How is US currency worth anything?

[Kerberos]

Assuming a static money supply, increasing productivity will result in lower prices over time - disinflation. This is referred to as the productivity norm. Contemporary economists seem to think this is a bad thing, blaming recessions and depressions on it, and using it to "justify" the need for fiat currencies. In fact, recessions and depressions are caused by the boom/bust cycles inherent in fractional reserve banking, as proven by the Russian economist Kondratieff.

There is no justification for fiat money, especially considering the inevitable and great abuse that comes with the allure of free money.

Ahh. So you're right and all the people who actually know anything about economics are wrong.

 

[Loss Leader]

Fun fact: in general, standing in line means the government screwed something up.

I agree. The government should find a way to more rationally distribute tickets to Wicked.

 

[Tippit]

What value has gold? you can't eat it. it doesn't give you warm. The only reason gold is valuable is because of its role in the monetary system. So this is just a convention. The reason gold was chosen for this was basically that it isn't as easily available, the mining process is slow, and there's still enough gold to run an small national economy in 1000 BC.

Gold has intrinsic value. It's rare, it's shiny, and people enjoy owning it. It was the money of choice (choice being the key word) for thousands of years. Absent the coercive, conventional demand for fiat money, few people would value pieces of paper featuring portraits of funny-looking dead men. Fiat money has no intrinsic value.

So basically, Gold is just valuable because everyone agrees it is.

Similiarly, the dollar is only valuable because everyone agrees it is.

We need currency. The actual medium is not important.

You got one-of-three right. Gold is valuable because everyone agrees it is, absent coercion, or convention which dictates its acceptance virtually everywhere you shop.

The dollar (which is not really a *dollar as I will explain later) only has value because legal tender laws guarantee its circulation, by penalty of physical violence. The only reason everyone "agrees" to accept it is because it is conventional, that convention arising ultimately from the coercive force of taxation.

We absolutely need currency, but the medium is crucially important. We can choose a currency which has physical limitations on the expansion of its supply by greedy bankers and politicians - gold and silver, or we can submit and accept pieces of paper with values decided by a few men, for their own gain.

The idea that we must accept fiat currencies to stave off economic depressions which are in fact created by fiat money/fractional reserve banking regimes is total bunk. I suspect this mentality has been promulgated by schools endowed with lots of fiat money.

However, when the economy is doing good, more people do the same investment. You will no longer be able to sell it for much more than what it costs you to produce as the prices drop due to concurrence. Ultimately, you won't get anything back from your investment. That's the point where people stop investing (or actually, even before that due to the so called Liquidity Preference) and money stops turning around. The turnover rate drops, and the national bank has to increase the money supply (bubble style) to keep the prices from dropping (Deflation)

You're conflating the Law of Diminishing returns and economic recession or depression. This law basically dictates that the rate of profit will trend downwards towards the average cost of capital, and has nothing to do with overall recessionary trends, or causes.

Given a static, constant money supply, productivity increases will result in an appreciating currency and lower prices (the productivity norm). Somehow you're trying to cast this as a bad thing. The ability to purchase more goods and services per unit of currency is a good thing.

Depressions are usually caused by sharp monetary contractions. The Great Depression was preceded by a one-third contraction in the money supply by the Federal Reserve, as noted by Milton Friedman. The contraction itself was preceded by a fiat-money induced expansionary boom during the roaring twenties which resulted in malinvestment, and stock speculation.

The enemy of economic expansion is not sound money, but fiat money and fractional reserve banking regimes. The cause of the problem is not the solution.



* A dollar was defined by the law of 1792 as the Spanish milled dollar which contained 371.25 grains of fine silver. By this standard we can see how much it has depreciated. To whom did all of this lost purchasing power go?

 

[Dabljuh]

/me points finger at Tippit and screams "MARXIST"


Just kidding. I talk to a lot of marxists on a regular basis, just never manage to ever convince them. It's a religion really.

But I may be wrong about you being a marxist. I think this problem with fractional reserve banking you're having is not marxist nor neomarxist as far as I know. Is this a purely american phenomenon? Elements of marxist economic theory combined with a potential free market policy?

