Do you consider large, multinational corporations to also be contributors to the reduction in money velocity? How many times does money exchange hands before it ends up in Amazon’s bank account where it will virtually sit, untouched for all eternity? It can’t even be taxed out of existence because Amazon doesn’t pay taxes lol
Yes, of course. It doesn't matter if money is held by individuals or corporations. The incentives inherent in the monetary medium are the same.
Apple currently has $192 billion in cash reserves, Amazon has around $85 billion, Facebook has around $60 billion, and Google has over $100 billion. Imagine what would happen if those companies were forced to put all of that money back into circulation -- not because anyone forced them to do so but because it was in their own self-interest to do so.
Monetary history is happening in the present! Namely the rise of crypto currencies. How does this fit into your theories? Can you imagine a world dominated by crypto, completely free from the control of any single government? Crypto has a built in mechanism for depreciation since each bitcoin has a date that is was mined associated with it. Crypto also would obviate the need for vaults and theft protection, since it cannot be stolen. The extreme volatility, which at present, prevents crypto from actually becoming a widely used currency, may be a 'birth pang' and may smooth out as ownership of crypto becomes more widespread.
I agree that crypto may be creating new possibilities for the future of money, but I think thus far the overall movement has its priorities exactly backwards. As I discussed in a previous essay, money as it currently exists has two primary functions -- as a medium of exchange and a store of value. It is my belief (based on Silvio Gesell's analysis) that these two functions are mutually contradictory and it is not possible for any form of money to effectively serve both purposes. Any currency which is designed to function as a store of value (in other words, any currency which can be hoarded) will systematically fail to perform its function as a medium of exchange.
And the entire crypto movement thus far is focused on the store of value aspect of money rather than the medium of exchange function. Bitcoin, for example, was specifically designed to have a strictly finite supply. And it also incurs no carrying costs. This makes a lot of sense if one is trying to design an effective store of value, but it is completely wrong for a medium of exchange.
Charlie Munger (Warren Buffett's second in command) made some remarks the other day about crypto. He said that crypto is essentially an effort to create an artificial substitute for gold. (And, since the gist of my essay is that gold is unsuitable for use as money, obviously artificial gold is also unsuitable). He also said that crypto is "disgusting and contrary to the interests of civilization." Of course, Munger is 97 years old and is perhaps no longer in tune with the cutting edge of financial innovation, but I agree with his basic analysis.
Interestingly there does exist a cryptocurrency which is based on Gesell's ideas. It is called Freicoin, and it depreciates over time. It is tiny and insignificant at this point, but I think it points the way forward to a possible future in which new forms of cryptocurrencies could effectively serve money's more important function as a medium of exchange.
I have no resistance at all to the idea of decentralized, digital currencies taking the place of our current forms of money, but I am nearly certain that none of the existing major cryptocurrencies will be able to accomplish that.
I am note clear on you position on crypto. You refer to the possibility that 'new forms of cryptocurrencies could effectively serve..' and yet you agree with Munger's view that is crypto is 'contrary to the interests of civilization'. Are you making the point that crypto is worse than other stable/rare media such as gold, as Munger seems to be saying. If so why? The only objection I see to crypto is the large amount of energy required to mine it and the consequences for the climate. This could be dealt with by higher electric rates for bitcoin miners.
As a small point, it is my understanding that Bitcoin, like all cryptos, is not 'designed to have a strictly limited supply'. Rather with each successive mining, the difficulty of the next mining become greater. So, eventually the cost of mining the next bitcoin would be less than its worth. In this way it is similar to other stable/rare media.
My main point about the currently existing forms of cryptocurrency is that they are primarily designed to function as stores of value rather than media of exchange. To me, that's not the proper function of money, and prioritizing its functions that way is socially harmful. I believe the hoardable nature of our existing forms of money is THE primary cause of poverty, inequality and economic crises and dysfunction in the world. And cryptocurrencies that are designed to be hoarded contribute to the same dynamic. Generally speaking, money that is in motion is socially beneficial, and money that is stagnant is socially harmful. Crypto is mostly stagnant (even if it is changing hands between hoarders/speculators). Very little of it is actually used to productively exchange real goods and services. So most of the wealth that is invested in crypto is unavailable for investing in productive, useful applications or to facilitate socially beneficial exchange. That is where I agree with Munger's opinion that it is contrary to the interests of civilization. (The use/waste involved with mining crypto is the least of my concerns.)
