[asveikau]

I deleted my comment because I concluded it's obvious and contributes nothing to the conversation.

But since you replied I will say: Yes it is backed by nothing. There is no central bank. It's funny that you draw comparisons to gold's lack of intrinsic value because the whole point of central banking is to move away from storing shiny objects in vaults, and in that regard Bitcoin is a regression. (Replace shiny objects with shiny prime numbers.)

[humbledrone]

I don't think the point of central banking is to move away from shiny things stored in vaults. I think the point of central banking is to consolidate macroeconomic power in the central bank, so as to e.g. promote growth of the nominal GDP by maintaining a so-called healthy rate of inflation.

And, as I mentioned in a cousin comment, I think the whole definition of backing is just silly. Bitcoin is backed by trust in math and computation, but gold and the USD are backed by trust in people and government respectively. Gold is trusted since it's been in use for thousands of years and is widely used as a store of value. The USD is trusted because the US government has been relatively stable (and powerful) for a while now.

[drcode]

> There is no central bank.

OK, let's suppose for some reason there is a sudden inflation of the US dollar...

Please, asveikau, can you explain a single precise example of what the "central bank" can do to help in this case that causes a net improvement?

Will they invent an "un-printing press"? Will they get people to turn in the excess dollars by exchanging them with gold? Please, asveikau, explain what it is that a central bank can do in this situation that justifies its existence.

[humbledrone]

Central banks have already invented the un-printing press, and it is perfectly possible for them to intentionally deflate a currency (vastly if desired) through the use of OMOs and also simply by increasing the fractional reserve requirements for other banks. This is totally normal and non-theoretical central banking stuff.

http://en.wikipedia.org/wiki/Open_market_operation

http://en.wikipedia.org/wiki/Fractional_reserve_banking

[drcode]

This is admittedly a good and intelligent retort to my comment. However, I did use the term "net inflation" so this raises the issue as to whether time-shifting the monetary supply by selling bonds/raising interest rates via OMO really counts, since it usually merely postpones the increase in monetary supply (i.e. more money needs to be printed to cover the interest payments this requires, and the principal will eventually come due.)

However, you are right though that adjusting reserve requirements does generate a net sink for excess monetary supply, though it is of limited capacity. Also, it is not a very viable tool right now, since bank reserves are already at an all time high.