[118884] in Cypherpunks
Re: TGE: Who needs money, anyway?
daemon@ATHENA.MIT.EDU (Robert Hettinga)
Sat Oct 9 13:27:59 1999
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Date: Sat, 9 Oct 1999 12:58:44 -0400
To: worley@ariadne.com (Dale R. Worley)
From: Robert Hettinga <rah@shipwright.com>
Cc: dcsb@ai.mit.edu, Digital Bearer Settlement List <dbs@philodox.com>,
cryptography@c2.net, cypherpunks@cyberpass.net
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Reply-To: Robert Hettinga <rah@shipwright.com>
At 11:14 PM -0400 on 10/8/99, Dale R. Worley wrote:
> It seems that the S&P 500, though, doesn't satisfy the "store of
> value" principle -- its value swings (relative to the price of bread
> and milk) much more than the dollar. (Even more than the dollar did
> in the days of high inflation.) People like to have a way of
> denominating future transaction values (like their salaries) in
> non-inflating units, and also like to do their short-term investing in
> ways that are largely pegged to non-inflating units. (Do you run your
> checking account off your money-market fund or your S&P 500 index
> fund?)
Somewhere, in the bowels of my original rant, which I forgive you for
not reading *all* of, ;-), is exactly that point.
What we have in bonds are differing maturities of debt, and, usually,
the closer you get to the present, the less volatility you have
because the repudiation risk of the interest and principal is more
predictable. The reason we put government t-bills, particularly US
government t-bills, at the bottom of that risk curve at zero risk is
because the principal and interest repudiation risks of those bonds
*are* effectively zero. The US government is probably not going to go
feet-to-the sky in the next 90 days, and, of all issuers of debt, it
is the *least* likely to do so.
I would claim, along with most modern financial theory, that the
"repudiation risk" of a stock index is *also* effectively zero.
Furthermore, that the volatility of the index price in the short run
is due to the implied *duration* of the equity investment, and
nothing else. Finally, I agree with current opinion that a
sufficiently broad and liquid stock index is also *less* risky than a
government debt instrument of identical duration.
As a result of those three things, I'm thinking that, if you had a
publicly calculable index-based derivative of some kind, you'd get
the same result that we do now with t-bills, but you'd be using those
derivatives and a stock index instead of a government obligation.
Couple that with digital bearer settlement, and, boom, we have a
completely testable and non-repudiable, zero-risk asset class. Using
something like that, you could construct "synthetic" currency,
denominated in, or at least collateralized by, that new asset.
That new currency would be based on the assets of the economy as a
whole, instead of the taxing power of any single government's ability
to confiscate its revenue. And, because it could be settled using
digital bearer financial cryptography, the use of such a currency may
turn out to be cheaper to use than a national currency like US
dollars. The transaction could be executed cleared and settled
without government force preventing the repudiation of a given
transaction, for instance.
Of course, this is looking *waaaay* out there, I think. To get from
here to there, we not only need digital bearer-held shares in a known
market index, and digital bearer-held derivatives to artificially
shorten the implied duration of the index, both held and traded on
the net in sufficiently large numbers to make an efficient, liquid
market. Even better, some day, we would need to build an index on
digital bearer-issued equities themselves.
The fact that bearer equity, debt, and derivatives are effectively
illegal at the moment kinda puts the kabosh on the whole idea, right
now, anyway.
But, if internet digital bearer cash turns out to be significantly
cheaper to use than book-entry equivalents, that would be a step down
exactly this road.
Which, of course, is why I started IBUC. :-).
> Perhaps you want to peg your pseudo-money to the market basket of the
> Consumer Price Index.
Thank you, but no.
I'm not going to trust my money to an arbitrarily calculated
government index of particularly non-fungible commodities when I
already have the US dollar, ostensibly calculated taking that very
index into account. Occam's razor, and all that. My opportunity costs
are too high to even think about it.
For IBUC, at least, we're going for bearer-to-bearer regulatory
parity between the dollar you withdraw from your own bank account
using an ATM, and the milli-dollars you withdraw from your own bank
using your bank's or IBUC's web page.
My objective in the rant was, as always, to show that it's at least
conceivable to have a completely government-orthogonal currency which
will a lower risk-adjusted transaction cost than those issued by
government.
That, at least as an intermediate step to their final end-state, is
exactly what Black, Fama, et. al., were getting at when they were
talking about monetary separation in the first place.
Cheers,
RAH
-----------------
Robert A. Hettinga <mailto: rah@ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
