Topic: The value problem - explained (Read 4769 times)

Japan economy:

https://translate.google.com/translate?hl=en&sl=auto&tl=en&u=https%3A%2F%2Fwww.amari-akira.com%2Fdiet%2Findex.html

"Seems resilience of the economy of the "July-September period is not as strong as the expected weather anomalies also have an impact. Fact that was pointed to the water consumed in the torrential rain and onslaught of typhoons every weekend also cause Do not one of "

There was a request and that I want you to explain to estimate that, whether there how much negative impact of weather from attending ministers. find yourself was investigated in various Cabinet Office, we reached the conclusion that 1.6% much or not than depress the GDP in the average value, because it is what Nobody has done. "

Where did I say that? Can you read? 

It's somewhat predictive, roughly, and in the long run. Sadly, for the science of it, it depends solely on the minds of the actors, which is not exactly measurable. The science, if you accept that it is a science, can disprove that money velocity is relevant. It is based on the axioms and some deduction.

You mean: Show some respect for authority? No, declined. It's the root of all evil.

Re: The spending problem is totally irrelevant.

uh, maybe. The current valuation seems to depend on the utility curves of a rather small population, the hoarders. I was wondering if there is a way to predict changes in the number of btc that enter the marketplace, to be held by new hoarders. Then your valuation theory might have some predictive skill.

I'm not arguing if Keynes was right or wrong.  Just pointing out that whatever Edrogan posted has nothing to do w Keynes.

The question is what to do in a recession

Keynes:  Boost aggregate demand.  Govt should create jobs so that workers have money to spend.  But we'll have to go into debt for this to happen
Friedman:  Govt should pump more money into the economy.  Companies have money so they'll invest more.  Tide lift all boats
Hayek:  Don't do anything because OMG! NAZIS!

I find it hilariously ironic that bit coiners don't understand the economic ideas of these guys.  Keynes should be the one they embrace because he's for the common man.  Friedman the Libertarian is for big business.  Hayek, well nobody cares about him

Then stop making up shit and calling it Keynesianism

Goods are paid with goods. Money is irrelevant for production. Check out Japan of today, and you(twiifm) will see.

I've heard this shit. There is nothing micro about the pockets of the elites.

The problem with the idea that aggregate demand drives production is that aggregate demand depends on production. After all, you can't get something without producing something else to trade for it. You could also say that aggregrate supply drives consumption. The key to the conundrum is saving and borrowing. Money decouples the direct relationship between production and consumption, and invalidates many of the simplifying assumptions made by Keynesians or Austrians.

Value is a societal construct. Nothing has value per se.

That has nothing to do with Keynes.  Keynes is macro not micro.  Furthermore, Keynes isn't political he doesn't care about power of govt.  Only that govt should use its power because they have that power

Keynes says aggregate demand drives production.  In times of recession, AD decreases.  Recession can set off deflationary spiral.  Max potential output sits there doing nothing and you get rise in unemployment.  If govt can artificially stimulate AD via stimulus spending then they should.  Keynes isn't against debt, if debt is used to backstop deflationary spiral.  But Keynes also says when equilibrium is reached then debt should be paid off.  Keynes proposes that govt use their power on counter cyclical policies

I agree with the current value: If the number of users were stable, and there is not much possibility for appreciation, the current price could be far lower than it actually is. But the vision that some users have, is that the user number will expand, because of spread of knowledge and the network effect, so they take action by holding early. In general, when you look at history, the value of money is not only dependent on the money volume, base or otherwise. The perception of the future value overshadows the money volume in the short term. Just take a look at Argentina, they have had 40% yearly money volume expansion and 40% yearly price expansion, but currently, with 20% yearly money expansion they still have 40% inflation. They just don't trust the future value of the peso.

The spending problem is totally irrelevant. To me, it seems like keynesianism today is about fooling the masses into spending, reducing their self governance, adding government power and pouring their wealth into the pockets of elites. Here is the proof that spending is not affected by rising or falling value of money: All trades have two parties, one is selling stuff and one is buying stuff, money is at the same time exchanged in the opposite direction of the trade. So, if noone would buy anything with falling prices, why would anyone sell with rising prices? Why would anyone sell a coke for 2 $, if he knows that he can get 3 $ next year? Would he not load up with cokes and earn 50 %? This is absurd.

