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World’s biggest bar room

Commenters on many blogs, this one included, often seem to labor under the mistaken notion that they are going to change everyone’s mind. Even leaving aside that on controversial subjects, many comments are mere tired sarcasm and tedious ranting, there are deeper reasons why you will not write The Blog Comment That Changed The World.

The Internet is not Plato’s Academy or Aristotle’s Lyceum; it is more like the world’s biggest bar room. On their stools sit all sorts of characters, from the witty and well informed to the dull and stupid, opining loudly to all around who will listen to them. The other drinkers retort with a like range of ability. Occasionally somebody says something so compelling that it commands general assent, at least until the next round of drinks comes.

On the topics that this blog and many others cover, there is in the background a large body of scholarly writing (I hesitate to call it a literature, given how poorly so many economists write). Sometimes the posts acknowledge it, while other times it is only there implicitly, but it is always there. On the topics I write about, almost always I have read some of the major scholarship and sometimes a lot of minor scholarship. Your blog comment is unlikely to change my mind for the same reason that my blog post is unlikely to change the minds of the scholars whose work I mention, if they are still alive. The intellectual effort that goes into a blog post or comment is small compared to the amount that typically goes into a piece of scholarship. It is perfectly justifiable for somebody who has thought a long time on a subject, especially if he has contributed to its scholarship, not to be swayed from his position by some stray words on a blog. If you say, “Yes, but the logic (or the facts) are on my side,” well then, go write it up in a scholarly form and try to get agreement on it from some experts, not just your personal cheering section.

And while we are still in the bar room, I will share one of my pet peeves with you: commenters who do not use their real names. In certain forums, it is appropriate to protect privacy. I perfectly well understand if you are logged into a medical blog and you do not want the world to know that you have foot fungus, or if you are a Cuban dissident who does not wish to end up in jail for your posts on a political blog. On the Free Banking blog, such considerations do not apply. I heavily discount pseudonymous comments because failing to use one’s real name in this context indicates a lack of intellectual courage. While it is true that, as the saying goes, good wine needs no bush, with so many wines to choose from whose origin is well attested, why should I bother with what experience has too often proved to be merely vinegar?

  • http://wcoats.wordpress.com/http://works.bepress.com/warren_coats/ wcoats

    Kurt,

    Well said and so true. The issue of the blogasphere, also highlights the continuing importance of filtering, a service performed by news papers, magazines and journals or even some bloggers of established reputation.

    Warren

  • http://www.subprimeregulations.blogspot.com/ Per Kurowski

    If you find yourself at that bar, and Ms Janet Yellen happens to drop by, why do you not ask her the question I feel the US senate should ask her during the upcoming confirmation hearings for Chair of the FED?

    http://subprimeregulations.blogspot.com/2013/11/here-is-question-for-janet-yellen.html

  • Paul Marks

    Given what Plato and Aristotle taught about Political Economy (yes Aristotle and Plato were very different, but the legacy of either one is not good from the point of view of economics) it is just as well that the internet is not like their "schools".

    As for using one's own name – I agree.

    • Kurt Schuler

      Given that we owe Western civilization more to them than to anyone else, I think we can forgive them if they did not know roughly 2500 years ago all that we know today.

  • dcarroll001

    I'll drink to that! Note that some bars are better than others. However, blogs are still filtered opinions, as writers have a reputation to protect. The comments can be a little too crazy to wade through sometimes, though there definitely can be diamonds in the rough.

    Dan

  • http://vikingvista.blogspot.com vikingvista

    "I heavily discount pseudonymous comments because failing to use one’s real name in this context indicates a lack of intellectual courage."

    You're not the first distinguished blogger to express that annoyance. At least one of your blogging colleagues has as well. So have other fine bloggers. And it always mystifies me.

