Negative Interest Rates May Spark Existential Crisis for Cash
bloomberg.com
bloomberg.com
It seems that a Swiss pension fund tried to evade negative rates on deposits by withdrawing a very large amount of physical cash with the intention of vaulting it. But the bank refused to allow it to withdraw the money in the form of physical cash.
http://www.forbes.com/sites/francescoppola/2015/04/25/the-sw...
ADDENDUM: The OP article is more about banks imposing negative interest rates, actually triggering a renaissance in cash storage. While storing huge amounts of cash as an individual during a deflation is, from an egoistic perspective, the better option in terms of personal purchasing power (minus the obvious physical risks). That the banks and financial regulators don't like this is clear, since it's money not under their control.
If we live in a world where it's too dangerous to have any unauditable transaction, perhaps we're doing something wrong at another level.
Most of these arguments are bunk anyway. The government captures every phone call in entire countries. We collect images of every piece of mail. Are you telling me that the government forgot to collect the serial numbers of every dollar bill as it enters the banking system?
The other sad thing is this really reinforces and legitimizes the fear that fuels the right wing. Perhaps the goldbugs on talk radio are right!
I will never understand this argument. What right do people have to a return on their savings? None. It's an economic transaction.
You realize that when you "save" money, there's someone on the other side of that transaction that is taking that money, along with some risk and ingenuity, and putting it to work economically?
If you want return now, take more risk. The world is awash in capital, safe assets earn nothing.
As far as "conducting business", the largest corporations are selling massive amounts of debt at historically low rates; it's not a bad environment to conduct business.
Why 2008? "Safe" assets earn nothing because the US has printed trillions of dollars to shore up bank balance sheets at low/no cost to the banks. Large, "too big to fail" banks and large corporate entities are awash in cash. Smaller business entities have a hard time getting access to capital.
Meanwhile, we've tightened controls on physical money to the point where people with straightforward business models like salons, laundromats and retail are one jump bank compliance offer away from some sort of interaction with law enforcement.
"Conduct business" doesn't mean large corporations selling debt on capital markets. There are day-to-day financial transactions, by those of us who aren't, you know, large corporations. Forcing everyone to go to electronic money is a kind of radical step. If you read the article, you'll notice that one of the implementations recommended by the economists quoted is to require all transactions to be conducted in a reserve currency. The entire thing is about giving central banks more power, according to Citigroup. Citigroup is also quoted as saying that they like that idea, very much.
These sorts of actions are not the way to instill trust in government. The article says as much, in acknowledging that anyone who already has a lot of trust in government won't mind giving it more, by removing any further anonymity in financial transactions.
The post by so-called economist Frances Coppola in Forbes claims that consumers have an irrational fear of a cash-less society. I think she is too glib, and so is Citigroup. Requiring all transactions to be electronic, or in a reserve currency, or using tax stamped bills will result in a black market or underground barter economy. That's just how people are.
None. But people are coerced into depositing their savings. To such a degree that the typical person simply cannot comfortably think about not depositing their money. That's for pimps and drug dealers (and they expect that even pimps and drugs should start doing that as soon as they're successful enough to figure out how to launder it).
And what do you get for depositing it? For the last 20 years, bankers have been deputized as spies, first for the drug war and only for deposits of $10,000 or more. But now for tax cheats, and for deposits less than $10,000. How much less? No defined amount. If they think there's a chance that you're doing $100 to try to skirt the $10,000 rule, then they have to report that too.
God help you if you run a small business that brings in a few thousand per day/week... I suppose then you're expected to save it up to $10,000 before depositing, just to avoid suspicion (though the DEA will then be putting you under a microscope).
We put up with alot of shit to deposit money. It's not absurd to think that if we somehow play by the rules, maybe that money will earn enough interest to keep up with inflation. Hell, we all grew up being taught in public schools that banks use deposits to earn money, and give us a cut. That's the way it used to work, at least... now I guess that they earn all their money by gambling with the viability of the world economy and playing games of "Spot the Pyramid Scheme!", so they have to penalize us for it.
It usually the middle class that is desvated as most do not have any assets other than their homes and rely on a salary for the majority of their income.
It is possible for inflation and deflation to co-exist.
Wages could down while the cost of food, housing and energy raises.
Increase in prices itself is not inflation, but an lagging indicator of inflation. The prices go up because there's more money around, but the same amount of products and services. One way this can happen is when the government keeps printing money faster than the economy is growing.
At the end, this is just a disguised form of taxation. The government creates extra money, but if there is not extra GNP to back it up, the extra value has to come from somewhere else. That means all the previous money get debased. Everybody pays their "fair share", even the pimps and drug dealers mentioned earlier in the comments. (This is not the only possible scenario, but it is simple and easy to understand).
And the reason you do not want the government to stop printing more money at all, the way the gold bugs say things ought to be, is that if the economy grows but the money supply stay flat you get deflation. Same amount of money chasing an increasing supply of goods and services... meaning you are basically paying people to sit on their cash and wait for prices to go even further down, arresting economic growth. This is the stuff economic depressions are made off.
All the actions taken by the fed since 2007 (and the rest of the world really) was to stop deflation not inflation.
They do. Mainly to track banknote usage and average life from when / where they enter circulation, to when / where they end up. Basically demand for and lifecycle of cash. It is valuable information for knowing how much to print, and for improving the durability of notes themselves (which is surprisingly low, an average of months, with a non-fat long-tail to weeks, for low denomination notes).
[BTW, the date on the note has little to no relationship to the date it enters circulation, the serial number is used for this.]
There is huge knowledge cap between economists and policy makers and journalists and population.
Who here in HN thinks they could pass the test If I were to administer one? For example questions related to macro- and microeconomic determinants of the demand for money, Baumol–Tobin transactions demand for money, portfolio selection, demand function stability, quantity theory, general equilibrium framework for money, yield curve, interest parity, AA–DD paradigm, etc.
I feel that at least I know enough economics to know that I don't have simple technical solution (bitcoin, gold, what have you).
My objections to modern economics are as follows:
- utility is an ordinal quantity, not a cardinal one. I can tell you I prefer my soon-to-be-born daughter's first kiss to my sister's cheerful hello, but not by how much (how much "what"? What are the units?).
