Topic: Inflation and Deflation of Price and Money Supply - page 44. (Read 1424803 times)

No, "market value" is PRICE, and has not much to do with value.  

Value is satisfaction.  Price is the exchange rate in a market (for instance, apples for eggs).  

Suppose that to me, I value an apple more than  9 eggs, but less than 10 eggs.
Suppose that to you, you value an apple more than 3 eggs, but less than 4 eggs.

Now, there are still many other people exchanging apples for eggs, and when offer meets demand, we have the price.  Suppose the price is 6 eggs for an apple.  So the price of an apple is 6 eggs in the market.

As I value an apple more than 9 eggs, if I buy an apple, I have a value creation of more than 3 eggs in doing so (the apple was worth 9 eggs to me, and I could get it at the market price of 6).  If you sell your apple on the market, you win more than 2 eggs in value in doing so: the apple you lost was worth less than 4 eggs to you, and on the market you could get 6 eggs for your apple.

So if you sell an apple, and I buy an apple on the market where offer and demand resulted in a price of 6 eggs for an apple, you won 2 eggs in value, and I won 3 eggs in value.

You and me selling and buying an apple resulted in a "total value creation" (I'm adding here different subjective  values to different subjects which is in principle not done, but ok) of 5 eggs "out of nothing" because of our individual appreciations of an apple.

Of course, on the price level, there's obviously no "gain".  You sold an apple for 6 eggs, and I bought one for 6 eggs.  That's because price doesn't measure value, but only exchange rate.

Price does result from the subjective values of different actors in the market, but only indirectly, where offer meets demand.

You are talking about establishing a market value of apples. If you created economic value of apples when selling them, then who created their economic value when you bought these apples? If I get an apple in exchange for something else, its economic value to me remains the same. I just exchanged it for something that I value less.

Strictly speaking, every apple I buy diminishes their economic value to me (marginal utility and so on).

I do.  If you value apples more than what you want to give me in exchange, and I agree with that, the value for you has increased (because you lost something you valued less, and you gained something you valued more, namely an apple).
If I agree to do so, it means that what you give me, has more value to me than the apple I will give to you.  So by agreeing, I'm also increasing value on my side, by obtaining something (whatever you give me) that has more value (to me) than the apple I give up.

So by agreeing to exchange an apple for something else, both of us have created value for both of us.

In my hands, the apple was essentially value-less (to put it extremely).  By giving it to you, the apple got value (because you value it, and you have it now). The apple got value because of the exchange.

Edit: of course I understand what you want to say: you mean: somehow an apple had to be grown.
Yes.  True.  But taking iron ore,  oil, labor, knowledge, and transforming that into a car is totally equivalent to taking a car and labor, and grinding it to iron filings.  It is just a transformation of assets and labor into other assets.  The result of that transformation can be valued (like the apple) by some, or not.  Maybe people value cars more than iron filings.  Maybe people value iron filings more than cars.  Who knows.  The value comes from the person appreciating the produced object and gaining value by exchanging something for it.
The car producer has no use for his 2000th car.  It is as useless to him as the apple was to me.  The car got value because it was given to someone who happened to value cars.  But it is in principle just as possible that someone values iron filings more than cars.  
So "making a car" is by itself not creating value (unless you make a car for yourself).
It is "selling a car to someone who happens to value the possession of a car" that gives value.

Somehow you forgot to paste my whole reply where I say just that. How come?

Though this doesn't change anything, namely, that apples have different economic values to different people, since in any case it is not you in the first place who created the benefit of apples if you happen to just resell them. Exchange doesn't create economic values of objects, it allows to establish market value, which is a different notion. To say otherwise would mean that economic value doesn't exist beyond exchange, which is nonsense indeed.

Recessions are a good thing: they allow for badly allocated resources to businesses to go broke, so that they can be better invested.  Recessions allow change, through pruning of bad businesses. 

You can compare it a bit to wood falling to the floor of forests.  That wood accumulates and when it is dry, forest fires devellop.  That allows the elimination of that wood, and provides opportunities for new plants to grow where the fire was.

If you put the fire brigade at work which will extinguish forest fires, you do not allow the wood on the forest floors to be consumed.  Until there's so much of it, that you obtain gigantic forest fires which the fire brigade cannot handle any more either.

So yes, you "smoothed out" small recessions that were nevertheless necessary.... and you accumulate for big big recessions every few decades or so.

