I also don’t think tether makes it easy (or possible?) to sell Tether’s back for the $1. It’s “backed”, but it is a meaningless idea. It’s all the best parts of a bank without the hard parts. And is basically fraud.
Heck, who'd like a few hundred thousand jerfcoins? Come and get 'em! They're backed by dollars, in the sense that I guarantee there exists in the world many hundreds of thousands of dollars. jerfcoins don't give you any claim to those dollars, of course, but they're backed by them just the same!
("But jerf, what are US dollars backed by?" Purchasing from the US government the right to not be arrested and thrown in jail for lack of payment on taxes. Just 11 days ago, many people completed trading in their dollars for the year for that backing, so it's definitely a transaction that can done by real people. It may not be an aesthetically pleasing form of backing, but it seems to be working.)
I agree with you almost 100%, just wanted to add that no current Government/State can back the nominal monetary mass flowing through its economy with real money, no matter the amount of taxes they're collecting. The reason being that the nominal monetary mass it's pretty big (to use an euphemism) compared to the real money flowing through the real economy.
For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion (give or take a few trillion). Yeas, I know the CDS market back then was a financial abomination, and I do know that a lot of those $36 trillion were probably money counted twice or thrice or even more, but the idea remains. And that's just one market.
What indeed still keeps this whole house of cards still standing, what keeps any financial system standing, is trust. And, as you very well put it, once you have the power to put people in jail (or launch inter-continental ballistic missiles) you kind of have a lot of trust by default. But there are moments when no matter how powerful you are you still manage to lose that trust, see the USSR post 1989 or the Spanish Empire during and after the rule of Philip II [2], that's when things turn nasty:
> Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Phillip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years.[9] Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.[10]
[1] https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg
[2] https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy
No matter how many times we go through the refutation, zombie ideas like this just never die.
Money is purely a social construct. It only has value because people collectively find it useful. There is no backing.
The argument that state-issued currencies have value because they're the only currency you can use to pay taxes back to the state is true in some sense, but the value is still essentially arbitrary and the trust is still required. (e.g., if I owe money come April 15th, I have to trust my bank, Visa, and TurboTax, probably, even before it gets to the IRS).
It'll be interesting to see how the cryptos work out. I'm optimistic that bitcoin will still be valuable in decades to come due to scarcity and fame. Bit like Van Goghs and that kind of stuff.
You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy.
If fiat isn't backed by some sort of government compulsion it is difficult to justify why savers or workers would deal in it. It isn't stable enough - it's value declines too quickly. The people who benefit are borrowers, the big banks and to some degree employers - powerful players, but not enough to force fiat in a battle where government isn't involved. The uniform acceptance of fiat is strong evidence that compulsion is involved.
Getting no raises is a pay cut, yes. But most workers spend their wages in the same year, inflation is not a problem here.
Contract A: I'll give you 1,000 warm meals in the first year, 980 warm meals in the second year and 960.4 in the third year, progressing according to meals = 1000 ^ (year - 1). There is an understanding that I'll maybe give you a raise every year or maybe not depending on market conditions.
Contract B: I'll give you 1,000 warm meals a year. We'll renegotiate next year. If market conditions have changed I might offer you less.
Now, in principle these two contracts are not that different and market conditions should force the employer to pay market wages. But if you offered a worker the choice between the two options they'd pick B. The structure of contract A is clearly not in the workers interest because it involves a lot of bureaucratic foolishness just to get offered a steady real income. It can only encourage shenanigans.
If I were on Contract A (which, since I'm payed in fiat when I work, I am) then I have to semi-regularly run figures against a diverse array of facts to figure out if I'm making or losing against my starting salary and I have to fight my employer for a wage raise if inflation is 4% but they offer a 2% increase. In addition there is opaqueness about what inflation really is; the government agencies do their best to measure it but it isn't a perfectly distributed phenomenon. I don't think I can accurately estimate what wage increase would be maintaining a fair wage when I am working. I don't have enough information about, eg, inflation by postcode or asset class vs my consumption.
I don't accept that that compensation structure is good for me as an employee. And more broadly the incentives for workers is to be paid in something that looks almost exactly like currency but does not inflate away year on year.
Since inflation affects everything at once, it can be ignored when calculating wages vs profits. It's all about the distribution of money, not some esoteric "value" derived from macroeconomic variables. For wage-sensitive jobs, the minimum wage is usually raised every year (or couple of years), so that should correct for employees without leverage over their wages.
Inflation affects different economic actors differently, but at "regular" levels of about 2% a year, it's too low to matter for the majority of people.
Yeah, the employer is fine. This is about the people earning the wages.
> Talking about spherical cows here. > Since inflation affects everything at once
Are we dealing in spherical cows here or not? That is a friction-less spherical cow if ever I've seen one.
The agreement on inflation is to use the best-guess, which is the government number, but the as-experienced effect of monetary creation would varies enormously depending on where and how people are engaging with the economy.
> at "regular" levels of about 2% a year, it's too low to matter
The ordinary people I've dealt with care a lot about small amounts of money because they don't have much to spare. 2% p.a. represents a significant risk to them. And, critically, if a wage earner had a choice they wouldn't choose to be subjected to it.
Inflation mostly affects people that can save significant amounts of money for longer periods of time, not wage earners.
The alternative to getting payed in fiat is some other value storage thing that is even harder to turn into rent and groceries. Unless it's actual groceries and corporate housing, or token for corporate shops, which is even more regressive.
If somebody doesn't have savings, then they are spending everything they earn. A 2% real change in wages would require them to reduce their real consumption by 2%.
> Inflation mostly affects people that can save significant amounts of money for longer periods of time, not wage earners.
