Rethinking Money: Breaking Up Currencies

from the different-purposes dept

I remember when I was quite young, my father predicted to me that we'd probably see the end of cash within our lifetimes, as all money would move to electronic money in the form of credit cards (or credit card-like interfaces). Every so often this idea has been discussed, but it usually gets shot down by those who like the anonymity of cash (which is one reason why some governments don't like it). So it's interesting to hear via Slashdot that an Estonian economist is recommending that the country go completely electronic as it adopts the Euro. I would imagine there are some issues with doing so (including the fact that cash and coins from other Eurozone countries would inevitably bleed in).

That said, there have been a few other stories lately that have me thinking about the future of money, and I actually could see a way that countries could move in this general direction without actually getting rid of cash entirely. Last year, we wrote about the question of whether or not the world would move to a single world currency, while simultaneously considering whether or not we'd actually start to see growth in very localized currencies, which are increasingly common in various cities to encourage people to shop locally. Again, neither situation seemed ideal, but were definitely interesting to think about.

Recently, however, Umair Haque wrote up an interesting post, positing that money could be split into three types of currencies which serve three separate functions. The idea is not to break them up by region -- as described above -- but by function. Umair's writeup is a bit opaque, but he notes that currency is used as a store of value, as a medium of exchange and as a unit of account, but those functions can be separated. The end result, would be as follows:
You have three kinds of notes in your wallet. The first you use at the grocery store. The second, at the bank and in the financial markets. The third, between your employer, the state, and public services. Each has very different volatilities and trajectories, because each has very different levels of supply, demand which are, crucially, independent from one another--but interdependent on real wealth, long-run productivity, etc.
Now, this may be difficult to comprehend in the abstract. How would that actually work and why would each have different volatilities and trajectories? Well, the good news is that we actually have a real world example of this. A few weeks back the always excellent Planet Money team at NPR did a wonderful episode on how "fake money" saved Brazil from rampant inflation. The story is fascinating, and I highly recommend listening to it. But, it was basically a simplified version of what Haque is suggesting. Brazil had crazy inflation, so crazy that every day, stores had to remark their entire stock to raise prices, and people would rush ahead of the clerk with the price stickers to get "yesterday's" prices.

The way Brazil "solved" the issue was to effectively issue a made up new currency to handle some functions of money: mainly the unit of account. You couldn't actually get paid in it, or pay with it, but all the goods in all the stores were suddenly priced with it. Then, rather than having to change the prices every day, each day, the government would put out a rate card with the exchange rate, and people would work off of that. Now, you might say this shouldn't make a difference, but it actually did. It got people thinking in terms of the new "stable" rates, and got them past their general distrust of monetary value. (One side note: this upset some of the wealthy, who were simply making a ton in interest -- and they complained about how this new system meant they actually had to innovate and invest to make money -- which reminded me of certain industries in the US who like to avoid innovating and investing themselves...).

Either way, you had a situation where the currency for prices was perfectly stable at the same time the other currency was still dealing with massive inflation. As Haque points out, you have different currencies with different volatility. Eventually, Brazil switched entirely over to this new currency and made the fake currency a real currency, but there's no reason why you couldn't keep multiple currencies, and break them up into a third bucket as well, as Haque suggests.

I can definitely see how there could be some value in doing so, providing a lot more flexibility, and removing certain risk elements. However, I do wonder if the greater level of confusion might be a problem for many, and lead to huge potential arbitrage opportunities, where the more financially sophisticated folks took advantage of much less financially sophisticated individuals, to swap these different levels of currency around. I'm not convinced either way on this, but it does seem fun to think about the possibilities...


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  1.  
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    Steve, Nov 24th, 2010 @ 5:41pm

    Why not sound currency

    A universal currency would be a huge boon to trade and every economy as a result, but if its not a "sound" currency, we're going to have the same problems we have with other FIAT (paper) currencies, except on a massive, global scale.

    The problems we have with instability related to currency are due to its nature as "debt-based" currency. All the USD in existence are essentially loaned to the US government from the FED at interest. This debt is never paid back, and continues to build and eat away at the economy.

