Mailvox: the fifty trillion dollar question
KJ offers the opportunity to ask a question of some European functionaries:
The former and long-serving vice chancellor of Germany (Dr Joschka Fischer) and the EU’s High Representative for Common and Security Policy (Dr. Javier Solana) are here... debating the economic situation (and potential solutions). The Spaniard is (in summary) saying the situation is looking pretty shit right now and it could be fixed by Germany “opening up” to the rest of poorer/less-productive Europe (when pressed he confessed that includes offering up more of its – i.e. Germany’s - money). The German is (in summary) saying the situation is looking pretty shit and what we need is to centralise and consolidate political power in Europe. Lol! 4th Reich anyone!? According to both, the Euro breaking up would just be catastrophic. We can ask questions but I don’t have the heart to ask any. It’s so depressing listening to this glossy, typical politic speak from which no straight answers can be extracted. Do you questions for the German Vice Chancellor or EU's High Representative?I wrote back: Yes. Since inflation or default are the only way to escape debt of this magnitude, which is the vice-chancellor's preference? If you get a second question, ask why the successful bank defaults in Iceland have not been permitted to take place in the EU.
Completely admits that historic 1920s inflation destroyed the German middle class, and admits not a result of market developments but intentionally by German central bank to write off war debt, so accepts inflation is going to have to play its part in the current situation!! Greek default, (and kicking them out), is not an option apparently, not forthcoming as to why other than that it would be “hugely detrimental to the rest of Europe”. No luck on the second question; earlier on he had alluded to “endless lawsuits” and “serious capital restrictions” to anyone taking the opt-out of paying their debts which he implied would make that option not viable. I didn’t hear Iceland mentioned at all.This lends further support to what most of us here have always assumed, that the central banks and governments will inflate. The question is, can they do so? This is where the question of the nature of money, and if credit is more properly considered money or simply the accounting of money, becomes the 50 trillion dollar question. Nate and I will be debating this in the reasonably near future, but I'll leave you with this thought: given their performance over the last four years, what are the chances that the core monetary assumption of the central banks and governments is correct?
71 Comments:
" given their performance over the last four years, what are the chances that the core monetary assumption of the central banks and governments is correct?"
HA!
Touche sir. Well struck.
I shall counter this by pointing out that outstanding debt not being money does not mean that debt does not effect the health of the economy.
The money supply is like the blood of the body. The amount of blood is important... the flow of the blood is important.
Debt is like the popular concept of bad cholesterol. Its not blood.. but get enough of it in the blood stream and you shut the whole system down.
Thus I want to be clear. I understand the dangers and problems of debt. I am simply saying its not money.
Vox, on April 30th, you posted a Ron Paul - Paul Krugman video. In it, Krugman defends by claiming we can't be watering down money because with modern financial products, we no longer know what money is!
Please add this to the topic list for your debate with Nate. Where does "money" stop and something else begins, on the scale from gold coins to paper bills to mortgage-backed pass-through securities.
Thus I want to be clear. I understand the dangers and problems of debt. I am simply saying its not money.
No worries. No one has ever mistaken you for a "debt doesn't matter" Neo-Keynesian.
> but I'll leave you with this thought: given their performance over the last
> four years, what are the chances that the core monetary assumption of the
> central banks and governments is correct?
We could just as easily ask you the same question. For the last 36+ months you (and many others) have been predicting a complete meltdown, that has yet to come. At what point do you have to admit that your prediction was wrong? Do you simply get to extend your prediction until some crisis does occur?
I am simply saying its not money.
It doesn't matter how you define money when the rest of the world uses and accepts it as money.
Good question Vox. What happens if the banks try to inflate but it doesn't work?
As I understand it, and I am correctable, to truly have inflation you need to have the new "money" get into everyone's hands and circulate around. If the banks do it today by lower interest rates further, would that increase the amount of money or would the current credit slow down continue?
I fear the real issue is what Joe talked about. "Money" doens't have a defintion anymore. How do you inflate the money supply if as Krugman maintains, we truly don't know what it is?
As many here can imagine, when I have spoke/written to the many blue pill eaters there is absolutely no true connection in their minds between what is called "money" today and "value". The vast majority of people are the perfect frogs - the water has been heating slowly enough that telling them the dollar is worth less than a nickel of what it once was doesn't register. I tend to believe this will come down on the side of the inflation scenario.
