Topic: The fiat experiment: Stopping time (Read 5492 times)

Heh.  Never thought I'd get a tip for making "Ghostbusters" jokes. But sure, I never turn down money!

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Thanks for appreciating it. 

Cryddit... can I give you a bitcoin tip? That was an amazing explanation... thank you so much.

No one will lend to you at that point.  


The purpose of politics, taken on a dollar-weighted basis, is to insure that they do not.  

As an aside:  Reserves do show up in the circulating economy.  The reserves imposed on a bank by external forces free up other capital which would otherwise be held in actual reserve.  That capital is used for flow trading, market making, and speculation, one way or another.

Do you really think that debt will not grow exponentially if they try to inflate it to be "insignificant"?  Why not take out a loan if the debt will be insignificant in the future?  Also, your assumption that the loan recipient benefits from the loan is certainly not true for all loans.  Businesses go belly up all the time and leave bad debts.  Students loans debt is at an all time high and most of the people I know who only have bachelors degrees are working in retail of food service, making minimum payments that should have their loans paid off about 1 week before they die.  Look at 2008.  How many of those loans were not paid back because the homes they were spent on lost half their value?  And what happened to the interest accruing class in 2008?  They got bailed out by their buddies while they were kicking people out of their houses, only to let the houses sit vacant or be torn down.

Capitalism is private ownership and private responsibility.  We don't have such a system in the US.  We have private ownership of profits and socialized losses.  Until the interest accruing class is forced to take responsibility for their mistakes, our debt problems can only grow.

I'd watch for some catastrophic event taking millions of lives. It would take something of a planetary caliber to reboot the planet-wide financial ponzi, and I doubt that people responsible would hesitate much.

I like this post. What other indicators need watching?
I do feel that the end game is imminent though.

I wish you were my teacher, be it economy or english lessons.

That does not apply to "excess reserves" however.  If they are reserved by anything other than market forces, it is a "gentleman's agreement".

Yep.  In a financial meltdown where there is a crisis in the money supply and a widespread run on banks, they will be allowed to spend it to stay afloat.  I think it requires an act of congress or some kind of disaster declaration to authorize.  But once they spend below the new reserve requirement, they have a limited time to get back above the reserve requirement or they lose their license to do financial services work.

I don't see any reason for a complete fiat collapse anytime soon (barring complete mismanagement by the central banks or some "unknown unknown"). Though, I'm not exactly sure how nations without monetary sovereignty (Euro nations) will handle their public debt. The U.S.'s debt:GDP ratio has been higher than it is now (after WWII). Ideally, not all the benefits of economic growth go solely to the small, interest accruing class (those who received the investments or loans would have received greater benefit than the interest paid, else they wouldn't have taken the investment/loan). Public debt doesn't have to grow exponentially. It can be paid down, and/or inflated to be insignificant over decades. Debt has just grown exponentially recently because it could be (exponentially expanding economy and population growth). The problem of always needing economic growth to function is a feature (or bug?) of capitalism itself.

When they need to buy bitcoin, and it is already started

The strange thing is: Although USD cost almost nothing to make, people are willing to give up their asset in exchange for dollar, just because other peoples also accept dollar as payment medium. So eventually bankers own everything valuable on the planet using their printer, this process is going slowly but steadily

There must be conditions defined by Basel III under which the banks could actually spend those reserves. After all -- if they were NEVER allowed to spend it, then it wouldn't be a stabilizing force, would it? Imagine if the US government in its war on poverty required everyone to put at least $100,000 into a "rainy day" savings account, even giving it to you if you didn't already have it -- but NEVER EVER allowed anyone's balance to drop below $100,000. If such were the case, those $100,000 may as well not even exist. There would have to be "emergency" conditions under which your balance could drop below $100,000 for it to serve its purpose.

So the question arises: under what circumstances would the banks end up spending some or all (well, a significant amount, not necessarily all) of their reserve USD? and what are the odds of that happening?

Thanks for that. Does all of this new money not also come with huge interest obligations? Assuming the "plan" worked flawlessly, how is this new interest to be paid going forward, assuming everything else went back to normal? Wouldn't that require more money, and more debt all on its own? (setting aside the impossible task of tapering).

