Topic: "Backing" - what does this actually MEAN? - page 3. (Read 8605 times)

You have not added to my post, merely restated its content (albeit poorly).

To establish trust in that thing, through transference of trust in another thing.


General goldbuggery  (yes, I am sticking the UK version of the verb "bugger" in there)

Very well said

The reason for seeking a "backing" is a sign of lacking of confidence, people need a powerful entity to provide that "backing"

But there is already a powerful entity: The bitcoin community. It is a collection of many talents from all around the world. Developers back the software infrastructure, miners back the computational power, exchange operators provide the exchange channel, and large traders provide the liquidity support. Those who hold lots of coins have already made a fortune and now they can support the exchange rate of bitcoin using a small part of their profit

Maybe this "backing" is not as powerful as today's government, but in a world wide context, this is the first multinational backing that has never existed before

You are off base in my opinion.

Ask yourself this simple question: Why back anything? Why the call for backing?

The reason is, that the person holding the media, wants to have confidence, that it will retain its purchasing power. Nothing more, nothing less.

Its not only about the supply. Yes exploding supply, will kill off the future exchange value (purchasing power) of the media.
However, something can be limited in number and still loose its purchasing power because nobody wants it.

It is a general concept; you want to be confident, that what you are holding will buy you (the same amount of) resources in future.

There cant be any serious discussion about this fact. This is the goal of backing.

You can define backing however you want, so long as you explain to other people what you're talking about. But IMO, that's not a useful definition of "backing". Suppose someone offered a "secured Bitcoins" service, with a promise that they will buy back any secured Bitcoins you have for $10 any time in the next ten years (or 1/4 gram of gold, if you prefer). These are "backed" by your definition, but common sense will tell you that they're not significantly more useful or valuable than "unbacked" Bitcoins. And the truth is, this is the only kind of backing you have for fiat or even gold. Nobody "backs" demand. At most, they back supply. And Bitcoin's supply is backed more than fiat is.

You are babbling. Your post is nothing but distracting noise (irrespective of ones position on bitcoin, 0 relevant content).

Pretty much, but not completely. It is not all traders that guarantee the value. The value of the money in the market is decided by the volume of the money and the value holding preferences of the actors. An instutution is the guarantist, and you have to go there to get your guaranteed value in gold. The institution will have to make sure that they do not issue to many units, else all money will go back to the institution and the money system will be de facto decommissioned.

Nothing has such "backing". Did you think of the fiat? You have been desinformed by the Federal Reserve propaganda system.

No, all value is subjective, but some things have an exchange value component in addition to use value, and some things have only exchange value (fiat and bitcoin).

As I said, most things have at least a miniscule use value, for bitcoin (I am talking of the actual bitcoins) that could be the bragging value that the first miners might see in their otherwise valueless coins. The system itself, not the actual coins but the totality of the system, the invention, the miners, the fact that the system can transform the society, is of course extremely valueable, but it is difficult to decide exactly how much. You could try to say that the bitcoin system is more valuable than the gold money system, or the fiat system, or some other system, like the internet or the sea transport system or the judicial system or the police force. But we are concerned with what is the value of one dollar, one ounce of gold or one bitcoin. That is the units of the money systems.

No, that's pretty much the dictionary definition.  It's a promise to exchange the token for a specific good or service.  If you doubt the ability of the entity making that promise to keep it, then you may be well advised to trade it for less than the value of that good or service. But reliable or not, that promise -- or hope if you prefer -- IS what economists used to mean when they talked about a currency being 'backed' by something.  It's a notion most economists have stopped talking about.

No. I did not just make it up. I look at the GOAL of backing.

Why do we want to back anything? Because we hope that by backing it, it will retain its purchasing power in future and thus there will be more trust.

You just made up your own personal definition of "backing," which most people would just call "hope." Nothing is guaranteed to retain purchasing power.

It really doesn't matter what form backing takes.  