We could just as easily ask you the same question. For the last 36+ months you (and many others) have been predicting a complete meltdown, that has yet to come. At what point do you have to admit that your prediction was wrong? Do you simply get to extend your prediction until some crisis does occur?
No, you can't. I mentioned a specific trigger point, which has not yet arrived. Do you understand this well enough to know what that is? My prediction counts until a) the trigger point arrives or b) real economic growth takes place. The fact that they're still fending off the crisis doesn't change anything and indicates that I correctly diagnosed the problem.
"Please add this to the topic list for your debate with Nate. Where does "money" stop and something else begins, on the scale from gold coins to paper bills to mortgage-backed pass-through securities."
Not speaking for Vox here... but for me the defining characteristic is liquidity.
M2 is not a perfect representation of what I consider the money supply but it is close enough to make it the number that I most use in tracking.
I understand the dangers and problems of debt. I am simply saying its not money.
So, a Federal Reserve "Note" is not money?
What is the precise definition of "Note" in the financial sense?
Or how about Money Market funds that have checking accounts attached to them? Are these the equivalent of bank checking accounts? What is the financial makeup of these funds' assets (hint: debt instruments), and given that people can use them as checking accounts, does this make these money, or not?
i.e., what Stilicho said:
"It doesn't matter how you define money when the rest of the world uses and accepts it as money."
"Or how about Money Market funds that have checking accounts attached to them? Are these the equivalent of bank checking accounts? What is the financial makeup of these funds' assets (hint: debt instruments), and given that people can use them as checking accounts, does this make these money, or not?"
You're aware that all of these things are included in M2 I'm assuming... and thus I am confused why you would ask the question when I already explained that M2 was my preferred metric.
Please add this to the topic list for your debate with Nate. Where does "money" stop and something else begins, on the scale from gold coins to paper bills to mortgage-backed pass-through securities.
Here's a good starting point.
Defining money will be essential for the purpose of any such debate.
"It doesn't matter how you define money when the rest of the world uses and accepts it as money."
Bait and switch. You're confusing commodity and money. The US cash dollar is money. The claim that it is debt is trivial and pointless. What the dollar represents means nothing. What matters is... it has perceived value as an exchange medium that is effected by supply and demand. Thus it is money by the austrian definition. Debt is being owed money. So we either make the whole thing a big circular jerk like the wanna-be philosophical skeptics.
Gold isn't money because of what it represents either. Thus there is no reason to bother even going down that road. The dollar is not valuable because of what it represents. indeed what it represents has no value at all. Its value comes from its utility as an exchange medium.
Debt is a commodity. Money is an exchange medium.. which is a subset of commodity.
Btw, Nate, if you want to go first, you can start working on yours now. I suggest maximum 2,500 words each.
I doubt defining money will be as big a deal as you folks suppose. Vox and I each will refer to the Austrian definition.
which is..."the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market." according to Rothbard anyway.
Actually Vox... I think I'd prefer you to go first.
I would prefer to do this after the other debates are tied up nicely with bows and such. Writing an initial post only to have it sit for weeks is no good. I will find myself tearing it apart myself and rewriting it so many times you won't know what you're responding to.
Regardless... we know where we are going with this. It will be educational for me, and if I can help you sharpen your knives as well so much the better. And I suspect it will be fun for everyone.
Later on in the process we may tie down the topic a little. We don't need round 1000 of the inflation / deflation struggle. unless we do.
Bait and switch. You're confusing commodity and money.
Not at all. If I confuse anything, it is your previous explanations of your point of view. However, in light of the coming debate, I will simply wait for your "official" position to be set forth here before discussing it in any detail.
About any definition of money - one thing that seperates one money from another is its acceptance in the payment of taxes.
Zerohedge reports that the people employed in the labor force has taken another half a million drop. Screw "unemployment" numbers. Who is collecting from the government isn't any where near as important as how many of us are still working and bearing the burden of this mess.
What separates money is its acceptance as final payment.
What separates money is its acceptance as final payment.
Nope, not gonna do it. Just gonna wait for the debate.
