[athrun]

> IMO it'd be sensible to let the markets set the interest rate

I'm not sure what you mean by this. The interest rate policy is linked to the money creation/destruction process, which is ultimately a centralised state function. Banks create/destroy the money, but the pace at which they can do so is governed by interest rates.

I don't understand how the market would be able to set that rate. You'd need multiple entities acting as "central banks", and somehow competing?

What do you have in mind?

[roenxi]

I'd prefer to see a policy where either the schedule for monetary creation was publicised several years in advance, or where a constant amount of money in the economy was targeted rather than a specific interest rate (I'd go with the former, it seems harder to game). We've actually got exactly that in Bitcoin which is making it an interesting experiment for me, although it is too cumbersome to act as money we'll get to see how that sort of system performs in a market.

The idea that it is proper to adjust the rate of monetary creation based on the market is suspect. It can't create wealth, it can create confusion and is looks suspiciously like a distortion that results in asset owners becoming wealthy at the expense of someone else. Asset prices appear to inflate more in line with the M2 - somewhat faster than the CPI, suggesting that asset owners are getting more benefits from this policy than anyone else. I don't see why they need an extra boost given that they already own productive assets.

Basically; at the moment the system is designed to penalise anyone who tries to preserve wealth in actual cash and as collateral damage prices keep eternally climbing. Neither of those things is helpful and if anything it just makes it harder for people to make rational decisions. It is confusing policy with no theoretical upside that has been drawn to my attention.

[bluecalm]

You need more money when there is potential for more economic activity. Think about money as centralised IOUs. If 10 farmers want to borrow to buy seeds and fertilizer you need 10 units. If 100 farmers want to do it you need 100 units. Same with the rest economy. You just need some institution which assumes the risk the IOUs are not paid back (cause that would destabilize the system). Those institutions are banks. Limiting amount of money in circulation is just limiting economic activity for no reason and allows rent seeking behaviour of sitting on top of money pile selling to the highest desperate bidder.

And yes, system is such that it penalise anyone who tries to preserve wealth in actual cash and that is for very good reason! If you want to preserve wealth - it's easy just buy wealth (stocks, real estate, land). If you want preserving wealth without exposure to asset class fluctuations then you want insurance and in any rational market insurance costs you money. Keeping cash is safe and it costs you - exactly as it should be.

[mitthrowaway2]

The problem with that is that it creates an incentive to hoard real estate for the purpose of wealth preservation, which can have major detrimental effects. Even using stocks for this purpose may cause or exacerbate problems, such as asset bubbles.

Why is it preferable for people to hoard land than money? Land is a tangible and productive asset; if I had to choose between the two, I'd rather that it be efficiently allocated than that money were. Only those people who desperately need land, in order to make productive use of it, should have any financial incentive to own it.

[verall]

And this can be solved with real estate taxes - a disincentive from just holding land.

[mitthrowaway2]

One of the difficulties with this is the question of how you tax an asset whose value you don't necessarily know for certain, because real estate is not fungible and its market price is only really known when that specific parcel is changing hands between unaffiliated parties. Perhaps you could apply the tax as a lien, set as a percentage of an unknown value, and deferred until it is next sold, and have the government take back ownership of the land if that percentage reaches 100%. But even this might only encourage people to trade land between agents at suppressed prices, just to pay off the tax, and then flip it at its "real" price shortly thereafter.

[verall]

Every local government in America has basically figured out how to value real estate for taxation, although it's not perfect - I think that loans against a property should be limited to it's tax value as a first step, and ultimately land-value rather than improvement value should be taxed based on who else is trying to purchase the land.

[radlad]

For real estates, but not for other assets classes. Unless you tax the ownership of every asset.

That begs the question, is even more regulation really the best solution?

[verall]

> For real estates, but not for other assets classes. Unless you tax the ownership of every asset.

Other assets are (supposedly) productive - investing in companies lets them do research, pay employees, etc, investing in property improvement (as opposed to land) gives more people nicer homes.

> That begs the question, is even more regulation really the best solution?

Even more than what? These regulations would improve things. Which particular regulation do you feel is harmful?

[JumpCrisscross]

> that it creates an incentive to hoard real estate for the purpose of wealth preservation

It creates an incentive to create and hoarde value. Western real estate as a market being broken is orthogonal to the system. (Case in point: Japan.)

