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Monday, August 27, 2012

Currency incoherency

Karl Denninger points out the observable difference in theory and practice on the part of those who deny that credit money is money:
I happen to find the esoteria between the gold bugs and various other flavors (and, in my view, mis-flavors) of Misean thought to be highly amusing. From my perspective there's only one point worthy of consideration in this regard, and that is whether or not the particular economic model under debate counts all credit and currency as "moneyness" and therefore innately fungible when evaluating the impact of various policy decisions and strictures.

Sadly, few if any do, and thus I find them all flawed.

I further find it amazingly frustrating that those who claim that such a distinction is unimportant (or, at least, less important) think absolutely nothing of waltzing into the closest restaurant, bar or other establishment and whipping out their VISA card, pretending that it is currency. There's a certain level of intellectual disconnection required to do that, you see, and it appears in people on both the left and right, conservative and liberal and among all particular monetary theorists. Indeed, most will simply argue that credit is nothing more than a time shift for which one pays a privilege in the form of a thing called "interest."
Another observed monetary inconsistency is that those who claim to believe in inevitable inflation are not borrowing heavily. The logically correct thing to do, if you are sure that an inflationary or hyperinflationary scenario is in the works, is to borrow as much money as possible at today's low interest rates, then purchase real assets such as gold that will appreciate in value and permit the repayment of the loans in the significantly less valuable dollars of the future.

If someone is proclaiming "inflation is coming" and "get out of debt" at the same time, the chances are that their monetary model is less than perfectly coherent.

This doesn't mean that a gold standard isn't to be vastly preferred to other monetary models, in that it is somewhat harder to abuse by banks and governments. But anyone versed in economic history will know perfectly well that the gold standard isn't some sort of economic miracle cure either.

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64 Comments:

Anonymous Josh August 27, 2012 9:51 AM  

Karl kind of missed the main point of the statement between Jaitly and other Austrians, namely that there are No True Austrian Economists except Menger, that Mises chap apparently perverted the pure bloodlines of Austrian economics...

And max keiser jumps in and calls the Austrians statists because the Austrians think that price discovery is best and most efficient in markets with private property.

Anonymous Stilicho August 27, 2012 9:52 AM  

But anyone versed in economic history will know perfectly well that the gold standard isn't some sort of economic miracle cure either.

Too true, but this is where Denninger goes off the rails re: gold. He won't acknowledge the useful role it can play in limiting credit excesses. A 100% gold reserve for demand deposits would certainly help matters. Savers can actually use banks to save their money. Banks can freely lend their own capital and can lend time deposits as long as there is a reasonably close duration match. They should have to lend from actual savings. No more lending then finding/creating reserves. Of course, this type of banking requires open disclosures and I would expect the banks to react to that like Nosferatu to sunshine.

Blogger Shimshon August 27, 2012 9:54 AM  

Vox, that argument is difficult to make because, as is widely known (or should be), markets can remain irrational longer than you can remain solvent. Besides which, the kind of easy, or even practically unlimited credit that existed prior to 2007 is simply not there. There are better ways for elites to make money anyway. Front-running Fed policy changes. Getting in early on businesses like Facebook. And so forth. Which are also things Denninger comments on.

Denninger's argument is tainted because he is fixated on a "price stability" mandate, even though such mandate not only doesn't make sense, it is simply impossible when looking at the economy as a whole. He mocks gold, because, technically, a gold standard itself isn't enough to prevent a boom-bust cycle from occurring. In this, he's right. Yet, he inexplicably trusts that if there were, in the Fed's mandate, "or else" clauses for not acting according to the law, that the Fed would suddenly turn into a candy-crapping unicorn and obey the law (like all the banks do, with plenty of "or else" legal clauses that are already present?!). For someone so cynical, I just don't understand how he can be so naive.

That said, he seems to be one of the few (you and Mish and maybe a few others are out there) who does understand the issue of credit.

Anonymous JI August 27, 2012 10:00 AM  

Thank you for this one, Vox. Couldn't agree more with every one of your statements.

Anonymous FUBAR Nation (Ben) August 27, 2012 10:07 AM  

Vox, what you are saying about hyperinflation is a misconception. Granted, you could pay off the loans in cheaper dollars. The problem is that your cost of living will skyrocket, canceling out any benefits derived from the hyperinflation.

Where am I wrong?

