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Wandering_Dog

The impossibility of liquidity in xrp

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Liquidity in the financial system is achieved by an elastic supply of the global settlement asset, USD, and an elastic supply of various private monies below the settlement layer, typically in the form of bank deposits, bonds, and derivatives, such as swaps, in various currencies (EUR, GBP, JPY, etc). 

This financial system operates in the simplest sense as follows:   

image.png.dc34f652cf96a453e14180ce94b0f658.png

The primary creators of money are account holders at the central bank, namely commercial banks. These allocators of credit determine the purchasing power of economic participants and the direction and magnitude of spending in the economy. The largest problem with this simple system is that the financial assets that banks create are themselves affected by the money that banks create. This feedback mechanism can be explained in the simplest terms as follows:  

image.png.d285bd0d09fd0cbba3df3b52f3b0e6d9.png

This process is known as a credit or financial cycle, and reflects an expanding money supply, and a corresponding expanding supply of settlement money to ensure markets clear. If you replace an elastic settlement layer but retain the elastic private money layers, you will create a problem: there is no way to increase the amount of settlement money, in this case XRP. There will be contracts created today that in the future cannot settle due to an insufficient amount of XRP in the economy.  

The result is known as a deflationary spiral. Without a lender of last resort to create new XRP and lend that XRP, firms must liquidate their balance sheet, flooding the market with assets, which prevents other firms' capital gain, weakening balance sheets, and finally collapses prices. Because there is no balance sheet with the capacity to absorb all losses (the central bank), all balance sheets contract to zero, and the economy either collapses entirely, and unemployment reaches 100%, or the currency system is abandoned, which is historically the case with the gold standard.

In this context, the slogan "use XRP to source liquidity" is a contradiction--adoption of XRP as a standard necessarily implies an illiquid system, which has only one possible outcome: liquidity crisis.  

The argument which remains in favor of XRP adoption is equally absurd: XRP as a hard constraint on lending behaviour of banks. This is the equivalent of the gold standard, which has a long empirical history of failure.

If XRP is viewed from this perspective, it can only be appreciated as a precursor to something else, chiefly a global, elastic settlement system of a similar design but is national economy agnostic. However, currently this plausible implementation of an "XRP_2" does not exist, nor is it even discussed.        

 

Edited by Wandering_Dog

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100 billion XRP divisible by 1 million drops each and each transaction only takes fractions..I think the math has been done before and it would take hundreds if not over a thousand years to get through them all. The rate volumes can eat up the XRP can also be adjusted.

Just sayin' 

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2 minutes ago, Ripple-Stiltskin said:

Relative noob in macro-economics here ( I’ve studied micro- or business economics or how you call it?), but the elasticity of XRP is NOT in the supply >  the # of XRP, but in it’s price > it’s not traditional money ,  the price itself is the supply.... higher prices can move higher values. So an increase of “ settlement money” will be reached, not by issuing more XRP ( max supply is fixed), but in higher prices.

Mind you:  it will be a long way before reaching the point of having this problem, but who knows....

This is a gold standard. A country whose currency floats against gold either accepts high inflation in terms of goods and services (imports) or consistent pressure for structural changes (wage decreases) in order to balance payments. Whether you float or fix, it doesn't matter, welcome to info stating otherwise.   

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Just now, lucky said:

"We plan to hold 50 billion XRP by the end of 2021" - Ripple statement in 2017. These guys have thought things through.

The total USD used to backstop the global financial system in 2008 was > 8 trillion. 

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4 minutes ago, Wandering_Dog said:

This is a gold standard. A country whose currency floats against gold either accepts high inflation in terms of goods and services (imports) or consistent pressure for structural changes (wage decreases) in order to balance payments. Whether you float or fix, it doesn't matter, welcome to info stating otherwise.   

XRP isn’t a currency, the anology is false imo, consider XRP as a “ truck ” instead of money/currency. The truck can transport any amount of goods, you just pay more for it. 

But I’ll leave the macro economists to it. 

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9 minutes ago, jbjnr said:

Disagree. The money supply can be elastic, but xrp is only required for exchange of one elastic currency for another. Devaluation of the elastic currencies is reflected in increasing value of xrp. xrp is not pegged to anything other than it's value as a transaction medium. There is no need for liquidation of balance sheets, only a trade between fiat and xrp and vice versa. Using xrp to 'source liquidity' does not mean creation of new money, it only means easy access to someone else's cash so that settlement can take place using liquidity 'on demand' as opposed to prefunded liquidity. Nobody needs to borrow xrp or have it loaned out as they simply buy and sell it as needed. I do not see any liquidity crisis emerging. (xrp could be loaned to market makers, but that's orthogonal to the argument).

