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Next Currency … A Real One?
Pretend for a moment that the US $dollar is no longer useful. With what could we settle transactions?
Obvious answers are a new fiat currency from a new Central Bank;
currency issued directly by the government, such as US Treasury-issued
Greenbacks; precious metals in raw, coin, or certificate form; various forms of
local or private coupons or currencies; novel concepts, like various forms of
digital currency; and certificates of claims on present or future assets,
baskets of goods, commodities, energy, or even other currencies.
Currency is managed scarcity. The
complaint against fiat currencies is that it is managed poorly. Precious metals are by their nature scarce,
but have practical issues associated with mass, competition with industrial
consumption, speculation, coin clipping, and assorted predatory market
manipulation.
Clearly a society can have some level of success trading in feathers,
seashells, salt, precious metals, government coupons, and even fiat
currencies. Of course, systems tend to
fail with surplus or scarcity shocks, either through natural disruptions, or more
commonly through management-induced changes in currency supply when the Wizards
of Smart are found to be lacking.
However, most would probably agree that historically the most successful
currencies have been through precious metals and fiat currencies (depending on
a definition of “success”, and to some extent, the motives for maintaining a
currency).
For fun, let’s assume for a moment that we want to try something
different.
In our pretend example, we would like to have our currency “backed” by
something, thus fulfilling the fundamental requirement of scarcity: Since nothing is infinite, a currency backed
by something cannot itself be infinite (short of accounting fraud). It would be nice if the market determined the
value of that backing, and (of course) that backing will change over time
relative to other things society values, but we generally want that something
to have a somewhat “stable” value.
What about a basket of stocks and bonds?
Remember that a “stock share” is a share
of all future profits. While some
pretend it is represents a percentage of ownership of a company (which is sort-
of true), and it may represent a claim on the company in liquidation, remember
that the company’s bondholders and creditors fill their claims from a company’s
assets first. While most shares today are
purchased for speculation (e.g., the
share is desired because the buyer expects its future price will be higher),
this is somewhat of a distortion because its fundamental value as an investment is merely the value of all
future profits delivered.
Now we’re ready: Many investment
companies offer a “Total Stock Market” investment fund with low expenses. The fund purchases shares on the open market
to maintain a balance that resembles a market index, but which is distributed
among all the stocks on the market.
Thus, this fund is backed by shares in companies that are regulated,
audited, and exposed to public scrutiny.
Individual companies may be performers or stinkers, but the public (at
some level) can scrutinize and value the individual company’s worth. These same investment companies offer a
“Total Bond Market” investment fund with low expenses, and the public can
similarly perform due diligence on individual bonds that comprise that fund.
Next, we have the magic of a Money Market Fund, originally designed to
provide liquidity and price stability at one dollar. It pays dividends to the fund with increased
shares, but the shares themselves remain at one dollar (i.e., one nominal
unit).
Combine all three (Total Stock Market Index, Total Bond Market Index,
and Money Market Fund), and we now have a Money Market Fund backed by the Total
Stock Market and Total Bond Market (at a 50% / 50% ratio, to pick a ratio, with
history suggesting such a balance is more stable and productive than all of one
or the other). Let us call this fund,
the “Bocks” (for “bonds/stocks”, since that’s easier to pronounce than “Stonds”
[for “stocks/bonds”]). Another cool name
might be the “Sibs” (for “stocks-index-bonds”), but I must admit I was never
very cool, and probably should not be permitted to coin such terms.
The final requirement is the issuance of “Bearer’s Bonds”. If you bought one share of Bocks, it is worth
one share of Bocks. Its value is
somewhat stable at the nominal Money Market one dollar. However, on deposit at an institution, the
institution would receive the dividends from the underlying assets that back
that share of Bocks (and that institution may be kind enough to split that
dividend with you).
It’s true that bearer’s bonds of Bocks in circulation (equivalent to
today’s M1 printed money supply) would produce no dividend (because to where
would the dividend be sent?), but that is a relatively small number of Bocks related
to the total money and credit supply, and that merely increases the dividend distribution
to deposited Bocks (where we actually have an address to which we can send the
dividends).
[Side note: The US banned new
issuance of bearer’s bonds in 1982 to inhibit tax avoidance, but even a
personal check can be considered a “bearer instrument”, which can be used
legally. While it may be possible for an
investment company to establish a Bocks system today, a legislative change may
make this easier.]
Thus, we could still have anonymous transactions without centralized
control (e.g., the private trading of goods-and-services for bearer’s bonds, or
printed Bocks), and Bocks found buried in a back yard after a decade would
still hold the face Bocks value (although the dividends would have been
forgone, since they were not on deposit).