I think I'd prefer you to go first.
Okay, NP.
Vox, I think your analysis can be construed to be incorrect due to the 3 year time gap between your book and now.
You don't hear much from Robert Prechter anymore due to getting some big forecasts dead wrong, like looking for a big stock market top in 2009 and being dead wrong as well as the bearish call on gold.
Where is Prechter anyways?
Vox, I think your analysis can be construed to be incorrect due to the 3 year time gap between your book and now.
Not to speak for vox, but I don't think he anticipated the various schemes for the banksters to play extend and pretend
given their performance over the last four years, what are the chances that the core monetary assumption of the central banks and governments is correct?
This is the wrong question. The correct question is, "What are the chances that the core monetary practices of the central banks and governments are advancing their intentions and goals?" The answer appears to be, "100%."
"Not at all. If I confuse anything, it is your previous explanations of your point of view. "
Strange. to my knowledge I have consistently said debt is not money. That's been one of the foundational points of my inflationism.
Like I said, I'll wait to see the Summa Inflationista. Your stated position therein should clear up any misunderstandings on my part about your views. The back and forth in the comments on a variety of econ posts can result in people talking past each other sometimes, so it is only fair to be sure of what the details of your views actually are. We may even agree on some important things.
a preview:
vox: z1 uber alles
nate: m2 uber alles
vox: z1 is much bigger than m2 and is collapsing faster than m2 is rising
nate: z1 is irrelevant because it's all fake money. also, you're a loafer wearing eurofag soccer fan.
vox: credit money is just as real as currency money, blah blah blah, also you're an inbred ginger greek redneck.
nate: you're short. and gay.
vox: I know you are, but what am I?
fin
> No, you can't. I mentioned a specific trigger point, which has not yet
> arrived. Do you understand this well enough to know what that is? My
> prediction counts until a) the trigger point arrives or b) real economic
> growth takes place. The fact that they're still fending off the crisis
> doesn't change anything and indicates that I correctly diagnosed the
> problem.
There are a range of options that exist between your scenario (a) [no, I do not know what your specified trigger point is], and (b) real economic growth. I have not read your book on the topic.
All of those range of scenarios, including what we have now (stagnation with a heavy dose of extend & pretend) are a failure of your prediction. The choice is not between meltdown, and a healthy (real) growing economy. And saying that some future point a crisis will happen is essentially claiming that an analog clock is not broken because it will eventually be the correct time again.
It is inherently irrational to accept any prediction, especially economic ones, without a timeline involved - a defined start and end period.
For example, you would never accept a Neo-Con's argument that the US defeated Al Qaeda because eventually they will all die of old age.
Josh FTW
> Zerohedge reports that the people employed in the labor force has taken
> another half a million drop. Screw "unemployment" numbers. Who is
> collecting from the government isn't any where near as important as how
> many of us are still working and bearing the burden of this mess.
Bingo. We are at the start of a long demographic period where the workforce rate continues to decline for the forseeable. Age-based retirements - anyone who possibly can find a way to afford it is leaving the workforce for retirement (or conversion to occasional or temporary work) - are part of this. Another part is the deleveraging trend. One reason people voluntarily deleverage (i.e. default on consumer loans, short-term debt, and mortgages) is to use the cash-flow owed towards debt service for immediate needs. As people walk from unsustainable bubble inflated assets (homes and cars), and into present value rentals and cash economy, they need money, and employment shrinks again. Once you lose the incentive of a shiny house and slick cars and a high-flying social life the motiviation to work two jobs and hustle overtime dries up.
Money and debt are both measurements more than they are things. We get confused about the nature of money because we count it, can carry it around in our pockets, and in general treat it as a thing. But it's not really a thing, it's a measurement. The mechanism through which it works is as a medium of exchange, but it's fundamental nature is as a yardstick to measure value - call it a moneystick. Inflation is just someone changing the scale on the stick. Which is a pretty disruptive activity if the changes are large.
"What matters is... it has perceived value as an exchange medium that is effected by supply and demand. Thus it is money by the austrian definition"
But debt also became an exchange medium recently (or at least became a widely used one recently). Both among the the banksters and bureacrats with swaps and what not (and pension schemes), as well as among the "little people" with credit cards, refis, and apparently college loans (at least in the US). The relatively rapid growth in default swaps and debt-backed securities de-calibrated our moneysticks pretty rapidly.
