Hi guys,
The link below :
http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity
gives a very peculiar and interesting point of view on the definition of
the money. Specifically the one of the fiat money.
The definition and history of the fiat money is also very well presented
here :
http://en.wikipedia.org/wiki/Fiat_money
According to the wikipedia definition, the fiat money is monetary obligation
(regarded as a legal tender) that derives its value from government
regulation or law. On the other hand according the economists form the
Bank of England, who published the article in The Guardian, nothing
would be further from the truth. Newly disclosed process of money creation ( M1
Stream) turns out to be nothing more than capitalisation of loans and
other financial obligations created by the banks. In such a process, slowly and
gradually all the existing material wealth and people's possessions
and/or obligations will end up as a property of banks. This includes financing of
all forms of government to begin with. Paradoxically, the process is
self-destructive in its very nature and it will spell the end of money as
we know now. Simulation models performed by researchers at Harvard and by the
Bank of England economists, show the entire process to last approximately
80 - 90 years, out of with 60 some years already had passed. After that
time central banks literally own everything and there is no way to
monetized any more obligations.
What then ?? Historically, every previous attempt to introduce fiat paper
money has failed; every one more spectacularly than next. What about the
current cycle ?
1- What other forms of recognizing and regulating/capitalizing of the
obligations will egsists ?
2- What else can be used to create a stable money system ?
3- What do you think of using new crypto-currencies, like bitcoins or
litecoins as new emerging standard for monetary system ?
4- What are 2 main advantages of emerging binary standards like Bitcoins
over every other monetary system known to People in the past ?
When asked what will happen my answer is as follows: in principle, nothing, the economic world will be exist. Though, ordinary people will pay per experimenting in economics. When banks become owners of everything then we will be their slaves. Afterwards the system will collapse maybe, later will grow up new monetary system consistent with the needs of human. So has been already in the history, as an example I can give Byzantium.
ReplyDeleteThe answer to this question is a bit difficult because I am getting reply from page: "404 Page not found" at this moment.
1. Sure, it will be exist because people need such a mechanism in the economy.
2. Maybe gold however or something else what it have worth and which also is a convenient as means of exchange?
3 I have not much to say about this. It is because I have not ever paid and I have not received payment for using the "bitcoins" or "litecoins".
4. I do not know any benefits of "bitcoins" or "litecoins" but I know them defects. Such, “new” system enable them to more yet easier manipulate the economics and manipulate people.
Last year, I didn't think people would continue to be interested in Bitcoin for long, but a lot has changed since we talked about it the last time. It didn't get banned, instead governments started recognizing that it exists and even gave tax guidance. There was a lot of news coverage. On the other hand, the biggest Bitcoin exchange went bankrupt and the situation in China is unclear. I still think it's not a very good currency system (because the value is so unstable), but it looks like it's not going away.
ReplyDeleteI wouldn't call it a competitor to fiat money and I don't buy the whole political and economical reasoning associated with it, I just like the technology behind it. With every currency, you have to trust the issuer, the people who don't trust the government in the first place, will have a problem with that. Bitcoin is different, because there is no central issuing authority, instead the whole network of users verifies that all Bitcoins are accounted for. So you need a majority of users if you want to change the way the system works. That is an advantage and something which hasn't been possible before. But nothing stops you from starting your own crypto-currency with your own rules, and we've seen many new clones being created over the last year, some of them quite successful:
http://coinmarketcap.com/
Who knows where this is going? There are still many problems to overcome: so far crypto-currencies have proven difficult to use in a secure way (both for users and exchanges). Legal issues remain (with taxes and compliance with existing laws). Can the developers keep up with the growth of the network? We shall see.
I have just finished reading the presented article. It is something very interesting for me, because money (or their lack ;-) are a necessary part of my life. The Guardian’s article showed me process of capitalization of loans but does not clarify all my doubts. The most important seem to be:
ReplyDelete1. Can every loan be capitalized into money when central banks should be care about the inflation?
2. Why should you imply that “This includes financing of all forms of government to begin with”? Can governments force somebody to lend money for particular purposes?
Probably I strongly believe in a self-regulation of financial markets.
Turning to questions:
1. I don’t know. As I mentioned I believe in a self-regulation of markets and I am hope that politics will fit a law in a way avoiding a market deregulation.
2. I suppose that creation of fiat money wasted a way for creating a stable money system. I think that only situation when all money has coverage in goods might create a stable monetary system. In other cases there will always be a place for speculations.
3. I have never heard about the necessity of covering values of these currencies in goods. In my opinion they will not create a stable monetary systems. Although I would like to be mistaken in this case ;-).
