Monday, December 27, 2021

Is money a ponzi?


 Matt Levine entertains the possibility that all money is a ponzi:

"But of course crypto people will happily tell you that fiat currency is the biggest Ponzi scheme of all, and they are not really wrong are they?"

Here is my discussion with some crypto folks on Twitter making that claim.

I disagree. Here is a short (930 words, 3 minutes) blog post explaining why money is not a ponzi.

Aneroid is a small town in Saskatchewan. It has 100 inhabitants. Selma, one of the town's 100 inhabitants, starts a ponzi.

By ponzi, I am referring to a general class of economic phenomena that can only exist if additional people continue to join up. Under these schemes, old investors are paid with new investors' funds. Once the incoming flow of new entrants dries up, the ability to pay out funds to existing participants comes to an end. The scheme ends. This family of economic phenomena includes not only ponzi schemes but also pyramids, chain letters, MLMs, HYIPs, speculative bubbles, and Nakamoto schemes.

Out of the above options, Selma opts to go with a chain letter. She drafts one up on paper and sells a copy to her friends Tom, Sally, and Alice for $10. (I'm replicating the basic design of the notorious 1970s Circle of Gold chain letter). The letter requires the recipient to send $10 to the person at the top of the list, copy the letter (removing the name from the top of the list and writing one's own name at the bottom), and sell it on to three friends for $10.

Selma's chain letter proves to be popular. 99 inhabitants of Aneroid eventually buy a letter, send $10 to the person at the top of the list, and resell it.

But when Jack, the 100th inhabitant, buys a letter and sends $10 to the person at the top, he finds that he can't resell it. Everyone in Aneroid has grown tired of the game. The chain letter stops propagating, the flow of money ceases, and the whole enterprise dies. Jack $10 copy is worthless.

Does money have the same ending as Selma's chain letter?

Enter the Bank of Aneroid. 

The Bank of Aneroid is the town's sole issuer of banknotes. The Bank lends a $10 banknote to Selma secured by a $15 lien on her property. Selma spends the $10 note at Frank's hardware store who spends it at the grocery store etc etc, until it ends up in the hands of Jack. But to his dismay Jack finds that, for whatever reason, no one will accept the $10 note.

Alas, poor Jack. His $10 banknote now seems as worthless as his $10 chain letter.

Lucky for him, it isn't. Unlike a chain letter, Jack can return the $10 note to the original issuer, the Bank of Aneroid, for redemption.

Recall that the Bank of Aneroid owns Selma's $10 property-secured IOU. When Jack walks into the Bank and asks to have the note redeemed, the Bank of Aneroid makes good on its promise by selling Selma's debt in the debt market for $10 worth of gold or central bank money. It then pays this amount to Jack. The Bank of Aneroid then destroys its $10 note.

(Alternatively, the Bank of Aneroid can tell Selma to repay her $10 loan, the proceeds being used to pay Jack. Or the Bank can take the more extreme measure of seizing Selma's property and selling it in order to make good on its promise to redeem Jack's $10 banknote.)

As you can see, what I'm describing is not a ponzi scheme. That is, the Bank of Aneroid's $10 banknote isn't valuable because a new buyer keeps arriving to take it off of the previous owner's hands. It is valuable because the original issuer, the Bank of Aneroid, will always repurchase its note using its resources, i.e. its portfolio of loans.

Careful readers will protest at this point. "C'mon JP, you're talking about redeemable bank money. Of course that's not a ponzi. It's the non-redeemable stuff, fiat money, that's a ponzi!"

But I'd argue that the same principles apply to fiat money. I'm going to define fiat money as a banknote that can't be redeemed on demand by its holder into an underlying instrument, perhaps gold or government money. 

In our example, let's modify the Bank of Aneroid so that it issues fiat banknotes, not redeemable ones. Apart from that, everything remains the same. Now when Jack takes his unwanted $10 banknote back to the Bank of Aneroid for redemption, the bank refuses to convert it into an underlying medium.