100 years ago there was a greater difference between money and debt because money was at least a thing you carried in your pocket and debt was generally a formal contract and a set of books. But today, money and debt have largely merged. We created an industrial-scale accounting operation so we didn't have to lug bags of money around. It's a pretty good way to do things, but unfortunatley the senior management at the accounting factory kept trying to grow their profits even after they passed the point of offering value for their services.
Sorry to butt in on your debate. I'm looking forward to reading what you guys have.
To get inflation, you have to have NEW money getting out there and moving around, and to get that you need BORROWING. That's where the problem has been:
http://strikelawyer.wordpress.com/2012/05/03/interesting-developments/
I mean, the government is borrowing, but then the deficits explode. It's a tough problem, but I'll bet the CB's are using Canada as a test to see if gradually RAISING rates will work.
Look, Nate is really a deflationist at heart because, when it becomes apparent that all those debts are worthless, only final payment money will have any perceived value. Got fiat?
100 years ago there was a greater difference between money and debt because money was at least a thing you carried in your pocket and debt was generally a formal contract and a set of books
"Gold is money. All else is credit." J.P. Morgan
The great irony here is Nate's stated financial strategy of taking out debt and not paying it back, if adopted wholesale, would hardly produce an environment of rising prices.
I forgot to add in a gratuitous shot at nate's stay at home dad status and both odd them refusing to sleep with each other.
on a slight tangent, having all of that power must be intoxicating for the bankers...they can rule the world, if they just get the right monetary policy
Vox and I actually see things very very similarly. There are just a very few small differences that result in our differing predictions. I suspect... given that we've both read the same things... rothbard... mises.. hayek.. marx... keynes... and we both agree on who is right and who is wrong... there will be a lot more agreement in this debate than what we're used to.
This isn't going to be like Hayek and John Maynard going at it. This is going to be more like Rothbard and Hayek discussing minute points of disagreement.
vox: z1 uber alles
nate: m2 uber alles
vox: z1 is much bigger than m2 and is collapsing faster than m2 is rising
nate: z1 is irrelevant because it's all fake money. also, you're a loafer wearing eurofag soccer fan.
vox: credit money is just as real as currency money, blah blah blah, also you're an inbred ginger greek redneck.
nate: you're short. and gay.
vox: I know you are, but what am I?
Wow, Nate, do we even need to bother now?
"To get inflation, you have to have NEW money getting out there and moving around, and to get that you need BORROWING."
We have a word for this... we call it a preconceived notion... and one that is in fact... incorrect.
I don't know if the topic of the debate will be broad enough for this... but just in case... I'm not going to go into here today. If its decided that the debate will be purely about what is and isn't money... then I will be happpy to clear this matter up.
OT- Beastie Boys' MCA dead, Link
This isn't going to be like Hayek and John Maynard going at it.
Don't underestimate the ability of the whitey mc to turn anything into a rap video
@Vox & Nate,
I politely request that in the course of your debate, both of you acknowledge historical precedent, and how it ties to your position.
For Vox, please point to a time in history where a central govt/central bank two-headed hydra decided to CURTAIL their spending and get their financial house in order?
For Nate, please point to times in history where central governments inflated by producing inferior coins and/or engaged in coin shaving to just buy a little more time, then a little more, until the system crashed. Please limit your historical examples to no more than 20 events total.
"The great irony here is Nate's stated financial strategy of taking out debt and not paying it back, if adopted wholesale, would hardly produce an environment of rising prices."
Of course, how often do a majority of people, let alone all, follow a long term course that would be positive when the "common wisdom" is that it is lunacy? I use "common wisdom" because it is not common sense. It is what the elites and those in control of mainstream media push. By the time the bulk of the populace comes around to seeing it and rush into it, it will be to late. Oh yeah, and when it does become wholesale? That is the best time to cash out. Never follow the herd unless you enjoy eating dust.
This isn't going to be like Hayek and John Maynard going at it. This is going to be more like Rothbard and Hayek discussing minute points of disagreement.
More like Rothbard and Nate.
