Charles Hopley @charles_hopley
(https://twitter.com/charles_hopley/status/945040369179246592)
Charles Hopley(e)k Bertxiotua Deficit Owls
Thread: How to start a currency…
Charles Hopley(e)k gehitu du,
Deficit Owls @DeficitOwls
Replying to @FawkeEU @jbhearn and 14 others
Let’s do an example. You, me and 49 other people are in a room. I would like you to clean the room, and the rest of them to paint the walls, make lunch, etc. In exchange, I will give you each piece of paper with my name on it. Will you say yes? Hopefully not.
2017 abe. 24
(https://twitter.com/DeficitOwls/status/944427271972179968)
Let’s do an example. You, me and 49 other people are in a room. I would like you to clean the room, and the rest of them to paint the walls, make lunch, etc. In exchange, I will give you each piece of paper with my name on it. Will you say yes? Hopefully not.
2017 abe. 22
Deficit Owls @DeficitOwls abe. 23
Replying to @DeficitOwls @FawkeEU and
But there’s an extra piece of news: there’s only one door out of the room, and my associate is standing outside pointing a gun at it. The only way to get out the door and not get shot is to give him one of my papers. Now would you like to work? Hopefully yes.
Deficit Owls @DeficitOwls abe. 23
I’ve just created money. How much are the papers worth? They’re worth whatever I say they’re worth. You need 1 to get out of the room, but what do you have to do to get that paper? If I say I’ll give you one after 1 hour of work, then they’re worth 1 hour of work. If I say that
Deficit Owls @DeficitOwls abe. 23
I’ll give you one after a day of work, then they’re worth 1 day’s worth of labor. They’re worth whatever you have to do to get them from me.
Deficit Owls @DeficitOwls abe. 23
How much should I spend? Well, there’s 50 of you, and each person needs 1 card. So, I probably better spend at least 50 cards. Clearly if I only give out 49, then somebody won’t be able to leave. What happens if I give out more than 50? Then after everybody leaves, somebody will
Deficit Owls @DeficitOwls abe. 23
still have some cards. My deficit (giving out more than I take back) is exactly equal to the “private” savings. What happens if nobody wants to save any? Well, then clearly I won’t be able to spend more than 50: you’ll each have 1, then you’ll all leave. But what happens if some
Deficit Owls @DeficitOwls abe. 23
people want to save some, but I don’t provide enough? Maybe 10 people would like to save one, so the tax (50) plus the saving (10) = 60, but I only spend 55? Clearly either 5 people won’t get their desired savings, or everybody will get their savings except 5 other people will be
Deficit Owls @DeficitOwls abe. 23
stuck in the room, or somewhere in between.
Deficit Owls @DeficitOwls abe. 23
One question is, why would anybody want to save these anyway? Here’s one reason: maybe we actually do this more than once, perhaps quite often, and maybe they would like to accumulate an extra paper now, so they don’t have to work later. Here’s another reason: these little pieces
Deficit Owls @DeficitOwls abe. 23
have a quite stable value (they’re worth whatever I say they’re worth) and are already accepted for goods/services (I’m paying people to clean the room, make lunch, etc), so it would be quite convenient to start using them for private market transactions, ones that don’t involve
Deficit Owls @DeficitOwls abe. 23
me. In order to do that, they’ll need to build up some surplus funds, that they can use as a working “money supply.” That will require me to run deficits, to give them the papers they want. Once the papers are being used for market transactions, then a lot more reasons to save
Deficit Owls @DeficitOwls abe. 23
them arise. All of that saving comes from me running deficits, there’s literally no other place for them to come from. That’s easy enough for me to do though: I either allow more people to work for me, or lower the tax. That way, I’m providing the savings that people accumulate.
Deficit Owls @DeficitOwls abe. 23
My deficits are therefore the norm. But just accumulating savings is no fun! Everybody wants to earn a return on their savings. They all offer to lend those savings out. Competition from every person with savings trying to lend them drives rates down, potentially to zero for very
Deficit Owls @DeficitOwls abe. 23
short-term loans. How can I get a rate above zero? There are only two options: 1) I can start paying interest to people on their savings. Nobody would make a loan at LESS than they could get just from sitting on the papers. Or 2) I can drain all the excess savings. I would do
Deficit Owls @DeficitOwls abe. 23
by selling bonds: I offer to “borrow” the papers from people, at some interest rate, for some time. Am I borrowing them because I need them to spend? Clearly not. Am I borrowing them to prevent inflation? Clearly not, these are papers people have already saved. Plus, the papers
Deficit Owls @DeficitOwls abe. 23
are worth whatever I say they’re worth. I’m borrowing them because I would like interest rates to be above zero, which requires me to drain the excess liquidity. Now, there is one more situation where I might be forced to borrow them: suppose I had a fixed exchange rate.
Deficit Owls @DeficitOwls abe. 23
Perhaps I’m promising people that I’ll convert their papers into gold at some rate. Well, what happens if I run deficits? People start accumulating my papers, which they could convert to gold. What happens if I don’t have enough gold? Then if everybody tries to convert, I’m
Deficit Owls @DeficitOwls abe. 23
going to have a big problem. So on a gold standard, a deficit could be quite dangerous. What can I do about it? Simple: I can “borrow” the papers back, by selling the bonds. The bonds won’t be convertible to gold. I’ll offer some interest to get people to accept them. If I do
Deficit Owls @DeficitOwls abe. 23
that, then my gold reserves will be safe from people trying to convert. Observations? On a fixed exchange rate, gov debt is potentially a big problem. I need to offer whatever interest rate is necessary for the market to hold the bonds, so that my gold won’t be at risk. It
Deficit Owls @DeficitOwls abe. 23
becomes potentially imperative to get the papers out of people’s hands, so they won’t convert to gold. But on a floating exchange rate? Who cares. They could hold their savings as paper, or as paper-bonds. It doesn’t matter to me. It’s just a question of what my interest rate
Deficit Owls @DeficitOwls abe. 23
policy is
Replying to @DeficitOwls @FawkeEU and
Great explanation, great thread.