Jack's $10 won't be worthless like the $10 chain letter, though.

"Sorry Jack, we can't redeem it," says the bank manager. "Our banknotes are non-convertible fiat notes. But Selma's $10 loan is due next week. To pay us back she's going to need your $10 note. Why don't you talk with her?"

And so Jack walks over to Selma's house and offers to sell her the $10 note. And Selma will buy it since she'll need it to repay her $10 debt to the Bank.

So in the end, Jack's $10 banknote is valuablenot because a ponzi process props it upbut because the bank that originally issued it reaccepts it. The support that a bank offers to its banknotes is more obvious when a banknote is immediately redeemable by its issuing bank at par. But even an non-redeemable fiat banknote has an underlying linkage back to the issuer that helps support its value.

By contrast, a chain letter (or any other ponzi-like instrument) lacks this connection and only has value as long as a new player emerges.  



PS. This note is for Ethereum fans.

Another way to think about the question of fiat money is to bring in some stablecoin analogies. The Bank of Aneroid's non-redeemable fiat notes are equivalent to Rai or MakerDAO's Dai (before Maker introduced the PSM). 

Rai and pre-PSM Dai are fiat monies. Neither are directly redeemable into underlying USDC, Tether, or bank dollars. But this doesn't prevent Rai and Dai from staying close to their targets (in Rai's case $3-ish and in Dai's case $1.) In the absence of direct redeemability, the main force pushing these tokens towards target is the requirement that vault owners (i.e. debtors) repurchase Rai and Dai to repay their Rai- and Dai-denominated debts to the system. This is the same force that stabilized the Bank of Aneroid's $10 fiat note in my story. Recall that Frank's $10 note was valuable because Selma needed it to close her debt to the Bank of Aneroid.

Adding an on-demand redemption feature to the Bank of Aneroid's notes only makes this stabilization more direct and immediate, much like Maker's addition of a direct redemption mechanism, the PSM, resulted in a more direct fusion of Dai to its $1 target. (The PSM means that Dai has become non-fiat money.)

Another force keeping Rai and pre-PSM Dai anchored to their respective targets are the threat of Rai's "global settlement" or Maker's "emergency shutdown." Basically, in extreme scenarios both systems can be completely unwound. When this happens all the collateral held in the system gets distributed back to its respective stakeholders, including the owners of Rai and Dai. The knowledge that this could happen helps nudge the price of Rai and Dai closer to their targets.

The Bank of Aneroid's notes are also subject to their own version of emergency shutdown. At any point in time the owners of the Bank of Aneroid can wind up the bank. By collecting on all of their debts, selling those debts to others, or seizing collateral, the Bank can buy back all of the notes they have issued at par. The possibility that this could happen helps pull the Bank of Aneroid's fiat notes towards a stable terminal value.

Sure, there are stablecoins that depend on an underlying ponzi process to stay pegged to $1. But Rai and Dai do not fall into that category of stablecoins. Rai and Dai use non-ponzi mechanisms to create a stable version of the dollar. The Bank of Aneroid's fiat notes are not ponzi-ish for the same reasons that Rai and Dai are not ponzi-ish. And the same goes for Federal Reserve dollars, Bank of Canada dollars, and Bank of England pounds, which operate on the same principles as the Bank of Aneroid's fiat notes.

47 comments:

  1. Very interesting point, and a clear and understandable way to describe the problem.

    On the other hand, what happens when the original money lent out to Selma does not have any sort of backing? Think of the process of QE, where new money is created and injected into the capital market, how would that look like if that money was given to Selma instead? In the end when Jack goes to Selma to buy some service or good from her for the 10$, she just doesn't need it to pay back any debt, cause the original money was created out of thin air.