The issuing agency would “benefit” from Bocks that were lost or
destroyed (since these shares effectively were dropped from circulation,
resulting in a reverse-dilution for the remainder of Bocks holders), and the
issuing institution would remain viable just as they are today by charging a
“management fee” to be paid from the dividends produced by the underlying stock
and bond assets. Theoretically, the
underlying companies issuing the stocks and bonds themselves could be priced in
Bocks, with the relative value of the company being determined by its
competitive place against other companies:
One company could not grow-in-value ten times overnight without
similarly lowering the rest of the market by that value in that same night.
This is as it should be: The
value of all houses in my city is fundamentally determined by the incomes of
all the people that live in my city. The
value of all products produced is determined by the purchasing power of all
people that consume products. The value
of the entire stock and bond market is determined ultimately by the value of
all future profits, which themselves are determined by the value of all future
productivity.
This system also honors the fundamental “time value of money”: One dollar tomorrow is not as good as one
dollar today, so when I loan you my money today, I want you to give me back
more tomorrow (e.g., “interest”). One
Bocks on account is worth more tomorrow simply because of the dividend it can
claim through its underlying assets, the stock and bond markets.
Further, we need not grant a single institution monopoly control in
issuing Bocks: Many investment companies
exist today with these market funds, each with their own structure. One Bocks is worth one Bocks, no matter who
was the issuing company. Counterfeiting
is only possible through fraud, in the event Bocks are created without
purchasing the underlying stocks and bonds on the open market.
What about speculation? Stock
market crashes? Secular cyclical changes
in the markets?
First, these swings principally relate to the expansion and contraction
of credit. Society must make its own
decisions regarding fractional reserve lending, leverage limits, auditing
guidelines, government fiscal discipline, and any other mechanized fraud. That has nothing to do with the currency
itself, or the fundamental “worth” of anything.
Second, our fictional Bocks currency itself doesn’t care about the price
of the stock or bond markets. Ten
thousand? Three thousand? One zillion thousand? Who cares?
We don’t care because the Bocks is itself merely a unit of exchange, and
its instantaneous “worth” is merely its fundamental claim on future dividends. When the market crashes, conceivably the
Bocks is worth more, in the event future dividends are expected to be
relatively high compared to the current market “share” price.
Nothing is “fixed” forever, as things constantly change relative to each
other. We need only consider as currency
something that is “relatively” stable, and “relatively” worth something. We can agree the dollar (or any national
currency) has had volatile swings in valuation over the decades, with the US
dollar currently devalued in excess of 95% from its inception. It is hardly the poster child for a more
stable system. In fact, no unit of
exchange satisfies this “super-stable” concept.
Thus, the best we can do is pick a backing that is of relative stability
and value, and which represents the productive capacity of society: The stock and bond markets.
Fundamentally, all other markets are ephemeral: Wealth is stuff people want, and society
creates wealth through the productive capacity of the stock and bond markets. Holding a share of all future profits from those
may be the best we mere mortals can do.
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Well all I can say is:
if the dollar dies tomorrow, since 58% of the American population earns a check each week from gov. spending a lot of folks will go hungry. Gold and silver are naturals as money but it's also very easy for any community to create barter systems such as LETS, CES, Time Banks and others. Personally I'd prefer local currencies backed by local commodities or PMs. Berkshares.org theplenty.org ...there are dozens of local currencies now in operation across America and they work very well. A local group in Mendicino, CA has Mendo Food Credits paper based on local quantities of beans and other dry goods. I don't think the dollar will die but a real devaluation of 40-70% seems on the way. In which case "those that have" will use PMs "those that don't" will use local barter systems.
Mark
editor@dgcmagazine.com (Digital gold currency magazine)
http://ccmag.net (Community currency magazine)
#212550
"The future of currency is Digital, Anonymous, and has an "open window call" on gold (or some similarly tangible "asset") to keep it honest."
Mazarin is so right about anonymous and digital. Why have LESS privacy than a $100 bill or 500-euro note and many are working on this already. For example see:
http://themonetaryfuture.blogspot.com
It always comes back to gold doesn't it paper bugs? Even to begin a discourse on a new paper scheme you know you have to roll out your refutations, protestations and lamentations on gold's failings before declaring that there just has to be something better. Just like the Marxists that killed countless millions in the 20th century, their ideas still live because adherents maintain the failures were because collectivism had yet to be implemented properly. This same insanity about the perfectibility of money and the desire to keep placing monetary control into the hands of centralized governments, cabals, etc. will get you the same results - each and every time. You are correct, monetary gold isn't perfect, people are involved after all, but it is manifestly better than any other option, although I'm sure people will keep trying.
