A little secret that will make the world fall apart

http://alumnit.ca/~apenwarr/log/?m=200901#14

by soundsop • 17 years ago

89 113 17 years ago

dylanz• 17 years ago

Great synopsis. Who grows food anyhow? Most people have lost this skill, and it's pushed over to "specialists (farmers)". Have you ever tried eating money for lunch? It tastes horrible.

DenisM7• 17 years ago

The dollar is backed by taxing power of the US government - there are 300 million people who must pay taxes to US gov and the latter only accepts dollars. These 300m people will do anything to stay out of jail so they will trade whatever they have for dollars, thus insuring continuous demand year after year.

Money is not worthless.

mjnaus9• 17 years ago

What you just said means absolutely nothing: "backed by the taxing power of the US government". First and far most, when everybody comes running to the US government to cash in on their dollars, there is no taxing power between heaven and earth powerful enough to satisfy all the creditors. And what do you imagine the government paying them with?

For regular folks your statement is even more airy; when they start to figure out that their precious greenback has nowhere to go but down; are they gonna call their local representatives and ask them to change the dollars into gold (oops, no can't do, no more gold standard!) or euros/yen/whatever?

Face it; the dollar is backed by NOTHING! And thank god most people don't realize this because we would be in a much deeper hole then we are now.

pg3• 17 years ago

Have you acted on these convictions you seem to feel so strongly? Have you e.g. bought options to buy gold in the future at a price much higher than the present one?

utnick• 17 years ago

Is gold really any less arbitrary than paper money?

Couldn't advances in technology create cheap alternatives to gold that would destroy its value?

jerf2• 17 years ago

'What you just said means absolutely nothing: "backed by the taxing power of the US government".'

Money is recursive. The US government's acceptance of dollars is the base case. The US Military, Police, and various other force-directing agencies are the induction step.

It isn't entirely worthless, nor is its worth entirely intrinsic. It lives in the middle. Glib generalizations that put it on one end or the other are wrong.

Xichekolas7• 17 years ago

Actually what he described is the basis for Fiat money systems everywhere. As long as the government demands that all entities doing business pay a tax in dollars, the dollars will be worth something to those entities. (It's worth freedom to do business.)

From Wikipedia: http://en.wikipedia.org/wiki/Fiat_currency

The unifying feature of all fiat money is its (typically exclusive) acceptability to the government for payment of taxes.

And yet again: http://www.absoluteastronomy.com/topics/Fiat_currency

Therefore the integrity of the financial system requires that there be a different ultimate form of backing, such as the acceptability of the fiat currency in payment of tax.

DenisM7• 17 years ago

You missed my point: US citizens will always accept your dollars because they want to stay out of jail. This means they will give up whatever they have and give it to you. The entire sum of non-dollar poessions(goods and labor) of all US citizens are backing US dollar.

pg3• 17 years ago

More generally, you can/have to use dollars for any transaction with the government. E.g. buying oil leases, grazing rights, etc.

mhartl• 17 years ago

And this applies not just to transactions with the government, but to any (U.S.) transactions whatsoever. You can see evidence of this on every dollar bill: "This note is legal tender for all debts, public and private [emphasis added]". It's illegal to refuse dollars, even for private debts.

Threatening people with imprisonment to force them to accept dollars should seem fishy, though, and it's a hint that there's something rotten about fiat currency. Unlike commodity money, whose supply is limited by physical scarcity, fiat money can be expanded without limit, and the result is both sad and predictable. Consider: (1) monetary expansion benefits debtors, who can repay debt in inflated dollars; (2) U.S. monetary policy is set by the Federal Reserve, whose officials are appointed by the U.S. Federal Government; (3) the U.S. Federal Government is the world's largest debtor. It doesn't take a rocket scientist to figure out what is going to happen in this scenario.

jhancock6• 17 years ago

if you do not make any money, your tax is zero. therefore, no jail time and no need for dollars.

bokonist6• 17 years ago

If you do not make money, you starve.

Also, it's not just taxes - there are tens of trillions of dollars of outstanding dollar denominated debt. Millions of people and corporations have contractual obligations to deliver dollars. If they renege on those obligations, their creditors will seize very real assets (buildings, houses, etc).

jcl• 17 years ago

You've only shown dollars having no value for one person; this is not true of all people.

For example: property tax. Not everyone pays it, but many must. These people need dollars, so they are willing to do stuff for them. The stuff that they are willing to do provides the value of the dollar -- regardless of what the non-taxpayers think or do.

DenisM7• 17 years ago

If you grow your own food you must pay prperty tax on land. If you trade with others for food you must pay sales tax.