    I just can't understand why it would even occur to you to care. Do you find it worthwhile to investigate the veracity of plausible but unfamiliar names? Do you really think more words of drivel are posted by implausible than plausible names? Is there some imaginable identity that could make a factually incorrect or illogical statement true? Would comments sections be so much better if all the bylines of the most annoying trolls seemed to be real names? If I posted under my real name (which I'm almost sure you've never encountered) would that really make this comment more interesting (or at all interesting, for that matter)?

    You being someone of influence (as one influenced by you, I assure you that you are), and as a humanitarian (or not, it doesn't matter), I would think your advice to commenters here and everywhere would be to carefully maintain anonymity on all Internet posts, unless there is a sufficient advantage not to. At least, that will be my advice to my son. Since having a stranger reveal to you her completely unfamiliar name seems to contribute nothing to the usefulness of any argument or question, doing so is not so much an act of courage, as gratuitously bad judgement.

    I can understand why you might want to restrict commenting to a small group of vetted commenters. I can also understand why you might think that it could further your interests in unexpected ways to leave it open to engage the hoi polloi. I just don't know why you'd care what names the hoi polloi go by.

    But then, I'm the kind of person who tends without regret to forget a name before the handshake is over–whether or not we've shared a mere introduction, or a night of argument and a gallon of beer.

    As you've explained, there is a good chance you don't have time for this comment (both anonymous and unrelated to banking). But maybe one of those expressing agreement with you has the time to demystify this not uncommon annoyance.

    • http://www.subprimeregulations.blogspot.com/ Per Kurowski

      I just know that more than a decade ago I decided I would write everything under my name, so that I would not have to ask myself… now who wrote this?

      But I do not really care much about whether someone is writing anonymously or not… I mean that’s his loss, not mine.

    • Kurt Schuler

      It matters because whether you are Alan Greenspan or just a college freshman beginning your study of economics, you have a background that makes you more likely to be authoritative on some matter than on others. If you are Alan Greenspan writing under your own name about Ayn Rand's ideas on money, I will pay close attention to what you write. If you are Alan Greenspan writing as Vikingvista, my impulse will be to dismiss you as another pseudonymous Internet blowhard.

      • http://vikingvista.blogspot.com vikingvista

        That is surely a lofty goal for a blog, but then your annoyance isn't with pseudonyms. It is with the kind of people who are posting.

        And it is a little unfair to them (us). I'm sure many economics students and interested masses who come here don't do it because they want to annoy you. They do so because your work interests them, and there really is nowhere else to go to discuss these topics. Since there is no indication that they are not wanted here, I don't see how they could know. A short message above the comment box that reads, "No economics students, please" or "Economics PhDs only" or "No blowhards" (this one in particular would've deterred me from the very beginning) or whatever is appropriate to the forum you really want, might go further than you imagine. Or perhaps an invitation only forum would make the most sense.

        My point is that suggesting people post their true identities on the Internet is not only very bad advice, but wouldn't do anything to create the elite forum that you want.

        Having taken the opportunity to champion Internet anonymity, and now that your wishes are known, I'll respectfully relegate myself to lurker.

        • Kurt Schuler

          You misunderstand me. You are welcome to keep writing here. All I am saying is that I automatically discount by about 50% the views of anybody who is unwilling to accept the accountability that comes with giving his real name. If you are an unemployed loner writing from your parents' basement, offering knowledgeable comments under your real name is a way of building your reputation; you'll become known as that thoughtful unemployed loner writing from his parents' basement.

          • http://vikingvista.blogspot.com vikingvista

            "You are welcome to keep writing here."

            Hopefully you won't regret saying that.

            As I look around, I still don't understand why my mother's basement would possibly interest you. Nor do I understand what difference it could possibly make to you if I posted my real name–or how you would even know it is my real name. For all you know "Vikingvista" is on my birth certificate.

            I do know that my advice to my young son will go something like this:

            "Vikingvista, Jr., your real name on the Internet is for prospective employers, government authorities, litigators, political opponents, future dates, and stalkers. Since you can always confide your pseudonym to a trusted friend, when someone on the Internet asks for your real identity, you should ask yourself to which of the above he belongs.