Anyway, this would only be tested when all trade is performed with sound money.

Re: value is fictional
Yes, sure. Value is fictional in the sense that it arises from a subjectivity. But a practical or useful valuation arises from a collective subjectivity, so some elements of it are more-or-less objective.

Re: the thought experiment
Yes, I wanted to have about $2K on hand (back in 1989). But this relates to the time issue -- I wanted a couple of months of living expenses. This seems like a rational approach. Maybe it is worth working out some consequences.

Currently, it looks like there are on the order of a hundred people that are active readers of this forum. Everyone is different, but I would guess, on average, this group of people would like, say $100K of btc buying power as insurance against hyperinflation of the USD. [I am wildly extrapolating from my current motivation to ~hold~ a given amount of btc. [Of course, I have other reasons for spending btc and participating otherwise.]] Based on this logic, then the market cap of btc should be 100*100K, or only about $10M. My estimate that there are 100 people like me is wrong, but it probably isn't off by more than a factor of 10. This puts the current price of btc at about $100/13 = $8/btc. Even if there are 10000 people chasing the 13M btc for $100K each, the price would be $80/btc.

Thus, either the price if btc is horribly over-valued now, or there is another group of people with a different motivation who have established the valuation. I speculate that there is a group of early adopters who feel they are nominally rich, and can't bare the thought of loosing their stash. If there are 1000 people like me, but only 1M btc in circulation (at the current price), then the price could be in the $500 to $1000 per btc range. This seems plausible to me. I don't have much of a stash, but I've only spent about 1/50 of the btc I've bought [actually, I guess I've spent about 1/4 of what I bought; but I've spent none of what I mined. Interesting psychology there.].

But do you think the hoarders will spend more freely if the valuation increases, or do you think they'll spend more freely if the valuation decreases?

-pbtc

Value is an abstract concept that has real impact. There is no contradiction in the fact that a mutual agreement can have consequences in the real world.

If you observe which things are / have been used as money, you will notice that most of these things have no or only very limited utility in itself besides the mutually agreed value. It's exactly only the mutual agreement / common belief of value that constitutes money. Using money for other things (like plowing fields, feeding livestock, wiping butts ) where it gets damaged or depleted is in fact counterproductive in regard to its universal usability as a store of value.

It is human all right. Some animals can run faster, see better, navigate in the dark, navigate using earth magnetism, some can fly etc. Some animals organize in herds. Some animals create tools and use them. Some animals can learn. But no animal that I know of engage in trade. Exchange some item of value for another with a stranger, both parties being better off.

The value is assigned to something by each human. It is real. Imagine finding yourself in a strange country, where the locals look at you with suspicion and are ready to scare you away, you are hungry and freezing. Having some value in the form of money will make a very real difference.
 

And the strategy is simple: Buy and hold.

I think I established that the demand the urge to save value for later, and the supply is the urge to hold less than you currently hold. Aggregated, the urge to hold (measured in psychical value) is the total value of all coins.

Join me in this thought experiment: Remember back in your life when you were confident that you had enough money. Maybe just after you started earning, and before your consumption exploded (for some, that might be the current time). How much value did you hold in money plus deposits, measured in some form of value (the value of a car, the value of one month of consumption). For me, I have sometimes had the value of a used car in reserve, or stated otherwise, the value of a few months of food and rent. (Later, I bought flats and so on, excess reserves went into the loan. Don't include your other assets, only money and deposits). Lets say you can decide a number for yourself.

Now, imagine bitcoin is fully implemented, most people on earth define it as money, so you are quite sure that the value is easily exchanged for merchandise or readily exchanged for fiat, and the value of bitcoin is rather stable, but prices of merchandise expressed in bitcoin are slowly decreasing (weak deflation).

In this scenario, how much value would you prefer to have in reserve in the form of bitcoin. Compared to the first number you compiled above, is it less, the same, more, or far more? For me, it is certainly far more. No need to go upmarket in housing just to build equity.