    Until we get a non-debt based money supply, preferably one based on a sound currency, we will continue to have problems

     

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    SUNWARD (profile), Nov 24th, 2010 @ 5:54pm

    stupid idea for one currency. Just looked at what is happening with Ireland and with the Euro. Support for the sake of support.

    People also want to buy in their own currency or in a familiar one (such as the US dollar or Euro)

    Not going to happen.

     

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    Mike Masnick (profile), Nov 24th, 2010 @ 6:11pm

    Re: Why not sound currency

    A universal currency would be a huge boon to trade and every economy as a result,

    Not sure I agree. The situation with the Euro shows why that kind of inflexibility causes problems. You can't do useful things like devalue your currency when necessary.

     

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    out_of_the_blue, Nov 24th, 2010 @ 6:34pm

    The Rich already have fake money.

    Credit Default Swaps, mortage-backed securities, "stock" traded at computer speeds, Treasury notes and Treasury bills, all mere numbers in a computer somewhere. -- Yet they expect the poor to *labor* in exchange for those fictional notions, to be put in debt by the gov't, a debt which can't be paid off because by definition there isn't enough to pay it PLUS the interest. And by the way, WE didn't run up the bills, nor speculate with imaginary money.

    Regardless what tricks economists would like to see, the Day Of Reckoning approaches, as The Rich get ever more insistent that they're due luxury for life without effort. Get your pitchforks and rope ready.

     

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    Anonymous Coward, Nov 24th, 2010 @ 6:45pm

    One can have one global currency and the local currencies are adjusted on that just like the Brazilian plan but in a global scale the other one commented about I'm not sure what it means.

     

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    Anonymous Coward, Nov 24th, 2010 @ 7:00pm

    BTW "money" is the biggest religion based on pure faith that exists today.

    Money today is based on promises, the thing to realize is that people don't need money, they need to keep producing things and giving it to others and keep doing that until they die, but that is not glamorous and they loose faith on things so you have the incentives to keep people hooked on that thing called money, you can live a good life and use very little money if you produce the things you need by yourself but then many wouldn't bother to produce things for others that is the real problem money solves.

    Also that is why America is falling behind, because it is not producing anything and because of that it doesn't have work and nobody will give to others anything without payment, the solution for that was to create credit, but that blew up in the face of the government after decades, people knew that in the 70's at least because economists told me then it would end badly at the time I didn't thought much about it because I didn't really understand the dynamics of things.

     

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    Mike Masnick (profile), Nov 24th, 2010 @ 8:28pm

    Re:

    Money today is based on promises

    I'd say it's based on "trust," which is slightly different.

    the thing to realize is that people don't need money

    "Need"... perhaps. But I would argue that it actually serves such a benefit that it's about as close to need as possible.

    Also that is why America is falling behind, because it is not producing anything and because of that it doesn't have work and nobody will give to others anything without payment, the solution for that was to create credit, but that blew up in the face of the government after decades, people knew that in the 70's at least because economists told me then it would end badly at the time I didn't thought much about it because I didn't really understand the dynamics of things.

    Almost nothing in that run-on sentence is accurate.

     

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    DMNTD, Nov 24th, 2010 @ 9:19pm

    whatever..

    How long can any one thing remain the same?

     

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    gojomo (profile), Nov 24th, 2010 @ 9:59pm

    Gov-payment scrip

    Reminds me of a favorite (though far-fetched) idea for encouraging federal fiscal responsibility I read about long ago: have two currencies, one for all private use (including taxpaying), one that's used to pay all government workers, dependents, and contractors. The exchange rate between the two would float such that for any given rolling reference period, payments in Gov$ must equal receipts in Priv$.

    All at once, all the constituencies whose tight-feedback-loop lobbying and politicking throw budgets into long-term deficit would pay a lot closer attention to government overpromises -- because the main way they'd be reconciled would be automatic devaluation of Gov$.