Anonymous Rantor August 27, 2012 10:09 AM  

Fiat money works so long as the amount of funds banks are allowed to extend as loans is tightly controlled. When the banks are allowed to create money willy-nilly, without deposits as backing, you have a problem.

When investment banks are allowed to freely create debt instruments and other obligations with no control whatsoever (they call these derivatives) you reach the point where there are more instruments out there, purporting to have value exchangeable for currency, than there is currency.

These unbacked instruments have been recognized as a store of wealth but when it comes down to the collapse of credit, they should prove to be worthless, unexchangeable. That is why AIG and others required bailouts, no one was willing to believe that their derivatives, insurance, reinsurance, and other products had in fact value until the Fed and whoever else said they did-and spent money to save them.

As seen in the great depression, a gold-based currency will not solve all evils as long as credit, debt, and other derivatives are not tightly controlled.

Anonymous Josh August 27, 2012 10:09 AM  

Monetary policy is one area (energy and foreign policy are others) where kd, for whatever reason) goes off the reservation. Guy actually thinks that if we just change the laws and put the right people in charge of the Fed, things will work.

Anonymous Rantor August 27, 2012 10:13 AM  

FUBAR,

You buy stuff, house, car, food, fuel tanks, etc. on credit now and pay for it with inflated dollars later. Yes stuff will cost more, but the price you payed is already set. You can sell some of your stuff at inflated prices when the hyperinflation hits and use inflated dollars to pay off your debt.

Blogger tz August 27, 2012 10:18 AM  

Around 1720, both the Mississippi Scheme and the South Seas bubble occurred under a Gold standard, and the latter was from national debt (maybe we will have an exchange promising untold riches for exchanging treasuries for stock in goldman sachs, bank of america, citi, chase, and the other tarp welfare queens).

The Mississippi bubble collapsed when a single investor brought carts to the office and requested the notes be redeemed in gold.

Gold can change value a little. But credit says there is some gold somewhere that eventually can make good on the paper - and with fractional reserves, it doesn't exist. Bernanke might be able to marshal electrons in an iNflation device which is usurer friendly, but he can't get 79 protons together. As long as everyone believes and trusts the credit, it exists. As soon as there are problems, everyone tries to exit and we find how much real money is behind it.

As to inflationists going deeply in debt, the problem with doing so is we no longer honor the rule of law even in a hypocritical way. Locked in cheap interest rates will be unlocked if the banks get in trouble. MF Global proved you don't own the money in your account. Even gold in a "safe" place might be clawed back depending on the whims of the oligarchs.

Blogger Joshua_D August 27, 2012 10:19 AM  

I enjoy reading most of Karl's stuff, except when he starts harping on gold and gold bugs. Like Stilicho said, Karl simply refuses to recognize the mitigating benefit of a free-market, sound, hard-money system.

Blogger Vox August 27, 2012 10:19 AM  

Vox, what you are saying about hyperinflation is a misconception.

No.

Where am I wrong?

Because you'll come out far ahead with the profit you can make on the real assets purchased on credit.

Anonymous Boetain August 27, 2012 10:20 AM  

I believe in a diversified approach to personal finance. So, yes, I do keep some very low interest rate debt around just for the fact that it will benefit me if inflation occurs. But I would not load up on debt since you never know what will happen. Spread your bets, etc.

Blogger Joshua_D August 27, 2012 10:20 AM  

What's your point, tz?

Anonymous KAFlick August 27, 2012 10:30 AM  

I am one of those people that say "Buy gold and silver and get out of debt." My reasons are not that borrowing money now and paying it off later with cheaper money is not a good idea. I do not believe that the Banksters and the Government will let that happen. With the complete destruction of the rule of law here in the US I believe that they will try and make the people pay (at least) what they owe (if not what they owe adjusted by the "completely unexpected" inflation) and will not let them collect what they are owed. Also with any interruption in the banking system people will be punished for not paying what they cannot get but the banks will not be forced to make up what they don't pay.

Anonymous Shild August 27, 2012 10:34 AM  

Anxiously awaiting the Vox vs Nate debate. I'm more excited about that than the next novel.

Anyone know the ETA on that debate?

Anonymous JartStar August 27, 2012 10:37 AM  

Vox, that argument is difficult to make because, as is widely known (or should be), markets can remain irrational longer than you can remain solvent.