The consequence of this (in case you and others also want to hold far more value in the form of bitcoin), is that the aggregated value of bitcoin also will be far more than the aggregated value of fiat and deposits as of now. Then divide by 21 million. I could say a number, but everybody can do that, and since we don't know, any number is as good as another. But you will quickly see that the value of a bitcoin can be quite high, far higher than now.

Now I will go back to being depressed because the current price is so low...

Value is FICTIONAL. A human mind made concept. Anything can have value if people agree it has value.

Sorry to be joining the conversation so late. I read the original post a couple of days ago, and it took a while to digest.

I think the OP presents a clear and valid discussion of the value problem, as far as it goes. But it obviously skirts the question of interest to most people, which might be phrased as, "What is a logical or rational price/utility curve?"

If you have a basis for identifying irrational price curves, then you could, in principle, hypothesize an "investment strategy," which might be as simple a deciding to consume later, or it might evolve into a more complex strategy of opponent modeling and exploiting irrational prices within a market.

I don't think this contradicts the OP's points, but maybe it clarifies some of the practical import of people's urge to identify an objective basis for the value of btc.

-pbtc

 The difference between bitcoins and other currencies is that there is no centralised bank that prints the currency and sets relative values. Through transactions, the value of bitcoin fluctuates through supply and demand.

I agree, the so-called economics books like The General Theory of Employment, Interest and Money and A Treatise on Money are the "astrology" books of economics to the "astronomy" books like The Road to Serfdom, or A Program for Monetary Stability. BTW, great analogy shawshankinmate37927.  If you are learning economics from books like TGTEIM, there is no point in discussing.

 

Whats the point of discussing money from pre 1907?  We're in 2014.  Half the money doesnt even originate from central bank system.

Why do you think GFC 2008 happened? 

If you are learning economics from conspiracy books, then theres no point to discuss

Some absurdities are presented here. shawshankinmate37927 has it right. Ignore the other later posts.

Nope, money is something that acts as a medium of exchange, store of value, or unit of account.  When something is used to fulfill any of these functions, then it is money.  Period.

If money is a commodity, then yes, gold is a commodity, because gold is money.  It's not really important though, if money is considered a commodity or not.

Jekyll Island is where the modern fiat monetary scam was born.  The book will explain to you how that scam works.  Don't just take my word for it.  Check out the reviews.  It has helped a lot of folks see through all of the smoke and mirrors.  (Hint: Keynesianism and MMT aren't economics.  That stuff is to economics what astrology is to astronomy.  Or do you believe in astrology too?)

Don't listen to what bankers say, look at what they do.  Actions speak louder than words...and of course bankers are hoarding gold...because they know it's money and they know their fiat scam will eventually come to an end.  When fiat ceases to be money, gold will continue to be money just as it has for millenia.

"Nobody" is a pretty broad term. I'm sure there are some people putting cash in savings accounts, although these days probably less because of low interest. Of course I wouldn't and that's why I said I'd use Gold.

Nobody uses cash for long term store.  LOL

They have portfolio of assets

As long term store I'd use Gold over fiat. For transacting and liquidity sure I'd take cash and then allocate it to whatever I wanted (stocks, gold, etc.)

You forgot liquidity preference.  If you sold a house you should accept 500K cash instead of equivalent in gold.  You can do more w the cash.  Like buy gold w it if that's what you want

Money are instruments used to settle debts.  Period.  

Gold is not money anymore.  It hasnt been money for a long time.  Doesnt mean its worthless.  There is still market value because its a traded commodity.  Same as soybeans

MMT is just an economic theory that describes money in a modern economy.  What Im telling you is not political.  Its just how it works.  

What does Jekyll Island have to do with anything?  Reading that kind of stuff isn't how you learn about economics

Bernanke said gold is not money.  He calls it an asset. Search it on YouTube.  And here you are claiming central banks hoard gold because its money.  

I agree, everything has and maintains its value because other people (the market) value it. Gold could be a useless chunk of metal, just like IOU's could be defaulted on. However, if I was to prioritize the risk levels of both Gold and IOUs, I would rank Gold as the less risky asset to hold.

If I could be absolutely guaranteed of future repayment of the IOU, then I'd agree that the future productivity would be more valuable than Gold. The world we live in doesn't have those guarantees and that's part of the reason why we use these tools to store value in the first place.