- the utility function, so widely used, is an unknown function. However mathematics are performed after choosing an arbitrary functional form that has the features desired
But most importantly:
- It assumes utility exists and humans behave accordingly.
These are fundamental objections to the field. I can talk to an economist about yield curves flipping, but that jumps over the foundational objections: they are projecting complex human behavior onto fairly outdated mathematics. And then making a mess of it.
Your post boils down to: "The models are outdated, so let's throw out the entire field." The thing is, the outdated models are predictive enough to be more useful than your complete lack of a proposed alternative.
And even if you did propose a better model, you'd still have to understand the outdated models in order to prove that they are worse than the model you're proposing.
If a climatologist proposes a model, good or bad, we can still use that model to make predictions and then wait for them to come true (or not). The climatologist is in no position to coerce the weather to adhere to what his models says will happen.
An economist is in a position to influence the economy. And economists as a group are in a position to steer the economy in the direction of whatever their model predicts.
Any predictions they make are less predictions and much closer to being promises.
> And economists as a group are in a position to steer the economy in the direction of whatever their model predicts.
> Any predictions they make are less predictions and much closer to being promises.
Economists are in a position to coerce the economy in a direction, but I don't think that economists are in a position to coerce the economy to fit a model unless they have an accurate model (which may or may not be the same model as the first model) of the economy already.
For example, I might predict that putting a 100% tax on oil will cause the stock market to rise. But that model is just wrong. I might be able to put a 100% tax on oil and then coerce the stock market to rise despite doing that, but to do that I would have to have an accurate model of the economy.
An accurate model allows you to coerce the economy intentionally--without an accurate model you can take actions that will affect the economy, but you can't predict what effects your actions will have.
You can't steer the economy if you don't have an accurate model of it.
EDIT: There is significant incentive for economists to lie; that is, economists might publicly espouse a model they don't believe in order to steer the economy based on a model they do believe. There is also some evidence that some economists do this. However, this should not be mistaken for a proof that non-economists are better qualified to talk about the economy than economists. Ignorance is no more truthful than dishonesty.
But with a handle like "cops are bastards" I'd be for charitable interpretations. SOME cops are bastards, which anyone can agree to. Not All ;)
If someone inadequately communicates what they mean, that's on them, not on me.
Maybe not. If the new model has better predictive qualities, that in itself might be a good signal :)
If I'm trying to predict, say, the price of a currency over a day, I'm going to use a different model than if I'm trying to predict the price of a currency over a year, even though it's likely I could use the same models. I'd also pick different models if I knew that oil prices had just gone up 50% than I would if I knew that the S&P had downgraded the US credit rating.
Which model you choose comes from an understanding of the inputs of the model, the thinking behind the model, and the situations in which the model is suitable.
There's no shortcut here. In any sufficiently complex field, people without any understanding of the field don't even know what they don't know, and therefore can't form valid opinions on the field.
Intelligent people whose self-esteem is partially based on their intelligence are particularly susceptible to the Dunning-Kruger effect. Don't fall prey to that. Recognize when you don't know something, and admit it.
In others contexts, we avoid it. Trials are operated by trained lawyers but the final decisions are often rendered by juries of everyday citizens, who might have little or no legal experience.
And of course, anyone can run for office, vote in an election, or lobby their elected officials, regardless of education or training.
Where does economics fall on this spectrum? That's a pretty tough question, actually. It's a highly technical field, but the systems it measures and predicts are broadly inclusive of everyone. Is it engineering or policy? Somewhere in between.
So while I appreciate how annoying it must be to trained economists to hear lay folk expound on auditing the Fed or whatever, I think the culture of the U.S. is that citizens get a say in the policy that affects them. And a lot of conversation about economics are actually about economic policy decisions.
Yes, they aren't educated in law, but the intent of the system is that the judicial system informs the jurors adequately for them to form opinions. I'm not trying to exclude people based on whether they have a degree.
> And of course, anyone can run for office, vote in an election, or lobby their elected officials, regardless of education or training.
But the intent of the system is that we elect people who are informed enough to make good decisions for us.
> Where does economics fall on this spectrum?
There is no spectrum, you've simply conflated formal education with being informed.
When it comes to who should make government policy, fundamentally the questions is not "how informed is enough," the question is "who gets to decide how informed is enough." Or roughly "who watches the watchers."
And that is the source of so many problems (although a better solution does not exist, that I am aware of).
For example, let's say that demolishing a minority neighborhood in LA to make way for a private highway will maximize utility for all of LA. So what? Is it moral?
About proposing a predictive model. I don't have to to point out flaws (not sure that I did). If A is false, I don't need to prove B to prove ~A. I concede that that it strengthen an argument. That being said, I hate to go all tin-hatter on you, but some would argue that "Peter Schieff was right" ;) He wasn't the only one, surely. But man, did he make bank!
So, maybe don't talk about maximizing unknowable variables in unknown functions. We can talk about utility functions in the abstract in a theoretical context, but once you're trying to make actual assertions, economic models aren't dealing with unknown functions, they're dealing with very specific utility functions that maximize for very specific values.
When an economist talks to the public, they necessarily speak in simplified terms. But the dumbed-down version of economics that you see on TV shouldn't be mistaken for what an economist actually does. Your argument is basically "I've never seen a Bloomberg Terminal, therefore economists must just be theorizing in a void." That's not the case.
> For example, let's say that demolishing a minority neighborhood in LA to make way for a private highway will maximize utility for all of LA. So what? Is it moral?
If your criticism of economics is that it maximizes unknowables, maybe don't pick ethics as your example of something better?
The thing is, to answer the question "Is it moral?" you can pick a lot of economic functions to look at. How will the highway effect the income of the people in the minority neighborhood? That's fundamentally an economic question.
> About proposing a predictive model. I don't have to to point out flaws (not sure that I did). If A is false, I don't need to prove B to prove ~A.
Predictive models are all false. The question is not whether they're false, it's what the margin of error is in relation to reality. A false predictive model with a low margin of error is useful--complete ignorance is not useful.
