Inflation vs Deflation IV
Nate has put together an excellent response entitled Mount Chapter 3, the full significance of which I suspect even he doesn't recognize yet, but which I will begin to illuminate in my next post on the subject:
So... now here we sit happily atop Mount Chapter Three. Ain't the view grand? Now... with all of this as a basis of monetary understanding... we can address Vox's traps... I mean... questions.Read the rest of it there. As for those who are concerned about the score, I think I can assure you, that is almost certainly the least interesting aspect of this debate. Not, of course, that I am conceding anything in the slightest. I am just as capable of seeing the obvious as anyone else, the difference is that I also see that which is, apparently, considerably less obvious.
1. Are gold and silver commodity money? All gold and silver? Money is a condition that can be deferentially diagnosed by behavior. Are they functioning like money? Then they are money. Its the behavior that makes them money. It is the commercial commodity that lends subjective value and thus allows us to categorize them in LVM's terms.
2. Are the Federal Reserve Notes, in both cash and deposit form, commodity money or fiat money? The standard answer is fiat. But in reality FRN's have characteristics of both credit money and fiat money.
3.Does TMS2 represent your definition of the money supply? No. like M2 it is only a useful tool for estimation. It is flawed... but it serves for watching trends. I am agnostic on the claim that money supply can even be measured accurately. But I lean toward it being a pure impossibility. Its like watching ants at a huge ant mound. You have no idea how many ants are actually there... guessing is pointless... but you can stand back and watch them and tell if the swarm is growing or shrinking.
4. What are the various components of TMS2, commodity money, fiat money, or some combination therein? Given the nature of my explanation of Chapter 3's 4 types of money... its abundantly clear that all categories in TMS2 are fiat money. Many are credit money as well... but its impossible to parce in our banking system due to the various shenanigans... AND... if you listen to Ludwig... well...
"As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium"
- Human Action( p. 433)
With apologies to Vox, he has taken a large list of money substitutes and asked me to do what Mises says literally cannot be done.
72 Comments:
Thanks mate. I appreciate the compliment.
Thanks mate. I appreciate the compliment.
It's a trap.
I remember that other opponents of Vox have also run into problems after three chapters...
Should we be worried about Nate moving to a sandy western state Anne becoming a gigolo?
my reference did not go un-noticed... excellent.
TMS2
Can anyone recommend a proper technical definition of TMS2?
Dh:
http://blogs.forbes.com/michaelpollaro/austrian-money-supply-definitions-sources-notes-and-references/
Usually when Vox spars with someone it’s like a barn door swatting a fly. Here we see iron sharpening iron.
This debate showcases Nate's intellect. Vox had more debates prior so that gives him the advantage.
So far we are not seeing that advantage here.
"Usually when Vox spars with someone it’s like a barn door swatting a fly. Here we see iron sharpening iron."
I'm glad you're enjoying it... and I hope you're not overstating my abilities.
As a reader, the score is irrelevant. I've already learned more in this repartee than in the four graduate economics classes I took at one of Ohio's worst universities.
 I am agnostic on the claim that money supply can even be measured accurately. But I lean toward it being a pure impossibility. Its like watching ants at a huge ant mound. You have no idea how many ants are actually there... guessing is pointless... but you can stand back and watch them and tell if the swarm is growing or shrinking.
You haven't given your definition of inflation yet, have you? It'll be interesting to see that, because the standard "an increase in the money supply" answer won't work for you given what you've written here.
It's far too early to start talking about scores.
Kickoff has just started.
It's far too early to start talking about scores.
Subjective Value of Argument.
Nate; I read your blog post completely and am impressed. [not that you need or want my opinion]. But, I'm also fond of what you did over there.
I agree with someone above that stated they just learned, in the start of this debate, more than they ever did in graduate courses in school concerning economics.
That was an excellent and extremely lucid explanation of a tough subject. Would that most in this country could read and understand it enough to change out all the banksters and political ruling class in mass. Start over and put Vox and Nate in charge of treasury dept.
Well Done!
"As a reader, the score is irrelevant. I've already learned more in this repartee than in the four graduate economics classes I took at one of Ohio's worst universities."
And if others agree with you... Then win or lose I will consider this worthwhile and successful.
