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Sunday, December 02, 2007

Regaining Currency

Floating money like ours has no intrinsic value, which isn't so bad. If the government collapses and the money's backed by gold, it's not like you're going to get your gold back. The problem is that people say our national debt doesn't matter and mention that Americans have 72000000000000$ or so saved up. Well, yah, but that's a whole lotta nothing.

The gold standard is worse. First, the money supply needs to be constantly proportional to the size of the world economy in order to avoid inflation. However, this implies that as the economy grows, we must find more gold. Otherwise the growing money supply will be backed by less and less gold, which would confuse people with the paradoxical implications of zero inflation and high inflation occuring simultaneously.

If a basket of commodities including gold is used as a standard, then similar problems occur, but instead of one problem you have something like N! problems, which, in layman's terms, is bad. Also, most commodities are either perishable or finite in number.

If the commodities are locked up in Fort Knox, then all the loot is going to waste. If it's distributed through the economy by some futures scheme or something, then it's not really "backing" the currency in a very comforting way.

The solution is to use some sort of stock index as currency. There would be constant deflation, but that would be largely irrelevant (or a good thing) since all of the world's savings would be invested in economic growth.

This system is only feasible with ubiquitous IT, not to mention the cooperation of or abolition of governments. To avoid a disastrous mismanagement of the index, multiple varieties of currency would have to compete. These would have to be easily, instantly converted from one to another at point of sale. They would also have to be managed by private companies, which has been illegal for a few centuries, in order to minimize the use of the index's clout to pursue political objectives.

Though in the end, paper money is just paper when the bombs fall.

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