Surely economists use a functional form for utility in their models. My objection is that utility (if it exists) has a functional form that is unknowable to us. That they've chosen a functional form and called it a day is not the same (a bit like when I choose B3LYP for my DFT functional, validated it a bit and, ultimately, called it a day w/ a smile)
2) I think my language has seemed a bit caustic because I was annoyed at OP's proposal for a Turing test to allow a debate. I think the conversation should definately include economics. And ethics. Now, 60 years after we built the interstates we're starting to realize the damage we caused by ignoring other voices (sometimes the damage was willful - see Ryan Gravel '99 thesis). Perhaps we would be wise to listen to others before we make societal decisions (TARP's an upcoming one that comes to mind)
I'm working on Bayesian models right now so I do appreciate the power of modern computational techniques.
Anyway, ethics has an "economic" streak to it with utilitarianism. For what it's worth I'm more of a Kantian, but I appreciate what a utilitarianist adds to the discussion.
3) Predictive models are all false. But some are more false than other, no? Newton is smack on for anything the vast majority of engineers will ever do.
Economics, while I respect the points, seems to have had a bit of a bad predictive streak. It's great at predicting what has happened when it'd fed what happened before. But that's modeling after the fact.
Again, I don't think the economics is BS or should be discounted. History also has poor predictive capabilities and yet we learn from it. But I make no secret at getting annoyed at the suggestion I have to do a Turing test on Tirole's life work when the fundamentals of the field are in question.
That's exactly what I'm saying isn't happening. You're attacking a straw man.
Very few people are stupid enough to believe that any one number is a perfect measure of utility. Certainly not any economist I know of.
> Surely economists use a functional form for utility in their models. My objection is that utility (if it exists) has a functional form that is unknowable to us.
That's true, and also completely irrelevant, because no economist I know of is claiming that they can measure utility perfectly. At the very best, they can estimate an approximation of utility that maps roughly to the things that they or their audience value.
Obviously USD isn't utility, but if you're claiming that therefore economic models which measure things in USD are completely useless, you're just wrong. USD are useful for measuring utility in a lot of situations.
> Predictive models are all false. But some are more false than other, no?
No, things are either true or false, there is no middle ground. What I think you're trying to say, though, is what I said earlier:
"The question is not whether they're false, it's what the margin of error is in relation to reality."
> Economics, while I respect the points, seems to have had a bit of a bad predictive streak. It's great at predicting what has happened when it'd fed what happened before. But that's modeling after the fact.
Let's not forget that the alternative you're proposing is to treat literally everyone's opinion on economic issues as valid.
Yes, the accuracy bar for what passes as an economic prediction is pretty low. I don't see how this is argument that we should set the bar even lower.
> But I make no secret at getting annoyed at the suggestion I have to do a Turing test on Tirole's life work when the fundamentals of the field are in question.
If you're going to claim that the fundamentals of a field are in question, you might first want to know what the fundamentals of the field are. Given you think that economics deals in generalized utility, you'll excuse me if I don't take your questioning of the fundamentals of economics very seriously.
Economists are quite aware that dollars and any other single-number measures aren't utility. That's incredibly obvious. Are you really so arrogant that you think you're the first person to notice this despite literally thousands of very smart people devoting their lives to studying this?
If I may, we've degenerated into a boring match of hair splitting, projecting what we wish the other had said and now we're about to fall into ad-hominems.
I'm not going there.
I'm sorry to call you arrogant, but I don't know how else to describe someone who thinks they've invalidated millions of man-hours of scholarly work without even understanding what the thing is they are invalidating. The Dunning-Kruger effect is strong here.
Rational choice theory assumes only complete partial ordering, transitivity and that irrelevant alternatives are independent. If preferences have continuous representation, utility function can be continuous, otherwise they are not (but can sometimes be modeled as continuous),
>It assumes utility exists and humans behave accordingly.
I think you are implicitly adding too much meaning into economic definitions of preference and utility. Economic definition of utility and preference assume very little. As long as people are forced to make decisions where they select one option over other you can infer underlying utilities.
But I agree utility is a model and it's conditions are quite clearly stated [1], and one may always infer an utility from the given choices as long as they obey those quite brand conditions (and I wouldn't call a choice consistent if they don't obey those -- for instance if you prefer A over B, B over C, and C over A).
Just that? Does it have any feature that wasn't widely disproven on real people?
This has an answer, though, assuming you're using an appropriately strict notion of utility function. I do gather that "utility function" is used sometimes just to mean a function that reflects (deterministic) preferences, and making that cardinal has no obvious meaning. But a utility function in the more strict sense reflects preferences over gambles -- and there are theorems[0] to the effect that, given ordinal preferences over gambles satisfying appropriate conditions, these can always be represented by a cardinal (real-valued) utility function, which is unique up to positive affine transformations. In fact, the utility functions you get as a result of Savage's theorem -- which I think makes for a better foundation, personally, as it doesn't assume the notion of probability beforehand -- are always bounded.
(I'm going to ignore the notion of "utility function" as used by utilitarians. That's largely unrelated -- a fact which has caused no end of confusion -- and is truly ill-defined.)
Now, of course, it is true that actual humans do not have utility functions -- that is to say, they do not respect the conditions required to have one. Any agent that somehow did, however -- not that such a thing can actually be built -- would be acting exactly as if it did have one, and it would be meaningful to speak of its utility function (up to a positive affine transformation), regardless of whether such a function were explicitly programmed into it. Regardless, as I see it, if economists are getting decent results by approximating humans as having utility functions, well, good for them. That's not my area though, so I couldn't say whether they are or not. (Meanwhile, there have been attempts to modify utility theory to describe how people actually behave; prospect theory[1] is an example of this.)
But as to your question -- what do the numbers mean? As I said, they reflect your (ordinal) preferences over gambles. That is to say, if you have utility function u, and u(A)=10, u(B)=1, and U(C)=0, this means that you would be indifferent between a 100% chance of B, and a gamble where you have a 10% chance of A and a 90% chance of C. Or, in other words, utility is that thing you're maximizing the expected value of (if it existed, anyway). Note that it doesn't mean that you would be indifferent between some amount of A and ten times as much of B or anything like that; the numbers are purely about probabilities. It's not clear what that would even mean in general anyway (and real things have diminishing marginal utility, you know).
