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EverydayInvestor (< 20)

A fiat currency parable

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March 03, 2009 – Comments (28) | RELATED TICKERS: SPY , VTI , VEU

Note: graphic content. Reader discretion advised.

I had done everything right. I had five handguns hidden throughout the house, all always unlocked and loaded, in case I should ever be surprised by a burglar. This is exactly what the security consultant had advised. And yet despite my precautions, my son was dead, his brains slowly dripping out of the back of his head. He had found my gun under the couch, next to my favorite reading chair. I kept wondering, what could I have done differently?

The aftermath was surreal ... the police officer consoled me, saying "Yeah, you did everything right, but sometimes accidents happen, you know? At least you were prepared for an assailant. Kidnapping is up big these days." My wife cried for our loss but made sure that I did not fall into the parasuicidal behavior which always accompanies my melancholy. "You didn't do anything wrong, honey," she said. "Sometimes accidents happen." 

After Daniel was in the ground I went home, drank 375ml of Kracher #6, picked up one of my guns, and held it to my head. The sage words of Richard Feynman's first wife came to me, "Who are you to care what other people think?" What if everyone was wrong? What if the risk of an armed burglar was lower than everyone thought? What if our obsession with preventing armed burglary led to more accidental deaths than could ever be prevented?

I put the gun down and sidled to my computer. I had to hack the government's servers to find the data, but find them I did. Fifty times. Fifty times more accidental gun deaths than deaths or even injuries from armed burglars. Everyone was wrong. I had believed them, ignoring my own common sense. The guilt overwhelmed me. 

My wife came home to a quiet house that night.

... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...

Now, perhaps you think that is a horribly absurd (and absurdly horrible) story. And yet it exactly describes the absurdity of having hundreds of different fiat currencies. Economists tell countries that controlling their own currency with a central bank is smart. It gives them the flexibility to devalue their currency to remain competitive in a downturn. Yet how many countries does that flexibility save? The flexibility destroys far more economies than it ever could save. Most small (or large) countries inflate their currencies, many disastrously so (can you say Zimbabwe?). In a severe downturn like what we have now, many other countries suffer runs on their currencies. Here are but a few: Ukraine, Hungary, Poland, Iceland, Armenia, Turkey, South Africa, South Korea, Australia, Latvia, and Estonia. Currency troubles could turn a depression into complete societal collapse in Ukraine and other East European countries.

Yet there is still the same poor advice from economists. Every country needs its own currency! Bollocks. Ecuador and Panama are doing quite nicely by using the US dollar. If I were to advise any country with a small economy, I would tell them to switch to using either the US dollar as their currency (or maybe the Euro if the country is closely tied to Europe).

Of course, if I were to advise a large country, I would suggest something more radical. Why not use equity as currency? While gold is nice and all, there is no reason we can't do better. Using equities as a base for a currency, each Goode (as they should be called) will be a real asset--ownership in all the public countries in the world. Cash itself would have a yield--without any need to give it to an untrustworthy bank. In a world where cash has an intrinsic yield, there will be little desire for fractional reserve banking (the source of today's problems).

Another benefit of using the Goode while there are still many countries using fiat money is that worldwide recession would automatically devalue the currency to keep a country's labor competitive. Gold would have the opposite effect, leading to troubles exporting (as Japan is experiencing). The Goode would, like gold, be impervious to politicians' attempts to inflate it.

I think the alien (an Ood) is describing politicians at the end of this clip

 

28 Comments – Post Your Own

#1) On March 03, 2009 at 3:14 PM, abitare (30.14) wrote:

I have been to about 30 countries, they always take dollars and usually Euros (they usually want dollars or Euros if able). Many crap-hole countries make it illegal to use other currencies outside of their own or to hold other currencies or to hold gold or trade gold.

The US made holding gold illegal, France makes it illegal to take gold out of the country, UK made it illegal to use other currencies before etc....

What the leadership likes and what the people like are two different things. Most leaders of thrid world crap-holes have US or Swiss or Bermuda accounts and move their money outside of their crappy currencies. Most leaders do not know or care about the masses. They care about themselves, their wivesss, children and their girlfriendssssss. 

For those that are on the fense of gun ownership. I recommend the movies:

1. Downfall (Hitler of course rounded up guns),

2. The Pianist (another great movie about gun ownership),

3. The Killing Fields (another outstanding film about gun ownership)  

4. You can read Mao (a great book about life of a non-gun ownership society)

5. I have a couple blog posts on Gun ownership - google -lessons from the Russian Collapse, Lessons from the Argentina Collapse.