This is always the issue. Even if FRNs and gold reached the correct valuation levels (whatever that number might be, and does even God know what that number should be?) and when hitting this number we see massive inflation, the market still won’t suddenly be rational as one or more asset classes will have “incorrect” valuations as well.

If one came up with a valuation method and gold reached that price in FRNs, how do you know you didn’t just get lucky? How many more times would your valuation have be correct, and for how long?

Even though an old school, fully diversified portfolio is held in as much contempt as 9mms here, I haven’t been able to come up with a better idea as the rest is all dependent upon market timing to some degree.

Anonymous Orion August 27, 2012 10:57 AM  

I agree with some of what Denniger says, but at the root of his problem is that he thinks there is a way to "fix" cycles. Or at the very least create a stable fiat money system. Since both have that progressive ideal of "improvement" through rational thought, they both belong to the Utopian school whether he thinks so or not. I am sure we all know the zipcode of Utopia. His dumping on a gold or some other fixed value scheme just seems to smack of someone who has a hole in their thought process and knows it, but insists it doesn't exist.

Blogger Positive Dennis August 27, 2012 11:06 AM  

While I am not a hyperinflatinist, I do expect stagflation. Why then am I not borrowing money? Several reasons. First if the loan you get is not fixed then it will skyrocket. I am old enough to remember paying 22% interest on my cattle. What a mess that was.

In addition while one can get a fixed Loan on your house, my guess is that the interest rate deduction will be eliminated.

If I could get a fixed rate loan on my business assets, I would do so I can't.


Well wish me luck, I am off to my audit.

Anonymous Roundtine August 27, 2012 11:10 AM  

Vox, what you are saying about hyperinflation is a misconception. Granted, you could pay off the loans in cheaper dollars. The problem is that your cost of living will skyrocket, canceling out any benefits derived from the hyperinflation.

Where am I wrong?


You are comparing two completely different things. Yes, you may still suffer during hyperinflation because your cost of living goes up, but if you borrow $1 million and buy a farm, 5 years later, you will sell 1 chicken for $1 million. You get a "free" farm. Or "free" whatever you buy on credit. If you buy $1 million in gold, 5 years later, you will have maybe $100 billion in gold. You can break off 1/100,000th of your gold, give it to the bank and pay off the loan. Anyone who truly believes in hyperinflation should be at least have already talked to their bankers and have huge lines of credit open. You will want to borrow again and again and again, stacking it up Ponzi-style, before cashing out near the end of the hyperinflation.

If you think the piling on and pyramiding of debt sounds a lot like the past 30 years and doesn't seem likely to happen again in the near future.......you may be a deflationist.

Blogger Positive Dennis August 27, 2012 11:13 AM  

Guys, the debt interest rate is not fixed. If the interest rate is higher than the inflation of the particular asset class you invest in you are screwed. It is also possible that the loan will not be rolled over after the 1 year renewal leading to a personal liquidity crisis.

Blogger James Dixon August 27, 2012 11:22 AM  

> Even though an old school, fully diversified portfolio is held in as much contempt as 9mms here...

Well, by some. :)

The problem is in defining "fully diversified", of course. The basics are stocks, bonds, cash, and commodities; all diversified globally in both source and holding location (that assumes you classify real estate, gold, an silver as commodities). That's difficult for your average person to manage.

Anonymous Noah B. August 27, 2012 11:25 AM  

It's worth noting that taking out loans at the prime rate to buy gold would have been a fantastic investment strategy over the last decade or last 5 years (though not the last year). Also, there's a vast difference between believing that and outcome is likely and being certain of that outcome.

I am one of those who believes inflation is coming and yet encourages my friends and family to avoid most debt, and while I understand how that may seem inconsistent, here is my reasoning. First, it's important to point out that I believe that deflation would be the natural response of this monetary system in its current state and that inflation requires central bank action. Therefore, either outcome is possible, and the question of which will happen is ultimately a political one. Second, timing is always difficult to predict, and if an investor is right in concept but dead wrong in his timing, he still ends up broke. Truly massive inflation might be another 10 years down the road, and meanwhile, one could spend a fortune servicing debt. Yet another issue with debt that's rarely discussed is that there's a fair chance of ending up with a government as your counterparty (if your bank goes under, for example). Considering that the western world has dispensed with the rule of law, what would stop government from arbitrarily increasing the interest rate on your loan as inflation accelerates?

Basically, being out of debt is a good hedge against deflation. So is having a decent amount of physical cash.