            P.S. We can move out grandma's basement just as soon as I can get myself off the Internet."

  • Paul Marks

    Not just a matter of Plato and Aristotle not knowing "what we know today" Kurt – they actively attacked people in their own time who had a better understanding of important principles.

    Remember how Plato opens (or near opens) what we call the "Republic" – he opens by ATTACKING the traditional view of Justice (respecting the property of others and repaying debts) of ancient Greek thinkers. And he attacks it with absurd arguments such as if you borrowed an axe from someone and they went mad (wanting to use it to kill people randomly) would you give the axe back to them at the agreed time. This "foundation of Western political philosophy" is full of trickery (and it is trickery – for it is not a refutation of the non aggression principle to refuse to help someone break it) of this sort.

    The idea states described in what we call "The Republic" and "The Laws" are not just inferior to "what we have today" they are inferior to what the Greeks already had – in real states such as Athens, Corinth and Argos. These works of Plato represent DECAY – not progress.

    As for Aristotle – his attack upon Lycrophon is famous, famous and WRONG. For the idea that the state is there to make people "just and good" (not just to protect the persons and possessions of people) is both wrong and highly dangerous.

    And on economics he attacks the defenders of both investment and trade (thus, in a back handed way, admitting that investment and trade had defenders) – pushing the fallacies that collecting interest on a loan is somehow evil, and even that all trade is ether of equal values or if to the advantage of one party automatically to the disadvantage of the other.

    I do not think that the West should go overboard in admiration for those who attacked the very idea of limited government, and also attacked the usefulness of investment and trade.

    Indeed "argument from authority" is one of the classic errors of thought, leading to (to bring things more up to date) people holding that Irving Fisher was right and Frank Fetter was wrong – because Fisher is more cited than Fetter is.

    Even though, in reality – it was Frank Fetter who was oorrect and Irving Fisher was wrong.

    Full disclosure – my old friend Antony Flew (dead now) opened my eyes to the dark side of Plato and Aristotle many years ago.

    I do not want to give the impression that I thought this all up myself.

    • Kurt Schuler

      Aristotle is expressing his own views. Plato wrote in dialogue form, so it is important to keep in mind that the characters are different from the writer, otherwise it is like saying that King Lear or Othello expresses Shakespeare's views. Usually, though, it seems that from whatever we can divine about Plato's views, Socrates is usually the character closest to them. As one who has read extensively in Plato and Aristotle, I can confidently say that their errors are often more productive than the correct ideas of lesser minds.

  • Gonzalo R. Moya V.

    Vikingvista has a point in that there exist commenters at Free Banking who use their real names that make poorer comments than others who do so anonymously (honestly, and not to make him feel bad, the name of Mike Sproul comes to my mind, who has defended and expounded "Real bills doctrine" at this blog consistently and vigoroustly, although to no avail).
    More importantly, nicknames in the internet afte a while become "the" real names of those users. For instance, Vinkingvista has commented here before at previous posts and through his comments he has managed to create a virtual persona, with a standing of opinion that others can identify and that is expected to be built upon with his additional comments. Say he would want to begin commenting with his own true name here, he would have to start building his virtual character from scratch.
    Even if he states that he is the same person as his nickname, some may miss the comment where he establishes the connection, so to be safe he would have to do it every time he comments again, which would be impractical compared to just continue using his nickname.

  • Paul Marks

    Kurt Schuler – you have just (unintentionally?) undermined your own argument.

    What Alan Greenspan writes (about Ayn Rand or generally) is terrible – it is nonsense.

    What Vikingvista writes is not terrible – it is not nonsense.

    So the argument that an "authority" (such as Alan Greenspan) will be more careful about what they write, falls.