Recessions are part of the normal business cycle.  You cannot really eliminate them.  You can postpone them, and accumulate them "for later".  Until you can't any more.

As you say, the FED gets (as long as it lasts) short term "stability" for "long time disaster".

Instead of undergoing the small frequent recessions, the FED booms them out, until a recession comes that is too big to fail.

An apple doesn't possess any benefit or value in itself.  Value is a relationship between a subject and an asset (or a service).  It is only a subject that can value an asset.

Maybe an apple isn't worth anything to you, but is worth a lot to me.  It is the fact that an apple's value is different for different subjects, and even for different moments in life of different subjects, which makes that exchange creates value.

It is by re-arranging the possession of assets through exchange such that they are in the hands of those people appreciating them most, that value is created.

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On the contrary.   As your plot shows, before the FED interventions, inflation and deflation set each other off.  Since FED intervention, there is no deflationary compensation any more, and the effect is one-sided inflation.

What used to be fluctuations, have been transformed in monotonic value-loss.

"The general price level" is a phantom.  It exists only as a phrase we use.  It isn't even an abstract thing.  No one can describe it adequately, nor calculate it.¹


Lucky you to live in a universe where money is not subject to supply and demand.


Fixed it for you.  The "correct" basket isn't possible.  "Optimal" is only meaningful from some particular subjective point of view.


I don't think that many bitcoiners are looking for a prescriptive theory of money that involves privileged actors.  And I'm not aware of any (non-trivial) predictions that it makes as a descriptive theory.

1 One may object that we can construct a basket and calculate it.  This is not a calculation of the general price level, but a calculation of that particular basket, and not of "the general price level".  You could define the basket as "everything", but that isn't calculable either, not even if you had perfect knowledge about all economic transactions, because transactions occur in lumps and smears, rather than flows.  You'd need to slice up time, and now you are just calculating that particular choice of time rather than the general level.

If you first buy and later sell an apple, you are dealing in with the same apple (provided it doesn't get rotten in the process). If you hadn't bought and then sold it, the benefit this apple possesses would still be the same (though different to various people), and it is not you who created its benefit to them (unlike the car in your example).

I intentionally substituted benefit for value here, so that you wouldn't call price gains as an increase in economic value (i.e. benefit).

It seems that YOU are confusing both !

When you buy something, you do that because you think you have more value than what you pay for it.
If you sell something, you do that because you think that you get more money than what you value the thing you are selling.

If I buy an apple, my satisfaction of having an apple is higher than the money I give for it, so there is value creation (there is increase in satisfaction).  The one selling the apple appreciates more the money than the apple (maybe to buy an egg which he values more than the money, or the apple).  His satisfaction increases too.

This is not different in principle from taking resources like iron ore, oil, labor and so on, and transforming those into a car.  Maybe people value that car more than the iron ore, oil, labor and so on.  Then value is created.  Maybe the car is lousy, and I put in huge amounts of iron ore, oil, labor and so on, and the final value is lower, because the lousy car gives less satisfaction than the loss in iron ore, oil, labor and so on.  Then I simply destroyed value.

Production is just a specific case of doing stuff with assets.  I can also just transport them in time or in place.  I can bring them together and transform them.  Each of these actions can create value, or can destroy it.

Value is individual satisfaction.

Price is the exchange rate of goods and services.

Exchange normally implies value creation, and of simply price exchange.  Nobody wins "price" in an exchange.  But both win normally satisfaction.

Speculation is the idea that I can do something with an asset to win in price exchange, doing something, and another price exchange.  The "do" is "transport in time", "transport in space", or even transformation (production).  Whether I win or not is dependent on the price of the second exchange, which depends on offer and demand at that moment.

If I buy an apple now to sell it later, I bet on the fact that the price of apples will be higher later than now.
If I buy an apple here, to sell it there, I bet on the fact that the price of apples there will be higher than here.
If I buy iron ore, oil and labor and want to sell a car that I made out of it, I bet on the fact that iron ore, oil and labor are cheaper than the car.

Yes, but with sound money (that is, a fixed money supply, and hence CLOSED LOOPS of money fluxes, with no sources or sinks), you get exactly that.

If the economy "slows down" then that means that prices rise (there is the same amount of money to buy less stuff).  That encourages people to produce.  If the economy becomes more productive, prices lower (the same kind of money to buy more stuff), so every  body can profit from the economic growth without the need of a huge financial system: storing money is enough to get "purchasing power interest".

