Economics Questions

Re: What if we had a free market in money making tomorrow

Laotzu del Zinn — Fri, 17 Sep 2010 20:59:56 GMT

The Dollar was our currency before the FED, I don't see why we wouldn't still use it after. It just wouldn't be a fiat dollar, but backed by gold/silver.

Re: What if we had a free market in money making tomorrow

mclean — Fri, 17 Sep 2010 20:50:20 GMT

The question posed was "what if we had a FREE MARKET in the produciton of money tomorrow". In that case, I don't see how anyone would accept paper dollars for exchange. It just doesn't make sense that prices would gradually increase in terms of dollars. It would be a totally different process than hyperinflation(gradually losing faith in the currency) or inflation(money printing). The dollar would instatly be worth zero.

Re: What if we had a free market in money making tomorrow

z1235 — Fri, 17 Sep 2010 17:37:02 GMT

filc:
If the dollar has failed, why are people anxious to get paper dollars out of the bank?

There will be two simultaneous rushes: (1) to transform the digital $ numbers into slightly more valuable paper numbers (cash) in your hand, and then (2) to transform this worthless cash into whatever someone else is prepared to give you in exchange for it. You can extrapolate what that's going to do to the value of the cash in your pocket.

You keep asking boundary questions about when and what exactly is going to happen. My suggestion that markets are forward looking answers this question. The price of 1oz of gold will never move from $1300 one second to $1.3million the next, or the price of a loaf of bread from $3 to $3000 the next second, but both can adjust pretty quickly to those levels as the probability of your assumptions increases.

Re: What if we had a free market in money making tomorrow

filc — Thu, 16 Sep 2010 18:01:56 GMT

For those of you who think the dollar would fail immediately, what would goods be priced in the day following the elimination of the fed? What about the day after that? and after that? And apply the same question to gold, how would gold be priced?

At what point does gold stop being valued in the dollar, and the dollar start being valued in the gold. Get the difference?

Re: What if we had a free market in money making tomorrow

mclean — Wed, 15 Sep 2010 01:44:32 GMT

I'll assume you mean the US goes to a free market monetary system and the rest of the world does not. Here goes.

1 The federal reserve would have to distribute their gold to the banks. Gold distribution would occur in direct proportion to bank deposits. In other words, the amount each depositor would get would be calculated by (total ounces of federal reserve gold / total bank deposits) * personal account balance. (this could be a very small amount)

2. The dollar would be worthless immediately. All personal, bank, and govt debt would be immediately wiped out. All purchases would require some form of monetary commodity or barter material.

3. The initial price discovery of gold/silver etc would not take long at all, but afterwards, those who get left holding the dollars would sell assets to buy essentials. Asset prices such as houses would be relatively cheap compared to food, etc. The economy would basically start over. The people with all cash or cash equivalents, no debt, and no assets will be hurt the most. They'll have to start from scratch and go to work, luckily labor will be in high demand unless the gov't tries some sort of wage control.

4. Free monetary system would expand throughout the world rapidly. Why? Each government faces a decision, either jump in with the US and give up their control of their monetary unit, or keep their system and risk complete trade isolation with the US, any other country that joins the US, and mass exodus of precious metal from their country and into the free monetary system countries. I think many (especially the more democratic ones), would chose the former, and this would cause a cascade effect, because the more countries that went free monetary system the more isolated the fiat countries would be. At first they would be flush with foreign assets, but when they run out of gold or silver,

5. All governments would rapidly lose power, and this would probably be the beginning of the end of all government power, entitlements and military would phase out but this, of course, would be a good thing.

Re: What if we had a free market in money making tomorrow

Peter Sidor — Tue, 14 Sep 2010 18:12:11 GMT

What exactly makes it real?

The question of what makes things real, dear sir, is a deeply philosophical question I hope not to have to answer. :)

Seriously though, the difference between a 'real' dollar note (whatever its monetary qualities may be) and a copy should be clear enough.

Re: What if we had a free market in money making tomorrow

filc — Tue, 14 Sep 2010 17:19:38 GMT

Peter Sidor:
but selling copies while pretending they are the real thing constitutes fraud,

What exactly makes it real?

Re: What if we had a free market in money making tomorrow

filc — Tue, 14 Sep 2010 17:18:49 GMT

filc:
Are you stating that if the Fed ended tomorrow, the dollar would automatically fail immediately?

Z1235:
Yes, together with the rest of the currencies that are backed by nothing but "the full faith and credit" of govts and their corresponding central banks. The chances for your more "hopeful" scenario went out the window with the Gold Standard.

