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Friday, February 22, 2013

The Great Inflation-Deflation Debate

Nate forces my hand by kicking it off on his own blog:
It appears to me that there seems to be a bit of confusion out there about what the money supply is doing.  Is it growing?  is it shrinking?  Inflation?  Deflation?  Stagflation?   Obviously I am a hyper-inflationist...   Our buddy Vox is a deflationist.  So what gives?  Does it matter?

Well... if we're going to talk about this we're going to have to establish some kind of basic vocabulary.  For example... what is money?  I know... you're thinking dollar bills and coins.  Yes and no.  Money is an exchange medium that is used to complete a transaction.  The critical characteristic of money is that it does not require any additional transactions to satisfy the terms of the exchange.  You got your money... and that's good enough.  Lets look at gold for example.  Gold is money.  It always has been money.  You want some of my cattle... you give me a small amount of gold... and we're done.  Modern cash is similar.  You give me cash.. I give you a cow or two... we're done.  Cash is money.

What about debit cards?  I swipe your debit card... I give you cows...  we're not done.  Your bank has to send money to my bank.  That's an additional transaction.  Debit cards aren't money.   Same for checks.  Checks aren't money either.  They are IOUs for money.
Go to his place.  Read the whole thing.  If it doesn't make sense, read it again.  Grok it in its fullness.  I will respond here within one week.

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176 Comments:

Anonymous Josh February 22, 2013 1:10 PM  

Do you agree with his definition of money?

Anonymous Daniel February 22, 2013 1:11 PM  

Oh no he di'in't.

Anonymous Josh February 22, 2013 1:15 PM  

Also, popcorn.

With bourbon.

And bacon.

Anonymous Northern Observer February 22, 2013 1:16 PM  

The cow is the money.

Anonymous robh February 22, 2013 1:25 PM  

Sorry, but popcorn and bourbon is a recipe for heartburn here. Gonna have to pass on the popcorn.

Anonymous MendoScot February 22, 2013 1:28 PM  

The cow is the money.

But if you brand an IOU onto the cow - does it increase or decrease its value?

Anonymous DrTorch February 22, 2013 1:29 PM  

Then money disappears every time it's "invested". Then it reappears. Kinda like subatomic particles.

Anyway, it's a nice start to a challenging subject, but not complete by any means. For example, at some point the "investments" become satisfactory completions of a transaction (stocks as part of business acquisitions, or the old silver certificate currency).

Curiously, Au is falling significantly, while housing prices are up. (reverse of 2-3 years ago).

Are we done w/ deflation?

Anonymous Mina February 22, 2013 1:30 PM  

Physical, tangible things are "money". Everything else is worth the paper it is printed on.

Blogger Nate February 22, 2013 1:37 PM  

You know we're not even going to get past the definition of money here.


And the music on my blog is better.

Blogger Positive Dennis February 22, 2013 1:37 PM  

It seems to me that Nate's definition is too rigid. I think we are in a modest deflationary period, but my concern is what happens when the fecal matter hits the air circulation device. Then we may have inflation. My guess is the 10 to 20 % range.

Anonymous Daniel February 22, 2013 1:38 PM  

More importantly:

Are bunnies money?

Or are they just pledges toward future money that goes to Vox?

Anonymous Salt February 22, 2013 1:39 PM  

@Nate

Yep!

Blogger Nate February 22, 2013 1:45 PM  

It is rather disturbing to me that Vox up and decided to start the debate this way.

Particularly sense I specifically told him the terms of the agreement were... He goes first.

I suppose I could take this opportunity to call the whole thing off.. but I just don't have the heart. Y'all have waited way to long for this. I will not be denying it you on a technicality.

So...

its game on then.

Blogger swiftfoxmark2 February 22, 2013 1:47 PM  

Already see some holes. But it's all related to the definition of "money" so I guess that's going to be a point of contention for everyone.

I'll see what VD says in response. Then we can see who has the Better Metal Snake.

Yes, my music is pretty metal too.

Blogger Bob Wallace February 22, 2013 1:48 PM  

@ Josh

And bacon.

Bacon is the best money there is, but you actually couldn't eat it, just keep it frozen and pass it from hand to hand.

Hardly seems worth the trouble.

Perhaps women could be money....

Anonymous VD February 22, 2013 1:48 PM  

It is rather disturbing to me that Vox up and decided to start the debate this way. Particularly sense I specifically told him the terms of the agreement were... He goes first.

No worries. What I'm going to write will be little different than if you hadn't written anything at all. In fact, I'll even ignore the specific examples given. I have no intention of taking any unfair advantage.

Beyond, of course, my good looks and superintelligence.

Anonymous Vidad February 22, 2013 1:49 PM  

And so it begins.

Anonymous Toby Temple February 22, 2013 1:51 PM  

just make sure there will be no judge with the initials "C L" this time around...

OpenID alphamission February 22, 2013 1:55 PM  

Our money is debt. There's not a dollar printed that isn't owed to the Fed with interest.

Blogger Nate February 22, 2013 2:00 PM  

I posted an update guys...

Look I'm gonna be splitting for 6 days or so in less than 24-hours. Get your questions posted in my comments and I'll do everything I can to answer them tonight.

Anonymous Salt February 22, 2013 2:01 PM  

@Nate Particularly sense I specifically told him the terms of the agreement were... He goes first.

Really! Then why did you?

Anonymous Cheddarman February 22, 2013 2:04 PM  

If only Howard Cosell were alive and in his prime (as in the 1972 or 1976 Olympic Boxing coverage) to do the ring side commentary...

I don't know of any other journalist who could do justice to the coming battle of words, numbers, ideas and statistics...



Anonymous p-dawg February 22, 2013 2:20 PM  

Uh, if debit cards aren't money, then neither are Federal Reserve Notes. It says right in the name....NOTE. A note is legally an IOU for money. Not money. Sorry, Nate. That's the legal definition. It's printed right there on the bill. That cash is not your property. It's the property of the Federal Reserve. Again, says so right on it. Just look it up in Black's or American Jurisprudence.

Anonymous Porky February 22, 2013 2:27 PM  

Debt is money. Money debt. That is all ye know on earth, and all ye need to know.

Anonymous Noah B. February 22, 2013 2:29 PM  

Don't mean to sound ungrateful but... about damned time! Thanks guys.

Anonymous Porky February 22, 2013 2:32 PM  

And if you think a CD is risk and gambling but a Fed note is not... well, you'll find out.

Anonymous JN February 22, 2013 2:34 PM  

I get the feeling that if you two could actually agree on what constitutes "money" there would be no debate.

Blogger Tom February 22, 2013 2:42 PM  

If money is a medium of exchange, and exchanges are based on subjective value, couldn't anything be money?

As long as I don't plan on using it, wouldn't something I take in exchange but plan to just trade to someone else be money?

Is money different from "legal tender?" Because legal tender is defined by law, and that definition is whatever a government says it is.

Anonymous allyn71 February 22, 2013 2:48 PM  

I have to say at first blush it looks like it will be a tough haul for you with your defintion of money but whatever the outcome I am sure it will be both enlighting and entertaining.

I hate to say this, but when I read your definition of money and the money supply the first thought I had is that it sounded like something Tad might say. No hard feelings, but it is what it is.

Have a safe trip and look forward to the defense of your position upon your return.

Anonymous Anonymous... February 22, 2013 2:48 PM  

Look I'm gonna be splitting for 6 days or so...

Running away like a biatch.

Anonymous mjb February 22, 2013 2:49 PM  

Someone just called Nate Tad?

Blogger Dominic Saltarelli February 22, 2013 2:51 PM  

I'm with Nate on the inflation scenario, just not for the same reasons. I'm on the fence regarding his definition of money.

"The critical characteristic of money is that it does not require any additional transactions to satisfy the terms of the exchange."

A dollar is just a redeemable coupon for debt forgiveness. That means these redeemable coupons I have here for camping gear are money. I could go get a $100 tent, and hand the cashier 4 twenties and this here coupon.



Blogger tz February 22, 2013 2:55 PM  

@Tom - anything can be money, but it is best if it is easily transported, doesn't rust or rot or otherwise decay, is easily divided without changing value (unlike gems but like pieces of eight), and is generally recognized or has common uses.

Blogger Huggums February 22, 2013 3:02 PM  

Kind of OT, but I thought it might be relevant to economics. This man and his family decide to rely on the excess produced by others to survive as some kind of protest. I don't think he even understands what this implies.

Blogger Huggums February 22, 2013 3:04 PM  

The commenters appear to see through the bulls***.

Blogger ajw308 February 22, 2013 3:09 PM  

Printed dollars aren't money, but they are believed to be money.

I think Vox would help us all out be defining money first. That way we'll all have a common reference point to work from.

Per Nate's definition: Money is an exchange medium that is used to complete a transaction.
and that sounds good, but what about trading intangibles. For example, NY cops trading hookers protection for fellatio. While it does have value, you can't tell me sex is money.

I know what Nate is saying, I just think his definition needs some tuning up so it no longer includes everything ever bartered in the definition.