If people have more demand for store of value, you get a deflationary effect and it becomes more attractive to buy stuff.
If people spend their savings (less demand for store of value) you get an inflationary effect and things become more expensive, which makes it less attractive to buy stuff. 
If things become cheap, you need to put less money aside to have "a secure future".  If things become expensive, you want to save more to "secure the future".  This sets off all ideas of deflationary spiral.

Sound money has a lot of self-regulatory signals in it, and the huge advantage is that it avoids a huge financial sector which is only there to suck out the seigniorage caused by all central bank manipulation, pushing people to have "saving accounts" to get a little back of the stolen inflation, and hence giving monstrous amounts of money to banksters to play casino with.

The BTC price is highly volatile because it is not really determined by its use as a currency (that is, the demand for BTC is mainly NOT to be used as a currency to buy products with).  BTC at this moment is not yet a currency.  Prices are not indicated in BTC, and suppliers and wages are not paid in BTC.  It is the interlock between all these prices that stabilize (in as much as that means anything) a currency.

If my customers buy products in BTC, which are priced in BTC, and I pay the wages of my employees in BTC and I pay my suppliers in BTC which would pay their employees and their suppliers in BTC and so on, and if the use of BTC would be the main part of the demand for BTC, then BTC volatility wouldn't be much higher than that of any other currency.

But the "currency depth" of BTC is so terribly shallow, and BTC demand is for 95% speculation (in the narrow sense), that we have way way too high BTC prices and that those are very volatile.

Sound money is a currency of which a finite and fixed amount is circulating and which is generally accepted as a means of payment. 

The price of sound money is then determined by the total economic activity and by the demand for store of value.

You seem to be confusing price (exchange value) with economic value. Simply speaking, when you just buy something and then sell it, you don't create new value (benefit) but transfer one. You may make an endless number of new ad-hoc definitions, but they would only further confuse matters, not clarify them.

Indeed.  The idea of stabilizing all prices is ridiculous, because that would mean that nothing ever changes in an economy: no change in resources, no innovation, no change in people's desires.  The static schoolbook economy 101.  Prices are signals to adapt production, to correct misallocation of resources, to adapt to depletion of resources.

If prices are stable, that means that nothing can or has to change in an economy, that no resources get exhausted, and no inventions are done.

Now, if the idea is to have a "yardstick" of price (not of value !!  Price is the expression of the tension of offer and demand, and value is a measure of personal satisfaction), you can have a random basket of products, define an index on that basket, and express all prices as a function of that index.  You don't even need a currency which is a genuine asset. 

You can, as kjj says, make simple baskets with just one product, for instance: with an egg in it.  Or with a Big Mac in it.  And then you express all prices in eggs, or in Big Macs.

Eggs or Big Macs don't need to be currency.  Anything with a price can serve as a yardstick.

As prices change (by definition of a dynamic economy), prices will fluctuate as expressed in this yardstick too.  That's normal.

You can introduce a currency and try to stick it to any basket by monetary manipulation.  Or you can just introduce a sound currency, that will be its own yardstick.  Or you can just count abstractly in a debt-based system expressing debt in the index value "you owe me the equivalent of 50 000 Big Macs" without ever introducing a genuine currency.

Ah.  To me, an asset is something to which ownership can be applied and which HAS value (subjective value for the owner).  A spoon is an asset. But an hour of work, not.  A bond is also an asset.  A bitcoin or a dollar bill, too.  Debt is not an asset for the debtor but is an asset for the creditor.  Garbage is not an asset, because its ownership doesn't imply value for the owner (on the contrary).


Value is the increase in personal satisfaction.  Close to what economists call "utility".  Subjective value.  Not "price".  If you have an apple, and I have an egg, and you prefer my egg, and I prefer your apple, then there is value creation by the exchange of the apple against the egg.  There is (by definition) of course no "price gain", because the price of an apple, in this deal, is an egg, and the price of an egg, is an apple.  So on the "price" level, there is simply an exchange ; on the value level, there is creation of value because my and your satisfaction have increased in the deal (which was the motive of the deal in the first place).

Now, there are different ways to speculate (that is, to make a bet on the economic interactions of others).  One is "in time".  Buy now, sell later.  (it is what I assume you call "speculation" in a more restrictive way).  Another is "in space".  Buy here, sell there.  It is a specific form of speculation which is a mixture of merchandising and transportation.  Or: buy production factors, and make something else, to sell.  It is the specific form of speculation which I call investment (and the action of taking production factors and turning them into something else is called production).  Time, space, and transformation of assets are three different ways of speculating to me.  Because they all have one thing in common: they bet on the economic interactions of others: in the future, in another place, or for a transformed good (a product).