Also worth a read:

Vietnam Suspends Gold Imports, Follows FDR's Great Depression Lead ...
Jul 4, 2008 ... The Vietnamese government's decision to ban gold imports follows an unprecedented surge in gold ownership. The locals have lunged for gold....

 

 

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#2) On March 03, 2009 at 3:52 PM, goldminingXpert (28.93) wrote:

Wow, you just blew my mind. I've got to think about this more.

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#3) On March 03, 2009 at 3:54 PM, tonylogan1 (27.64) wrote:

Nice post, though I would contend the ratio of people who are accidentally injured by their own guns to those injured by burglaries gets higher based on how dumb the person is.

In other words... I cannot figure out a way to injure myself cleaning my gun, yet somehow it apparently happens all the time. I cannot figure out how I could shoot myself while at a nightclub, but somehow it happens. My kids (if they existed), would have no way to get to the gun, and even if they could, they would know not to touch it unless I was present.

Back  to the basis of your article... The "Goode" is the number one enemy of those in control right now. If the value of oil got low enough and Russia could partner up with enough countries to get the "Goode" going as a viable currency, I guarantee we would have a war on the scale that would at least approach WWII if not surpass it.

By the way, the "Goode" would be the kindest, most fair method of money the world had ever seen. It could be easily set up to have no fiat ability, therefore everyone would have to be productive or suffer.

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#4) On March 03, 2009 at 3:56 PM, EverydayInvestor (< 20) wrote:

arggh, "ownership in all the public countries in the world" I meant "ownership in all the public companies in the world"

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#5) On March 03, 2009 at 3:58 PM, EverydayInvestor (< 20) wrote:

tony - my numbers for gun deaths were of course made up. I am sure they would be very very high if police and 'security consultants' did give such dumb advice as economists give to countries.

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#6) On March 03, 2009 at 5:14 PM, BigFatBEAR (28.60) wrote:

Reaper...   wow! What an insanely thought-provoking post. This is CAPS gold.

I really enjoyed the analogy of a tool designed to prevent harm, that ends up backfiring with unforeseen consequences. I understand why people choose to own guns, but have recently lost a friend due to an accident. I will likely never own one.

I've never really considered fiat currency "the enemy" before, but the Goode does look pretty attractive compared to it. Where did you get all these crazy ideas? Since wrapping my head around an equity-based currency is kind of hard, I'm officially requesting a follow-up post with how this whole system would work, and the pros/cons.

As for econ advice...  I'd say that the major era of misinformation for economists advising third world countries was in the 80s...    so many bad moves, mostly on the part of the World Bank and IMF. From what I've seen recently, economists are still hardline with capitalism/democracy, but more willing to be flexible, especially with things like debt forgiveness.

Again, great read. Definitely a rec for you.

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#7) On March 03, 2009 at 5:37 PM, EggplantWizard (87.86) wrote:

This is a very compelling idea, but there are some interesting questions:

How would the mechanism work?

If you deniminate currency in equity, how does one denominate equity?

How could dividends be practically handled?

What about initial public offerings? How would one qualify to gain entry to this "index"?

Thanks. Recced your post.

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#8) On March 03, 2009 at 5:51 PM, arboretum (28.06) wrote:

Great read. I hope I never own a gun. I have difficulty safely owning a lawnmower. Accidents are stochastic, they happen to everyone at a low probability.

On the other hand, the probability of governments messing with the currency to the ultimate harm of the population asymptotes to 1 over time.

I am just not sure whether it is possible to stop them messing with the Goode. After all, the Goode kind of exists right now in the form of ETFs like VT. Now, I have the utmost respect for Vanguard, but would you really want a private company maintaing the ETF when creaming off a tiny, tiny fraction of a basis point would make them vastly rich? Remember what happened with Lehman, Madoff and friends lately as if you could forget.

Or, would you trust the governments to do it? Same problem.

 I guess we could get several companies to compete - but then we'd have several currencies, and it would be a mess.

Having said all the above, I would /so/ much rather get paid in VT than in dollars. Let alone Icelandic Krona or whatever. Good thinking Batman.

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#9) On March 03, 2009 at 5:52 PM, Aerius (83.57) wrote:

+1 from me.

Just thinking, I'm trying to figure out how corporate debt would play into this. If you believe Mish (and I tend to), the current deflationary environment is due to destruction of private credit more than any other force. Does that problem eliminate itself under the Goode?

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#10) On March 03, 2009 at 6:08 PM, ReaganD (29.44) wrote:

cool idea.  governments love their seignorage though.

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#11) On March 03, 2009 at 6:12 PM, jstegma (28.88) wrote:

The problem is that we just keep printing more Goodes, so that each Goode represents less goods. 