Note of course that no utility value is meaningful by itself -- again, utility functions are unique only up to positive affine transformations. But if you have three utility values[2] a, b, and c, then the ratio (a-c)/|b-c| is meaningful. Although, if you're dealing with bounded utility functions, then you could always normalize so that the infimum is 0 and the maximum is 1, and then the resulting numbers would be meaningful by themselves (because you'd be implicitly setting c=inf and b=sup in the above).
This then (once we expand it a little) is the answer to your question "What are the units?". You ask this as if it were a strike against the notion, but in fact utility is more similar to conventional dimensioned quantities than you might realize. The biggest difference isn't, as you might suspect, that (as opposed to, say, length) it is nebulous and hard to measure -- it's that it's affine rather than linear!
Let's examine the notion of "length" more closely. Here's the thing -- you can't really directly measure lengths, either! What you can do is measure ratios of lengths. That's why length is a dimensioned quantity -- when we say "this has a length of 5 meters", we mean, "the ratio of its length to the standard length 'meter' is 5". You can't just measure length and get a number; you have to pick a unit.
Utilities, then, are similar, except that they're affine rather than linear -- like, say, temperature, before the discovery of absolute zero. These days of course we know that there's such a thing as absolute zero and it makes sense to measure temperature on a linear scale, hence Kelvins; but let's say we don't know that yet and we just have Celsius. This is an affine scale. Unlike meters (or Kelvins), it doesn't make sense to add two Celsius temperatures, or to multiply one of them by a (dimensionless) scalar, or to take the ratio of two of them. It does however make sense to take the difference of two Celsius temperatures, and get not a temperature but a temperature difference. (Which, again, today would be measured in Kelvins, but we're ignoring that.) It does make sense to add temperature differences, or to multiply them by scalars; and you can add a temperature difference to another temperature to get a new temperature, or you can take the ratio of two temperature differences to get a dimensionless scalar.
This is exactly how utility works. Rather than picking one reference point (like a meter), you need two reference points (like the freezing and boiling points of water) -- these are the b and c in (a-c)/|b-c|. If we are measuring temperature and we set c=freezing point of water, b=boiling point of water, then when we plug in the temperature a we want to measure, we're now measuring it in... OK, not the Celsius scale, but a rescaled version that goes 0-1 instead of 0-100. (Just as with lengths, we can only measure a/|b|; and if b is the distance traveled by light in 1/299,792,458 of a second in a vacuum, we've reinvented the meter scale.) Whatever -- your reference points don't have to be 0 and 1, that's just convenient.
So what units are utility measured in? Whatever you want, once you pick your two reference points. As mentioned above, if it's a bounded utility function, you have a natural two reference points in the infimum and supremum, but otherwise, use whatever two reference points you want. Of course frequently this is just implicit -- you have some function, and somewhere it's 0, and somewhere it's 1, and those are your two reference points. It's just not that important a lot of the time! A warning -- utility is often expressed in the undefined unit "utils", but personally I think this gives bad intuition, because again, utility is affine, not linear; I think "degrees utility" might be a better term. Of course, differences in utility are linear, and I don't see anything wrong with referring to those in "utils".
So -- while this is far from justifying the general use of the notion of utility, which, as you say, does not actually apply to humans -- I hope this answers some of your questions and shows that it's actually on a much firmer footing than you imply (at least, as a description of abstract agents, rather than humans).
By the way -- notice how when I was looking for a physical example of an affine scale, I used temperature before the discovery of absolute zero? (I mean, OK, I could have used position -- as opposed to displacement, which is a difference in positions, and thus linear -- but I wanted to keep things scalar.) The thing is that units, dimensions, are implicitly a statement of symmetry. Before the discovery of absolute zero, temperature appeared to have a symmetry (translation symmetry) that it in fact does not. When I say "You can't measure lengths, you can only measure ratios of lengths", I'm implicitly saying that if we scaled all the lengths in the universe by a constant factor, the result would be exactly the same. And that was a statement that appeared to be true when we knew less about physics. But these days, we know that's not true for speed (because of the physically significant speed c); we know that's not true for action (because of the physically significant action Planck's constant, or its reduced version); and we know that's not true for... uh, whatever the hell Newton's gravitational constant G is. And so by combining these we can see that it's not true for length, either; the Planck length forms a "natural unit", making actual lengths -- expressed in Planck units -- potentially meaningful, and not just their ratio. So when it comes to physical things, what things are affine, what are linear, and what are dimensionless, well, it depends on the physics -- in a Newtonian universe things might be different -- and our knowledge of physics has changed over time. Of course Planck lengths are not exactly convenient (and not as directly physically relevant as, for instance, c) so we continue to typically use meters despite the lack of actual symmetry; and in many ordinary cases the symmetry is still approximately there. But utility really is only unique up to positive affine transformations -- you are going to have to pick two reference values. (Though, once again, any utility you get from Savage's theorem will be bounded, making for a fairly natural choice.)
Edit: Just to clarify the above point about "in a different universe things might be different" -- if we lived in a universe where the only physically relevant constants were, say, the speed of light c, the gravitational constant G, the Coulomb constant k_C, and the Boltzmann constant k, then you could double all lengths, times, masses, electrical charges, and temperatures, and get an isomorphic universe; from inside, it would appear absolutely the same -- any actual measurement you could make would have the same result. In fact, however, the Planck constant is also physically relevant, and since this change would quadruple all actions, it would not be a symmetry of our actual universe. (And of course there are other physically relevant constants with yet other dimensions as well.)
[0]The VNM theorem: https://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenster... -- for people who already believe in probability
Savage's theorem: http://lesswrong.com/lw/5te/a_summary_of_savages_foundations... -- does not assume probability, constructs it together with utility
[1]https://en.wikipedia.org/wiki/Prospect_theory
[2]By which I mean values that "have type 'utility'", not necessarily outputs of the utility function; for instance, a supremum of outputs of the utility function would certainly count.
Sure, eugenics is bad, but not that bad.
- Most (not enough) people today have become aghast at it.
