Generational Dynamics Forum - New Site

vincecate wrote:

Higgenbotham wrote:

vincecate wrote:Bernanke may really think that since he is doing it on a computer it will not cause hyperinflation (as you seem to).

Paper dollars and electronic dollars are very different indeed. I can think of many scenarios where electronic dollars either get jammed or wiped out, either by natural or man made forces, and have mentioned that. Once a paper dollar is printed and in somebody's hands, it is quite safe from being destroyed. In no way is that true for an electronic dollar.

Do you think we are safe from hyperinflation because they mostly keep track of money on computers and don't bother printing all of it?

John wrote: The concept that I'm flirting with is that under today's rules, it's
not only true that hyperinflation WON'T occur, it's also true that
hyperinflation CAN'T occur. The reason that it CAN'T occur under
today's rules is that the money will always flow (like water) to the
best investment opportunities in the world, and will not and cannot
contribute to the local wage and price increases related to
hyperinflation.

Higgenbotham wrote: No. The electronic dollars can be destroyed through hyperinflation while the paper dollars become more valuable.

Electronic dollars can be destroyed through an EMP pulse attack. I wouldn't doubt the Chinese or Russians have discovered ways to selectively target EMP pulses. They can be destroyed by a catastrophic or man made Internet lockup. They can be jammed by lockup of the payments system (see many of mannfm11's posts regarding this). They can be jammed by market preference. Or a number of other ways.

John wrote:The concept that I'm flirting with is that under today's rules, it's
not only true that hyperinflation WON'T occur, it's also true that
hyperinflation CAN'T occur. The reason that it CAN'T occur under
today's rules is that the money will always flow (like water) to the
best investment opportunities in the world, and will not and cannot
contribute to the local wage and price increases related to
hyperinflation.

John

vincecate wrote:Nuclear bombs can destroy paper money as well. And electronic data can be backed up in several locations, so it is probably harder to wipe out. Assuming that the Fed computers do normal database transactions that either commit or abort, how does anything on the Internet or some payment system create or destroy money? A key function of a database is to update both accounts or neither account when moving money from one account to another. They are reliable at this.

Higgenbotham wrote:

vincecate wrote:Nuclear bombs can destroy paper money as well. And electronic data can be backed up in several locations, so it is probably harder to wipe out. Assuming that the Fed computers do normal database transactions that either commit or abort, how does anything on the Internet or some payment system create or destroy money? A key function of a database is to update both accounts or neither account when moving money from one account to another. They are reliable at this.

Paper money is virtually indestructible. It is diffuse so any conflagration would have to burn the entire earth. A limited conflagration only makes paper money more valuable if a portion of it is destroyed. That would be deflation in action. Electronic money is not diffuse nor is it necessarily discrete. Electronic data can be backed up at an instant in time but that doesn't necessarily make the electronic money flow or the account interactions get updated.

Higgenbotham wrote: Payment system lockup has to do with solvency and what discerning humans will accept as payment. A check drawn on a certain bank or fund where there is a rumor of insolvency doesn't need to be accepted. Once it is known people aren't accepting checks from one or more entities, the system shuts down and the armored car companies will be busy delivering legal tender.

vincecate wrote:

Higgenbotham wrote: Payment system lockup has to do with solvency and what discerning humans will accept as payment. A check drawn on a certain bank or fund where there is a rumor of insolvency doesn't need to be accepted. Once it is known people aren't accepting checks from one or more entities, the system shuts down and the armored car companies will be busy delivering legal tender.

I can see a payment system no longer be accepted. But this does not destroy any "base money", right? All the money on the Fed computers is still there and all the paper money is still there, someplace.

Until 2004, Woodman's allowed payment only by cash or check, when they began to accept debit cards. Woodman's does not accept payment by credit card as they will not pay processing fees or assess them on their customers. The company advertises relatively little, and attributes their lower prices to these practices.

Higgenbotham wrote: > A point may come, say the Euro may collapse or who knows what,
> where the knowledge or perception that certain banks are insolvent
> begins to matter in the marketplace, the checks are no longer
> accepted and the payment (clearing) system shuts down. At that
> point, there are lots of different pathways available but the end
> result is probably that the insolvent banks are put through some
> kind of process whereby the base money is used to cover the
> liabilities and somebody takes a haircut. If the Fed had not done
> QE2, the assets (treasuries) would be liquidated in the
> marketplace in exchange for cash. Since the Fed has done QE2, the
> increment of electronic base money is still in the system and the
> haircut will still come in the form of reduced stock and bond
> values of the insolvent entity or partial losses in deposit
> accounts. In the meantime, in a case like this, I think base money
> lays idle while the insolvency is cleaned up. In a nutshell, I'm
> saying that there isn't a way to distinguish a bad check from an
> insolvent bank from any other claim on the bank's assets. The
> solution to that is to require legal tender as payment.

> Going to the window of an insolvent bank to draw your cash out and
> close your account is the same thing in principle as a refusal to
> accept a check from that bank as payment. It has the potential to
> turn into a run which can have systemic effects.

• QE money will flow into banks, and from there into "hot" investment
  opportunities. This will create new asset bubbles, but not inflation.
• The choice of bubbles is a matter of fashion. The real estate
  bubble was highly fashionable five years ago, but now it's passé.
  Today's hot bubble are commodities and stocks, and investors are as
  oblivious to the dangers of commodity investing today as they were to
  real estate investing five years ago.
• What's really changed today, versus previous centuries, is that
  bubbles are being created with "electronic money," rather than
  physical money.
• There's already a multi-tier stratification of securities, with
  companies like Moody's serving as arbiter.
• Some event will cause a panic, leading people to lose faith in
  electronic money. This is a new concept that I've never seen
  discussed before.
• The multi-tier stratification of securities will be extended
  to "cash." Presumably physical money will be considered the safest,
  while various other forms of electronic money will be rated as
  safe or unsafe in some way.
• This panic will immediately reduce the money supply by anywhere
  from 10% to 50%, causing an enormous deflationary shock. People won't
  receive paychecks, landlords won't receive rents, creditors won't
  receive monthly payments.
• Initially, whatever commerce occurs will be only through physical
  money. As time goes on, faith in some forms of electronic money
  will be rebuilt from backup disks and paper records.
• One possible government response at this time will be to
  make a lot more paper money available, thus returning to the original
  meaning of "printing money." At that point, the huge deflationary
  shock may be offset by some inflation, but the net will still be
  deep deflation.