Jason's or the LP's stance on money creation

[Jason Harvestdancer]

Yes, I haven't logged on to the forum for several days. Maybe one day you'll figure out how to notice that. Every profile shows that stat.

You are wrong. I'm on here several hours daily. Running the board requires it.

Where did I write that you weren't on here several hours daily? Every profile shows the last time a person was logged in and active (even if just browsing) and I hope someday you'll learn how to use that feature to see when others have been on.

 

[Loren Pechtel]

Yeah, they don't track perfectly, but in the long run that's going to happen.

Just as a few remarks:
(1) Long-term and short-term interest rates often move separately.
(2) Typically interest rates lag behind inflation. Anticipation of future inflation is often more relevant than actual inflation measured over the recent past.
(3) When rates ARE stable, the difference between nominal interest rate and inflation rate is an important parameter. That parameter generally correlates with economic success: prosperity causes the "real interest rate" to be HIGH, a slump will make it low, at least when a central bank is cutting rates to combat the slump.

Agreed on all of these--they track, they don't match. There's wiggle, especially in the short term rates.

The point is that his dream of long term high interest and low inflation isn't going to happen.

Inflation is usually measured via the Consumer Price Index. But very important to the investor class is Asset Prices and, rightly or wrongly, the FRB does NOT respond to asset price inflation. Below I attach a graph (https://www.longtermtrends.net/market-cap-to-gdp-the-buffett-indicator/) showing that the Wilshire 5000 index has more than tripled (relative to GDP) over the past 15 years and is now 179% of GDP.

But what does the Fed have to do with that?

You're agreeing with me! "the FRB does NOT respond to asset price inflation." It COULD do, if Congress or a FR Governors' majority so decided. And some economists have occasionally suggested that doing so would be wise. In particular, the FRB sets the margin requirement (50% now for decades) for broker's call loans, and some have suggested that this margin be increased to combat stock-market "bubble."

I think that would be an overall bad deal because deflation is so much more harmful than inflation.

And I doubt the margin limits have much long term effect on stock prices.

I don't know if RVonse was suggesting this or not.

It MIGHT be an interesting topic to discuss, but let's hold off for a day or two. BECAUSE right now we seem to be "feeling our way in the dark," confused and using incompatible viewpoints, etc.

(And BOTH of you are charged with leaving a deleted Swammi post inside the quote box! )

The software makes it awkward to delete the empty quotes.

I also strongly dislike this board's software, but we may dislike it for different reasons.

Do you post from a telephone or from a computer? I almost NEVER even attempt to post from phone.

I put some effort into my posts. But the response to my complaints in the Software Complaints (or whatever it's called) thread lets me know I use the editing modes very differently from other posters.

Computer. It's just I've had so many posts eaten by trying to clean up the quotes that I make one attempt to sweep off what I want but generally don't go hunting the empties.

 

[ZiprHead]

Yes, I haven't logged on to the forum for several days. Maybe one day you'll figure out how to notice that. Every profile shows that stat.

You are wrong. I'm on here several hours daily. Running the board requires it.

Where did I write that you weren't on here several hours daily? Every profile shows the last time a person was logged in and active (even if just browsing) and I hope someday you'll learn how to use that feature to see when others have been on.

Sorry. I misread your statement. My apologies.

 

[Swammerdami]

Okay, Swammerdami , you wanted to know what would be used for money if it were not a centrally controlled endeavor. To understand that you have to start at the beginning.

I already started at the beginning in the History of Money thread!

What makes a good currency? There are several key requirements.
1. It has to be relatively scarce....
2. It has relatively few other applications. Sure, you could burn federal reserve notes to keep warm, but obviously that isn't the best option. Copper and iron are very widely used in industry for example.
3. It has to be durable....

Your criteria #1, #2, #3 sound like you're laying a foundation for a return to the gold standard.

4. It has to be divisible. Since most of our currency exists inside computers, it is very easy to divide it even smaller if we wanted. Gemstones are not divisible without some loss.
5. It has to be fungible. One bit of it is like any other. A dollar is a dollar. A euro is a euro. A pound is a pound. If we both take a dollar out of our pockets and exchange them, neither of us is made any worse for it because a dollar is a dollar.

Those are key requirements of money being used as a store of value for exchange purposes.

The question is What should replace the FedRes system? You've presented some criteria, but not answered the question.

Reviewing the TYPES of money (intrinsic-worth, bank-created, fiat) may be an appropriate way to begin a debate, but I'm reluctant to do that here -- it may provoke insurrection like we saw in the other thread!