 

[Kerberos]

The dollar (which is not really a *dollar as I will explain later) only has value because legal tender laws guarantee its circulation, by penalty of physical violence. The only reason everyone "agrees" to accept it is because it is conventional, that convention arising ultimately from the coercive force of taxation.

So how do you account for the wide acceptance of dollars in many foreign countries under no obligation to take it? The dollar has also replaced local currencies in some countries (usually non-developed countries). Not gold, the dollar.

 

[Nathyn]

So, that's all really, how is US currency worth anything? I often think of it as a game with cards and chips, with some end objective for a combination of cards you are suppose to have. In all versions of the game you can trade cards and chips with other players. But in one version you can trade the chips for cards out of some middle pile and in another the chips cannot be used for anything but trading with other players. It would not take very long in the latter version for players to realize the chips are worthless and shouldn't be accepted in a trade for cards. I fail to see how our currency is any different, I worry that the size of the card game just makes it take longer for everyone to realize they're exchanging notes of no value.

Though this seems to be well accepted as wrong and crazy and I'm not an economist, so, the question is, why is our currency worth anything?

If you don't understand how the money supply works, paranoid speculation isn't justified.

To understand how and why the money supply is NOT conjured up by sneaky Jewish bankers, read this:

http://money.howstuffworks.com/fed.htm
http://en.wikipedia.org/wiki/Money_creation

 

[Dabljuh]

Gold has intrinsic value. It's rare, it's shiny, and people enjoy owning it. It was the money of choice (choice being the key word) for thousands of years. Absent the coercive, conventional demand for fiat money, few people would value pieces of paper featuring portraits of funny-looking dead men. Fiat money has no intrinsic value.

It's rare, it's shiny, and people enjoy owning it. Same as gold. So you're wrong.

The dollar (which is not really a *dollar as I will explain later) only has value because legal tender laws guarantee its circulation, by penalty of physical violence. The only reason everyone "agrees" to accept it is because it is conventional, that convention arising ultimately from the coercive force of taxation.

The term 'legal tender' applies, and it goes further than just taxation. It is not a necessary requirement for money (money by its own right is required) but adds to the trust people have into it.

We absolutely need currency, but the medium is crucially important. We can choose a currency which has physical limitations on the expansion of its supply by greedy bankers and politicians - gold and silver, or we can submit and accept pieces of paper with values decided by a few men, for their own gain.

Actually the value of the pieces of paper are decided by the fed,* which is supposed to act on behalf of the public. This is the way it is in pretty much every country. Just that some countries have differences on what policy (expansionist/strict) exactly they employ.

*The prices of what you buy is of course decided by offer and demand. The fed controls the money supply and thus, in the long term, the value of a "dollar"

The idea that we must accept fiat currencies to stave off economic depressions which are in fact created by fiat money/fractional reserve banking regimes is total bunk. I suspect this mentality has been promulgated by schools endowed with lots of fiat money.

No. Fractional reserve banking is a result from using tangible money. Because only that way, the banks can increase the dwindling gold supply to behave like it got bigger.

You're conflating the Law of Diminishing returns and economic recession or depression. This law basically dictates that the rate of profit will trend downwards towards the average cost of capital, and has nothing to do with overall recessionary trends, or causes.

Well... I disagree.

Given a static, constant money supply, productivity increases will result in an appreciating currency and lower prices (the productivity norm). Somehow you're trying to cast this as a bad thing. The ability to purchase more goods and services per unit of currency is a good thing.

Why? Only for those that already have lots of currency. With fiat money, you can simply give everyone twice the money, but that you don't like either even though I think it's even better. Because deflation can cause a massive economic collapse. Have you ever heard of the 1930ies?

Depressions are usually caused by sharp monetary contractions. The Great Depression was preceded by a one-third contraction in the money supply by the Federal Reserve, as noted by Milton Friedman. The contraction itself was preceded by a fiat-money induced expansionary boom during the roaring twenties which resulted in malinvestment, and stock speculation.

So... the depression was caused because the monetary supply could be increased at will? No? But that's exactly what you are saying. Of course Friedman was right when saying that the contraction was wrong (for the economic health). But that wasn't news in the 1930ies.

The enemy of economic expansion is not sound money, but fiat money and fractional reserve banking regimes. The cause of the problem is not the solution.

Wow, you are way off here.

