymore to sell oil, someone organizes a coup,...), and you're being thrown from a rooftop.

etc.

quickthrower23• 4 years ago

Agree with all these. Except power outage. There is nowhere near enough cash in circulation to take over, not the means to easily access it. See: Lebanon.

Maybe Lebanon is the poster child for needing a more cashful society! Or using gold (not gold standard)

realcertify• 4 years ago

Recently I opened an IRA account at Fidelity. I had my 401k with them for more than a decade. Soon after I opened it they locked my account demanding ID and papers proving my residential address. I'm not sure what else they may request, but fact is I can't use my hard earned funds at this moment.

I experienced similar locks at a bunch of other websites. It looks to be a norm nowadays to randomly lock accounts. Now if similar things start to happen to bank accounts and retirement funds it's easy to understand that it will ruin people's lifes.

Bottom line is - we shouldn't fully rely on electronic money. I will do everything to avoid living in a cashless society.

Gordonjcp• 4 years ago

Bottom line is - we shouldn't fully rely on electronic money. I will do everything to avoid living in a cashless society.

How exactly do you propose to do that?

selimthegrim• 4 years ago

Fidelity had my 403b account listed under the address of some Brazilian guy who worked for Microsoft when I logged in one time. There’s a reason they do that.

dghughes• 4 years ago

Remember that a chip is a liability to its issuer. Whoever ends up with those chips can come back to demand cash, so - in the case of a casino - it’s not in their interest to randomly issue huge numbers of chips to customers who don’t actually deposit anything.

At the casino where I used to work one Auditor would pore over slot machine reports tracking down single cent tickets.

People had stuffed their pockets with tickets when out for a night and then forgot about it.

But the auditor had to account for it in case they came back wanting the penny. My mind reeled from the tedium nature of that job.

hoosieree• 4 years ago

I'm curious what people who've used AliPay in China think about this. From the little I've heard about it (on a podcast interview[1]) it seems like people refuse cash because AliPay is so strongly preferred. How does that fit into the whole "casino chip society" view?

[1] https://corecursive.com/software-world-tour-with-son-luong-n...

tsukikage4• 4 years ago

banks (...) might end up sandwiched by competition from (...) Layer 3 stablecoin systems. This is why banks are currently (...) demanding that stablecoins be regulated in the same way that banks are.

...but earlier:

Thinking of these different layers of money as enforceable ‘chips’ within a legal system helps to highlight that ‘thin air’ is thicker than we may think.

...surely the author themselves here is effectively admitting there are more reasons one might desire regulation and oversight in the crypto space than just stifling competition?

The Casino-Chip Society

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