If the fed fails Thursday, what are goods priced in on Friday?

Z1235:

There's no regression theorem for money backed by "faith". It only applies to commodity money. When the "faith" goes away in a "faith"-based currency, there's nothing left to support it.

How is the gold standard any less of a faith-based currency system? And don't get me wrong I'm all for the gold standard, or any commodity standard. Isn't any currency based on peoples faith that they hold the highest vendible good available?

Z1235:
As to what exactly would happen... Start with a run on all banks, as every market agent tries to transform his digits on a computer screen (or on his bank statement) into paper currency. Since the $500billion in paper currency is nowhere near the aggregate amount of all such transform attempts, most of those agents would end up holding the bag. The winners would be the ones who had transformed their "faith" based digits into gold before this occurs, which is why I said that markets are forward looking.

If the dollar has failed, why are people anxious to get paper dollars out of the bank?

Z1235:
I don't know the details about Somalia but I assume that most currency claims there had been of the paper (and not digital) kind, making the first part of the above scenario a bit less painful.

Clayton:

After the collapse of the Barre regime in Somalia, counterfeiters were able to issue Somali shillings like there's no tomorrow. But no Somali would accept a shilling note in excess of 1,000 shillings, the largest legal size printed before the collapse of the Barre regime. So, the shilling experience a brief period of rapid devaluation (over the period of a month or two IIRC) until it fell to about 3 or 4 cents for a 1,000 shilling note which is about the paper, ink, transportation, etc. costs of printing them. So, we have a voluntary system of shilling note issue which is maintained by "counterfeiters" who print notes when the value of the shilling goes up a little and stop printing when it goes down, which keeps the supply of notes in working condition as notes go out of circulation due to loss or wear and tear. This is just a regurgitation of economist Ben Powell's description of what he jokingly calls a "commodity paper money" in Somalia. There's an online lecture somewhere where he discusses this.

Other currencies, including USD and gold Krugerrands, co-circulate with Somali shillings for larger transactions.

Clayton -

Z1235:
Finally, I didn't mean to be condescending. The above things are so clear in my mind that I thought a detailed elaboration was unnecessary.

Thanks Z, you and I likely have very few things to squibble about.

Re: What if we had a free market in money making tomorrow

z1235 — Tue, 14 Sep 2010 13:03:12 GMT

filc:
Are you stating that if the Fed ended tomorrow, the dollar would automatically fail immediately?

Yes, together with the rest of the currencies that are backed by nothing but "the full faith and credit" of govts and their corresponding central banks. The chances for your more "hopeful" scenario went out the window with the Gold Standard.

filc:
I'm asking for what in your opinion, how the whole mechanism would play out,keeping the regression theorum in mind.

There's no regression theorem for money backed by "faith". It only applies to commodity money. When the "faith" goes away in a "faith"-based currency, there's nothing left to support it.

As to what exactly would happen... Start with a run on all banks, as every market agent tries to transform his digits on a computer screen (or on his bank statement) into paper currency. Since the $500billion in paper currency is nowhere near the aggregate amount of all such transform attempts, most of those agents would end up holding the bag. The winners would be the ones who had transformed their "faith" based digits into gold before this occurs, which is why I said that markets are forward looking.

I don't know the details about Somalia but I assume that most currency claims there had been of the paper (and not digital) kind, making the first part of the above scenario a bit less painful.

Finally, I didn't mean to be condescending. The above things are so clear in my mind that I thought a detailed elaboration was unnecessary.

Re: What if we had a free market in money making tomorrow

Merlin — Tue, 14 Sep 2010 11:46:26 GMT

Good arguments indeed.

Re: What if we had a free market in money making tomorrow

Peter Sidor — Tue, 14 Sep 2010 10:27:18 GMT

To myself, a product is fraudulent when it pretends to deliver something that it doesn’t.

I'm all for that.

thus, when a Chinese guy makes a shitty Porsche Cayenne, externally undistinguishable form a decent one, that is fraud. On the other hand, if I make an exact copy, down to materials and all, of the thing, that its not fraud for me to sell it as a Porsche Cayenne: after all I am selling the real thing.

Here I'd be careful, this is running into problems of determining what is the "real thing"'. If you are selling the Porsche as a perfect copy, congrats, it is okay. But it is still not a "real" Porsche built by Porsche - and selling it as one would be fraud.

These days you can buy perfectly looking "antiques", replicas of items centuries or millenia old, made out of the right materials with the right techniques - the same principle applies.