    Please explain it if my point is not valid

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    1. In some sense the new QE is backed by government debt, so you could argue, that the gov could go to Selma to purchase service or good for the 10$. But what if these government debts are due in 10 years in a 0% interest rate environment, when (with a stable 2% inflation) the real value of the money needed for the gov to pay back the debt is less than 8$. So after 10 years the gov (or Jack) don't need 10$ worth of goods or services from Selma, just 8$ (in real terms) and the government profited from the "Ponzi".

      The "Ponzi" is not the money as an instrument itself, the "Ponzi" is the inflation and money creation itself

      Looking forward to your answer

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    2. QE is when the Bank of Aneroid issues banknotes by purchasing securities in the open market, say shares in the Aneroid General Store or bonds issued by the Aneroid city council.

      But the story is the same as before. When Jack goes to the bank to redeem his $10 note, the Bank can sell the shares or bonds that it has bought to meet his request. If the notes are non-convertible fiat notes, then Jack can sell them to the city council, which can use the notes to pay bond interest to the Bank of Aneroid.

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    3. Yes I think I understand, but you still look at money as a debt instrument, which partially it is.

      But my point was that the "Ponzi" part of money is not as a debt instrument, but the ever increasing amount of outstanding debt, that is worth less due to inflation and financed with even more debt, that is also inflated... etc.

      Isn't this "Ponzi" like? Repaying debt and interest by taking even more debt, while devaluing the currency that denominates the debt.

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    4. Here's the definition of ponzi we're using for this post:

      "By ponzi, I am referring to a general class of economic phenomena that can only exist if additional people continue to join up. Under these schemes, old investors are paid with new investors' funds."

      You're free to use an alternative definition, but that's a different post.

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    5. I agree with Andrew here. These examples also assume that the collateral used by Aneroid bank (whether Selma's property or open market securities) retain or grow their value over time.

      This is a good explainer JP but clearly it's pretty nuanced in the complex real world. I think it's in that complexity that the Ponzi lies because of the debt creation.

      Money in and of itself isn't a Ponzi, and neither is fiat inherently. However, how we've now moved to money creation via the usage of future taxes + inflation to pay for current money assumes Ponzi-like (or better yet, Nakamoto-like) mechanics.

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    6. Bringing it back to your original definition of a Ponzi...

      Let's assume we remove inflation for now. The only way you have the ability to service the future debt and pay the original investors (ie. current population) is if government revenues increase or costs go down.

      Typically, since governments are terrible a reigning in spending, this comes from:

      1. tax rate increases;
      2. investment returns; and/or
      3. the amount of income that can be taxed increases (GDP growth)

      Historically, the 3rd point has been preferred and has been dependent on population growth (specifically productive workforce growth).

      We're moving to an era where technology breakthroughs are reducing the dependence on population growth solely, but it's still very much required and in some cases automation is actually making it harder to cover the costs of maintaining a healthy and productive vs. the government tax revenue.

      If we do manage to achieve revenues through technology breakthroughs then I guess it's not a Ponzi and was more of a period of stress.

      If we don't, eventually the debt becomes un-repayable and then it meets your definition whereby "new money" slowly dries up.

      More than likely we see governments aim to inflate the debt away and socialize the cost through this bonus hidden tax. But all scenarios are possible.

      All this to say, you're not wrong, but you're not right either.đŸ€·‍♂️

      I appreciate all your writing btw. Have learned a lot from you! ❤️

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    7. You're adding a lot of assumptions and unproved assertions about how you believe the 'real world' functions to the discussion. Your opinions could be right, they could be wrong. But you're missing the main point of this blog post, which was to set up a very simple world so that we can see why redeemable bank money and irredeemable bank money are different than Selma's ponzi.

      "These examples also assume that the collateral used by Aneroid bank (whether Selma's property or open market securities) retain or grow their value over time."

      If the Bank of Aneroid makes an error about the value of Selma's IOU, and she goes bankrupt and the property is worthless, then the Bank will fail. But that failure is of a different sort than the failure of the chain letter.

