Finance

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#1
The financial system is needlessly complex, its unclear if this is intentional in order to hide whats actually going on.

Its unclear what even counts as money, in the united states the following system exist

M0: The total of all physical currency including coinage. M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.

MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits

M1: The total amount of M0 (cash/coin) outside of the private banking system[clarification needed] plus the amount of demand deposits, travelers checks and other checkable deposits

M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).

MZM: 'Money Zero Maturity' is one of the most popular aggregates in use by the Fed because its velocity has historically been the most accurate predictor of inflation. It is M2 – time deposits + money market funds

M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.

M4-: M3 + Commercial Paper

M4: M4- + T-Bills (or M3 + Commercial Paper + T-Bills)

L: The broadest measure of liquidity, that the Federal Reserve no longer tracks. L is very close to M4 + Bankers' Acceptance

Money Multiplier: M1 / MB. As of December 3, 2015 it was 0.756.[36] While a multiplier under one is historically an oddity, this is a reflection of the popularity of M2 over M1 and the massive amount of MB the government has created since 2008.
 

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#2
About national debt
A lot of countries have most/all of their debt in their own currency and therefore its very unlikely they will default on their debt, instead whats very likely to happen is that the central bank will step in lending out money to the government directly or indirectly.

The obvious issue with having the government lend money from itself is that it increases the effective money supply (inflation) which is very likely to cause increased prices measured in your national currency.
 

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#3
Why no digital equivalent to cash?
A digital equivalent of cash does not really exist, the closes is the deposit central bank account but that is typically only available to some banks. The closest think you can get to digital banknotes as a private citizen is government bonds but you can typically get a better interest by simply having an ordinary savings account insured by government (up to a fixed amount).

There isn't really any good reason for the government to prop up private banks by guarantying deposits up to a certain amount (for each bank). It would be better to have a digital equivalent to cash that is not being landed out to anyone. Several central banks are currently working on this but it takes a lot of time.

An interest of 1% could be given up to a fixed amount benefitting citizens with small to medium savings.
 

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#4
Gold
Unlike fiat currencies like bitcoin and dollar gold has intrinsic value and unlike government money it cannot just get printed, its very expensive to mine more gold and the more you mine the harder it become to find more.


Unfortunately dealing with physical gold is unpractical and a bit costly. If you sell your gold you will typically get significantly less than the metal value while you need to pay more than the metal value to buy it, especially if you buy smaller amount.

https://findbullionprices.com/closest-to-spot/?category=gold&

Gold is still useful (especially for governments) as a way to store value, its a lot more solid than foreign currency which is why a lot of countries (china, russia, india, etc) have increasingly switched over to it instead of holding US government bonds that over time get closer and closer to zero in value.
 

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#5
Is the dollar about to collapse?
Eventually if the money printing continue the value of the dollar will collapse, this however may not actually happen, instead we might see an deflationary implosion due to the central banks trying to prevent an hyperinflation apocalypse Weimar republic style.

 

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#6
2 catastrophic scenarios
Central banks have for a long time drastically inflated the money supply, this has fueled various bubbles such as the cryptocurrency insanity (currencies backed by nothing being worth over a trillion $).

Eventually if a central bank continue with the money printing insanity their currency will implode wimer republic style which will be a total economic disaster, in that case your only good option for preserving a significant portion of your wealth is precious metals like gold, platinum, palladium, rhodium. The issue with silver is that you need too much of it to store a big amount of value and thus its not really practical in the case you need to re-locate quickly taking your valuable metals with you.

But will central banks really let their currency collapse? most will probably resort to hiking their interest rate in an attempt to combat CPI-inflation and in that case gold might actually drop in value, same with stocks and housing.

Stocks will only really do well if neither of these 2 extremes comes to fruition. In the case of catastrophic ilfation stocks will fall relative to gold while increase nominally (which will be taxable if you sell unless you use special savings account).
 

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#7
Why workers co-ops is a terrible idea
The issue with worker co-ops is that the ones building the company will not get proper ownership of it. Instead you only get the profit from the period you worked there and thus there would be a perverse incentive to prioritize short-term profits since once you leave it doesn't matter what happens to the company.

There is nothing wrong with workers owning stock in the company, it's actually a good thing since humans generally want to belong to something bigger and if the employees own stock they will get a share of the profit and thus be more motivated to work hard. It's especially important that executives own stock.

Facebook stock ownership was initially limited to people who actually worked for the company and arguably this helped making facebook a success. The people who helped build the company actually got the fruits of their labour.

https://www.businessinsider.com/first-20-facebook-employees-where-are-they-working-now-2017

We should introduce a system where shareholders of a company they work for get taxed less and allow people to get paid in stock and have it not be taxed until they sell (dividents will be taxed via the normal capital gains rate).
 