Gold as a store of value has it's history behind it and therefore almost zero chance the market will stop giving gold it's value (unless Bitcoin completely takes its place).  That is why they say fiat currency, bonds, etc. all have what's called "counter-party risk". The risk of the issuer defaulting is much higher than the risk of the whole market deciding Gold is worthless.

Gold has been money for thousands of years and will very likely continue to be for many years into the future.  As long as there are people that continue to hoard it as a store of wealth, it's money.  Whether you choose to accept this fact is irrelevant.  It still remains a fact.  Bitcoin is also money because there are people that are willing to hoard it.  Bitcoin or gold may not be your money of choice, but as long as it is the money of choice for anyone that produces goods or provides services then they are both money.

I should have said that foreign central banks "used to hold USD to back their currencies."  Fiat currencies aren't backed by anything now because the issuers will not allow you to redeem them for anything.  Printing new units of currency and buying government debt with it is not backing--it's debasing.

The functions of money have not ever and will not ever change.  This "modern monetary theory" that you refer to is nothing more than an elaborate scam.  I understand it well and I'm quite familiar with how it works.  When you decide that you're ready to be deprogrammed, I recommend you start off with reading The Creature from Jekyll Island.  From looking at the reviews, it appears to have helped a lot of people in your shoes.

Gold only has it's value because the market gives it value. There is very little useful things you can do with gold and if you were to "use" gold then you would be loosing out on a lot of value. You would make the same argument that the market could stop giving gold it's value

Gold is not money anymore its an asset.  Cryptos might become money but currently it isnt.  Bitcoins were money inside silk road market.  But not outside

Foreign currencies arent backed by dollars theyre backed by their own treasuries.  Foreign central banks might hold dollars as assets.  But its not to back their money.  Its because they need to setlle debts in dollars

Your idea of money isnt modern.  Search modern monetary theory to have a better understanding

Those aren't qualities of money; they are the functions of money.  Some of the characteristics that money has to possess in order to fulfill those functions are: scarcity, durability, portability, fungibility, divisibility...

Gold outperforms fiat in scarcity and durability, but fiat outperforms gold in portability and divisibility.  Scarcity and durability are the characteristics that are important for people that live below their means and accumulate savings.  Most people don't fall into this category, so they don't use gold as a medium of exchange.  Those who do fall into this category just convert fiat to gold rather than accept the gold itself as a medium of exchange.

FTFY.  It's only fiat money that is credit.  Precious metals and cryptocurrencies are not credit.  They aren't issued in the form of debt, but as an asset.


No, they hold USD to back their currencies.  This started when the USD was pegged to gold.  At the time, they agreed to back their currencies with gold indirectly because they could redeem USD for gold as needed.  Also, central banks don't need fiat to settle debt because they don't accumulate debt, they issue debt loans.


The value of money (which is what this thread is about) has EVERYTHING to do with hoarding.  When no one is willing to hold a particular form of money, it's worthless.  It's simple supply and demand.  No demand means no value.

Edit: Should have said "...they issue loans."

If somebody is holding two assets, Gold and IOU's, don't you think there is less risk in holding the Gold? IOU's are great, but not when a company defaults and you're left holding their worthless paper.

Your thinking of gold coins.  Later on it became gold notes.  Banks kept gold bricks in the vault and handed out notes.  But you are right the only legal tender now is fiat.   You can still make your own currency tokens but not for paying taxes

Gold used to be a medium of exchange, why couldn't it be now? Part of the reason USD is a medium of exchange is because it's enforced by law.

In order for something to be considered as money it needs to have three qualities:
1 - It needs to be a unit of account
2 - It needs to be a store of value
3 - It needs to be a medium of exchange

Gold would not meet this criteria because people will rarely deal in terms of gold, therefore it is not a medium of exchange. Governments hold gold because of it's large and stable value

What are you talking about?  All money is credit.  

The reasons other Central Banks hold USD because they can use it to settle debts in USD.  The reason USD has value because its backed by assets like gold, securities but mistly treasuries.  Treasuries are debt of USA (US Treasury)

None of this has to do with hoarding

They hoard the asset-based money to offset the risk of debt-based money.

