Edit: Much of this article/thread references this short video clip, check it out, it's pretty cool:
http://www.youtube.com/watch?v=boUD5eG9Bf4Preface: I didn't take Labor Economics at University. This article is mostly based on courses I've had in Microeconomics, and Money & Banking. It was inspired as a rebuttal this article:
http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea, specifically, it's composed as a response to the distribution, or "Seeding Initial Wealth", section of the article. However, I'm used to writing essays for my Economics professors, so the article comes off as a general analysis of the current model of new money distribution in the US.
I was really pleased that, in writing this article, I was able to reference and further analyze this bit of dialogue from a classic film I enjoy:
http://www.youtube.com/watch?v=boUD5eG9Bf4 which I'd always found unsettling, based on what I already knew about Economics. This article allowed me to reconcile what I'd been taught with the appeal of the dialogue. /preface
__How Does the Federal Reserve Disbribute Money?__
The US Treasury prints money and the Federal Reserve (commonly referred to as "the Fed") distributes the money printed by the US Treasury.
The Fed does this in order to control, or manipulate the US money supply and therefore control inflation, the amount of money being lent out, and the amount of interest being paid on money that is lent out. The ultimate goal being to maintain or increase Aggregate Supply (the amount of goods and services being produced domestically).
The money has traditionally been distributed by buying bonds and securities from banks using newly-printed money. However, in recent years, the Fed has decided to increase the money supply by giving near-zero interest loans and buying near-worthless assets.
How Do Banks Distribute Money from the Fed?
Traditionally Banks have lended out the money they receive from the Fed, as this money has been the result of normal market transactions (the Fed paid fair market price for the bonds and securities purchased with newly printed money).
However, the Fed's recent injections of funds into banks have been more similar to subsidization. They've essentially donated billions of dollars to giant banks. Much of this money is currently sitting in banks as reserves. However, banks are starting to use it, but not to give out loans. Banks understand that the massive increase in the US money supply will lead to inflation, so banks have instead been buying commodities and therefore driving up the price of those commodities.
I would like to propose a different method of money distribution. I propose that new money distribution might benefit from being based on work.
This video should give you an idea of what I'm talking about:
http://www.youtube.com/watch?v=boUD5eG9Bf4Although the character could be alluding to the labor theory of value, I would like to relate his speech to microeconomics.
http://coinchan.org/microeconomics.PNGThe blue line shows the demand for gold. The lower the price of gold the greater the quantity of gold the market wants.
The black line shows the supply of gold, notice it's very steeply upward sloping. In other words, it takes a large increase in price to bring about a small increase in the quantity of gold supplied; this relates to the fact that it takes a lot of work to create a small amount of gold.
The red line is very important in our discussion. The red line shows what would happen if gold was very easy to get (for instance, if we were to give banks hundreds of billions of dollars in newly mined gold in exchange for near-worthless assets). In this situation a small increase in price results in a large increase in quantity supplied.
The situation described by the black line results in a much higher price than the situation described by red line, assuming the same demand curve (the blue line).
So what happens when a good (US Dollars, for instance) becomes much easier to obtain (say, for instance, it's practically given away to US banks)? The price of a dollar (in terms of goods or foreign currencies, in this instance) goes down, possibly way down.
And so ends our lesson on current practices regard the Fed's distribution of new money, and the relevance of the labor theory of value with regards to microeconomics!
What are your comments? What are your criticisms? How do you see this as related to BTC, if at all?