If only the gold bugs would actually study the history of gold.
The Rothschilds started as goldsmiths. First they started storing it for others, because they had a safe. Then they started loaning it out. They they started issuing gold certificates because it's not always safe or easy to carry gold.
One of my ancestors, Louis McLane Jr., was an early president of Wells Fargo. How, you ask, would a stage coach company end up as a bank? Because they were the ones hauling it out of the Sierra Nevada and storing it. The only time a gold based currency has ever worked for the average person is when they can go out and actually dig it up out of the ground. Then the poor fools go and spend it and the banks end up with it.
You poor fools just can't take your eyes off the shiny object.
Well, if we look upon history we learn that it is not the shine that makes it desirable but the inability of alchemists to copy it or produce fakes. With a standard weight and purity there is no challenger to it as a store of value.
Which version of history are you reading from? The first metalsmiths didn't have safes. Certificates were issued to guarantee weight and purity - and the certificates became more liquid than the metals it certified. Long before the Rothschilds.
Go ahead and build another pyramid of paper that the metrosexuals can all bow down before... I am a simple man, and being distrustful of ponzis, will hoard gold and silver.
I don't care if this new paper system is based on the S&P 500 or US Treasuries or is coming from the U.N. Its all just a game that I'm not interested in playing.
My allies who also Go Galt will be here with me, in a world of our own creation. One without all the "drama".
sex, sin & cigarettes, ladies and gents. barter your bodies, morals and kin for grocery bags of tin-can foods and gastric whimsy.
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And hence the round robin....
When one tries to blanket over indigenous problems....
One invites currency failure....
Just ask Greece....
Where is Greece going to be currency wise in 12 months....
Their CB does not even know the solution to this....
.........................
The point...
Too many indogenous differences for blanket currencies to be successful....
The point being there should be a worlwide balanced basket currency for which all countries make up a portion thereof....and people choose their venue....
Thus always having the incentive to be better off financially.....One core worldwide currency....and the local....The free people choose their own....or a mix thereof....
We can focus on keeping control on fiat money supply year to year based on a realistic target rate of inflation. Competition and free markets will take care of any attempt to create artificial scarcity as the demand for that product in which scarcity is being created artificially will be satisfied by another producer. This will also force people to look for value as fiat money supply is limited leading to production efficiencies. Of course this depends on full disclosure about the products in the market and accounts of businesses and that depends on the rule of law without which all discussion is moot. As Mikla pointed out the legitimacy for fiat currencies is a result of governments accepting taxes in the same currencies as also payments for government provided services. Gold is too in-elastic in supply and risks an even greater degree of financial engineering than in fiat currencies because there simply isn't enough gold around and people will always look to 'leverage' it, even more so given it's dramatically more limited supply than fiat currency. Anyway gold isn't an industrial metal and has no intrinsic value unlike silver, copper or platinum. So if we at some point prefer another metal to decorate ourselves gold's value will drop to near zero. I also believe that it has so much value only because it's supply can, has been and continues to be manipulated. i think mikla's bocks are a credible option as those issuing them have a vested interest..that is to stay in business, accumulate resources(money) and grow their business. one bock is one bock and is difficult to inflate it as is printed on paper the medium has little if any value which won't suddenly or otherwise become incredibly valuable either. currency should derive it's value from production. it is indeed a store of productive value and shouldn't have it's own independent intrinsic value which itself can increase or decrease. that defeats the purpose. one unit is one unit not just in face value but in exchange too. otherwise, it's like the metal in the coins becoming more valuable than the face value
They're already getting started in detroit...
Struggling towns printing their own cash
Also.....
One could add this characteristic to
DIGITAL MONEY
Guess what....NO "ANTIQUE CRIME"....
Drug money...bank robbery...tax havens....
All these issues would dissappear ?
Interesting point of view....
Here is another one....
DIGITAL MONEY
Think about this....
Why have hedging methods....or physical money ?
Why not just digital money ?
Why should digital money be subject to a particular govt's. flaws ?
Digital money would be a compilation of CB's valuations based on debt/income for each country....
If populism gets out of hand and devalues a country's economic state....then that country's weight auto diminishes....
There would be no change....just giving another country that amount which was lost....but the digital money would be the same....
Thus all MCD Big Mac's would have the same price worldwide....Oil would be the same price worldwide....
All countries would than better set economic objectives....and the cost of materials in one country would be the same as in another....Labor would cost the same all over the world for similar tasks....
Taxes would be auto deducted from being part of the price of the tangible item consumed....
There would no longer be physical money....
This money would be digitized via the local govt. as a matter of record ....and from this point would be directed towards all other account types....
