Topic: Why does anyone pay attention to people that study "economics"? - page 6. (Read 9560 times)

The US Treasury sells bonds to the Fed (through commercial banks) that are paid for with newly created fiat. Commercial banks lend money into existence and the UST uses it to fund government programs.


Gold serves only as a store of value. The physical amount of gold does not matter; it is a finite resource.

Fictitious numbers as an example:

1 candy bar = $0.10 USD in 1900
1 candy bar = $1 USD in 2000

Value of $1 USD in 2000 is 1/10th of what it used to be in 1900.

1 bar of gold = $100 USD in 1900
1 bar of gold = $1000 USD in 2000

Value of 1 bar of gold in 2000 is 10 times what it was in 1900

By placing your 1900s dollars in gold, you mitigated the loss of purchasing power over 100 years had you only bought candy bars with your money. Effectively, you can now take your $1000 dollars in 2000 and purchase $1 candy bars at the same purchasing power Charlie Chaplin enjoyed.

From my limited understanding that would be from banks (in the form of something like a housing loan) or the government state (they are in charge of the printing press so there is no real way to stop them from printing it for themselves if they want to apart from something like a revolution).


What you call money today could become far less useful as that in the future if its supply has become drastically restricted (this doesn't really apply the same to Bitcoin due to its divisibility). What would normally happen then is that people would turn to something else to take place of the less useful money.

If we were using gold and the vast majority of gold was taken out of supply (by hoarding or by it being dropped to the bottom of the ocean) then people would turn to something else (such as silver - but again this doesn't apply very well to Bitcoin so I wouldn't be expecting to get rich from holding Litecoin for a very long time).

It is interesting to read your discussions here, it seems you really have some own insights into the economics

I have several questions that have been bothering me for decades, maybe we can have a discussion here:

1. Who get the ownership of every newly created fiat money?

2. We all know that value is decided by supply and demand, but is money's value really decided by supply and demand?

Please share your thoughts

There is a difference between buying something on market and issuing money. When you buy assets on market, you raise the price of those assets immediately. When you issue money backed by your assets, the assets' market price is not affected directly

For example, I have one ounce of gold, I issue 1200 dollars backed by this ounce of gold based on its market value, anyone get my money can exchange them for gold from me any time. But this activity does not affect gold's price, since majority of those money will flow into the economy instead of buying gold, as long as people's trust of my money is intact

The same goes for any kind of collateral: Unless the new money want to exchange for the collateral itself, the price of the collateral will not be affected by added money supply

So even FED officially say that they are buying MBS, what actually happened is that they issue money backed by MBS's current market value or even with a discount, and commercial banks gave those MBS to FED in exchange for money. As long as FED do not sell them, and no one is buying those MBS, the housing price will not be affected, but the liquidity problem is solved

And when banks get new money, they will never buy those MBS from FED, they just send the money oversea to buy something else valuable, for example oil. And next time they will buy something else, and so on... So there will not be inflation no matter how much money is created, as long as those money are all backed by assets

This was the original idea of John Law, his money was backed by the value of his Mississippi Company (which owns large amount of land around the world). Unfortunately, those money were used to purchase the stock of Mississippi company and pumped that company's value into a bubble. Then he could issue more money to support the stock price because the company worth a lot more later, but when people discovered that his company's land did not worth that much, the trust of the value of the company's stock (land in fact) lost. So many of the money turned to him in exchange for gold coins, then the plan blew up

But in modern monetary system, there is no risk for such bank run, the loop has closed. When the asset that back the money's value is crashing, thus make the money lose their backing, the money can only be used to purchase anything on market, thus create an inflation



For normal people they will just save all the extra money if there is no more intereting thing worth spending. It does not hurt to have one billion dollar in savings, and a large reserve will definitely change many aspects of the life

There is a lot of Gold buying because the Euro is going down and the US is having a fake recovery.

Let us think for a moment about that.  How could the fisherman rake in 99% of the money ?