[mitthrowaway2]

Japan has had three decades of deflation. So it does seem that when cash holds its value, people don't need to speculate on real estate. In the '80s, when it had high inflation, it grew a real estate bubble well beyond the 2008 US bubble (despite plenty of construction). China has rampant overconstruction and a plummeting birth rate, and yet it has built a real estate bubble perhaps even beyond '80s Japan, because its population saw real estate as a safe place to store and grow their wealth.

[JumpCrisscross]

> Japan has had three decades of deflation

It’s had three decades of flirting with deflation. Its price levels have been rising for at least the last decade [1]. (Albeit, not steadily.)

[1] https://www.stat.go.jp/english/data/cpi/158c.html

[bobthepanda]

To be fair, bubble Japan had ridiculous property bubble valuations. At the peak, the grounds of the Imperial Palace had a valuation more than the entire state of California.

[datavirtue]

Taxes and depreciation eat at that wealth. Better to invest in a going concern.

[maxcoder4]

What about inflation indexed bonds? As far as I can see you can't lose money with those, and they don't cost anything (even earn a bit, after adjusting for inflation).

[littlestymaar]

Well, bitcoin shows you exactly what to expect in such a situation: it makes a terrible currency that nobody ever wants to spend.

I know many people are convinced that the value of money comes from its scarcity, but it's actually a very limited view: An even more important characteristic of money is that it must be abundant enough. That's why humanity spent most of history using gold and silver as support for value and not diamond and platinum.

That's the neat part with credit-based money: it's generally produced in just the amount you need for the economy. But another problem arise in case of financial crisis: banks can run out of liquidity if other banks refuse to lend them, and it has a catastrophic effect. That's what central banks are made for: they are lenders of last resort.

The problems you are referring to aren't really related to monetary policy itself, but about fiscal policy: when you try solving all problems (namely aggregate demand being too low) with monetary policy alone, you end up in weird places.

[RunSet]

> Well, bitcoin shows you exactly what to expect in such a situation: it makes a terrible currency that nobody ever wants to spend.

Long before bitcoin, Gresham's Law already said that, given the choice between spending soft money and hard, people will spend the soft and hold the hard.

https://en.wikipedia.org/wiki/Gresham's_law#Theory

If the grocery store and tax man accepted Monopoly's in-game currency, I would likewise expect people to spend that before U.S. currency or bitcoin.

[jameshart]

Gresham’s law doesn’t apply to bitcoin because it isn’t legal tender.

If bitcoin were legally valid for all debts public and private… would people still hodl?

[JumpCrisscross]

> Gresham’s law doesn’t apply to bitcoin because it isn’t legal tender

Gresham’s law applies to anything used as money. Which I would still argue does not apply to Bitcoin, as it’s transitioned into a store of value versus functional currency.

[jameshart]

Gresham’s law is really about currencies where coins have a ‘true value’ and a ‘nominal value’. Like, a silver coin has value as silver, and compared to a nickel coin with the same face value, it’s a ‘better’ coin, so people won’t spend it.

It’s not obvious how to apply Gresham to a conversation about dollars and bitcoins. Legal tender parity would be one way to make the law apply.

[belorn]

Talking about currencies and banks, a core aspect is that debt is also a form of currency that be created and destroyed. The biggest issue in modern financial crises is not that banks run out of liquidity, but rather that the trust of existing debt can crash to the point of making people believe that the bank can no longer recover enough of it. A central bank can then act as last resort and buy the debt or repaying debt, restoring trust.

[littlestymaar]

> The biggest issue in modern financial crises is not that banks run out of liquidity, but rather that the trust of existing debt can crash to the point of making people believe that the bank can no longer recover enough of it.

This is exactly what we mean when talking about banks running out of liquidity though.

[belorn]

The financial crisis from 2007-2008 would not have been prevented if banks had more liquidity. Debt insurance help, but that just moves the problem to the insurer.

Subprime mortgages, toxic assets, and excessive risk-taking is about trust and risk. When the government becomes the debt insurance, then that risk get managed through stricter banking regulations. Liquidity do not make a bad debt less bad. At best it can hide the problem as the bank tanks the loss, but that only works as long the bank is profitable.

An other interesting example was the Icelandic financial crisis, where the Sovereign debt defaulted on loans from UK and Netherlands. This caused diplomatic problems, including threats of cutting of the Icelandic banks from the global banking network. The value of the Icelandic currency sharply dropped in relation to other currencies, and the Central Bank of Iceland became unable to act as a lender of last resort. The solution in the end was a international bailout support program, including securing more debt from other nations to pay existing debt. This renewed trust in the sovereign debt, but also the trust in the currency and the government.

