OK, fair enough.

The thing is, legal tender laws are in place precisely because paper with numbers printed on it doesn't have any inherent, or "intrinsic" value to speak of. Governments need the legal tender laws precisely *because* the paper has no intrinsic value at all. Without the force (literally) of law, nobody in their right mind would accept a piece of paper with numbers on it for an actual tangible thing. One thing nice about commodity based monies is that the ARE themselves, actual tangible things of usefulness and value. This is what I mean by "intrinsic" value. Another way to look at it is this: without laws (which can happen during war or civil collapse), does the paper have any value? It doesn't, and history shows this repeatedly. But the gold or silver coin does, and a gallon of diesel fuel or a bag of rice does. This is an enormous difference.

So when you say that the "intrinsic value" of paper money comes from its legal status, you are really completely missing the point. There is no intrinsic value, there is only compulsory legal value. It does not become intrinsically valuable just because the government "says so". Its value is strictly due to the willingness of other people to accept that paper for goods. The real wealth is in goods, not money. Just like a person is not a slave just because the government says so, the piece of paper is still just a piece of paper, and eventually that cold, hard reality becomes self-evident.

Now, that wouldn't matter all that much in times of peace and responsible fiscal governance, but neither of those conditions apply to US dollars. The kind of reckless money printing going on right now is exactly the kind of thing that starts the death spiral of a currency collapse.

Inflationary money printing (distinct from the consequent rises in prices) is essentially counterfeiting. The recipients of the newly-printed money get to go buy things at today's prices, without having actually done anything valuable to get that money. That literally robs society of the things that that ill-gotten money purchases. Ultimately, that currency makes its way through the rest of the economy and WILL result in higher prices - eventually. It has, mostly in the stock and bond markets at the moment, which makes sense because the beneficiaries of this counterfeit money are large banks to use it to buy stocks & bonds (often to buy T-bills and then use that deposit to inflate even more by lending out -- creating -- about 10x more money in credit, pocketing the rate difference). This is just horribly dishonest, I would say criminal, and immensely destructive to people who have actually saved money.

Making matters worse, the same idiots like Krugman and statists everywhere will try to "fix" the inflation problem (when it reaches consumer goods) by imposing price controls. This will happen in the US, and evidence of this is the price controls imposed during hurricane Sandy. The combination of legal tender laws (forcing people to accept pieces of paper for actual goods) combined with government-set low prices causes "shortages". In reality, there are no actual shortages, but goods stay in warehouses rather than being shipped to stores and sold at a loss.

All of this is before us.

You seem very willing to just blindly accept the "party line" on all of this. This 2% inflation target is one example of your credulity. Why is it OK to steal 2% of people's savings every year? That's literally what inflation is, when you understand how it is created. Why not 10%? Perhaps the most booming industry in recent memory is computers, which is characterized by extreme *deflation*, yet you never question the "wisdom" of this nonsense.

The reality is that central governments like inflation because it allows them to finance government expenditures without raising taxes. They just don't want to admit it. As Henry Ford said, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." What, exactly, do you think he was talking about?

Isn't it funny, then, that people around the world who are under no legal obligation to follow U.S. legal tender laws come up with pretty much the same valuation of the dollar that we do domestically?

My argument is very simple. A government creates the "thing" called money, backed by the full faith and credit of that government. Peoples' perception of the stability and credit-worthiness of that government factor into everyone's valuation of that money, but the value at the time it's created is easily observed. Of course that value can change, but so too can the value of gold after it's mined, so I don't see any practical difference in how "intrinsic" this value is to the paper money vs. gold. Legal tender laws do ensure that the fiat money is privileged above other media of exchange, but if it were truly just those laws that were propping up the value of the dollar, then nobody outside the U.S. would want to accept dollars to settle debts.

On inflation targeting, as I said upthread, it's not like our central bank's preference for a small but nonzero amount of inflation is a secret. Just as we expect drivers to be able to follow the rules of the road, savers need to factor inflation expectations into their savings plans.

Why do central banks tend to aim for low but positive inflation? Because the mainstream economic consensus is that deflation is the worse of two evils. You don't want too much of either, because both can spiral out of control, but if you have to have a little of one (since you can never aim for stasis with 100% accuracy) most countries have decided they'd rather have a little inflation. Yes, you slowly erode some savings, but you retain the ability to lower interest rates (which obviously can't go below zero) and you don't lose employment the way you do with deflation when everyone begins hoarding money instead of spending it on capital and wages.

But the real question, again, is: why are we talking so much about inflation when it barely makes the list of threats to the US economy right now? Even if actual inflation were higher than what CPI shows, the alternative to inflation today is mass unemployment and crippling austerity. How's that working out in Europe? You can't even blame it on the Euro, because the UK has been tightening its belt with adverse effects, and they have their own currency. Where are the austerity / tight money success stories?