      There is nothing in my post assuming that the value of collateral needs to "grow over time." The value of collateral can even fall a little bit. The Bank of Aneroid has asked Selma to provide $15 worth of property as security for the loan. If the property falls to $10, the Bank is still sufficiently protected. If the Bank anticipates that the town of Aneriod will stagnate over time, then it can ask for even more collateral. Or it can ask for more interest. But that doesn't mean it is a ponzi.

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    8. Yes, your blogpost is about how we can see that redeemable bank money and irredeemable bank money are different than Selma's ponzi, which now I understand.

      But the title of your post is "Is money a ponzi?", and sure, money in this simple world does not fall into your given definition of ponzi.

      But my observation was that while fiat money as a debt instrument is not a ponzi, the whole fiat monetary system with inflation and ever increasing government debt is "ponzi-like". Where "old investors are paid with new investors' funds." (taken from your definition).

      Meaning that they are repaying debt and interest by taking even more debt, while devaluing the currency that denominates the debt.

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    9. "But my observation was that while fiat money as a debt instrument is not a ponzi, the whole fiat monetary system with inflation and ever increasing government debt is "ponzi-like"."

      That's not an observation, that's a theory. I'm not even sure how you'd prove your theory, or how I'd disprove it. We'd be engaging in speculation that, while fun, would never end up anywhere substantial.

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  2. Excellent Article. Isolating the "game" to an island with a limited number of residents allows for the Mental Modelling of game outcomes.

    The argument that US Dollars are a ponzi stem from the fact that at any point in time, there is not enough money to pay off all the loans with interest. That money has to be borrowed into existence to complete the game.

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  3. "And so Jack walks over to Selma's house and offers to sell her the $10 note. And Selma will buy it since she'll need it to repay her $10 debt to the Bank."

    But what value of property will she give to him? Nobody wants to value things in terms of banknotes issued by Bank of Aneroid.

    By extension to fiat money in general, we see that all fiat money at moment of issue, is backed by the assets of the entire economy. If suddenly after issue, no one wants all that money, finding fair exchange value becomes exceedingly difficult. Enter hyperinflation.

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    1. "But what value of property will she give to him? Nobody wants to value things in terms of banknotes issued by Bank of Aneroid."

      $10s worth. There may be an external dollar standard, say a Canadian dollar, that Aneroid uses. Or inhabitants may use the Bank of Aneroid as their accounting unit.

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    2. Are you suggesting that the entire money supply in a modern economy is equal to the loan assets on the books of the central bank? I don't think this is true as commercial banks themselves can increase the money supply by lending from customer deposits. In that case then, all the money circulating in the economy cannot be simply redeemed directly / indirectly via the mechanism you mention. So then is modern fiat money really a ponzi by the definition this article agreed on?

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  4. Let's suppose the bank has no outstanding loans and all the banknotes in circulation correspond to the amount of banknotes the bank had to print in order to pay its employees and shareholders. Does it become a Ponzi scheme then?

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    1. What if the bank's loans only correspond to 50% of its banknotes? In that case, if there is a run on the bank and everyone tries to get rid of their banknotes, only half of them will eventually be reaccepted by the bank. Only those who sell first will get their money's worth, just like in a Ponzi scheme. Is there a cutoff point such that if the bank doesn't have enough loans backing its banknotes, it becomes a Ponzi scheme?

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    2. If the bank's loans only cover 50% of its banknotes, then I'd say that the bank is a ponzi according to the definition we've been using in this post.

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    3. I don't understand how it follows from your definition that this hypothetical bank is a Ponzi, since there is nothing unsustainable about this scenario. As long as the bank keeps making loans (for example, it could be committed to maintaining this 50% ratio), borrowers will keep demanding banknotes in order to repay their loans, so the price of the notes will remain positive.

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    4. For a bank balance sheet that is in accordance with accouting the money paid to shareholders and employees is also backed by loans , assets, on the balance sheet. There is no extra deposits for shareholders and employees on the liabilities side. Those deposits are listed the same as for other deposit holders.