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#8
The way some worker co-ops try to solve the issue of rewarding people who join early is to require you to pay money to become a member

Once membership is mutually accepted, the worker has 36 months to contribute his or her initial capital share of €15,000, which represents the system’s minimum annual salary. This can be amortized through salary deductions, or in some cases borrowed from a bank as “capital to work.”
https://drpop.org/mondragon-how-do-you-become-a-member/

The issue is still however that you do not get proper ownership, they may find out that they do not need you and then you get let go.
 

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#9
Modern monetary theory
Of course when you can print the money you owe to other people you can always avoid technically going default.

Why worry about being like Greece if we have the option to be like Zimbabwe instead?

fee.org/articles/modern-monetary-theory-debunking-the-latest-incarnation-of-government-s-magic-money-tree/

This is arguably a case in favor of the Euro, then governments cannot as easily resort to money-printing to finance their budget deficits, there is actually a real risk for default.
 

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#10
Why UBI/NIT is better than the current welfare system
With the current welfare system people essentially get trapped into welfare dependence since if they start working even a little they will lose out on welfare benefits and not earn much if anything extra from it, in addition they might not be able to get their welfare back since they have now demonstrated that they are capable of working.

It's especially bad for people wanting to start a business since you will generally not be allowed to get welfare benefits as you are building up your company (possibly because the left wants to keep people in welfare dependence).

Financing UBI
It's relatively simple, you simply severely cut traditional welfare and raise the tax-rate on people who earn a small income. With more people working (since it would become incentiviced to earn your own money) the government would earn more allowing for bigger UBI than what we could afford today with the current tax-base.

Negative income tax
It's just a different description of what is effectively the same system.

With NIT you will get back money from the state (instead of having to pay money in taxes) if your income is small resulting in people in effect having a universal basic income since your income cannot be smaller than a certain amount (unless you lose money).

non-egalitarian basic income
Instead of giving the same amount to everyone different people can be given different basic income, this can be determined by your citizen-class.

For example we may want to give more money to young people and less to the elderly (that are less useful and cannot really rebel anyway).
 

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#11
Impacts of income taxation
Lets say you need to paint your house and your neighbour need to cut their grass. You can both do that yourself but what if you prefer cutting grass and your neighbour prefer painting?

Well you could just barter your labor, you cut his grass and he paints your house. If we insist on taxing that it's likely to make it unworthwhile to trade labour. Barter systems in general are however clumbersome and inefficient, the ones who you do labor for might not be able to offer anything in return for you that you value in terms of labour.

A much better system is to just exchange labor for money, then you do not have to worry about the transaction being unbalanced (such as you helping him much more than he helps you) but with income taxes doing work in exchange for money is taxed which deinventivize people from trading their labor for money. The higher the taxes the more products and services are priced out since you need to charge more to earn the same money for yourself.

With 50% of total taxes you end up having to charge someone 200$ for your labor to make 100$ yourself, that is very likely to reduce the total economic output since a lot of economic activities never get done. WIth increased taxes we can expect less economic activity and less productivity in general.
A 1 percentage-point decrease in the tax rate increases real GDP by 0.78 percent by the third year after the tax change
https://taxfoundation.org/reviewing-recent-evidence-effect-taxes-economic-growth/

1635761794381.png
 

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#12
Marginal tax-rate and economic growth
Logically it makes sense that high marginal tax-rates would be harmful since then people who are already well off will become a lot less motivated to work harder to earn even more.

It might also create a bad culture where people no longer focus on what actually makes sense economically, people become less responsible and more dependent on government.

Empirical studies have found mixed results.

https://www.sciencedirect.com/science/article/abs/pii/S0176268002001040
 

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#13
Why you should be sceptical regarding peter schiff
While what he does say generally at least seem to make sense on a logical level he has not done a very good job at actually giving people good advice when it comes to growing your wealth.

For example he has been very much against cryptocurrency but people who went against his advice made a lot of money.

He has recommended gold heavily but gold lately really hasn't been doing super-great. People who instead invested into stocks did way better.

He likes to predict doom but that never really happens, at least not on the scale he is predicting.

If you study how government debt actually works you should be able to figure out that we can indeed have an ever increasing debt without ever paying it off, there is no need to ever pay it off. If the debt is in a currency you control defaulting is just a political choice since you can just rely on the central bank to control the interest of said debt. The only limiting factor here is inflation but temporary high inflation will not doom the economy, sure it's probably not great to have high inflation but it will not lead to utter disaster, you can survive it.
 

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#14
Bitcoin = wannabe gold
You may have noticed that crypto pushers often use coins of gold coins trying to equate that to their favorite crypto.

Instead of mining for real gold that can be used for real things bitcoin wastes electricity to for useless calculations. Bitcoin uses artificial scarcity while gold is physically scarce.

