Money is not worthless.

For regular folks your statement is even more airy; when they start to figure out that their precious greenback has nowhere to go but down; are they gonna call their local representatives and ask them to change the dollars into gold (oops, no can't do, no more gold standard!) or euros/yen/whatever?

Face it; the dollar is backed by NOTHING! And thank god most people don't realize this because we would be in a much deeper hole then we are now.

With all the billions of fresh created money (created out of thin air) being pumped into the US economy at the moment, the real devaluation of the dollar will pick up speed.

Source: http://news.ycombinator.com/item?id=410830

1. It is needed for industrial/electronics purposes.

2. It is internationally recognized as being valuable, regardless of culture. That is, cultures as diverse as India, China, England, Russia, pan-Arabic (i.e. non-Jews in the Middle East) have all viewed gold as having value, and that over at least 1000 years of recorded history each.

3. It does not corrode or rot the way paper money does. In Israel they recently found some Byzantine-era gold coins, aside from the obvious numismatic/collector value they still retain value for the gold itself.

4. Gold does not require a government to enforce its value. It's value is innate or intrinsic to the thing itself. As such if a government falls or decides to modify the value of a paper dollar (as Mexico, Argentina etc. have done in the past) then the value changes. Gold that you have in your pocket cannot have its value modified by a government order.

Item 3 is simply a property of gold (which you may or may not find advantageous). For instance, the same thing can be said about granite. It does not rot like paper, but that has nothing to do with it's value as a currency.

Item 4 is simply an extension of item 2. The reason a single government cannot control the value of gold is because all the other government's of the world don't go along with it. This is great if your government is somewhat careless with it's money supply, but doesn't have anything to do with 'intrinsic value'.

Regarding 1, using gold as a currency drives up the costs of using it for industrial/electronics purposes, just like using granite as a currency would drive up the price of countertops. But the fact that gold has a practical use does impart it with some value.

However, the value of gold as a currency is entirely due to Item 2. Gold is worth something because everyone agrees it is worth something. It would be interesting to see how this came about. I'm willing to bet gold's value originated in it's scarcity (and the exclusivity of showing it off), but obviously it has nothing to do with anything 'intrinsic' to gold. It's just as likely that an accident of history would have revealed some other rare metal that royalty desired to show off, which would have imparted 'value' on this metal instead of gold.

The reason gold holds value today is entirely historical. People value it precisely because people have always valued it.

The reason why gold and silver are "valuable" and the dollar is not, lies in the fact that gold and silver can not be created "out of thin air". This was exactly the reason why, in better days, currency was backed by gold or silver, thus transferring the intrinsic value of precious metals onto the currency.

If I were starving on an island, I'd much rather have a sandwich than a bar of gold. Gold is worthless without someone else around who wants it, just like fiat money.

The US government has "outsourced" control of the money supply to a cartel of private banks who have, as far as I know, no restrictions on the amount of money that they're allowed to create.

In the end there is more debt than there is money. So there is a lot of people who are constantly looking for money and they can't all get it at the same time. The actual amount of money is less important than the amount of debt out there. If Debt > money then there is demand.

PS: It's far less harmful for society to mess with the value of pretend money, than to take a useful thing like gold, and prevent people from using it for useful things. And because people don't have gold debt it's value is far more flexible. I don't think gold is worth much, and I don't own any, but I don't want to get into gold trading because guessing when the bubble pops is risk I don't need.

EDIT

I reverse my position. Sure, banks have the prerogative create money, but their ability to do so is based on people using the banks. Once banks no longer provide value for people, they lose their money creation ability. So, even banks are limited in their printing of money.

Money is recursive. The US government's acceptance of dollars is the base case. The US Military, Police, and various other force-directing agencies are the induction step.

It isn't entirely worthless, nor is its worth entirely intrinsic. It lives in the middle. Glib generalizations that put it on one end or the other are wrong.

For all the same reasons, it does not matter that the US government accepts dollars. It matters what you will get back for those dollars. When, if ever, people will come to collect en masse, the US government will have no means what so ever to pay of those creditors, in other words, the government becomes insolvent and the dollar plunges.

Remember: The US is indebted primarily in Dollars. Not in cars, gold or Euros. They can not go bankrupt for lack of their their own currency.

"In my world, goods and services I purchase are the final goods, not the money I need to purchase them."

This is also objectively wrong. Sorry, the dollar is backed by the US government and I'm afraid those things are derived, not fundamental.

You are mistaking what you want to be for what actually is. And because of money's recursive nature, regardless of what you think about that, the fact that a dollar can be used to pay off Uncle Sam means it's usable to pay for a loaf of bread, too.

