I don’t have a background in finance, so there are a number of concepts about banking and currency that are way over my head, but the most interesting thing that I’ve started to pick up on over the past few years is that the topics of banking and currency are still being figured out: nobody has all the answers. Governments across the world, for hundreds or thousands of years, have basically tried to employ smart people to figure it out, but it seems that only by chance do they occasionally come across anything that works, and this is only obvious in retrospect. Fiscal policy, although it often learns from the past, is really just a leap of faith that things will go according to plan, and when it fails, adjustments are made. Sometimes these adjustments have desired effects, other times they have undesired effects.
While reading through an abridged version of Lawrence James’s “Rise and Fall of the British Empire” (which I haven’t finished), I was amazed to realize that national debt was largely invented by Britain in the 18th and 19th centuries (I’m not always good at remembering dates). While France had to raise taxes to go to war, which was very unpopular, Britain invented a system of national debt where they said, “Yo, citizens, buy these bonds from us and we’ll pay you back a guaranteed interest”, so people bought them up, taxes didn’t have to be raised, and Britain basically walked all over France and its allies as a result. Effective systems like this don’t stay a secret for very long. Fast forward a hundred years or two and this is a large part of how most governments operate, by using a system of national debt (though I’m making a lot of generalizations, because this just isn’t something I’m very familiar with).
So…it’s easy to criticize the government for its national debt, but would you prefer they just raised taxes through the roof instead? In a sense, national debt actually addresses many of the problems of the past, but it’s clearly not the absolute answer, either, as there are a lot of concerns over what this national debt means for future generations. It was such an effective policy for so long that people take for granted that it simply works, although we don’t yet know how far those bounds extend. It is an experiment, but a necessary experiment. Likely, a new approach will arise that addresses some of the current problems, but I’m not arrogant enough to assume I have any clue what that new approach might be.
And currency is a very interesting topic, too. I used to run a thought experiment through my head: Take a basic, tiny village, of 4 or 5 people. Let’s say there is a “money supply” of $100, and person A lends this to person B at 5% interest. After one year, where the hell does the extra $5 come from? I simply didn’t get that. How does that work? But after reading another book, “Where Does Money Come From?”, focused largely on the UK but still applicable across the board, it makes more sense that money supply is just the exchange of credits and debits, assets and liabilities, and currency can easily be “created” when a bank creates a loan. They simply write a number in the borrower’s account. It becomes a liability to the borrower, because it costs, and an asset to the bank, as it pays interest. The money supply technically increases because of this activity. Hell, gift cards increase the “money supply”, since the gift card simply becomes a liability to the company (a future debt that must be paid, 0% interest at that), but an asset to the receiver of the gift, who has a claim on future exchange. When you receive a $25 gift card, the “money supply” has almost literally increased by $25, assuming, of course, the solvency of the company (and notwithstanding the fact that gift cards can’t typically be exchanged at other companies).
And I’m probably botching a few things here, but the idea should be roughly correct. And it’s really compelling. It’s complicated stuff.
(Briefly returning to my thought experiment with the village, what constitutes currency would be a promise on the future payment of an actual good. Currency could technically be an IOU from the apple farmer to the wood cutter, a promise of X number of apples upon exchange. If this has report among the other villagers, they may accept that promise in exchange for their goods, too. Unless the apple harvest is bad, in which case exchanging those promises would be a like a bank run, and the apple farmer might end up with concrete shoes at the bottom of a river, or something. This is how I imagine life in rural Illinois must be.)
(The money supply technically shrinks when collateral sells for less than the original value of the promise, too, or when a loan is paid off)
The more I think about it, the more I realize that currency is simply a means of exchange that others will accept. Some people think we should return to the gold standard because it was more objective, but there was nothing objective about it, it was just widely regarded as exchangeable. Some cultures had gold and didn’t much care for it, but other cultures thought it was worth a tremendous amount, not because it was universal, but because back in their home culture it was accepted as a means of exchange.
Everything goes back to those things that Anthropology tries to understand.
Occasionally, certain currencies like the US Dollar have value in other countries, but you can’t pay for anything here with sea shells, or even Rubles. And you wouldn’t work for a US company that paid you in Rubles, either. But you would in Russia. Neither is inherently “valuable” except insofar as they are accepted as a means of exchange, which is why it is called “fiat”, due to some strange contortions of the Latin for “to be”, I’m guessing because of the sense of “it’s valuable because because”.
