This article explores John Nash's "Ideal Currency" series of lectures and papers. As we all know, John Nash re-constructed our understanding of economics by expounding various game theories. Nash Equilibrium is one of the most widely cited solutions to date, but it was not until nearly 40 years that Nash was recognized for this outstanding contribution.
Although Nash was not understood at first, he did not stop researching valuable solutions. He believed that there would always be people in the world who could apply his ideas to practice. This paper argues that Nash's importance on ideal currency theory is significantly higher than his early and 1960s thoughts.
Lecture and writing on the ideal currency for 20 years
There are many different versions of the ideal monetary theory. Nash has been mentioned many times on many occasions, but it has not produced any influence. Even the professors of economics are not familiar with this theory. Many versions of the ideal monetary theory can be found on Nash's homepage and are fully public to the public.
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Each lecture or article uses different metaphors and examples to explain the concept of ideal currency in different ways using our historical or modern economic events. One of the papers was published in the Southern Economic Journal, which is very different from other existing papers and lectures. If you don't know anything about Nash, it's harder to understand this article.
The origin of the ideal currency concept
Nash said in an interview that he had a basic prototype of ideal monetary theory when he arrived in Europe in the 1960s. It can be seen from his biography that he had paranoia at the time. Since then, he has been thinking that the government is plotting to harvest the people, and he will become the "savior."
On the one hand, this behavior is obviously considered to be extreme narcissism and paranoia. On the other hand, it shows that Nash has never given up on this view, and his observation is actually very logical. This is also the conclusion of the ideal currency:
“Keynesianism always implicitly states that some good managers can do something meaningful. Working with the Ministry of Finance and the Central Bank, the “customer” of the country providing money services does not actually need or is not suitable for managers. What are they managing, what they are doing, and how these management will affect the “customer” funding situation.
Therefore, for those who claim to be "Keynesians", perhaps an analogy can be made: although they are working on the banner of achieving the lofty goal of universal welfare, the fact is that they are letting the government "print money." ”
How to measure (a stable) value
Understanding the definition of value is not easy, and there is no stable metric. There is a need to understand how to assess the currency and commodities in the market, because the market gives us a price signal for money and commodities.
In other words, we may ask how we can objectively evaluate government-issued bonds; for example, if we compare the euro to the dollar, we can observe that the euro exchange rate has been declining at some point. This means that the euro has suffered losses, but if the price of the euro against Venezuela Bolivar rises, it means that the euro does not necessarily suffer losses, but the actual situation may be that the value of the dollar and the euro are growing, but the dollar Both the increase and the growth rate exceeded the euro.
Since the exchange rate of each currency is floating, the central bank issuing the currency has corresponding policies and exchange rate controls, so no currency can maintain long-term stability.
“In any case, the price of anchoring a basket of currencies is more objective than comparing it to only one currency. This is similar to how central banks measure and set inflation targets:
… It is the observation of the new "line" of the "central bank" function related to the currencies of various countries, which gives us inspiration to study the "close to ideal" currency.
The idea seems contradictory, but officials refer to the “inflation targeting system”, which actually acknowledges that… it is indeed controlling inflation by controlling the money supply (like by controlling the amount of a piece of art). ).
So what do they do? They measure inflation through the relationship between the “cost of living” index and the domestic price. ”
In a country, the sum of the prices of different commodities can help to objectively measure the inflation rate of the currency. Nash's argument is based on a similar concept that he calls the ICPI (Blue Fox Note: Industry Consumer Price Index, which includes commodity prices in multiple regions around the world, providing global standards for commodity price comparisons). ICPI uses the international price basket as the best choice and provides an international basis for value comparison.
Is the value of gold not very stable?
Historically, although some people say that we have never really adopted the gold standard, gold does provide us with a relatively reasonable and stable value base at some point. After the end of World War II, many countries in the world began to adopt the gold standard, that is, the United States linked the local currency to gold under the Bretton Woods Agreement.
This standard continued until the 1970s, when the United States suddenly gave up this standard, and other countries in the world were forced to abandon the gold standard and turn to the floating exchange rate system that we are common today.
