First question is already not correct by the expert. Afaik the value of the USD depends on the GDP / economic output of the country. Money -exchange- can be tied to the other person accepting your value token or not.
Here are two facts about the dollar that a lot of people don't know:
1. The Federal Reserve holds assets (mainly stocks and bonds) whose value exceeds the value of all the dollars that have been issued.
2. If they anticipate that inflation will be greater than their 2% target then they sell these assets in order to push the value of the dollar back up.
So even though the dollar isn't backed 1-to-1, it's value also isn't an arbitrary social decision like some people seem to think. It's being supported by assets with real value.
Of course many of the bonds owned by the Fed are US government bonds, and so the dollars value is partially dependent on the ability of the US's government to tax wealth from its citizens.
> 1. The Federal Reserve holds assets (mainly stocks and bonds) whose value exceeds the value of all the dollars that have been issued.
This is not true at all. The Fed does not hold equity (stock) and the Fed is also not the only entity that can create money. Lots of money is created by regular banks lending out deposits. This is called fractional reserve banking and until recently was the primary mechanism for money creation.
> Lots of money is created by regular banks lending out deposits
I was only counting Federal Reserve accounts and printed money as dollars. Dollar-denominated accounts at regular banks have value because of the assets held by those banks.
Good question. Here I meant it in opposition to the 'fake' kind of value that gold and bitcoin have, where people value them purely because other people value them. Of course gold and bitcoin do have real value in the sense that the market is willing to buy them for a certain price, but the social network effects that give them value are different from how the dollar obtains its value.
Thanks for this comment, so you got money exchange (I accept your value token) , the token itself, and it has got be backed for it have to have worth. So I accept a dollar, but not a bottle cap. So the expert was wrong in that sense, that’s what I am trying to determine.
> And dollar denominated bonds as backing for the dollar are basically a short-circuit.
The difference between dollars and dollar-denominated bonds is the time delay. Suppose you issue 100 kineyCoins and give them to me, and we have a contract that I have to give them back to you in a year. Then those coins will have value to third parties, because they know that if they hold them then as the deadline approaches I will have to buy those kineyCoins back in exchange for whatever those third parties value.
> Afaik the value of the USD depends on the GDP / economic output of the country.
No. The GDP increases every time a USD transaction happens (e.g. you buy a cup of coffee with USD). And an American buying a cup of coffee definitely does not increase the value of the USD.
Ultimately, "value" is always a social construct. When currencies were backed by gold, you could say, well the currency value is its gold equivalent - but this only works because, apparently, gold has "value".
Otherwise, things have "value" because we can do things with them. Food and drink are probably the most immediate ones - we need them to survive.
Classic currencies have quite a lot of use too. They are universally-accepted, protected by governments (inflation concerns notwithstanding), tamper-protected, there are safe and easy ways to store and exchange it (bank accounts / transfers, cash, cheques), it is protected by the full might of the law against crime. In some countries more than in others of course. So it's a good universal medium of exchange, even if ultimately it is a social convention.
Crypto in general has some, but not all of the above properties. I now totally get that when you really can't trust your crony government to provide such a currency, they are a good alternative.
But ultimately all "value" is merely what someone will pay (exchange) for the thing.
Exactly why I mentioned monetary -exchange-, not backing. The value is backed by a countries GDP, which helps determine its value/worth. If I accept (exchange) a Dollar for a Euro, I know it is backed up by a certain economic output, status and its national banks. I think that’s a difference there?
It’s a bit different I think, you can’t explicitly exchange a dollar for a (tiny) fraction of US GDP. You can buy some product of it with it, but eg if US continues to grow at 2% per year, you can’t latch on to that.
By contrast, shares have this property, to some extent, because in the long run they either pay dividends, or are returned for capital. A share literally owns you a bit of the company’s economy. Give or take non voting shares, non dividend paying shares etc.
In a first approximation, what back the currency is that it's accepted to buy things that are denominated in Dollars.
But in a deeper sense, what back the currency is that it's the only currency accepted by the USA government to pay taxes and other liabilities (1).
If tomorrow, people decided they not want to use Dollars, they would still have to get Dollars in order to pay their taxes, that would grant demand for Dollars.
I kind of doubt it. Because China has the second largest GDP, and it is quite comparable to US. But Chinese Yuan is basically worthless outside of China. Almost all international trade, even when involving China, is done in USD.
So definitely there has to be some other factor apart from GDP which gives value to a currency.
But isn’t there a static exchange rate right between Yuan and USD according to economy inflation or GDP? Or proof of work for Bitcoin, so what backs bitclout?