Anonymous Daniel February 22, 2013 3:11 PM  

It is rather disturbing to me that Vox up and decided to start the debate this way.

Particularly sense I specifically told him the terms of the agreement were... He goes first.

I suppose I could take this opportunity to call the whole thing off.. but I just don't have the heart. Y'all have waited way to long for this. I will not be denying it you on a technicality.


Dude, did you just promise to do it for the children?

But, technically, Vox shot first. He said: "Oh, lookie. Nate is talking about cows and such. What a good time for me to debate him about that one thing."

After all, no one expects the Spasmic Disquisition.

PS - If Vox has ever said or written "lookie" in his life, I'll be impressed. I engaged in a fair bit of literary license to re-create that there flashback scene.

Blogger Chad Ressler February 22, 2013 3:13 PM  

I'm completely ignorant about economics. I just have a question:

"Gold is money. It always has been money. You want some of my cattle... you give me a small amount of gold... and we're done. Modern cash is similar."

Doesn't gold have intrinsic value, where our modern currency is just a fiat currency with no worth of it's own? So, gold and cash wouldn't be similar? Am I correct?

Blogger JaimeInTexas February 22, 2013 3:26 PM  

Currency: A system of money in general use in a particular country.

Money: A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.

Asset: Property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

Capital:
1. Financial assets or the financial value of assets, such as cash.
2. The factories, machinery and equipment owned by a business.

Coercion: the act of compelling by force.

----------------------------------------------

Money is really a way to store labor. Capital, in the second definition above, is acquired through labor or some co-mixing of labor and capital.

For example, if gold and only gold is used as money. There are 5 ways to get gold:
1) self-labor -- Mining the gold from a mine (capital/aset) owned by the laborer.
2) employment -- Labor in exchange for some amount of gold.
3) bartering -- Exchanging gold for some capital/asset.
4) gifting -- Transfer of gold without receiving labor or capital/asset in return. For example, charity and inheritance.
5) stealing -- Taking through the use of coercion, the gold.

In items 1 through 4, all exchanges are voluntary. Only item 5 is the exchange forced.

Now, suppose that for ease of exchange the gold is placed in a storehouse and pieces of paper are printed representing fractions of the whole store of gold. As long as the piece of paper correspond to its existing gold quantity, it is money. Any piece of paper that does not have its corresponding quantity of gold in the storehouse is a a debt and that is assuming that the lack of gold in store is disclosed. Therefore, a debt becomes money only when gold enters into the storehouse to backup the piece of paper.

And, how gold enters into the system? Through labor in items 1 and 2 above.

If no gold enters into the system, a piece of paper representing a debt is only as good as people are willing to sustain a structure of hope and confidence that gold will enter the system.

So many ways to create mischief through pieces of paper representing debt. So much ruin by accepting debt as money.

Blogger JaimeInTexas February 22, 2013 3:29 PM  

Correction: And, how gold enters into the system? Through labor in item 1.

Blogger Giraffe February 22, 2013 3:30 PM  

Doesn't gold have intrinsic value, where our modern currency is just a fiat currency with no worth of it's own? So, gold and cash wouldn't be similar? Am I correct?

No. All value is subjective.

Anonymous FUBAR Nation Ben February 22, 2013 3:30 PM  

Gold doesn't have intrinsic value. It only has value due to the mechanics at work in the regression theorem as explained by Mises.

Credit may not technically be money, but it effectively is, due to the ability to have it accepted just as easily as money (e.g. credit & debit cards). That's why Mises defined inflation as an expansion of the supply of money and/or credit.

Ignoring credit in trying to make the case for hyperinflation is not a good idea because most transactions in the economy today are credit based.

Another side of the coin that needs to be analyzed is the demand for money and/or credit. You could have hyperinflation if people lose faith in the coin of the realm, so to speak.

Taking these issues into consideration, I think Nate's analysis has a high chance of being incorrect.

Read Vox's book. You'll understand more about economics than most people if you that. It's also not that expensive, so instead of buying an overpriced crap cup of coffee at Starburnt, buy Vox's book, read it and understand it.

I am out.

Anonymous fish February 22, 2013 3:31 PM  

Kind of OT, but I thought it might be relevant to economics. This man and his family decide to rely on the excess produced by others to survive as some kind of protest. I don't think he even understands what this implies.


What a good idea! I think we should all live off the surplus created by others.

OpenID newrebeluniv February 22, 2013 3:34 PM  

Nate forces my hand by kicking it off on his own blog:

Nate has a blog? I thought he abandonded it years ago.

--Hale

Anonymous George of the Hole February 22, 2013 3:34 PM  

Giraffe: "No. All value is subjective."

No. Unconditional love has intrinsic objective value.

Anonymous Cryan Ryan February 22, 2013 3:35 PM  

"If only Howard Cosell were alive and in his prime (as in the 1972 or 1976 Olympic Boxing coverage) to do the ring side commentary.."

DOWN GOES NATE!!
DOWN GOES NATE!!
DOWN GOES NATE!!

har har

Twas a debater with an excess of guts,
He viewed Vox just a confused young putz,
In the rumble that ensued,
He had his ass quite tattooed,
And was soon home licking his nuts.

Anonymous Russell February 22, 2013 3:39 PM  

What's the over/under for the number of exchanges until Vox gets busy on something else and forgets all about the debate?

Blogger Giraffe February 22, 2013 3:46 PM  

No. Unconditional love has intrinsic objective value.

So what's it worth?

Blogger Chad Ressler February 22, 2013 3:46 PM  

"Read Vox's book"

Luckily, I have it. Wasn't sure if I would grasp it with, pretty much, just an elementary knowledge of economics. But, I will work through it.

Anonymous Jack February 22, 2013 3:47 PM  

Are magic beans money?

That's what the guy that took my cow told me.

Anonymous Josh February 22, 2013 4:01 PM  

Money is really a way to store labor. Capital, in the second definition above, is acquired through labor or some co-mixing of labor and capital.

That sounds like an attempt to construct a labor theory of value.

I think a better way to phrase it would be that money is a form of capital, which is a way to store excess production.

Anonymous George of the Hole February 22, 2013 4:05 PM  

So what's it worth?

If you have to ask....

Anonymous Jack Amok February 22, 2013 4:06 PM  

Printed dollars aren't money, but they are believed to be money

BS, they most certainly are money. Money is anything that isn't (primarily) a good or service that can be exchanged for a good or service. It's an IOU for future goods and services. All forms of money have some inherent speculative risk, in so far as future providers of goods or services may not accept the money you have, or may heavily discount it.

Money is an IOU for future goods and services.

I can save all of you a good deal of trouble arguing this point - accept my definition and get on with the more useful debate about what impact political mismanagement of money will have on the economy.


Doesn't gold have intrinsic value, where our modern currency is just a fiat currency with no worth of it's own? So, gold and cash wouldn't be similar? Am I correct?

Gold has some intrinsic value in the creation of electrical components and jewelry, but other than that, it has no more intrinsic value that paper money. So unless you're making high prices speaker cables or Rapsta Bling, there's no fundamental difference.

The difference is in perceived risk - there's less chance of someone flooding the market with gold than with printed dollars.

Blogger Joshua_D February 22, 2013 4:09 PM  

"Chad Ressler:

Now, suppose that for ease of exchange the gold is placed in a storehouse and pieces of paper are printed representing fractions of the whole store of gold. As long as the piece of paper correspond to its existing gold quantity, it is money."

In your example, that piece of paper becomes "money", i.e a "medium of exchange", as soon as that piece of paper is exchanged and accepted in exchange for another good or service. It doesn't matter if that piece of paper is backed by gold or not, that paper is acting as money.

Money is simply whatever is being used as a medium of exchange to buy/sell goods and services.

Anonymous Difster February 22, 2013 4:10 PM  

No worries. What I'm going to write will be little different than if you hadn't written anything at all.

BURN!

Anonymous Salt February 22, 2013 4:13 PM  

If it doesn't make sense, read it again

Is there something about the second reading that makes it better than the first?

Anonymous Difster February 22, 2013 4:14 PM  

I think the question no one has really asked yet is "Deflation of what?"

Most people of course think of inflation and deflation as "price (de)(in)flation."

So let's define what is being inflated or deflated.

You can have price inflation while have a deflationary money supply.

And which prices are we talking about? Aggregate pricing? The CPI isn't exactly a reliable measure.

So what are we talking about inflating or deflating here? Define it.

Anonymous Porky February 22, 2013 4:17 PM  

Even Krugman gets that debt is money. He just doesn't care.

Anonymous Noah B. February 22, 2013 4:21 PM  

"No. Unconditional love has intrinsic objective value."

What's your hourly rate for that? Just in case Tad wants to know.

Anonymous praetorian February 22, 2013 4:23 PM  

"Curiously, Au is falling significantly, while housing prices are up. (reverse of 2-3 years ago).

Are we done w/ deflation?"

What I see is that we are in a broadly stagnant-to-deflationary environment, with a wild, wounded animal buying 40 yards of MBS a month. So housing will bounce a bit, gold/silver chop sideways to slightly down, while oil swings wildly around lurching us into and out of people-shooting-themselves economic contraction.