Blogger IM2L844 August 27, 2012 11:26 AM  

I just did my part to kick the can down the road and refinanced. I was able to keep a good chunk of equity, reduce my payments to a level well below rental rates in the area and I will save about 80k US over the life of the loan as compared to the loan I paid off. Thank's Mr. Bernanke!

"It ain't no hill for a stepper" ~ Grandpa

Anonymous GmBH August 27, 2012 11:30 AM  

Funny Vox should mention that hypers ought to recommend borrowing heavily. That's exactly what Dr. North suggests readers do: buy single family homes at <$100 sq ft, rent it out, and let inflation pay off the mortgage.

Blogger Gerald Benard August 27, 2012 12:55 PM  

Vox,
There are two consistent strategies where one believes hyperinflation is coming and at the same time pays off debt. This is for individuals:
1) Reduce risk due to job insecurity - If another 10 million jobs structurally disappear in the coming years due to job mobility (outsourcing), or depression, individuals would be better off to reduce risk by reducing debt
2) If hyperinflation is preceeded by a deflationary depression. Scenario:Economy contracts, deflation ensues, our leaders pump infinite currency (sound familiar), after years, hyperinflation takes over for a time. If you can't buy and hold your debt during deflation, you are better off not getting into debt.

In the aggregate, those who have assets to ride out the storm would be better off getting into debt to benefit from future hyperinflation. Since many are not in that position, a defensive strategy may be more sound.

Anonymous Joe Doakes August 27, 2012 12:57 PM  

Of course I whip out my Visa card. If they're dumb enough to give me food for electrons, why would I give up my gold, whiskey or bullets? I'll continue to offer fake money as long as they continue to take it. Duh.

Anonymous Jim August 27, 2012 4:06 PM  

Using credit to buy a hard asset is a dilemma that was long debated. It was sort of settled by the crash in 2008. Credit cannot be sustained. You have to pay them back at some point.

Buying and renting is a good idea if you can deal with tenants. Many are good renters, but there are many bad apples. Property upkeep requires a substantial amount of money to be kept in reserve (a bank account). That's why some recommend buying condos to avoid dealing with landscaping and roofing.

Buying gold is a good idea. Actually, I benefited when the Gold ETF went up in price, but gold might have reached a plateau. In this case, buy solid gold on weakness. You'll have to know how to store and dispose them.

Best thing is buy your own home in a solid community with good property values. Buy between one quarter to one third of your monthly income. Do not overextend. Refinance if you can get a better interest rate. Cash out some equity if it makes sense.

Anonymous Noah B. August 27, 2012 4:52 PM  

Also, the aftermath of either hyperinflation or deflationary collapse could be pretty much the same: supply chains destroyed, economic activity greatly reduced, and the value of debt instruments of all kinds wiped out. So taking out debts that you can never repay is a potentially valid strategy for those convinced of an impending deflationary collapse, too.

Anonymous Remir August 27, 2012 5:10 PM  

Of course I whip out my Visa card. If they're dumb enough to give me food for electrons, why would I give up my gold, whiskey or bullets? I'll continue to offer fake money as long as they continue to take it. Duh.

This flippant comment actually touches on the heart of the issue: Money is money by convention. To be precise, money is defined as a commonly accepted medium of exchange (cf. Human Action XI.2, p.202). So if the store (and its brethren stores across the country) consider a swipe of your Visa card money, then it is money, no matter how little it would deserve the name in a hypothetical rational economy. If debt deleveraging happens with a vengeance and there's a lot less credit for the store to call money? Then there is less money, so by definition deflation has occurred. If the store (and its brethren stores around the country) no longer trust credit, and demand dollar bills, checks, or debit card swipes instead? Deflation.

Anonymous JT August 27, 2012 5:38 PM  

Yes, but you could hold to an inflation model and jump out of gold as soon as they start talking of stricter capital requirements, cuz it will tank.

Anonymous John Regan August 27, 2012 8:33 PM  

The gold standard does contribute to a stable "economy", but that is because it pertains to the rule of law, not economics:

http://strikelawyer.wordpress.com/2011/01/23/the-gold-standard/

http://strikelawyer.wordpress.com/2011/01/24/gold-standard-ii/

Anonymous Enrique August 27, 2012 8:56 PM  

The logically correct thing to do, if you are sure that an inflationary or hyperinflationary scenario is in the works, is to borrow as much money as possible at today's low interest rates, then purchase real assets such as gold that will appreciate in value and permit the repayment of the loans in the significantly less valuable dollars of the future.