The only way to not pay taxes is to live on donations from others (who paid tax on that which they gave you).

corentin• 17 years ago

I think you may be confusing two things here. The federal debt indeed is backed by the taxing power of the US government. That is, if you lend it 100 dollars today, you can have some confidence that you will get them back plus interests in the future.

But the dollar isn't backed by much; it's backed by trust, which itself depends on the acts of the Fed (i.e. it really depends on what the Fed does). If you can buy two widgets for 100 dollars today, you don't have much confidence that you'll be able to buy them in the future.

In either case, there's nothing to guarantee your purchasing power. With gold, your purchasing power isn't 100% protected either (because new gold is digged every day) but at least you're much safer from arbitrarily high inflation.

But you are obviously correct when you say that money isn't worthless.

cellis• 17 years ago

If you really want to know what the dollar is backed by, you should read Confessions of an Economic Hitman.Yes, some may take what was said in the book for hyperbole, but i firmly believe that the dollar is backed by the power of the U.S. Military.But what the dollar is backed by is irrelevant. Currency values will rise and fall with the general prevailing theories of economists;in the end all modern monetary systems are simply backed by the belief in the system.For the US dollar, that belief stems largely from the network effects of the dollar, as well as the relative ease of doing business and fair regulation in the U.S.

Pearls to swine, people will continue to lose money shorting the dollar. Its like Microsoft...you can love it or hate it, but its not going away.

icefox2• 17 years ago

Well for the past year Microsoft stock has continued to slide down.

helveticaman• 17 years ago

I suspect the only kind of passive income that works is slavery.

yters7• 17 years ago

There are two kinds of goods: consumable and capital.

There are two kinds of capital: direct and indirect.

Money is indirect capital, but it is still capital, as long as the financial infrastructure exists.

DenisM7• 17 years ago

I entirely agree with the author's main point:

  there may simply be not enough important things to 
  do to keep everyone busy

If people only bought what's truly needed then only a tiny fraction of the world population would be employed. I for one am very glad that people keep inventing iPods and other stuff to keep everyone productively occupied.

bsaunder2• 17 years ago

I think there are plenty of important things for people to do (automation, biotech, energy). Unfortunately, I think they are getting harder and harder to do (and ergo fewer and fewer people have the skills necessary to do them (retraining at the local community college, just won't do)).

The other problem seems to be that they are longer term problems with much lower success rates. Businesses, and I get the feeling VCs, are focused on the sure thing with a high return in a short time period. I don't think "important things" fit in that group.

Ultimately I think we will all be enjoying a lot more free time, but it think it will take a painful transition to a different social structure to get there.

debt• 17 years ago

Making useless clutter is not productive.

DenisM7• 17 years ago

By "productively occupied" I mean "people do something that they think is useful". This in contrast to watching TV where people are occupied but do not have illusion of doing anything.

I believe this distinction is important to the well-being of those people and the community they are in - prolonged idleness has negative effects.

bwd• 17 years ago

Who decides what is useless? If I compare the enjoyment that I receive from having an iPod and being able to listen to any song I own at pretty much any time I feel like it against the amount of labor that I performed in order to acquire it, I feel like I came away with a pretty good deal. I expect that there is an item or an experience that you value which could only be purchased with labor via money that I would consider useless. That is the whole point of having markets, so that people can make their own decisions about what is and isn't useful to them.

jhancock6• 17 years ago

Useless stuff is productive within the bounds of the existing economy. However, that economy is provably unsustainable.

Best to move on and try to build an economy that is sustainable. I suspect such an animal will have a far higher useful::useless ratio.

lionhearted3• 17 years ago

As long as any human needs or wants are unfilled, there's infinite potential for people to do work. We can always be healthier, have lower infant mortality, make knowledge easier to diffuse, and make products cheaper. Nowdays, we can eat peanut sauce made in Thailand, tea from China, beef from Nebraska, chocolate from Belgium, coffee from Brazil almost anywhere in the world.

Philosophically, how much of this is "important"? I think overall, looking at the world in big chunks of time, things have been and will continue to get better. I talked with a PhD Physicist friend of mine recently for a while, and he sold me on how awesome the world is going to be when the cost of electricity approaches zero - without getting into a ton of details, it's going to be a massive party. Battery and transistor advancements meaning running a 1 pound, high powered laptop for weeks without charging it, free internet throughout the entire globe even in the most remote places, and a hell of a lot of human knowledge freely available to everyone in all of the major languages.