Who would control the companies that make up the Goode's value?

If a company needed to raise more capital, where would they go to raise some more Goodes?

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#12) On March 03, 2009 at 6:34 PM, EverydayInvestor (< 20) wrote:

"If you deniminate currency in equity, how does one denominate equity?"

Actually, equity doesn't need currency ... even if all currencies go to pot (even gold), you can still say, I own 1% of Coke (KO), and will sell it to you for a nice seaside estate and four tons of pig iron. Unlike debt denominated in currency, the equity has value even if the currency it is traditionally quoted in blows up. 

Aerius (< 20)--- an effect of going to the Goode Standard (hehe) would be a decrease in the cost of equity. Standard P/Es would go way up to maybe 20 or 25. With equity so cheap, public companies would use much less debt. Conversely, equity returns would be much lower (they would be cash returns!) but would be much, much safer.

jstegma (99.76) -- there is no reason for the Goode to be handled any different than current market cap weighted indices. So equity issuance would increase the money supply. But unlike with governments, there would be limits to how much a company could increase the money supply: by issuing a lot of shares, a company would see its share price fall, thus minimizing the increase in the money supply. Here is the kicker: as the economy grows over time, the value of the equity increases, keeping the money supply growing at about the same rate as economic growth. In other words, you have stable prices!

Also, you would end up with everybody owning a small part of every public company. 

arboretum (97.91) -- yes, paying money to Vanguard to deal with administrative issues would suck. But there is no reason you can't have multiple companies vying for that business competitively, yet offering a standardized product. Vanguard or State Street would act essentially as a custodian or trust bank for the Goodes. Even if the product is not standardized, you could easily convert one into the other--there would be no uncertainty over correct exchange rates.

EggplantWizard (98.90) -- IPOs would work as they do now. By increasing equity supply, IPOs would increase the money supply. But unlike with governments, there would be practical limits to how much the money supply could increase. Dividends could easily be handled on electronic accounts. Likely cash would not accrue dividends to keep things simple.\

BigFatBEAR (99.45) -- I may flesh out this idea later. I haven't thought through all the details. As to where I come up with this stuff ... I have a gift for thinking outside the box--really outside the box. I am also a born contrarian -- make a simple statement and I'll argue against it (if only in my mind to be polite). For example, politically speaking, I went to a very liberal / hippy college as a standard conservative. The interplay of my own ideas and others turned me into something radically different from my peers, family, or previous beliefs: an anarcho-capitalist.

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#13) On March 03, 2009 at 7:04 PM, Aerius (83.57) wrote:

My point was more that debt demoninated in Goodes is recursive (in the same way that fractional reserve lending is recursive). If a company has 10 Trillion Goodes worth of (unpayable) debt and total equity of everything is 2 Trillion Goodes, you've still got the same problem: 5 parts in 6 is worthless.

Don't get me wrong, I like the idea waaaay better than a fiat currency (or 50 fiat currencies), I just think fractional reserve lending leads to the same problems whatever your currency is backed by. See The Panic of 1837 for more details.

In any case, I love the idea of having multiple assets back the currency thus if we do find a way to turn lead into gold the economy doesn't collapse. 

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#14) On March 03, 2009 at 9:27 PM, Tastylunch (28.83) wrote:

If you do that I would tie the "Reaper" errr I mean "Goode" to the New Yorks Stock Exchange Composite (or maybe a  new composite of both the NYSE and the NASDAQ) so that S&P doesn't have undue influence on the currency with their inclusion/exclusion policies....Still Then I suppose you have the potential problem of changing listing requirments ( like we have now) affecting the currency....You also might have even greater baillout temptation for congress as a sector wide collapse say of banks could affect the nation's currency 

I dunno i can see good and bad things from doing that.

Interesting idea, I'll have to think about whether I like or not.

No doubt you are right about smaller countries though. Not much utility in having your own fiat currency if you aren't a fat cat.

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#15) On March 03, 2009 at 9:43 PM, EggplantWizard (87.86) wrote:

Tastylunch: " I would tie the "Reaper" errr I mean "Goode" to the New Yorks Stock Exchange Composite"

Why not just go all-inclusive, and put every publicly traded company in the world that would constitute, say 0.0001% of the index by market cap into it.

You wouldn't want to be US-Centric if part of the goal is enabling smooth trade.

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#16) On March 03, 2009 at 10:08 PM, MarkPerkins1 (< 20) wrote:

I'm not so sure of that long-term. Pegging the currency to the dollar is just a short term fix. In Argentina's economic crisis one of the ways they tried to save the currency was pegging it to the dollar. It works for awhile but doesn't make sense long-term. The depreciation in the real exchange rate can be way less than it should be and there isn't the benefit of lower currency to foreigners in a recession. 