     

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    Anonymous Coward, Nov 25th, 2010 @ 1:05am

    Re: Re: Why not sound currency

    A single currency is "inflexible" but lots of different currencies with different areas of validity and complex exchange systems is "flexible".
    Doesn't your BS detector tingle when you read that ?.

     

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    Anonymous Coward, Nov 25th, 2010 @ 1:14am

    If you have a currency just for just for using at the grocery store (and presumably other necessities), then regardless of any possible merit it will fail because Americans will understand it as "socialist" or "communist" or some other un-Americaan label.

    Just because the book is called "the new capitalist manifesto" doesn't mean it's compatible with American capitalism - the American version is quite a distinct and extreme interpretation.

     

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    Anonymous Coward, Nov 25th, 2010 @ 3:01am

    Re: Re:

    Trust and faith are very similar but I would like to hear about the slight difference that you perceive that make it a important one.

    ""Need"... perhaps. But I would argue that it actually serves such a benefit that it's about as close to need as possible."

    I agree with you here, there are human traits that actually "need" the concept of money to function and that haven't been challenge for a long time, people need something to get angry at or to explain why they can't have it all or how much they are worth it etc, something that can be measured, but if you didn't actually have to address those mostly psychological issues money isn't really needed, unfortunately we have those issues and they are important.

    "Almost nothing in that run-on sentence is accurate."

    Please by all means offer a better explanation to why Americans are in debt since the 70 mostly 1 and a half times their earnings in general and how the government started cheap credit as a way to boost economic growth through consumption, I can't see a better explanation to it. You may have a better explanation then I do and I would like to hear about it.

     

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    Freak, Nov 25th, 2010 @ 3:21am

    Re: Re: Re: Why not sound currency

    Depends who it is flexible for.

    If I have my own currency, it's much more flexible for me than joining in a larger currency.

    The system overall, with another currency, is, however, less flexible.

     

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    martin, Nov 25th, 2010 @ 3:35am

    One currency for banks?

    I dont think that banks would be contempt in the long term with the fact that they only interact with one type of currency. I'd guess that sooner rather than later, a bank would have the idea to offer accounts for the government money at least (i think you had in mind that the grocery money is actually physical, or on a pre-charged medium).

    And to the Anonymouos Coward: I couldn't really care less if americans think the grocery currency is un-american (after all, the story describes it as brazilian invention, which inherently makes it un-american anyway). If it works for the rest of the world, why not just stick with the imperial system? :)

     

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    Freak, Nov 25th, 2010 @ 3:48am

    Heh, wrote something like this once.

    When I saw the line " . . .not to break them up by region -- as described above -- but by function.:, I realized I've written a sci-fi story about this before, (Creative writing class, was a pre-req for the poetry class I was interested in).

    And actually, I split up currency the same way he did. Goods, services, and financial trading, (which I think I titled as luxuries & financial trading).

    Rather than imagining constant trading, though, I imagined that people would often pay for one item in multiple currencies; buying groceries at the grocery store, you pay small change in service currency, with the bulk of it being goods. Buying an expensive dye job at a hair salon would be mostly service, but some goods as well.

    I forget most of the details, but I had 35 pages of jot notes on how it could and couldn't work, and what you need to do to incentize people to use the system the way it's intended, (never factored in US psychology; I'm sure some country somewhere wouldn't deal with that bullsh*t), for a 10 page short story that never had a good excuse to explain any aspect of the system.

    Anyhow, tangential personal story aside, I'd be interested in a test of such a system of breaking up currencies. Mostly in seeing how people would deal with traditional concepts in such a new system. Like, say, welfare. Or minimum wage. Would you be paid in one currency, and expected to constantly exchange currencies? Or, as in my imagination, be paid in all three in varying amounts and seldom exchange? Would people even treat the currencies as different, or merely swipe in their debit card and expect the system to automatically exchange?
    There are so many situations where people & businesses would make it effectively a single currency again, which defeats the point and makes the system work against the consumer, (So much more math at the register, so much harder to work out an effective budget).

     

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  16.  
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    Anonymous Coward, Nov 25th, 2010 @ 4:26am

    Re: Re: Re: Re: Why not sound currency

    How and when is your own currency more flexible ?, how do you imagine use of the currency by others results in less flexibility ?