Obviously when the economy is healthy again we take our foot off the accelerator and raise interest rates to soak up excess liquidity, but anyone who wants to moralize about theft from savings accounts needs an answer for what we would do about the mass layoffs and misery that would come with a tightening of monetary policy. They also might try to find better evidence of current high inflation than citing record highs in non-inflation-adjusted stock market indexes and a site that says that a Big Mac meal cost a dollar in 1990.

Back on the original topic of Bitcoins, a couple of links.

The serious: 78 percent of Bitcoin currency stashed under digital mattress, study finds



The whimsical, yet still quite informative: Buttcoin

Bitcoin value fluctuating wildly: http://www.theverge.com/2013/4/10/4209800/bitcoin-price-fluctuates-wildly-after-massive-run-up

Gold value also fluctuating, but not nearly as much as bitcoins: http://www.businessinsider.com/gold-is-getting-slammed-2013-4

But but but I was told there would be no bubbles because FREEDOM.

Currency of the future!

If only there could be some kind of organization that could manage BitCoin to make it a more stable currency. I don't know, something where smart economists have sophisticated models and powerful tools like creating and destroying BitCoin currency on the fly. I wonder if that could ever work.

Indeed, comrade.

BTC is back down to $120, so it looks as if the recovery yesterday may have been a bit of a dead cat bounce.

If only we'd implemented a "market cooldown" in 1929...

= Central Bank. Maybe a technologically advanced central bank, but a Central Bank. Not saying it's good or bad, but just observing.

It seems to me that both TigerJimmy and TonyC have both objectively good points.
Currency value is exactly the value you put on the things currency can buy. Calling it "intrinsic" or not is a debate on words, rather than concepts. And, you may print "$5" on a bill, but its value will be significantly different if with that same $5 you buy a hamburger or ten hamburgers. Value IS by definition subjective. If we're talking about "face value", that is the number you print on bills, that's nothing like the actual, real economic value. As long as we agree on words and definition, there's little to debate here, I think.

At the same time, indeed currency is more efficient and effective than barter in exchanging value among trading parties, and so in allowing a market to exist. That's the primary and possibly the only real reason why currency exist.
Yet, indeed currency >supply< and >value< (versus the goods or services it can buy) can be, and have been, manipulated by governments, and that requires, necessarily, caution and, as much as possible, surveillance and monitoring on behalf of citizens.

I find it absurd to assume Governments have always and will always be fair and honest in dealing with currency.
In the 80s Italian Governments have ALL altered exchange rate to gain international competitiveness without addressing internal efficiency issues, only to pay the bitter price for that choice two decades later when the Euro exchange rate was fixed, practically doubling internally the prices of most goods, and causing so much de facto inflation right at the beginning of the economic recession. Not to mention the huge, unjustified public debt we're still struggling to cope with. Just an example of very poor government decision making in terms of money supply.
Governments may and often will make mistakes, ("mistakes"?) and currency WILL be affected by such mistakes more than goods that do carry objective value. An apple will feed you whether it costs $1 or $100 in the market. This is undeniable and clearly I am with TigerJimmy on this. Gold may not be the answer, though, as it is not an Apple and, itself, it is a quasi-currency, and has a lot of the uncertainty of a currency, albeit probably not AS much, if you look at past data (but who knows). Still, the principle remains: currency by its own nature is will not necessarily preserve its value at desirable levels, and often because of poor economic policies or, even more often, of poor politics. It is wise to keep this in mind.

That does not mean we can address gov'ts misconduct in terms of monetary policy, or edge against fluctuation of money market or currency purchasing power, by just not using currency, or by mistrusting currency per se, as a system.

You will get no argument from me on either of these points, but the choice here isn't between two different policies with different levers, it's a choice between one policy with a set of levers that don't always work the way you want them to, and another policy with an empty control panel, save a label that reads "suck it up and work harder!"

Eliminating the central banking role means that global economic problems become your country's economic problems, whether you like it or not. The Austrians would rather let the Schumpeteresque "work of depressions" take care of everything, but if you step away from the philosophical a bit, what you're actually talking about is letting people suffer and die when you have resources available to help soften the blow. The fact that there may be negative future consequences of cranking up the printing presses does not, to me, provide an acceptable moral justification for standing by and watching while people eat cat food to survive.

With respect to Bitcoins, and to a lesser extent gold, what I think we're seeing in their prices now (which were both driven up by a whole lot of speculative investing) is the old adage that the price takes the stairs up and the elevator down. Gold isn't going to lose 60% or 70% of its value the way Bitcoins did, but I can certainly see it losing a majority of what it picked up over the last five years within the next couple years as people see opportunities in equities and capital investments.