Imagine that everybody, except the fishermen, are putting all of their monetary possessions in circulation (otherwise it is already impossible to rake in 99% of the money).
Now, in order for the fishermen to obtain 1% of all the money, they have to produce *net* 1% of the entire economic value (net, that is, what they produce, minus what they consume).
In order to obtain the second 1% of all the money, due to deflation, they have to produce *net* 1/99 of the entire economic value.
In order to obtain the third 1% of all the money, they have to produce *net* 1/98 of the entire economic value.

And so on.

In order to obtain 99% of all the money, they have hence to produce net:
(1/100 + 1/99 + 1/98 + 1/97 ... + 1/2 + 1/1) of all the produced value of all the others.  This sum is even not right because between 2% of the money in circulation, and 1% of the money in circulation there will be deflation too.

But nevertheless, the sum is about 5.2.  It means that the fishermen, by themselves, have NET produced 5.2 times all of the economic value that all the others have ever produced and consumed.  So you might even think that to be honest they should have 520 % of all the money :-) but they only have 99% of the money.

Imagine this:

Joe, Bill, Jack, and Alice each have 25 Klonks (unit of money).

If Joe does something for Bill that Bill pays with all of its money, then Joe will now have 50 Klonks.  If Joe does something for Jack that Jacks pays with all of his money, then Joe will end up having 75 Klonks.  If Joe does something for Alice that she pays with all of her money, then Joe will end up 100% of all the money.

That's normal, because Joe has been doing EVERYTHING !  If you like the "debt" wording of money: Joe has now all the IOU because indeed, everybody owes him stuff, and he owes nobody anything.

Would you find it normal that after Joe has done everything, that people can still again ask Joe to do stuff ?  Isn't it normal that Joe can now profit from the others without any return ?  So it is normal that Joe has all the money in a sense.  The "economy is not broken". Joe has just been giving a lot !

So on the "morality side" there's no problem for Joe to hold all the money.
In the same way, there's no problem for the fishermen to hold 99% of all the money if they have done NET 5 times more than all the others together.


However, money is NOT an IOU.  Money is speculative.  So the fishermen have a big problem.  They have by themselves produced net 5 times more than the entire economy.  They have been giving to the others more than 5 times the entire economy.  They obtained against that 99% of the money stash (which, when spent again, will buy them of course 5 times the economy).

1% of that money is still circulating (or is hoarded by others, who knows !).

If the others put into circulation another monetary item, then our fishermen may just as well be sitting on a stash of assets which isn't buying anything anymore !

No.  I started with your assumption that the fishermen would hold all the money, and showed that this led to absurdities, or to the fishermen losing the value of their money.  

But of course my point is that the fishermen will not have a huge stash of money, and that the money will be distributed according to production of wealth.

Of course the fishermen will have more wealth, simply because they produced more wealth, and that will probably lead them to keep a larger amount of value stored in money than others.   But there is no runaway in principle.  Why should there be any runaway ?

Anybody who produces value will get money.  Newcomers just as well as oldtimers.  


Monopoly can only happen if it is imposed by a violent agent such as a state, that has distributed privileges to some.

Better entrepreneurs will of course earn more, and maybe keep more value stored, but only to the amount that they are better.  If newcomers are better entrepreneurs than oldtimers, the newcomers will accumulate more wealth (in as much as they put aside part of their earnings) than the oldtimers.  I don't see what the money supply has to do with that.  

After all, if the oldtimers are producing less value, they will have to spend more money than they can earn, and will have to use their stash to keep a certain standard of living.  


There's nothing armed here.  You can have many currencies.  Its value depends on what you accept as currency against your production.   You don't have to impose anything with weapons.  If you say to the fisherman: I don't accept your money for my coconuts, you have to pay me in shells, then that's it :-)

You are still obsessed with a state-imposed "currency".  People decide by themselves what they want to accept as a currency in a free society.