    You do not like Vikingvista – but if there has to be a Federal Reserve (and I agree with you both – there should not be) who would your rather have as Fed Chairman.

    Credit Bubble Alan Greenspan (whose answer to every problem from the 1980s onwards was to create more money – from nothing) or Vikingvista?

    The honest reply is "vikingvista".

  • Paul Marks

    I can not read Greek – but I find the argument of Allan Bloom that Plato did not really mean what he seems to mean, unconvincing. And it is often the "goodies" (for it is obvious who Plato wishes us to have sympathy with in a discussion) who say the worst things.

    As for Aristotle – we do not actually have most of the writings for which he was famous (what Cicero called the golden stream of speech).

    What we do have often reads like student lecture notes (the Politics is a classic example of that), so it is hard to be sure that Aristotle meant what is attributed to him. But we have what we have – and we have to base our judgements on what we have (unless someone turns up something – perhaps in the deserts of Egypt).

    By the way – in most of the little "tests to see which philosopher you agree with most" I come out as closest to Aristotle. So I do not have a bias against him. The three great principles (the objective nature of the physical universe, the objective and universal nature of right and wrong [good and evil] and the ability of a human BEING to choose between good and evil in their conduct) are Aristotelian.

    I have also learned a lot from Plato – for example his description of how democracies turn into tyrannies (by a process of smooth talking political leaders promising the poor the goods of the rich) is clearly true.

    But their dark side (dark even by the standards of the time – for example Aristotle's attacks on peaceful trade and his celebration of the conquest of the "inferior" by the "superior") must also be noted.

    These opinions were not uncontested at the time – and those who contested them were correct, and the "authorities" incorrect.

  • Mike Sproul

    Kurt:

    You got me to thinking about working paper archives like REPEC, which are a great compromise between academic journals on the one hand and blog comments on the other. So here's my Blog Comment that could Change the World: REPEC should open a comment section for each paper that it posts, and commenters should have to use their real names. Academic journals should do the same.

  • Mike Sproul

    Gonzalo:

    Well, yes, of course I feel bad when someone insults my work, but keep in mind that you don't see the emails I get from people who have taken an interest in the real bills doctrine because of my work. Of course my progress looks agonizingly slow, but that's the way with new ideas. For example, it took 150 years for Copernicus' ideas about planetary orbits to be accepted. It's an experience I'd recommend to anyone. Try introducing a new idea sometime. 90% of people will ignore you. Of the 10% who pay attention, 90% will throw rocks. Of the 10% who who don't throw rocks, 90% will lose interest after a few days. So we end up with 1 convert out of 1000 attempts.

  • Kurt Schuler

    (Replying here since I can't attach a comment to Vikingvista above). To repeat, Vikingvista, the issue is accountability. If you lack the tiny amount of intellectual courage necessary to use your real name, you can change pseudonyms, write under multiple pseudonyms on the same post, or engage in other behaviors that are evasive and cheapen debate. I will give my last words on the subject in this thread to the Cowardly Lion from the Wizard of Oz movie: "But I could show my prowess / Be a lion, not a mowess / If I only had the nerve."

    • http://vikingvista.blogspot.com vikingvista

      "If you lack the tiny amount of intellectual courage necessary to use your real name"

      I just don't know what that means. It reminds me of those who discounted Snowden because he didn't have the courage to stay in the US and get arrested. "Courage", it seems to me, is entirely the wrong word here.

      Cheapening debate is another matter. It has nothing to do with what a person calls herself. Cheap debate is completely a function of what a person posts, irrespective of who the person is. Cheap debaters, I have found, don't change just because their identities are known. The person is the same person regardless of the ASCII characters in her moniker, and most couldn't escape that prison if they tried.

      For instance, although I'm sure I've seen some of it in passing, I have no idea from where Kurt Schuler matriculated, where he teaches, what honors he's been awarded, or anything at all about his personal life. And no disrespect, but I don't care. All I know, is that every time I read something with the characters "Kurt Schuler" under them, I learn something irresistibly compelling, and I desire more. So whether the byline is "Kurt Schuler" or "Shirt Cooler", couldn't possibly matter to me.