I too would wager that A = A. But who's wagerin' against it?

Excess reserves are reserves in excess of requirements.  The fed pays interest on these reserves, to favored money-center banks.  Some of these are primary dealers, which bid on treasuries at auction.  The fed also purchases treasuries from primary dealers.  In this way, the primary dealers get a spread on treasuries which end up owned by the fed.  The interest and the spread are subsidies in effect paid by diluted currency holders to the money-center banks and primary dealers.  The excess reserves being literally in excess of requirements, the banks can stop holding them on deposit, and lend them into the economy, with a fractional multiplier.  If they don't, it's because they don't see a risk-adjusted benefit in doing so.

The stated policy mechanism for withdrawing excess liquidity, should it arise, is reverse repo.   They ran some reverse repos a few months back to test the mechanism.  No one has ever attempted to remove trillions of USD in liquidity via reverse repo, and it is rational to consider the risks involved in such an untested enterprise at such vast financial scale to be very large.

Swap lines with European banks are used to shore up those banks as well.

Public knowledge of the monetary operations of the fed outside of the open market programs is very poor.  Hence the Congressional campaign to "audit the Fed".
They keep lots of secrets.  Some of these are probably hiding malfeasance, given the history of government secrecy and human nature.  That malfeasance is probably quite grand in scale, given the patterns seen elsewhere (such as the plane loads full of pallets of $100 bills that went missing in Iraq) and the scale at which the Fed operates.

The Fed suffers from enormous political risk.

The issue with Basel III is actually very simple.

The Fed issued a godawful amount of $USD which now has to sit in banks, not to trigger inflation or deflation, but in order to stabilize the banks.

The increased reserve requirement is effective in propping up banks, even if the money backing it up is just an illusion.  

I'm going to just use hypothetical numbers here instead of the ones that the Fed actually used, but this is how it works.  

Let's say banks are doddling along with a 20% reserve requirement, cheerfully lending out five times as much money as they actually hold.  And the doctrine is, "you can't suddenly inflate the money supply.  That would lead to hyperinflation.  Imagine every atom of your body, radiating outward at the speed of light!  That would be BAD!

Then something happens (like the financial industry crashing) that makes it utterly clear that 20% is not enough of a reserve requirement.  Banks that actually did hold 20% reserves are struggling to keep from going under as 17%, 18%, and 19% of their loans suddenly go into default.  It's a crisis of Biblical proportions!  And what about this guy over here who caused the crisis?  It's true sir, this man has no dick.

Guys at the Fed decide that it's really only safe for bankers to loan out 3 times as much money as they hold, so the reserve requirement ought to be raised from 20% to 33%.  But if the banks suddenly have to make it up on their current reserves, then we are all DEAD, because they are struggling to survive by spending down a 20% reserve to meet their obligations.  To deal with that you'd have to suddenly and dramatically raise the money supply!  And that would be BAD!  In order to even get back to 20% within some reasonable time, the bankers are having to raise interest rates on mortgage holders by some obscene amount like going from 8% to 23% on long-term mortgages.  If they were trying to get to a 33% target, they'd have to raise their interest rates on mortgage holders to something even more obscene like 50% or 60%, and then we would all be dead.  Panic in the streets, rains of blood, dogs and cats living together,  -- it's the end times!!  

Then someone comes up with a ray of hope in the darkest hour, and says ....  hey, Quantitative Easing!  The new reserve requirement will turn the financial sector of our economy into a "giant sucking noise" that takes a hell of  a lot of money out of the economy, but what if we just give out about that same amount of money?  People will spend it once or twice, then it'll wind up getting sucked into the giant black hole we've just created in our banking sector, and if we add the money to the economy at about the same rate that it gets sucked up by the giant black hole, then we can do it without creating (too much of) a liquidity crisis!  Why, we might not even have a revolution!  But hey, wouldn't that be .... you know, BAD? Well, There's a chance -- a very small chance -- we might survive.  Oh, I love this plan! This is a great idea!!

