Ask HN: Do you care about sound money? | Hacker News Reader

Ask HN: Do you care about sound money?

4 pointsCapira29 comments

Bitcoiners care a lot about "sound money" (or "hard money"). They believe for a society to be sustainable, it is fundamental that its money is hard to debase. Furthermore, they believe that only if a society uses hard money the prices in the market can accurately reflect the cost of production. Otherwise, the market will always end up with inefficiencies and worse quality.

Apart from all criticism with regards to bitcoin's energy consumption - do you care about sound money in that regard?

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No, I don't—I care about central bank independence.

I’ll answer this in the context of the gold standard—the ultimate hard currency/sound money. That history is very different than the one its proponents portray. Governments routinely had more currency in the circulation than they cover with their reserves, the money supply was effectively ceded to technological developments in mining, and we saw a period of social unrest in the back half of the 1800s as farmers got screwed by deflation. (See William Jennings Bryant’s ‘You shall not crucify mankind upon a cross of gold.’)

The money supply matters. Historically, the gold standard exacerbated swings in the business cycle. Economies would grow by exporting good and gold would flow in, people had more money so they spent more growing the economy more. But, if the economy was bad and there wasn’t gold down in the basement, the government and central banks were unable to issue the currency necessary to stimulate business activity to help end the problem. Milton Friedman made his name by looking at the money supply as the root cause for why the Great Depression was so bad.

Could the Federal Reserve do better? Absolutely. But if you compare the last 10-15 years to any other period in the last 150, things are as good as they’ve even been on the monetary front.

> things are as good as they’ve even been on the monetary front.

European central bank just announced they miscalculated how bad the inflation really is currently and that they expect it to get worse. The FED is pretty much in the same situation, no?

They just answered they plan to raise interest rates. Inflation isn't out of control, it's been high for like 6 months after 18 months of no inflation or deflation.

No, it's not just the energy consumption, the economic model isn't sound either. The upper ceiling on the supply isn't a feature, it's one of the reasons why you can't run an economy on Bitcoin.

Money so sound that it lost 30% of its value since November? I know that it's massively up long term but it's still a volatile asset measured against actual currencies; it doesn't function as money.

If it has a chance of succeeding in any way, it's to be an asset that people are convinced enough that it's a reliable investment similar to gold (gold's actual usefulness is a small fraction of the value so the comparison is close enough). So maybe people will keep buying Bitcoin for it's own sake and making dollars with it, who knows. But the "sound money" argument is bullshit.

> Bitcoiners care a lot about "sound money"

I doubt that most of them care. It's just that when you have a strong financial interest in something like Bitcoin going up in price, it's very easy to start inventing and believing all kinds of arguments that don't make sense.

The general idea of money that is hard to debase has nothing to do with bitcoin.

And vice versa.

But discussing bitcoin is a straw man here. Hard money is the interesting idea.

I care about the value of the dollar (since I'm in the US) being stable. I do not care about how many dollars exist, whether that number is going up or down, or whether the number going up constitutes "debasement".

Also, the prices in the market reflect the cost of production (the cost curve) and the demand curve. I'm not sure that looking only at the production side tells you anything meaningful.

The US Dollar gets debased significantly. Its value deceases exponentially in comparison to gold (for example).

OK, let me be more precise: I do not care about small amounts of steady, predictable inflation. (I care more about the monetary authorities having room to maneuver to prevent deflation, which is far more damaging than inflation.)

Why do you think deflation is bad? Wouldn't it be great if things got cheaper over time such that you would buy fewer products with better quality?

Sure, that would be great.

What tends to happen, though, is that people have borrowed money to buy things, and now dollars are more expensive to pay back those loans. Some of those who have borrowed are now underwater - they owe more than the value in dollars of the asset that they bought with the loan. Some of those will sell their assets (or the bank will do it for them). Now you have higher-than-normal selling, so the price goes down. Now more people are underwater, so it keeps going.

And some of those "people" are businesses, and some of them fail because of this. Now some people don't have jobs. Prices are lower, but that doesn't help you if you have no income.

This isn't just theory. Look at several of the financial panics in the 1800s, and you'll see this in action. When it happens, it's very destructive. It wipes out lots of people.

So, a slow, steady, predictable deflation might be a good thing - if it could be and remain stable. But there are lots of examples of it not being stable...