That being said, I believe that other forms of crypto could be developed which are designed with different priorities in mind -- i.e. to primarily function as media of exchange rather than to store wealth. In my view, in order to accomplish that properly they must not be hoardable -- meaning that they either need to deteriorate over time (just like 99% of real goods and services do) or be subject to some kind of financial disincentive to hoarding. As I mentioned in my comment above, there already is at least one cryptocurrency that does that (Freicoin), but it is tiny and insignificant at this point.
a thought from my boss (smartest guy I know ) on the subject of crypto:
"The gamers are starving. The crypto-brokers are eating all the CPU cycles. Turning real money into virtual money AND massively contributing to global warming in the process. cryptocurrency is, in my opinion a wonderful study of entropy."
I don't pretend to know the answer but the US getting off gold in the 1970's to settle international trade imbalances was not a good step. Settling these imbalances in dollars removed all discipline from the shoulders of the US financial system and the US government. As a result the US is allowed to purchase any amount of foreign goods, some of it paid for by US exports and the rest of it paid for with dollar IOU's. At present there is roughly $20 trillion of these IOU's outstanding, with the number growing at a rate of 0.7 trillion dollars per year, and that number is increasing rapidly, especially with the now declining rate of shale oil production which means we have to import more and more oil in the years ahead. Meanwhile our overall production capacity has dropped sharply because of offshoring our manufacturing. So if other countries decide they want to spend these IOU's on goods from the US, we don't have the capacity to produce them. The whole system is based on confidence in the US dollar. That confidence is why foreign institutions have been willing to hold these dollars. With the US behaving terribly on the international scene and threatening to go to war with anyone and everyone, how long will that confidence last? The eventual likely sequence of events is that the dollar will get badly trashed, and we won't be able to purchase international goods at current prices. The standard of living in the US will take an extreme decline.
I don't disagree with any of that. However I think it is beyond the scope of this conversation. The thesis of this essay -- and this newletter in general -- is that hoardable currency is one of the root causes of the inequality and dysfunction that seem to be unavoidable aspects of our economic system. So switching from gold-backed money to our current fiat currency system was replacing one fundamentally flawed monetary medium with another. The original sin of hoardability remains unchanged. I have no opinion about which one is worse.
I do agree that the US dollar is likely doomed -- and our standard of living along with it. The question on my mind is what will take its place after it collapses.
Do you consider large, multinational corporations to also be contributors to the reduction in money velocity? How many times does money exchange hands before it ends up in Amazon’s bank account where it will virtually sit, untouched for all eternity? It can’t even be taxed out of existence because Amazon doesn’t pay taxes lol
Yes, of course. It doesn't matter if money is held by individuals or corporations. The incentives inherent in the monetary medium are the same.
Apple currently has $192 billion in cash reserves, Amazon has around $85 billion, Facebook has around $60 billion, and Google has over $100 billion. Imagine what would happen if those companies were forced to put all of that money back into circulation -- not because anyone forced them to do so but because it was in their own self-interest to do so.
Monetary history is happening in the present! Namely the rise of crypto currencies. How does this fit into your theories? Can you imagine a world dominated by crypto, completely free from the control of any single government? Crypto has a built in mechanism for depreciation since each bitcoin has a date that is was mined associated with it. Crypto also would obviate the need for vaults and theft protection, since it cannot be stolen. The extreme volatility, which at present, prevents crypto from actually becoming a widely used currency, may be a 'birth pang' and may smooth out as ownership of crypto becomes more widespread.
I agree that crypto may be creating new possibilities for the future of money, but I think thus far the overall movement has its priorities exactly backwards. As I discussed in a previous essay, money as it currently exists has two primary functions -- as a medium of exchange and a store of value. It is my belief (based on Silvio Gesell's analysis) that these two functions are mutually contradictory and it is not possible for any form of money to effectively serve both purposes. Any currency which is designed to function as a store of value (in other words, any currency which can be hoarded) will systematically fail to perform its function as a medium of exchange.
And the entire crypto movement thus far is focused on the store of value aspect of money rather than the medium of exchange function. Bitcoin, for example, was specifically designed to have a strictly finite supply. And it also incurs no carrying costs. This makes a lot of sense if one is trying to design an effective store of value, but it is completely wrong for a medium of exchange.
Charlie Munger (Warren Buffett's second in command) made some remarks the other day about crypto. He said that crypto is essentially an effort to create an artificial substitute for gold. (And, since the gist of my essay is that gold is unsuitable for use as money, obviously artificial gold is also unsuitable). He also said that crypto is "disgusting and contrary to the interests of civilization." Of course, Munger is 97 years old and is perhaps no longer in tune with the cutting edge of financial innovation, but I agree with his basic analysis.