Anonymous Josh February 22, 2013 4:23 PM  

Dif,

I think the working definition if inflation/deflation is an increase/decrease in the supply of money and credit.

The crux is that Nate disagrees that an increase/decrease in the supply of credit is inflation/deflation. Because, per Nate, "credit isn't money."

However, even if credit isn't money, the change in the supply of credit will generally have a much more substantial effect on the money supply than just the change in m2.

Anonymous Jack Amok February 22, 2013 4:24 PM  

So, the interesting thing is I can see exactly how this debate is going to proceed. Can't say I know how it will end, depends on how stubborn Nate is and how speculative Vox is wiling to be. Also, I'm not sure how the inflation/deflation issue will play out in real life either. I consider both possible, with fickle political winds choosing which medicine we end up taking.

Here's the deal. Nate doesn't believe credit counts in the money supply, so he sees hyperinflation coming when the Fed/FedGov tries and fails to print it's way out of bankruptcy, a la Weimar Germany. On top of that, he probably figures less productivity too as our under-maintained infrastructure starts to break down. More dollars chasing fewer goods => inflation.

Vox on the other hand does think credit/debt is money, and much of the recent inflation we've had is the result of credit expansion. Vox figures that as the various speculative bubbles burst, debts will be written off and poof!, vanish, reducing the money supply as they disappear. Vox believes the credit/debt bubble will deflate faster than the Fed can print money, causing the money supply to shrink. Thus, we will have fewer dollars chasing more goods => deflation.

Vox is certainly right about the first part - debt is money. He may or may not be right about the second part, the Fed may be able to run the presses fast enough. I also believe we will see lower productivity, making deflation harder as there will be fewer goods in absolute terms, creating inflationary tendencies independent of what the money supply is doing.

At least as likely as either hyperinflation or deflation is... conversion to an entirely new monetary system, abandoning the dollar. Or Old Dollar, or Norte Americano Peso, in which case it will be difficult to say whether we had inflation or deflation.

I'm out for my own 2 day adventure. Have fun kids, remember to clean up the popcorn.



Blogger tz February 22, 2013 4:25 PM  

His definition of "complete a transaction" has a problem. He says a Cheque (apparently even one made out to "Cash" and thus transferable) does not complete the transaction, nor does debit cards or the like. But then Federal Reserve Notes do not either, no more than Bearer Bonds.

So exchanging a cow for some "magic beans" would complete things, but no one in their right mind would exchange a cow for a few common pieces of paper with famous portraits on them.

The Federal Reserve and treasury can create/emit credit but not value, i.e. money in the sense that Nate is using the term. They take impaired debt and replace it with not-yet-visibly-impaired debt.

"This note is legal tender for all debts, public and private" simply means the debts are being defaulted upon.

A Greek Treasury note has lost value, so in terms of it there is hyperinflation, but it is equally "debt deflation" as the amount of value is falling.

If a FRN is debt, it is debt default, it can only be inflation or even hyperinflation if a FRN is "money".

Gold is (can be) money, so if one ounce of gold will buy more tomorrow than today of nearly all commodities which are not typically money, we are deflating, not inflating. One or two commodities affected by supply shocks (e.g. oil) is merely a shift of the supply-demand curve, and neither inflation nor deflation. Gold itself slowly inflates as it is mined, but normally that is slower than productivity increases so the natural tendency is toward mild deflation.

Anonymous Porky? February 22, 2013 4:28 PM  

He may or may not be right about the second part, the Fed may be able to run the presses fast enough.

Trillion dollar coin?

Blogger tz February 22, 2013 4:33 PM  

As to who is right - is debt/credit part of the money supply or not is a semantic issue, at least for this debate. If Bernanke was the gosling from the Puss in Boots anime and emitted gold, we would have inflation (in terms of gold). But all he can do is emit bills of credit - that is what paper currency, things like confederate dollars or continentals were termed.

The effect is identical:

You are holding shares/bonds in an entity going bankrupt (thing GM bailout) but issuing more shares or bonds, so those shares/bonds are losing value in anticipation of default or simple dilution.

You are holding legal tender certificates in an entity emitting more of those certificates, but because they are the monetary unit, and called by some "money", the identical process and effect is called inflation or hyper-inflation.

Is an FRN, euro, yen, yuan, pound-sterling, Swiss-(cheese?-)franc, and the rest "money" or "debt"?

Anonymous John Regan February 22, 2013 4:41 PM  

Whatever money is, the Fed doesn't want us to worry about it losing any:

http://money.cnn.com/2013/02/22/news/economy/fed-future-losses/

Anonymous Anonymous February 22, 2013 4:51 PM  

From a non-economist point-of-view. I do not care too terribly much what the academics of this debate mean. I got zippo in the stock market, so big picture stuff ala politics and monetary policy is lost on me. But I do understand that nearly all the stuff I purchase and use from toothpast to fuel to food is made by companies that are stock exchange listed. So I assume inflation or deflation will have material effects on me and mine. I also know those that come to my place of biz and I are linked. So if they or their workplace are tied more directly to the stock market and the larger picture in economic terms that will effect how often they visit and how much they can spend for the services we provide. Forget the academic wordsmithy and debate what is the bottom line on what one could expect in real terms re: inflation or deflation?

Blogger tz February 22, 2013 4:51 PM  

Josh:
I think the working definition if inflation/deflation is an increase/decrease in the supply of money and credit.


Jim Pulplava had this on one of his q-calls saying the deflationists changed definitions, but I think he is the one in error, or at least should allow terms which can be confusing to be defined.

If someone issues me $50,000 in credit - which might have been created by a reverse "poof", I can spend $50,000. If I don't it does sit there.

Money can be real or virtual, but if virtual - I would include paper - then Whiskey-Zulu (Weimar/Zimbabwe) is possible, but the reason the money is created is for the government (and the connected cronies) to be able to spend with "money" created out of nothing. It may destroy the value of the rest that already exists, but they can "print" more. There is confidence involved here as long as it is virtual.

But credit is all virtual. It is a claim against - maybe something. Maybe nothing. I can borrow and give out a loan to someone who in turn will give out a loan, who in turn might pay for the original load I took out. An unbacked "daisy chain". While money seems to have a more solid base, credit depends on the confidence of the creditor.

Banks are NOT loaning now except to the most credit-worthy who do not need it (they are buying back stock, swapping higher interest and short term for low-interest long-term). So the supply of spendable dollars is contracting from this effect.

Fractional reserve banks count debt as an "asset" so even in gold, a real deposit becomes a small reserve of real assets and claims or calls on debts - which were/are paid out with (actual if gold) money.

Blogger tz February 22, 2013 4:53 PM  

I got zippo in the stock market,
Except that it is full of lighter fluid and the steel wheel is being rotated and is in contact with the flint.

Anonymous Josh February 22, 2013 4:55 PM  

Whatever money is, the Fed doesn't want us to worry about it losing any:

And...this is why Nate's hyperinflation scenario won't happen. The Fed exists first and foremost to protect itself. It's not going to launch infinite QE because that will eventually destroy the federal reserve system.

Anonymous Noah B. February 22, 2013 4:55 PM  

One thing a lot of people seem to be saying is that different things can be money under different circumstances, and this seems right.

A couple of days ago we were mostly in agreement with the idea that the value of any particular thing is dynamic and subjective. If this is true, then because the money supply is simply the sum of the value of many things, then it must follow that the quantity of money is also dynamic and subjective. While we may be able to definitively state that there are 7 billion ounces of gold, we cannot definitively state their value in terms of anything else. The same principle should hold true in attempting to relate the quantity of fiat currency with the quantity of debt denominated in that currency. Some entities will value debt to a radically different extent than others, based on their estimation of systemic risk.

Not very satisfying and overwhelmingly complex. The reason we're struggling to agree on a definition of the money supply is because it simply isn't possible to define a measure of the money supply that is adequate for all people in all circumstances.

Anonymous Josh February 22, 2013 4:58 PM  

Banks are NOT loaning now except to the most credit-worthy who do not need it (they are buying back stock, swapping higher interest and short term for low-interest long-term). So the supply of spendable dollars is contracting from this effect.

Exactly. New money has to be lent out first before it can be spent. Of course Mish and Keen made a good case that the lending comes first and then the reserves are created.

Blogger Wagnerian February 22, 2013 5:12 PM  

@Dr. Torch: "Then money disappears every time it's 'invested'".

Does it? Or does it "appear" in the assets of those with whom it is invested?

Anonymous Difster February 22, 2013 5:22 PM  

Let's get Ron Paul, Peter Schiff, Mish, Tom Woods and Robert Wenzel to be the judges of this debate.

Anonymous zen0 February 22, 2013 5:30 PM  

Another thing to remember is that 10-20% inflation per year is not hyperinflation.

For instance:

One of the most famous examples of hyperinflation occurred in Germany between January 1922 and November 1923. By some estimates, the average price level increased by a factor of 20 billion, doubling every 28 hours.


