Bitcoins and gold standard dollars -- was Re: Anyone want to make a housecall?

Levi Pearson levipearson at gmail.com
Sun Jun 2 19:52:31 MDT 2013


On Sun, Jun 2, 2013 at 4:37 PM, S. Dale Morrey <sdalemorrey at gmail.com> wrote:
> On Sun, Jun 2, 2013 at 5:18 PM, Stuart Jansen <sjansen at buscaluz.org> wrote:
>
>> >>On Sun, 2013-06-02 at 17:03 -0500, S. Dale Morrey wrote:
>> >>My opinion is that ALL currencies are just a medium of exchange and it
>> >>needs to flow freely.
>>
>> >> Longterm stores of value would be things like gold, silver
>>
>> >Wow. Just... wow.
>>
> Please elaborate.  I'm very interested.  I like knowing where I am wrong.
> It makes me smarter. I'm a bit like a Pakled in that regard.
> http://www.imdb.com/title/tt0708768/quotes

Gold, silver, etc. can be used as a store of value, and some
economists advise keeping a small fraction of an investment portfolio
on precious metals as a hedge against highly unlikely scenarios, but
they're generally a poor place to put your money.  Most financial
assets provide some sort of dividend (interest payments, etc.) while
inert metals just sit there, and are still vulnerable to market
bubbles and busts in the commodity markets.

There are three roles that can be played by "money", which is not a
universally-defined word.  The one you refer to is known in economic
parlance as "liquidity", which put simply is the ease with which it
can be traded for some other asset.  Something is illiquid in
proportion to the cost (or "discount") associated with buying
something with it.  Your 401k is not very liquid prior to your
retirement, as you must pay a large penalty to withdraw from it.  A
checking account is extremely liquid, as you can withdraw cash from it
at will.  Savings accounts are generally slightly less liquid; they
often have some transaction limit per month, fees associated with low
balances, or other costs for meddling with them.  Beyond that are CDs,
bonds, etc. that can be purchased for some fraction of their face (or
"par") value with a fixed amount of time before they "mature" to full
value.  You can sell them on the market before the maturity date, but
there will be a discount based on market rates.

Anyway, in the larger economy, liquidity also comes into play when you
need to move a large quantity of something.  In this case, if the
quantity you want to move is a large proportion of the current trading
volume, your transaction will have an effect on the price of the thing
you want to move, which will end up being a cost to you.  So trade
volume imparts liquidity as well.

Another important role of money is simply to provide a common
denomination for accounts on balance sheets.  An entity might have a
net worth of billions of dollars without actually having any cash on
hand.  For a currency to be valuable as a market denomination, it has
to behave in a stable and predictable manner in describing the value
it denominates.  The value doesn't have to be static, just
predictable.

Finally, there's money as a store of value.  It is important for
stores of valuable to be available, but money is hardly the only thing
available for that purpose and using it as a store of value works
against its purpose as a source of liquidity.  Some people like to
make a great big deal about how the dollar has been devalued, which is
true in an absolute numerical sense, but it's also true that real
assets and wages have kept up with or surpassed this.

The Fed exists to manage the currency so that it remains useful as
money for the first two meanings above.  It doesn't care nearly so
much as the third, except that it's tied to the second in the short
term.  The Fed's open market actions almost universally involve
swapping illiquid assets at banks for liquid ones.  The balance sheet
totals remain the same in dollar value everywhere except at the Fed,
which gains assets without debiting a corresponding cash account.  The
interest on those assets is returned to the Treasury on a regular
basis.  When it needs to slow things down, it reduces liquid reserves
in the system by trading its illiquid assets back into the market,
vanishing the cash received for them back to the ether from whence it
came.

All of these transactions occur in the inter-bank lending market that
was created with the Fed, by which member banks can make overnight
loans to one another to adjust for liquidity needs.  If the need for
liquidity is so great that it can't be met by the reserves of the
other banks, the Fed acts as lender of last resort and loans cash to
the banks in need of liquid reserves.  These tend to be very
short-term operations; the banks will subsequently unwind some of
their less liquid assets in order to pay off the overnight loan.

It also provides a central check-clearing system due to the fact that
some institutions would not honor the checks of certain others even
though they were good.  The Fed charges fees for this system, and this
is one of the primary revenue sources that allows the Fed to function
without any input from the Federal budget. It also ensures that money
can move freely between the banks, which is essential for liquidity.

        --Levi


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