Some economic philosophers have suggested that we try to achieve the gold standard as much as possible. However, as pointed out in the book Ideal Currency, this may not be the optimal solution:
However, for the following reasons, few people now propose to simply adopt the gold standard:
“The cost of gold mining depends a lot on technology. The recent cyanide leaching technology has made it possible to re-mine gold in locations that have been abandoned in the US, so the US is now a big producer. Unpredictable costs. Sex is a negative factor.
The choice of gold mining locations may not be “politically attractive”. Therefore, it seems unlikely that relevant political choices will be made to increase the economic importance of these particular regions.
Although gold is the most logical choice, there are still some negative psychology about gold. ”
Despite this, people still hope that gold will become an integral part of NICP's proposed ICPI.
Misunderstanding of ICPI proposed by Nash
“When I finally introduced the “ideal currency” theory, I conceived a standardization basis that would compare the monetary value with the ideal standard.”
Not many people have come into contact with most of Nash's views, and people often mistakenly believe that Nash suggests that we should link money to a politically constructed ICPI. Although ICPI is the foundation, it is not a solution proposed by Nash itself, because it needs to be constantly adjusted over time, which may bring political pressure:
“We all know that time can change everything, especially if a “miracle energy” is discovered, so if a perfect ICPI is established, it should not be as permanent as it was originally defined. Instead, it should be based on the international trade pattern. The actual evolution is regularly adjusted.
However, the authority for setting standards is controlled by politicians, and the election will inevitably undermine the continuity of standards. ”
However, the proposal to anchor the currency to ICPI is not Nash:
“However, if the currencies of the two countries are measured by the domestic CPI index and the value is stable, then the monetary relationship between the two countries will also stabilize. This is also possible. Moreover, no ICPI index is adopted. In the case of the basis of the value standard, the limit of this development trend is actually the “ideal currency”.”
Understanding of the purpose of developing the theoretical theory of ICPI
Nash's solutions and papers are often unique. His perspective on solving problems is an angle that others have never thought of, and his solution is logically jumping. Many years later, when we fully understand his achievements, we can understand all of his things through logic, but his results seem to be only a paradigm shift, and there is no cohesive explanation.
This is the case with the ideal currency. Basically it is mathematical induction. It's like when building a bridge, once the key parts are in place, the construction process no longer only focuses on formal things.
Simply put, Nash's point of view is that although we can't design a currency that is completely stable, we can see that a currency close to a stable value can be said to anchor a basket of the best choice of commodities. The limit.
Nash's observations may not be like a special or valuable insight, but Nash has spent a lifetime. This has become his lifelong career, and his speeches over the past 20 years have all revolved around this theme.
What is the significance of Nash's insights?
"The significance of this idea is what you can infer from it, not the idea itself. From this point of view, if you put money in a competitive environment, it must survive in the competition, we can't help but start asking, what is it? To create such an environment."
The lengthy text below unbelievably reveals the genius of John Nash:
“I think there is a good analogy in mathematical theory, such as “class domain theory.” In mathematics, a set of axioms can be used as a basis to form a field of theoretical research. For example, if a set of axioms is specified and accepted We have the theory of the ring; if another group of axioms is the foundation, we have the theory of no square ring.
Therefore, from a critical point of view, Keynes's macroeconomic theory is like a plane geometry theory without Euclidean axioms, classically called "parallel hypothesis." (There is an interesting thing in the history of science. At some point before the nineteenth century, mathematicians were demonstrating the unnecessaryness of this axiom or hypothesis, which should be deduced in other ways.)
Therefore, I think the Keynesian macroeconomics is like a scientific study in the field of mathematics, and this research in the field of mathematics is carried out without sufficient axioms. This result is similar to the case in planar geometry. The plane is not necessarily flat, and the area inside the circle can be hyperbolically expanded as a function of radius, not just the square of the radius. ”
The way we understand axioms is not new until we understand the ideal currency. Nash emphasizes:
"The absence of axioms is a well-established axiom that the currency that the central government is investing in should be properly handled in order to maintain long-term stability of value."
Central bank problem
The central bank is not the devil. People who think that banks are immoral do not actually understand the purpose of the central bank. The central bank adjusts the money supply through interest rate policy to reflect economic growth (or decline). The central bank wants to maintain a small inflation, however, this attitude may change as the political and economic environment changes.
