Fiat No More

Antti, I agree with you on fiat money.

"Am I too harsh if I say that the ones who see fiat money, many economists included, don't understand how the monetary system actually works?"

Many people who have joined the bitcoin movement only have a bare-bones understanding of the monetary system, as I'm sure you've noticed. For them, the phrase "fiat money" has become a slur, or an epithet, that they use against critics. I suppose it is normal for a political group to have located an enemy. A bad guys provides members with an opposite to strive against, and getting to know the enemy might weaken its usefulness as a motivator.

As for economists, that's trickier. Here's a conversation I had with Stephen Williamson on the topic:

newmonetarism.blogspot.ca/2018/01/is-bitcoin-waste-of-resources.html?showComment=1516715485257#c8590615334274405001

Dror Goldberg has some good ideas about why economists like the idea of fiat money:

"Interestingly, monetary economists do not claim that their “fiat money” concept is fictional. On the contrary, they identify it with the modern money we use in reality. Legal scholars and laypersons call the money we actually use by the same name since “fiat” refers to its status as legal tender. Monetary economists usually ignore this status. As Wallace and Zhu (2004) explain, using the “fiat money” concept (even when money was gold or silver) “was convenient because it produced a simple and strong prediction: allocations are independent of the amount of money.” Convenience aside, the literature has used various ways to justify the use of “fiat money” in models and its identification as the money we actually use in reality...."

More here: www.appropriate-economics.org/materials/famous_myths_of_fiat_money.pdf

Getting back to my comment and also hopefully back on topic.



Antti writes:



I think it's been an epic mistake to believe in the existence of fiat money. This belief, which forms the rationale for Bitcoin and other crypto-assets, is falling to pieces





Taking JP's slippery fiat slope, I think crypto-assets are trying hard to NOT be fiat. They are an attempt to create electronic assets that emulate 1) as best as possible. Is that what you meant? Of course creating the ultimate 'anti-fiat' is a futile endeavour if there is no such thing AS fiat in the first place.



So one question is, if we assume that there is no fiat, then what is it exactly that the crypto types are against? And where do economists come in?



The most obvious dichotomy with which to exemplify the ideological battle is, in my opinion, 'centralised vs. decentralised'.



Crypto currency is an attempt to build a decentralised currency to counter what they believe to be the centralised, government monopoly system we have. Government / centralised / monopolist = bad, no government / decentralised / competitive = good. If there is a problem, it must be one of government (acceptable to a point, I suppose) and so any solution must lie in having less government (grave philosophical error, imo!). Commercial banks have of course become part of the cabal, unlike back in the good old days of free banking.



What do monetary economists think? What do economists think? And are either of them complicit in constructing a false enemy? Or is the enemy in fact real?



I'm not a monetary economist, but I think that at least in its most basic form, conventional monetary theory does come with a narrative that supports the idea that modern, non-commodity money is by construction a monopolistic system run by the central bank / government. And the idea of 'fiat', i.e. that there is a 'thing', a basic building block, that is intrinsicaly worthless, but is given worth or credence by something the central bank or government does, e.g. legal tender laws or limiting its supply (quantity theory), is part of that narrative. After reading the paper 'Famous Myths of “Fiat Money” you linked to above, I don't think it matters whether one believes that 'fiat' ever existed or not. It is its use as a building block in monetary theory that begs the question of how a non-barter monetary system works. Grossly simplified, barter is a commodity, thus it has intrinsic worth. A commodity standard has worth, because it is 'backed' by a commodity. Fiat, on the other hand, is intrinsically worthless. So there must be something a central authority does which gives it its worth, if there is no visible backing to fall back on. That something, as I said, might be a legal tender law, a quantity rule, an interest rate rule etc. or a combination of those. The idea of fiat is the starting point of a centralised, hierarchical theory of modern money and thus the the head of the 'fiat dragon' that the crypto folks aim to slay.



And what about non-monetary economists? Again, I'm not one of them, so all I can do is take an educated guess. And that would be that the construct of 'perfect competition' is actually the formalised version of the same anti-static ideology that the crypto folks hold. Of course, it is sold as a self-evident truth, an ontological fact, not a theoretical simplification. And, although monopolies, monopsonies, and other, complementary catagories are also named and studied in their own right, it is still the 'state of nature' of perfect competition that forms the teleological trajectory of any classically informed economic theory. Free and equal forces keep checks an balances on each other in a divine dance the epitome of which is the nirvanic state of equilibrium.