 

[Suddenly]

* A dollar was defined by the law of 1792 as the Spanish milled dollar which contained 371.25 grains of fine silver. By this standard we can see how much it has depreciated. To whom did all of this lost purchasing power go?

Did the free masons toss it down a well?

 

[Dabljuh]

Tippit, you're dead wrong. Fractional reserve banking is harmless and useful to the public. Fiat money is key to lasting prosperity.

Nevertheless I want to know more about this theory of yours. Is this all Ron Paul's? The little I've seen from him hasn't impressed me at all.

 

[Nathyn]

This all resolves to the quantity theory:

price niveau * goods changing hands = money supply * turnover speed

The equation above might be easier to understand if written as follows:

Whereas
M = the money supply
V = the velocity of money (how many hands it goes through)
P = the price level
Q = real GDP

M*V = P*Q

Also, Dabljuh, Tippit said gold has intrinsic value:

There's an episode the Twilight Zone you should both see.

Some scientists rob a government-owned train containing gold bullion, then hide in a cave, where they seal themselves in suspended animation chambers for hundreds of years.

When they wake up, it turns out that gold is useless because in the future, it can be synthesized as easy as steel alloy.

And another thing: The strongest argument against the gold standard is that there isn't enough gold left in the world to do it, not even in the poorest countries. In order to print enough dollars to have a stable financial system, you'd have to reduce the convertibility of gold to less than 100% (a partial gold standard) and you'd have to continually reduce convertibility in reaction to deflationary pressures.

All the numbers you need to do the calculations can be found here:
http://en.wikipedia.org/wiki/Gold

 

[Dabljuh]

I tried putting the quantity theory in layman's words. Thanks, CptWisecrack.

I wouldn't find the twilight zone episode particularly enlightening, tbh. Plus you've already given away the twist.

And that's what I've been saying. The gold supply is too limited to serve as currency for a growing economy. We could do with just tiny, tiny pieces of gold (and give gold a much higher value than it has now) but then everyone in the public would be out in the streams digging for gold again, which would again cause inflation.

So, gold is a really really bad medium. And the worst part you don't even know, but I'm not getting into that now.

 

[Kerberos]

Also, Dabljuh, Tippit said gold has intrinsic value:

There's an episode the Twilight Zone you should both see.

Some scientists rob a government-owned train containing gold bullion, then hide in a cave, where they seal themselves in suspended animation chambers for hundreds of years.

When they wake up, it turns out that gold is useless because in the future, it can be synthesized as easy as steel alloy.

You and Dabljuh are undoubtedly right on the economics of this, but your knowledge of nuclear physics are lacking. Gold can in fact be synthesized, but it requires such enormous amounts of energy to do it that it's far less expensive to dig gold from the ground. This is not merely an engineering problem it has to do with how nuclear physics work. There are good arguments against a gold standard, but the risk of waking up tomorrow and discovering that someone invented the philosophers stone isn’t one of them.

 

[Nathyn]

I tried putting the quantity theory in layman's words. Thanks, CptWisecrack.

I wouldn't find the twilight zone episode particularly enlightening, tbh. Plus you've already given away the twist.

Well, that was the twist, but there's definitely a lot more to the story than that...

And that's what I've been saying. The gold supply is too limited to serve as currency for a growing economy. We could do with just tiny, tiny pieces of gold (and give gold a much higher value than it has now) but then everyone in the public would be out in the streams digging for gold again, which would again cause inflation.

So, gold is a really really bad medium. And the worst part you don't even know, but I'm not getting into that now.

Yeah.

Also, I say that even paper currency is a bad medium. Recently, I've come to the conclusion that an electronic money supply is the way to go.

 

[Nathyn]

You and Dabljuh are undoubtedly right on the economics of this, but your knowledge of nuclear physics are lacking. Gold can in fact be synthesized, but it requires such enormous amounts of energy to do it that it's far less expensive to dig gold from the ground. This is not merely an engineering problem it has to do with how nuclear physics work. There are good arguments against a gold standard, but the risk of waking up tomorrow and discovering that someone invented the philosophers stone isn’t one of them.

As it stands now, you're probably right.

But who's to say what discoveries science will or won't make hundreds of years from now?