Well, you are considering two groups: the "fishermen" and "the others".   As long as there isn't any violence, the division of economic agents in groups is similar to having different states.  Mercantilism is the stupid idea that accumulation of MONEY in a group is accumulating wealth in that group.  It isn't, simply because money is only wealth when you GET goods and services for them.
If you have produced a lot of goods and services, and you accumulated a lot of money, then it are *the others* that have had a good live and a lot of wealth.  And you are simply sitting on a stash of stuff that is going to be worth whatever the others are going to be willing to do for it, which may very well be nothing, if they use now another monetary asset !


I do not deny the relationship between wealth and power.  Wealth can buy violence, which is power.

Because those private banks have nothing to say in the FED policy or are not aware before any others what will be the next policy move ? 
Why would private banks be members if they:
1) have no influence on policy
2) have no knowledge before others of the policy
3) cannot keep the 6% dividend because they have to hand it over to the treasury ?

Why would they on earth be members if there's nothing in for them ?


No, it is not a conspiracy.  If by buying an asset, the price of that asset increases, then all holders of that asset profit from the increase, which is nothing else but the seigniorage.  Now who is holding the stuff the FED buys ?  So who is getting the seigniorage ?

The increase of the price of the bought assets IS price inflation, but it is concentrated on the bought assets initially.  It will diffuse through the economy at the pace that the owners of the assets who profited from the FED's printing (and hence price increase) convert their assets into other things.  If they don't, the asset in question will undergo a bubble.  That is what has happened now already a few times. 

You cannot get around the fact that printing money is causing seigniorage somewhere, and when that seigniorage is 'taken up' by those profiting from it by turning it into goods and services, it causes general price inflation.  But that takes time.

By the time that the CPI is affected, the policy that was at the origin of it is long forgotten.

The Fed is neither pubic nor private.  It was law enacted by Congress.  The chairman is appointed by POTUS and confirmed by Senate.  It has a board of governors of member private banks and they own stock but its required for membership.  They can't sell the stock but they receive a 6% dividend.  All its profits goes to the Treasury.  Describing it as a banking cartel is incorrect.

I agree that if the Fed buys an asset the price increases.  Any large buys whether from a large funds or the Fed will make price increase.  But so what?  You are trying to make it sound like there is some conspiracy when the truth is much more simple.

You may not like it but as a system it's better than what we had before.  You have to go back in history to understand the development.

Btw, there are some private central banks like BoJ, whose shares is publicly traded

I know, and I showed you where it failed.  A capped money supply doesn't instore any monopoly.  That is a mercantilistic vision.
The point being that there are two possible cases:

1) the fishermen family hoarded most if not all of the money.  This means that they do not spend it on things OTHERS produce (if they would money would get in other people's hands too).  If they do not spend it on things others produce, those others don't get their hands on the money, and they cannot buy fish with the money they don't have.  So the fishermen do not "get rich" on the back of others, who cannot buy their fish and from whom they do not buy anything (or the money gets distributed).  In that case, their money isn't worth anything or not much.
So in as much the fishermen family has most of the money, that money isn't WORTH much.  You can't buy much stuff with it.
And in as much as they buy stuff with it, the money gets redistributed.

2) in as much as the fishermen hold all of THEIR money, and that money doesn't circulate amongst others, and those others don't interact economically with the fishermen, another money may as well emerge, replacing the former money. Then, the fishermen are sitting on a stash of worthless assets.  Maybe shells will emerge as money.  Or coconuts.  Whatever the OTHERS exchange amongst themselves.

Money is only worth what other people want to do for it.  In a free society, there doesn't have to be one kind of money.  If many people don't find any usage for a certain money, they can just as well introduce another kind of money, pushing the former kind of money out of the money market.



By being more violent than others.  By winning battles, and killing their opponents.

The link between money and power is that those having violent power are interested in trading that power for goods and services, and those with money can buy violence with the corrupt violence monopolist.

The power that money can buy is the corruption of the state.

I'm not making a moral argument.  I'm making an economic one.  If it makes you happy I agree that skilled people deserve success.

Also my argument has to do with the capped money supply vs growing population.  Then story is for illustrative purposes.