Therefore....
Is DIGITAL MONEY inevitable ?
Markets tend towards efficiency....why not ?
mikla,
I would agree on this being a thought-provoking article, but overall I think it fails to recognize a trend that is likely to continue building - that of moving towards an ecosystem of local and semi-local currencies, not all of which are formally considered as such. Airline miles, local government scrip (e.g., California), bocks (love the name, btw) and options on same, gold, even grocery coupons serve to a certain extent as media of exchange over the various electronic networks, albeit at different levels of conversion.
I see this kind of transaction going on all the time in the Vancouver/Victoria area. The Japanese yen is actually more heavily used in Richmond (ironically, a Chinese enclave) than Loonies are, as many of the vendors in the region utilize Japanese financial services in order to better integrate with Chinese ones.
California's scrip was problematic because legally they could not in fact back such scrip with hard assets, as this would have violated Article I Section 10 of the US Constitution - in effect all they are legally entitled to produce are promissory notes with (possibly) an interest accrual rate. However, as currencies become more virtual, I believe the ability of the Treasury to enforce the distinction between US state-based scrip or private (corporate or individual) bonds vs. US FRN will become increasingly limited.
Moreover, should a hyperinflation scenario occur, it may very well force a situation where states such as California or Texas need to issue asset-backed scrip in order to continue their own foreign trade scenarios (and what's a state "trade mission" but simply a back door way of setting up a formal contract with a foreign country without calling it a treaty, which is specifically precluded in the Constitution).
Of course, should it come to that, then it's a very short step from this to formal secession and assertion of sovereignty. The prerogative to issue currency has long been a sovereign one, but it's never been exclusively sovereign. Again, an example from north of the border: the Hudson Bay Trading Company was a chartered corporation that owned most of what would become Canada (as well as much of the Pacific Northwest). It issued its own scrip, maintained its own standing police and navy, negotiated "trade agreements" (aka treaties), ran its own schools and so forth. Even after the Canadian provinces coalesced into Canada in the late 1860s, HBC scrip was still considered legal tender in most places for several decades thereafter.
My guess is that given the likely long global depression that most of the first world countries are now entering into, we're going to end up seeing a veritable hotbed of alternative currencies emerge as large empires break up, as corporations assert their own existance as formal states (something I expect to see being a significant trend by the 2030s) and as the authority of existing issuers of currency, starting with the US Dollar, continues to decline.
good points, if economy melts down as many believe, it will be hard to keep the currency genie in the bottle. Govts will do tyrannically things to squash it, but I think there are too many avenues for them to keep it completely in control. In south america, some city mayors have used things like bus tokens to pay unemployed workers to clean public spaces etc..Hard to say make no payments in bus tokens...
Unfortunately, it will likely take great pain for regular folks before we break our chains and open up to the alternatives..
I think what you describe is the most likely scenario. South of the US/Canada border, we also have tremendous expansions in "gift cards" and "points" issued directly by businesses, and that will only explode when people don't trust a "reference" currency (e.g., the dollar).
I think the rest of your post makes some deep and sensible projections too: When push comes to shove, California issued its own currency (IOU's), because it *had* to. It didn't care if it was legal or not. (Indeed, regulatory agencies couldn't make up their mind for a long time after they were in circulation as to what those pieces of paper *were*). That would happen again.
Ditto for your observations on sovereignty: California will throw out its Constitution and re-write it. That will be illegal and with no precedent, but nobody will care, because their Constitution mandates the spending of money they don't have (so stupid). It could be *anything* after it's rewritten, and secession is not "off-the-table".
Wild stuff. In my area, things like Craigslist have given rise to the makings of a barter economy, and internet connectivity (like eBay) makes it much easer for people to price "apples" in terms of "oranges".
Still, I have a fundamental concern regarding the "store of value": How?
I'm a little nervous about picking a single commodity and calling it "acceptable" for all long-term storage/investing needs.
Vermont has a group trying to secede now, they mostly seem like anti-war types, and they have support of 15 percent of population...and they are not hurting economically nearly as bad as MI, FL, CA....interesting times.
And they like guns a lot. Is anti-war economically harmful?
Wouldn't that just exaperate the business cycle?
So if everybody likes their new Bocks and they're earning dividends in their accounts, they are getting richer and the banks are geting richer, the money suply is increasing and inflation kicks in, wealth condenses as the more $ someone has the lower % of their income goes into consumtion and they therefor earn dividends on a higher portion of their income, I do suppose we might see a higher rate of savings as people would want to obtain dividends, but if people are going to invest, they will do so in things that offer a higher rate of return then the bock, so usually a higher risk, less risky stable returns see a decrease in value and riskier investments see profit as they are attracting all the excess funds accumulated by the expanding currancy mainly expanding for those that have the most of it, until someone fscks up and the market crashes...