- Its biological underpinnings are actually quite sound. Intelligence has a genetic component. So does aggression. They also have a strong social component. However, eugenics is fundamentally a social theory, arriving at social conclusions. It is not a scientific theory, arriving at scientific conclusions (that would be biology and the theory of evolution)
- Opposition to it at the time was large and strong (the T4 program driven underground by religious opposition; the US' program, which survived well into the 70s, was very low key). However, while opposition to a social theory was based on moral and social grounds, ignorance of largely irrelevant scientific points was used to deny standing.
I feel that the OP's Turing test, while interesting and important, ultimately denies standing to most Americans. Therefore, it must be treated with caution.
That's like saying you can't complain of a headache unless you're a neurosurgeon. Not even when the neurosurgeons have declared they have no solution for your headache. And heaven forbid you try to do something about it before studying graduate-level neurology.
(BTW, neurosurgeons have a much better diagnosis and treatment rate than economists.)
Or just trying to siphon off value out of the system using applied phlebotinum and handwavium.
Perhaps I'm just a cynic.
Traditional money alone is obviously outdated.
The situation we have is as if World of Warcraft had only one stat for each character (money) and no way to track what was going on wih the environment aside from user reports. And the server somehow could not regulate anything in the simulation without it being done by a user.
Economists have done an amazing job with one number, at least in terms of finding ways to game the system and multiply one's point total while ignoring billions of people. But we need automated and mainstream systems with more than one dimension.
Economics isn't like physics. There are wide disagreements over a host of issues and models and the disagreements impact public policy, which impacts us; the electorate.
Wait, what? I've never met a single person who did. Am I the outlier, or are you?
The anti-intellectualism of attacking models has become really disconcerting. Should we start dismissing coders for using abstractions, that solve real problems, with no ties to the reality of the machines running the code?
If you make a statement about how X will result in Y, you have some model upon which your idea is based. That can be critiqued and studied to see if X does in fact result in Y. Everyone uses models in their thinking without realizing it.
For example, interest rates. A large part of why they're so low is that technology has enabled tracking everyone and everything, essentially guaranteeing that people cannot skip out on debts. Ever-lowering interest rates is what has caused housing prices to shoot through the roof (most people budget for a house in terms of monthly rent payed to the bank).
Mainstream economists take these conditions as unassailable facts, create models based around them, and then advocate for policy that's consistent with the model. But every (worthwhile) model is consistent with the system it was developed for, so what they are essentially doing is simply advocating for the status quo while fortifying and obscuring their inbuilt assumptions.
Policy needs to be debated in terms of the bigger picture - does it make sense that saving is so heavily discouraged? does it make sense that there is a dossier built up on every person that determines where they can live and their general station in life? does it make sense that the only way to preserve one's wealth is to play the Wall St casino? does it make sense to make buying a home so easy while essentially erasing the concept of ownership? does it make sense that prices should always be going up when competition wins out by lowering them?
If these assumptions start being examined, long term financial instruments are indeed going to act weird in response. But the function of the economy should be to optimize for us, not to optimize us for itself.
And yes, we should dismiss coders who attempt to force their abstractions onto us (ie proprietary network protocols)
Also answer me this. Physics students can make all sorts of computer simulations that simulate some aspect of reality, like the center of a tornado, or fluid dynamics, or galaxy collisions, etc. And physics students barely have any money! Now my question: Bankers, with all their money, have never been able to get a single simulation of a country going. Where is the computer simulation where we mess with interest rates, minimum wage, QE, etc, and see what happens? Where is it? Where's proof of this great "Science"?
- A free market naturally tends toward an exponential distribution of wealth.
- When debt is allowed in the model, the rich get richer, even without considering that interest is paid from the poor to the rich.
- The U.S. clearly has a two-class structure.
But mostly the physicists gave up because they discovered that problems in economics are much harder than problems in physics; everything is a heterogeneous n-body problem with endogenously determined rules governing interactions.
Ugh. Good article until the author felt the need for this asinine political gem. I am neither a militia member nor a tea party republican, but I recognize the flaws of a system in which a bureaucracy controls money supply based on arbitrary theory rather than some index immune to manipulation. Therefore, I must be a militiaman. Cheap thrills kill copy, journo.
Commodity money and representative money aren't any more immune to manipulation than fiat money. It doesn't matter whether you use gold, silver, or marshmallow peeps -- the value of your holdings are pegged to the value of the assets, which sway with the market. And the central bank can still manipulate that value, they just have to buy and sell the asset to do it.
Fiat money gives nations a central mechanism to manipulate their own currency without hoarding gold and silver. Commodity & representative currency allow other countries to manipulate the currency. In _any_ monetary system, losing control of your money supply causes bad things to happen (see also: Greece).
Or maybe I'm just an intelligent individual.
Big "maybe" there, admittedly.
Yes, true. But the fact that there is SOME LIMIT is pretty nice. In other words, the Fed could create as many dollars as there are bits to represent them without much effort at all. Only once you start overflowing a 64 bit integer does there start to be any kind of restraint on the amount of dollars created and only for a year or two until all the software gets migrated to use 128 bit long long long longs!
Commodities -- especially gold and silver which have widespread historical precedent as money -- can't really just be made up. Yes they're vulnerable to the vagaries of the market, but that market is at least based on some reality! And before you say "but the central bank can just make the prices go to infinity" thus achieving their price goals anyhow, I would respectfully disagree. The point of commodity backing of paper notes is that if you lose faith in the value of the notes you can always demand the commodity and hold that instead.
Then why were gold and silver considered money for thousands of years if they were so awful and horrible and destroyed everyone's economies? We still use forks and spoons even after the spork was invented, and regular chairs even after beanbag chairs were invented.
Perhaps it was the financial innovations that caused the problems, not the actual money? It's obviously hard to disentangle the two, but the East India Company didn't make up a bunch of gold, they issued a lot of stock. That was the innovation that really enabled things to go nuts. The Great Depression here in the US was the result of tremendous amounts of credit being issued against stocks; people were allowed to buy on margin in absolutely insane ways. Eventually prices went down and the margin calls were made and the whole thing collapsed.
But the gold didn't cause the problem. The problem was the issuance of credit based not on the creditworthiness of the individual or the project but based on the assumed value of the instruments that the credit was being issued to purchase. Blaming the money for not being able to inflate is like blaming the victim for being weak enough that the criminal is able to murder them. It confuses the cause (the criminal) with the outcome (the victim is murdered).