Anonymous Imatiger February 22, 2013 5:34 PM  

@ Noah B.

I like your explanation. So, to solve this problem. 1) Determine who holds the most debt 2) Of the biggest debt holders, determine how they are calculating systemic risk and what their risk estimate is and gain insight into their near-term actions 3) Sum the results. Simple, right? Anyone got a super computer free?

Blogger Markku February 22, 2013 5:59 PM  

Now, suppose that for ease of exchange the gold is placed in a storehouse and pieces of paper are printed representing fractions of the whole store of gold. As long as the piece of paper correspond to its existing gold quantity, it is money.

Suppose? Yeah, I bet you'd want me to suppose you're going to give me gold for the piece of paper, whatever the situation.

Nope, ain't gonna happen. The moment I actually need the gold for survival, you're going to tell me that this is the extraordinary moment when I can't have it due to the economic situation.

And I'll be the fool in the transaction. I gave you gold, you gave me a piece of paper. Wow, I'm such a businessman...

Blogger Nate February 22, 2013 6:07 PM  

Dear God...

So much fail... so little time.

Anonymous DrTorch February 22, 2013 6:16 PM  

I like JamieinTx answer.

Because money is like potential energy in thermodynamics. Energy is the potential to do work. Money is the potential to do work. But of course, both can be wasted.

You can talk about an economic engine, and it's not even metaphor. The Carnot cycle and laws of thermodynamics hold. Makes understanding economics much simpler.

Blogger Nate February 22, 2013 6:18 PM  

Let me start with the most ridiculous of the claims... and yes I'll deal with it at my place too... The fact that a dollar bill is a note.

It doesn't make a damned bit of difference what a dollar bill is supposed to represent. The exchange of dollar bills completes a transaction. Thus... dollar bills are money. They could be blank, and it wouldn't matter. They could say IOU on them. Wouldn't matter. There is no additional transaction required to complete an exchange... so they are money.

Literally anything can be money. Paper... rocks... leafs... blades of grass... ANYTHING.

Except something that requires an additional transaction to take place. Then its not money.

Blogger Nate February 22, 2013 6:19 PM  

Also...


Its painful to have to point this out... but no... sex is not money. Sex is barter.

Blogger Nate February 22, 2013 6:22 PM  

Look boys... Do yourselves a favor... If you think I just pulled this definition of money out of my ass and not very much thought went into it... just keep quiet.

It will save you a lot of embarrassment.

And anyone that thinks VD and I are having this debate because we think each other stupid... or ignorant... is a fool. I loved RGD. I have enormous respect for vox's intelligence and for his thoughts and theories on economics.

Blogger tz February 22, 2013 6:35 PM  

So a blank piece of paper which has no exchange value (dollar bills are money. They could be blank, and it wouldn't matter. They could say IOU on them. Wouldn't matter.) completes a transaction, but a cheque, CD or something else which does have value does not complete the transaction? So a blank piece of paper is "money" but one that is a title to something of actual value is not.

Anonymous Noah B. February 22, 2013 6:36 PM  

"Literally anything can be money. Paper... rocks... leafs... blades of grass... ANYTHING."

If anything can be money, why not include bonds? You might not be able to buy groceries with them, but at most places, you can't buy groceries with a gold bar either. And in many cases, bonds are used and traded as though they were money. I've read that the Chinese are using them as collateral to back foreign mining operations for a few years now. For that purpose, Treasury bonds are far more useful and easily exchanged than suitcases of cash would be.

"Except something that requires an additional transaction to take place. Then its not money."

This seems contradictory to the argument that anything could be money. Let's assume the paper dollar is our primary currency, i.e., paper dollars are the thing that what we want. You are arguing that going from a check to dollars requires another transaction, which is certainly true, so a check is not money. But in this context, gold could not be money either, since another transaction is required to convert gold into paper dollars. Therefore, nothing other than paper dollars could be considered money after applying the constraint that no additional transaction can be required.

Anonymous zen0 February 22, 2013 6:37 PM  

Nate says:

Look boys... Do yourselves a favor... If you think I just pulled this definition of money out of my ass and not very much thought went into it... just keep quiet.

It will save you a lot of embarrassment.


Without accusing you of unhygenic thought processes, why, if economists differentiate between commodity money, fiat money, and bank money, do you reject the idea of bank money as money.?

Anonymous Salt February 22, 2013 6:37 PM  

Except something that requires an additional transaction to take place. Then its not money.

Okay, I'll play.

The %age added as Tax, where required by law, is additional to the transaction. I buy a widget at the dollar store for a Dollar. I give the man a Dollar and I get the widget? Not yet I don't. Have to add that % tax. Another transaction.



Blogger tz February 22, 2013 6:43 PM  

I don't think you've pulled the definition out of your ass (what ARE you feeding your donkey?), but if you assert that the paper you wipe your ass with is money but bearer instruments representing a claim on commodities are not, I disagree.

I don't think you are stupid, nor Vox, but if you aren't defining the same things the same way you will talk past each other. You can have two people with near 200 IQs, one who only speaks spanish, the other who only speaks urdu, and they won't be able to communicate.

In your attempt to define money, I don't remember a clear example of what you consider real money to be and it being used in a transaction - including the closure you seem to imply v.s. the other examples of what is not money (e.g. a cheque made out to "cash" or any other bearer instrument which you didn't identify as money or not, at least not clearly enough for me to be sure).

No one accepts a dollar bill as such - they plan on doing an exchange in the future with it, not much unlike a cheque. The debit card transfers "money" from my account. So if I went to an ATM and got dollars first, those dollars would be money although you would have to deposit or exchange them to use them, but if the transfer was directly to your account - which would be credited identically - it would not be?

Anonymous Neutral Observer February 22, 2013 6:45 PM  

They got Nate surrounded. The first guy that gets called a retard wins.

Blogger foxmarks February 22, 2013 6:46 PM  

Except something that requires an additional transaction to take place.

They could say IOU on them. Wouldn't matter. There is no additional transaction required to complete an exchange... so they are money.

If a debt (promise of future payment) says “IOU” on it, is it money? If a debt IOU is issued without an expectation of settlement (perhaps by a sovereign or a vampire squid), no additional transaction is required.

I will need to hear more about this "additional transaction" stipulation. If an exchange is made by intermediaries, how many transactions is it? I give the broker two goats, he gives me a receipt promising delivery of one cow, trades my goats for a sword, then trades the sword for a cow, which he delivers to me, who paid for the sword?

Anonymous Salt February 22, 2013 7:05 PM  

If a debt (promise of future payment) says “IOU” on it, is it money?

Future money, else it's fraud.

Anonymous Godfrey February 22, 2013 7:17 PM  

This is huge... this is so freak'n huge.

Anonymous Godfrey February 22, 2013 7:22 PM  

Are IOU’s “money” if they continue – for all practical purposes - in perpetuity?

Anonymous Noah B. February 22, 2013 7:25 PM  

Are IOU’s “money” if they continue – for all practical purposes - in perpetuity?

I would think they would have to be money. In all practical respects, they would be just another currency.

Anonymous zen0 February 22, 2013 7:30 PM  

who paid for the sword?

Bernanke

Blogger tz February 22, 2013 7:30 PM  

The problem is that "Money" in any ordinary definition (hoping Asher will not elucidate here on this topic) does not mean "that which completes a transaction". You might be using the word to indicate that process or state, but that does not mean such a (re)definition applies when you try to apply it elsewhere including the "price", "velocity" or even "inflation". You cannot have an increase or decrease in the quantity of something that merely is able to complete an exchange, or conversely, a change in quantity in other things which facilitate exchanges (cheques or credit) might cause much more or less activity but cannot cause inflation or deflation. So issuing credit causes prices to skyrocket since there are credit instruments people are willing to use in exchange but are not "money" as you use the term. Yet the price shift is due to the availability of a medium of exchange - an increase or decrease of supply of the medium, so would be inflationary or deflationary.

Mises used the term "money substitutes" when he needed to distinguish.

Even if I think it would be reasonable to define "money" by your usage of the term, you cannot then extend the definition to anywhere else it is used, e.g. "Inflation is the increase in money", or anything which uses the term "money" since such statements uses a definition different than yours. You would have to prove the statement is still true if your definition of "money" is used. If by "hyperinflation", you mean something equally different or specific and nonstandard, I can't disagree with what you are saying, but you are speaking a different language, using words to mean something different, so by "hyperinflation" you mean something different than what I would refer to if I used the term.

Blogger ajw308 February 22, 2013 7:31 PM  

Here's the problem, we're differentiating between the definitions.

To further confuse Nate's criteria "debt is not money" there are two types of debt, the first type, Bob loans Larry $10. Larry has $10 that Bob no longer has. Here debt is not money as Nate has stated.

The second type, First National Bank (FNB) loans $1,000 to Joe to buy a car though it only has $1,200 deposited and has loaned out $9,000 to other customers in the form of loans. Rather than argue that money was created out of debt, I'll say that the value in the economic system hasn't changed, just the money supply has been inflated. Again, debt is not money, though it may appear to create it.