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    5. > Philippe Belanger
      The answer is in your question , "as long as the bank keeps making loans" . That is the ponzi scheme , the constant requirement for new borrowers that is in your example of the hypothetical bank. A legitimate bank can retire all its current deposits using its current loans.

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    6. Phillippe: "As long as the bank keeps making loans (for example, it could be committed to maintaining this 50% ratio), borrowers will keep demanding banknotes in order to repay their loans, so the price of the notes will remain positive."

      Under your scenario, if all of the Bank of Aneroid's loans are paid back then only half of the Bank's banknotes will be extinguished. That leaves the other 50% of the Bank's banknotes in circulation without an associated loan. So the only way for an inhabitant of Aneroid to get rid of these notes is find someone like Jack to fob them off on. And that was our original definition of a ponzi.

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    7. But this is true of any bank whose banknotes are not 100% backed by its assets, including fractional-reserve banks which issue redeemable currency. For any such bank, it's true that if everyone tried to redeemed their banknotes, some people would be left holding notes without any value. But just because something could happen doesn't mean that it will. As long as the bank keeps enough assets to prevent a bank run, the banknotes will not lose their value and won't turn into anything resembling a Ponzi scheme.

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    8. A bank's notes are more than 100% backed by it assets. 100% plus a capital buffer. So that is more than 100%. So there would be no people left holding notes without any value. "Enough" assets to prevent a bank run is at 100%. Lower than 100% is what causes the bank run.

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    9. Philippe, read Dinero's last comment. The Bank of Aneroid's banknotes are 100% backed by its assets. So it is not a ponzi.

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    10. Obviously if the banknotes are 100% backed by the bank's assets, it isn't a Ponzi scheme. It doesn't follow from this that if the banknotes aren't 100% backed, then it is a Ponzi. The price of the notes is determined by their supply and demand, and there is no reason to believe that the demand for notes would fall to zero if they weren't 100% backed. A person holds banknotes because she believes that if she needed to, she could redeem or sell them, not because she believes that everyone could do so.

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    11. >Philippe
      as you said in the previous comment some people would be left holding notes without any value , she does not want to be that person so no she would not hold them.

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    12. Let's modify the original thought experiment and suppose that the government declares that only banknotes from the Bank of Aneroid are considered legal tender. Further suppose that the bank has no loans; all the banknotes in circulation were printed out to pay the bank's shareholders and its employees. As long as people trust the bank to maintain the quantity of banknotes fixed, there will be a stable demand for banknotes, since borrowers will need to acquire notes to pay out their debts. The notes will not lose their value, yet the bank will not own any assets that back the banknotes. What determines the value of the banknotes is their supply and demand, not whether or not they are 100% backed.

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    13. > Phillipe Belager

      Your comment that a Banks notes value comes from their supply an demand is wrong.

      The aggregate Value of a banks notes is the value of the banks assets.



      Using your vernacular "let Us" then consider where
      you say the bank has no loans, but it does have borrowers , a contradiction in terms, then your comments as they stand do not have any objective meaning and so can not be commented on.

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    14. I was wasn't referring to the bank's borrowers (in doesn't have any), I was referring to all the borrowers in the economy. Just because the bank has no loans doesn't mean indiviuals aren't lending to each other.

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    15. That any currency which is considered legal tender will be demanded by borrowers who need to settle their debts. But the debt they intend to pay out need not be owned by the bank that is issuing the currency. As long as the currency can be used to extinguish debt, there will be a demand for it, whether or not the debt is owed to the bank.

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    16. The borrowers of other banks would not constitute a demand for the notes, as they could not use those notes to settle their debts to the other banks as those other banks would not accept the notes that do not have any value.

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    17. Phillippe: "The notes will not lose their value, yet the bank will not own any assets that back the banknotes. What determines the value of the banknotes is their supply and demand, not whether or not they are 100% backed."