And for whatever reason, there’s a lot of bitching online about “fiat” because it seems so arbitrary, but it’s not, it’s just what people are willing to accept. Why are some cultures the way they are? Well, that’s difficult to know. It has to do with interactions, traditions, history, rituals, ecology, etc, etc. Modern currencies, which are “fiat” by means of the decree of governments (and general acceptance of the people), are also connected to the banking system and the stability of governments, and this all gets very complicated, very fast. I don’t know that I will ever study this far. And as I mentioned, nobody has everything figured out. We’re talking n-tier systems, here, we don’t even know how many levels deep this stuff goes. Not yet. That doesn’t mean nothing can be known, it just means having the perfect picture is likely not possible.
I think that cryptocurrencies have their uses, but I’m still baffled by how much faith some people have placed in it. It doesn’t suffer from being tied to a particular government, but then it also doesn’t benefit from being tied to a particular government, either, and every cryptocurrency, in so far as it is bought and sold, acts like individual stocks, and can very easily be manipulated. I don’t know how that is supposed to instill confidence in it as a means of exchange.
It’s fascinating to me that central banks have an inflation “target”. Like…it’s not actually completely in their control. It’s a goal. An aim. They use the tools available to them in hopes that they can reach this target, but as mentioned, the systems are not completely understood, and some tools are flawed and don’t achieve the desired outcomes. You’re basically at the mercy of supposedly smart people who occasionally have bright ideas. Those idea work wonderfully under some circumstances, and miserably under others. What can you trust? But often, action is better than inaction, so new paradigms are followed when enough other smart people agree to them. But the reason inflation is still a goal is because deflation discourages spending. After all, nobody wants to hoard currency when it’s being slowly devalued, so they try to find things to put that money into. I’ve even briefly read about an old “Alpha strategy” that focuses on buying things up front, or in bulk, specifically to avoid the effects of inflation, which is sort the goal of central banks: keep money flowing. And if you think about it, you don’t want the rich hoarding their money: you want them spending it. By all means, buy yachts, it provides employment for yacht builders. Buy $20,000 luxury computers, it keeps the supply chain going. Buy new cars to keep those sweet kickbacks from the automotive industry coming in factories in business. Stagnant money means high unemployment, means civil unrest, means bad things. At least, that would appear to be the idea. If that’s true, then yeah, some inflation is probably better than deflation. (This seems obvious, but there’s a lot of ideology and assumptions behind it, too.)
Of course, to many conservative and libertarian types, deliberate inflation is the greatest crime ever committed. Poor families starving on the streets? Their problem, not mine. Goddamn gub’ment devaluing my hard-earned money! That’s what really matters, right? (Okay, I’m being mean to the political right. But seriously, I am NOT libertarian. People need to get a life sometimes)
Also of course, it does still matter. Inflation affects different industries in different ways. As Louis Rossmann has pointed out, if the cost of Apple computers is not increasing, but you run an Apple computer repair business, you can’t just pay your employees more when inflation increases. If you pay your employees more, you might have to raise prices, but this actually disincentivizes your customers to choose repair over replacement. But now your employees are technically earning less than before, so that sucks. Too much inflation is considered bad for this reason. My gut tells me the topic goes pretty deep.
Going back to crypto currencies, I just don’t see the appeal, unless maybe you’re in a country that is highly unstable. But at that point, you’d better hope the internet stays up when you need to pay for something. And it’s one thing when companies make it an acceptable means of payment, it is something completely different for it to be a widespread, acceptable means of exchange. Or a means of paying taxes, which is super important for whether something has value or not. I get that some people are fundamentally opposed to taxes, but I also think that some taxes are necessary. Either that, or you have no government, so some other government takes you over, and now you have a government anyway. This, too, is a deep topic. I prefer to reduce my taxes, honestly, but I don’t begrudge the fact that some taxes must be paid. There are far worse things in this world than taxes, but then again, we literally threw a boatload of tea into a harbor because the tax on it was too high. Wish people would do that with their cigarettes….
And one more note on cryptocurrencies: it’s not really being used as currency on a large scale, it’s largely being used as speculation, which is interesting. If you own cryptocurrency but haven’t used it to buy anything, I call clown on your pretense that it’s supposed to become a widely accepted means of exchange in the future. You are literally buying and holding, hoping it goes up in value or sees a spike when your flavor of choice supposedly goes to the moon and becomes an established currency. You’re not actually using it for the very thing that you speculate is supposed to make it increase in value. But just like penny stocks, which one is going to take off? Can there only be one? Will there be multiple? Will there be any? I wouldn’t dare say they won’t continue to have some value – they probably will – but I don’t understand why so many people are fanatical about it. What concerns me is that it is becoming popular as a means of speculation, and some securities have already been created to allow people to easily invest in it. What happens if these crypto-backed securities implode, just like the mortgage-backed securities did in 2007? The world suffers when investors gamble on things like that. Will it ever become that popular, though? Maybe not, but who knows?
There’s a lot to learn in this realm. I don’t know how far I’ll ever go down these rabbit holes, but I just wanted to write out some of my thoughts.