Just passing along this nice piece from the Bank of England on Bitcoin and its role in the monetary system. A lot of this stuff jibes nicely with Monetary Realism. Here’s a short summary:
- The article discusses the reality that the monetary system is essentially already an endogenous system in which we all can issue money, but banks dominate the system with their issuance of the primary form of money, bank deposits.
- The banking system is constructed around the Central Bank as the bank where interbank payment clearing occurs.
- The Bank of England is skeptical about the ability of Bitcoin to serve as a competing form of money without the same components that have been addressed by modern banks.
If you’ve read most of my thoughts on Bitcoin I don’t think that much of this will be new to you, but it’s an interesting read for the uninitiated. Read it here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
I think your link is wrong, it points to “Institutional investor portfolio allocation, quantitative easing and the global financial crisis”. The paper doesn’t even mention Bitcoin.
Shouldn’t money represent a store of value, rather than an endogenous system, in which we can all issue money?
We should be able to issue money only if there is a tangible good or service backing it.
If “money” had a tangible value, it would be hoarded and the economy would grind to a halt.
I can see that would male sense if the tangible value grew at a pretty good clip.
I am merely saying that backing dollars with goods or services, gives the money more ‘hard faith’ worth thaN simply the “soft faith” of the dollar backed by the goodwill of the U.S., an intangible asset.
Whether a business or a government, goodwill should be a vast minority of the entity’s value.
The way I look at this, is that the low interest regime forces everyone into riskier assets and out of “safe” deposits that have generally returned something close to the inflation rate (stored value). And because the economy is weak and cannot support a savings rate that equals the inflation rate, then “everyone” is effectively taxed to subsidize the economy for the greater good, if they keep their assets in a 0% deposit savings bank. Or they need to take on “risk” by acquiring riskier assets.
And you could argue that the “1%” whose disposable income has steadily increased and who park savings in assets are guilty of “hoarding”. And their inability to spend excess income is contributing to the economic slowdown. Blaming the “middle” and “lower” class for hoarding or wanting to save retirement or expecting them to spend 100% of their disposable income (which some do) to sustain the economy is not “fair”. There is a problem here and I don’t have great solution. Maybe they should give tax break for for “spending” of savings (non-debt based) to encourage spending of their large savings. Or a tax break for real investment – starting a business (rather then parking big piles of money in bonds and equities)
Good point, Don. I think the dollar is already implicitly backed by goods and services. The dollar is ultimately a claim on production. The dollar is widely accepted due mainly to the productivity of the USA.
Money absolutely is never a store of value! Since money is an artificial construct it has zero value by the First Law of Thermodynamics. Money is a medium of exchange only. The only difference between fiat money and hard money (e.g. gold) is that gold does have some real value, but with time and technological changes, other metals have more real economic value. There are billions of goods and services produced in the world every single day, and the real value of these changes every single day. So we use money, which has no value, as the primary way of making exchanges between real things.
Some argue that the natural rate is inflation + real growth, but this is not correct. That is the rate across all financial assets. The t->infinity limit diverges if the integral over all asset classes is not equal to inflation + real growth. The correct argument, which many people to make, is that the risk adjusted return across all assets is equal to inflation + real growth. So in a stable long term system low risk assets (insured deposits, Tsy, …) are required to return less than inflation + real growth. But it is possible for them to return more than just inflation.
Actually, without the huge tax distortions we have, the current conditions look reasonably close to ideal. Safe assets (Tsy and insured deposits) are returning less than inflation + growth, which is how it has to be in a long term stable condition.
I don’t follow why it need be unstable. During the 80s there were positive real yields without too much problems until 2k (well we had 87 but 90s were a grind) but there was the concept of deposit savings. Since 2k everything has been difficult. I know real yields were negative in the 70s and am unsure of the 50s and 60s.
In my view, things are more unstable today. Everyone is forced in risk assets. This creates the conditions for asset inflation.
JD, regarding Treasuries being required to return less than NGDP. I don’t know whether that’s right or not, but I like it. 🙂
It seems to make sense, and agreed it’s healthy.
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