They also hoard a greater amount of Mortgage Backed Securities and Treasuries.  Its called an asset not money

Wrong again.  Even central bankers know gold is money...that's why they hoard it.

Umm no.  Gold isnt money anymore.  Bitcoin was only a money inside silkroad market. 

Fiat currencies are essentially IOUs, but not money in general--gold and bitcoins being two examples of money that is not debt-based.  If the central banks around the world that are hoarding dollars in the form of reserves were to suddenly decide they don't want to hoard them anymore then the dollar would certainly collapse in value.  Has everything to do with hoarding.  Hyperinflation is the result of no one willing to hoard the currency.  (When I use the term "hoard" I consider it to be synonomous with "hold" or "save".)

Building on this basic supply and demand function, why do people want to have, or want to have less, and why do they offer the prices for buy and sell that they do?

The reason to have more, is the general saving, and the want to save in bitcoin is the understanding that it is sound money, giving higher value or at least it keeps its value over time (or at least you know that the government is not going to manipulate it).

The urge to sell, is to exchange some of your money value to consumable goods. That is the only point of saving money in the first place, to consume later. (Investments, including deposit in a bank for interest, is for making money, with the prospect of consuming more, later, and in the mean time you do not have the money, but the capital goods in some form).

So what about the reference value? Since money have no direct use value (it is never consumed), you have no individual valuation to rely on, you have only yesterdays value on the market, measured in some fiat or price of some good, plus the anticipation of future value, based on all relevant information you have access to.

Correct.

Whatever it is potentially exchanged for. Gold, beer cases, candles, buck skins. This is a non-problem.

So how could the value of btc be defiend without any fiats existing?

I would also add that the bitcoins which are ready to spent (in exchange for goods or services) would also form part of the supply.

Money is not an IOU. Money is something that other's feel is valuable. Money in the bank and bonds are IOUs as the bank/issuing company may or may not have the physical assets to back up your claims.

Money are essentially IOUs.  It has value because someone accepts it as settlement

If nobody accepts it then it worthless.  Has nothing to do with hoarding

Nope.  If no one is willing to accumulate and hold on to a particular currency then it has no value.  Doesn't matter if debt is denominated in it that currency or not.  The IOUs become just as worthless as the currency.

To clarify what supply is - this is somewhat confused because we talk about the M0 supply, the 13 million coins as supply.

Supply in the sense of a market, where the supply (with demand) results in a certain price, the supply is the coins that are on offer on the market at different volume an price pairs. It is not enough to want to sell, you actually have to offer them on the market, to make them a part of the supply.

Edit: So the bitcoin supply is like the ask curves of the exchanges and all corresponding ask curves off exchanges, aggregated.

What?  This is wrong.

Money has value because someone can settle debts with it.  How many people are hoarding Litecoins or Dogecoins?

Derivatives require counterparties that reliably pay up when they lose big. That's not something the Bitcoin world does.

I don't think the market is going to consider a bitcoin derivative to be the equivalent of a bitcoin.  Time will tell.

Derivatives extend the money supply, so this is a real problem.Still, there is less reason to accept derivatives in bitcoin, since it is straightforward to have the real thing. You could sell a car, and receive a bitcoin deposit in a bank (this is currently what a "cash" transaction is in fiat money), but if there is a risk, any risk perceived at all, the seller would prefer to have the real money. Since that is so easy, it will prevail. That is my anticipation.

Loans and other financial services may have real value to the traders, but not on the scale that is currently the situation in the fiat market.

A government can use the central bank to create bitcoin credit (bitcoin promises) to pay for state consumption, but I think the sellers of goods and services to the state would prefer to convert that credit to real bitcoins. Especially if they make promises that they might not be able to keep.

Anyway, there is a large amount of threads created for that discussion.

Interesting post.
But would all this be valid once we have derivatives in the market?

Thanks both (last posters). It's great to have some support.

This is a nice quote to have as a signature, to reming bearish people that we are going nowhere than up.

Yes, this "willingness to hold the money" is also referred to as "demand". With no demand the price will drop to zero and that is what causes hyperinflation—a collapse in demand for a currency.  If no one hoards a currency it is worthless.  It is the fact that someone is willing to hoard it that gives currency value.