[JumpCrisscross]

The biggest problems in modern finance are not about banks running out of liquidity. It hasn’t been since the Great Depression. The recurring problem has been non-banks being bank-like.

[littlestymaar]

It is the biggest problem, until Central Banks intervene and solve the problem altogether, which makes the problem functionally disappear, but it's still the key problem. That's true for any company btw: you can live practically forever insolvent as long as you are liquid, but no matter how solvent you are “liquidity kills you quick”.

[roenxi]

It isn't a terrible currency because of the fixed supply pattern though; it is too volatile because there isn't a consensus on how to price it yet. At some point it'll be more like gold where the value of crypto is obvious and understood. And I think the major problem is it is too risky, a fat-finger mistake can deplete an entire wallet with technically no recourse.

[littlestymaar]

Gold is also a terrible currency in today's world, that's why it has been abandoned by everyone during the last century.

Of course bitcoin is broken in many additional ways, but the economics doesn't make sense in the first place. (And it was created and promoted by people who were confident that the Fed's intervention in 2008 was going to trigger hyperinflation, what happened in the following decade should give you a pointer how economically literate these people are).

[detourdog]

I believed that for a long time but I have come around that to the idea that it makes sense to have physical gold like a secondary savings account. I now understand how gold can be personally useful during normal economic times.

[JumpCrisscross]

> makes sense to have physical gold like a secondary savings account

That’s fine. That’s a store of value. Stocks and bonds aren’t currencies either.

[roenxi]

> Gold is also a terrible currency in today's world, that's why it has been abandoned by everyone during the last century.

Open to question how bad though; there isn't really such a thing as a good currency. If the argument is that the US dollar is the best we have it is a bit of a disaster; it can't even be used to compare values over a 12 month span, the inflation is significant. And as I recall the abandoning done in the US was because because Nixon said the US government wasn't winning the game and flipped the table as opposed to any fair process, vote or even market consensus that gold was a bad idea.

I'd agree if the argument was to anchor currency value to an energy commodity to preserve some sort of $/Joule energy measure. That'd be really helpful for using money to track value. I'm still not sure why people are so unhappy at the idea of using money to track some constant amount of value.

[sobellian]

The point of a currency is not to experience zero inflation, it is to facilitate commerce as a medium of exchange. If you want to save, buy appreciating assets.

> I'm still not sure why people are so unhappy at the idea of using money to track some constant amount of value.

What's the grand cosmic purpose of having something that holds a "constant amount of value" (whatever that means)?

[zie]

Because when the world blows up, people need someone to step in and get the system going again. If they don't it will take forever to get the economy going again.

See the GFC as an example. The US economy was about to implode, but the govt stepped in and said, heck no, not on my watch and fixed it. Instead of taking many many decades to right itself, we did it in 1 and the US govt made a nice profit to boot.

A counter point is Japan, they chose not to fix their capital markets and it's 30+yrs later and they finally are getting back on track.

[lupire]

Why on earth would you expect something literally called "currency" to have any longitudinal attribute in time? Currency is meant to be used immediately. That's it's entire value proposition, as the lubricant of trade. If your time horizon is longer, you shouldn't be holding your assets in currency.

[littlestymaar]

I'm going to stop here because of Brandolini's law. But I'd recommend you to read non-Austrian stuff on money.

At this point it's pretty clear that you have very strong opinions on stuff you have very shallow familiarity with, and the only way to fix that is to actually try understanding how the system works.

[lupire]

What is the unit of value? It doesn't exist.

[headcanon]

> Basically; at the moment the system is designed to penalise anyone who tries to preserve wealth in actual cash and as collateral damage prices keep eternally climbing.

That is a feature of the current monetary system. Excessive inflation is bad, but reasonable inflation is a design goal. Cash isn't meant to be hoarded, its meant to be spent and invested. How would you encourage investment in a non-inflationary currency? Thats the problem with bitcoin, people want to hodl but not spend.

[s1artibartfast]

> How would you encourage investment in a non-inflationary currency?

Returns on actually profitable investments would be the motivation. Turn the question around for a minute. Do we want an economy that forces people to make unprofitable investments simply to hedge against inflation? Do we want people to have to gamble or lose their assets?

[klodolph]

There’s a tradeoff between risk and return. It’s not a binary tradeoff where you either have no risk but no return, or good return but unreasonable risk. It’s a gradient.