I'm pretty psyched for humanity, and think there's a hell of a lot to be done. We're not perfect, but we're generally trending upwards with a few blips here and there.

yters7• 17 years ago

That is neat, how does your friend foresee free electricity coming about? Something specific like "alternative energies," fusion, etc.? Or just the general trend of people trying to develop and diversify sources of energy?

jhancock6• 17 years ago

If there is no other solution, than what you suggest is ok...but a rather boring and provably unsustainable "ok".

but, there most likely is a better solution...there are many problems to solve in the world that would keep the majority "employed": clean water...disease...racism...housing... Is it possible to build an economy around solving these problems? Since we have never really given a serious attempt at doing so, I guess the answer is yes. Most likely, concepts of "employed", "debt", "education" all have to be redefined to fit this new economy.

bokonist6• 17 years ago

Presumably, if an individual wishes to consume far less, they also work far less. There is no reason to work 50 hours a week just to hoard a bunch of dollars until the grave. If they work less, then the supply of employment decreases naturally, and it all balances out. Those who wish to work long hours and consume a lot of goods can still do so. There would be no need for involuntary employment.

lallysingh• 17 years ago

A wise man once said that a man would live in a cardboard box, were it not for his need to impress women.

Sexual competition will always drive work out of men. And women only recently started working, as a way to avoid depending on men (and a few other good reasons, but I digress).

anamax2• 17 years ago

> And women only recently started working

Nope. The 4-70s US stay-at-home Mom was an abberation. She didn't exist before the Great Depression. (Farmer's wives worked.)

lionhearted3• 17 years ago

I believed this when I was younger, but now I've amended my position. Paper money isn't worthless - it has no inherent value, which is true. But if we all agree upon it as a means of exchange and set fair rules on how it's made and spread, then we're good.

The issue isn't with paper money, it's with making the rules excessively complicated or unfair, or just outright breaking the money rules. Paper money is conducive to that though - any currency specialists have an idea for creating a better way?

I've always wondered about a private (non-government) diversified commodities-backed currency floating against international currencies, with liquid electronic and paper notes - and simple yet rigid rules and governance on how to absorb new purchases into the system and buy assets with it, and what reserves to keep for people cashing out. This is one of those things I sit and think about, but I reckon it'd be hard to do. Thoughts?

Raphael• 17 years ago

Sounds good. A penny mutual fund with zero commission trades could be a good alternative to traditional money.

bokonist6• 17 years ago

You would need to back up the currency with commodities that have 1) minuscule storage costs and 2) a very high stocks to flow ratio. Also, all commodities used must have identical stocks to flow ratio, or the pricing between the commodities will be very unstable. As a result, using a single commodity is ideal.

As luck has it, such a currency exists. Simply log into your brokerage account and buy the GLD ETF. It's only been around for four years, it will be very interesting to see how it does versus the dollar in the long term. If I was a Fed chairman, I would be worried.

DenisM7• 17 years ago

my thought is: "counterparty risk".

ken• 17 years ago

While I usually don't think of it in such terms, I've found a good litmus test for me is whether, if I was Phil Connors, something would be of any use to me. Anything that Phil would lose at night, it's possible for anyone to lose, and thus I probably will lose it at some point. My activities tend towards acquiring knowledge, universal skills, and doing things that scare me.

A couple of businesspeople have explained to me that every part of building a business is about reducing risk. They talk about diversification, but then only apply it to money. As personal investments go, money (in any form) looks like one of the riskiest! It's much harder to forget a foreign language, or how to play a musical instrument, than it is to lose money. I'm trying to reduce risk by diversifying my assets to the point where money is a relatively small portion. After all, the happiest people I know don't tend to be those with the most money.

bokonist6• 17 years ago

Mencius Moldbug describes it best:

"Money is the bubble that doesn’t need to pop. As long as there is demand for indirect exchange, at least one asset will be stockpiled by hoarders, hence experience demand that is not a consequence of any direct utility, hence be overvalued. As long as the storage cost for this asset is zero and the supply in existence is fixed, you have a perfect Nash equilibrium - using any other asset as a medium of indirect exchange provides no advantage, and runs the risk of buying into a bubble which will subsequently pop as punters revert back to the stable standard." (source: http://www.interfluidity.com/posts/1233118501.shtml)

The story of the past ten years is that people started trading dollars for substitute stores of value ( houses, stocks, oil futures, etc). But those substitutes were not stable Nash equilibriums. In the long run, supply of housing is elastic and bubble prices cannot be sustained. Prices crashed, and people rushed back to using dollars as a store of value. When demand for dollars increases, it becomes harder to trade goods and labor for dollars, so the price of goods and labor in dollars decreases ( deflation). However, employment contracts and debts are denominated assuming a higher price level. Thus businesses are unable to meet payroll and pay creditors. Businesses fire workers or go out of business. That's the stage we are at now. The solution is to simply renominate the currency by mailing everyone checks, in order to restore/maintain the 2007 price level. This eliminates the frictional problem without creating massive transfers of resources from the private sector to the government.

eru5• 17 years ago

Nice theory. Though the existence of other currencies complicates the picture.

ewiethoff2• 17 years ago

"[T]here may simply be not enough important things to do to keep everyone busy."

