From: Mixmaster <mixmaster@remail.obscura.com>
Date: Tue, 9 Dec 1997 08:37:18 +0800
To: cypherpunks@cyberpass.net
Subject: Message
Message-ID: <199712090023.QAA18676@sirius.infonex.com>
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Steve Schear wrote:
>Nerthus wrote:
>>Might be a bit of a stretch, but I think this is because money today is 
>>inherently a liability, that is a debt that someone, somewhere has promised 
>>to pay back.
>
>You've got this all backwards.  The bearer certificates (paper money) issued 
>by governments is an interest-free loan by those holding the paper to the 
>issuer.

This is true, but it is only part of the picture.  The paper currency issuer 
(the central bank) is enjoying seigniorage, that is -- in the case of the US 
- -- the Federal Reserve is collecting revenue from the interest earned on the 
outstanding paper dollars.  This earned interest is given to the Treasury 
and accounted for as revenue for the federal government.

However, this tells us nothing about the currency's real worth.  We need to 
look deeper to find the source of the paper currency's value.  When the US 
government wants to create money, it issues debt instruments such as T-Bills 
to the Fed or to a commercial bank.  The bank then credits the government's 
deposit (checking) account for the face value of the T-Bill.  The bank 
believes it will collect this money back plus interest in a certain amount 
of time.  The government can then ask the Fed to issue some paper cash in 
exchange for the deposit currency (new paper is then created).    

The T-Bill is nothing but a promise by the federal government to pay back a 
debt.  The government has taken a loan from a bank and promises to pay it 
back in 1,5,10 or 30 years with interest.  The money to pay it back comes 
directly from the tax revenues the government collects from its citizens.  
Thus paper currency is based on the debt saddled upon future generations of 
citizens/taxpayers.

Interestingly, this is not much different than John Q. Public getting cash 
advances on his credits cards for a few years and then wondering why he is 
$25k in the hole and growing at 18% per annum.  Many people, especially 
politicians, always go for the short term gain, regardless of the long term 
consequences.  Debt-based currency (primarily a 20th century phenomenon) has 
ushered in a new era of political and financial irresponsibility.

Eventually the debts must either be reneged on or paid off.  When that time 
finally comes, neither option will paint a pretty picture.

Nerthus

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