I'm not following your argument, can you give me a bit more detail when you say "access to someone else's cash" with respect to settling a transaction in XRP? 

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Comparing XRP to gold to come up with potentials strikes me as a little like comparing the internet to carving pictures on a cave wall.  To make such a comparison fair, you need to imagine a history where gold has additional properties, such as:

1) Having a significantly larger supply, so that whilst bound somewhat by its own economics, was never bound by limitations of its own physical representation, such that a sub-nano-grams of gold could be as easily physically exchanged and accounted for as 100 metric tonnes (should either need arise).
2) Any amount of gold (theoretically up to or including the entire supply, or down to 1 hundred quadrillionth's worth) able to be physically teleported around the world in 3-4 seconds at a dynamically-adjustable typically-negligible cost.
3) Any gold holder can elect, simply by choosing a random number, to store their physical entitlement of gold in such a way that the only way for someone to steal it would be to learn that number - leading to previously unimaginable situations of individual financial empowerment such as the ability to undetectably cross a border, or evade a war zone, with a kings-fortunes-worth of gold merely by remembering a sequence of seven words.
4) The ability to "program" the gold to avail itself to a recipient at a future date, given the fulfilment of a particular condition (such as the date passing).
5) The ability to add to all of the above properties with further features as they are thought of, and as needs arise in a cooperative, dynamic manner.

If you go back through time, give gold all of the above properties (and more I've left out), and reimagine all of history in that light - maybe you'll find some fair comparison between gold and XRP.

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2 minutes ago, Ripple-Stiltskin said:

XRP isn’t a currency, the anology is false imo, consider XRP as a “ truck ” instead of money/currency. The truck can transport any amount of goods, you just pay more for it. 

But I’ll leave the macro economists to it. 

The truck analogy may make sense when you say it to yourself, but a bit more detail would help to understand what you mean. Best perhaps with an example?  

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1 minute ago, Wandering_Dog said:

The truck analogy may make sense when you say it to yourself, but a bit more detail would help to understand what you mean. Best perhaps with an example?  

Maybe, but first I’m trying to understand what you’re stating in the OP yourself. It’s a high level, academic description of a possible theoretical problem ( fixed supply of XRP puts a restraint on liquidity?), but can you describe in simple words with a concrete example how and where this problem will arise?  For clarity purposes. 

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5 minutes ago, Professor Hantzen said:

Comparing XRP to gold to come up with potentials strikes me as a little like comparing the internet to carving pictures on a cave wall.  To make such a comparison fair, you need to imagine a history where gold has additional properties, such as:

1) Having a significantly larger supply, so that whilst bound somewhat by its own economics, was never bound by limitations of its own physical representation, such that a sub-nano-grams of gold could be as easily physically exchanged and accounted for as 100 metric tonnes (should either need arise).
2) Any amount of gold (theoretically up to or including the entire supply, or down to 1 hundred quadrillionth's worth) able to be physically teleported around the world in 3-4 seconds at a dynamically-adjustable typically-negligible cost.
3) Any gold holder can elect, simply by choosing a random number, to store their physical entitlement of gold in such a way that the only way for someone to steal it would be to learn that number - leading to previously unimaginable situations of individual financial empowerment such as the ability to undetectably cross a border, or evade a war zone, with a kings-fortunes-worth of gold merely by remembering a sequence of seven words.
4) The ability to "program" the gold to avail itself to a recipient at a future date, given the fulfilment of a particular condition (such as the date passing).
5) The ability to add to all of the above properties with further features as they are thought of, and as needs arise in a cooperative, dynamic manner.

If you go back through time, give gold all of the above properties (and more I've left out), and reimagine all of history in that light - maybe you'll find some fair comparison between gold and XRP.

1) The quantity of a settlement money supply is either fixed or not-fixed, the actual amount at some time t is largely irrelevant when considering stability, only the dynamics of expansion and contraction of said supply are relevant.

2) Gold certificates are ledger entries and can possess the exact same characteristics.

3) see 2. 

4) see 2. 

5) Emergent behaviour is unknown, that's what I'm reading here, and that's true, but I don't see how a discussion of emergent behaviour, which we can't reliably simulate, adds to a discussion of stability, except to say "well, we don't know till we try it do we", which seems a bit nonsensical, unless you mean we should just abolish economics as a discipline and wing it :)  

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