      Yes, but under your scenario the Bank of Aneroid's notes are still a ponzi according to the definition of a ponzi set at the outset of our post. What determines their value is that someone else emerges to demand that banknote. If the flow of new entrants dries up, the banknotes will be worthless. A legal tender law that forces people to participate doesn't change the nature of the game. What was a voluntary ponzi has become a forced ponzi.

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    18. Dinero: If the banknotes are legal tender, then by definition other banks would have to accept them as payment of the debt. This is just what it means for something to be legal tender.

      JP: What if everyone in town holds banknotes and uses them for transactions? The flow of new entrants would be "dried up", since there would be no one left to enter the process. Yet the notes wouldn't be worthless.

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    19. I think my point still stands.

      If, as you suggest, everyone in town uses the Bank of Aneroid's notes, and Jack wants to spend $10, he is relying on an existing entrant re-entering with a new bid to accept those notes. If an existing entrant doesn't enter with a new bid, then the notes will be worthless. In other words, it's still a ponzi.

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    20. Ok, but if this is what it means to be a Ponzi scheme, then anything that isn't redeemable on demand is part of a Ponzi. For any such asset or good, if nobody is willing to bid for it, then its price will effectively fall to zero.

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    21. Not goods, because you can consume them. If I grow apples, and there is no one willing to bid for them, they will still be valuable to me because at least I can eat them. But if the Bank of Aneroid issues ponzi notes, and no one is willing to bid for them, they'll be valueless. (I suppose I could burn them for heating.)

      Nor will the Bank of Aneroid's fully-backed unredeemable banknotes, or its shares, fall to zero. Remember, Selma will need my banknotes to repay her debt. And if no one wants to bid for the Bank of Aneroid shares that I own, they will still be valuable to me because I am entitled to a dividend (and the possibility that the Bank will eventually buy me out.)

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    22. If the definition we are using is that the asset will be worthless to the holder unless someone else bids for it, then that still makes any good which the holder doesn't value a Ponzi. Some people don't like apples. More importantly, it doesn't make redeemable banknotes that aren't 100% backed a Ponzi. As long as the bank has enough assets to redeem the holder's notes, he doesn't have to rely on someone else buying them from him.

      It also seems to me that your definition makes your original example a potential Ponzi scheme. Suppose the bank has decided not to issue any new loans, so Jack can't take out a loan and use his notes to repay it. Then his notes will be worthless to him unless someone else (Selma) buys them.

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  5. > JP
    Your scenario describes the very rare case where a loan is not repaid in an orderly fashion. So not the best way to describe the way bank money works. The norm is that the loans are repaid by the process of borrowers selling goods and services to deposit holders.
    And so the best way to show there is no ponzi scheme is to point to the goods and services that the deposit holders buy and the borrowers have made a pledge (bond) to bring to market.
    The best way to understand the money system is to stop looking at deposits or bank notes to find the source of value. To find the source of value look at the loan agreements on the asset side, that is where it lies.

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  6. Wrote this on twitter (https://twitter.com/buchmanster/status/1475691490940633089) but figured I'd add it here:

    Nice post but you missed interest! Selma doesn't owe $10, she owes $10 plus interest, and unless some other sucker shows up to take a bank loan, the money to pay the interest doesn't exist. Ergo, ponzi :)

    Also I think the link to our twitter discussion from the beginning of the post is broken. Presumably it should link to https://twitter.com/buchmanster/status/1474486710469894151 but it links to https://twitter.com/buchmanster/status/14744 which is something else all together!

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    1. >the money to pay the interest doesn't exist

      Yes, but it is not a problem: interests are flow, not stock. Interest are not visible in the balance sheet.

      When loans are contracted, assets (loans) and liabilities (deposits) are created, but without the interest amount. When a borrower pay interest, deposit goes in the bank capital, and when a bank spend its profit, bank capital return in deposit, and borrowers can fully repay their loan+interest.