Anonymous Shutup, Tad February 22, 2013 7:32 PM  

And anyone that thinks VD and I are having this debate because we think each other stupid... or ignorant... is a fool.

Are you accusing people of Taddism!

Blogger tz February 22, 2013 7:38 PM  

Are IOU’s “money” if they continue – for all practical purposes - in perpetuity?

This assumes they can do so. The legal structure saying the debtor must/can pay back, his ability or willingness to declare bankruptcy, and the willingness of others to accept the IOUs in exchange at par and not at a discount are unlikely to happen in perpetuity.

Continentals and confederate dollars also circulated for a while and were considered "money". Until they didn't.

For a while, a "dollar" was a claim on a specific amount of gold or silver at the treasury, not fractional, but fungible. Technically they were IOUs, but everyone expected to be able to exchange. Until they couldn't, but for a while - through today - we assume the IOUs are sufficiently good for exchange and are thus "money".

As an example, in Weimar, as soon as they were issued wheelbarrows full of paper for their daily pay, they would try to buy something with them before they depreciated. Were they money or not? I would say no under Nate's definition because although you might say the first exchange was completed, there was a very strong impetus to do another exchange for something else of value. Generally the government forced the first exchange to be in the government currency so it was not strictly voluntary so could only be completed after the exchange of the money for goods.

Anonymous Asher February 22, 2013 7:56 PM  

Money is the ability to apply the will to power, and nothing, besides.

Anonymous Noah B. February 22, 2013 7:59 PM  

You win, Asher.

Blogger Nate February 22, 2013 8:00 PM  

Ok...

I haven't been through all of the comments here yet... but I have addressed numerous questions and comments in a second blog post at my place.

Please check it out.

I suspect it will answer a number of your questions.

Above all people... remember...

THERE IS NO MACRO.


THERE IS ONLY MICRO.


If you don't understand that concept... then you have no PRAYER of following this debate.

if you don't understand that something can be money in one exchange... and NOT MONEY in another exchange... then you don't have a prayer of following this debate.

We're going egg head here.

if you're not tall enough for the ride... take it up with your mom and dad.

Blogger Nate February 22, 2013 8:03 PM  

"Are IOU’s “money” if they continue – for all practical purposes - in perpetuity?"

there is no macro. There is only micro.


If you accept the IOU and don't exchange it for anything... its money. If you exchange it for something... its not money.

Blogger Markku February 22, 2013 8:07 PM  

Neither of those things, marcro/micro or money/not money in a particular exchange, are going to make a significant difference unless they directly pertain to the only interesting question:

If I have a dollar, is it going to buy significantly less (that is, half or less) food, ammo, medicine or gold in the near future than it does now.

Blogger Nate February 22, 2013 8:10 PM  

"If I have a dollar, is it going to buy significantly less (that is, half or less) food, ammo, medicine or gold in the near future than it does now."

Which is inflation.

Give the Finn a dollar.

Anonymous Asher February 22, 2013 8:10 PM  

@ Nate

On my phone so long comments are out.

If you don't exchane an IOU for something its money? Don't ever? Don't exchange for a year? How long of not exchanging an IOU before it becomes money?

I have a twenty in wallet right now ... it's so money and it doesn't even know it.

Blogger Nate February 22, 2013 8:13 PM  

Shut Up, Asher.

Blogger Markku February 22, 2013 8:17 PM  

Which is inflation.

If that happens, it is inflation in a sense that will be of interest to us all. Denying inflation then would be just plain ridiculous.

But one could also imagine inflation as sophistry, where only the ratio of debt to dollar notes changes, but the purchasing power I mentioned, doesn't. So that one would define money in a self-serving way only to win the debate. Such a thing would be nothing more than mental masturbation. It is of supreme importance that any arguments presented are arguments in favor or against the former kind.

Anonymous Mina February 22, 2013 8:19 PM  

Money is a store of value and the value can be fixed if the store is tangible.

Gold for example, can be weighed and each unit of measure has worth no matter how the increments are divided. Unlike diamonds for example where a larger diamond might have exponentially more value than the units of measure that makes up its whole.

The problem is that our money system isn't backed by anything and so can be conjured out of thin air. Unlike gold which has to be located, labor invested and has an inherent value. There is no inherent value in the USD monetary system. All dollars are created from debt therefore every new debt that is created expands the quantity of "money" in our system which therefore reduces the value of the money we hold already.

This is the definition of inflation and that is why inflation is a foregone conclusion. The magic of compounding ensures that our money supply inflates faster and faster all of the time. We are still boiling the frog but eventually everyone is going to start to notice that the temperature has gotten really uncomfortable.

Every fiat currency ends in inflation. Every fiat currency has had an average lifespan of about 20-40 years. This time will not be different.

Blogger Nate February 22, 2013 8:22 PM  

Mina

You're arguing about the quality of a system... not what is or isn't money.

Anonymous Mina February 22, 2013 8:23 PM  

If you haven't ever watched the 4 hours of Chris Martenson's Crash Course, it's worth it.

Here's Chapter 6 What is Money?
http://www.youtube.com/watch?v=U8dq1bH1X6s

Blogger Nate February 22, 2013 8:23 PM  

"If that happens, it is inflation in a sense that will be of interest to us all. Denying inflation then would be just plain ridiculous."


it is happening in every sector except real estate. The trouble is Vox isn't here so he doesn't know that.

and yes... denying it is ridiculous.

Anonymous Asher February 22, 2013 8:24 PM  

@ Nate

First off, it was a hunorous to a classic movie line. Secondly, once you set up some defining criterIon for something it's necessary to test that criterion for consistency and applicability. The logical conclusion of your criterion is that something is money if it's never spent.

You need to modify your criterion t account for the obvious realitythat, at some point, what we call money actually gets spent.

Anonymous Mina February 22, 2013 8:27 PM  

"Money is a store of value and the value can be fixed if the store is tangible." - this is a statement about the quality of the system?

No. I don't think so.

Blogger Nate February 22, 2013 8:31 PM  

""Money is a store of value and the value can be fixed if the store is tangible." - this is a statement about the quality of the system? "

no... the rest of your comment was that argument. The quoted bit was a terrible attempt at a definition money that actually ends up including almost literally everything that someone may value.

Cars can store value... so can charcoal... without including the exchange medium aspect... you're just jacking off.

Anonymous Asher February 22, 2013 8:33 PM  

Money is anything storeed in the short term and not consumed on the expectation that ot can be exchanged in the long term for something that can.

Blogger Nate February 22, 2013 8:33 PM  

'You need to modify your criterion t account for the obvious realitythat, at some point, what we call money actually gets spent.'


No I don't.

Something is or isn't money based on how it is used in any given exchange. It can be money in one exchange... and not money in another.

Anonymous Noah B. February 22, 2013 8:35 PM  

"There is no inherent value in the USD monetary system."

The notion of inherent value is similar to that of objective value. Objective value is an idea that is not supported by the reality of markets/human behavior. Gold has some inherent properties that make the supply of it more stable than that of paper currencies, but that does not, in itself, allow us to make any statements regarding the value of gold. As with all things, it has only the value that people believe it has.

Blogger Markku February 22, 2013 8:35 PM  

Are the real estate prices of such apartments that are reasonably (without insane debt) available of a normal, working class people coming down fast enough to offset food etc. prices? In Finland, they aren't. If the situation is the same in USA, that's inflation. What's happening to the average price of a home is then just what always happens to malinvestment in Austrian economics. If you bought an expensive house, well, you were a fool. You and your money are soon parted.

Blogger Nate February 22, 2013 8:36 PM  

"Every fiat currency ends in inflation. Every fiat currency has had an average lifespan of about 20-40 years. This time will not be different."

20-40 years????

Where did you get that???

Blogger Nate February 22, 2013 8:37 PM  

"Are the real estate prices of such apartments that are reasonably (without insane debt) available of a normal, working class people coming down fast enough to offset food etc. prices?"

real estate prices in the US have stabilized... when they should've dropped another 30% or so to reach the 100 average. Further evidence of inflation.

Blogger Nate February 22, 2013 8:38 PM  

" What's happening to the average price of a home is then just what always happens to malinvestment in Austrian economics. "


PREACH.


I have made this exact point here a dozen times.

Anonymous Asher February 22, 2013 8:39 PM  

@ Nate

I suspect you are conflating the concept of money with ROI. If I buy a ton of coal to tore value at$500 and then sell it at $100 it is still exchangeable, ie money. It is also a negative return on investment.

Anonymous Asher February 22, 2013 8:45 PM  

@ Nate

Wrt your comment at 8:33 pm

I agree with you that something may or may not b money depending on the circumstance. However, that is completely unrelated to your initial criterion. You have the irritating tendency t lay out criteria on a subject and then proceed to make, often reasonable, arguments about that subject which are wholly orthogonal to your initial criteria.

That indicates you need to revise your criteria.

Blogger Nate February 22, 2013 8:48 PM  

" So a blank piece of paper is "money" but one that is a title to something of actual value is not."

PEOPLE.

you didn't pay attention to the subjective value posts at all did you?