Power and money are intimately connected but that's beside the point.  How did they become lords in the first place?  Not through innovation but from ancestors laying stake to a finite piece of land on an island.  This exactly what would happen if the money supply was capped and distributed to the first generation and not redistributed as population increased

It is.  Many people think it is a state institution, but that is not true.  It is a private cartel with state privilege.  Granted, with some state control.


http://en.wikipedia.org/wiki/Federal_Reserve_System


Absolutely.  However, the FED buying these assets makes their price increase, because of higher demand.  If a private bank can obtain a higher price for a security because of this, it is getting the seigniorage from that demand which corresponds to the printed amount of money that bought it, and hence increased its demand.


Deficit spending must be financed by state bonds, which are then bought by the FED.

It is more or less the same, except that those profiting from the seigniorage are different, and usually influence faster the CPI than the holders of inflated securities.

If a business is in more demand than another, that means it creates more value (satisfaction) than any other.  That those that produce more satisfaction, are entitled to obtain more satisfaction, is not unfair in my book.

However, if you produce 5 times more satisfaction than your neighbour, then you're entitled to 5 times more enjoyment too, but this will not lead you to dominate everybody in the long run.  That can only happen through violence, in other words, state intervention.

I tried to show you in your example were your reasoning went wrong.  If a family is made of very skilled fishermen, then they DESERVE to get more, because they bring more.  But their skills will never totally outpace the skills of others, who are free to develop them too.  In as much as only this family would KNOW how to fish, and if fish is what keeps the others from starving, they would be dominant, and *rightly so*. 

However, if others develop fisher skills, or people also eat coconuts, there is absolutely no reason how the fishermen family can "build up an empire and dominate everything".  Yes, they can build up wealth - the wealth the CREATED and hence deserved.  Nothing stops others from creating wealth too.  The fishermen wealth is not at the expense of other people's own wealth creation.  It is only in the case where the fishermen are the *only* ones creating wealth, that they dominate everything else... and rightly so.


That had nothing to do with money, but rather with violence and violent power.

Actually, because during a feudal system, lords were paid in land, and land was finite, you see that the monopoly of power by the king was actually totally undone, and distributed amongst many lords.  But again, feudalism is not an economic system, but a system of violence and war.

You are asking why some business is in more demand than others? Or some why people have more skill than others?  It doesn't matter how it happens.  I'm making an example to demonstrate a simple economic principle.

I can't show an example from real life because I can't think of when a money supply was capped finitely.

But examples where an closed island economy tend towards class stratification is feudal Japan & England.  And lots of example of monopoly and inequality due to consolidation effects.

As the islands population increase more economic activity is required to sustain the inhabitants.  You get to a stage where there is exponential growth followed by specialization.  So money is required for trade.  Whoever has more money has more purchasing power.  How is this mercantilistic?  They are stuck on an island.  If anything I'm describing Capitalism. 

Also it's not my story.  Some other poster made up this story and said its better to cap the money supply.  I only introduced the idea of a growing population and argued how this leads to monopoly.  Because I think he erroreously only thinking of a static population

Basically I'm arguing for an inflating money supply to meet demands of growing economy.  Basically what we've witnessed in history.  If you wanna argue the opposite it's your burden to find examples

How can that happen ?  How could fishermen get rich on the back of poor people ?   How could others not decide to get into the lucrative business of fishing ?  That can only if there is an enforcement of a privilege to give the fishing industry to just a few.

In principle, everybody can start fishing.  If it is such a lucrative business that it makes people rich, then it will attract more fishermen, until fishing becomes an activity with a small margin.  First because there will be less fish to fish if everybody starts fishing, and second because the supply of fish will be more than the demand (you can eat 3 fish a day, but not 30 fish a day).

Only if a monopoly to fishing, or quota, or whatever, are granted, the fishing empire remains a closed business.

This has nothing to do with money.