      Example:
      Alice take a loan of $10, and must pay $1/month during 12 month (so $2 interest). A loan of $10 appears in the bank asset, and a deposit of $10 appears in its liabilities.
      The firs 6 months, the bank receive $6 dollars: $2 in interest (paid first) and $4 are canceled on the Alice loan and deposit. Asset (Alice loan) is now $6 (10-4), liabilities (Alice deposit) is now $4 (10-6), but bank capital is $2.
      The bank can buy things to Alice, and so Alice has now $6 dollars in deposit, and can fully repay its loan+interest.

      "the money to pay the interest doesn't exist" is a false problem.

      BUT

      If the bank don't buy things to Alice, or buy things to Bob who prefer not spending, or don't fully spend interets received, (and if the central bank don't buy assets to Alice), Alice could not have enough money to fully repay its loan+interest.
      Alice need to sell things to a new borrower who, in logic, wants to spend. But the new borrower will have the same problem, postponing it.

      So, a true Ponzi problem?

      Also JP, you say "By ponzi, I am referring to a general class of economic phenomena that can only exist if additional people continue to join up", but I think only new funds are enough.

      In your example with the chain letter, when the 100 habitants already paid a letter, maybe Selma has already make profit, and wants to continue.

      I think that as long as there are players, even old ones without new ones, the game can continue. The same goes for bitcoin. Players are not necessarily tired of the game.

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    2. Unknown: "...the link to our twitter discussion from the beginning of the post is broken."

      Whoops, I fixed the link.

      Unknown: "Selma doesn't owe $10, she owes $10 plus interest, and unless some other sucker shows up to take a bank loan, the money to pay the interest doesn't exist. Ergo, ponzi"

      Why would that be a ponzi? Even if no one shows up to take out a loan from the Bank of Aneroid, and so only $10 in banknotes are outstanding, Selma can still pay interest in-kind. And the Bank will accept that in-kind payment, since otherwise Selma will default. (I think in-kind interest payments is what commenter yyy means by "the bank can buy things to Alice.")

      (In practice, the Bank would have made loans to more people than just Selma, and so Selma would have no problem finding notes to pay back her loan and interest.)

      yyy: "I think that as long as there are players, even old ones without new ones, the game can continue. The same goes for bitcoin. Players are not necessarily tired of the game."

      Fair point. I agree.

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    3. >I think in-kind interest payments is what commenter yyy means by "the bank can buy things to Alice."

      Exactly. No other loans are, in theory, required for Alice to repay her loan+interest.

      But I think that, in practice, Alice could be in difficulties if no one wants to buy things to her. She is dependant, she could not fully repay her loans+interest (and could lose a part of her collateral for the bank).

      >In practice, the Bank would have made loans to more people than just Selma, and so Selma would have no problem finding notes to pay back her loan and interest

      I think it is what append in deflation crise, when owners of money prefers to not spend it. It is difficult to find money to repay loans. And you may not be able to repay it.
      To avoid this, Alice needs new buyers (new borrowers, or current savers to spend, or banks to spend). She needs new users/funds... like a ponzi?
      Maybe, but she hasn't lost everything. With the money of her loan, she was able to buy stuffs. She may lose her collateral, or part of it, but she already had things in return.

      By analogy:
      - conventional money is like a pawnshop. You can provide stuffs to banks (promise/collateral) to have money, spend it, earn it, and recover pledged stuffs. If you cannot recover your stuffs because nobody give you money, the bank gains your stuffs (but lose capital). And if you have money but not pledged stuffs, you know that somebody, somewhere, want your money to not lose its pledged stuffs. There is a guarantee.
      - bitcoin is a game where you spend money/stuff/energy to have coins, and try to sell this coins with profit to somebody  telling him that he too could try to sell this coins with profit to somebody telling him etc. If it stops, no guarantees.