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#17) On March 03, 2009 at 10:15 PM, EverydayInvestor (< 20) wrote:

Aerius (< 20) -- having a currency that pays a dividend--as an equity currency would--this would obviate the need for fractional-reserve banking. Then you ban fractional-reserve banking. The banks that remain would offer only savings products like CDs that have terms that match the loans

Tastylunch (99.90)-- - yes, it needs to be all-inclusive, market-cap weighted. That way it is not easily influenced.

MarkPerkins1 (< 20) -- currency pegs don't work long term. I'm suggesting that the countries abandon their own currencies and just use dollars.

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#18) On March 04, 2009 at 12:03 AM, shffl (< 20) wrote:

sh*t, you scared me. at first i thought your story was real! until the last sentence haha

i agree with you that smaller countries shouldn't even think about having their own fiat currency. this would've probably saved countries such as argentina and mexico back in the 80s and 90s.

since we are on the topic of currency, what is your opinion on where the dollar is heading towards?

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#19) On March 04, 2009 at 12:20 AM, tonylogan1 (27.64) wrote:

Everyday... reading the comments I must not have understood your plan for the "Goode"

 What at least I was referring to of the number one enemy of fiat currency printers is a "currency" that is strictly based on a basket of goods. The "Goode" would be worth one once of gold, one bushel of wheat, one barrel of oil, etc. It would encompass a large enough bushel of real goods that various countries around the world that actually have or produce real goods would be the owners of real wealth that could not be taken away via fiat.

Example: If the USA decides we need more steel, we can give a small country a large loan in dollars that they can not realistically repay, then later we esentially call in the loan, but since they cannot pay in dollars, we gladly take their natural resources for our own benefit.

 This existing system works great for the USA, at the expense of the rest of the world holding dollars in reserve.

There are plenty of countries that are ok with the arrangement, so the system keeps working, and those countries that fight against our control get their leaders removed from power (or worse).

The key to the system (that I guess I am proposing) is one where no central power would have control of the currency, unless they had enough power that they could control the price of nearly every consumer good / resource out there.

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#20) On March 04, 2009 at 2:20 AM, Daretoth (< 20) wrote:

Did you write this or did I?

Damn good post man! This is what I have been preaching through satire for awhile. The problem is that the IMF is way too powerful to allow any hard currency to exist. Inevitably everyone would switch to such a currency if it were allowed to compete because it would hold value while the others did exactly what they are doing now...losing value at the whim of a few people.

But if you can find a way to do it, I'm the first on board to trade in my dollars.

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#21) On March 04, 2009 at 4:25 AM, SuperPicks (28.63) wrote:

Interesting idea, I have to think it over. Rec'd

Would this essentially mean all public companies are owned by the people thus the government?

With so much of the goodes decentralized in the hands of the masses, any actual holding of most every single citizen that makes up the masses, are unlikely to ever participate in the voting process for shareholder equity voting across so many companies....this essentially will be handled by representatives of the people...the government?

For any one public company that is already included as being part of a Goode, how is this company bid up or down versus other companies? or are they?  do the new governments vote on valuation?

For any up & coming large private company, what would be the pros/cons of joining Goode?  wouldn't include, by human nature, big barriers to entry?

For any existing Goode company, what would the incentive be to go to private sector?  can a company, once Goode, be able to do so?  what's an incentive to stay public and remain Goode?

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#22) On March 04, 2009 at 5:35 AM, LawfordCap (30.31) wrote:

It’s really great that people see value in something like a Goode.... I would love to have your comments on the following posts on Whereaminows blog....its a rather different context to yours...if you think we have similar ideas and are interested, it would be great to try and work it through with you. Maybe, if this has not already been done, we could put together a paper in relation to how we see the future evolving and the expected implications for the functioning of the state.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=154524&t=01000860093551905860

#17 Your post stimulated me to think about the future of fiat currencies and the entities that manage and depend on them….

- In the UK a bank account can be in Euros or in Pounds and in Argentina you can take dollars or pesos from an ATM.

-Technology that allows people to switch between alternative assets (gold, dollars, euros, oil) is becoming ever more widely available.

-and asset transfer technologies like PayPal are developing fast.

- As ease of asset transfer increases along with the ability to trade one asset for another, people will increasingly view the tradable fiat currency they hold as more of an asset then as a solid store of value.

- The more fiat currencies are viewed as such their management, their creation and those that depend on them will change.

-I feel they are unlikely to disappear, rather the role they play in a global economic system will just evolve.

These are just my thoughts….and I would love to hear your comments.