Any (voluntary) sale creates value.  It is the goal and motive of the sale.

Nonsense.  You are claiming to have stabilized the prices of "all goods", but in reality you've stabilized the prices of none of the goods.

Your goal, of course, is to have a stable value for the unit of currency.  This is a fool's errand.  There is no objective yardstick against which to measure the currency.  The best you can do is make a basket, but then you are just measuring your own biases, and you'll wake up tomorrow with an obsolete basket because the world is not and cannot be made into a static system.

In your example, you imagine that "your best labor" is a worthwhile measure, but it isn't.  While you were sleeping, someone has invented a machine to make your job easier, devaluing your labor, or someone has retired from your profession, decreasing supply and increasing your value, or something.  That your labor can "still demand" a set price is an abomination, not a goal.

Ok, so you manipulate the quantity of money to stabilize the price of eggs and now the world is happy.  Oh, but the price of milk is now insane.

Your definition of speculation as a bet on being able to sell an asset is tautological, since an asset is an economic notion which itself is defined as "anything tangible or intangible that is capable of being owned or controlled to produce value". In short, anything that can be converted into cash, i.e. capable of being sold.

If you redefine speculation as selling anything for something else (with the aim of getting richer), you still have to distinguish whether you are dealing with new value created or just a transfer of value. Your definition fails to do that and equals them, while the conventional understanding of speculation refers only to the latter. In other words, selling something with value created (added) is not speculation.

Well, I consider the drive of economic interactions to be classified in essentially 2 categories.  Of course, the ULTIMATE drive is simply consumption (or meta-consumption).  Consumption is seen very broadly as "satisfying one's needs and desires" (included, empathic desires, such as wanting to get the impression that your kids, or poor people, or your political party, are "happy").
But there is consumption, and then there are "plans".  There is direct consumption, and indirect consumption.

You can of course acquire directly assets and services that bring you this satisfaction: that's direct consumption.  But you can also " make a plan"  to increase your perceived capacity to consume in the future.  As such, the acquisitions of assets you do in the frame of that plan are not directly interesting to you (you do not acquire them directly for their capacity to bring you satisfaction).
But in making your plans, you can be dependent on a bet on the future economic interaction of others, and then I call that speculation, or you can not be dependent on that, in which case it is not speculation.

Investment is the acquisition of assets that are used in production.  In other words, investment is buying stuff that will help make products.
Now in as much as that production is going to provide you with your consumption goods and services, that investment is not speculation.  In as much as that production is to be sold to others, it is speculation, because you are betting on other people's future desire and capacity to buy your production.

Simplistic examples:

- you buy bread because you're hungry: direct consumption.
- you buy bread and freeze it, because you know that next week the bakery is closed, and you will be able (you think) to sell your bread with some gain: speculation and not an investment.
- you buy an oven to bake bread so that you can eat that bread: investment but not speculation: you are not dependent on other people's desires to buy bread in the future for your plan to work.
- you buy an oven to bake bread to sell it: investment and speculation.

Of course you can do combinations:
In your house, you install a second shower and bathroom.  That's an investment, and it is partly a speculation.  It is a non-speculation because you're going to use that shower and bathroom (consumption), but it is also a kind of investment because you think it will increase the sales price of your house when you will sell it one day.

If you buy shares, that's an investment and speculation, of course.  The goods produced by the business you're buying the shares from are probably not meant for them to be consumed by you.  But who knows

Apart from consumption, there is hence investment and speculation, but these are not mutually exclusive classes.  There can be investment that is not speculation, speculation that is not investment, and investment that is speculation.

Now, whether we call investment that is not speculation, "indirect consumption" or whether we also call everything that is not direct consumption, indirect consumption, is open to debate

There's a form of meta-consumption, which is the satisfaction and the fun one obtains (sounds like consumption) if one is getting the impression of doing good speculation or investment.  
So this gives a direct consumption utility to assets which don't seem to have any consumption value.

People holding a huge stash of bitcoins may get a lot of pleasure from contemplating that.  As such, the holding of bitcoin (which is a purely speculative asset objectively speaking) provides pleasure (which is nothing else but the result of consumption).
Being a greedy bastard is based upon (too much) meta consumption of speculative assets.  Living a poor man's life to "be rich in the bank" is driven by meta-consumption.