[cs702]

Step-by-step, in plan English: (1) China sells stuff to US buyers, who pay with US dollars. (2) A US dollar is essentially a made-up financial instrument "backed by the full faith and credit" of the US -- it has value only because US laws make it so -- that is, by government fiat. (3) China could easily sell all those dollars, but if it did that, the dollar would depreciate, making Chinese products more expensive for US buyers! Chinese manufacturers would not like that. So what does China do with all those US dollars? (4) China buys US treasury bonds -- another made-up financial instrument, issued by the same government, that pays interest in the form of more dollars. Effectively, China exchanges one made-up instrument that pays no interest for another one that does. It's not an "investment" in the traditional sense of the word.

--

PS. If you find all of this mind-boggling, you're in good company. When asked about the value of money two centuries ago, Nathan Mayer Rothschild -- a member of the famous banking dynasty -- reportedly said that only two people in the world really understood it, but they disagreed with each other. And things were a lot simpler back then!

[JVIDEL]

The way I see it its actually quite simple: the intrinsic value of X, anything from a piece of code to a building, needs a standard expression, and that expression is fiat currency. Currency has a value as long as someone is willing to trade something for it; the papiermark was worthless because nobody was willing to trade with it, the moment that happens with the US dollar it will become worthless as well.

The reason we use these standards is simple: convenience. We can discuss forever how many lines of code you would have to write to pay for your rent, and what if your landlord doesn't needs any code? then you have to find someone who needs code and is willing to trade it for something your landlord needs and its also equivalent to your rent. Fiat currency in this case is like the metric system: it works (nearly) everywhere.

[Friterie]

It's strange you say it works because it happens that every case of hyperinflation in history has occurred under a fiat, paper system. Paper is very easy to debase, but if you want you can go to the "best" "schools" in the world and they can tell you why it's such a good idea... and maybe one day you can pick up a job at a central bank. And if you're really lucky your peers will prefix your name with a sobriquet of high honour as cool as "helicopter".

[kamjam]

It's strange you say it works because it happens that every case of hyperinflation in history has occurred under a fiat, paper system.

So what, we go back to the bartering system? It's difficult to trade my skills as a programmer for food directly.

Not sure what the rest of your statement is saying...

[bradleyjg]

I'll give you a hint: it involves a pretty undistinguished metal from any practical standpoint that for some reason right wing nutjobs are totally obsessed with.

[kamjam]

Sure. But gold, and diamonds and other pretty shiney things only have as much value as we place on them, the same as paper money.

@21echoes covers everything else I wold add on this.

The US currency used to be backed by gold up until 1934 [1], as did several other countries[2]. But as times have moved on, there are several other minerals which have become more important, I think it would become too difficult to rely on just a single precious metal these days.

[1] http://www.federalreserve.gov/faqs/currency_12770.htm [2] http://en.wikipedia.org/wiki/Gold_standard

[Zancarius]

> Sure. But gold, and diamonds and other pretty shiney things only have as much value as we place on them, the same as paper money.

Whenever I come across the argument that we return to a gold-backed economy, this is among one of the first things that comes to mind. Gold is worth so much because it's considered a precious metal and has numerous uses in industry. But besides the extensive history of its worth throughout the ages (which probably maps well to its chemical attributes, such as malleability), there's nothing that suggests it won't eventually become worthless if civilization values something else (salt, platinum, clean drinking water).

I used to think I was a little crazy whenever I'd have such an argument with my inner monologue, but now that I see the same point raised by others, I'm not so sure.

Maybe I still am crazy.

[tedunangst]

Yeah, that metal based economy worked out so well for 16th century Spain.

[Friterie]

That's a very important case that is so fascinating because despite all the weaknesses of employing a precious metal as a currency; since the introduction of paper currency in the last centuries central bankers have managed to create hundreds more Spanish disasters in such small period of time!

Weimar, Austria, Zimbabwe, Argentina... It's a long list of 20th Century, central bank, paper induced economic disasters: http://en.wikipedia.org/wiki/Hyperinflation

Can you find any hard-money regimes like that?

[Friterie]

Oh I'm sorry, you must inhabit that parallel universe where central bankers and their web of oligarchs are public-spirited socialists, and where in the words of Blankfein actually are "doing God's work".

Did it never strike you as odd that when the robber barrons were deposed by the class of disenfranchised oligarchs they were awarded the Federal Reserve as compensation.. Yes they were quite pleased.

[yxhuvud]

Back to bartering? There have never been a big scale bartering system as they always end up being debt based since that is a lot more convenient for all parts.

6000 Years of Debt is a book that can be recommended for information about that. It is not a very good description of the present, but it captures the past very nicely.

[scott_s]

I believe you mean "Debt: The First 5000 Years". I'm still reading it. It's good for understanding these ideas, but it spends a lot of time in the beginning in "the language of debt" and how it relates to religions. That is interesting in its own right, but not why I picked up the book.

[nunb]

yeah, that religious part was a bit far-fetched. (As a hindu/brahmin I LOL'd).

I've read several different theories of money and I don't find the debt vs coincidence-of-wants bifurcation that Graeber alludes to such a big difference in practice.

He pretty much hangs his whole approach off of that, but the two can be reconciled quite easily in my mind.

I wish everyone would read David Graeber (first) and then Detlev Schlichter.

[kamjam]

That was my point.

[Friterie]

Indirect exchange was not invented with paper pushing central bankers... Read some economic history, even a bad one and you'd know that already. Aside from French experiments with paper during their revolution, hyperinflation is very much a modern, paper induced phenomenon.