     

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  17.  
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    Freak, Nov 25th, 2010 @ 4:50am

    Re: Re: Re: Re: Re: Why not sound currency

    Say I have a store, and like Canadian Tire, I give out [store] dollars.

    If my shop is the only place you can use the currency, it's extremely flexible. As flexible as I choose it to be.

    For example, if I find I've given out too much, then I can declare that each [store] dollar is worth 50c. What's anyone going to do? Complain that the money-like thing I gave them for free is suddenly less valuable?

    Fun fact, Canadian Tire tried that a few years back, (devaluing canadian tire money because they calculated there's several hundred million worth unspent canadian tire money saved up), but because there are places, (usually cheap second-hand shops or pawn shops, where the owners would spend it at canadian tire, (or at each others stores) anyway), which accept Canadian Tire money 1:1, they found that people instead spent CT money there instead of returning to a CT location. The entire point of CT money is customer loyalty, (indeed, they lost more money than they saved through loss of customers), so they very quickly changed back.

    (And yes, I do find it hilarious that the value of a CT dollar didn't drop when CT removed 1/4 the backing of the CT dollar, (Each CT dollar was worth 75c instore))



    With countries, it works on a bit of a larger scale, but the more people besides them dealing their currency, the less control they have over it.
    The US is pretty upset at Zimbabwe right now, since they nearly completely use the US dollar there now, and it's having a negative impact on the US dollar.

    Does that answer your question?

     

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  18.  
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    Anonymous Coward, Nov 25th, 2010 @ 6:13am

    Re: Re: Re: Re: Re: Re: Why not sound currency

    Everything you describe provides less flexibility and more risk for the consumer.

    I think the whole point of the original article was about a system which better suited the consumer rather than a more efficient means to separate the consumer from their money ... but maybe I read it wrong and the real point is "divide and conquer" ?.

     

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  19.  
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    btrussell (profile), Nov 25th, 2010 @ 6:24am

    "In other words, all we would do is hold different currency in a different account and pretend it doesn't change value like the more volatile other currencies, but to use the money we have to convert it so at any given moment its actual value is in fact fluctuating with the other currency."
    Third comment from Umairs' post.
    All it does is create another "money" market. People will invest in the different currencies at appropriate times, buy low sell high, much like anything else - gold, currency, etc., fluctuating the supply and demand, which in turn fluctuates the "value."

    The whole idea also sounds like a pita to me. Constantly exchanging currencies.

    No, I don't want plastic either.

     

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  20.  
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    Freak, Nov 25th, 2010 @ 7:37am

    Re: Re: Re: Re: Re: Re: Re: Why not sound currency

    ?
    Maybe you need some reading comprehension . . .

    The article's proposition would be much less flexible for someone to control . . . for the consumer, that's good news, assuming the larger picture doesn't introduce any problems.

    On the stage of the large picture, for the country/region trying to control their economy, some people claim it would be bad for the currency to be inflexible or at least, less flexible. Rather, that it would more than overcome the benefits to the consumer if it would be flexible.
    I don't know enough to have an opinion either way, TBH.


    The point I was asked about was how it makes it more flexible. That, I can and did answer. A more limited currency is more flexible for someone trying to control it.

     

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  21.  
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    Anonymous Coward, Nov 25th, 2010 @ 7:39am

    Re: Re: Re: Re: Re: Re: Re: Re: Why not sound currency

    That was awkward wording. Let's try again.

    Some people argue that a flexible currency, although bad for the consumer at the base level, is good on the economy level. Enough so that it outweighs the benefits that the consumer gains from an inflexible currency.

     

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  22.  
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    Roger Browne, Nov 25th, 2010 @ 12:07pm

    Bitcoin has potential as a sound currency

    Your father may yet be right. Bitcoin has potential as a sound currency that could replace cash, without the centralization of a bank-based or government-based monetary system.

    There is no central control; it's peer-to-peer. All the computers in the network collectively keep track of all the transactions.

