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[Boea]

That would generally explain why there is always more around times of duress.

[Helgoland]

I heard something like that just a few days ago - wouldn't the Central Bank have to keep lending larger and larger sums, leading to quite a bit of inflation?

And on the "currency needs a backing" discussion: The only backing a currency needs is a consensus to use it. Whether it's cigarettes in prison, shells on a tropical island or shells and ammunition ( ) in a post-apocalyptic world, an item only has to be semi-universally acknowledged as valuable and - voila! - it suddenly has value and can be used as currency.

[Reelya]

It's not quite the same as automatically "causing inflation".

If the government stops issuing central debt etc, then the money returning to the central treasury will eventually exceed the outlays and there will be liquidity shortages causing deflation.

So there is a level of sustainable new debt that's not inflationary. That because the NEED for issuing the new currency is to keep liquidity so that previous borrowers can make enough money to pay back their loans. In this way you have supply, being the new loan money, and demand, being the old loans which need to be repaid.

A small positive inflation is actually deliberately built into the system by the planners (but not as an "inevitable" effect of the debt-currency relationship), but to make concepts of investment make sense.

[AutomataKittay]

Yeah, a lot of the inflation and deflation have to do with flow of currency, either with resource extraction and debasement of hard currency or issuing more soft currency or just not printing more. There're also reserves rate ( I forget the term for how much banks are required to back their cash/hard reserves with, which's used for loaning ) set by government to try to 'balance' economy. Or even just trust and desires for those types of currency leading to higher or lower rate of flow.

Really, the vision of 'eternal growth' doesn't works and inflation gives an illusion of one. Not to mention a lot of those methods of growth hits a really hard ceiling of usability/value at a point and ends up with faked reports or Enron

[smirk]

Temporary re-rail away from the inflation discussion, but I wanted to throw in

drugs

This. I'm away from my Tor computer at the moment and haven't been down into the Deep Dark for a while, but I assume the Silk Road is still going strong. Bitcoin is (for the moment, anyway) the most secure means of trading they have down there, and drugs tend to be a rather powerful economic engine. It might be a joke currency everywhere else, but as long as it's being backed by (some small part of) the drug trade, I doubt it'll vanish anytime soon.

At least, until governments start banning it for being part of the drug trade =P

[BinaryBeast1010011010]

Who said the government hasnt any interest in drug trade... It has happened. One wouldn't shoot oneself in the foot.

[AutomataKittay]

Temporary re-rail away from the inflation discussion, but I wanted to throw in

drugs

This. I'm away from my Tor computer at the moment and haven't been down into the Deep Dark for a while, but I assume the Silk Road is still going strong. Bitcoin is (for the moment, anyway) the most secure means of trading they have down there, and drugs tend to be a rather powerful economic engine. It might be a joke currency everywhere else, but as long as it's being backed by (some small part of) the drug trade, I doubt it'll vanish anytime soon.

At least, until governments start banning it for being part of the drug trade =P

Some banks and credit organization already bans bitcoin exchanges' non-bitcoin currency transactions because of those legal issues

Drugs and online gambling's pretty much illegal everywhere in first world countries, and seems to be the bigger user of bitcoin along with paying for computer crime activity. It does makes it much harder for legal users to adopt it, too.

[GreatWyrmGold]

To reply to the question posted in the title and the OP:
Bitcoins are as legitimate as you and the other person want them to be. Currencies are worth much less than what you buy with them; a 100-dollar-bill only has value because (almost) everyone in America (and many foreigners) have agreed that they will give you a certain amount of goods or services in exchange for those $100, because they expect that someone with something they want will be willing to accept those $100 for something they want.
Bitcoins are the same way. They're worth something if and because people decide they are.

[Capntastic]

To reply to the question posted in the title and the OP:
Bitcoins are as legitimate as you and the other person want them to be. Currencies are worth much less than what you buy with them; a 100-dollar-bill only has value because (almost) everyone in America (and many foreigners) have agreed that they will give you a certain amount of goods or services in exchange for those $100, because they expect that someone with something they want will be willing to accept those $100 for something they want.
Bitcoins are the same way. They're worth something if and because people decide they are.

