[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.

[JumpCrisscross]

> Gresham’s law is really about currencies where coins have a ‘true value’ and a ‘nominal value’

Correct. Or, more classically, a nominal value and commodity value. Whether it’s legal tender isn’t functionally germane (though historically, it is).

> not obvious how to apply Gresham to a conversation about dollars and bitcoins

Bitcoins have a sloped demand curve. Liquidating ten billion U.S. dollars gives you ten billion dollars. Liquidating the same in Treasuries gives you almost ten billion dollars. Liquidating the same in Bitcoin yields an unknown amount—the commodity value of a basket of Bitcoin that size. The gap between the quoted “value” and that true value of a given aggregate creates a localised Gresham effect.

[jameshart]

Legal tender law is the legal fiat that gives a coin its ‘nominal’ value distinct from its commodity value.

[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”.

[JumpCrisscross]

> until Central Banks intervene and solve the problem altogether, which makes the problem functionally disappear, but it's still the key problem

The Fed and FDIC are separate. Central banks help with the liquidity problem. Deposit insurance solves it.

It remains a core risk. But risks have to be managed. Problems are unsolved.

[littlestymaar]

> The Fed and FDIC are separate. Central banks help with the liquidity problem. Deposit insurance solves it.

It seems you are somehow conflating “liquidity issues” with “what happens with customer's bank account”, as if bank runs were the only kind of liquidity issue that could happen to a bank, and then arguing that this isn't the case. But that's not my point in the first place!

Commercial banks need to borrow (central bank) money every once in a while to meet their liquidity needs, there doesn't need to be a bank run for that to happen, and if at that time nobody wants to lend, they are dead. Fortunately they can get the liquidity they need from the central bank directly at the discount rate, and we don't have a financial crisis every other year like what happened just before the Fed was created.

[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)?

[roenxi]

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

Well, if a sandwich shop was selling sandwiches for $10 last year and $11 this year, it'd be convenient for me to have a way of telling if the real price of a sandwich has gone up without needing to do any calculations and look up statistical data. I think most people would benefit from that sort of comparative power to be honest; it is difficult to keep track of whether the offers being made are better or worse value as time passes. If the value of money were constant, then a $11 sandwich in 2024 would be guaranteed more expensive than a $10 sandwich in 2023.

I've talked to several people who are convinced the economy would collapse if that sort of constant pricing was normal practice. I have reservations about their claims.

[SiempreViernes]

But what purpose does the "constant value object" serve here? To evaluate if the real sandwich price has changed you need information about the sandwich (and the rest of the economy)...

[JumpCrisscross]

> it'd be convenient for me to have a way of telling if the real price of a sandwich has gone up without needing to do any calculations and look up statistical data

This is the core problem of economics. If we solve it, we solve, well, the economy. Nobody would need to buy anything; we could just produce and send everyone what we know they want. No need to consider unpredictable variations in individual choice and discretion.

Of course when you include that pesky individualism, this model breaks down. Because it becomes impossible to structure production today to perfectly meet demand tomorrow. Making currency transformations across eons breaks down because it doesn’t make sense to ask how many talents of silver Caesar would have paid for an iPhone.

> talked to several people who are convinced the economy would collapse if that sort of constant pricing was normal practice

No? Are you confusing what you described—which is the aim of price-level targeting—with fixed-price policy?

[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.