It changes the situation from one where wage earners will maintain their lifestyle if nothing obviously changes to one where wage earners will be worse off if nothing changes.
There is a practical difference between these two. If there was a choice, by far a majority of people would rather not live under that second regime. Similar (in a very minor way) to standing around on railway tracks; in theory there is no problem because when you see a train they could move - but still a normal person would not choose to stand there at all. Use of fiat and the associated inflation creates risk of costs for wage earners.
A system wouldn't stably settle on that sort of outcome without government backing the token with some serious clout. The uniformity of fiat for labor is very suggestive that it isn't a social construct. Society isn't that uniform.
I also agree that it was preferable to be payed in non-deflationary tokens, but I fail to see any real-world examples of that.
You're missing a very important point: US dollars are special because they are the only thing accepted to pay US taxes.
No matter how valuable of a thing you own - gold, euros, a truck full of mona lisas, shares in TSLA ... it will not be accepted as payment for US taxes.
Understanding where the value of money comes from and what it is actually used for and what the nexus is between financial entities and physical force ... it all starts with understanding what it means that the government will not accept anything from you, no matter how valuable, for payment of taxes other than the currency it issues.
The government starts accepting any asset for tax payments. You can now sign over fractional ownership in your factory, or your rental real estate, or your Mona Lisa to pay your tax bill.
Are dollars now worthless, because they're not required to pay taxes? Do you abandon your bank accounts because the dollars have no value?
Certainly not! It's too inefficient for the grocery store to appraise your Mona Lisa and negotiate a 1e-8 share of it. Dollars are still useful, and they still have value even if they don't have a monopoly on tax payments.
The answer is that the state has changed. The backing of the currency collapsed, and it turns out that currencies collapse hours, if not minutes, after that news gets out. In the modern era, probably minutes.
There's an irony to cryptocurrency advocates claiming money doesn't have backing, which is that the only reason you can claim that is precisely that you're so casually used to fiat currency being rock solid, to the point that you literally can't imagine it collapsing, that it leads you to misunderstand the nature of currency.
People say this all the time, but regardless of whether or not the CDS market was or wasn't a shitshow at the time, comparing the outstanding notional to GDP is meaningless.
At the time, the CDS market worked like most derivatives markets: you face a small set of players and you are constantly offsetting existing transactions and subjecting them to netting rules on a master isda.
So like, let's say Foocorp has 100m bonds out there. I want to buy protection on 1m of this (basically, I want to buy default insurance). You agree to sell this to me. Ok, there's 1m in CDS contracts' notional value outstanding.
Now, our views, other risks, whatever changes. Maybe I sell the bonds, and holding this CDS is too risky for me now because it's just a naked short of bonds I'm not long. Maybe you buy a bunch of these bonds, and now you're not only facing the default risk of the bonds but paying the default insurance to me.
So you decide to buy another CDS offsetting your existing one. I'm also trying to flatten out here so I sell a CDS offsetting my existing one. Now (mutatis mutandis) we're both at 0 CDS risk. We each have entered into 2 swaps, they're directly cancelling.
But the total notional? Now it's 2m. Contracts expire, so the number doesn't strictly go up, but given how the products are bought and sold, it mostly does. It would be like looking at the stock market not in terms of the market cap of all the companies, but as the dollar value of all the trades made in a certain time period. It's not that this number is meaningless, it's just that it does nothing to explain how much is "at risk".
Of course in reality this is all much more complicated, but the basic principle holds.
Anyway, I know this isn't your main point.
The wage garnishment and forcible (note the word) asset siezures are themselves backed by men with guns. If they tried to just go around and sieze assets politely, while never threatening a fly, it wouldn't take long before people figured out there's no particular reason to let them have it.
Let's assume that it's impossible to sell Tethers for dollars. I don't think that's completely true, but that's the "steel man" argument.
Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency?
You would know this was happening if the price of Tether dropped far below $1.00, or if the supply of Tether contracted as Tethers were destroyed on redemption.
The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
They (or at least some) are. BTC crashed about 10% yesterday.
What actually happened is the price of Tether dropped < 1% and the price of BTC reverted to where it was a week ago.
It appears to be defying gravity while the backer is accused of fraud and doesn't have funds to back it.
These exchanges are unregulated and unaudited, the movements in price are inexplicable, and the simplest explanation is fraud.
The price is accurate in that I can sell Tether and buy Bitcoin or Ethereum or Ripple, etc. at the market price.
The fact that a counterparty is willing to buy Tether, in large quantities, in exchange for Bitcoin, tells me that the market price is accurate.
https://modernconsensus.com/cryptocurrencies/tether/bitforex...
But if there were widespread problems selling Tether to buy Bitcoin, and withdrawing Bitcoin from the exchange, then we'd hear about it and there'd be a run on the exchange.
You can directly do this and the market is pricing it at 5% discount. Anyone can short it or buy tethers at a discount. It's been down to 85c in the past.
This is the equivalent of arguing "if roulette was a negative sum game, economically rational actors would cash in their chips". There's plenty of reason to believe that the USDT market doesn't even closely approximate economic rationality, and no reason to believe that there are ordinary investors with large sums of cash tied up in USDT who have superior insight into the level of backing Bitfinex actually have than the people questioning them.
The "why aren't more rational people shorting it?" argument makes slightly more sense, but then if you shorted Madoff when his fraud was first highlighted, you'd have been bankrupted in the ensuing 8 years...
I imagine it would be hard to get the borrow just now or I'd probably go for it.
I think that's a good observation but maybe it's just folks who already own Tether are inclined to belive in it... still, maybe not all that rational?