 

#20 Surely a lot of a currencies value is related to its liquidity, ease of exchange and risk properties…. so if another asset has these properties could it not be a type of "privately competing" currency… putting a possible “E-Oil”, “E-Copper” or some tradable “E-index” in a similar class to the E-gold and E-bullion you mention?

If a major shift in the perceived value of a fiat currency occurs… say for example, Argentineans abandon the peso in favor of some other store of value (under continued advances in the tradability and transferability of liquid assets) like those mentioned above, what implications do you think this will have on the functioning of the state?

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#23) On March 04, 2009 at 8:42 AM, kaskoosek (29.87) wrote:

The funny thing is that equity as a currency could work.

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#24) On March 04, 2009 at 9:12 AM, EggplantWizard (87.86) wrote:

The only flaw I can think of, here, other than the vested interests that would adamantly oppose any currency reform is that implementation of this system would effectively be a massive handout to existing shareholders, as the equity prices are bid up to track the index. Would you tax this one-time windfall, or something? If so, how could this be handled fairly?

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#25) On March 04, 2009 at 10:03 AM, EverydayInvestor (< 20) wrote:

To answer a few questions -- the benefit of something like the Goode is that it needs only two things to be used today! Alternative currency contracts need to be legalized. And alternative currencies should be taxed as currencies when used as such. That is all. Once that happens, alternative currencies would take over from weak currencies and would gradually become more used. Once I can borrow 5,000 VTI from my father and pay him interest in VTI (and the only tax paid is on the dollar value of the interest I pay my father).

And yes, of course vested interests would not let this or a gold standard happen.

SuperPicks (99.25) -- there is no need for companies to act any differently than now. Any public company listed on a reputable exchange (not OTC BB, for example) anywhere in the world would be purchased by the trust banks and added to the Goode. It would be just as what happens now with Vanguard's VTI. As to voting, that would be diluted, but there would still be stock markets and investors. I figure that the competing trust banks that held the actual underlying shares would vote in the companies' proxy contests ... you would need enough competing trust banks so that there could be different ideas and competing voting blocks.

EggplantWizard (98.90) -- Ideally, this would be a completely free currency that would gradually take over because of its superiority, in which case the effect on the stock exchanges would be gradual.

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#26) On March 04, 2009 at 11:17 AM, jstegma (28.88) wrote:

I'll give you that this post was an interesting read, but I am not buying the idea of Goodes instead of dollars at all. 

You blur the line between debt and equity too much by having the currency in which debt is denominated represent equity.  Debt has to get paid before equity or it doesn't work right.  I think the system may make it impossible for a company or anyone else to borrow at all, so the system would work about as well as our system did the day everyone started pulling their cash out of money market funds.  Debt may have caused our current problems, but it is still required for our system to operate as efficiently as it does.

 

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#27) On March 04, 2009 at 2:16 PM, EverydayInvestor (< 20) wrote:

jstegma (99.76) -- no, I don't blur the line at all. Equity in a company is an asset, like gold or silver, though less tangible. No reason you can't have debt when your currency is equity (it just sounds weird, is all). The Goode would represent the equity of all publicly traded companies, so any one company would make up a very small portion of that and thus there is no need to worry about cyclicality of X company's debt being priced in terms of its equity. Anyway, there is no need for debt. There is a need for for those with assets to be able to back those with ideas.

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#28) On March 12, 2009 at 5:24 AM, kingofthepaupers (< 20) wrote:

Jct: When I travelled to Europe in 1999, I contacted timebanks in 11 countries and paid for 39/40 nights accommodations with an IOU for a night back in Canada worth 5 Hours, Europe's agreed-upon rate for accommodations. About $60CA Greendollars, about $50US, a reasonable price.

All community currency lifeboats may now be quite small but as long as they all adhere to the Time Standard of Money, they will be able to intertrade globally by internet.

I created my own IOU page at http://johnturmel.com/unilets.htm where list my IOUs for that trip, and other spendings, as well as the credits earned doing accordion concerts in old-age homes, with my offers and wants.

Platforms are being engineered in Drupal, Twitter, and it's only a matter of time until interest-free time-trading takes replaces our interest-bearing "Gold or stuff" standard of money. 

 We need the United Nations Millennium Declaration Resolution C6 to governments for a time-based currency to restructure the global financial architecture. Barter Timebanks are economic lifeboats. Google "anti-poverty system" and get LETS. Google "anti-poverty engineer" and get John The Engineer.
See my videos on Engineering Heaven by Abolishing Interest Rates at http://youtube.com/kingofthepaupers with an index ot topics at http://johnturmel.com/kotp.htm

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