      And while I would not be surprised that someone who can produce what Kurt Schuler produces must have left an unusually accomplished past, the number of people like Kurt Schuler who are worth my time, is a drop in the ocean compared to the total number of distinguished experts in the world.

      But who knows. Maybe I will grow out of purely selfish intellectual pursuits, and decide to try to change my immediate world by practical means. Then instead of reiterating those arguments of Kurt Schuler that persuaded me, I may make use of my listener's weakness for appeals to authority and deliver the coup de grace of my persuasive efforts by concluding to him, "…so says Kurt Schuler, distinguished scholar".

      Beginning to regret the welcome mat yet?

      Thank for your time,
      vv

  • Gonzalo R. Moya V.

    Once again, Vikingvista has a point when he says that "Cheap debaters […] don't change just because their identities are known". I see that so far two debates sprang from this post: [1] the one with Vikingvista regargding posting anonymously (the main one), and [2] the one with Paul Marks regarding Ancient Greek philosophers and their poor contributions to Economics (more interesting). Since I deem both to be over now, allow me to start a third one from Mr. Sproul´s reply, who seems to insist with his "Real Bills Doctrine" (RBD) after all:
    First, I read what JP Konning posted on 06/14/13 at his own blog ("Moneyness") on this subject, where he listed the different versions of this theory, acknowledging Mr. Sproul´s as the latest one and even including a link to his website for further information. Allow me to put that URL and, to be fair with Mr. Sproul, recommend to read even the comments section below: http://jpkoning.blogspot.com/2013/06/real-or-unreal-sorting-out-various-real.html
    Second, there is also a Wikipedia article on the subject which -at least starting on the section whose neutrality is disputed- seems to have been written by him. However, this article hits the key point when saying that "This theory is in opposition to the Quantity Theory of Money proposed by Irving Fisher which states that money supply has a direct, positive relationship with the price level."

    • Mike Sproul

      Gonzalo:

      I wrote the wikipedia article on the RBD. It was originally a paper (available on REPEC) titled "A Reply to Mr. Timberlake". One of the few sentences I didn't write was the one you just quoted.

  • Gonzalo R. Moya V.

    I guessed Mr. Sproul that you did not write the part that says "Since 1945, it has been regarded as ´thoroughly discredited´ among mainstream economists" either, nor the part that says "Alternative theories: Quantity theory of money, the mainstream economic theory" (in "See also"). Nevertheless, I was looking at your "Informative example", and it is very misleading: although the farmer borrows money with the promise to pay from the money he will collect by selling his future production, banks do not register as collateral the future production of the farmer (which is intangible in the present) but with the farm itself (which is indeed tangible now and throughout the lending process). Remember that the purpose of collaterals is not to back the money itself but the loan only in the case of default (in this case, if the farmer for whaterver reason does not collect the money he expected from the sale). Keep in mind that the value of money (fiat or not) is always its purchasing power, which is the reciprocal of the price level, so fiat money does exist and does have value.

  • Mike Sproul

    Gonzalo:

    I've entered my replies in your text below.

    "Since 1945, it has been regarded as ´thoroughly discredited´ among mainstream economists" either, nor the part that says "Alternative theories: Quantity theory of money, the mainstream economic theory" (in "See also").

    [I wrote the "Since 1945" part, but not the "Alternative" part.

    Nevertheless, I was looking at your "Informative example", and it is very misleading: although the farmer borrows money with the promise to pay from the money he will collect by selling his future production, banks do not register as collateral the future production of the farmer (which is intangible in the present) but with the farm itself (which is indeed tangible now and throughout the lending process).