If you study the theory behind money velocity, you will see that they try to capture the production, distribution and consumption, not financial transactions. In fact, nobody measures money velocity directly, they derive it from gross domestic product and money volume. It is just another way to express gross domestic product. It is totally irrelevant for bitcoin. You could possibly get something meaningful if you aggregated bitcoin and fiat, and excluded financial transactions. Sending bitcoin to an exchange and convert bitcoin to and from fiat, would not be transactions included in the calculation of money velocity.

That is why I made the original post. The value comes only from the willingness to hold the money, from the peoples minds. When that willingness disappears, the money dies. This can also be seen in the multiple hyperinflation episodes in the past.

 


The velocity is determined by how long people hold bitcoins, whether due to hoarding or just waiting for confirmations. It is not constant, so it is a factor.

I proposed that the speed of money changing hands is not a factor, since money is neither produced nor consumed. Trades can not change the value. The value comes from the mind, trades come from the change of mind. So if you change your mind every day and therefore trade a lot, as long as there is not an upward or downward trend in your valuation in your mind, the frequency of your changing your mind can not affect the value.

 
  Thanks

Good post.  Yes the conclusion is basic.  But you explained it well, like the subject of the post described

You have formulas, and when they don't work, you blame the weather.

Oh I see, but the velocity affects supply and demand, so it is a factor if you consider it separately.

BTW, what is a "meteoroeconomist"?

Appearantly, it is not obvious to everyone, even seasoned meteoroeconomists, because some believe that the speed of the money changing hands is a factor. Anyway, congrats for being in the know.

Sorry, but you are stating the obvious, and nothing in your explanation made it more obvious.

Probably too long to read...

Long post.

The supply come from production. And production exists only if there is a demand for it and if the consumer is willing to pay price above the production cost.

The demand for btc exists because there are merchants out there willing to accept btc for payment and the merchant can sell the coin to speculators/investors.

The purpose here is to explain the value of bitcoin, using a normal commodity as a starting point, and deriving the value of bitcoin from that.

A precondition is agreement of the theory of demand and supply. This is basically that value comes from the considerations of people in their minds and their actions, each person has a stepped curve of value per unit, and these demand and supply curves are aggregated on the market.

Take a commodity that is produced and consumed, and is durable (so it is possible to hold), like aluminum or copper.

There are only two types of actors in this model of the market, the producers and the consumers. Both the producers and the consumers can hold, the producers after it is produced, and the consumers before it is consumed. So the producers and consumers meet on the market with their supply and demand curves, where the curves cross, trade happens, and after the initial trades, more trades occur only when the curves change. The commodity moves like this:

Production -> store -> market -> store -> consumption

Obviously, when production parameters change, the supply curve changes, and some will be sold on the market. The same goes for the other side, when the stuff is consumed , the consumers take to the market to buy more. The equilibrium price changes accordingly.

When the price is low, the producer might increase his store, this can be called reservation demand. When price is high, more will be produced. Conversely, when the price is high, consumption goes down, and the consumer might turn seller by reducing their holding.

Now to money. The special thing with money (fiat or bitcoin, gold is a bit of both, money and consumable commodity) is that money is not consumed. Think of consumption as destruction of the goods for a purpose. When you consumed a candle, it was destroyed, but you got the light that you wanted. There is no reason to consume money by destroying them, it gives you nothing, (compared to what you get when you trade them).

On the other end, production, bitcoin is not produced either, after the initial amount is created. (Fiat is special, since more is continually printed, but they don't have to be).

So what we have left is this picture (producers are not producers any more, but sellers, and consumers are not consumers any more, but buyers).

Seller -> market -> buyer.

Since a seller can not sell more when he is empty, he also has to buy, to continue to be an actor. And the buyer can not buy more than he has other goods or services (or other money types) to sell, and he doesn't want to either, because he can not consume the money. Therefore we can combine the buyer and the seller:

Seller/buyer -> market -> seller/buyer

And they have to change roles sometimes, so

Seller/buyer <-> market <-> seller/buyer.

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Thats all, folks. That is all there is to it.