 

[Kerberos]

As it stands now, you're probably right.

But who's to say what discoveries science will or won't make hundreds of years from now?

It's not simply a question of making new discoveries; it's a question of essentially rewriting the natural laws, as we know them. Obviously we can't totally rule out the possibility that they will be able to make cheap gold in the future, but I'd say that cheap synthesised gold is only somewhat more realistic than warp drives and perpetual motion machines. It's certainly not something that we should make policy decisions on.

ETA: This is based on finding a new method for synthesizing gold. I supose we could also imagine that they simply invent essentially unlimited almost free energy. That might be more realistic, but the cxonsequences of this are so far reaching that I don't think that upseting the gold curency would make a blip.

 

[CaptainManacles]

What value has gold? you can't eat it. it doesn't give you warm. The only reason gold is valuable is because of its role in the monetary system. So this is just a convention. The reason gold was chosen for this was basically that it isn't as easily available, the mining process is slow, and there's still enough gold to run an small national economy in 1000 BC.

So basically, Gold is just valuable because everyone agrees it is.

Similiarly, the dollar is only valuable because everyone agrees it is.

We need currency. The actual medium is not important.

Gold has value because it's shiney and pretty and rare and people like to own it. It has subjective value to individuals. Money does not, except for the rare occation of collectors and beign able to start fires and the like, but it's value as tinder puts the value of money significantly lower then it is now, and a $100 bill as valuable as a $1. Unbacked currency only seems to have the illusion of value. Perception of value is not the same as actually having value, even subjective value. Consider if I didn't actually like gold, but I wanted some because person B wanted gold. Person B only wanted gold because person C wanted gold. Person C only wants gold because I want gold. What's going to happen to the value of gold as it circulates in the scenerio? It's going to deflate until it loses all value. If you have a group of a billion people the deflation proccess would happen slower, but it would still happen.

Yes, that is the paradoxon of capitalism. Basically, when you invest into a production facility, you reduce scarcity of the product that is produced by the facility. As long as the good is scarce, you will be able to sell it for more than what it costs you to produce it, thus producing a capital income for your investment.

However, when the economy is doing good, more people do the same investment. You will no longer be able to sell it for much more than what it costs you to produce as the prices drop due to concurrence. Ultimately, you won't get anything back from your investment. That's the point where people stop investing

That's the point where people stop investing in whatever widget is being oversupplied. Isn't that a good thing? People keep investing in widget building until people don't want any more widgets. Why would you want people to keep investing in widget building after that point?

The turnover rate drops, and the national bank has to increase the money supply (bubble style) to keep the prices from dropping (Deflation)

Why?

Capitalism works extremely well as long as the interest rates for capital are high. As soon as they drop below 3-4% (which is approximately the liquidity fee) capitalism stops working nicely and becomes increasingly inefficient, with mass unemployment, which drops the price of labour, which makes the problem between rich and poor worse gradually.

So the solution is to encourage production of useless goods so poor people will have an excuse to get money without producing anything anyone wants?

 

[NobbyNobbs]

Yes, but that explination only works because 6 year olds don't ask tough questions, like explaining a light bulb by saying it works by magic. You make a jump in that explination that doesn't make sense. The "money" you end up with isn't anything like the "notes" that are clearly useful for trade, because they don't ultimately correlate to anything like TVs or Barbies or Chairs. If I write a note that says it's worth 3 chairs, it's worth 3 chairs. If I write a note that says it's worth 10 dollars, that's meaningless. It could be worth a billion chair or half a chair, and in reality it's worth zero chairs. If I hand out a bunch of notes that can be traded for chairs and then I die and my chairs are gone, the notes are worth nothing, even if people still use them for trade for awhile, the meaninglessness of it will catch up after awhile.

As in my cards example you have no reason to use chips. People might use them for awhile just out of ignorence, and then might sort of work for awhile, but inevitably people will except less and less for the chips until everyone realizes they're completely worthless. This make take 100 years when there are 100 million people in the card game, but it'll still happen, and we can see that happening.

The 10 dollars represents the time, effort, and skill it takes to make a certain number of chairs. Different chair-makers may decide their time and skill is worth different amounts, and that's fine. Ultimately, it comes down the the dollar being backed by effort, time, and skill.