Or are you just that damned slow???

TZ... the "you" is collective here because I know for a fact you've got some stupid high IQ that is probably terrifying to mere mortals. You have all the horse power you need to grasp the concept... the details are just getting in the way right now. Forest... Trees... all that.

Anonymous Mina February 22, 2013 8:50 PM  

What is money? 1. A store of value 2. A medium of exchange 3. Unit of account. Which is what I was trying to convey in my statement.

It is sort of difficult to have a conversation about "what is money" in the US without touching the fact that our currency is not in fact backed by anything tangible and thus prime for manipulation, unlike tangible stores of value like gold.

A fiat currency and the system that supports it have to be an integrated whole in order to function - you really can't have a fiat currency without the system to prop it up. The only reason our "money" has any value is because our Government decrees that it does.

Without that support the value of the USD would immediately go to nothing and a new monetary system based on something tangible would most likely replace it.

People need a way to trade things of value and barter is too complicated. Money is a way of enabling things to be traded because the transaction is conducted in something tangible that everyone agrees to accept as form of payment for goods and services and that has a fixed value. As long as whatever that was met the three main criteria it wouldn't really matter what the thing was.

Blogger Nate February 22, 2013 8:53 PM  

"I agree with you that something may or may not b money depending on the circumstance. However, that is completely unrelated to your initial criterion. You have the irritating tendency t lay out criteria on a subject and then proceed to make, often reasonable, arguments about that subject which are wholly orthogonal to your initial criteria.

That indicates you need to revise your criteria."

Asher.. money only exists as such during exchanges. When its in your wallet... it may be money... or it may not be... depending on what happens in the next transaction.

so it was money... and it may be money again.

But right now... well thats up in the air.

In terms of money supply we assume that the green pieces of paper will still be accepted as money... mostly because we have a law.

Blogger foxmarks February 22, 2013 8:57 PM  

If you accept the IOU and don't exchange it for anything... its money. If you exchange it for something... its not money.

If you don't in future exchange a received thing, that suggests the thing is a good in itself. This is the "store of value" aspect of money. You could exchange the cow/nugget/IOU, but until you do, it is just a cow in your possession.

Money then is an ephemeral, transitory thing. This is the "means of exchange" aspect of money. Whatever you take in exchange is money, which I think Nate has said multiple times.

The "unit of account" aspect of money doesn't seem relevant (yet). Cows and diamonds can't be broken into component units of value. A third of a (live) cow cannot be exchanged, so by Nate's concept, it cannot be money.

So, how can inflation happen if money is ephemeral? I must have something wrong in my first paragraph. Anything exchangeable is a store of value. At the micro scale, there is only cows, not a "cow supply".

Somehow, the unit of account must be relevant. How else can the same cow cost more "money units" as time goes on? Debasing the unit of account will make all exchanges appear to be of ever-increasing value.

Is the difference between the camps that one sees the increasing number of money-units and the other sees the devaluation of goods in terms of money-units?

Blogger Nate February 22, 2013 8:58 PM  

Asher...

You're much better on your phone. You should keep that up. I officially recant my "shut up, Asher" comment.

Anonymous Mina February 22, 2013 8:58 PM  

20-40 year life span for fiat currency. easy enough to verify that ... estimates range from 15 years (low side) to 40 years (high side) I rounded.

Here's an excerpt from Peter Schiffs EuroPacific Capitol site (not written by him):

"According to an interesting study of the 775 fiat currencies that have existed, 599 are no longer in circulation. The median life expectancy for the defunct currencies? Fifteen years. Perhaps the author was being unfair by focusing solely on the failures. Sadly no, the average life expectancy of all fiat currency is running at a truly underwhelming 34 years. Only a select few have managed anything approaching old age. The British pound sterling is one such example at over 300 years and counting. Before we get too excited by this apparent example of longevity, at inception the pound was defined as 12 ounces of silver. The pound is now worth less than 0.5% of this original value and of course there is no silver involved anywhere. In other words, the most successful currency in existence in terms of life-span has lost more than 99% of its value.
 
The study also found that 1 in 5 fiat currencies have failed outright through hyper-inflation - a percentage that I must admit surprised me as I was under the impression that hyperinflation was a much less common occurrence. The following is an excerpt of some of those hyper-inflationary episodes. Full details of each example with precipitating causes can be found here.    
Angola (1991-1999)
Argentina (1975-1991)
Austria (1921-1922)
Belarus (1994-2002)
Bolivia (1984-1986)
Brazil (1986-1994)
Bosnia-Herzegovina (1993)
Bulgaria (1991-1997)
Chile (1971-1973)
China (1939-1950)
Ecuador (2000)
Greece (1944-1953)
Georgia (1995)
Germany (1923-1924, 1945-1948)
Greece (1944-1953)
Hungary (1922-1927, 1944-1946)
Israel (1979-1985)
Japan (1944-1948)
Mexico (2004)
Nicaragua (1987-1990)
Peru (1984-1990)
Poland (1922-1924, 1990-1993)
Romania (2000-2005)
Russia (1921-1922, 1992-1994)
Taiwan (late-1940s)
Turkey (1990s)
Ukraine (1993-1995)
United States (1812-1814, 1861-1865)
Vietnam (1981-1988)
Zaire (1989-1996)
Zimbabwe (1999-2007)"

Blogger Markku February 22, 2013 8:59 PM  

If someone is going to tell me that what he actually meant by there being no inflation after I held on to my money meant that I could have bought a house with just my other kidney and 20 years of slave labor instead of 30, I'm going to say fuck off and die.

"What is money?"

"What is truth?" Pilate asked, and it was just as futile.

Unit of money, gold, ammo, food and medicine, I say. Those are the only things that matter.

Blogger Nate February 22, 2013 8:59 PM  

Foxmarks

Just because something is ephemeral doesn't mean it isn't effected by supply and demand.

its a Law after all.

Anonymous zen0 February 22, 2013 8:59 PM  

Nate:

so it was money... and it may be money again.

But right now... well thats up in the air.


Schrodinger's Money.

Blogger Nate February 22, 2013 9:02 PM  

Thanks Mina.

I am a Hyper-Inflationist and have used a similar argument before but I was under the impression the average span was closer to 80 to 100 years.

I'll dig some more.


Thanks for the Ammo.

Blogger Nate February 22, 2013 9:05 PM  

"Schrodinger's Money."

Nice.

Anonymous Mina February 22, 2013 9:08 PM  

and the referenced article goes on to support my points ...

"Since one of the key requirements of money is to act as a store of value and fiat currency seems abysmal at this function, why do we persist in its use and more importantly who benefits? The answer is obvious - fiat currency is extremely useful to the banking and political classes and so it persists.

For politicians printing money acts as a stealthy tax - a tax for which few voters are likely to blame the political class. Secondly, by reducing the value of the currency, the economy's "measuring stick" so to speak, politicians are able to deceive the voters that their wealth has increased."

Right. So they manipulate it by for example allowing "USD" to be created out of thin air via the creation of debt (the US economic system.) Which slowly over time inflates the "money" supply, which reduces the value of all of the "money" in the system. It's a stealth tax because most people don't understand it ... they seem to understand that the prices of things go up but they don't know why. The apple that's $0.10 today is $0.12 next week, but why? They can't put together that its not that anything changed about the apple, it's just that there's more money in the system next week than there is today.

That's why inflation is a foregone conclusion of a fiat currency and why no fiat currency is sustainable. A fiat currency is not a store of value , it's not money - its a creation of Government. It has the appearance of being money because the Government says it does.

Blogger Nate February 22, 2013 9:10 PM  

Anyway...

I responded at my own blog to many of these issues.

I need to drink, I mean, do some prep work before I split in the morning. If you have more points or comments or questions... I suggest you make them there... where I will be rocking Rammstein and responding as I can.


Oh..


And that picture on the right is Makers Mark Distillery. Click on it.

Blogger Nate February 22, 2013 9:12 PM  

""Since one of the key requirements of money is to act as a store of value and fiat currency seems abysmal at this function, why do we persist in its use and more importantly who benefits"

And one of the key requirements of a cat is that it have legs.

Does that mean that is the only key requirement?

Is everything that has 4 legs a cat?

Anonymous Mina February 22, 2013 9:21 PM  

I'd disagree with your premise. I'd say a cat could be defined by three things and that you'd select three things that were distinctly cat-like rather than things you knew were shared by most of the creatures on the planet.

IME as an engineer "Three" is a good magical number that can serve to support most anything, including making distinctions between things like cats and horses. But I also think you'd specifically eliminate things you'd expect that they would have in common, in order to make the distinction. I call that "controlling for variables" ... IOW if the "thing" shows up on both sides of the equation you can usually eliminate them from consideration. Like having 4 legs, for example.

From my earlier post: "What is money? 1. A store of value 2. A medium of exchange 3. Unit of account. Which is what I was trying to convey in my statement."

If you want to distinguish a good "money" from not-good "money" I think the three criteria I listed are pretty good. But I do think three is minimum for a definition. My understanding is that those three criteria are pretty much conventional wisdom - I certainly didn't come up with the list myself but I do agree with it.