A currency is backed by someone's promise to redeem it for some specific good or service. This promise must be a guarantee, in that it's supposed to bind even when the provider of that good or service would be exchanging it for coin at a loss.  Hell, in frontier America, a lot of saloons, merchants, and brothels issued 'trade coins' redeemable for drinks or goods or services and people used these tokens as money.  For as long as the 'money' value remained above the 'commodity' value anyway.  
^{Just a note, but 'bank runs' or their equivalent must have involved some very strenuous times at brothels and other service providers.}  
To the extent that people value the thing they can exchange a currency for, or know that others value that thing, they know that the coin they hold has some minimum value.  It may trade above that value, as did the Eagle coin when it was issued (it was worth a little *LESS* than $10 worth of bullion then), or at that value (as most Bullion coins do now).  But it will never trade for less, for the same reason US merchants in 1982 were buying up copper pennies; the copper in them had become worth more than a penny so the coins were being smelted into blocks and sold as metal.

In this sense, a bullion coin is "backed" by the bullion it's made of.  Even if that old $10 Eagle coin were worth less than its bullion value people could still sell it for its bullion value, just as Americans were selling their pennies in 1982. If it were stamped as a $2000 coin and made of $1300 worth of bullion, people could hold it knowing that no matter what happens to the dollar, it will always be worth at least $1300 worth of bullion.  

A fiat coin is backed by ... approximately nothing in the sense that there is nothing else you can really exchange it for.  It has value because it is approximately the only thing that the government will accept as tax payments and because people generally agree that it has value.  The issuer's power to compel payment of taxes and secure hold on temporal power play a big part in it.  But there's no good or service that you can take your fiat to the issuer and demand to exchange for it.

If it remains for an individual to decide what property should be considered as valuable (subjective valuation), therefore any subjective value would necessarily be direct use value (as you said before in respect to gold prettiness). If so, then, say, bitcoin security should by logical necessity be considered as direct use value too since there are many people who value bitcoin security high, right?

Backed is a broad word, but in the realm of money it means that there is some entity that is willing and able to exchange the backed money for a specified amount of something else. So gold is unbacked. I prefer to use direct use value. That value is not dependent of what others think (well if you want it, because others think it is pretty, but not yourself, that is in the fringe). Also in the realm of money, intrinsic value is the same as value for direct use, but that word has the same definition problem, because it is used for other things. By the way, I can not think of anything that have absolutely no direct use value, absolutely in the mathematical sense, after someone has selected it and brought it to the market.

Gold is unbacked, bitcoin is unbacked. In history there has been gold-backed banknotes. We have Casascius coins, but that is really the bitcoins itself hidden inside the coin. I think it is inevitable that bitcoin-backed notes will appear in the market, and I welcome it. Bitcoin would be excellent for backing.

1) Backing is a guarantee (weak or strong) that the media of exchange will be accepted for goods and services in the future; that it retains its purchasing power. Your definitions are not helpful. Look at the goal of backing and go from there.

If you substitute intangible property with any property which is considered useful by an individual, then the first notion will effectively be a subset of the second...

Blimey I don't think I've ever started a thread that's gone on as long as this one. Makes me feel right chuffed!

Very interesting and informative responses from many people. I will try to scrutinise and dissect each post as time permits. The general vibe I've got:

'Backing' is a nebulous everyday term with no well-defined meaning in any science, economics or otherwise.
If you have to give it meaning, two common ones are
1) X is backed by Y, where Y is a tangible substance e.g. gold, if it can be exchanged for a given quantity of Y and Y is generally considered to have value.
2) X is backed by Y, where Y is an intangible property such as scarcity or ability to pay taxes in it, if that property gives it value.

So if someone asks 'what is Bitcoin backed by?' it's probably better to ask them what they really mean first. In any case the important question is 'why do so many people consider Bitcoin to be valuable?', and the question usually carries a subtext that bitcoins are the new tulip bulbs, so that's the real 'question under the question'. In which case I'd mention all the usual aspects that have been hashed (ha!) to death here - scarcity, fungibility, cryptographic security, distributed consensus, decentralisation etc.

If so, do you agree that we could say that gold value is backed by its inherent objective properties through an individual's subjective valuation of them? If you don't like the word "backed" used here, what is, in your opinion, the best term describing the sustenance of value by objective properties?

Yes subjective. Both types of value is subjective. That is why everyone should decide what they want for themselves in the market, and what they are willing to sacrifice to achieve it. If you already have  some of that what you want, that will change your values, also your total situation, and not least, your personal preferences. If you like fresh vegetables, you might want to trade some of your time in a job, to somebody who wants the work done, in stead of growing the vegetables yourself. Nobody has the knowledge, nor the right, to decide for others. This is why voluntary action is best: more freedom (by definition), and more wealth for everybody.