Those 10 dollars may represent the effort takes to make 4 crappy chairs, or one good one, or the effort it takes to pick a bushel of apples, or refine 3 gallons of gas.

In that respect, you can trade that $10 note for 4 crappy chairs, because they're worth the same. Then that guy can trade the same $10 dollar note to someone for one good chair, who can trade it for a bushel of apples, etc.

I don't quite see why it needs to be much more complicated than that.

 

[egslim]

Good try at spinning.

How about you either explicitely state what your point is, or why you disagree with mine. Because right now, I don't even know what you're arguing for.

My points are that the dollar is in a long-term depreciation trend against several strong currencies, that trend is unlikely to reverse in the short to medium term. Hence that if you want your money to maintain its value, it's better to put it in a strong currency than in the dollar. And that the dollar's weakness threatens its international importance, which will further weaken it.

 

[Nathyn]

The 10 dollars represents the time, effort, and skill it takes to make a certain number of chairs. Different chair-makers may decide their time and skill is worth different amounts, and that's fine. Ultimately, it comes down the the dollar being backed by effort, time, and skill.

Those 10 dollars may represent the effort takes to make 4 crappy chairs, or one good one, or the effort it takes to pick a bushel of apples, or refine 3 gallons of gas.

In that respect, you can trade that $10 note for 4 crappy chairs, because they're worth the same. Then that guy can trade the same $10 dollar note to someone for one good chair, who can trade it for a bushel of apples, etc.

I don't quite see why it needs to be much more complicated than that.

That's Marxist nonsense.

http://en.wikipedia.org/wiki/Labor_theory_of_value#Modern_criticisms

Value isn't intrinsic, but exists in the minds of participants in an economy. And when a person has an item of value, only two factors are relevant: what he can do with it (utility) and how much he can sell it for (exchange).

If I work REALLY, REALLY hard to make a chair while someone else makes an identical chair, but worked very slowly, there's no difference in the value of the chair, because it still performs the same function and will sell for the same price, as that's all that anyone cares about.

The value of the chair in terms of the amount of work put into it is a sentimental, ethical consideration, not of any economic relevance. Many of us would like to believe that more work and more "socially necessary" time deserves more pay, but that's not how people calculate value in practice.

 

[Dabljuh]

Gold has value because it's shiney and pretty and rare and people like to own it. It has subjective value to individuals. Money does not, except for the rare occation of collectors and beign able to start fires and the like, but it's value as tinder puts the value of money significantly lower then it is now, and a $100 bill as valuable as a $1. Unbacked currency only seems to have the illusion of value. Perception of value is not the same as actually having value, even subjective value.

There is no such thing as intrinsic value. Marx postulated that there was only one valuable thing, work. And postulated that manufactured goods somehow contain "work" as an invisible property that should however decide upon its value. Basically, the theory of offer and demand was way better when Marx developed his Arbeitswertlehre (Labour theory of value) and this continues today.

There is no such thing as intrinsic value. Only what people are willing to pay, and for what price people are willing to part with it.

Consider if I didn't actually like gold, but I wanted some because person B wanted gold. Person B only wanted gold because person C wanted gold. Person C only wants gold because I want gold. What's going to happen to the value of gold as it circulates in the scenerio? It's going to deflate until it loses all value. If you have a group of a billion people the deflation proccess would happen slower, but it would still happen.

You confuse deflation with inflation. What would happen is inflation, the prices of things would go up.

That's the point where people stop investing in whatever widget is being oversupplied. Isn't that a good thing?

That's how it should work. Basically it would stop precisely at the right amount, not at "oversupply"

People keep investing in widget building until people don't want any more widgets. Why would you want people to keep investing in widget building after that point?

They shouldn't. The problem is they stop investing before that. But that's a different topic regarding the liquidity fee.

Why?

More money (ceteri paribus) = higher prices = inflation. Sinking prices = lower money turnover rate = Deflation. The two effects cancel each other out to produce somewhat stable prices (inflation rates around 1-3%)

So the solution is to encourage production of useless goods so poor people will have an excuse to get money without producing anything anyone wants?

No, the solution is to encourage the consumption of useless goods (creating artificial scarcity) so the interest rate rises, so rich people have an excuse to invest their money and create jobs.