Fiat Money: Useless paper that has subjective value only because some government said, "this is legal tender and you will use it as such." This creates the monopoly that makes the fiat money the dominant commodity. This is never a permanent solution. Its a bad.. bad idea...
It seems to me that "trusted third agent" is a missing element of this whole discussion. Did the intermediary stage in the historic development of money not include a kind of priest class which kept records and settled disputes. And then sooner or later that responsibility passed on to banks which over time became regulated by the state along with certain trust-in-money-related duties. Is it not impossible, in the real world, to have population-wide usage of money without a trusted third agent to manage the ledgers etc?
So, this is tangential, but anyone have any thoughts on the tungsten cores that have begun to show up in gold bullion? Any way to detect this other than to drill into it or melt it down?
but you can stand back and watch them and tell if the swarm is growing or shrinking.
I would suggest one can only view a black & white snapshot of the anthill. The swarm may be composed of both red and black ants who are fighting and killing each other.
Is it not impossible, in the real world, to have population-wide usage of money without a trusted third agent to manage the ledgers etc?
Well see...that's why gold and silver coins have been used as money for thousands of years...
and I should admit I'm diverging from this debate's consensus definition of money. So just say the subset of money as defined that is a) of only token value b) doesn't grant privileges of seignorage to any agent making payment, per the post-keynsian Augusto Graziani.
if I were in charge of treasury I would reduce its role to one simple function.
It would test, authenticate, and stamp coins out of gold, silver, and platinum, that citizens brought to it... and give it back to them.
The fee for this service would not be greater than the expenses of the process.
"So just say the subset of money as defined that is a) of only token value b) doesn't grant privileges of seignorage to any agent making payment, per the post-keynsian Augusto Graziani."
I will not speak for Vox here... but I refuse to discuss money in those terms.
Useless paper that has subjective value only because some government said
Are you not missing the "consent of the governed" element? I'm sure there are historic/current examples of a government which tried to do just that but it became empty rhetoric once the population rejected the value of the government issued currency. So you need either consent or coercion in addition to government diktat.
but I refuse to discuss money in those terms.
Fair enough.
I posted this at Nate's but I'll post it here as well, to head off the continued completed transaction circle jerk.
A much better way to understand the "completed transaction" bit that so many are hung up on is this.
A completed transaction does not create any additional accounting entries.
So...John buys a pink glock and a Mac from Nate...John gives Nate a thousand dollars in cash...
So to account for it, Nate gets $1000 in his asset column.
Scenario 2:John uses a visa card...$1000 goes to Nate...
Also, accounting entries are created for visa and John.
John: $1000 liability payable to visa
Visa: $1000 asset receivable from John
Well having properly read your post Nate, I see you do address that. So, retracted.
Nate, after watching you singlehandedly defeat 4 opponents on the subject of abortion several years ago on a newspaper blog when you lived in TN, I am very confident of your chances here with Vox.
For those readers here who missed it, it was truly epic. He had them reduced to quivering jello when he finished with them and did not even break a sweat. The 4 were still quivering over their beatdown the next day when I checked back on the blog.
Iron vs Iron is a good way to put this current debate.
HA!
Thanks Susan. Good times... good times... Obviously its not really fair though to compare Vox's intellectual fire power to something as minuscule as 4 baby killers.
That's fish in a barrel. This... is more like.. Leviathan... in open water.
You're gonna need a bigger boat.
"Usually when Vox spars with someone it’s like a barn door swatting a fly. Here we see iron sharpening iron."
Oh, please... the only difference here is that VD likes his opponent personally, so he isn't his usual brash, egotistical self.
"Oh, please... the only difference here is that VD likes his opponent personally, so he isn't his usual brash, egotistical self."
He's already called me an idiot twice.
The fact that you didn't notice doesn't mean it didn't happen.
Obviously its not really fair though to compare Vox's intellectual fire power to something as minuscule as 4 baby killers.
I don't want to start an abortion discussion and hijack this conversation, but if there's ever a group of leftest thinkers which you never let up on and pound them into intellectual submission, the baby killers are it.
He's already called me an idiot twice.
I'm waiting for the midget redneck ginger insults to start flying.