[RyanZAG]

There are many, many problems involved in pinning your value system to a random, naturally occurring substance. See [1] for one argument.

Another obvious problem: if we pin our money supply on gold, what happens if we find an asteroid made up entirely of gold - enough to triple the quantity of gold on earth? The person who grabs that gold now owns the whole planet and the entire economy is ruined, even though no actual production has occurred.

As with democracy, paper money is the worst possible system except for every other system anybody has tried.

[1] http://www.theatlantic.com/business/archive/2012/08/why-the-...

[Friterie]

Notice that I haven't mentioned precious metals once, it's only been imputed by others including yourself.

Nevertheless if that's the road you want to go down then the impact on Spain from it's South American conquest is an example from history that somewhat parallels your asteroid of gold.

And yet where Spain's experience serves as a warning we have to look to the modern central bank and revolutionary France in order to gain a true glimpse of what unfolds when a single entity has in it's possession an asteroid of money. Paper money imposed imposed by fiat.

Subjectively in the opinion of many, gold fails in one aspect that is essential to a functional money in that it lacks what would generally considered a wide demand for "useful" applications. The subject value bestowed on it for being yellow and shiny is hardly considered a virtue but perhaps that says more about the human condition than gold? It does however satisfy the remaining requirements of a money very well. It's detractors in favour of paper should perhaps ask the same questions of their beloved wood pulp and see if it doesn't come up short.

The Atlantic article, is in my opinion weak and childish. I don't blame you for opinions, they are inevitable conclusions reached my the majority of bright minds educated by the system. Having been a successful CFA candidate I'm readily familiar with all the received "wisdom".

If there is one reason I would hope might persuade someone to reconsider the validity of the economic consensus if it would be the fact that I can assure you that if you do a little digging you will discover that the architects of the fiat, paper, fractional, central banking system; certainly agreed with me rather than you.

The reason today's system is so fragile is the their progeny have by and large bought into the economic snake oil that poured through education system to justify their monopoly.

[21echoes]

rather than stating the risks/benefits of fiat vs metal-backed currencies as absolutes, how about you address them as they really are?

what would you rather have controlling your inflation/deflation rates? the rate of mining of a metal from the ground? or, in the case of the US dollar, a specialist committee controlled by a democratically elected government? (and don't come back to me with bullshit fed conspiracies, here).

i mean this question quite honestly: sometimes, your government is so fucked up that yes, indeed, the mining process, if less controllable, is at least more reliable. however, in the case of most modern, powerful countries, this is far from true.

[Friterie]

You're post is incoherent. I'll try to address what I can.

You ask what I would have controlling inflation / deflation. The free market is my answer. Study the history of inflation / deflation you will see that almost without exception inflationary shocks are caused by the control of money and its supply by a narrow self-serving elite. You ask what else I would favour when a much better question would be why, based on the historical record you would ever lend intellectual support to the status quo.

You mention "bullshit Fed conspiracies". Do you actually understand the Fed and its origins? I'm 100% sure that you don't. The robber barrons were never deposed. When the Rockefellers and Morgans were relieve of thier "monopolies" they gained the greatest cartel and monopoly that one can possess: The power to print the money. The won the central bank. That's no conspiracy. It's fact.

Your mention of mining is a bit confused, and I don't really understand what your getting at. You are aware that mining isn't cost-free activity?

Finally, before you repeat the asinine arguments as a peasant shill of their cartel how about asking yourself why the central banks of the world retain gold as their most prized asset while at the same time quite successfully employing you, for free to peddle the notion that only toilet paper has any utility in internet discussions.

[nunb]

Your posts are so well-written that I feel compelled to point out these few errata while you may still edit this one post:

- Your post is incoherent.

- why, based on the historical record,

- were relieved of their

- They won the central

- what you're getting at

- , for free,

I actually pointed out the mistakes, then worried that the malformed sentences would remain, and so I've posted the corrections instead.

Also, I think you might be responding to a troll. Or at least somebody with no hope of understanding or redemption, which is almost worse. Sigh, such is HN on matters of inordinate privilege.

[nunb]

Reflecting on the problems with metals-backed currency (eg FRNs) it's a wonder that nobody thinks BTC is the ultimate form of money.

It's especially a wonder that us hackers don't think it'll work, and that HN is so opposed in general (at least judging by the number of comments against it).

I wonder if this reflects the US-centrism of HN. I believe it's become a lot more popular in Europe (especially Germany, where Satoshi may well have been from).

[tedunangst]

When asked about calculus three centuries ago, Isaac Newton reportedly said that only two people in the world really understood it, but they disagreed with each other.

[pessimizer]

But mostly about who came up with it:)

[DanielBMarkham]

The only thing I'd add here is this: when faced with spending more money than it has in the treasury, the U.S. has come upon a simple solution. Make up more imaginary money! More money for the Chinese, more money to build houses, more money for jobs. It's all good.

If there is any consensus among economists, which I doubt, my guess is that they would say that this is a good thing, except when too much imaginary money is created. Then the Chinese and other bond holders start asking for more interest, and the entire thing spins out of control. [Insert long argument here about when, exactly, that might happen or if it has already happened and we're just the walking dead right now]

Try explaining this to your grandmother. She'll think you've been smoking crack.

[pessimizer]

>[A US dollar] has value only because US laws make it so

Or more specifically, because US taxes must be paid in dollars, and dollars must be used to buy US financial instruments.

[nunb]

A lot of people understand money today. The Chinese certainly do.

Unfortunately, most of HN doesn't seem to. Moldbuggery is a good introduction.