Interestingly there does exist a cryptocurrency which is based on Gesell's ideas. It is called Freicoin, and it depreciates over time. It is tiny and insignificant at this point, but I think it points the way forward to a possible future in which new forms of cryptocurrencies could effectively serve money's more important function as a medium of exchange.
I have no resistance at all to the idea of decentralized, digital currencies taking the place of our current forms of money, but I am nearly certain that none of the existing major cryptocurrencies will be able to accomplish that.
I am note clear on you position on crypto. You refer to the possibility that 'new forms of cryptocurrencies could effectively serve..' and yet you agree with Munger's view that is crypto is 'contrary to the interests of civilization'. Are you making the point that crypto is worse than other stable/rare media such as gold, as Munger seems to be saying. If so why? The only objection I see to crypto is the large amount of energy required to mine it and the consequences for the climate. This could be dealt with by higher electric rates for bitcoin miners.
As a small point, it is my understanding that Bitcoin, like all cryptos, is not 'designed to have a strictly limited supply'. Rather with each successive mining, the difficulty of the next mining become greater. So, eventually the cost of mining the next bitcoin would be less than its worth. In this way it is similar to other stable/rare media.
My main point about the currently existing forms of cryptocurrency is that they are primarily designed to function as stores of value rather than media of exchange. To me, that's not the proper function of money, and prioritizing its functions that way is socially harmful. I believe the hoardable nature of our existing forms of money is THE primary cause of poverty, inequality and economic crises and dysfunction in the world. And cryptocurrencies that are designed to be hoarded contribute to the same dynamic. Generally speaking, money that is in motion is socially beneficial, and money that is stagnant is socially harmful. Crypto is mostly stagnant (even if it is changing hands between hoarders/speculators). Very little of it is actually used to productively exchange real goods and services. So most of the wealth that is invested in crypto is unavailable for investing in productive, useful applications or to facilitate socially beneficial exchange. That is where I agree with Munger's opinion that it is contrary to the interests of civilization. (The use/waste involved with mining crypto is the least of my concerns.)
That being said, I believe that other forms of crypto could be developed which are designed with different priorities in mind -- i.e. to primarily function as media of exchange rather than to store wealth. In my view, in order to accomplish that properly they must not be hoardable -- meaning that they either need to deteriorate over time (just like 99% of real goods and services do) or be subject to some kind of financial disincentive to hoarding. As I mentioned in my comment above, there already is at least one cryptocurrency that does that (Freicoin), but it is tiny and insignificant at this point.
a thought from my boss (smartest guy I know ) on the subject of crypto:
"The gamers are starving. The crypto-brokers are eating all the CPU cycles. Turning real money into virtual money AND massively contributing to global warming in the process. cryptocurrency is, in my opinion a wonderful study of entropy."
I don't pretend to know the answer but the US getting off gold in the 1970's to settle international trade imbalances was not a good step. Settling these imbalances in dollars removed all discipline from the shoulders of the US financial system and the US government. As a result the US is allowed to purchase any amount of foreign goods, some of it paid for by US exports and the rest of it paid for with dollar IOU's. At present there is roughly $20 trillion of these IOU's outstanding, with the number growing at a rate of 0.7 trillion dollars per year, and that number is increasing rapidly, especially with the now declining rate of shale oil production which means we have to import more and more oil in the years ahead. Meanwhile our overall production capacity has dropped sharply because of offshoring our manufacturing. So if other countries decide they want to spend these IOU's on goods from the US, we don't have the capacity to produce them. The whole system is based on confidence in the US dollar. That confidence is why foreign institutions have been willing to hold these dollars. With the US behaving terribly on the international scene and threatening to go to war with anyone and everyone, how long will that confidence last? The eventual likely sequence of events is that the dollar will get badly trashed, and we won't be able to purchase international goods at current prices. The standard of living in the US will take an extreme decline.
I don't disagree with any of that. However I think it is beyond the scope of this conversation. The thesis of this essay -- and this newletter in general -- is that hoardable currency is one of the root causes of the inequality and dysfunction that seem to be unavoidable aspects of our economic system. So switching from gold-backed money to our current fiat currency system was replacing one fundamentally flawed monetary medium with another. The original sin of hoardability remains unchanged. I have no opinion about which one is worse.
I do agree that the US dollar is likely doomed -- and our standard of living along with it. The question on my mind is what will take its place after it collapses.