And so the Fed set out to do this thing.  They've been adding money to the economy at about the same rate that the banks have been required to suck it out of the economy.  Now it's a couple years later, the reserve requirements have been raised and, mostly, met, and the amount of money actually in circulation has stayed roughly the same.  The banks are now holding 33% instead of 20%, they've even managed to recover the reserves that they had to spend down in the crisis, if another 20%-threatening crisis occurs they'll be able to withstand it, and the public has been largely unaffected because money has entered the economy through QE just about as fast as it has gotten sucked out of the economy by banks that would otherwise collapse.

It's -- actually not that bad a plan.  What it comes down to is that in order to raise the amount held in bank reserves from 20% to 33%, the 'actual'  money supply had to increase from 1/5 to 1/3 of the 'circulating' money supply - meaning, from $3 on every circulating $15 to $5 on every circulating $15, so 40% of the 'actual' money supply at the end is 'new' money that didn't exist before.  Throw in another 15% or so to allow the banks to recover from the hole they were in with respect to their 20% margin obligations at the start of the crisis, and you have a picture that looks pretty much like the picture today.

Now comes the next and possibly even more difficult trick.  Now that the goal of stabilizing banks and raising the reserve requirements so they stay a bit more stable is more or less met?  Now they have to ... stop.  If they can manage this one last trick, then hats off to them because, well, frankly there's no other way we could have come through that mess starting from where, through ignorance and incompetence, they started.  If the new reserve requirement is met, then maintained, and they can judge exactly the right moment to stop printing so goddamn much new money, then we won't have hyperinflation because all that new money will stay in the banks and won't enter circulation.

If I were to wager on Tail in the next toss, it would be an indifferent investment at 1:1 odds.
If I were to wager on whether (P->Q) -> (~Q->~P), at any odds, it would be a good investment.


The long-term fundamental value is determined by PQ=MV, Fisher's quantity theory of money.  A minimum feasible long-term value of PQ > 500bn USD2014.  There may be elusive unicorns out there somewhere, but they are well north of 5000.  Probably north of 50,000.  Possibly north of 500,000.

How is that?
One of my college courses exposed me to the philosophy of Alfred Jules Ayer. One of the take-home messages was that a tautology is true or false based on how we define the words we are using, eg "a unicorn has a horn" is tautologically true because that's how we define the word unicorn. Unfortunately, a tautology tells us nothing about the real world, like whether unicorns do or do not exist outside our imaginations. The danger is that we sometimes allow ourselves to forget this fact, and we end up using a tautology to let us see what we want to see, even when it is an illusion.

When you say this:
I think: that is a tautology because by definition, the "long term fundamental value" is the value where it stabilizes. But how do we know whether the bitcoin "long-term fundamental value" will be observed in reality -- or will remain as elusive as a unicorn?

When it approaches its long-term fundamental value it will stabilize.  For now, the price is orders of magnitude too low, and the risk factors dominate discounting.  When waves of fear or greed hit the user base, price fluctuates dramatically because the discounting factors are moving so much.  As these factors converge and stabilize the price will rapidly stabilize.  I think what I am saying is trivial, in that it is essentially tautological, given classical no-arb assumptions, but it is simulatenously very hopeful, i.e. it indicates a very favorable future outcome.  When you invest on the side of tautologies, you usually do well.  I'm also implying that the risk factors of public imagination are not very realistic.  Why would this be?   I suspect it is because P2P and ECDSA, open-source and mining incentives, all are not well-understood by the public.  The safety factors which design introduces are lost on them.

I found this blogpost that more or less agrees with what you said. Also more or less agrees with my post (#30).
http://theecoptimist.wordpress.com/2012/05/08/money-multipliers-and-basel-iii-liquidity-rules/


One of my main concerns about bitcoin in the long term is volatility; as a bitcoin bull, the short term volatility does not concern me, because I see it as just a necessary growing pain; but what about the long term? What will cause the purchasing power of one bitcoin to stabilize eventually? IMHO colored coins (or some variant, like mastercoin perhaps?) may be the answer to this problem. If the global banking system were to suffer a meltdown like hyperinflation of the USD or something along those lines, I sure as hell hope that a colored coin infrastructure is solidly in place before that happens.