More and more these past few years I think of a favorite old science fiction story by Frederik Pohl called "The Midas Plague."

All production is done by robots. Production has become so, uh, productive that humans spend all their effort just wearing out everything made by the robots. "Poor" people must live in giant mansions with several robots and wear out more stuff than "well-to-do" people, who live in small cottages with few to no robots and enjoy leisurely, intellectual and social pursuits. Comically (or tragically), it's illegal to get a robot to wear something out for you.

I think I'll reread it today.

ewiethoff2• 17 years ago

Addendum (since I can no longer edit): I reread the story. Never mind the above reference to illegality.

gdee3• 17 years ago

Totally OT but I'll try. You don't also happen to know the name of a SF novel about some project Australia. Somewhat resemblant to what you describe. Physical work unneeded, robots doing everything, energy problem solved, people VR'ing with some spinal implants. Whole thing started as a corp. venture witch sold stocks at a dollar the unit?

pshc• 17 years ago

Man, Hacker News is full of UW students, eh? I see people reading it in class all the time, this article is just more evidence...

myth_drannon• 17 years ago

Larry Smith is amazing guy, he is a legend in UW. Although he is an economist, he is particularly fond of computer science nerds :) and encourages them to be bold and creative. See one of his lectures called "Creating Killer Applications" http://csclub.uwaterloo.ca/media/Larry%20Smith:%20Creating%2...

known3• 17 years ago

3 years back I realized that I am also directly are indirectly responsible for poverty in the world.

Devilboy• 17 years ago

you bastard

edu• 17 years ago

money is not useless, simply it's more comfortable to carry and trade with a set of coins/papers than a cow.

known3• 17 years ago

I petitioned govt to give rice freely to people Below Poverty Line (BPL), an economic indicator of standard of living, used in India.

Since rice is Indians staple food, I assumed that it will have a cascading effect on remaining food items and will help in reducing their prices and inflation.

But to my surprise BPL people started buying exotic products and services with the money saved because of free rice.

anamax2• 17 years ago

> But to my surprise BPL people started buying exotic products and services with the money saved because of free rice.

Did this experience teach you that you really don't know much about human behavior and should stay away from activities where such knowledge is important?

Or, did you double down and keep at it, perhaps with "I'm a good person so what I want is good."?

known3• 17 years ago

I'd say both wrt http://en.wikipedia.org/wiki/Perverse_incentive

Jem• 17 years ago

If you liked this post, you'd enjoy Terry Pratchett's Making Money.

nihilocrat• 17 years ago

But oh no! My job was producing those useless goods and services! And if people don't buy my useless goods and services, I won't be able to make money, which means I won't be able to buy food, which means I'll starve! PLEASE, SOMEONE, STIMULATE THE ECONOMY SO I DON'T STARVE!

The depressing thing about the great depression of the 1930s, as well as the current potential one, is that there may simply be not enough important things to do to keep everyone busy.

This seems to be the entire premise of the society present in "A Brave New World".

raheemm• 17 years ago

The US dollar gets some of its value from the awesome US military. Worse comes to worse, we can take stuff from others regardless of how poor we are. Its a self-destructive mode of operation and would be used as a means of last resort. (North Korea is an extreme example - the world pays them not to go crazy with their nukes)

A more positive source of the dollar's strength is the US economy and its resourcefulness and innovation (ie hackers:)

gills• 17 years ago

Despite this being sort of a doomer rant, I really got a chuckle from the snarky bit at the end:

"I mean, we can't just give people food for free.

That would be ridiculous."

Allocator2008• 17 years ago

Everyone in this forum is stupider for having read this. I award you no points, and may God have mercy on your soul.

redsymbol• 17 years ago

I'm almost done reading "The Creature from Jekyll Island", by Griffin. Having had little background in finance or economics, much of what's been happening in the financial markets the past several years was just a mystery to me, and about a year ago I decided I wanted to understand how it worked. CFJI has helped quite a bit. It's not an easy read, even though it's well written, simply due to the subject matter (I had to read ch. 10 three times). It nevertheless does a great job of explaining how modern fiat currency systems work, and the mechanisms used by nations' central banks today.

A little secret that will make the world fall apart

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