If the fisherman family will hold all of the money, then they can only sell their fish for that money amongst themselves.  The others not having access to that money can then not buy any fish either.  They may then use other means of intermediate exchange amongst themselves, such as shells.  The fishermen sitting on their stash of money which can only buy fish, will then be nothing with their money.  If they want to obtain something else from the others (like coconuts) they better pay them, in their money in as much as others are interested in buying fish from them (the only thing they can obtain with that kind of money) or the fishermen will have to obtain shells, in which they are poor.

You have a mercantilistic idea that holding a stash of monetary asset means being rich.  It doesn't.  It does only in as much as that monetary asset can buy a lot of value.  In your example, the monetary asset will only be able to buy fish.  It will be worth whatever fish is worth.

Not directly.  What it does, is to inflate the price of the assets that are bought.  The assets bought by the FED or the ECB or another central bank against freshly printed money is nothing else but an extra demand for these assets which is not compensated by a lesser demand for other assets, as it is bought with money that didn't exist before, and hence is not re-allocated to something else.
Normally, a new demand for asset A implies a lesser demand for asset B, so that the overall price level can stay more or less constant if the offer is constant.  If new money can create a demand for asset A without lowering the already existing demand for asset B with existing money, then the price of asset A will rise.

In other words, a central bank buying up assets increases artificially the price of the assets it buys, and is in fact distributing seigniorage to those that were holding already those assets.  If a central bank buys up securities, then the price of those securities is inflated.  If a central bank buys up mortgages, then the price of those mortgages increases.  If a central bank would buy up land (John Law's initial proposal), then the price of land would inflate, and would render rich people who own land (and render poor people who need to buy or use land).  If a central bank would buy up a certain stock, then the price of that stock would be inflated, and owners of that stock would get the seigniorage.  

It takes a while before the people that got the seigniorage start spending it, this is why the modern FED techniques have the inflation effect of their printing policies only work out much later.  In the mean time, those obtaining the seigniorage are well-served and get rich on the back of those not holding the bought-up assets.

In fact, as most securities bought up by the FED are held by banks, it are the banks who profit most from the seigniorage and the inflation of the bought-up securities.  In as much as it are state bonds, the state can debase those bonds by just issuing more of them, and it is the state, and those on who the state will spend those revenues, who will get the seigniorage.  However, these are probably faster in spending their seigniorage into the market, and inflation will follow faster.  The more the FED buys up long-term assets, the later in time they place the corresponding inflation.  As I said, mostly banks profit from that.  Which is not a surprise given that the FED is a bank cartel :-)

So you are right that the FED has learned to inflate stuff that doesn't show directly in the CPI, and the CPI is manipulated in such a way to hide the FED's inflation.

When the FED was just buying state bonds, which was then copiously distributed by the state in public infrastructure, well fare and other stuff, gave rise to almost immediate consumption and hence CPI inflation. 
When the FED started buying other securities, it was rendering banks and investors/speculators rich and was blowing bubbles, but the inflation of the CPI seemed under control.


So if you already have a nice car and your salary is doubled, you don't spend it, you don't do anything with it.  People don't like their salary doubled when they have already a house and a nice car, right.

The fresh printed money are all backed by assets, they have valuables backing them, and the banks get those money will use them carefully to not trigger inflation, they inject them into something that is not in CPI

If you already have a house and a nice car, and suddenly your salary doubled, would you buy another car just for fun? Same, you won't eat double amount of food because your income doubled, many demand have little elasticity, once it is filled, the extra demand is very weak

Umm that's besides the point

Scroll and read what he wrote, then my response.  In the case the money doesn't get redistributed with new members entering the population.  E.g. If the fisherman made more money than everyone else, and then his kids created a fishing empire.  After many generations, they will monopolize the wealth of the island.  (If wealth is measured in money) If the island is a closed ecosystem and no trade comes from the outside eventually you will have class division and ruling clans. Aka monopoly

The exchange rate would be the relation between total amount of goods and services (GDP) divided by money supply.  You are correct that the inhabitants should see deflating prices over time.  But that is not good.  In fact it's terrible for the kids born into poor families as their wages will reflect deflationary prices and eventually you'd have extreme class stratification. 

It's zero sum if the point is to make money in a fixed money supply system.