    Bitcoin has been up-and-running for over a year, and is continuing to grow.

     

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  23.  
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    Phonetician Hack, Nov 25th, 2010 @ 6:37pm

    Re: Re: Re: Why not sound currency

    I believe the word is "volatile." And it's not a matter of spider sense; as Mike showed it's a demonstrable economic concept. The Brazilians creating a currency of account, against which their own currency would fluctuate daily, provided a certain consistency of market that simply doesn't exist in the global currency exchanges today.

    Currencies move against one another based on relative supply and demand of those currencies (predicated by economic indicators and the business transactions that influence and are influenced by them), without any absolute frame of reference.

    The institution of a "global currency of account," as freaky as it sounds to some people, is essentially just a Consumer Price Index, showing how much of a local currency it would require to buy an equivalent loaf of bread. Effectively, it means nothing. Psychologically, however, it means everything: and money is backed by its psychological worth anymore.

     

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    Phonetician Hack, Nov 25th, 2010 @ 6:48pm

    Re: Re: Re: Re: Re: Re: Re: Re: Re: Why not sound currency

    Those people would be economists, probably. One of -- if not the -- most powerful ways to implement a country's fiscal policies is through its monetary policy. Being no expert, I can only offer a few examples, but the most obvious is through the interest rate at which the central bank loans -- the ripple down effect being that of encouraging or discouraging consumer borrowing and spending to slow or encourage growth against the currency. When you muddy that pool external and competing policies, it becomes harder to effect your own.

     

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  25.  
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    Anonymous Coward, Nov 26th, 2010 @ 9:05am

    One world currency would require one world economy would require one world government. And there are far too many reasons to oppose that to list in this mere comment box.

     

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  26.  
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    Gene Cavanaugh, Nov 26th, 2010 @ 10:23am

    Cash and electronic money

     

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  27.  
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    Gene Cavanaugh, Nov 26th, 2010 @ 10:27am

    Cash and electronic money

    Great article, and I agree in general.
    However, in the US we are on a "smaller government", "welfare for the wealthy" insanity, and the financial institutions are taking full advantage of it. Without colluding(?????) they are all using non-cash transactions to bully the consumer; so I am beginning to go from a full, unquestioning acceptance of being cashless back to cash.
    Perhaps if I move to a country that believes in social responsibility some day, I will return to cashless, but not here!

     

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  28.  
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    Mike Masnick (profile), Nov 27th, 2010 @ 12:29am

    Re: Re: Re:

    Trust and faith are very similar but I would like to hear about the slight difference that you perceive that make it a important one.

    Trust is about relationships. Faith is about blindness.

    I agree with you here, there are human traits that actually "need" the concept of money to function and that haven't been challenge for a long time, people need something to get angry at or to explain why they can't have it all or how much they are worth it etc, something that can be measured, but if you didn't actually have to address those mostly psychological issues money isn't really needed, unfortunately we have those issues and they are important.

    I disagree. I believe that money makes many forms of things viable that previously were impossible -- and that has allowed for economic expansion from which we have all benefited.

    Please by all means offer a better explanation to why Americans are in debt since the 70 mostly 1 and a half times their earnings in general and how the government started cheap credit as a way to boost economic growth through consumption, I can't see a better explanation to it. You may have a better explanation then I do and I would like to hear about it.

    Excessive debt is a problem, but the concept of debt itself is not bad. I don't deny problems with constantly over-extending ourselves, but you are making a mistake if you think debt, itself, is bad.

     

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  29.  
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    Anonymous Coward, Nov 27th, 2010 @ 7:30am

    "Trust is about relationships. Faith is about blindness."

    ??? don't really see the difference, but I guess your view is different from mine I even used the dictionary to try and see the difference and there are parts that can be interpreted in many ways.

    Faith–noun
    1.
    confidence or trust in a person or thing: faith in another's ability.

    Trust–noun
    1.
    reliance on the integrity, strength, ability, surety, etc., of a person or thing; confidence.
    2.
    confident expectation of something; hope.