So when the value of the whole market decreases, we have people whose money is in institutions paying dividends receiving a negative return, so they pull their bocks out as you specified dividends obviosly couldn't be paid to your pocket, so we have banks that face a liquidity crises while people lose money on their money they had thought they had so have less to spend...we know how that works out for everyone...but the supply of money would be decreasing at the same time, a deflationary spriral hits...
This is a very interesting point, which I think is the same issue as the "feedback loop" discussed elsewhere in the comments.
In short, I think it is counter-cyclical (good), and may be neutral or preferred to today's system.
Today, we have a dollar that fluctuates in value. In deflation, the currency is worth more, so the market drops in value. For a Bocks in this environment, expanding the currency supply is "cheaper" because the market is down. In inflation, the currency is worth less, so the market rises in value (I think that drove all market gains for the past year). If there isn't demand for the currency, under a Bocks system it is a simple matter for the managing company to "retire" some of the money market shares by selling the backing stocks back on the open market.
So, with a full-market-backing, it seems like the currency would do its proper job of being counter-cyclical. In theory, the central bank would do something like that with the dollar, but IMHO they do a terrible job. (If I were being charitable, I would assert that they have a poor world view, and that it is unreasonable to expect any human to be able to do that job.)
For your other point, it's important to note that "market returns" (of course) can be met by holding the market index. Holding currency (even on-deposit at an institution) will *never* yield that much, because of the management fee (since you're holding a "money market" fund). You'll get *something*, but not as much as if you simply bought the stocks yourself.
Similarly, if you think Apple will rise faster than the market (or want to emphasize some sectors), you'd rather invest your money elsewhere (not in the currency money market). If you're right, your returns would be far higher.
So, you'd still invest as you do now, but holding currency would not be a penalty, as it is now. (Inflation is a tax, you always lose holding currency in an inflationary environment, and the dollar managers ensure that we always have inflation all the time.)
Thoughts on this subject about our future currency...
I have a question for the well informed folks here at Zero-hedge...
I want to know more about why the United States minted using our Tax dollars at the Denver Fed mint facility over 800 billion of this coin metal called the AMERO...
All the coins minted where shipped to China under disguise and stored by the Chinesse Government in late 2007 going into 2008...
What is this ordeal all about ?
I trust nothing from our GOVERNMENT... Our .GOV is dead to me extracting any information...
http://www.youtube.com/watch?v=jj2oC64NSIA
Wouldn't that just exaperate the business cycle?
So if everybody likes their new Bocks and they're earning dividends in their accounts, they are getting richer and the banks are geting richer, the money suply is increasing and inflation kicks in, wealth condenses as the more $ someone has the lower % of their income goes into consumtion and they therefor earn dividends on a higher portion of their income, I do suppose we might see a higher rate of savings as people would want to obtain dividends, but if people are going to invest, they will do so in things that offer a higher rate of return then the bock, so usually a higher risk, less risky stable returns see a decrease in value and riskier investments see profit as they are attracting all the excess funds accumulated by the expanding currancy mainly expanding for those that have the most of it, until someone fscks up and the market crashes...
So when the value of the whole market decreases, we have people whose money is in institutions paying dividends receiving a negative return, so they pull their bocks out as you specified dividends obviosly couldn't be paid to your pocket, so we have banks that face a liquidity crises while people lose money on their money they had thought they had so have less to spend...we know how that works out for everyone...but the supply of money would be decreasing at the same time, a deflationary spriral hits...
we'd almost have to store value in something that works counter-cyclical to the market
Thought provoking article and comments.
Two brief comments...
First, in "adversity" there is "opportunity" (and we've got a bushel basket of each in this financial climate).
Second, there is "strength" in "diversity". Gold and silver are part of the mix, for many of the reasons cited in article and comments...but not the only two, "tools" in the "tool-kit".
Thanks for sharing.
Quite an article and string of comments, way above my intell.
Any consideration of the WDX Organization's World Currency Unit (WOCU) in this discussion?
http://wocu.com/Default.aspx
I was unaware of the Wocu.
The Wacu is similar to the IMF's SDR (International Monetary Fund's Special Drawing Rights). The SDR is a basket of four major currencies re-balanced every five years, while the Wocu attempts to re-balance every six months to help ensure more stable exchange rates.
Both of these are derivatives, valued in part by the changing trade balances and printing by their host countries, and part by international currency exchange rates (e.g., currency market performance).