I have a few questions regarding the economy, but I'm not entirely sure if I'm on topic here. Delete this post if it does not add to the discussion.
And please forgive me if these questions seem terribly naive or silly, I'm really very new to the study of economics and just found out about Austrian school about two months ago (hell, that was the same time I also found out that there were different schools at all!).
But I have been reading Ron Paul's book "The Case for Gold" and he states "in 1792 the dollar was defined as 371 4/16 grains of silver. From 1792 until August 15, 1971 the dollar was defined as a precise weight of either silver or gold." On the next page it says "until 1971 a dollar was 1/35 of an ounce of gold."
But here's were I get confused- how is this a standard? Is gold and silver always valued in proportion to each other? How? Does 371 4/16 grains (whatever "grains" are) always equal 1/35 ounce of gold? How? And if he is saying that this changed sometime between 1792 and 1971, from silver to gold standard, then why did it change? How did this not disrupt the economy, when the value of the dollar is arbitrarily change from one standard to another?
He also states, earlier in the book, that gold was more reliable because it came about due to work- when you trade for gold you are trading for the work of the miners and expeditions that got the gold. This is unlike paper money which is supposed to be worth far more than the paper that it is printed on.
But doesn't the work involved change? Perhaps gold is easier to get now, due to the technology. Perhaps it is harder to get, due to scarcity. Perhaps political situations, crime levels, natural disasters change the amount of effort required to receive gold. Would that not change the value people on gold? If I have 20 grams of gold saved up, and then all of a sudden gold becomes much easier to acquire due to technological changes, wouldn't the value of gold go down due to the ease (relative ease) with which it is now received? And if so, then how is that not inflation? Won't my 20 grams of gold be worth less in value now?
Suppose one was to trade in tobacco? Dr. Paul mentioned that people used to do this back in the day. How much with a carton of cigarettes get you now? I say 30 beers. But wouldn't that fluctuate depending on how much tobacco the farmers were able to grow and the demand and all sorts of other factors (transportation of products, competition, etc.)? And since brands and labeling and narcissistic identification are all part of our world today, wouldn't the name attached to the tobacco factor in as well? Is it any different with gold (although perhaps the branding part would not be the same, since gold can be melted down and refined and remolded into anything...)?
I'm not saying inflation is acceptable when it comes to the Fed printing off money in a misguided adventure into debt, they should certainly stop this, but wouldn't inflation (or deflation) still happen? Or is Dr. Paul's point that inflation will be less haphazard?
Also, unrelated to gold, this is something I have often wondered about: are banks required to have a certain amount of physical cash money on hand for when you submit a deposit? Say a man deposits a paycheck for 4000 dollars, do they have 4000 cash dollars to account for it stored in a safe somewhere? Or do they not check? To say: if everyone attempted to withdraw all their money, from all their accounts at the same time (or within the same month), would there be enough cash dollars to go around? I'm not sure why our digital count would differ from our physical cash count- but I've always been suspicious of it...
Once again, sorry for any stupidity, and thanks ahead of time for any answers. This stuff is eye-opening, but so very new, and it's leaving my head spinning...
Oh, another thing- it seems that you are not only trading for the work placed into getting the gold. Because even if it takes the same amount of work, labor, and tech costs to farm chickens than it does to get gold, then would they be valued similarly? Would the payoff be the same? I think not. It's not like a person automatically gets paid in proportion to his investment. There is something else to it.
I do know of the special properties of gold that make it valuable as a metal. But these properties are functionally useless- nothing useful (that I know of) uses pure gold, it is merely cosmetic and completely socially based. How is this different from a dollar bill, which receives it's value only from those who have chosen to place a social value on it?
Sorry, I don't mean to spam or annoy anyone! But I also had another thought- why does Dr. Paul promote a return the gold standard? Why not just shut the Fed, like what the speech that was posted by Vox recommended, and let the dollar represent whatever the economy decides it represents? Let it be a socially valued but limited currency? Unlike gold, if the Fed was shut down, dollars would always be limited and would not fluctuate due to technological changes in producing it (with the Fed shut down, it can't be produced!). Also, why does Dr. Paul claim (in one of the Republican debates this year) that shutting down the Fed tomorrow would be disastrous? What would happen?