    "I disagree. I believe that money makes many forms of things viable that previously were impossible -- and that has allowed for economic expansion from which we have all benefited."

    Yes, money did enabled many things to be realized that doesn't mean they were impossible in some other way, it means money was there to teach us something about ourselves it permitted us to evolve the understanding of many things and see the dynamics involved inside society which are mostly psychological, have you ever wondered why Wall Street is so susceptible to hearsay and use terms like "panic" to describe what drives them?

    "Excessive debt is a problem, but the concept of debt itself is not bad. I don't deny problems with constantly over-extending ourselves, but you are making a mistake if you think debt, itself, is bad."

    I didn't say debt was bad, what I said was that the path chosen in the 50's or 60's towards cheap credit, created an environment that was unsustainable, the production means where decimated by Asian(Japanese) competitors which caused a lot of unemployment, which arrested growth, which drove manufacturing to other places to try and find other markets, which made Congress go down hard on Japan which created the Asian Tigers, which fueled more cheap manufacturing capabilities elsewhere, which drove more U.S. companies to look at Asia, which lead to more companies being closed but because people were borrowing they didn't felt the impact until later in the 90's, it took half a century but all economists that I talked to in the 70's and 80's knew America was going to go banckrupt or something bad was going to happen.

    Want to see something that is coming and when it burst will be ugly and that everybody knows?

    Pensions your 401K, the government doesn't have the money to honor that, they have spended all, even though many people warned them that there would be no youth to work to pay that because natality is down. We know all of that, but like the economic train wreck, the social one we can only look and see it coming and do nothing. Why? psychology mostly, Mormons will not feel the impact of economics trends because they don't depend upon it, some people who are creating little farms in their homes will not feel those things, but the rest of people the great majority will likely suffer just like people in Egypt died when the rivers dried up, the river in this case is "credit", how do you keep creating the illusion of expansion without producing anything?

    Or you disagree that loss of manufacturing capabilities, uncontrolled expansion, cheap credit to fuel consumption based economic growth is not a good idea?

    Now I would like to see and others will enjoy it too, if ta better explanation with some more details came up. I saw all those events and that is how they come together in my mind of course I could be wrong, so I would like to you to give people here a better view of what happened if you can and care to share, you may have a working theory that you are not prepared to share because it is not polished and may have gaps or something and I do have an advantage cause I'm an AC still, pick the holes in my talking points and I will do my best to come up with better answers :)

    Have a nice day you all.

     

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  30.  
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    aikiwolfie, Nov 28th, 2010 @ 1:03pm

    Debit Cards Already Exist

    If anybody here has a debit or switch card then going almost completely electronic is already a reality. The money you spend on these cards comes right out of your bank account.

    Most of the time this is no big deal. My bank uses a chip and pin system. So it's fairly secure. Although chip and pin isn't perfect. It can apparently be cracked.

    The big con in the way these cards are set up and handled are the convoluted payment systems that work behind the scenes. My bank offers it's combined debit/ATM card in conjunction with Visa. Which clearly necessitates a charge on my account.

    So I need to pay someone else before I can spend my own money. I find this particularly annoying as I need to pay this charge just for having the card. And If I then happen to use an ATM that charges for withdrawals I pay a further charge.

    In case anybody hadn't noticed by now. The banking system is a big con and has gotten worse since it all became automated.

     

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  31.  
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    Bob, Nov 28th, 2010 @ 6:16pm

    Cash

    Cash is King its harder to trak everyone should use it more....

     

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  32.  
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    nasch (profile), Nov 29th, 2010 @ 8:41am

    Re: Debit Cards Already Exist

    If you pay any fees for having or using a debit or credit card, switch banks.

     

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  33.  
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    DS, Jan 20th, 2011 @ 5:23pm

    Cash used to be king

    Yes, it used to be king but you'll often find it much easier to get your money back when you don't like a product or service if you used a credit card. Cash doesn't give you rewards for spending it... and let's not forget the amazing power of credit cards to build up incredible amounts of debt and put us all in bankruptcy! How can you achieve that with cash ;)

     

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