Finally, if you use 'dollar copies', when your buyer expects 'actual' dollars, is fraud, no matter how perfect they are. Things are not the original even if they are exactly the same as original. :)

Re: What if we had a free market in money making tomorrow

Merlin — Tue, 14 Sep 2010 10:13:42 GMT

Well, that would depend on what one thinks constitutes fraud. To myself, a product is fraudulent when it pretends to deliver something that it doesn’t. thus, when a Chinese guy makes a shitty Porsche Cayenne, externally undistinguishable form a decent one, that is fraud. On the other hand, if I make an exact copy, down to materials and all, of the thing, that its not fraud for me to sell it as a Porsche Cayenne: after all I am selling the real thing.

Thus for unbacked banknotes: as long as they are exactly as the original, they are the original. Ah sure, if the note contains words such as “printed by Bank X”, than sure reproducing that would be fraud. But absent that, the counterfeited note is good enough, from my legal point of view. Of course in practice people would put “printed by bank X” on notes, but I’m not sure whether that would halt either counterfeiting (being illegal is something, being stoppable is entirey something else) or the demise of unbacked notes.

Re: What if we had a free market in money making tomorrow

Peter Sidor — Tue, 14 Sep 2010 09:56:33 GMT

An interesting point indeed. It would seem to me that holding one liable for merely copying and selling a piece of paper amounts to recognizing IP rights, for that is the only claim a bank can have to ‘its’ currency.

On the other hand, if the bank uses such pieces of paper as merely certificates for prompt redemption in gold, silver or what have you, than copying would be fraud no les stahn copying checks is today, and punishable thereof.

I'd like to make that more specific. Absent IP laws, copying a piece of paper is by itself not a crime - even selling it may not be a crime - but selling copies while pretending they are the real thing constitutes fraud, even if the bank issuing them doesn't exist. For example, making glass gems is perfectly fine, selling them as real gems is fraud.

Also remember the Kurds using old Iraqi currency, it was limited in number and hard to counterfeit, which suited them just fine as money (especially as the new currency was badly inflated). In this scenario, the dollar is likely to continue to stay in circulation for some time, though it is doomed in the long term.

Re: What if we had a free market in money making tomorrow

filc — Tue, 14 Sep 2010 07:32:36 GMT

Merlin:
Also note that the moment a truly free banking economy is established, the rest of the world will do whatever it can do destroy it.

Wow, This is an extremely powerful point.

Re: What if we had a free market in money making tomorrow

Merlin — Tue, 14 Sep 2010 07:25:25 GMT

Bert:

filc:

Bert:

As far as counterfeiting goes,

As far as free banking goes, what exactly is counterfeiting? Does it even exist?

This raises a valid point. Let's say a bank, or whoever is issuing/minting/printing a given currency, and someone copies that currency exactly (as best they can), is this "fake" money still valued about the same as the "real" money it's based off of?

What if a bank or someone who issues a currency decided to go as far to patent or copyright their money? If it's an actual metal like gold or silver, counterfeiting would not be likely, if they are issuing notes, it seems more likely. Can some agency on the market go through and prove what's the legitimate money of various banks on the market?

Of course if someone is going through the trouble of counterfeiting they might as well make their own currency. Would counterfeiters be held as criminals for copying someone elses currency?

I think the competition itself would keep "false" currencies from arising in place of someone is actually printing/minting money to make some sort of profit, but I feel like this just leads myself into a circle to define what a "false currency" is if the value is subjective...

An interesting point indeed. It would seem to me that holding one liable for merely copying and selling a piece of paper amounts to recognizing IP rights, for that is the only claim a bank can have to ‘its’ currency.

On the other hand, if the bank uses such pieces of paper as merely certificates for prompt redemption in gold, silver or what have you, than copying would be fraud no les stahn copying checks is today, and punishable thereof.

Thus, there would be, in a free banking system, a tendency towards commodity money. The poor Somalis can get hold on no gold or silver but free banking in a more advanced and/or endowed economy would probably switch to commodity within the decade.

Also note that the moment a truly free banking economy is established, the rest of the world will do whatever it can do destroy it. If we cant hold people liable for copying private banknotes, we sure as hell cannot hold them liable in copying foreign states’ pieces of paper. And since there is money in printing fake dollars with which to buy US Xboxes, a free banking community would very soon flood fiat regimes with their own currency, destroying other, less sound, economies. Thus, I believe that a free banking economy should, at the very least, poses nukes to starve off any invasion, for that is surely what will happen when free banking is implemented.