Not really, Reelya refuted this line of thought on the previous page.  Currency is actually more complex than a lot of people think.

[Helgoland]

Not really, Reelya refuted this line of thought on the previous page. Currency is actually more complex than a lot of people think.

No, he just eplained that the current currency has a mechanism to ensure that there always will be demand in a certain place. If no-one gives a damn about the institution, the currency loses all value regardless.
The way currency works is simple. The way modern currency works is not.

[GreatWyrmGold]

Nice thread here, i do enjoy discussing currency and economic ideas.

One thing I thought I'd mention is how fiat currency can have value if it's not "pegged" against anything ... e.g. wouldn't the value be purely based on psychology?

And the answer is no. The reason being the way modern central banks / federal reserves issue currency. Rather than just printing money and handing it out, they issue currency as DEBT (reserve banks loan money to other banks to be further loaned out). And debts always have to be repaid plus interest.

Think about what that means? For every dollar issued, more than that many dollars must be eventually repaid to the reserve bank. This ensures that the DEMAND for dollars is roughly proportional to the amount of money issued.

Obviously this is a simplified explanation, but you get the idea.

The debt isn't really the reason I accept money. I'm not taking the money so I can be payed back money later. I'm taking the money because I have a reasonable expectation that I'll be able to exchange it for what I want.
It's the same with gold during earlier centuries. It was a pretty but useless metal. Why did it have value? Because it was valuable, and therefore you could be expected to be able to trade it for valuable things. That's oversimplified, of course, but the point is that money has exactly the value everyone says it has.
If some chicken farmer says that one pebble is worth one egg, and people exchange pebbles to pay for stuff, the pebbles are a currency. Conversely, if no one accepts your $100 bill, it is not.

[Reelya]

I know YOU don't care about the debt. That's obvious. No-one would claim you care about SOMEONE ELSE'S DEBT. You don't NEED to care. The system doesn't require that.

The "reasonable expectation that I'll be able to exchange it for what I want" is due to the demand for dollars generated by those business' who need to repay their debt or declare bankruptcy and have their managing directors banned from running companies again. They generate demand for dollars since their livelihood requires it. They could take non-monetary payment, but then they'd fail to repay their loans since they're legally denominated in the state currency.

"somebody else needs it" is the basis of demand. You are not required to give a fuck about why they need it.

[GreatWyrmGold]

If their...whatever you call people you owe debt to accepted, say, golden pigeons or modern art to pay debt,they could pay debt in that and no one would care except the media (Breaking News! Company pays debts with buckets of paint slung at canvas! Successfully!)

The...debtees? accept dollars because they accept dollars as something of value. Granted, they'd have a hard time forcing the debtor to pay in modern art or whatever without a predefined contract, but that's not really important. The government only accepts dollars because that's all it's ever accepted; if Congress and the public all decided they wanted to, they could switch overnight from using dollars as currency to using, I dunno, purple coins with Richard Nixon's face on them with no repercussions except for economic chaos* and other countries being more certain that we're insane.
*And the economic chaos would not result from the fact that we were switching from a "good" currency to a "bad" one, but rather because of A. redrawing contracts and B. the new redistribution of wealth.
You really can't use the current economic system to justify using only certain kinds of currency; we didn't come into the economy with blank slates for minds and an infinite array of options, we came in with a decade or two of knowing no or almost no other way, with only one standard of exchange one could expect to be useable anywhere. If it wasn't for those "problems," all of these hypothetical situations could happen.

In conclusion, all that separates a worthless coin or whatever from one accepted as currency is that it's accepted as currency.

[Helgoland]

I think I have a good clarifying example: Imagine a country with a large amount of inflation. On day n, a piece of paper is currency, as you can use it to buy stuff. On day n+100 (or n+10 or n+1 or n+0.5, all that has happened at some point) its only use is kindling a fire, because it has become worthless. It's still the same piece of paper, though

[misko27]

Reminds me of the post WWI Germany. Motherfucking Hellhole that.
 
Anyway, it is possible to just issue bills stating they equal, say  10 of those original papers, and just carry those around. Or make pennies for the 1.