Idiots can be liked, Nate. Believe it!
Oh, please... the only difference here is that VD likes his opponent personally, so he isn't his usual brash, egotistical self.
No, the main difference is that there hasn't been any real differences of opinion yet and therefore Nate hasn't started obfuscating and failing to admit the obvious. I'm not saying he will, I'm simply saying he hasn't.
I like most of the folks on Team Calvin and that didn't stop me from piling the abuse on them.
Nate/Susan: any chance to dog out the abortion exchange of Nate?
On Topic: while there isn't much of a debate yet (it isn't until someone is called stupid), it's still educational. Nate certainly gets credit for his part so far. The first punch has yet to fly.
Vox, is it correct that credit expansion has to merely stop, and not contract, in order for there to be deflation?
How does wealth relate to money? Wealth is created by manufacturing, mining, farming and fishing.
(Any other means?) If wealth increases but the money supply does not, does that produce inflation or deflation? If wealth decreases and the money supply increases, does that produce inflation or deflation?
The key to avoiding contempt is not avoiding disagreement... is avoiding contemptible behavior.
So one debates in good faith.. and makes honest efforts to answer direct questions to the best of one's ability.
for example..
I may not answer vox's questions in the terms he asks them.. but they will always be addressed... and any changes to those will be made for reasons that are clearly explained... and I will attempt to provide quality supporting evidence to support that conclusion. By right then I concede the same privilege to him, to change the terms of the questions I have asked of him with those same qualifiers.
I'm more interested in getting all of this right than winning. That in and of itself reduces the animosity.
If wealth increases but the money supply does not, does that produce inflation or deflation? If wealth decreases and the money supply increases, does that produce inflation or deflation?
1. Neither, although money will be worth more and prices will be lower, so it would be confused for deflation.
2. Inflation. And it would be inflation regardless of the increase or decrease in wealth.
@Nate
I'm more interested in getting all of this right than winning. That in and of itself reduces the animosity.
Well spoken, indeed!
Vox, is it correct that credit expansion has to merely stop, and not contract, in order for there to be deflation?
No, that is debt-disinflation, which is when credit is expanding but at a rate too slow to provide economic "growth". That's the situation we've been in since late 2009. We had about one year of modest debt-deflation, followed by debt-disinflation. It will be interesting to see if we've fallen back into deflation in the next Z1 report.
"No, that is debt-disinflation, which is when credit is expanding but at a rate too slow to provide economic "growth". That's the situation we've been in since late 2009. We had about one year of modest debt-deflation, followed by debt-disinflation. It will be interesting to see if we've fallen back into deflation in the next Z1 report."
See?
Now try to think about how many extremely careful steps we have to take to even get close to a framework where a statement like this even remotely makes sense... and then you'll see where we are in the scope of the debate.
So, with global labor arbitrage the US cannot manufacture enough wealth to get out of debt.
Will the US government confiscate the gold and silver again (1933) and devalue the dollar?
LES...
None of what you just posted, except for the debt being impossible to pay back, has much, if any, relevance to this debate.
So, this is tangential, but anyone have any thoughts on the tungsten cores that have begun to show up in gold bullion? Any way to detect this other than to drill into it or melt it down?
Not entirely tangential, but anyway my thoughts on this are that it's one reason a Gold Standard isn't really a solution to the problems of a fiat money system. Fiat money is a problem when the government controllers of it cannot be trusted not to monkey with it in order to fund their own agenda. But gold bullion can be debased too, and anyway, how would you or I know how much gold is really in Fort Knox? If you can't trust 'em with fiat money, you can't trust 'em with commodity-backed money either.
Note in Nate's post, he mentioned commodity money and fiat money, but nothing in between them. Commodity money is literally made of the commodity - not backed by it, but made of it. So gold and silver certificates are fiat money, not commodity money. The only real difference between commodity-backed fiat money and the unicorn fart-backed fiat money we have today is when you try to translate from one currency to another. It's a little easier to figure out how many pesos you should get for a dollar if they're both nominally backed by gold (though see above, "nominally" is subject to fudging). But it's pretty hard to figure out the relative value of Mexican unicorn farts and American ones.
However...
this isn't anything brand new.