If you think the dollar is a fiat currency, then SDRs and Wocu's are fiat currencies on steroids. While academics (mostly economists) may like them because a "basket of currencies" may in some cases appear more stable than a single currency, and thus the international community may not be "held hostage" as much by a single nation's currency, IMHO these are the fundamental representation of today's problems: This is the main source for fiat currency inflation and irresponsible leverage worldwide.
We have more than a quadrillion dollars in the derivatives markets to de-leverage against world GDP of some $50-65 trillion specifically because of SDRs (and looks like the new kid too, the Wocus).
Heaven Help Us All.
Mikla,
Could you comment more on this?
I've seen SDR's mentioned periodically, especially with regard to the BRICs, but had assumed that they were specifically designed to focus upon oil sales exclusively, which is why I was surprised when India made that massive recent gold purchase using SDRs rather than Rupees or Dollars.
I can see that they are obviously derivatives, but I'm not quite sure I see the connection between their definition as derivatives and what sounds like sovereign based-CDS's, or why they should consequently be leveraged to such a degree (I get nervous when people start throwing words like quadrillion around - unwinds tend to lead toward the formation of black holes).
The Bank of International Settlements (BIS), which is the bank for all central banks (including the Fed) reported in March 2008 that the derivatives market had reached 1.14 quadrillion dollars ($190K per human on Earth, GDP of Earth is about $60 Trillion).
Searching "quadrillion derivatives" will give you a lot to look at (including a lot of gold bug sites), but one link with a chart that shows the exponential growth can be found at:
http://jutiagroup.com/2008/07/24/global-derivatives-market-now-valued-at-114-quadrillion/
The "proponents" will say no big deal, this is financial innovation, and this is only "notional" exposure, and when things all shake out, half the quadrillion is to cover the other half of the quadrillion (most of this is covered bets). The "net" exposure is expected to be much smaller.
The "complainers" (including me) say that for this uncovered exposure, a small percentage of a big number is itself a big number. If we are merely exposed to $60 Tn (only 5% uncovered), then we're merely exposed to the entire planetary GDP. That assumes a mere 20:1 leverage against the entire planetary GDP. While 20:1 leverage in a sane world would be terrifying, I have no faith that underwriters were that conservative (80:1, 100:1, and more is commonplace at major banks and even at the sovereign level).
Of course, the whole concept is silly because you can't spend the entire planetary GDP on anything (people will eat before they service their debts).
I was a little loose saying SDRs are the problem: Of course, the problem is leveraged speculation, plus some sovereign fiscal irresponsibility. However, SDRs work by having two countries print, and then swap. So, if my country is in trouble 1x, I can solve this problem by getting the planet to print 2x in new currency (your bank prints 1x, my bank prints 1x, and we swap). Thus, use of SDRs is tremendously inflationary. So yes, SDRs are tremendously dangerous, and they serve a role as an enabling backstop for supporting/increasing leverage.
SDRs are just more debtmoney.
Debtmoney is the problem because it requires growth. The real economy cannot grow anymore; that is why interest rates have fallen. They are forced to by the lack of economicalness of most activity this late into the cycle.
Can't lend at 6% if the activity only returns 5%..rates must match aggregate ROI
Our friend Ben Graham had this figured out long ago:
http://www.bengrahaminvesting.ca/Outreach/Symposium/PowerPoints/BenGraha...
Very interesting (Commodity-Reserve Currency Proposal, going back to the 1920's).
If I understand it, the government would host a program where commodities would be purchased and physically "warehoused" as a backing to currency issued. A formula of values and storage ratios would be established for items like wheat, barley, cocoa, corn, oats, rye, sugar, cotton, silk, wool, copper, lead, tin, zinc, petroleum, etc.
That PDF suggests critiques for why it was not adopted: Flexibility, organizational prerequisites, sovereignty, consensus. There were complaints about overhead for storage, that taxes would be required to support that storage, etc.
Further, I would complain that these arbitrary formulas would probably prove to be wrong over time. ;-))
Much has happened in the last eighty years: Individuals have far greater access to capital, and individuals have far greater investment opportunities (e.g., the rise of the "mutual fund"). For today, I would assert that no warehouses, no archaic formulae, and no taxes are needed. Companies exist with their own viable models, and these companies happen to include mines, wells, commercial real estate, farms, and anything else we might dream up as valuable to society. That's the whole point of the market.
So yes, commodities are important, but only as a subset of the greater market. I wouldn't tie the currency (or any symbol of societal value) to only commodities.
Bluebacks Snake?
heh, not if you live in Culver City (or most of California, for that matter):
http://www.doctorhousingbubble.com/real-homes-of-genius-–-culver-city-...