Crypto pushers like to paint gold as a currency without intrinsic value which is obvious nonsense. Even if you never sell your gold you van still get value out of it. You can watch your beautiful gold bar or use it to make nice jewelry.


Bitcoin tries to be decentralized while having a highly decentralized mining-pool situation (where a few mining-pools has over 50%).
Gold is decentralized for real and doesn't require the internet to work as currency.
Gold unlike bitcoin is an actual store of value unlike bitcoin and 'stablecoins' like UST.

Crypto also tries and generally fails at being fungible, bitcoin and most other cryptocurrencies are traceable so the bitcoin you hold might come from some child-porn producer without you knowing it. Various attempts have been made to make crypto more anonymous but none of these seem particularly great.

Crypto is fiat
Unlike government money which is actually backed by state(s) most crypto currencies are not backed by anything.
Crypto also isn't even a practical form of money to use for payments. It's a lot more convenient and in practice more secure to use transfer apps.
In Sweden (example) a lot of people use "switch" allowing them to send money to others instantly without having to pay any transfer fee.

If you want to send money to someone as crypto you first need to send money to an exchange, then buy (where you have to pay a fee) then send to someone (which does require a fee) and then the individual who recieved it has to pay a fee again when exchanging it to government fiat.
Central banks will roll out their own digital currencies allowing people to transfer money to each other with no or very low fee and not have to worry about losing money due to the bank going bankrupt (since it isn't being lended out to anyone).
 

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#15
Lesser known technical issues with crypto
The most severe is the CAP theorem showing that in order to scale a digital currency you need to centralize it.

https://cryptographics.info/cryptographics/blockchain/cap-theorem/

That more or less dooms the concept of having some decentralized currency become the dominant payment system. Instead we need some central authority or small number of central nodes to control the network to allow for quick transactions.
For example we might see various central bank issue digital currencies that will actually be practical to use and also stable.

Proof of stake isn't cheaper
Proof of stake coins still have to pay for the security in the form of lost liquidity. Because of that proof of stake coins will have a hard time competing with proof of work coins, that explains why proof of work currencies are still dominant.
https://www.truthcoin.info/blog/pow-cheapest/
So currencies that waste electricity doing pointless calculations will remain dominant.

Reducing the mining-reward will make the network less secure
One obvious issue with tokens like bitcoin is that with the exponential decrease of the mining reward the network will eventually become insecure the to the mining-reward being too small to secure the network, it's fairly obvious that transaction fees will not be enough to finance the security of the network.

Most people are not willing to pay 100$ / transaction to send money.

https://ycharts.com/indicators/bitcoin_average_cost_per_transaction

I personally suspect that the creators of bitcoin understood this and implemented exponential decay of mining-reward in part to limit the lifespan of bitcoin (allowing other better protocols to take over) but maybe i am overestimating how smart they are.
So having a secure network would require constant inflation (dogecoin has that for example).

agent_flounder wrote:

The CAP Theorem (Wikipedia) is interesting. Makes sense intuitively. Hadn't run across that before.

I admit I don't know much about distributed computing from a comp sci perspective since my degree was comp engr and I just didn't really study that topic. And to be fair the CAP theorem came out several years after I graduated and was busy doing system admin work. So... That's my excuse lol.

For the most part this seems to be a decent summary. Although the Wikipedia article is just as good if not better.

But where are they getting "99.99%"? Seems like hyperbole or made up. Would've expected them to examine this more formally and mathematically or else just leave it qualitative rather than pseudo-quantitative.
 

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#16
Deponzi schemes
Unlike amway and other garbage crypto actually worked for making many people rich. You do not even have to do any work. You can just sit back and wait for someone to pump the scam-coin you invested into.

These "deponzi" schemes work really well, since the pumping is decentralized there isn't any central authority that can just run away with all money, instead investors act collectively to pump the price.

Any individual can pump the price by buying it if the price drops too low, then the investor can raise the price they support and continue with that until the coin moons. Big investors may also pay for advertisement to get more people into it (attracting more to the deponzi scheme).

People invested into these scams will often believe it themselves and promote it to others thinking "we will all get rich" and often it works out well for some time. You can create something like a cult where they validate their delusion via social proof.

While miners being paid does eat away money making it a negative-sum game mining is also valuable in distributing the coins to many people making adoption easier.
 

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#17
About algorithmic stable coins
Major stable-coins like USDT and USDC are centralized. The advantage of that centralization is that then you can actually back it with the actual thing that it is pegged too. The disadvantage is that then you have to trust the central authority to actually hold up the peg rather than running away with the money or having their resources confiscated by some government.

An alternative is to instead back the stable-coin with crypto and then adjust the exchange-rate to hold up the peg. The issue with this is that then you need the crypto that backs it up has to be worth enough to actually defend the peg.

