fnew on Nostr: You think that’s money in your bank account? It’s not – that money isn’t ...
You think that’s money in your bank account? It’s not – that money isn’t really there at all.
What do I mean by this?
All modern monies, with the exception of silver, gold and #Bitcoin , are liability monies – by which I mean that they are nothing more than a promise by someone else to pay up. They’re a credit and claim system, nothing more.
There’s nothing necessarily wrong with this from first principles. Indeed, some schools of thought suggest that a system of credit money may have arisen earlier in human society than a system of commodity money.
That is, a society that functions by keeping track of mutual promises and obligations could well have emerged before a system that designated gold or some other asset as a token that could be exchanged for any promise, good or service.
Where the problem arises is hidden deep in the nature of the word “credit.”
“Credit” is derived from the Latin verb Credo, Credere, Crediti, Creditum, which meant “to believe” or “to trust”.
Credit or liability money only works, even at the nation state level, for as long as you believe the person making a promise, and trust that they’ll pay up.
When you deposit your money at a bank, for example, you exchange your money for a promise. As a matter of law, what you technically have at this point is not “money” in your account, but a claim against the bank in an amount equal to the sum of money you deposited with them.
As long as you trust and believe that the bank is good for the money, then all is well.
But as soon as you and other depositors lose that faith, then you get a bank run.
And thanks to fractional reserve banking, almost all banks will have made more promises to their depositors than they can repay at any one time. If everyone asks them to make good on those promises at once, then the bank will fail.
What’s the analogy at sovereign level? What happens when a vastly indebted nation state begins to look as though it can’t service its gigantic debt burden, whether that is thirty-four trillion or a paltry 2.6 trillion?
Very simply, a nation state typically has two choices when faced with a snowballing debt burden; and in these circumstances you really want to be a nation state whose debts are denominated in a currency you control – if the United States, you want to owe dollars, and if the United Kingdom, pounds sterling.
The first choice is to default on the debt burden, which no right-thinking country will do. Remember, the entire system is built on credit and belief. Lenders NEED to believe in you; they NEED to trust that you’ll repay them.
The dollar, remember, is no longer backed by gold. We’re told it is backed by “the full faith and credit of the United States”. So no hard default is going to be remotely likely. Without belief, the system collapses; and they cannot allow people to stop believing (even less than Journey could 😉).
Therefore, almost all nations will take the less unpalatable route of creating new units of the currency they control in order to service and repay their debts. Lenders (namely all the people, companies and other nation states who hold those government bonds) will get repaid the right number of currency units, but the value of those units, and their purchasing power, will have been destroyed and debased by the dilution of the total value of the currency as a result of the money printing.
If a nation’s debts are denominated in its own currency, it will always print to repay those debts. It prints more and more promises to repay, more and more units of credit or liability money, but in doing so it dilutes the worth of its own credit at the same time as it debases its currency.
It’s at times like this that you might want to have a bit of a safety net in the form of a commodity money that is no one’s liability, a money with no counterparty risk that hasn’t been swapped for an empty promise from an insolvent bank or a bankrupt government, a money that you can hold onto and secure yourself, no matter the cascade of failing credit institutions, breaking under the weight of their liabilities.
Counterparty risk is only as good as the counterparties. And when our faith in those counterparties runs out, the money follows very quickly.
What do I mean by this?
All modern monies, with the exception of silver, gold and #Bitcoin , are liability monies – by which I mean that they are nothing more than a promise by someone else to pay up. They’re a credit and claim system, nothing more.
There’s nothing necessarily wrong with this from first principles. Indeed, some schools of thought suggest that a system of credit money may have arisen earlier in human society than a system of commodity money.
That is, a society that functions by keeping track of mutual promises and obligations could well have emerged before a system that designated gold or some other asset as a token that could be exchanged for any promise, good or service.
Where the problem arises is hidden deep in the nature of the word “credit.”
“Credit” is derived from the Latin verb Credo, Credere, Crediti, Creditum, which meant “to believe” or “to trust”.
Credit or liability money only works, even at the nation state level, for as long as you believe the person making a promise, and trust that they’ll pay up.
When you deposit your money at a bank, for example, you exchange your money for a promise. As a matter of law, what you technically have at this point is not “money” in your account, but a claim against the bank in an amount equal to the sum of money you deposited with them.
As long as you trust and believe that the bank is good for the money, then all is well.
But as soon as you and other depositors lose that faith, then you get a bank run.
And thanks to fractional reserve banking, almost all banks will have made more promises to their depositors than they can repay at any one time. If everyone asks them to make good on those promises at once, then the bank will fail.
What’s the analogy at sovereign level? What happens when a vastly indebted nation state begins to look as though it can’t service its gigantic debt burden, whether that is thirty-four trillion or a paltry 2.6 trillion?
Very simply, a nation state typically has two choices when faced with a snowballing debt burden; and in these circumstances you really want to be a nation state whose debts are denominated in a currency you control – if the United States, you want to owe dollars, and if the United Kingdom, pounds sterling.
The first choice is to default on the debt burden, which no right-thinking country will do. Remember, the entire system is built on credit and belief. Lenders NEED to believe in you; they NEED to trust that you’ll repay them.
The dollar, remember, is no longer backed by gold. We’re told it is backed by “the full faith and credit of the United States”. So no hard default is going to be remotely likely. Without belief, the system collapses; and they cannot allow people to stop believing (even less than Journey could 😉).
Therefore, almost all nations will take the less unpalatable route of creating new units of the currency they control in order to service and repay their debts. Lenders (namely all the people, companies and other nation states who hold those government bonds) will get repaid the right number of currency units, but the value of those units, and their purchasing power, will have been destroyed and debased by the dilution of the total value of the currency as a result of the money printing.
If a nation’s debts are denominated in its own currency, it will always print to repay those debts. It prints more and more promises to repay, more and more units of credit or liability money, but in doing so it dilutes the worth of its own credit at the same time as it debases its currency.
It’s at times like this that you might want to have a bit of a safety net in the form of a commodity money that is no one’s liability, a money with no counterparty risk that hasn’t been swapped for an empty promise from an insolvent bank or a bankrupt government, a money that you can hold onto and secure yourself, no matter the cascade of failing credit institutions, breaking under the weight of their liabilities.
Counterparty risk is only as good as the counterparties. And when our faith in those counterparties runs out, the money follows very quickly.