Gold and silver used as money were actually a form of barter. They did not require people to trust a government, and in fact predated government as we know it today.
Gold- and silver-backed currency were actually paper, and thus required people to trust the government to redeem them. Well, if you're going to stipulate that people have to trust the government, then gold or silver is just an implementation detail. In operation, it works like government price fixing of gold and silver. Like any price fixing, it leaves the economy open to outside manipulation by anyone who controls enough of the price fixed item.
Fiat currency is resistant to such manipulation because no one can ever control enough of it to manipulate the economy. The government can create or destroy as much as it needs to.
That's a very interesting point! I think I "knew" that they were different without ever putting it together like that. It's obviously true though, there were a number of years here in the US when you could own dollars but not the gold that the dollars supposedly represented. http://en.wikipedia.org/wiki/Executive_Order_6102
> Gold and silver used as money were actually a form of barter.
I'm not sure I agree with that but it's probably semantics. Is gold "money" or "commodity" and why? There's no obviously right answer. If people did bookkeeping in ounces of gold and paid their taxes in ounces of gold, doesn't that make it "money" in the sense that we would use today?
> Fiat currency is resistant to such manipulation because no one can ever control enough of it to manipulate the economy. The government can create or destroy as much as it needs to.
So it's not clear to me that granting the government (technically the Federal Reserve which is privately owned and truly only answers to its owners) control over the economy the way we have is actually a good thing. You still have an entity that can manipulate prices and the economy, it's just most people accept this as a good thing without any thought at all. Most people probably still believe that the gold inside Fort Knox or the Federal Reserve banks are somehow meaningful and in some way related to our money; but they aren't. You've traded the possibility of someone manipulating the economy in a harmful way for the certainty that someone will manipulate the economy but with the outcome unknown at any time.
The Fed still does price fixing, by the way. They fix the price of money, or as most people call it, the interest rate. Because their balance sheet knows no limits they can buy or sell as much of anything as they want until the interest rate is the "right" one as decided by a bunch of people who don't have a lot of connection to the real economy anymore.
You might argue that the Supreme Court is similar (unelected and generally unaccountable) but there's a difference. The people on the Supreme Court can make decisions based on existing law and precedent and legal arguments brought before them. And it's fairly easy for the Congress to override their decisions if they're particularly egregious since they publish opinions that explain their reasoning.
As it stands there's really no feedback mechanism for the Federal Reserve short of writing new laws that change the entire system. None is built in. Sure they have to go before Congress twice a year, but they can't be fired for policy opinions. It's a sweet gig if you can get it, but it's kind of insane just how much power these folks wield and how little accountability they face for their actions.
It's an independent federal agency, like the EPA, FCC, FTC, SEC, etc. Its actions are constrained by the mission boundaries set by Congress. In the case of the Fed, part of its mission is to manage the economy for "maximum employment, stable prices, and moderate long-term interest rates." Another part is to set regulations on how banks can act, sort of like how the FCC sets rules on how communications companies can act, or SEC on financial companies.
It does get adjusted by Congress. The Dodd-Frank bill passed after the financial meltdown changed the Fed's role and gave it some new regulatory powers. If you read the Fed's mission web page:
http://www.federalreserve.gov/aboutthefed/mission.htm
The 3rd bullet is new, added by Dodd Frank in 2010.
In general, it's hard to pass major laws. I'm not sure laws governing the Fed have any special difficulty. Gramm-Leach-Bliley in 1999 (which banks lobbied for) and Dodd-Frank in 2010 (which banks lobbied against) both had major impacts on the role of the Fed. There are plenty of issues with a 10+ year gap in major bills.
Right, but the idea that the Fed is allowed to debase the currency at-will, with no repercussions because it's a "good faith disagreement over monetary policy" is precisely the problem. Just the language there attempts to steer the debate by hiding what is actually happening.
The idea that banks are too big to fail and bailouts will always happen and whatnot has led to a tremendous buildup of risk in the system. Profits are privatized and losses are socialized. Heads I win, tails you lose is great if you're me, awful if you're you.
In the absence of a "guaranteed" bailout (if you're too big to fail, anyhow) we might enforce some restraint on the banks but it might take a very painful recession where a bunch of them fail to do so. Or the government could break them up and say "nobody is too big to fail now, so good luck!" and institute some kind of rule about deposit insurance and banks' total assets under management.
Ultimately I'm not so much a "gold bug" who loves gold irrationally as I am someone who wants some kind of restraint on the government. There are probably other ways to do it, but at least by using older methods you get the benefit of a lot of history to read and to draw conclusions from. I'm open to other avenues of providing restraint, but they need to be distributed and not subject to the vagaries of elections. The people have precious few ways to directly influence the government given the way that politics have evolved, so any way to return some power to the people is a good thing in my mind. To me it seems like commodity money is a way to do that without turning the whole world upside down, but it wouldn't surprise me if we differed on that point.
Anyhow thanks for the conversation, it's been nice to engage with someone on the issue rather than just get downvoted.
It's unfair to claim that only gold standard currencies fall apart, or that they're more inclined to do so.
just look how usa dictated crude oil prices at will or how the diamond business work for the last couple of centuries.
I might argue that the commodities you're referencing and precious metals are a little different. What you want to look at is the size of the stores versus the yearly production.
I don't know what the crude stockpiles are worldwide above ground, but they don't amount to much more than a few months worth of consumption. So if you were going to pick a single commodity to use, you probably wouldn't pick crude. Because there's very little buffer, supply or demand shocks quickly work their way into prices. This is not ideal. http://en.wikipedia.org/wiki/Global_strategic_petroleum_rese...
Diamonds do satisfy the "large reserves relative to production" as DeBeers supposedly has many decades worth of diamonds locked up in vaults. This is to keep the price higher than it otherwise would, made possible by demand they manufactured through advertising.
So while diamonds do have the buffer we want, they aren't divisible. Take a barrel of crude and pour it into two different containers. Each is now worth basically half of the first container. But split a diamond in half, and its value isn't cleanly divided in two. Diamond prices are based more on the carat square or cube (http://forums.udacity.com/questions/100166221/power-law-or-e...) so dividing a diamond in half makes each of the halves worth 1/4 of the whole. Not a good feature of something monetary; getting change for a dollar doesn't destroy any value.