All joking aside - well written and thought provoking article, thanks for posting.
;-))
Of course, you can deviate for a time (perhaps even a couple decades) but, "leverage is a bitch". ;-))
Houses will correct downwards another 20-40% from their current levels in various parts of the country until this balance is restored.
Potatoes, Oranges, chickens, pork ...
An orange is worth 1 kg potatoes and a chicken is worth 1kg oranges.
If we trade edibles, if they loose value, we can still eat them, and we keep the edibles around :)
chia pets.
bingo that does it lol
Interesting idea, but stocks (i.e. pieces of paper) have no intrinsic value. They may be valued at anything the "market" desires.
You might as well print money backed by the value of chia pets.
At its core, the value of *nothing* can be trusted.
Owning a share of stock is a promise of future dividends. Owning a bond is a promise of future interest payments, plus return of principle. Owning a goat means you own a goat, and owning an ounce of gold means you own an ounce of gold.
What is it worth, this stock, this bond, both representing future promises? Risk and reward, and yes, you might get screwed.
What is a goat worth? Perhaps five chickens. Perhaps a quarter of a cow. That price will likely change tomorrow with the supply of chickens and cows.
What's an ounce of gold worth? How many goats, chickens, or cows? That price also will change tomorrow with the supply of goats, chickens, and cows.
Whether you hold it or not, your "asset" implies a highly variable dinner tomorrow night.
Mikla, your theory is false.
Stocks represent the sum total of speculation and accounting malfeasance by executives.
We don't live in a dividend world anymore. This is not the market of 1950, where CEO multiples were 25:1 because excess profits were disgorged to OWNERS (iow, shareholders).
We have shareprice ponzis now, therefore backing currency with stock is foolish. The valuations aren't based upon income or cashflow but on bullshit and expectations of the Fed to bail out a particular industry.
Look at IYR or components like SPG...they are paying dividends in more stock and have pps valuations right now that are utterly insane. Back currency with that?
With a REALISTIC stock market built around dividends, sure. But I say just print currency and let the FX handle it. NO DEBTMONEY.
We agree on the mess the market is in. IMHO, the market is a terrible representation of value, is packed with fraud, and ardant speculation. Changes in tax laws drove away dividends, the rise of IRAs and 401Ks drove share prices independant of dividends, and prefrontal lobotomies for regulators and financial experts drove derivatives and leverage.
Technically, I'm talking about backing a nominal unit of trade with both the stock and bond markets (minor point).
Sadly, unfortunately, what else is a working stiff to purchase? Surely holding some asset is better than holding nothing? At least the bonds hold liens against tangible pledged assets, and stocks merely buffer against catastrophic currency dislocations (headed to a market near you).
I'm not sure I understand this comment. Does this presume stability in the printed currency?
Dividends would be nice, but they are not an essential attribute of the system. Rather, the goal is to have the currency backed by *something* that is perceived to have societal value, and requires minimal effort and cost (e.g., no warehousing of commodities required).
Investigate Real Bills Doctrine.
I cannot believe I am the only one who has heard of Adam Smith
I askl myself: what would i now trade for gold?
My food? no
house? yes, but then what?
car? yes, but then what?
life insurance? no
health insurance? no
and on and on.....
I come to the obvious conclusion that unless all those I buy something from will accect gold, that it cannot now be used for currency, and to be used for currency it must happen simultaneously everywhere I transact.
This is a huge problem.
This article was a spoof, right?
Actually, no spoof: I'm suggesting Vanguard could launch a 50/50 TSM/TBM money market fund tomorrow, which I could use to settle transactions.
As a creditor, I would prefer to hold my "cash" as shares in this fund.
As a debtor, I would prefer receiving shares in this fund, as opposed to receiving dollars.
No, the complaint against fiat currencies is that they aren't scarce and have no intrinsic value. No one would accept them if not for the compulsion of legal tender laws. Bonds payable in fiat currencies have no more value than the currencies themselves.
We mostly agree.
When California issued IOU's last year, they were backed by nothing. While people grumbled and didn't want them (I wouldn't want them either), a market still existed.
Similarly, if a state demanded "tax coupons" printed by that state for payment of taxes, a market would exist for them. They would be printed by the state, not be backed by anything, but there would be a market for them because people would "want" them for the purpose of paying their taxes.
We agree that scarcity of fiat currencies is poor, and that they have no intrinsic value. However, a personal check that I issue to you has no intrinsic value either, and somehow we use it to settle transactions.
In contrast, a "Bocks" is a tiny slice of companies, actually backed by something (a little piece of many companies). Dividends would similarly be paid in Bocks. It satisfies your concerns (scarcity, backed by intrinsic value).