@ FHL: labor/=value. That's a marxist fantasy. Gold's suitability as money derives from its scarcity, fungibility, divisibility, and general acceptance. Don't rely upon RP for econ theory. Get thee to mises.org and read Mises, Rothbard, et al. Even better, start with the Intro to Austrian Economics that Vox has thoughtfully linked on the right and go forward from there.
Ok, thank you Stilicho. Does labor/=value mean the same thing as labor=value? Because if so, then we are agreement. I don't see how labor could automatically equal value, and this is was my trouble with RP's book. I shall get thyself to some Mises indeed!
Or wait, labor/=value is labor "does not" equal value- and if I disagree then I am in a Marxist fantasy?
Err... shoot, I really need to create a profile of sorts to edit my posts... to circumvent any confusion, I do NOT think labor equals value. I think that was clear from my posts.
Labor does not equal value. You can polish a turd until it shines and it will not be worth anything more than an unpolished turd. Value is always and everywhere subjective.
15 grains is about a gram of gold or silver. A gold standard means that dollars printed equal a portion of the gold on hand.
Put it this way - if you have a loaf (I'm using loaf so I don't confuse with an actual measure of gold) of gold, you could write on a piece of paper - "The bearer of this paper owns my loaf of gold." If you write another note that says the same thing, well, suddenly those 2 pieces of paper split the gold (virtually) in half. The person who holds both pieces has the buying power of a loaf of gold. The person with only one piece of paper has half a loaf's worth of buying power.
That's what a metal standard is: no matter how much paper you print, they reduce in measurable value, as if you were slicing the loaf into bits equal in number to the amount of money printed.
When you decouple the paper from such a standard, suddenly, you can print money like it is going out of style, and it becomes increasingly difficult to tie that money back to anything of value. An economy based on wooden nickels, for example can sort of hum along as long as everyone in the group "emotionally" values the wooden nickels, but as soon as someone says - "Hey, wait a minute, I have a ton of these just waiting to be chipped out in the woodpile," suddenly money becomes more and more meaningless. Without the ability to say - "No - your wooden nickel (or piece of paper or whatever) has a measurable value - by making more, you are only dividing up your own share of the gold (or silver)" suddenly confusion and unexpected economic outcomes amplify.
Put another way - without a metal standard to act as a natural control on the equally natural quality of greed, non-standard money creates bureaucracy and begins to attack real wealth.
As far as the specialness of gold - its uses (which are many) are less important than its natural rarity - there truly is only "so much" of it, regardless of how much can be mined from the ground. It can't be produced synthetically, there is always a truly measurable supply in existence. That is the critical anchor - not whatever social value is placed on it by a culture (although that makes a difference in price).
Think of it this way: gold has, quite literally, always been a form of wealth storage. A gold coin (or even nugget - to get away from the additional antique value) from 560 B.C. had incredible buying power back then, as it would today. A confederate dollar from 1865 had no value by 1866.
Paper is just a wooden nickel if it isn't tied to something that is has an intrinsic value. Worse, right now, the dollar is tied to little more than debt! And the fed could print an unlimited amount of the things.
I'll put it this way. If you were given the option of a suitcase full of fancy carpet swatches or only a small handful of gold, which would you pick?
As far as your scenario of 4000 needing to be on hand if a man has 4000 deposited? No. Banks have no duty to keep deposits on hand like that, and, in fact, wouldn't be in business if they did. Banks make their money by taking your deposits and giving it out. There's a very good scene in It's a Wonderful Life where the Savings and Loan company is caught having loaned out too much of its reserve to be able to pay anyone back.
A bank run is just that: when too many depositors ask for their own money back. The bank is caught short and shuts down, leaving the depositors robbed. This is not an artifact problem - it happens today - there's just a false "safety net" in place that makes it seem like they aren't happening...yet.
Finally, as far as the Silver Standard/Gold Standard goes
Oops, cut off - look into William Jennings Bryant if you want to get into the nuances of the Silver - Gold debate, but, generally speaking, a gold standard tends to be the most proven over time. Either would probably work similarly (but silver less because of purity and purpose problems), as long as it wasn't implemented as some sort of centralized magical wealth "creator" that some progressives like Bryant thought it would be.
