Re: Inflation-index bonds and private e-currency

["E. Allen Smith" <EALLENSMITH@ocelot.Rutgers.EDU>]

From:	IN%"rfiero@pophost.com"  "Richard Fiero"  1-OCT-1996 04:50:07.73

>E. Allen Smith wrote:
>> 	One of the attractions of privately-produced currencies is as a
>> hedge against inflation; this development may be a competitor to this
>> idea. On the other hand, this setup does have an unavailability in _time_
>> of the money (more so than other, equal-security bonds of the same duration),
>> which may offset its greater spendability.

>I don't get it. Why is this bond not saleable like any other? What 
>"privately-produced currencies" are a hedge against inflation? If 
>this bond is saleable like any other, why is the money unavailable? 
>What means "greater spendability?" Is this assumed to be yet another 
>government plot because it competes with other offerings and reduces 
>the cost of borrowing?

	The bond in question is salable... but its value is only
guaranteed (to the extent that any government promise is guaranteed) when it
comes due. Money supplies can be continuously adjusted by a private issue to
keep a privately-produced currency's value stable.
	Privately-produced currencies, with a few (unfortunately minor)
exceptions, are currently more of a free market economist idea than a reality;
current governments are quite close on keeping their monetary powers (witness
the protests in Europe against going the opposite way, to a common currency;
also witness governmental attempts at keeping the free market from determining
exchange rates). It is possible that private digital currencies will solve
this problem, since they are much cheaper to produce than paper money is to
print and can be traded privately much easier. There are likely to still be
some legal problems with them, although A. selecting the proper country to
base an issuer out of and B. not actually making avaliable through the issuer
the reverse transaction - privately produced money to governmental money -
only transactions for governmental money to privately produced money and
privately produced money for services and/or goods may do the trick.
	Greater spendability refers to that when this bond is converted to
government-backed dollars, most businesses will currently accept such dollars.
This is unlikely to be the case for the first few years for a private
currency, although an increased ease of exchange of a digital (as opposed to
governmental paper) currency may make up for this difficulty.
	I doubt that most of the governmental types involved in making this
decision know about privately produced currencies... but some may, and may
have encouraged central bankers et al (and those who oppose Greenspan for
his (quite admirable) opposition to inflation, like numerous politicians) to
encourage this idea; assuming complete innocence of a particular motive on
the part of any large organization is generally about as ignorant (and often
stupid) as assuming complete guilt. Moreover, government competition with
the private sector is rarely beneficial; in this particular area, I'd point
out that it isn't reducing the cost of borrowing, it's increasing it - when
lenders can lend to the government, they're _not_ lending to private
businesses and others who can make far better use of the money. This factor,
in a large part, is why most economists are in favor of a reduction in the
government deficit.
	-Allen

P.S. Sorry about the lateness of this reply, but I'm just getting around to
some of my earlier mail.