 

[Swammerdami]

A key question is How is the value of a unit of currency determined? For thousands of years, currency units were tied directly to the price of gold or silver. (Their use as money may have affected -- stabilized mostly -- the prices of those precious metals, but they still had a known fixed value.) Bank-created money will have the value of the base money, perhaps multiplied by a fraction to reflect confidence in the issuing bank. (Modern central-bank created money is a special case of bank-created money.)

While fiat money in the form of copper coins to make small transactions has been in use for almost 3000 years, the amounts of money in this form have been small so this is more a minor convenience than a major use of "fiat money." With the exception of modern central-bank-created money, most major uses of fiat money have led to persistent inflation or debacles.

So: What will determine the value of a post-FRB dollar?

 

[bilby]

For thousands of years, currency units were tied directly to the price of gold or silver. (Their use as money may have affected -- stabilized mostly -- the prices of those precious metals, but they still had a known fixed value.) Bank-created money will have the value of the base money, perhaps multiplied by a fraction to reflect confidence in the issuing bank. (Modern central-bank created money is a special case of bank-created money.)

This is one of the most confused (or perhaps just confusing) "explanations" it has ever been my misfortune to encounter.

"Their use as money may have affected -- stabilized mostly -- the prices of those precious metals, but they still had a known fixed value."

In what are you measuring "prices" and "value" here?

If "value" is shorthand for "monetary value"*, then the position you are taking is neatly circular; If "prices" are denominated in monetary units**, then your "fixed value" is tautological.

If "gold" and "money" were synonymous then:

"price" means "the amount of gold that can be exchanged for something"; and

"value" means "the amount of gold that something is worth"

Let us expand your sentence to show all the gold in use:

"The use of gold as money may have affected -- stabilized mostly -- the amount of gold that could be exchanged for gold, but gold still had a known fixed amount of gold that gold was worth."

It's not untrue; But that's because it says nothing other than "gold is gold, and is worth the same as gold".

Money isn't a commodity; It is an idea. We can decide arbitrarily to link that idea to a particular commodity, but it's still the idea part that is money. The gold remains gold.






*And if "value" isn't "monetary value", then what the hell is it?

**And if you don't, then how the hell do you denominate "prices"?

 

[Jason Harvestdancer]

The question is What should replace the FedRes system? You've presented some criteria, but not answered the question.

Reviewing the TYPES of money (intrinsic-worth, bank-created, fiat) may be an appropriate way to begin a debate, but I'm reluctant to do that here -- it may provoke insurrection like we saw in the other thread!

I have to get through the basics first.

So we've covered "what is money". Now we're going to cover "what is a dollar worth".

If you ask the average person "what is a dollar worth" the answer will be something along the lines of "duh, it's worth a dollar, stupid." It gets more interesting when you go to other countries, especially less developed ones. If you ask them what their currency is worth, they are likely to answer the exchange rate between their currencies and dollars. People who use Euros or Pounds are much less likely to answer the question that way, but even so they eventually get there.

It used to be the case that if you were to ask that person in the undeveloped nation what their currency was worth, they'd give you an answer in Pound Sterling, because it used to be the world's currency. Notice that just because a currency is the world currency doesn't mean it always will be.

But that doesn't answer "what is a dollar worth". The correct answer is "a dollar is worth what you can buy with it." It's worth is determined in part by the goods and services you can get for it. There are actually four factors to the equation: demand for currency, demand for goods and services, supply of currency, and supply of goods and services. Two of those raise the value of the currency, two of those lower the value of currency.

Since a dollar is worth what you can buy with it, then after the last three years people should be a little concerned with what a dollar is worth.

By the way, since you participated in a History of Money thread, you probably can guess the answer ahead of time.

 

[Swammerdami]

For thousands of years, currency units were tied directly to the price of gold or silver. (Their use as money may have affected -- stabilized mostly -- the prices of those precious metals, but they still had a known fixed value.) Bank-created money will have the value of the base money, perhaps multiplied by a fraction to reflect confidence in the issuing bank. (Modern central-bank created money is a special case of bank-created money.)

This is one of the most confused (or perhaps just confusing) "explanations" it has ever been my misfortune to encounter.

"Their use as money may have affected -- stabilized mostly -- the prices of those precious metals, but they still had a known fixed value."

In what are you measuring "prices" and "value" here?

Only a nitwit could imagine we measure the value of gold in gold, or the value of silver in silver. We might compare the two prices (se below), or measure the price of, say, wages, cattle or barley in gold or silver.

If "gold" and "money" were synonymous then:

Who said they were synonyms? Are you just pulling a steve? Why?

Money isn't a commodity; It is an idea. We can decide arbitrarily to link that idea to a particular commodity, but it's still the idea part that is money. The gold remains gold.

*And if "value" isn't "monetary value", then what the hell is it?