Value stability is the overall goal, but in order to meet the needs of imports and exports, the predictable exchange rate is sometimes more popular than the completely unstable exchange rate. If the value of a currency begins to rise, especially relative to other related currencies, then the export volume will be affected. If exports are expected to decline, the domestic economy will change, and central banks will often reduce the cost of exports by depreciating their currencies.
In the search for an international, stable measure of value and a desire to stimulate inflation to stimulate economic growth, the Triffin dilemma emerged:
“The Triffin Dilemma or Triffin Paradox is an economic conflict of interest between short-term domestic goals and long-term international goals of countries that act as global reserve currencies.”
Over time, the world's currencies have not formed healthy competition. On the contrary, different countries sometimes even rush to depreciate. The depreciation of reserve currencies (such as the common dollar) has certain consequences. Therefore, the instability of the currency brings pressure, even if the price volatility is the best solution for the country and citizens in the long run.
The importance of a stable value measure
We generally believe that money is the medium of value exchange. But this feature can be seen as a by-product of our need for effective value comparisons. When value changes, money no longer plays this role.
Nash uses this example to illustrate the importance of a stable value unit:
"There is a problem of inflation in the currency, so now the $100 currency may be equivalent to the current $50 to $10 a year. Who wants to lend a year's money?"
From a short-term, personal point of view, the importance of money seems to be reflected in daily trading services, but as a global economy, the real problem we face is how to establish a stable set of value standards.
Bitcoin as a prerequisite for Nash proposal
From the perspective of Nash, we can infer all aspects of Bitcoin, which is a catalyst for the evolution of the monetary system. Bitcoin's stability is comparable to a basket of optimal commodity prices (ICPI). There is a need for a currency or commodity that can be used for international trade, which is better than other alternatives available. This is what Nash calls:
“I came up with the possibility that a good international currency might have appeared before the official launch.
Here I am thinking about a politically neutral form of technical utility.
From Gresham's point of view, to be quite decent, money needs to be as good as other material goods that may be hoarded. ” People have come to realize that Bitcoin is a form of value storage that plays a much different role in the history of gold. Bitcoin actually mimics the scarcity of supply, but the relationship between supply and mining costs.
Bitcoin offers a fairly stable (but not perfect) and predictable measure of value that the market can rely on as a hedging tool. Nash even predicted the development timetable for Bitcoin, which will be halved every four years:
“The further question that arises is that if Sweden’s 1% to 3% inflation rate is appropriate and manageable, why not choose an inflation rate between 0.5% and 1.5%?”
Bitcoin is becoming more and more important, and more exchanges can be exchanged for more currencies. Central banks will realize that their issued currency is competitively related to Bitcoin. As a legal currency user, the nationals naturally put pressure on the central bank to improve their currency stability and print higher quality banknotes, as predicted by Nash 20 years ago:
“The currency that is often used for comparison, such as the current Euro, US dollar, Japanese yen, British pound, Swiss franc, Swedish krona, etc., users look at these currencies with a critical eye. Users also have the right to choose whether to use or how to use one of them. Currency. This may put pressure on quality, which leads to a decline in inflation."
The end result of this phenomenon is that our monetary system will reach the upper limit of the ideal, Nash believes that this result can be compared with ICPI (although ICPI has never been adopted). This reminds us of his original claim: Competing governments and their central banks are actually trying to harm the best interests of the people. Nash claims that he wants to solve this problem. In fact, Nash's approach is relatively rational:
“The standard, as the basis for the standardization of the value of international monetary units, will eliminate the political role of “the amnesty”,…”
Therefore, Nash claims:
"…the process of political evolution will allow citizens under "democratic countries" to understand the importance of monetary policy and understand that there are other ways of storing money in addition to "savings."
Difficulties in understanding Nash's point of view
Many of Nash's works are hard to understand. As everyone knows, the solution he proposed seems to have no corresponding explanation. However, Nash believes that the concept of ideal currency is not welcomed by traditional monopoly printing institutions:
“The central idea of my speech, linking the “ideal currency” with the choices and actions of the “frugal” or “savings” of individuals or “economic agents” is for the following reasons: In this era, the state administration does not need to go through the parliament. The program can take action, so everyone can't easily talk about the Keynesians.
