Where does Steem money come from? (response to @georgedonnelly)
Thanks a lot @georgedonnelly, good questions. However, I get the feeling that the video does not respond to the main question being asked. Where does Steem money come from?
"It comes from nowhere" isn't an answer. What people want to know is not how Steem money is created (out of the blue like all currencies, agreed) but where its value derives from. You did touch upon that question but not deeply enough I think.
For now, Steem money is valued because you can trade it back to bitcoins, which you can then trade back to national currencies. If that conversion were not possible, the value of Steem would be close to zero. You could reward authors for their posts and you could make micro-payments, but none of it would matter because you could not use your Steem money outside of the Steemit ecosystem.
So where does the value of Steem money come from? It comes from two expectations. The first is a short-term expectation: I can trade my Steem money into bitcoins today. The second is a long-term expectation: I believe that I will still be able to trade my Steem money into bitcoins tomorrow. Both expectations are important for the system to grow.
On which assumption are these expectations based? On the assumption that the amount of bitcoins feeding the system (i.e. people buying Steem money) will remain larger than the amount of bitcoins leaving the system (i.e. people trading their Steem money into bitcoins). As with any Ponzi scheme, that assumption remains valid as long as people endorse it but the system collapses as soon as they stop.
I'm still trying to get my head around that question myself but here's my intuitive conclusion. The only way to circumvent this assumption is to make Steem money useful by itself (which you somehow also mentioned), but it cannot happen as long as you cannot use the cryptocurrency in your daily life (to buy food, pay your rent, and so on). Bitcoin might reach that status because its adoption is motivated by that very reason (i.e. people want an alternative currency). However, the interest in Steem money for now only derives from the ecosystem (which allows to cash out), not from the crypto itself. So the ecosystem needs to deliver on its promise (i.e. rewarding authors and curators with tradable Steem money) during the whole period needed before massive adoption of Steem money can occur. And the 200 billion dollar question is therefore whether the balance between bitcoin inflows and ouflows can remain positive during that whole period.
There are some great insights behind the Steemit ecosystem but that very question needs to be clarified. I'd be interested in reading in-depth analyses on this point. If you have any posts to recommend, please do send them my way. Thanks!
And thanks a lot for the podcast, looking forward to listening to new ones.
Cheers,
Igor
Two final points: (i) the FED does not create money, commercial banks do when they lend money (huge difference); and (ii) one of the key reasons why the bitcoin system requires transaction fees is security - without any transaction fee, attacks on the blockchain would be possible at no cost (fees do suck but so far, there isn't any safe and sustainable alternative).
It's not true that Central Banks like the Fed do not create money. Through the process known as quantitative easing (QE), a Central Bank can purchase government bonds (i.e. public debt) with newly created money, and they have done so extensively in the past decade. Central Banks around the world also create new money to purchase corporate debt, equity shares (stock), ETFs, foreign currencies, gold, etc. Recent history has greatly expanded the tools that Central Banks are willing to utilize. Further experiments, such as "helicopter money" may be in our future.
True, you're right to stress that central banks can create money through QE. However, this is not the usual way money is created in most countries. I don't have the exact figures but the vast majority of the money existing as bank deposits (in the UK, bank deposits represent 97% of the money in circulation) is created by commercial banks when providing loans.
In brief, the monetary base increases (money is created) when loans are made and decreases (money is destroyed) when these loans are paid back. For more details, you can have a look at this paper on the process of money creation - published by the Bank of England.
If only the banking and monetary system would limit itself to the normal practices of fractional reserve lending... As it is, what the Fed refers to as non-traditional "tools" has caused its balance sheet to balloon from $800B to $4T since 2008. At present most of this currency is in hibernation as excess reserves in zombie banks that are being kept on life support with ZIRP and NIRP (zero/negative interest rate policies). It has also inflated asset bubbles in the markets for bonds and stocks. The currency inflation hasn't yet showed up in rising prices for consumer goods and commodities, but this could end badly. As you correctly point out, the only way to burn the currency is to retire the debt, but doing so is deflationary and kills growth. The only way out for central banks is inflation, which allows current debts to be extinguished with worthless currency.
You're right, it appears that inflation is the only way out central banks have. That's where alternative currencies could play a major role and where the different components of the story would start coming together.
On one side, we are going to see progressive drops in the value of major currencies. On the other side, we are going to see an increasing number of alternative currencies gaining both in value and reliability. So the use of non-traditional monetary interventions, by decreasing the value of standard currencies, could lead to increased reliance on alternative currencies and ultimately to the obsolescence of credit-based currencies.
That would be a smooth and natural transition towards what economists from different streams of thought have been calling for since the early 1900s, from Irving Fisher (separation of the monetary and credit functions of the banking system) to Friedrich Hayek (denationalized and competing currencies). A working paper published by the IMF a few years ago shows that some of these ideas are receiving interest in institutional arenas, which is an encouraging start.
I am still looking for a rigorous analysis of the Steemit monetary system and its sustainability. Do you know of any thread or anyone who has delved into the details and would be able to shed some light on the apparent Ponzi nature of the system? Thanks a lot!
@andrarchy has some ideas and did some interesting videos. The system is still being tweaked, so I would call it still experimental. There are 3 currencies in the system roughly analogous to debt (liquid STEEM), equity (STEEM POWER) and a derivative product with a loose peg to USD. To me, the most interesting observation so far is that even if the theory is sound, the system needs to explicitly account for the psychological implications of inflation rate. I believe that's what the hard fork revisions are addressing.