Noah B.:
"So, this is tangential, but anyone have any thoughts on the tungsten cores that have begun to show up in gold bullion? Any way to detect this other than to drill into it or melt it down?"
Tungsten has different electrical conductivity and slightly lower density than gold. So, a testing procedure with very sensitive and accurate instrumentation could be used.
@Jack: there is 'money certicicates' as the third definiton, which would be a dollar 100% backed by commodity money.
So, with global labor arbitrage the US cannot manufacture enough wealth to get out of debt.
But this is nonsense. All of that debt is measured in dollars. Money is not value, is not wealth, it's a measurement of it, and a subjective measurement at that. If that subjective measurement changes, it can be very easy to pay off.
The real question isn't whether the US can produce enough wealth to "get out of debt." The question is whether we can produce enough to support ourselves and have a little surplus left over to invest in capital improvements. If we can, then the debt is irrelevant, but if we can't, again the debt is irrelevant. Debt is never a permanent solution to a productivity shortfall, it's at best a cushion you can use to recover from a serious mishap. The only relevance our existing debt has is that we've already blown our cushion.
Peter, that definition is:
"...So... fiat money... exchangeable to some commodity with a direct 1 to 1 ratio..."
It's still fiat money. In theory it's backed by something other than hot air, which is nice, but in practice untrustworthy people will still cheat.
"It's still fiat money. In theory it's backed by something other than hot air, which is nice, but in practice untrustworthy people will still cheat."
agreed.
money certificates require some kind of contractual framework... and thus are fiat money.
Reactions to a couple of Nate's comments:
The key to avoiding contempt is not avoiding disagreement... is avoiding contemptible behavior.
Evidence we are not in a rabbit warren.
money certificates require some kind of contractual framework... and thus are fiat money.
And the Government is a party to that contractual framework when they issue the certificates. Since the government claims a monopoly on enforcing contracts, they tend to be less shy about unilaterally altering contracts they are a party to than a true second party would be (the government is both a party to the contract and sole arbiter of it... hmmmm, what could go wrong there?).
Which may be why the Fed is nominally not the government, but in reality it is just another part of it.
Debt is never a permanent solution to a productivity shortfall, it's at best a cushion you can use to recover from a serious mishap. The only relevance our existing debt has is that we've already blown our cushion.
Hey, it was a really good run, helped out immensely by foreigners taking pieces of paper in exchange for oil and cheap Asian manufactured products.
Also, debt is relevant unless you decide to default, because the interest payments eat up your economic surplus and make capital formation more difficult.
It's still fiat money. In theory it's backed by something other than hot air, which is nice, but in practice untrustworthy people will still cheat
That's true for any money, even if government were to be taken out of it. Thanks for pointing out out that 3 is a subset of 2.
"That's true for any money, even if government were to be taken out of it. Thanks for pointing out out that 3 is a subset of 2."
I wish I could organize it better than I did. Mises used 4 types... I used 4 types... like I said... I hate Chapter 3.
Oh, please... the only difference here is that VD likes his opponent personally, so he isn't his usual brash, egotistical self.
No, the main difference is that there hasn't been any real differences of opinion yet and therefore Nate hasn't started obfuscating and failing to admit the obvious. I'm not saying he will, I'm simply saying he hasn't.
Also, he's treating Nate on par with Nate's behavior. Be respectful, follow the rules. The Golden Rule is alive and well.
At first I thought that since Vox was talking Macro and Nate was pointing out that he was focusing on the Micro, that they'd be like Quantum Physics and Relativity, one micro, the other macro, both seem to work yet where they overlap they differ.
Yet, now Nate seems to have gone well beyond the micro and crossed the line of departure with Mises as his quartermaster.
I'm enjoying the match as well as the education. What's more, it may not be that long before we see who's right.
I'm shocked that Vox hasn't already banned Nate for disagreeing with him.
I am informed that no dissent is allowed in the echo chamber.
Finally - a proper Juris Macto between two citizens of the realm. I second the affirmation that the information distributed here has taught me far more than my Econ 201/202 courses in college ever did.
I wish I could organize it better than I did. Mises used 4 types... I used 4 types... like I said... I hate Chapter 3.