**And if you don't, then how the hell do you denominate "prices"?

Once again, you've missed the whole point. I'm not sure whether that's deliberate -- you like to squabble -- or whether it's just personal dislike for me or my writing style.

Pay attention.

I've already mentioned that a ditch-digger's wage in ancient Greece was about 1.4 grams of silver per day. This price was the same as it was in England in the mid 13th century, almost 2000 years later. That's called PRICE STABILITY. Many other goods have prices that fluctuated a lot but the value of silver or gold (as measured by their exchange for wages or commonly-used goods) tended to be MUCH more stable than the prices of tin, cattle, etc.

Capische? Will you insist on more data or do you finally get the point?

Similarly look at the gold-silver price ratio itself. It was 13 when Lydia's King Croesus was minting his famous early coins. It fell a little but rose to 15 by 1700; it remained near that ratio -- this was enforced by the Bank of France's willingness to buy either metal at a statutory price -- until the fast-increasing availability of silver caused countries still on a silver standard to switch to a gold standard. After this the price of silver continued to fall(*) with the gold-to-silver price ratio reaching 100 in 1940.

* - You may somehow seize on this as PROOF that I'm contradicting myself. Wrong again. Nowhere in my writings does the concept of "intrinsic-worth money" depend on any specific valuations. It is YOU who are fascinated by this and trying to twist out reasons to discredit my writing.

 

[bilby]

Only a nitwit could imagine we measure the value of gold in gold, or the value of silver in silver. We might compare the two prices (se below), or measure the price of, say, wages, cattle or barley in gold or silver.

You might; But that still wouldn't explain what the hell you mean by "intrinsic value", if you do not mean being able to measure the value of gold without reference to anything that isn't gold.

Perhaps you could explain to me what you think the word "intrinsic" means?

 

[bilby]

this was enforced by the Bank of France's willingness to buy either metal at a statutory price

ie By pegging.

Pegging always implies price stability, for the exchange of the pegged currency against the currency to which it is pegged, and this is no less (and no more) true when one or both of the pair is commodity money.

 

[Swammerdami]

Perhaps you could explain to me what you think the word "intrinsic" means?

I've explained this over and over and over. Bank-created or fiat money is accepted BECAUSE it is backed by some external "guarantee." Tobacco and peppercorns were accepted as money because they were commodities that had INTRINSIC value, independent of any bank or government guarantee.

I really do NOT understand your confusion. BUT we seem to be getting nowhere. I suggest we just stop reading each other's posts? OK?

You REALLY seem to base your diatribes on some personal dislike for me. Please just start a rant against me in Elsewhere if that's what you're all about.

 

[Swammerdami]

Perhaps you could explain to me what you think the word "intrinsic" means?

You certainly have some aversion to associating the word "intrinsic" with "gold."

Answer me this PLEASE: Could we have avoided all this monotonous disputation if I had chosen a term like "commodity-as-money" ? I do PREFER my terminology; I just wonder if that is ALL your fretful nagging is about.

 

[Jarhyn]

Money is not a store of any kind of value. It is a symbol of value, to represent a promise made in trade.

That is all money of all kinds.

All money of any kind is created when people agree that some number represents that some quantity of work is held by one or the other. That value on that ledger is "money".

Sometimes we represent the numbers with a unique object such as a coin made of hard to get stuff.

Sometimes we represent the numbers by making a sheet of paper and signing over ownership to some partial token such as a share of a large rock.

Whenever such a number or token or symbol is created such that it represents work to be exchanged between agents, it is "money".

 

[Swammerdami]

@Jason Harvestdancer -- it looks like you and I are the only ones who even know what the thread is about! The thread is NOT about "Seventeen Infidels give 17 different definitions of money": Please start a new thread to compare the 17 definitions.

This thread is about
(1) How does the present-day (FRB-based) system of money creation in the U.S.A. actually work?
(2) What should replace the FRB system if LP, Ted Cruz, et al have their way and abolish the FRB?

Jason: You know the thread topic, yet still haven't answered (2).

 

[bilby]

You REALLY seem to base your diatribes on some personal dislike for me.

Not at all.

I dislike some of the things you say, because they appear poorly thought out and either meaningless or wrong.

I also like many of the things you say, because they are well considered and accurate.

I don't know you, so it would be insane for me to dislike you. You do seem to react very badly to people not just taking your word for things. But so do I, so I can hardly hold that against you.

The fact is that I can (and do) disagree strongly with the things you say, without any personal dislike for you whatsoever.

 

[bilby]

You certainly have some aversion to associating the word "intrinsic" with "gold."

That aversion is based on the plain fact that "intrinsic value" isn't a thing.

Value is an opinion. Gold has no opinions. People do not have a universally consistent opinion about gold (or anything else).