    [It's mainly RBD critics who have focused on 'future production'. RBD advocates say that the farmer's IOU is backed by the farmer's ASSETS, which includes his land as well as his future production. The backing version of the RBD says that it wouldn't matter if the money was issued to a gambler who wanted to use it for a trip to Las Vegas. As long as the gambler's house is offered as collateral, the new money is adequately backed by the house.]

    Remember that the purpose of collaterals is not to back the money itself but the loan only in the case of default (in this case, if the farmer for whaterver reason does not collect the money he expected from the sale).

    [The money is the loan and the loan is the money. If a farmer asks for a loan of $100, the banker prints up 100 new dollars and lends them to him. It makes no difference if you think of the farmer's collateral as backing the loan or as backing the money.]

    Keep in mind that the value of money (fiat or not) is always its purchasing power, which is the reciprocal of the price level, so fiat money does exist and does have value.

    [That's the very point in dispute, besides being circular reasoning.]

    • Gonzalo R. Moya V.

      I agree that the farmer´s future production is like an asset to him and, although it makes him more credit-worthy, it cannot be accepted by a bank as collateral, as banks need something tangible and liquid that can appropiated and sold to get back the loan funds in case the farmer defaults. However, it is not true that collateral is the main determinant for a credit to be approved: it is the probability of default, as banks don´t want to go through the hassle of appropiating and selling your collateral in order to get back the loan funds, they want to get them "smoothly" through cash payments directly. Therefore, they are not indifferent between the gambler and the farmer.
      Regarding the banker printing money, I see that you were assuming a free banking system while I was assuming one with a central bank and with fractional reserves, where the loan funds are not printed but come from depositors´ savings.

      • Mike Sproul

        Gonzalo:

        Other things equal, the bank would prefer to lend to the farmer over the gambler. But if the gambler is rich and offers plenty of collateral, while the farmer is poor and has little collateral, it could easily go the other way. All any rational banker cares about is that he will be repaid with interest. Collateral and future earnings are both just means to this end.

        It makes no difference whether banks lend newly-printed notes, or whether they only lend out of depositors' savings. If banks habitually keep 20% reserves, and if banks only lend depositors' savings, then an initial deposit of 1000 oz of silver (in the form of dollar coins weighing 1 oz each) into the banking system will be multiplied through the loan expansion process until the banks have issued $5000 of notes, backed by assets totaling $5000 (=1000 in coin and 4000 in loans).

        On the other hand, if those same banks got the same initial deposit of $1000 in coin, they could, without releasing a single coin, issue $5000 of new notes and lend them. The next day, the banking system will have issued $5000 of notes, backed by assets totaling $5000 (=1000 in coin and 4000 in loans). Exactly the same as if the banks had only lent depositors' savings.

  • Paul Marks

    "It makes no difference whether banks lend out savings or freshly printed notes".

    Yes it does – it makes all the difference.

    And it is not "freshly printed notes" – it is a CREDIT BUBBLE (the "freshly printed notes" come later when government desperately tries to bailout the credit bubble banks).

    If someone can not see the difference (the vital difference) between lending out REAL SAVINGS and lending out a CREDIT BUBBLE (or government notes), then things are bad – really bad.

  • Gonzalo R. Moya V.