Therefore, in the political campaign and election boom (for example, in the United States), it is difficult to implement a national monetary policy. If such a policy is to be implemented “long-term” and consistently, an economic civilization is needed. Higher levels of national or national environment. (For example, Sweden and Argentina may be used to represent a higher level of "economic civilization.") (Blue Fox notes: Current inflation in Argentina is no longer in line with the author's ideal choice.)
Therefore, in 2012, I will be more cautious about any implications related to the Keynesians and the political interests associated with the academics of the Keynesian alliance (or composition).
This cautious attitude will continue until 2013.
I am referring to a research project that has not yet been fully completed, because I have not officially completed the paper in this area, nor have I submitted any articles describing the work. In addition, I have not fully embodied these details, which axioms to use and how to choose the basis for constructing hierarchical extensions. I am also very worried that there may be errors in learning this content.
Historically, the proposed system is either inconsistent or has unexpected weaknesses, which is common. So I think I have to be cautious and don't rush to pursue a goal. It is because of this fear, so I will not consult other experts in this field until my ideas are formed. ”
Although the conclusions have been elaborated, there is still a point about Bitcoin. The early currency holder community of Bitcoin was allegedly in a debate. On the one hand, a small number of people know nothing about the concept and basic purpose of the “super bitcoinization” of the central bank’s business claims.
The following is the conclusion of a person who does not correctly view the role of the central bank:
“The idea seems contradictory, but the official mention of “inflation targeting” is actually recognition… they are indeed consciously controlling inflation by controlling the money supply (like by restricting individuals to “print”) Limit the "printing" of a certain work of art."
When we consider the way the central bank actually operates, Bitcoin may help the central bank improve currency stability and currency quality. A congressional study on bitcoin explains this:
“With regard to the speed of currency circulation, if the increase in the use of Bitcoin leads to a decrease in the demand for holding US dollars, then the circulation rate of the US dollar and the actual supply of money (the currency in circulation plus the bank reserves held by the Federal Reserve) will increase.
In this case, the Fed needs to adopt a compensatory tightening monetary policy to maintain the same level of monetary easing. ” In fact, Nash gives a reasonable logical basis for the best applicable scenario for Bitcoin. Although many beginner bitcoins and people who have not received economics education support Bitcoin as the daily currency that anyone in the world can use at a lower cost, Bitcoin shows greater resilience and at the same time it acts as an inflation hedge. The golden nature of the tool is also increasingly recognized.
At the same time, experts in the field of economics pointed out that it is impossible for Bitcoin to grow in such a short period of time to serve the global population. In fact, Bitcoin's trading ability is difficult to expand at the bottom, which may be beneficial to the predictability of Bitcoin's value proposition, further consolidating its position as a new type of digital gold.
As bitcoin transaction fees rise, ordinary users who don't understand Bitcoin will be frustrated. But as bitcoin inflation continues to fall, the supply of bitcoin will eventually be scarcer than gold. As the network effect continues to push, transaction costs will continue to rise.
Not only is this not a defect in Bitcoin, but it can also serve as a reference indicator, indicating that there is still a lot of room for bitcoin trading needs. As the demand for wealth reserves increases, the price of Bitcoin against the legal currency of each country also rises, and more and more value players have to enter the market. In the end, large hedge funds and even central banks may have a large number of bitcoin positions.
At this point, Bitcoin, as a settlement system, will “gradually” deprive central banks of the right to print freely, as John Nash describes, to protect the ultimate interests of the people.
Some people think that Nash may be the mastermind behind Bitcoin, but whether or not he participates in this project will not affect the particularity of the "ideal currency." Regardless of whether Nash knows Bitcoin, his ideal currency is obviously built on the premise of Bitcoin. How Bitcoin should achieve scale application before the emergence of related technologies, Nash gives us the logical basis.
More and more scholars and economics professors now understand the views of Bitcoin and Nash, and a new human revolution will apply this theory to practice. Economic experts and professors around the world will agree with Bitcoin's digital gold attributes, and Nash's proposal will provide a theoretical basis for this change.
Risk Warning : All articles in Blue Fox Notes can not be used as investment suggestions or recommendations . Investment is risky . Investment should consider individual risk tolerance . It is recommended to conduct in-depth inspections of the project and carefully make your own investment decisions.