Anonymous zen0 February 22, 2013 9:38 PM  

Mina says:


From my earlier post: "What is money? 1. A store of value 2. A medium of exchange 3. Unit of account. Which is what I was trying to convey in my statement."


Many economists would say that #2 is the only relevant part and the other two are simply a necessary component of that.

Blogger SarahsDaughter February 22, 2013 9:41 PM  

You know, Zeno, my comment at Nate's place (time stamp 4:20) is about all I'll be able to contribute to this conversation....

Anonymous zen0 February 22, 2013 9:46 PM  

I think what would be useful to this discussion would be recognition of Exter's Pyramid

Nate, in his bucolic way, seems to be describing the same thing.

When liquidation is necessary, the lower orders of "money" increase in value.

The higher one goes in the pyramid, the more ephemeral and subjective the value, and the more complex the transactional dance.

Anonymous The other skeptic February 22, 2013 9:47 PM  

I think that Nate has a point. Cash and gold, silver, jewels, etc, can be used to pay for services/goods immediately, while anything else requires another step to settle the trade. The government can control your access to that other step.

However, perhaps all that means is that all these other forms of payment should be discounted relative to cash, gold, silver, jewels, etc.

Anonymous zen0 February 22, 2013 9:51 PM  

Here is another one:

The Exter Inverted Pyramid- A Refresher

Anonymous zen0 February 22, 2013 10:04 PM  

the other sceptic says:

However, perhaps all that means is that all these other forms of payment should be discounted relative to cash, gold, silver, jewels, etc.

They are, when debt de-leveraging is at play. Liquidation requires a movement toward lower orders of money. Its like the Austrian business cycle, only for Money.

De-leveraging deflation is the recovery process.

Anonymous Lulabelle February 22, 2013 10:07 PM  

Ugh. I am trying to wrap my head around all this. And now I feel like I have homework this weekend - trying to catch up.

Anonymous Cliff Notes February 22, 2013 10:15 PM  


Commodity money = no b.s
Fiat Money = situational b.s.
Bank Money = Total b.s.

Blogger Nate February 22, 2013 11:58 PM  

"Ugh. I am trying to wrap my head around all this. And now I feel like I have homework this weekend - trying to catch up."

If the subjective value post didn't make any sense to you... you're in trouble. If you grok Subjective Value... you should be ok.

Blogger Nate February 23, 2013 12:09 AM  

"Even Krugman gets that debt is money."

I would think the fact that krugman thinks debt is money should very much give you pause.

Blogger David of One February 23, 2013 12:49 AM  

Some of my own musings ...

Money (Currency) is a abstract construct with the foundation lying in power and control. The abstract construct has no real intrinsic value except that agreed upon, perceived or used in practice.

Hence Asher's paraphrased reference to Nietzsche (1885) ... "This world is the will to power—and nothing besides! And you yourselves are also this will to power—and nothing besides!"

The currency of the United States is one that is BOTH Sovereign and Reserve.

Any other sovereign currency would suffer hyper-inflation if it printed trillions of units of it's currency so as to devalue the value of the sovereign notes ... GDP divided by foreign trade/debt plus outstanding currency notes?

But US currency is both sovereign and the reserve note of most of the planet. Consequently the value of reserve currency can theoretically survive trillions of extra reserve notes being tendered across the participating nations vested in the use of the reserve notes.

Assuming my musings have some merit ... then multi-national GDP divided by multi-national debt plus outstanding reserve currency notes.

Restriction/contraction of the supply of reserve notes would lead to hyper-inflation whereas expansion of the supply of the reserve notes would be deflationary.

The exception would be individual participation of sovereign nations whose currency is NOT the reserve currency then inflationary pressures would occur due to excessive ratio between GDP and Debt. This can be mitigated by a quantitative easing via distribution of more reserve notes to a nation or nations for which inflationary realization was imminent. This is exemplified by the US Federal Reserve issuing Dollars in 2012 without Congressional authorization or oversight of over 1 Trillion Dollars to European banks in 2012. Consequently this action staved off the potential failure of national currencies and participating banks that was feared, if allowed to occur, would create a "domino" failure reaction of dependent/participating banks that used or exchanged the reserve notes.

I'm just thinking about this and my thoughts are definitely a work in progress.

I'll prepare myself for the potential beating that'll likely occur by my sharing of my current train of thought.

Blogger David of One February 23, 2013 1:07 AM  

It also occurs to me that the continued participation of the reserve currency independent of aggressive, pro-active and protected sovereign identity and culture of participating nations by resisting long-term abuses of the reserve currency ... that abuses such as multi-national quantitative easing may very well lead to global socialist political financial inducements/tendencies due to excessive economic dependency. For example, national debt by participating nations in combination with devaluation of the reserve currency through excessive creation and distribution of reserve notes.

Blogger IM2L844 February 23, 2013 1:24 AM  

All I know is that when I go to a certain website and enter the numbers that are stamped on a piece of plastic I have in my wallet, a guy with a pizza shows up at my front door in about 45 minutes. It's like magic.

Blogger David of One February 23, 2013 1:34 AM  

It seems to me that my statement ...

"The exception would be individual participation of sovereign nations whose currency is NOT the reserve currency then inflationary pressures would occur due to excessive ratio between GDP and Debt." ...

may be should state:

"The exception would be individual participation of sovereign nations whose currency is NOT the reserve currency then inflationary pressures would occur due to excessive ratio between GDP and Debt plus devaluation of the national currency."

I'm going to get some sleep.

I'm not an economist ... I'm just indulging myself in thinking I understand something even a little bit. Out of my league by any reasonable measure.

If it weren't for Vox and a good number of the Ilk I wouldn't even just a little bit of what I read.

Blogger David of One February 23, 2013 1:36 AM  

... If it weren't for Vox and a good number of the Ilk I wouldn't understand just a little bit of what I read.

Anonymous Mr. Pea February 23, 2013 2:51 AM  

The last I checked, there was just under 900 billion paper notes in circulation. Subtract that from our private and public debt. How can anything left over possible be "money"?

It is nothing more that a big giant sucking sound.

Every time you pay off a debt, all you are doing is paying it by recycling a percentage of whatever your debt is out of that 900 billion paper notes.

Anonymous Lulabelle February 23, 2013 4:32 AM  

"If the subjective value post didn't make any sense to you... you're in trouble. If you grok Subjective Value... you should be ok"

Really? Good. Cause I did actually understand that. Whew.

Anonymous Asher February 23, 2013 5:20 AM  

@Lulabelle

There's noting to understand. Arguing about theories of value is like arguing alchemy or how many angels can dance on the head of a pin.

Economics is about modeling behavior of individuals and economies.

Anonymous TGR White February 23, 2013 5:39 AM  

@ajw308

"For example, NY cops trading hookers protection for fellatio. While it does have value, you can't tell me sex is money."

That is straight up bartering. No medium of exchange, hence no problem. i.e. swap a cow for ten chickens. Money is a medium comes between two things being bartered, and in fact what yuou have is x bartered for money bartered for y instead of x bartered for y.


@ Porky

"Even Krugman gets that debt is money. He just doesn't care." Oh, he cares. Its just that his interests are opposite to yours. He wants to see everybody in debt.

Anonymous Koanic February 23, 2013 6:39 AM  

Nate's "legal tender only" and "there is no macro" arguments are in direct opposition to each other, and the grind meets at Z1.

I like Moldbug's theory of money; it will be interesting to see how Vox defines it.

I do not intend to follow Nate's argument, except insofar as is required to observe Vox's rhetorical methods.

As for deflation vs inflation, so far I see shrinking debt and increasing cost of living, reflecting economic inefficiency. Currency death would seem the obvious outcome.

Anonymous Koanic February 23, 2013 6:46 AM  

I think the essence of money is that it is a permanent bubble, qua Moldbug. Thus sex could be money if it were used as a medium of exchange and the value inflated to reflect its exchange utility. I.e., if payment were in hooker nights, denominated presumably 1-10.

Thus in times of extreme chaos ammo and medicine could become money, but are not currently.

And in times of order, such as now, Z1 debt is money. Although there is a cash discount.

Anonymous Mina February 23, 2013 9:57 AM  

Debt is money because of fractional reserve lending.

Anonymous Mina February 23, 2013 10:09 AM  

From my earlier post: "What is money? 1. A store of value 2. A medium of exchange 3. Unit of account. Which is what I was trying to convey in my statement."

"Many economists would say that #2 is the only relevant part and the other two are simply a necessary component of that."

If you skip #1 - you have a fiat currency and all of its attendant problems.

If you skip #3 - you have no way to divide up the medium or multiply it based on the "worth" of whatever thing you are trying to transact. I submit to you it's a little hard to pay for something with a 0.65 of a cow or 1.78 of a horse. Someone who wants to do business in cows might want a whole cow or two cows but not a part of a cow.

The advantage of a hard currency like gold or silver or platinum is that you can divide it and multiply it and the unit of account doesn't change. That's why gold, silver and platinum or any other hard but mallable, moldable currency works so well and something like diamonds doesn't.