Furthermore, it doesn't matter what you base a currency on, it will always work this way. Base it on something like gold and the currency will still have higher order effects that aren't directly connected to gold. That's the entire purpose of money, to reduce the problem of trade to a single universal currency and thereby enable an economy to develop, instead of being stuck on barter. Barter may be concrete, but that's just about the only positive thing going for it.

(Even a barter-based economy will still prove vulnerable to bubbles and all the other problems of a money-based economy, it just won't also generate enough wealth to survive such things. Some things like economic cycles are fundamental to economies themselves and can be seen in economies where Man has no participation at all. Ecology can be seen as a degenerate case of Economics with no intelligent participation.)

About "collecting en masse", I guess time will tell. You might be right, for those holding large amounts of dollars (China for example) a "run on the US government" would be a bad thing, they're better off unloading their less valuable currency gradually and exchanging them for something with intrinsic value such as gold and silver. And in the mean time, the dollar will keep on loosing it's value.

Couldn't advances in technology create cheap alternatives to gold that would destroy its value?

Steel. Now /that's/ what we should back our money with. Everybody needs steel. At least until carbon nanotubes get popular...

Having a gold standard means that gold mining companies can manipulate your currency. Suddenly find a huge new vein? Inflation! Go for a decade without any new discoveries? Deflation!

Ask someone who supports a gold-backed currency if they would be willing to back their currency with oil, and they look at you like you are crazy... as they should. But it's no more crazy than gold. Oil producing countries just have a more visible bad rap, so the problem with that particular commodity is more obvious.

I'd rather be in control of my own money supply thank you very much. Why you would want to leave it up to fate and potentially hostile entities is beyond me.

Currencies should be backed by something pretty fundamental. Eventually it has to be the Joule.

There is a finite amount of uranium on earth too, but the only reason it's considered valuable is because there is demand for nuclear applications.

Only a little over 10% of gold is used for industrial applications. Without the demand provided by people agreeing that gold has value as a currency, the price of gold would plummet. The high value of gold is self-fulfilling... it's based on people's faith that everyone else thinks it is valuable.

So the value of gold should in fact deflate over time, as we produce more and more of it.

Key here is that the total amount of gold on this planet is finite - not the production or extraction rate - making it truly valuable. Same thing applies to other natural resources such as oil, natural gas and diamonds.

I seem to remember reading that that's not the case anymore. As in, we actually can make gold through transmutation. The amount of energy required to do so is bigger than the "value" of the resultant gold tough.

+1 for the fine, fine irony. Intended or otherwise as it might have been.

  The only law money needs to follow is conservation, which energy fits. OTOH, the US government does screw around with the conservation law a lot, but it does apply to normal people.

12 points by demallien 20 days ago | link

Hey! Put some carriage returns in there! You're screwing up the page rendering...

There is a GM script that fixes this in FF3: http://userscripts.org/scripts/show/25039

Thanks for telling me how to not do that in the future. In this case, for some reason the edit button has disappeared... possibly because it was posted a while ago.

In contrast, a pure fiat system has only been in place since the 1970s, and all previous examples of fiat systems in history ended with disaster. This one might be the first stable fiat system, who knows?

But it is a lack of perspective to deem a gold standard as kooky, strange, and new and consider fiat as proven, reliable, and stable. Our system is a bold new experiment.

Gold is a good way to store wealth because it is durable, of limited supply, dense in space and value, portable, fungible, dividable, identifiable, and universally valued now and for the foreseeable future.

Zimbabwean paper money is portable, fungible, dividable, and identifiable, but its performance on the other characteristics makes it it an overall poor way to store value.

All forms of government-created fiat money are in danger of going the way of Zimbabwean dollar. The issuing government can just decide to print more, thus devaluing the existing money.

Other ways of storing value have their own problems. Some people use land, but while land is potentially very valuable, it's not portable, fungible, or universally valuable. Businesses organized as corporations can be used to store value, and many people save for their retirement this way (by buying stocks). This has the benefit that in good times, the value of your investment can grow by itself. Unfortunately, it can also shrink by itself in bad times. Also, shares of corporations are not easily dividable.

My point is that forms of money (stored wealth) are not arbitrary.

From Wikipedia: http://en.wikipedia.org/wiki/Fiat_currency

The unifying feature of all fiat money is its (typically exclusive) acceptability to the government for payment of taxes.

And yet again: http://www.absoluteastronomy.com/topics/Fiat_currency

Therefore the integrity of the financial system requires that there be a different ultimate form of backing, such as the acceptability of the fiat currency in payment of tax.