To the extent you can get fixed interest loans, yes. With variable interest loans, the lender just has to keep the interest rate higher than the rate of inflation to stay ahead. That said, I get all the fixed interest rate debt-money I can get my hands on and exchange it for durable goods. :-)

I find a considerable difference between credit offered (such as available credit on credit cards, lines of credit, and mortgage offers) and credit used (such as credit card balances, and mortgages). The former is available for purchases, and as such functions as money. The latter is just a promise to repay some time in the future, which may or may not actually be repaid, and in either case is not presently available. I would count credit offered as part of the money supply but not credit used.

Credit used, in the event it is repaid, is repaid using money in the money supply, such as savings, cash, credit offered from some other lender, etc. It (credit used, i.e a loan), in my opinion, should not be considered part of the money supply, but rather as a (rather speculative) asset. It can possibly be sold if another lender is interested in it, but it is not liquid, and can not generally be used to purchase other goods.

As far as measuring inflation goes, there is a difference between goods that are typically bought primarily with credit (such as houses and cars) and those that are bought with cash or equivalents (and I include credit and debit cards here). Most of the industrialized world now has declining prices in the former while prices rise in the latter. The central banks try to boost the former, but most of the increased money supply ends up boosting prices in the latter category.

Anonymous Geoff-UK August 27, 2012 9:37 PM  

Throughout history, governments that end up owing more than they'll ever repay end up devaluing the currency. So many times it's sickening. Really, go look. Really a really lot of times.

So what's different about this time, VD and KD? Yes credit IS money--but credit AND dollars can be created at will by Bernanke. Pls don't tell me that would be illegal--nothing is illegal anymore.

And why would someone collect PMs and at same time NOT leverage themselves into debt? Because there is no faith that the debt won't be redenominated into something horrifyingly large in the next currency. It's a good time to run and hide from every investment anywhere except food, PMs, water, lead and high-speed-lead-delivery-devices.

Anonymous Jack Amok August 27, 2012 9:50 PM  

A 100% gold reserve for demand deposits would certainly help matters. Savers can actually use banks to save their money. Banks can freely lend their own capital and can lend time deposits as long as there is a reasonably close duration match.

Yeah but...

Who verifies that the gold reserves are actually there? We recently had a scandal where banks holding people's gold were, um, not actually holding it, but instead issuing title to empty spaces in their vaults while they tried to shuffle the gold bars around and skim some profits off of that exactly the way they do it with paper (or just plain digital) money.

What's to stop the US from claiming there's a bajillion more tons of gold in Fort Knox than is actually there? Same for any other country issuing gold-backed money. It still boils down to a matter of trust, and there's not much of that to go around these days. Switching to a gold standard won't suddenly make all the same banksters and kleptocrat pols into virtuous saints. We have to change the people to fix things.


Blogger Nate August 27, 2012 10:24 PM  

This is a pathetic bait and switch.

The "high credit" limit on a visa card can certainly be counted as money... that is to say... there is point to be made there. But the money cannot be counted 15 different times.

The money only counts once in the money supply calculation.

High credit is POTENTIAL money. It may be spent. It may never be spent.

Blogger Nate August 27, 2012 10:34 PM  

and given that the contraction is related to the reduction in the public's appetite for new debt... it makes perfect sense to ignore reduced credit limits... sense people are not interested in borrowing more anyway.

Anonymous Jonathan August 27, 2012 11:32 PM  

After reading posts and comments like these for a long time, I still have no idea what the fuck is coming in the future... hyperinflation, or deflation (stagflation?).

My professional opinion currently is "whatever-the-fuck-happens-it-will-probably-be-something-that-surprises-everyone-and-it-will-probably-happen-right-before-a-nuclear-bomb-goes-off-and-so-i-guess-we're-all-fucked-anyway-FLATION".

Anonymous Jack Amok August 28, 2012 12:18 AM  

After reading posts and comments like these for a long time, I still have no idea what the fuck is coming in the future

I don't think anyone really does, because all we know for certain is that we're going to end up with a mess of some sort when the charade finally falls apart. But exactly what sort of mess depends on how people react when that time comes. Harry Seldon being a fictional character, that's remains a known unknown.