4. I am writing in the context of my little knowledge about BTC: two advantages of these binary standards are the independence from a one central bank connected with one government and clear rules for creating new money. Nonetheless, as Wiktor noticed, it did not prevent decreasing its value last year .
Kinga, as I remember you bought some BTC. Could you tell us whether it was a good investment?
Slawomir Janiak , Wiktor s2483, Grzegorz Gruza
ReplyDeleteI don't want to argue with you guys, but I think that you have missed the
main point of the article :(
Do you actually understand what are the consequences of banks losing the
power and tools to create new money ? What catastrophic consequences for the
economies and markets that would follow ?
Do you know who are the actual biggest debtors of the central banks ? The
govenments of course.
Btw, grzegorz - when you compare the purchase of BTC for $ 40 to the
current value of $ 400 after just one year, then you have to admit it was a
good investment. Regardless of the big volatility of the BTC exchanges :)
Congratulation for the excellent investment. Respect!
DeleteAs you claim I probably did not catch the gist because I am not too good in financial matters on a central bank level. Please, teach me more ;-) and improve my point of view. Let me refer to your question:
Do you actually understand what are the consequences of banks losing the power and tools to create new money ?
Why do you suggest that banks have ever had a power to create new money? The Guardian writes: The central bank can print as much money as it wishes. I understand that creation new money means printing new money. Thus, have banks (excluding the central one) ever had a possibility to create new money?
What catastrophic consequences for the economies and markets that would follow ?
I do not want to waste time on speculations about situation which seem to be impossible and are not understandable for me.
Do you know who are the actual biggest debtors of the central banks ? The governments of course.
As I know treasury bonds are nowadays rarely buy by central banks (I have just read it in Wikipedia). In my opinion, if the governments are the biggest debtors now, this situation is changing.
I have more doubts, but after clarifying the presented ones they may chance not to be actual ones.
Generally, in my opinion author present situation which exists for years. I do not believe that it will cause a collapsing financial markets if it has not caused it so far.
I thought Bitcoins were more interesting, so that's what I wrote about :)
DeleteThe Guardian article is a bit sensationalist, it's better to read the source:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf
Let's not forget this is only about the Bank of Englad and the specific situation in Great Britain, don't try to extend this to everywhere else! We don't have quantitative easing in Poland.
I'm not going to pretend I understand (or even read :) ) the whole paper, but the conclusion seemed simple enough:
"Most of the money in circulation is created, not by
the printing presses of the Bank of England, but by the
commercial banks themselves: banks create money whenever
they lend to someone in the economy or buy an asset from
consumers. And in contrast to descriptions found in some
textbooks, the Bank of England does not directly control the
quantity of either base or broad money. The Bank of England
is nevertheless still able to influence the amount of money in
the economy. It does so in normal times by setting monetary
policy — through the interest rate that it pays on reserves held
by commercial banks with the Bank of England. More
recently, though, with Bank Rate constrained by the effective
lower bound, the Bank of England’s asset purchase programme
has sought to raise the quantity of broad money in circulation.
This in turn affects the prices and quantities of a range of
assets in the economy, including money."
So, regular banks increase the money supply by lending and then lending again. The Bank of England normally uses interest rates to control how profitable that procedure is (and how much it's going to be used).
Because we're not living in normal times (the interest rates are already close to 0% for GBP), the Bank of England found a new way and started buying assets through quantitative easing, and uses that to control how much lending is going on.
What makes you think the buying will continue until "all the existing material wealth and people's possessions and/or obligations will end up as a property of banks"?
No, the moment inflation picks up, they will stop buying assets and go back to raising interest rates, like they normally do.
And if the inflation never increases? Well, believers in Bitcoins shouldn't have a problem with that, deflation is good, right? ;) Hopefully that won't happen, but I don't know the future.
thank you :) I wish to have more investments. Grzegorz, this articul is
Deleteactually not about what money is or what it is used for, but about the
current mechanism of fiat money creation and it's limitations.
Kinga, maybe you would like to discuss about country financial at a too high level for me. I read article from the Guardian but I did not read the source. Maybe it is a problem.
DeleteYou asked about situation when country will lost possibility for creating new money. I do not believe that such situation will appear. The treasury bonds are not mortgage loans. In the case of country bankruptcy they will lost their value and after some reforms its financial systems the fallen countries recover their ability for printing new money. Such situation happened many times (i.e. for Poland, Argentine, Greece).
The existence of quantitative easing and other mechanisms can make process of country bankruptcy faster and more often. I believe that market will regulate such situation automatically because buying the treasury bonds of unstable financially countries will not be profitable. It should force such countries to improve a financial policies.
It is my point of view about finances at a country level ;-).