So, to summarise, modern, non-commodity (backed) money, aka fiat, lacks intrinsic value which it would need to exist in a free and competitive environment as both crypto-ideology and economoc theory suggest would be best and fairest for all. The radical solution, then, is to return (gold bugs), or simulate (crypto folks) a pre-fiat state of the world in which that which one believes gives money its value is a natural feature of the thing that acts as monetary medium, as opposed to the result of monopolistic meddling.



And what do I believe? I think economic theory has done itself a disservice by elevating its own categories to ontological levels that then pervade all discussions and create unnecessary ideological divides. On the above mentioned points, and getting back to our endless discussions on this board, I think it is wrong to think of money as having various degrees of commodity and 'fiat' components. There is a clear divide between barter and that which isn't barter. And all which isn't barter is an IOU (or a TOM, if you like), the value of which is derived from that which is owed and the level of trust placed in the people an institutions involved. So, in its most basic form, there is no monopolistic head to be slain by the crypto dragon slayers. Modern money is already decentralised in that its value is the result of a myriad of individual decisions. There is, however, a centralised component that has has become as much part of modern money as its basic, IOU core and which is exemplified by the central bank. But rather than characterising that component in quantiative terms, whether as a quantity of money or interest rate, my focus would be more on the qualitative aspects of monetary policy and their, possibly conflicting, effects on the value of money and the stability of the financial system.

Seems like I managed to clear out the forum with my rant. It was not my intention to suck anyone into a tedious, political discussion, nor do I expect anyone to agree with me. It's just that the whole crypto buzz has a distinctively ideological feel to it. So do ignore my comment but don't stop commenting because of it!

JP, interesting discussion you had with Williamson! I think he blurred it in the end; you had a very strong argument against money being fiat money / a bubble (which I take to mean the same in this context; fiat money = a bubble), and I didn't see him refuting it.

As we also saw in your discussion, I think, 0 % interest is no argument for a bubble. No matter interest rate, this boils down to money being a part of a credit-debt relationship, or not. If not, then it's a bubble.

Is central bank money a part of a credit-debt relationship? To me it is obvious that it is. We only need to imagine a situation where all debt in the economy is repaid, and for a minute or two there's no debt (new debts will emerge through trade shortly, but for a moment we're in a weird situation with no debt). Central bank money would have disappeared, with the debt, which is IMO clear evidence of it not being a bubble. (Depending on how we define debt, there could be some central bank money in existence, fully backed by gold and other tangible assets on the CB balance sheet.)

Money being a bubble means it would still exist when all debt has been momentarily repaid.

How does this sound?

Regarding casino chips, here's straight from the horse's mouth (Las Vegas Sun):


It's funny that he contrasts legal tender and property of the issuer. But he's not an authority on that matter, so I hope you can ignore it.

Regarding gold, I don't now have evidence at hand, and I'm not even sure how gold has actually been treated. (Anyone?) But let's think about it. The government has in public coffers gold coins worth in total $200 as bullion, with $1,000 face value (if used as public IOUs). That's $200 worth of public assets, right? It then proceeds to purchase horses for $1,000, giving all gold coins to our old friend, the horse trader (JP must love this...). Would the government BOTH write off $200 worth of public assets AND add a $1,000 public debt? That would make no sense. Yet, public debt has increased by $1,000, so the only reasonable option is to continue to value the gold bullion as a public asset, even though the coins are in circulation (note: not sold or traded away, but in circulation).

So, I'm for netting on the issuer's side. Net debt is $800 (gross debt minus assets), not $1,000.

On the creditor's side, the situation is as follows. First, we have just concluded that the gold is still a public asset, so it cannot be also the horse trader's (creditor's) asset. The horse trader holds credits worth $1,000. Those are his assets. Second, if you think about it, would you treat a $100 dollar bill differently if you heard that the paper itself is worth $20, not a fraction of it as you previously thought? Well, perhaps you would be nicer towards it, but I guess you would pass it on just like before. Am I right?

I'm going to get back to your earlier comments on Bitcoin later. There's a lot to discuss there, but I don't want to make this too messy yet

Oliver, I'm afraid I took us off topic with my comments. The property question isn't that meaningful, because it's hard to think of an occasion when it would matter whether coins and notes are property of the government or the holder. I was thinking more on a theoretical level. As you know, I approach this from an accounting point of view. Cash to me is part of public infrastructure, in a way. Whether it's in the form of an accounting entry in a bank's ledger or a physical token/note, people are holding credits, not property. I guess you see my point?

The bullion in gold coins could be alternatively viewed as some kind of insurance against high inflation. Not a good insurance, though, if it only covers 20 % of the value of the credit.

I think we can move on.