Threatening people with imprisonment to force them to accept dollars should seem fishy, though, and it's a hint that there's something rotten about fiat currency. Unlike commodity money, whose supply is limited by physical scarcity, fiat money can be expanded without limit, and the result is both sad and predictable. Consider: (1) monetary expansion benefits debtors, who can repay debt in inflated dollars; (2) U.S. monetary policy is set by the Federal Reserve, whose officials are appointed by the U.S. Federal Government; (3) the U.S. Federal Government is the world's largest debtor. It doesn't take a rocket scientist to figure out what is going to happen in this scenario.

Pearls to swine, people will continue to lose money shorting the dollar. Its like Microsoft...you can love it or hate it, but its not going away.

Also, it's not just taxes - there are tens of trillions of dollars of outstanding dollar denominated debt. Millions of people and corporations have contractual obligations to deliver dollars. If they renege on those obligations, their creditors will seize very real assets (buildings, houses, etc).

the fears are real for others. and to build an economy around solving these problems is interesting.

I believe now is a great time to think about alternate economies instead of holding steadfast to rules that govern the current domain.

Cash is a way to create trust between two parties that don't know each other.

Without cash, if I walked into Best Buy for a TV, I'd offer to trade goods or services for it. Since Best Buy doesn't know me from Adam, they have no way to know whether I'll make good on my promise (they can't trust me), and so giving me the TV is a risk. However, Best Buy probably trusts the US Government to continue accepting dollars for tax payments, so dollars are valuable and trustworthy. If I give Best Buy some dollars, they are immediately useful in paying taxes.

Likewise if I work for Best Buy, and there was no money, Best Buy would 'pay' me by providing everything I ask for up to a certain standard of living. I'd have to trust Best Buy not to abuse this situation. It's far easier to be paid in dollars, because I can trust that businesses I buy from will value dollars... because they can trust that the government will value dollars (for tax payments).

The only way to survive without trust (either the real thing or via cash, which is really trust in a third party), is for everyone to be totally self-sufficient. Specialization is a huge economic boost, so giving it up means a lower standard of living for everyone. However, if everyone were truly self-sufficient, there would be no need to trade goods/services, and hence no need for trust or cash.

If everyone just worked for non-profits focused on providing for people, that statement isn't true =P. Not exactly what you meant...

There's something wrong when 30% (soon to be 50%) of the population doesn't pay taxes, and expects the rest of us to provide for them, IMHO.

Welfare/Social Aid/Safety Net programs add value in the same way. By allowing an unemployed programmer to continue paying his rent, you prevent him from using his skills for evil. Or something along those lines.

Likewise, there is "the law of unintended consequences" where we are finding that people born into welfare tend to stay on welfare. For their entire life. And bear children in welfare. Obviously that cycle is a problem.

I think the safety net needs a through debugging and re-tuning to make it both more effective and more cost efficient. However, I still think its cheaper than the alternatives and their intended and unintended consequences.

The only way to not pay taxes is to live on donations from others (who paid tax on that which they gave you).

For example: property tax. Not everyone pays it, but many must. These people need dollars, so they are willing to do stuff for them. The stuff that they are willing to do provides the value of the dollar -- regardless of what the non-taxpayers think or do.

But the dollar isn't backed by much; it's backed by trust, which itself depends on the acts of the Fed (i.e. it really depends on what the Fed does). If you can buy two widgets for 100 dollars today, you don't have much confidence that you'll be able to buy them in the future.

In either case, there's nothing to guarantee your purchasing power. With gold, your purchasing power isn't 100% protected either (because new gold is digged every day) but at least you're much safer from arbitrarily high inflation.

But you are obviously correct when you say that money isn't worthless.

The issue isn't with paper money, it's with making the rules excessively complicated or unfair, or just outright breaking the money rules. Paper money is conducive to that though - any currency specialists have an idea for creating a better way?

I've always wondered about a private (non-government) diversified commodities-backed currency floating against international currencies, with liquid electronic and paper notes - and simple yet rigid rules and governance on how to absorb new purchases into the system and buy assets with it, and what reserves to keep for people cashing out. This is one of those things I sit and think about, but I reckon it'd be hard to do. Thoughts?

As luck has it, such a currency exists. Simply log into your brokerage account and buy the GLD ETF. It's only been around for four years, it will be very interesting to see how it does versus the dollar in the long term. If I was a Fed chairman, I would be worried.

  there may simply be not enough important things to 
  do to keep everyone busy

Philosophically, how much of this is "important"? I think overall, looking at the world in big chunks of time, things have been and will continue to get better. I talked with a PhD Physicist friend of mine recently for a while, and he sold me on how awesome the world is going to be when the cost of electricity approaches zero - without getting into a ton of details, it's going to be a massive party. Battery and transistor advancements meaning running a 1 pound, high powered laptop for weeks without charging it, free internet throughout the entire globe even in the most remote places, and a hell of a lot of human knowledge freely available to everyone in all of the major languages.