Blogger Nate August 28, 2012 12:24 AM  

"My professional opinion currently is "whatever-the-fuck-happens-it-will-probably-be-something-that-surprises-everyone-and-it-will-probably-happen-right-before-a-nuclear-bomb-goes-off-and-so-i-guess-we're-all-fucked-anyway-FLATION"."

Read the book. There are 4 scenarios and they are spelled out thoroughly.

The two most likely are hyper inflation... and deflation. And given that the preparations for each are pretty much the same... it doesn't really matter... except to econ egg heads like Vox. And me.

Anonymous Noah B. August 28, 2012 12:44 AM  

"Yes, but you could hold to an inflation model and jump out of gold as soon as they start talking of stricter capital requirements, cuz it will tank."

When they start talking of stricter capital requirements, they'll be lying to try to restore confidence. This thing is going to get UGLY.

Blogger R. Bradley Andrews August 28, 2012 4:29 AM  

What is the chance that the Feds will pass some law to index "fixed" mortgages if hype inflation hit? I was wondering that the other day. Not legal or moral, but that has stopped many things today.

Anonymous VD August 28, 2012 6:38 AM  

The "high credit" limit on a visa card can certainly be counted as money... that is to say... there is point to be made there. But the money cannot be counted 15 different times.

We're not talking about credit limits counting as money, but credit spent.

Anonymous Conrad The Crazed August 28, 2012 7:59 AM  

Any system of money is supported by trust. I'm no economic genius, but if the underlying support structure of money is trust, I have to ask myself:

Do I trust a managed system, where decisions affecting the value and cost of money are made by something akin to a corporate board of oligarchs? In THIS environment where the rule of law is completely non-existent when it comes to those very same entities?

Or....do I trust a system of money generally supported by 6,000ish years of human history? By that I mean gold/silver as the basis/backing of money. Has this system not proven itself repeatedly in the trust department? In the end, when piles of paper money yield a postage stamp, do these metals not reassert themselves as the preferred methods of sound money?

So yes, I understand the arguments in support of both deflation and hyperinflation. My gut tells me we are in store for both. I'm not sure I'm on board with using credit expansion (on a personal level) as a means to acquire hard assets, with the idea of paying off the credit with cheaper future money. I certainly don't TRUST that TPTB won't change any and all rules, on the fly and perhaps even post facto, in whatever fashion necessary to blow such a strategy completely to smithereens. Whether credit terms are altered, interest rates, what have you....they WILL do it if it means preserving the status quo at your expense.

If one is not burdened by much debt, and has physical possession of the two assets supported by most of human history as the most TRUSTED basis for real money....then it seems one is better positioned to weather the storm, in whatever shape it ultimately takes and regardless of what sinister machinations in the 'rules department' are imposed by TPTB.

Granted, outright confiscation of hard assets is possible, but then we're into a different phase of the collapse, and one which will require the use of different methods to resist, usually involving different metals and high-speed delivery devices of such.

Anonymous Josh August 28, 2012 9:14 AM  

We're not talking about credit limits counting as money, but credit spent.

and now Nate is going to say that if we count the accounts receivable of banks as money (which most loans technically aren't, since they're term debt), we should count the accounts receivable of all other businesses as money...

Blogger Joshua_D August 28, 2012 11:28 AM  

Conrad The Crazed August 28, 2012 7:59 AM

(1) Any system of money is supported by trust.

(2)I'm not sure I'm on board with using credit expansion (on a personal level) as a means to acquire hard assets, with the idea of paying off the credit with cheaper future money.


1. I don't think this is correct. A "hard money" like gold or silver, or a "commodity money" like a bushel of tobacco, only requires that you want the money more than the good you are selling for the money.

Even a fiat system, doesn't require trust. It simply requires that people want Federal Reserve Notes (dollars) in exchange for the good they are selling.

Now at some point in the future, people are going to decide they don't want those FRNs.

People may decide they no longer want FRNs because they don't "trust" the Treasury or Federal Reserve to not print them ad infinitum but that is only because of the nature of fiat currency.

For example, if we used hard money, people might decide they no longer want silver eagles because they prefer nickles to silver eagles. People may decide they prefer nickles because more nickels are available and function better as a "money." Trust or distrust in nickles has nothing to do with it.

Trust and distrust only ever has to do with "People." You either trust a person or you don't. If your money depends on trusting someone, then you're screwed from the start.