If one believes that, why not own gold and other precious metals? It's true that the dollar is not backed by anything except the government's decree that it is legal tender, but cryptocurrencies have not even that.

Gold has a few fundamental disadvantages:

- Hard to transport (also not digital)

- Hard to verify authenticity

- Hard to split up

The IShares Gold Trust, symbol IAU, holds physical gold and has an annual expense ratio of only 0.25%. In return for that, the problems you listed are solved.

Money serves a specific purpose, it's an exchange medium. BTC is a digital asset, as an exchange medium _has already failed_.

Additionally, having the FED controlling rates is a democratic, reasoned approach. BTC is not handled by a known, government controlled authority. I know that many BTC proponents don't like governments for $reasons but BTC _liberal_ alternative is more akin to a jungle than a civilised society :-)

If we all suddenly woke up and started saying "US tender is worthless" and chose another item, the dollar would only be worth it to those who still care about green pieces of paper.

Economy is fiction based on the trust of everyone participating either genuine or faked. Once the trust is gone, it does not matter how you cound your riches.

Is there any truly hard money other than precious metals? If the internet goes down or partitions, then what happens to all those coins?

> dexwiz - Is there any truly hard money other than precious metals? If the internet goes down or partitions, then what happens to all those coins?

If the internet goes down, we have bigger issues to think about?

No, precial metals aren't hard money either. The point of money is that it can't be hard. Money is a thing that you can trade flexibly for other things - for which you need consensus with other people about what's acceptable money.

As soon as you start thinking about "what's really hard money", you jump over money altogether and land on "what goods can I trade for other goods".

The core idea that I wanted to discuss is: If money is easy to debase then it will get debased a lot in the long term. That leads to inefficiencies in the market, and in particular to less sustainable behaviour of people and less sustainable societies.

Bitcoin is just an example for an attempt to create hard money.

> If money is easy to debase then it will get debased a lot in the long term.

What happens to money in the long term doesn't matter much, what happens in the short term does. Investment vehicles short-term fluctuation matters less, but their long-term performance matters more.

> That leads to inefficiencies in the market, and in particular to less sustainable behaviour of people and less sustainable societies.

I see no reason to believe that the long-term smooth decline in the value of money does that at all compared to achievable alternative behaviors of money. In fact, one of the reasons money is typically managed with a goal of low-but-positive inflation with low volatility is that there is quite a lot of experience suggesting the opposite.

Economies need a human-in-the-loop to adjust the settings every once in a while. That's what monetary policy does - it changes the money supply and interest rates as a response to what happens in the economy. Thinking that you can lock that policy in place once and let it run forever is naive - it just doesn't work in practice. This is why we don't have the gold standard anymore - it was a system so bad that it eventually broke and we had to move away from it. That's where all the talk about sound money ends - money has to be "unsound" in order to work in the real world.

> do you care about sound money

No, I care about stable money, not “sound” money.

The value of the US Dollar deceases exponentially in comparison to gold.

> The value of the US Dollar deceases exponentially in comparison to gold.

I don't give a fly fig about the value of gold on its own (and, consequently, as a benchmark for anything else.) I mean, except when I am considering gold as a potential investment vehicle.

Now, if you were to say that the value of the dollar loses value roughly exponentially, with a low and gradually changing exponent, compared to, say, the basket of services used to define the CPI or any other broad price measure, I’d say fine, that’s great. Low volatility is stable, and that's what I want in money. (Escalating value with higher volatility is acceptable in an investment vehicle, but currency should not be a primary investment vehicle; what is good in one is not good for the other, in either direction.)

The value of US Dollars deceases exponentially in comparison to any finite good, no?

Furthermore, most people's salaries don't increase as fast as the value of dollars deceases. That means for the average person it's likely that you are paid less every year.

> Furthermore, most people's salaries don't increase as fast as the value of dollars deceases.

Yes, they do. Real (that is inflation-adjusted) median hourly wages have overall pretty much been even since the 1970s; dropping a little bit through the 1980s and early 1990s and rebounding slowly since.

Individually, people generally move up in relation to the median over their career, so with the median generally flat (and recently tending to be slightly positive), they tend to get higher real wages over time.

(Now, wages haven't kept up with productivity, and that's a real problem, but it's different than the one you are inventing.)

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