Some stablecoins offer or has offered very high interests to entice people into investing into their platform which obviously isn't sustainable. The issue with offering high-interest to get users is that then the growth isn't organic and your project may collapse if you try to later slash your unsustainable interest rate (because you will have less of a reason to hold it).

TerraLuna kept up their unsustainable 20% interest for way too long and eventually the whole thing went down in flames.

https://www.nytimes.com/2022/05/18/technology/terra-luna-cryptocurrency-do-kwon.html

In this case they had some plausible deniability with regard to it not being a ponzi scheme. Most people believed that the high interest was just a temporary measure to get users to the platform, the issue with that strategy is that you cannot actually limit the amount of interest paid to a single individual with crypto without strict KYC so it's a very expensive way to get users.

In effect it does however seem like the whole thing was largely a ponzi-scheme. Luna had value due to people wanting the stable-coins and the stable-coins had value largely due to it being backed by luna, they did later buy BTC as additional backup but it wasn't enough.


The death-spiral that happened with luna was something many people had already warned about, it had already happened to other algorithmic stable-coins so of course it could happen again.

 

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#18
It definitely seems like the world financial systems are made very complex on purpose. This can be seen from playing MMOs, where you can have gold and there isn't things like varying tax rates or advanced quantitive easing systems. I believe the purpose of obscuring the simplicity of how money operates is a way to give economic leaders a method of control over the larger population. Things like cryptocurrency can shift the power back towards the general populace.
 

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#19
Why crypto-holders should be afraid of central bank digital currency
I see a lot of fear-mongering being pushed about how central bank digital currency will supposedely lead to some dystopia. This of course is utter nonsense.

If the government is actually bad then you are in trouble with or without central bank digital currency, the nazis didn't need it to commit the holocaust. It's not needed to send people to jail, it's not needed to monitor transactions, it's not needed to exercise government control over the economy.

What central bank digital currency does is allow people to hold money digitally without risking anything in a bank collapse. It's effectively similar to buying government bonds but unlike bonds you will be able to easily use it for payments. This can be a very good thing for society since it could eliminate or reduce the need for deposit insurance. If you are against bank-bailouts you should support central bank digital currency.

But what if you do not trust your own government when it comes to monetary policy?

In that case you might be able to use money issues by some other governments similar to how the dollar is the most popular currency in zimbabwe. With central bank digital currency it becomes easier for people to change which government they are going to rely on for their fiat-savings.

Most people are going to prefer using fiat-money issues by some government over ineffective and 'decentralized' fiat money backed by nothing. Bitcoin at the previous peak had a maintenance-cost of over 100$/transaction which would have made it completely unviable as a payment system if it wasn't for the block-reward (inflation) subsidizing the network.

One big issue with POW cryptocurrencies is that securing the network requires inflation. Switching to "proof of stake" doesn't actually reduce the cost of securing the network, instead the cost is paid in the form of reduced liquidity, thus POW coins will generally outcompete POS coins. Both will be outcompeted by central bank digital currency or other digital fiat system.

The main utility of cryptocurrency is and has always been as a get rich scheme where people who bought when the coin was less known will get massive returns if the coin goes mainstream. This is good for all the people who got rich out of crypto but all that and more will be paid by people who entered later into the scheme and got stuck holding the bag.

In practice central bank digital currency will likely offer superior anonymity than bitcoin and most/all other 'decentralized' crypto currencies. With central bank digital currency you only have to trust the government who issues them. With crypto transactions are almost without exception public making it possible to potentially link it to your identity.

Governments do actually have an incentive to defend the value of their currency since if it's a better store of value that competing fiat currencies there will be demand for the currency allowing the population to export their currency in exchange for goods of value, one of the reasons why governments aren't pursuing this more is because many the public is economically illiterate and think having a trade-deficit would be a bad thing when it really isn't when you export paper in exchange for physical goods of value.
 

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#20
Debunking: the dollar and gold is also backed by nothing
First let's start with gold. While gold can be used for money and a store of value it also has other uses giving it intrinsic value and a backing
In 2018, electronics consumed over 1,400 tonnes of gold, and in 2017, it accounted for 34% of gold used in the US.
https://www.bullionbypost.co.uk/index/gold/uses-of-gold/

That's around half the yearly production being used for electronics alone.

There is also demand for gold as jewelry and this also gives it backing.

Of course an asset with intrinsic value can still be overvalued, people have different opinions regarding if gold is overvalued. I do however think it makes sense for governments to hold physical gold themselves since that cannot be frozen by other countries.

Government money has backing
That should be obvious. It's backed by the government. Governments have many tools available for defending the value of their currency.

Many central banks have gold reserves available to them as a backing. Officially the United States government own 8133.5 tons of gold which is 2.3% of the M1 money supply.

https://tradingeconomics.com/united-states/money-supply-m1

Governments typically require you to pay taxes in their own currency, if they then cut spending to less than what they take in in taxes it will support the currency.
 
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