My dear young lady Kingo I think that no one on this forum don't want to argue. We all want to conduct scientific debate. But above all we should all each other respect! I could suggest that the author of this article do not understood what is the money. They forgot about some of the elementary functions the money, which are, at least:
ReplyDelete- Medium of exchange (the circulation).
- Unit of account
- Measure of value.
- The payment.
- The store of value!
You write about catastrophic consequences, I experienced already greater disaster (collapse of the soviet system) and I think that we can survive this upcoming disaster. :)
I agree with you - this discussion is about English not economics, so thank
Deleteyou for you opinion.
This comment has been removed by the author.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteSome time ago I read an interesting book about how money was created .
ReplyDeleteAuthor of that book describes the whole history of money and how it was changing over the years.
Sometimes ago concept of money wasn't exist, people paid in gold for everything but because gold is heavy and painfully for transportation humans began deposited gold, and in return they received a document confirming how much gold they deposited.This has led to the fact that people started to exchange those documents. Since those documents were big and uncomfortable it was decided to reduce them, and in that way appeared a paper money.
But still everyone could go to the bank and pick up all of his gold and any of such paper money had its equivalent and cover in gold, and it was ensured by law. However, if I remember correctly in the days of the Civil War in the U.S. government needed the money to finance the war so they began to print money and that money were not covered in gold, but to did so they first changed the law and from that time money is fictitious and imaginary value of.
What is more in the years 20 or 30 at the time of the Great Depression government again changed the law and allowed banks didn't withdraw people money in emergency situations to protect the banks from collapse.
So in these times money is artificial and not sustainable as demonstrated by the recent crisis in housing loans where banks had to ask for a loan to the governments do not go bankrupt.
Back to your question:
1- What other forms of recognizing and regulating/capitalizing of the
obligations will egsists ?
I don't know but I believe that banks and governments should leave the market alone :) It is known that some regulations are needed but as little as possible
2- What else can be used to create a stable money system ?
Now a day where every one and every country is in debt i don't know what can be done :).
3- What do you think of using new crypto-currencies, like bitcoins or
litecoins as new emerging standard for monetary system ?
This is that same good money like others if someone want to get that kind of payment I don't have problem with that as long as someone will take that money and someone will paid it is ok.
4- What are 2 main advantages of emerging binary standards like Bitcoins
over every other monetary system known to People in the past ?
I think that advantages is that this kind of money are free from central bank and they value depends on self-regulation of markets
thank you for you opinion :) can you write title of this book?
DeleteI must say, all this sounds quite sensantionalistic. While the exact methods used by banks are unclear to most people - myself included - the idea that eventually everything will be owned by Central Bank seems ludicrous. Our recent financial crisis did prove that the system has issues and served as a early warning sign to many, but I like to think that people will learn from that and make necessary changes.
ReplyDeleteThen there's the fact that this entire article was about Bank of England. It might be my economic ignorance speaking, but I don't think that banking laws and regulations are the same across the entire world. At very least, if the system does collapse - again - it won't be at the same rate, so most countries will have time to adjust their monetary politics.
I'm very skeptical of digital currency of bitcoin variety and other similar ones. Theoretically, they're available for everyone and are supposed to bypass various national regulations and restrictions. On the other hand, their value can change dramatically within days or weeks, they are only accepted in limited amount of place/services, exchange times for "real money" can be extremely long - and one of major Bitcoin exchanges going bankrupt certainly isn't helping things. Some people did make a lot of money when Bitcoin prices rose, but do keep in mind that they made "real" money. Even these supposed millionaires are merely trading it for USD/national currency.
The amount of new forms of digital currency is also making me wonder, just how easy is it to create such thing? How is the value actually determined, if someone can keep creating these coins with their own computer, then keep exchanging them for new ones that are currently most profitable? What if I have "free" electricity, am I basically printing money?
I must say, parts of this article/your comments did sound like an advertisement for cryptocurrencies, which is making me rather wary.
This comment has been removed by the author.
ReplyDeleteI prefer don't speak about "fiat money" because I would have to know more about this, but I know the BTC market ;)
ReplyDeleteBitcoin was a very nice idea (i loved this idea), but last months showed its weakness. Therefore, I believe that even this type of money must be managed by the Government so I don't consider it to be money of the future. Currently we have 10+ money market similar to the BTC what starts to scare me (for one of this money market is already virus for Android platform to steal this money).
People steal the money from another people and what we can do? Go to government? (Some government already decided to outlaw this money).
In addition to this, theft causes a drop in the stock market and more people lose the money. For me this is worse than gambling. I can't risk, so this was the reason why I sold all my BTC. I waiting for something new.