    Yes Mr. Sproul, it is harder for me (and others) to convince you out from your backing theory if we don´t even have the same subject of conversation. Seems like you want to talk about banking and monetary theory and finance all at once in order to support your thesis. I read your guest post and all the comments that sprang from it. There were very smart counter-arguments from Rob Rawlings, Lawrence Kramer (ex Remarkl thanks to this post apparently), Jim M47 and Justin Merrill, but there was a short, low-profile one by MichaelIM who hit the keypoint in my opinion: the accounting of a central bank.
    Central banks are non-profit institutions. They issue currency not for a gain but to inject liquidity (i.e. medium of exchange) into the economy. Currency goes in the liability side of the balance sheet as it is exchanged by certain non-liquid securities in possesion of the public, which go into the asset side of the balance sheet. The Peruvian central bank for instance can only hold up to 5% of its currency "backed" by bonds of its own government, as for all other countries who cannot export their inflation, funding your own treasury like the Fed does is clearly inflationary. Central banks hold most of their "assets" in the form of foreign currency and other countries´ tresury bonds, which are jointly called "net international reserves". To "sterilize" the effect on the exchange rate, they buy "Central banks´s Certificates of Deposit", which are bond issued by themselves, not because they needed money which they can always print, but to have a tool for monetary policy and a way to match the book-keeping.
    This will be the simplest explanation you will get of how foreign (for you) central banks work, it comes from someone who works in banking supervision (not at my central bank, as that function is delegated to a separate institution in other countries), and I hope that it illustrates what you called "the very point in dispute": the value of money is the amount of goods you can get in exchange for it, which is the inverse of the GDP deflator. Whether that money can be redeemed in addition at the central bank for some precious metal or the composition of the asset side in the central bank´s balance sheet can only influece that through the demand for money, which is incorporated in the Quantity Theory in the "V" variable of its equation.

  • Paul Marks

    Whilst money is something that can be created out of nothing (especially by "non profit" entities out for the "public good") the financial system will remain a mess.

    As for a commodity (such as gold or silver) being "backing" for money – this is a error (an error of the first magnitude). Ether the commodity is the money or it is not, talk of "backing" or a "standard" just opens the door to vast abuse – as with the antics of Benjamin Strong of the New York Federal Reserve in the late 1920s.

    As for lending out money to poor credit risks (such as the "poor farmer"). The statists (the inflationists) have it both ways.

    First they demand that poor credit risks should be lent money (which they often should NOT be) then, when the poor credit risks default on the loans, they scream that their farms (or whatever) should not be taken away.

    Sorry – but creating credit from nothing (a demented act in itself) does NOT mean that the credit should then be lent out to people unlikely to pay back their loans.

  • Mike Sproul

    Gonzalo:

    Suppose the Peruvian central bank holds all its assets in the form of US government bonds. Say it has issued 100 nuevo sols (NS) in exchange for a US bond worth $100. I don't see how anyone could deny that 1 NS=$1. If the bank prints another 40 NS and buys $40 of US bonds, then you have $140 of backing for 140 NS, and the BT says that 1 NS=$1. I suppose you would say that since the quantity of NS rose by 40% relative to some fixed money demand, then the NS would lose 40% of its value. That would sure be a sweet deal for the central bank, since it could use $100 of its bonds to buy back all the 140 NS and still have a profit of $40. Then re-issue more NS, and keep doing the same thing over and over.

    Or, go back to $100 bonds backing 100 NS. Say the bank president spends $40 of bonds on a new ferrari for his girlfriend. I'd say that the NS will lose 40% of its value, but I suppose you'd say that the NS will hold its value, since their quantity has not changed relative to some fixed money demand. One wonders why all central banks haven't spent all their assets on ferraris by now.

  • Gonzalo R. Moya V.

    *Sigh* You just keep throwing up the same example over and over again, without reading carefully what others try to explain you before their patience runs out. The current exchange rate PEN/USD is 2.80 not because the BCRP (Peru´s Central Bank) has issued 2.8 soles for every dollar that it has as an asset. Remember when I said the value of money was 1/P? Well, if all goods were perfectly tradable, the nominal exchange rate would be E=P*/P, which comes from (1/P)/(1/P*), where P and P* are the local and foreign price level, respecetively, so that you are just comparing the purchasing power of both currencies. (Actually, the term "purchasing power parity", which you should have heard of, only states that the real exchange rate should be unitary by tautology R=E*P/P*=1). Steady deviations from E=P*/P come from the obvious fact that not all goods are (perfectly) tradable, and the added noise comes from demand-supply interactions at the forex market. Your "backing" theory is irrelevant. This is my last comment on this subject, I´m done, sorry.