[s1artibartfast]

I would say it's heterogeneous, not a gradient, but I understand your point. However, my point is that inflationary monetary policy precludes cash savings forcing currency owners to take on additional risk to mitigate inflationary losses. Like the parent post points out, it incentivizes investment. If your currency is inflating at 5% per year, it becomes rational to buy an asset which depreciates at 4% per year. More generally, individuals and Society have to perpetually Gamble on growth in order to stay ahead of inflation.

[sangnoir]

> Do we want people to have to gamble or lose their assets?

Yes. 0-velocity money isn't good for economic activity.

[s1artibartfast]

How do you weigh the benefits of economic activity against human considerations?

[partitioned]

It seems to work pretty well

[s1artibartfast]

That's a fair point, things are relatively stable in the US compared to a lot of places. However, it does preclude labor and savings as a path to Financial Security. Your options become Gamble or die poor. If you want to start a family and own a home in midlife, you have to participate in a national pump and dump cycle and come out on top.

[sangnoir]

> However, it does preclude labor and savings as a path to Financial Security.

Correct. This is an unfortunate fact that most try to sweep under the rug, but when it comes to weighing capital vs labor - the system is exactly what it says on the tin: "Capitalism."

[truckerbill]

For you

[sunshinerag]

For who?

[maxcoder4]

The problem with bitcoin is that transaction fees completely disqualify it for everyday life (i don't know right now, but probably around $5 for a transaction). I think that problem dwarfs deflationary nature of the currency.

[JumpCrisscross]

> a policy where either the schedule for monetary creation was publicised several years in advance

This is like mandating a city’s thermostat ratings—in degrees on the dial, not temperature—be set months in advance. The source of the variation isn’t the thermostat. It’s the weather.

> idea that it is proper to adjust the rate of monetary creation based on the market is suspect

It’s possibly the most empirically supported finding in macroeconomics. Fortunately, there is never a shortage of populists or anarchy providing counterexamples.

> the system is designed to penalise anyone who tries to preserve wealth in actual cash

Yes, we separated the transactional (deposits) and store-of-value (Treasuries) functions of the U.S. dollar decades ago. Storing value in cash is literally using money wrong.

[roenxi]

> It’s possibly the most empirically supported finding in macroeconomics.

... he asserts confidently while providing literally no examples or counterexamples. Or explaining the analogy - I don't adjust my thermostat very often, I know the temperature that I like, so setting it years in advance is feasible although weird. And governments mandating thermostat settings is a value-destructive idea - much like governments mandating that people use a specific currency (the argument there seems to be that it is necessary for the tax system to function, which is fair, but the mandate isn't value-creating).

> Yes, we separated the transactional (deposits) and store-of-value (Treasuries) functions of the U.S. dollar decades ago. Storing value in cash is literally using money wrong.

"We've implemented this policy on purpose" isn't a valid argument. A year or so ago Sri Lanka implemented a ban on fertiliser. They then had a food crisis because the policy worked as designed. The argument should be "here are the pros, here is the argument/evidence that the pros outweigh the cons". Deliberately doing something stupid just makes it more stupid.

[partitioned]

The problem is that there IS competition between central banks. If one country did this, the countries that game'd their currencies would have an advantage.

[pjc50]

You cannot sensibly target M2 directly. You can target M0, but not M2. The interest rate is an indirect control on M2.

(This actually also applies in bitcoin! It's just that because bitcoin credit markets are extremely poorly developed the M2 is both much closer to the M0 and much harder to measure. There are also several completely uncontrolled dollar-flavoured tokens circulating on exchanges such as Tether.)

Why can't you control M2? Because issuance of credit is decentralized.

The hard money people would like to split out deposit-keeping (which would inevitably have to charge, not pay interest) and lending out (which would have to be limited to the amount of equity available, as it is to e.g. VC funds). This would make business credit, consumer credit, and mortgages much more expensive.

> designed to penalise anyone who tries to preserve wealth in actual cash

These people are a tiny minority of outliers and trying to force up the cost of credit, on which the real economy runs, to benefit them is pointless.

(also, the Japanese system rewarded cash holders! Bank depositors got paid nothing: https://moneykit.net/en/guide/yen/

"As of 20, 3, 2024, the interest on Yen savings account is 0.001%. Interest will be taxed at 20.315%")

[detourdog]

I think the original comment might be getting at the cultural differences between the US and Japan.

It is plausible to me that the group that owns the most Japanese Yen get to set the rate. That group can decide to tread water or start to charging outsiders for use of the capital.

Warning the above is wild speculation from a stranger on the internet.

[pjc50]

All central banks get to set a "floor" rate by virtue of being a central bank. Commercial banks then charge a "vig" on top of that.