1- What other forms of recognizing and regulating/capitalizing of the obligations will egsists ?
ReplyDeleteI do not know. It depends on the politicians and bankers.
2- What else can be used to create a stable money system ?
Everything that have fixed, or at least steady growing amount like: natural resources, time, land (also on Mars) etc.
3- What do you think of using new crypto-currencies, like bitcoins or
litecoins as new emerging standard for monetary system ?
For me is not stable, not because amount of resource is not stable or at least steady growing but because peoples feelings about this currency is not stable. I believe that currency have to be stable and this is most important.
4- What are 2 main advantages of emerging binary standards like Bitcoins
over every other monetary system known to People in the past ?
Do not regulated
Do not taxed
I do not have any simple answer and I'm afraid there is no such one existing.
ReplyDeleteThe economic environment we live in is very complex and I must admit, that banks are very well positioned in this complexity.
I’ve already talked about below topic in one of my posts few months ago.
Let's look at the process that occurs at most of the situations when young people want to settle down and poses their own property call it a house or a flat.
Most of the time situations is that they need a loan so they get one.
On the other hand the developer needs money to build new flats or houses and he also operates on a basis of a credit from ... a bank.
Please note that bank gets paid from both sides so it does have huge influence on price of the property.
Regarding electronic money. There are caveats.
Electronic money is inevitable I think but dangerous in the same time.
The speed of electronic transactions allow situations when ordinary people are cheated/tricked (see algorithmic trading).
There is also a place for human mistake in the system design that can be already present but not yet discovered and can lead to rapid system collapse in the future.
And there are system bugs that can surprise system owners and system users in unpredictable ways.
Bitcoin as a self-emerging thing that relies on the power of computing (Bitcoin mining) can lead to system break down as soon as some technological breakthrough will allow a way faster data processing comparing to what is at our disposal now.
It's hard to say how this will affect the future. We will, unfortunately, be independent of the people who will govern. Definitely people do not cease to trade in gold and may increase trade and people
ReplyDeletewill start to trade gold as it is already at times in history. I think that with the money you no longer need to experiment. It is now well, pay cards for a total turnover of money is virtual. I think I do
not need anything new to invent. The newly invented does not mean that it will be better. And if there is a better overall economy will lose.
I don’t have knowledge about that so I don’t have an opinion, but it sounds scary especially considering that many western economies have abandoned the gold standard but I don’t understand the details on that topic so it’s hard for me to say which way is better.
ReplyDeleteI can comment on bitcoins, which I consider as a probably stable money in near future and good in a sense that it cannot be “created” when someone decides to “print” more money. Bitcoin is finite just like gold. Then maybe it’s a good alternative to gold?
I must say that I'm far from being an expert on this topic. I believe that the only stable monetary system is the one that is based on the stable resource (so I agree with Piotrek on this one). And I treat the "crypto-currencies" as something far too volatile and unstable for me to put my hard-earned money into it. Although I must agree that the people who invested their money in BitCoin a year back now have made big bucks by doing so (The world belongs to the brave!). I also have the same concerns as Kamil concerning such monetary systems - how can we accurately determine the real value of virtual money?
ReplyDeleteI can feel Kinga that you are really enthusiastic about this topic but personally I am an skeptic on this one.
1- What other forms of recognizing and regulating/capitalizing of the
ReplyDeleteobligations will egsists ?
It is very hard to predict it at this stage but I hope there are some specialists that will figure something out so people like me don’t have to worry.
2- What else can be used to create a stable money system ?
It must be something valuable and convenient to use as a currency.
3- What do you think of using new crypto-currencies, like bitcoins or
litecoins as new emerging standard for monetary system ?
It is hard to say as I have never used any of these but I’m quite optimistic and I think it can go through as for me there are much more advantages that disadvantages. .
4- What are 2 main advantages of emerging binary standards like Bitcoins
over every other monetary system known to People in the past ?
For me the biggest advantage of it is that it is bank-independent and low inflation risk.
1- What other forms of recognizing and regulating/capitalizing of the
ReplyDeleteobligations will egsists ?
There must be a system for the exchange of some other elements necessary for the flow of funds and goods. For sure we can handle.
2- What else can be used to create a stable money system ?
It's interesting because I do not know what it will be. In The novel P. K. Dick were the skins of animals which stopped entropy was new currencies.
3- What do you think of using new crypto-currencies, like bitcoins or
litecoins as new emerging standard for monetary system ?
I have never used crypto-currencies is nothing I can say about that.
4- What are 2 main advantages of emerging binary standards like Bitcoins
over every other monetary system known to People in the past ?
At the moment I can not find any positive elements in favor of the use of crypto-currencies.