Anonymous John Regan August 28, 2012 11:31 AM  

You often get this confusion where people (e.g., @Geoff UK) believe that Bernanke can create money "at will". But "creating" money requires a loan: both a borrower and a lender, in other words.

So the big problem, which has been brewing for decades but only surfaced in the 2007 subprime thing, is a paucity of willing or capable borrowers. No new borrowers = no new money.

Thus money in circulation, whether you call it "credit" or currency or something else, stagnates or shrinks, except for this: the government can become the borrower of last resort. And this is what has happened.

At that point government deficits explode, and you have some political push back, since some people believe exploding deficits to be irresponsible. But then others, like Paul Krugman, actually argue that the deficits could, and should, be far higher.

Which seems insane, mainly because it is, but then the alternative - "austerity" - is politically suicidal for the current rulers.

Ultimately, then, debates about inflation, deflation, and so on are beside the point. This is a political issue, not a strictly economic or monetary one.

Blogger Joshua_D August 28, 2012 11:34 AM  

As for (2), the reason I'm not a big fan of idea that we should borrowing to buy assets because we think that inflation will overtake our debt is because that is stealing.

That is exactly what the Fed, banks and government are doing and it's morally wrong. Theft is wrong.

Now, taking back what has been stolen from you is fine.

However, we know that governments don't actually create wealth. Governments steal wealth via taxes. We know that the majority of today's banks do not create wealth, they steal it via unbacked credit and inflation.

So more than likely if you borrow to buy assets, then you'll be stealing from a hard working American or a hard working Chinaman, etc. You won't be stealing from the banks or the government, aside from the fact that you may be taking what they have stolen.

However, desperate times call for desperate measures.

Blogger Nate August 28, 2012 12:02 PM  

"We're not talking about credit limits counting as money, but credit spent."

Which is already accounted for in M2... so you're counting the same money twice... well... by the time you're done you'll be counting it 4 or 5 times...

Its bogus.

You get to count it 1 time.

Anonymous Josh August 28, 2012 12:39 PM  

So...if everything in z1 gets counted in m2, m2 would equal z1...which it does not.

Anonymous Conrad The Crazed August 28, 2012 1:20 PM  

Joshua, by trust I meant to imply the human trust that whatever the form of money being used is, we trust that it will be accepted by the next human for the next transaction. Not necessarily placing trust in the physical item itself for its pure sake.

In other words, trust in gold and silver exists because human history has shown that it will more often than not be accepted as money, whereas fiat currency will do so only until it eventually begins to lose 'value', as all such currencies do.

So you're right, fiat does not require trust in the FRN itself, but rather trust that when that FRN is handed to the guy at 7-11 for gasoline, he will accept it....even though both of you may know it is, in reality, worthless.

The system thus will only exist so long as trust in the currency (or its acceptability?) does. Perhaps trust is not the best word, maybe confidence would have been more accurate.

Blogger Joshua_D August 28, 2012 1:24 PM  

Conrad The Crazed August 28, 2012 1:20 PM

The system thus will only exist so long as trust in the currency (or its acceptability?) does. Perhaps trust is not the best word, maybe confidence would have been more accurate.


I agree. We're saying the same thing.

Blogger Nate August 28, 2012 1:26 PM  

"So...if everything in z1 gets counted in m2, m2 would equal z1...which it does not."

/facepalm

You can't be serious. All money is not credit money. Some of it is actual cash.. some of it was never lent to anyone ever.

Anonymous Jack Amok August 28, 2012 1:59 PM  

...the alternative - "austerity" - is politically suicidal for the current rulers.

Indeed, but let's just remind everyone what austerity really is - it's nothing more htan a sharp reduction in publically financed handouts to political cronies. Which of course is why it's political suicide for people who rule through payola. But ultimately it's nothing more drastic or heartless than shaking off a bunch of parasites. The parasites won't like it, and will certainly pitch a (possibly violent) fit, but that doesn't change the nature of it.

Maybe if we start calling it "de-worming the government" instead of "austerity" it'll sound better to idiot liberals who like big government. "Just like a vet helping out your dog, your precious little government will feel much better when we're done..."

Anonymous Josh August 28, 2012 3:12 PM  

You can't be serious. All money is not credit money. Some of it is actual cash.. some of it was never lent to anyone ever.