I'm pretty psyched for humanity, and think there's a hell of a lot to be done. We're not perfect, but we're generally trending upwards with a few blips here and there.

Sexual competition will always drive work out of men. And women only recently started working, as a way to avoid depending on men (and a few other good reasons, but I digress).

Nope. The 4-70s US stay-at-home Mom was an abberation. She didn't exist before the Great Depression. (Farmer's wives worked.)

The other problem seems to be that they are longer term problems with much lower success rates. Businesses, and I get the feeling VCs, are focused on the sure thing with a high return in a short time period. I don't think "important things" fit in that group.

Ultimately I think we will all be enjoying a lot more free time, but it think it will take a painful transition to a different social structure to get there.

but, there most likely is a better solution...there are many problems to solve in the world that would keep the majority "employed": clean water...disease...racism...housing... Is it possible to build an economy around solving these problems? Since we have never really given a serious attempt at doing so, I guess the answer is yes. Most likely, concepts of "employed", "debt", "education" all have to be redefined to fit this new economy.

I believe this distinction is important to the well-being of those people and the community they are in - prolonged idleness has negative effects.

Best to move on and try to build an economy that is sustainable. I suspect such an animal will have a far higher useful::useless ratio.

"Money is the bubble that doesn’t need to pop. As long as there is demand for indirect exchange, at least one asset will be stockpiled by hoarders, hence experience demand that is not a consequence of any direct utility, hence be overvalued. As long as the storage cost for this asset is zero and the supply in existence is fixed, you have a perfect Nash equilibrium - using any other asset as a medium of indirect exchange provides no advantage, and runs the risk of buying into a bubble which will subsequently pop as punters revert back to the stable standard." (source: http://www.interfluidity.com/posts/1233118501.shtml)

The story of the past ten years is that people started trading dollars for substitute stores of value ( houses, stocks, oil futures, etc). But those substitutes were not stable Nash equilibriums. In the long run, supply of housing is elastic and bubble prices cannot be sustained. Prices crashed, and people rushed back to using dollars as a store of value. When demand for dollars increases, it becomes harder to trade goods and labor for dollars, so the price of goods and labor in dollars decreases ( deflation). However, employment contracts and debts are denominated assuming a higher price level. Thus businesses are unable to meet payroll and pay creditors. Businesses fire workers or go out of business. That's the stage we are at now. The solution is to simply renominate the currency by mailing everyone checks, in order to restore/maintain the 2007 price level. This eliminates the frictional problem without creating massive transfers of resources from the private sector to the government.

More and more these past few years I think of a favorite old science fiction story by Frederik Pohl called "The Midas Plague."

All production is done by robots. Production has become so, uh, productive that humans spend all their effort just wearing out everything made by the robots. "Poor" people must live in giant mansions with several robots and wear out more stuff than "well-to-do" people, who live in small cottages with few to no robots and enjoy leisurely, intellectual and social pursuits. Comically (or tragically), it's illegal to get a robot to wear something out for you.

I think I'll reread it today.

A couple of businesspeople have explained to me that every part of building a business is about reducing risk. They talk about diversification, but then only apply it to money. As personal investments go, money (in any form) looks like one of the riskiest! It's much harder to forget a foreign language, or how to play a musical instrument, than it is to lose money. I'm trying to reduce risk by diversifying my assets to the point where money is a relatively small portion. After all, the happiest people I know don't tend to be those with the most money.

The depressing thing about the great depression of the 1930s, as well as the current potential one, is that there may simply be not enough important things to do to keep everyone busy.

This seems to be the entire premise of the society present in "A Brave New World".

"I mean, we can't just give people food for free.

That would be ridiculous."

A more positive source of the dollar's strength is the US economy and its resourcefulness and innovation (ie hackers:)

There are two kinds of capital: direct and indirect.

Money is indirect capital, but it is still capital, as long as the financial infrastructure exists.

Since rice is Indians staple food, I assumed that it will have a cascading effect on remaining food items and will help in reducing their prices and inflation.

But to my surprise BPL people started buying exotic products and services with the money saved because of free rice.

Did this experience teach you that you really don't know much about human behavior and should stay away from activities where such knowledge is important?

Or, did you double down and keep at it, perhaps with "I'm a good person so what I want is good."?