Money is a type of thing that is fiendishly difficult to understand or explain - it's an abstraction that we deal with frequently enough for it to seem like it's not abstract at all. It can give even a non-aspie fits tripping over definitions and technicalities.
I second the commenter who pointed out that he has so far learned more here than in 4 graduate economics courses. I majored in economics, which is basically useless, and I've learned more from reading Vox's books and blog than 4 years of college. It just shows you how useless the undergrad college system is.
The only econ I had in college was a book I read to prepare for the CLEP test. Even though I wasn't very interested in the subject at the time, I immediately saw some major inconsistencies in the material. Now that I think about it, those inconsistencies are probably what caught my interest.
By far the most significant defect I found in the book, not surprisingly, involved Keynesian theory. The book went to great lengths to explain the Keynesian belief that deficit spending was an appropriate and beneficial government response to recession. But it ignored the obvious question: when does the government repay that debt? I found it troubling at the time, but I assumed that it was just a poor explanation in that particular textbook rather than a gaping hole in mainstream economic theory.
The whole idea of ignoring debt is so ridiculous that I practically can't wrap my mind around how it could be possible for anyone to believe such a thing. It's not much different from a structural engineer ignoring the effects of gravity.
Noah, to us it's a bug. To Keynesians, it's a feature.
This comment has been removed by the author.
Noah.. gravity not structure. if gravity not structure... how can gravity effect structure? crazy. crazy dumb dumb!
Keynesian theory is to governmentalists as a Pizza and Ice Cream diet is to fat girls.
"Really? I can do that and it's good for me?"
Of course it isn't, but all they're looking for is justification for doing what they want to do anyway. A herd to hide in when it all goes wrong.
Nate said:
Noah.. gravity not structure. if gravity not structure... how can gravity effect structure? crazy. crazy dumb dumb!
Nate old sod, gravity constantly effects structure. 24/7. It is a constant.
Gravity is the enemy of structure, and the Great Leveler.
Don't be dissin' Gravity, Nate.
Some Nigga want Gravity to be his friend, and that's how the Towers fall down.
Seen any Zero Hedge recently on how Dimon and the USG conspire to bring the Lehman Tower down?
Theory and Practice, theory and practice. The Yin and Yang.
I submit that given certain socio-governmental relationships that WE are the commodity for which the governmental monopoly of fiat currency is based upon.
I suppose that this train of thought could be extended to include ...
'Soylent money is equal to soylent people.'
Well, I will be interested in how this works itself out as I have had only one Econ course, some 28 years ago. I follow and try to learn and this is a great place to learn as mentioned by others.
However, I have one request.........please try to arrive at a good understanding of money in such terms that it includes something that I actually have in abundance (besides rocks in my head). The way I see it if you come up with a definition in my favor I will talk to my accountant and credit union people and inform them that I am indeed rich and my money problems are over. College for my children, check...new car, check.....air conditioned tractor, check.....great vacay for me and the misses, check....... Well you get the idea. For once in my life I want to come out ahead if you don't mind. :)
SOrry, bad attempt at humor. It's past midnight and I am working on my taxes for my business. Thought I would blow off a little stupid to ease my stress and disgust.
Alabamarob
Josh:
Scenario 2:John uses a visa card...$1000 goes to Nate...
Also, accounting entries are created for visa and John.
John: $1000 liability payable to visa
Visa: $1000 asset receivable from John
My brain is trying to tell me that the transaction between Nate and John and the transaction between Visa and John are two discreet transactions, not one.
> Usually when Vox spars with someone it’s like a barn door swatting a fly. Here we see iron sharpening iron.
There's a reason we read this blog, Claymore. There's also a reason we usually keep our mouths shut unless we know what we're talking about. :)
Well, as with others, my economics training consists of one econ course in college. :( However, I consider myself an informed layman, so let me weigh in with a few comments.
> If wealth increases but the money supply does not, does that produce inflation or deflation? If wealth decreases and the money supply increases, does that produce inflation or deflation?
I see Josh has already answered. The classical answer is the the first would be deflation and the second inflation, but Josh's clarification is a valid interpretation.
> But it ignored the obvious question: when does the government repay that debt?
As I understand it; in classical Keynesian theory, during the next expansion cycle. In practice, that never happens.
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