Gold and silver on the other hand are divisible, fungible, and have high value relative to size and weight. Gold doesn't tarnish at all and silver very slowly and whatever oxide it does produce is protective. Also the yearly production of gold and silver from mining only represents a few percent of world stockpiles so supply or demand shocks have to be very large indeed to make drastic price changes; also a nice feature. Diamonds aren't fungible nor divisible. Crude doesn't have large stocks and has much lower per-unit value.
The sentence reads: "Militia men and Tea Partiers hate fiat money". Not "people who hate fiat money are Tea Partiers or militiamen".
Some people love to be offended, I guess.
Do you agree:
the government may not operate beyond what the Constitution clearly grants & empowers?
short of actual declared war, government should spend no more than tax revenue?
currency should be commodity-backed (gold preferably)?
direct federal taxation of citizens should be repealed?
human life, including right of continued existence, begins at conception; the "choice" is to create human life, not end it?
short of adjudicated felons & mental defect, ownership of weapons in defense of self/family/state shall not be restricted?
short of conspiracy to commit non-victimless crime, contracts are binding and upheld, if needed, by the state?
capitalism is, on the whole, superior to all other socioeconomic systems?
insofar as capitalism isn't perfect, government should only interfere (minimally at that) to resolve chronic systemic problems?
voter identification is a valid administrative process (ensuring only you vote as you, and you are entitled to)?
financial "entitlements" are unconstitutional/inappropriate and should be ended (society has better solutions to the issues addressed)?
government exists to protect & facilitate rights, not limit/suppress them? freedom *of* religion != freedom *from* religion?
Now, here is a kicker: I don't like these people either.
EDIT: Downvotes! Ha!
My real argument is that the article had merit until the subtle mud slinging and big reveal of the author's bias.
(A ⇒ B) ⇏ (B ⇒ A)
You know who else liked central currency? Hitler!
"As a result of technological advances and generational priorities, cash’s days may well be numbered. But there is a whole world of difference between a natural death and euthanasia. It is now clear that an extremely powerful, albeit loose, alliance of governments, banks, central banks, start-ups, large corporations, and NGOs are determined to pull the plug on cash.."
In 2011, System D (global underground economy) was claimed to be $10 trillion in size and growing, http://www.forbes.com/sites/benzingainsights/2011/11/07/rise...
"..the OECD concluded that half the world’s workers (almost 1.8 billion people) were employed in the shadow economy. By 2020, the OECD predicts the shadow economy will employ two-thirds of the world’s workers.."
It's pretty clear why they'd want to push to abolish cash and institute negative interest rates. It would put them at the center of the economy instead of the near center. Another back-door bailout like this might help deal with their, um, insolvency.
What isn't clear is why anybody else would want it.
We're asked to trust bankers to keep track of bits when they'd foreclose on homes that were current with their loan payments!
Bankers who consistently make risky bets because they know their losses will inevitably be nationalized.
Bankers who have manipulated the libor index, engaged in insider trading, broke the fiduciary trust between them and their clients advising them to buy assets they were selling.
Ya, we should abolish cash and make these folks in charge of our money
>Bank notes, as an alternate storehouse of value, are a constraint on central banks’ power. “We view this constraint as undesirable,” Citigroup Global Chief Economist Willem Buiter wrote.
He goes on to describe some ways that central banks could stop people from trying to hold on to their cash, thus undercutting the supposedly desirable goal of expanding bank power. They included:
> One, abolish paper money. Two, tax paper money.
One lone guy at NYU's business school made the only (to me) rational observation. It was how the article ended:
> if you’re afraid that central banks are in a war against savers, or that the government will try to control your financial affairs, cash is your best defense. Taking it away “is a prescription for revolution”.
This is a strange "basic income" strategy. Mash that meme up against that meme and you get some weird observations. It seems to be failing, but its at least interesting. The idea of a debt jubilee, of course only for rich people, implemented as a low negative rate rollback instead of simply eliminating debt accounts, is related and interesting. Consider a novel solution to the housing bubble crisis or the death of the oil frack industry or the upcoming death of the social media bubble, don't just write off mortgages and loans but make them all neg 2 percent or whatever to not suddenly shock the economy. Its an interesting implementation idea.
This is a symptom of a dying/collapsing economy. Not the rate itself, but look at how fast people are getting kicked off the island and no longer allowed to participate as they had participated for decades/centuries. Much like has been happening in the labor markets. The way economies die is almost never a light switch (that comes from reading greatly summarized histories deep in the past) but its more like the number of people permanently kicked out of the game increases YoY until no one cares about the legacy economy so it gets unstable and the few remaining die hards watch the final irrelevant tipover. You can see a technology analogy in software versions. Windows XP never died on a certain date, just fewer people used it over time with variations in rate due to external forces (support contracts, new windows version releases, pirated releases, etc) and finally it'll no longer be relevant in the marketplace, eventually. Likewise, economies die the same way. Its not only the quantity of transactions or size of transactions, but literally the number of players.
Seriously, if they truly were negative, we could all stop working now, borrow some money and live of the proceeds.
IMO, the story that CBs know what they do and are there for our own good is not believed by anyone anymore and the future will teach us a lesson of sorts that will prevent us from repeating such lunacy for hopefully at least a few decades.
The goal of the central banks here is to get people to spend/invest their money instead of saving it.
Because otherwise who will pamper and serve the central bankers and politicians if we're allowed to live free off our savings?
Negative rates for bulk low-risk lending are a result of the collapse in borrowing. If retail rates are 1-2% and there's a 3% overall risk of default, that turns into a negative rate.
http://sacred-economics.com/sacred-economics-chapter-12-nega...
... except in the form of inflation. Adding yet another centrally-planned mechanism for that (negative interest rates & elimination of cash) will amplify rather than reduce chaos, and (as intended) lead to a less-free market.
We've experienced another form of decay. We had a few old leftover dollar bills from a trip to the USA we made last century. When we wanted to exchange them back into local currency a couple of years ago, all exchange houses would only give back around 70% of their face value, merely because they were old bills (they were in good condition).