To not have an aversion to the phrase "gold has intrinsic value" would be perverse. It's a nonsensical phrase. I dislike nonsense, outside the context of intentional humour. Perhaps your use of the phrase "intrinsic value" is an obscure joke?

 

[Swammerdami]

To not have an aversion to the phrase "gold has intrinsic value" would be perverse. It's a nonsensical phrase. I dislike nonsense, outside the context of intentional humour. Perhaps your use of the phrase "intrinsic value" is an obscure joke?

I wish I even knew WHAT we are "arguing" about. I asked "Would your objections go away if I used a different phrase -- "commodity-as-money" -- instead of "intrinsic wealth money"?
Do beanie babies have intrinsic worth? tobacco? iPhones?

Physical gold and promises to pay gold are two DIFFERENT things. It seems that you disagree. Can we see what conclusions that disagreement might lead to? Rather than just expounding over and over and over and over and over and over and over and over and over and over and over and over on what seems to be disagreement about the word "intrinsic".

 

[bilby]

Physical gold and promises to pay gold are two DIFFERENT things.

Yes. The former is gold (a metallic element with atomic number 79), and the latter is one form of fiduciary money (a token of exchange of value, where "value" is an opinion about how desirable something is).

Weight of gold has been historically used as a monetary token (until not long after the first coins were struck), and after its abandonment as money in most markets, the new tokens were pegged to gold (some were even made of gold) until as recently as last century.

Many people appear to associate money so closely with metallic gold that they don't grasp that they are totally different things, or that the value of gold is almost entirely a consequence of public opinion about the value of gold - and public opinion is also the source of the value of any other monetary token.

There is exactly nothing 'special' or 'different' about gold money as compared to other kinds of commodity money, other than the longevity of gold in history.

And commodity money in general is of very limited utility, so almost immediately on its introduction, fiduciary money in the form of promises of gold (or other goods or services) was created to fix some of its many problems.

Amongst those problems are a lack of portability, difficulty in assaying metal to determine its gold content, and the inability to create gold to increase the money supply when the economy grows.

The latter ability is vitally important for money; But your tone suggests that you dislike and/or mistrust fiduciary money as somehow less "real" than commodity money.

Bits of paper, you point out, are intrinsically almost worthless. However, I am pointing out (to your apparent horror at my heresy) that bits of gold are ALSO intrinsically almost worthless, and that when choosing a commodity to use as money, that is a feature and not a bug.

Your belief that gold has some kind of value that can be separated from its use as a token representing an opinion, is widespread and historically was almost universal. It is also nonsensical and wrong. Belief in cartesian dualism, or that the Earth was basically flat, were likewise widespread and historically were almost universal. These too turn out to be nonsensical and wrong.

Gold has no soul. Its value (other than for trivial purposes like dentistry and optical coatings) is a property of the opinions of people, not a property of the metal itself.

Today gold is valuable for the exact same reason that tulip bulbs were valuable in the C17th, or shares in the South Sea company were valuable in the C18th - because everyone expects that everyone else will continue to participate in the asset bubble. Maybe it will never burst. Or maybe it will burst tomorrow. If and when it does, gold will be essentially worthless, because we have far more of it stockpiled than anyone is ever likely to use for anything.

 

[Toni]

The opening post might not be the best OP to introduce the topic of LP's stance on money creation or even definition. But Jason did repeatedly insist that I should be the one to start the thread ... a thread on a topic of which I am ignorant. I do think those calling for the elimination of the Federal Reserve System should reveal the alternative they envision.

I have no idea what Jason's opinion is. But I do know what my own opinion is of the fed and it is very low. So maybe I should offer up my opinon to your question while waiting from a response from Jason.

The US does not need a fed and never needed a fed, because the country did just fine before Woodrow Wilson. The fed is a private club responsible for our economy and you ain't in it. The fed is by far the most undemocratic institution the US has.

At the very minimum if you insist we should have a fed, we should at least attempt to make this institution more accountable and democratic to the public. For example, if someone like Ron Paul wants a fed audit he should get a fed audit if the fed has nothing to hide. Also the fed should not just be judged on inflation but on wealth disparity statistics as well. Because almost all of their efforts have directly or indirected resulted in the poor becoming poorer and the already rich becoming richer.

There should be no revolving doors between the fed chairman and the banks. And the picking of the fed chairman needs to be more carefully and democratically picked. The fed chairman should be accountable like any other employee or government servant and fired and replaced if he (she) does a bad job.

Why should Ron Paul get to hijack the resources of the Fed to satisfy his ego? Seriously.

 

[bilby]

Is the condition of being a gold bug called "gold buggery"? If not, it certainly should be. If for no other reason than the association with "pegging".