@ Daniel
Thank you for your reply.
I'm waiting for the next part of your post because it looks like the word count cut you off.
But that's an issue I didn't think of there: how easy would it be to reproduce a U.S. dollar. Because from what I could see, a U.S. dollar is indeed (like Stilicho had said of gold) "scarce, fungible, divisible (perhaps up to a certain point), and generally accepted." My thinking was that if the Fed was shut down, no one would be unable to produce it; U.S. dollars would just exist as gold would. Rare, traded by everyone (as is happening now; many foreign countries will accept U.S. currency straight), and impossible to reproduce.
But now I'm wondering about the impossible to reproduce part- it seems alot easier to counterfiet another country's paper currency than it does gold...
But now I'm thinking of my trips to Egypt, and the people who always wanted to be paid in American dollars, why don't these people just print their own...
Oh, and thanks for the answer regarding the banks. It was something I was always curious about... I knew I had a reason to be suspicious...
@ Daniel
Ok, thank you for your second post!
edit: "if the Fed was shut down, no one would be *able* to produce it"
not "no one would be unable to produce it"
@ FHL The dollar (federal reserve note) is not scarce. In fact, it is available in theoretically unlimited quantities at a single keystroke on Ben Bernanke's computer. Gold's scarcity cannot be easily changed by a gov't or central bank. See the difference?
@ Stilicho
Yes, I think I understand that part.
But why did Vox hype up that post about shutting down the Fed? I thought the whole point of shutting down the Fed was to eliminate this "theoretically unlimited quantities at a single keystroke." My question was this: if the Fed was shut down, and no gov't or central bank was able to produce dollars, would that solve the problem (or at least much of the problems, relating to inflation)? And if not- if the problem lies intrinsically with the notes themselves- then why advocate shutting down the Fed? And if so- if shutting down the Fed will cause the dollar to have a stable value- then why say we need to return to the gold standard, when another valid option is to simply shut down this ability to produce currency?
@ Stilicho
But yes, I agree, gold's scarcity is hard to control in comparison, and hard to counterfeit. This is an advantage.
I think I'm gonna take a break, cause I need to read and learn much more about these issues first! I'm way out of my league here! Please do not take offense if I do not respond.
Geoff UK: 1970s Great Britain?
Inflation/deflation exists in a quantum state. We are on the outside arguing whether the cat is dead or alive, but it won't be dead or alive until we look. Ultimately, Prechter's socionomics may be the best place to look. It's a herd behavior and what smart money isn't primed for either scenario? Everyone is in a holding pattern.
I think it may come down to whether it is a dollar crisis or not. If the crisis is dollar centered, we get hyperinflation because the negative social mood and collapse in confidence presents itself as loss of faith in the currency. If the crisis is not dollar centered, but Japan/EU/China centered, it presents as loss of faith in government/central banking ability to manage the economy and prevent a collapse. EU/China/Japan are more into central planning and EU/China have major political agendas that conflict with economic policy.
In order to reach hyperinflation, the U.S. first needs inflation. The foreign central bankers all oppose a weaker U.S. dollar and print faster than the Fed. Global behavior is U.S. dollar supportive; hyperinflation must come from U.S. internal rejection of the currency. I don't think we're there yet. As global central banks inflate faster than the Fed, the Fed is in a position of relative deflation. A hyperdeflation scenario becomes more likely as time passes because everyone else is heading towards hyperinflation. The Fed could fall ass backwards into hyperdeflation.
FHL: Suppose one was to trade in tobacco? Dr. Paul mentioned that people used to do this back in the day.
Yes, most recently in US federal prisons until smoking was banned. They probably still use it in state prisons where it's still allowed.
FHL: But wouldn't that fluctuate depending on how much tobacco the farmers were able to grow and the demand and all sorts of other factors (transportation of products, competition, etc.)?
Precisely why it doesn't make a good exchange medium on an open market. Not only can farmers grow more, but so can the average Joe in his backyard. As a commodity, it isn't rare enough. It also suffers in that it has no intrinsic value to people who don't smoke.
Prisoners were more limited in their access to tobacco, however, so it worked better there. Even if a prisoner does manage to flood the market with cigarettes, devaluing its purchasing power, eventually many of them will be smoked and the value will return to previous levels.