      I think that's the real difference. Both can continue forever, or end. But with bitcoin, when the game ends, if you haven't already received anything in return, then you've lost everything. Conversely, with conventional money, when the game ends (nobody want to sell things and try to get rid of it, overbidding on each other = inflation crise), you can still recover your pledged stuffs or other pledged stuffs (but at a cost because of inflation). And during deflation, it is your stuff that is harder to recover (other pledged stuffs seized and for sale are cheaper). Conventional money owners lose everything only in the event of systemic bankruptcy, or central bank collapse / robbery.

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    4. > Why would that be a ponzi? Even if no one shows up to take out a loan from the Bank of Aneroid, and so only $10 in banknotes are outstanding, Selma can still pay interest in-kind.

      Isn't this changing the rules of the game? One could also say in the chain letter that people could pay in-kind for Jack's letter.

      There's also an assumption that in aggregate the bank is only issuing as much money as either (1) it would be willing to accept back with in-kind work from people, or (2) would be necessary to sustain increases in the velocity between the people its issuing to on par with the interest rate. I see no reason to expect this to be true in modern banking.

      I think this problem is at the heart of the idea that the money supply should match the real productive capacity, but I'm not sure we've figured out an institutional form that really enables that.

      In the past we had a crude link between money supply and real productive resources in the form of gold. Bitcoin is an updated attempt, using basic computational power (rather than availability of gold) as a proxy for real productive capacity. Obviously still insufficient, but it hints at more advanced ways to ground the credit creation process: https://ebuchman.github.io/posts/mmt/

      It's also maybe worth noting that a major difference between banking and traditional ponzis is which side of the credit relation the ponzi mechanism is happening on. In the traditional ponzi, the ponzi operator is the borrower. But in the bank, its the lender. Maybe this is only possible for banks since only they have the privilege to create money by lending - ie. its a ponzi that allows for payments

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  7. Ponzi are illegal. They are illegal bc they are a type of investment scheme that always ends up the same way- running out of new buyers to help pay off older ones. So it an illegitimate scheme bc it always fails and people lose money. It’s not an investment in a real thing.

    Money or fiat currency isn’t an investment scheme. It’s either a commodity like gold or a fiat backed by gold or just fiat without backing. It’s purpose isn’t to profit.

    Expanding the money supply and exchanging nothing for something is theft.When the fed prints. Loaning the government money for a return? It’s an investment and if the only way they can pay them is by getting new people to lend to them that’s a ponzi. But the fed can just print and be the ultimate buyer of last resort never running out of buyers. It’s still a Ponzi bc old investors paid by new ones even if in theory the fed can print forever. It still will fail bc of loss of purchasing power.
    Money itself isn’t the ponzi though. It’s not an investment paying a return.
    Even in your example which I didn’t relate to exchanging a dollar for a dollar isn’t investing.

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  8. Bitcoin is a ponzi. Has anyone challenged this in the courts? Ponzi are supposed to be illegal frauds.

    ‘ What are the facts of reality that give rise to the differentiae of "fraud"? The first, I believe, is that fraud proceeds by inducement rather than by direct physical coercion. Secondly, it proceeds by inducements based on the promise of gain rather than on the threat of harm. Thirdly, its inducements of gain involve a conscious and harmful deception of the person who conveys the goods or performs the services. Thus, fraud may be distinguished in turn from malicious deceit that harms but does attempt to obtain goods or services (e.g., giving a motorist false directions); from the seizure of goods by direct force; from the acquisition of goods through threat; and from the acquisition of goods through trade. Its definition is: "The act of obtaining goods or services from another through an inducement of gain that involves a conscious and harmful deception of the person who conveys the goods or performs the services."

    https://www.atlassociety.org/post/understanding-force-and-fraud

    This article was helpful.


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  9. Are you suggesting that the entire money supply in a modern economy is equal to the loan assets on the books of the central bank? I don't think this is true as commercial banks themselves can increase the money supply by lending from customer deposits. In that case then, all the money circulating in the economy cannot be simply redeemed directly / indirectly via the mechanism you mention. So then is modern fiat money really a ponzi by the definition this article agreed on?

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