(American banks would give you face value.)
It's still a loss of value. When they were new, they could be exchanged everywhere for their face value (minus a few percent for the commission). After a few decades, they can be exchanged for their face value only in certain places. Who knows what will happen after a few more decades? Will they still be accepted anywhere?
In my country, if you still have any local currency bills or coins from before 1994, they're worthless except as a collector item. Won't surprise me if the same happens one day to old US dollar bills.
I think the next decade will change everyone's perception of central bank money and cash, going from the most basic law on value, to just another thing that can be traded with another thing, losing or gaining value. The real question is if merchants will still accept these "I owe you" notes in the far future, instead of requesting something of real value.
Timing means everything for something to become successful, and bitcoins couldn't have hoped for a better time than now.
So, technically, wouldn't it be more likely to have an even stronger economic crisis?
A lot of this is my own observations, so take it with a grain of salt.
It doesn't encourage lenders to lend recklessly (they won't make any money for the credit risk).
Of course, that won't stop anyone from lending recklessly any more than rationality did last time around.
As long as lenders are Too Big To Fail and therefore don't take on the full risk of their lending decisions why wouldn't they continue on the private profits/rewards and public losses/risks trail?
In the short term this "activity" is exactly what they're trying to spark. The problem is in the medium and long term all you've done is pull demand forward.
"58 percent of New York City condominiums are paid for entirely in cash ... If, as Goethe posited, architecture is frozen music, then these buildings are vertical money."
Which, coincidentally, would help a LOT to prop up Citigroup's ailing balance sheet and let them take on even more risk, until they end up needing a 3rd bailout.
Their economist didn't mention that when they went on about how great this idea was, though.
Which is a scary thought. The Fed holding rates at a very low level for a long time was a large factor in the housing crisis. It prompted many depositors to start casting about for somewhere else to put their money. Many of them settled on mortgage-backed securities. We all know what happened next.
The Oatmeal had a post where he talked about how heavy his $200,000 withdrawal was (that was in 20's).
A little Google searching found: http://www.cockeyed.com/inside/million/million_dollars.html
I think Adam Curry talked about buying actual gold bullion and storing that. Still takes a lot of space and a lot of cost in storage. $100M in gold is over 80,000 oz. Two tons of gold?
https://en.wikipedia.org/wiki/Gold_bar#Standard_bar_weights http://demonocracy.info/infographics/world/gold/gold.html
Me, personally, if I had $100M, I'd buy an island somewhere close to an internet backbone. Real estate is always a good investment!
This could be taken quite a number of ways.
One way is to think that the conveniences of credit has made cash less relatively liquid (there are fewer goods, such as those online, that can be traded for credit whereas most things in the physical world can be traded for credit).
Another way is to see this as a hedge against a currency backed by a US facing fundamental challenges to its place as the global leader (not just in finance), whose growth even with stimulation boasts a mere 0.2%; 7% under major competitors.
Another way to see this (e.g. in these comments) is a strategic means for banks to try to institute consumer credit as a currency of their own.
One could also think of it as a fed inspired policy trying to get cash into circulation. The point of inflation is so that those holding large amounts of currency can't sit on the currency and make money from doing nothing. Banks and finance basically allow people to do this despite inflation (tending to benefit the rich more than the poor in this case). Putting a negative growth rate on storage of cash simulates the same thing.
I think all the points are true within the context that it's clear the negative interest rate is a way to get around problems of stimulating the economy, but also that there's certain banks who would love to get more people hooked on consumer credit. Frankly, I just hope this situation is resolved without having to chain everyone to such a terrible situation of perpetually needing consumer credit to pay for goods/services. I don't feel it's the right way to ensure a healthy economy. Or at least that's my view of it.
I for one welcome our pending transition to federation credits. ;)
But those piles of cash don't belong to "us" to spend as "we" like.
The theory behind negative nominal interest rates is that depositors will move their money out into the economy where it can earn a the least a positive rate of return, or used for consumption. For some reason this isn't explained very well in the article. Personally I've never bought it, both in theory and practice. Real interest rates (the rate of return you get after accounting for inflation, i.e. real = nominal - inflation) have been negative for some time and there has not been this huge outflow of deposits into other or potentially better investments. It is mostly institutional investors and banks with money parked on the sidelines who are affected by these negative rates, but being (supposedly) risk averse entities, it does sometimes make more financial sense to know you are going to lose 1% a year rather than something more. Ironically, if anything, having a nominal negative rate of interest in a situation where the money remains parked in a bank says more about how low economic expectations are.
But the ECB and the Swiss National Bank are setting a negative nominal interest rate because there is political opposition to expanding their balance sheets in the same way the Federal Reserve has done, so negative rates are really their only additional option. Right now there is an ECB bond buying program, but it will only purchase (and inject) about $1 trillion dollars in the Eurozone. The Fed bought about $4 trillion dollars.
To call what JP Morgan has done through this "utilization fee" a negative interest rate is slightly disingenuous albeit still correct in principle, in which case your could call any fee that decreases what you put in a negative interest rate. They want to get rid of these deposits because it improves their balance sheet and lets them operate more freely under the current regulatory regimes, or at least make something on the side if the money stays. The articles does state this but it's buried at the end of the third paragraph.
Then there is the part about moving away from cash. There has been this push lately by well known academics and some main stream economists of an idea that cash is somehow detrimental to the economy. Beyond the privacy implications and the affect this would have on people who are in the low income segment of society and those who are un-banked, I really don't get it and I think it's driven by the need to try and get creative about monetary policy. I suppose with a cashless society you could technically also move to a completely consumption based taxation system, but this idea runs contrary to the idea of trying to get people to spend money since tax liability would be proportional to how much of your income you spend.
It's also difficult to accept the proposition that trying to force people to spend money and increase consumption will improve the economy in a real and long lasting way, when it is savings and investment that drive the real economy. This is my main issue with an extended period of ZIRP or NIRP. No one is inclined to save anything and so investment is funded by further periods of monetary expansion. (And for everyone who is going to say something about the identity S=I, I know, I completely bastardized it and technically it's only true for closed economies but the point still holds the same, savings are important to a having a good economy.)