According to an article in the Wall Street Journal, the medium of choice now in federal prisons has become cans of mackerel. Hard to see how that's going to be able to hold off inflation, as not many people are going to want to consume it. Something that now costs two macks is eventually going to cost three, as more and more macks enter the system.
First, I don't believe that the time lapse between the publication of RGD and today is sufficient justification for saying that Vox is wrong about the deflationary scenario. I foresaw the dotcom collapse and the housing bubble, but in both cases, I was 3-4 years off with the timing, so I understand very well that correctly predicting the timing of market action is far more difficult than gaining a broad understanding. Also, as Vox points out, nothing major has happened that is directly contradictory to his predictions.
The question of to what extent different instruments constitute money has become extremely complicated. In a rare moment of honesty, even Krugman has admitted as much. As long as the Fed and OTS are allowing banks to keep debt on their books as an asset, debt is clearly a monetary instrument. Although you can't use debt to buy groceries, you also cannot use cash to buy a house, a car, or an airplane ticket without a reasonable probability of being labeled a criminal or a terrorist. Few would argue that cash is not money. This is why there are multiple measures of the money supply, but not even these are adequate for all purposes.
As I see it, the first point of contention is whether central banks and governments, acting in collusion, have the power to increase the money supply even in the face of widespread debt default. I suggest that in the US they do, and that they possess more mechanisms for expanding the money supply than may be commonly recognized. We're all aware of the ability of the Fed to print hard currency and make zero interest loans, which effectively creates money from thin air. The number of ways in which this money could be distributed is limitless. Another very simple mechanism is for the government to allow banks to keep bad debts on their books at above market value, a policy that was reinstated just over three years ago. Another variant on the same theme is for government to directly guarantee bad debts, which the US has done with the FDIC, PBGC, NCUA, Fannie, Freddie, and of course, entitlements.
Government guarantees of bad debts do not show up in money supply statistics, but they have a profound effect on the economy. Many people today base their economic activities on the assumption that they will continue to receive, or soon will receive, some form of entitlement or welfare. People leave their money in the bank based on the assumption that it is guaranteed by the government, that the government has the ability to uphold those guarantees, and that their money hasn't already been lost in reckless gambling by the big banks. Despite the fact that GAO reports show beyond any doubt that the government cannot fulfill all (or even most) of the guarantees that it has made, most people still act as though government guarantees have meaning. The net result is that people spend more money than they would if they realized how broke they really are.
In real terms, the government has made more promises than it can keep. The repudiation of these bad debts must come either through inflating them away, defaulting, or some combination of the two. The exact path that will be taken is a political question. However, between government backing of debt and the ability to create new currency, the US government and Fed have an unlimited ability to expand the money supply. Still, for a deflationary collapse to occur, I believe the USG and Fed would have to choose not to use their power to expand the money supply.
"About any definition of money - one thing that seperates one money from another is its acceptance in the payment of taxes." ~Salt
Credit cards are accepted by the IRS and can be used to post bail because I know... and they know it's a final irreversable payment. A virtual digital printing press for spending money(?) I don't have at maximum velocities.
I remember the first time I saw a Bank of America Visa Card in an actual transaction back in the late 1960's as a garage monkey and it seemed to me like something out of a Hollywood movie. That was the turning point that turned us all into loafer wearing eurofag soccer fan inbred ginger greek rednecks.
That experience is probably why I look on people that use credit cards out in broad day light as a scourge on all that is righteous and a mark of the beast... except for gas.
And get this, 33% of all Americans on food stamps are in California using... GOVT CREDIT CARDS!... as vigorish at Indian Casinos... Oh if only we could return to the great depression. ;)
Oh that aint working... Look at the yoyos... banging on bongos like the siamese.
http://www.youtube.com/watch?v=lAD6Obi7Cag
I should have learned to play eurofag soccer loafer on the MTV.
The road is tight... you're in deep.
http://www.youtube.com/watch?v=XcATvu5f9vE&feature=fvwrel
You might as well face it.
I cant walk, I cant dance. The only think about me is the way I talk.
http://www.youtube.com/watch?v=qOyF4hR5GoE&feature=related
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