So then m2 should always be greater than z1

Blogger Nate August 28, 2012 3:34 PM  

"So then m2 should always be greater than z1"

Now you're just being deliberately obtuse... unless you're suggesting that M3 doesn't measure anything.

Anonymous geoff-uk August 28, 2012 7:42 PM  

@john regan

how am i wrong again?

i said history is replete with govts devaluing their currency

it sounds to me based on your post that u and i are on same page. bernanke will buy treasuries as he has been doing and govt will continue spending the made up money. and a sixpack of beer will soon be ten bucks. then twenty. a year later people will say "i miss being able to buy a sixpack for thirty bucks."

Anonymous The Anti-Gnostic August 29, 2012 10:11 AM  

Can anybody point to a single example of some schlep in the Weimar Republic or late Ottoman Empire waltzing into the bank and paying off all his debt with a day's pay? For this crackpot pay-off-your-debt-with-hyperinflation scheme to work, ALL prices would have to adjust simultaneously to the new money entering the system--this NEVER happens.

The hypothetical example of mortgaging a chicken farm for $1M and paying it off with a single chicken is not real. Yes, it COULD happen, just like communism COULD work but you are betting on extremely long odds.

Before the crack-up boom, your feed, your gas, your water, everything, will rise in price. Entire sectors of the economy will disappear as everyone realizes the sector is unprofitable absent a constant stream of increasingly worthless dollars. Debt is terrible advice under just about any scenario. You cannot count on every star aligning just right.

Someone mentioned price stability upthread. This is the same sort of chimera as "boosting aggregate demand" or "full employment." Prices should reflect supply and demand, not what Wall Street or some underwater homeowner thinks prices should be.

In sum, monetary policy should be the Bureau of Weights and Measures, not "price stabilization."

Blogger Nate August 29, 2012 9:09 PM  

"and a sixpack of beer will soon be ten bucks."

assuming you don't buy total crap.. a six pack already is 10 bucks.

Anonymous Geoff-UK August 30, 2012 7:24 PM  

@Nate,

You must be shopping at the grocery stores in Mountain Brook...Newcastle in bulk at Costco behind the Galleria FTW.

Anonymous John Regan August 30, 2012 11:02 PM  

@geoff-uk:

Not exactly the same page. The government can continue to borrow, but as the deficits explode we wind up with a different problem: how is the government going to pay the money back?

As that becomes less and less credible you're in the same situation as Greece. Greece doesn't have inflation, or hyper inflation. They have "austerity". They start selling off public land to pay off creditors. They renegotiate to maintain their debt balance but draw it out, which restores some modicum of credibility to the promise of payment, but just a bit. They reinforce this by reducing spending on pensioners and other lower order serfs. Then the serfs protest and then riot. Lots of new "money" is being injected into the system, but nobody's getting any except the people at the top, who look for a return elsewhere. Like China.

You should read Taibbi's article on Bain and Romney over at Rolling Stone. The Fed can generate "capital" through its circle jerk with the government, but it's going to a rapacious connected class. It's fueling pillaging, not production.

It's a very, very sick thing. I think the reason that inflation v. deflation is so muddled because this all has little to do with inflation and deflation.

There's no inflation in sight, still. We're in uncharted waters.

Anonymous John Regan August 31, 2012 9:02 AM  

@geoff-uk:

And as if on cue, from one of my twitter friends from over on your side of the pond:

http://coppolacomment.blogspot.co.uk/2012/08/harvard-inflation-and-belief-in-magic.html

Anonymous Stilicho August 31, 2012 1:23 PM  

well... by the time you're done you'll be counting it 4 or 5 times...

Because it was spent 4 or 5 times. It was exchanged for some product or service 4 or 5 times. It may have been fraudulent, but it happened.

Anonymous Stilicho August 31, 2012 1:25 PM  

You can't be serious. All money is not credit money. Some of it is actual cash.. some of it was never lent to anyone ever.

What is a paper dollar/FRN if not a debt marker?

Anonymous Geoff-UK January 18, 2013 9:20 PM  

@John Regan,

So I'm mistaken in thinking that Bernanke is NOT constrained from creating money out of thin air...despite the REPEATED failed Treasury auctions we've seen for two years where you-know-who picks up the slack using his sock monkey Primary Dealers. And you also say something about the lack of borrowers necessary for money creation/inflation.

Then two sentences later you mention the govt is borrowing. I'll say!

Where is it you and I disagree again?

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