Points of dispute could only relate to whether or not you think owning tiny pieces of companies is a good idea, or if you think this system enables more fraud than the current system.
So nice to see that someone from AIGFP (or is it Countrywide?) is now writing articles for Zerohedge.
So you think we should use derivatives as currency? Are we to imagine that some means of using leverage to arbitrage your derivative currency against itself will not be found and utilized? Your currency is inherently unstable and would amplify the forex issues dealt with by countries globally. It's a trader's dream come true.
Your use of derivatives is a little loose in this context. I'm not even talking about actively managed funds. The "Total Market" fund is merely a compilation of many funds, so you are able to buy 0.0001% of one share at a time, but you actually do own that piece of that share, which is not leveraged nor "borrowed into existence".
In reference to derivatives, there are no "third-party" bets by which we derive value from an underlying asset, and there is no leverage.
No doubt you prefer to hold dollars. Perhaps some day you will be able to explain what that means, or what backs that instrument.
Your use of derivatives is a little loose in this context.
I'll quote from your article:
What about a basket of stocks and bonds?
Remember that a “stock share” is a share of all future profits. While some pretend it is represents a percentage of ownership of a company (which is sort- of true), and it may represent a claim on the company in liquidation, remember that the company’s bondholders and creditors fill their claims from a company’s assets first. While most shares today are purchased for speculation (e.g., the share is desired because the buyer expects its future price will be higher), this is somewhat of a distortion because its fundamental value as an investment is merely the value of all future profits delivered.
See where the leverage lives in your proposal? Right there. And here is the derivative context: "its fundamental value as an investment is merely the value of all future profits delivered."
A currency explicitly based on a variable string of future cash flows? Can anyone imagine this currency being stable? I can't.
Yes, the article mentions that IMHO most shares are purchased for speculation, which I assert is a distortion. That's a shame, and I think that's bad. So, I do concede that point.
However, you connect that with leverage. No. If I purchase a share of GE, am I levered? No, I am not.
It's true that GE may be mis-priced. It's true that others may be levered, and may have driven up the price of GE. It's true that the market may be ready to crash because of this build-up. However, that's a separate issue: I paid too much for a share of GE, but I am not levered for having done that.
I don't attempt to address fractional reserve lending, margin requirements, and extension of unsecured credit. That's not the job of a currency. That's the job of policy, regulatory agencies, exchange rules, taxes, and all kinds of controls that have nothing whatsoever to do with the currency. Rather, we both can agree that life is a mess if GE stock is consistently priced badly, and leverage will tend to do that. The fact that I own a share of GE has nothing to do with that.
The proposal for us to swap mutual-fund shares as currency merely means that those shares are backed by something. They are scarce because shares are finite, and they have some value because they have some promise of future dividends. We might be unrealistic about the worth of those future dividends, because we are stupid about price discovery, but I can't fix the market.
A better comparison would be based on our stability expectations for the dividend stream from the "whole" bond or "whole" stock market. We should be able to agree that it should be a positive number approximating a somewhat consistent value year-after-year, acknowledging good years and bad years. Can you describe a more stable investment? Certainly no single sector can possibly be more stable over time than the whole market.
Society leverages through borrowed money. I don't leverage simply because I paid too much for a stock that was priced poorly. The fact that I bought a share of GE doesn't mean that my share of GE is itself a derivative (it is not).
It's true that GE may be mis-priced. It's true that others may be levered, and may have driven up the price of GE. It's true that the market may be ready to crash because of this build-up. However, that's a separate issue: I paid too much for a share of GE, but I am not levered for having done that.
While YOU may not be levered, the price of the GE stock you own IS, therefore your derivative currency is also levered.
They are scarce because shares are finite, and they have some value because they have some promise of future dividends. We might be unrealistic about the worth of those future dividends, because we are stupid about price discovery, but I can't fix the market.
Shares are only finite in the most literal sense. You've just pointed out that corporate boards would have the authority to print money under your system, merely by issuing more shares. Your currency would blow itself to bits in a few years. Those promises of future dividends would easily be diluted by printing up shares, devaluing your currency. No one would know what your currency is worth.
A better comparison would be based on our stability expectations for the dividend stream from the "whole" bond or "whole" stock market. We should be able to agree that it should be a positive number approximating a somewhat consistent value year-after-year, acknowledging good years and bad years. Can you describe a more stable investment? Certainly no single sector can possibly be more stable over time than the whole market.
If your stable environment is the past 30 years of market history, and I strongly suspect it is, it is entirely based on a regime of falling interest rates and the concurrent illusion of steady market profitability / returns. That regime is at an end, and any logic system based on its continuance will fail.