I don't put much stock in anything economists say in case - look how wrong they have been and how they lie. There is no reason to believe a word they say.

Anonymous Mina February 23, 2013 10:36 AM  

Asher is wrong, understanding what money is, how it is created in our economy and why our economy is now faltering because of it is Very Important to everyone's lives from here forward.

Whether you understand it or not, you will be play a part of its eminent demise. IMO it is much better to understand what is going on so that you can adjust to it than it is to be completely ignorant and be a victim to whatever happens.

Anonymous Mina February 23, 2013 10:49 AM  

JaimeInTexas February 22, 2013 3:26 PM:

Money is a store (or a claim) on human labor.

That is the best definition and is why gold and other fine metals make such good currency, While still meeting the three main criteria.

At both my kids' colleges they have their own currency that is used on Campus and many of the local stores take the currency as well. They are called "$Husky Bucks" and they are backed by ... a fiat currency (USD$) ... but still the idea is there (they are backed by something most people consider "tangible value" - clueless though that perception may be.)

They are a store of value (exchangable for a certain # of USD), they are an accepted medium of exchange by the local residents of the area for goods and services and they have a unit of account (15 Husky bucks = 15 x $1 Husky buck)

It's a really good lesson to the kids in how money works. Now if you created a bank that only took Husky Bucks and you instituted fractional reserve lending, you could create $Husky Bucks out of thin air like we do with the USD. Eventually, because of fractional reserve lending, you would need to remove the backing of the $Husky Buck from the USD and it would become a fiat currency. Because of compounding and interest, soon you would have inflation and the currency would hyperinflate,everyone would lose confidence in it and it would fall from circulation.

Remember that fractional reserve lending only became possible after 1971 when Nixon removed the backing of the USD from gold. You can't have fractional reserve lending with a currency backed by something.

Blogger JaimeInTexas February 23, 2013 11:06 AM  

A has diamonds but needs gold to make earings. A is a jewler.
B has gold but needs diamonds to trade for diamond knife sharpeners. B sells knives and services them.

A and B exchange gold and diamonds, in some agreed quantity.

For A, gold is not money but raw material.
For B, diamonds are money.

Under this definition, as Nate proposes, money indeed is transitory.

But, that seems to me to be just a descriptive and the definition I would not agree.

Looks like the pinhead will be a battle circle ... and angels lean forward to pay close attention. I think it is a sold out performance.

Anonymous Mina February 23, 2013 3:42 PM  

yes but a 1 carat diamond is not worth 10 x 0.1 carat diamonds.

most likely, the equation looks like:

10 x 0.1 carat diamonds < 1 carat diamond

so this test fails the "unit of account"

Blogger JaimeInTexas February 23, 2013 6:42 PM  

stay with the grneral principle but, if we must, the diamond in question is really more like diamond bits, remnants of cutting nice big ones. That is why the knife gury guy went to jewlerer ... he knew jewlerer had "em bits.

How your equation balances out now?

One A's trash is one B's treasure.

Anonymous Mina February 23, 2013 7:21 PM  

not really because no one wants 10 0.1 carat diamonds. They only want the 1 carat.

you can cut up a diamond all you like, the fact is that 10 0.1 carat are not worth the same as a 1 carat.

that's why diamonds don't work as money like a mallable metal does. 10 0.1 oz of gold is exactly the same value as 1.0 oz of gold. that's why it has a unit of account and works as money.

Blogger JaimeInTexas February 23, 2013 11:17 PM  

Are familiar with industrial uses of diamonds?
google: industrial grade diamonds.

I own a diamond knife sharpener. Trust me when I say that it is not made with 1ct nor .1ct diamonds. Yes, diamond "dust" has industrial applications.

You are missing the point, though.

Anonymous Other Josh February 23, 2013 11:22 PM  

Nate's understanding of debt shows me Vox should have no problem disassembling his arguments with relative ease - if Vox is able to explain debt and its role in the economy in a concise, clear fashion.

Nate & Vox are both smart dudes... much smarter than me. It'll be fun watching the heavyweights duke it out in a friendly online debate.

Anonymous Roundtine February 24, 2013 6:24 AM  

Diamond dust is not diamonds, any more than breadcrumbs is bread. A loaf of bread will sell at a different price than an equal weight of bread crumbs.

Anonymous Roundtine February 24, 2013 7:15 AM  

Paper dollars are money. Credit transactions are money. When the bank loans me 100k, they put 100k in my account. As far as the bank is concerned, they have 100% reserves: they loaned me 100k and there is 100k in the bank. It counts as money as soon as the bank credits my account.

Paper dollars exist in physical form. If all the banks failed tomorrow, the money supply would collapse to the physical dollars in circulation, most of which are in Europe and Asia. If all the banks failed in Zimbabwe or Wiemar Germany, the money still exists because they printed it.

One way to look at the system is a ratio of credit to M2. Total Credit Market Debt Outstanding/ M2. This shows that at the peak, there were $7 in debt oustanding for every $1 in M2. Thus credit is what moves the economy. Now, all the printing has taken this ratio down to 5.5, but at the start of the debt bubble in the early 1980s (the end of the previous debt destruction cycle) the ratio was 3:1.

If you notice, the ratio always pauses during a recession because Fed monetization ("printing") outpaces credit creation. However, currently this ratio is flat out falling, which indicates Fed "printing" far exceeds credit creation. Now, if the economy were growing, this would be hyperinflationary. But since credit is flat/falling, the Fed is offsetting the deflation. If at any point the economy takes off, this ratio will start rising and then we can worry about a serious bout of inflation. The Fed's goal is to keep printing until the ratio starts climbing.

TCMDO/M2

Blogger JaimeInTexas February 24, 2013 9:18 AM  

If diamond dust is/are not diamonds, what ais it, talcum? Who knew that the definition of diamonds was also in need of debate?

Anonymous Mina February 24, 2013 10:40 AM  

Diamonds are just an excellent example of something that most people would mistake as having the potential to make a good tangible as currency - because it is something "valuable" that you'd assume most people would be willing to take in trade for goods and services.

They are also an excellent example of something that makes bad currency - for the very reason cited:
value of 10 x 0.1 carat diamonds < value of 1.0 carat diamond.

It's all a very interesting discussion but when I found Chris Martenson's Crash Course in 2006 I knew I had finally found someone who could explain money, inflation, and the economy in a simple, easy to understand manner ... until I see / hear something compelling enough to challenge it, his definitions and explanations stand as far as I am concerned.

I will be interested to see what Vox posts this week, for comparison.

Anonymous Roundtine February 24, 2013 6:59 PM  

If diamond dust is/are not diamonds, what ais it, talcum?

I've never seen an ad from Kay jewelers where a guy gives his wife a bag of diamond dust.

Blogger JaimeInTexas February 24, 2013 8:08 PM  

No. But, wives give their husbands flat pieces of metal, encrusted with diamonds. Makes dressing game, fileting of fish and carving meats a lot easier.

Blogger tz February 25, 2013 5:18 PM  

Oh, you don't have to accept FRNs?

http://consumerist.com/2013/02/25/court-rules-airline-doesnt-need-to-accept-cash-for-in-flight-purchases/

I showed my card but they didn't accept it - the 7 of Diamonds. Apparently everything is not according to Hoyle.

Credit is NOT money but spends like money. That is why Mises titled the work the theory of Money and Credit. They are different but related.

@Nate, I can grasp the concept and fully understand it, however you are attempting to use the word "Money" to describe your particular definition, which is NOT either the common usage of the word, nor any of the particular technical usages I am familiar with. This means you must redo every proof or even discussion (e.g. P/Q, M/V, supply and demand). I understand your definition, so go ahead. And be sure to (re)define all the other terms you use.

If you wish to create a definitional microcosm, or worse alternate universe, I can follow you but won't allow you to assume anything about your definition-opia v.s. the real world. If you use a different definitions for economic terms than Mises, Keynes, Smith, Ricardo, etc. you cannot use their theorems or proofs or even discussions to prove any point in your universe. They may have proved 2+2=4, but when you disagree about what "2" or "+' means, you cannot keep "=4".

At best, you can create a tautology - based on YOUR definition of money and hyperinflation, you can easily prove the first causes the second, just as you can prove bloop causes glorph if you can define "bloop" and "glorph".

You don't address the issue of velocity.

Also if you don't accept X is money, do transactions involving X occur outside your model? What if those are 99% of the actual transactions? Does either party that exchanges A and B legitimately own A and B after the transaction - by which definition? What do they own currently or ultimately?

The current problem is that credit - about 60 trillion originally is collapsing - being defaulted or marked down to ZERO, slowly, painfully, incrementally, while the Fed is attempting to stop the process. This is like someone with two sucking chest wounds which aren't sealed, and someone tries to do CPR. The lungs aren't going to reinflate any more than our economy.

If someone bought their house for $500k and currently they could only get $100k, did they lose $400k or not (and that isn't credit)? What if it was financed for nearly the entire value?

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