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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 507761 times)
kjj
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December 03, 2014, 06:51:54 PM
 #421

I've been sitting out because reading dinofelis attempt to repeat himself to victory is extremely boring.  But ZephramC is asking a question based on flawed assumptions, and I feel it is worth addressing.  His scenario only makes sense under the extremely literal view espoused by (among others) dinofelis.  ZephramC, if you are less committed to this view than dinofelis is, I hope that this adds to your understanding:

In my view, once the peanuts start being used as money, they behave in a very debt-like manner.*  Before money, barter is the exchange of wealth for wealth.  Once money shows up, the same barter transaction is virtualized in time and space.  One party gives wealth in exchange for a token that they expect to be able to redeem for wealth later.  When they actually get around to redeeming it, the barter is completed.

One key to this system is the value of the money.  In this hypothetical, peanuts-used-as-money are much more valuable than peanuts-used-as-food.  This is a general result throughout history, by the way.  If you don't see the peanut as a token representing a claim on wealth** you have to resort to silly handwaving to explain this premium in value.  (Note that I said "explain", not "name".)

I'm not saying that all money is literal representations of debt, though some such representations can be (and are) used as money.  And I'm not saying that money isn't an asset.  I'm saying that the moneyness of money is the expectation that it can be traded for wealth, and that the essence of debt is that expectation on the holder's part, rather than the specificity on the borrower's part.

At the platonic ideal of money, people are just swapping abstract IOUs around.

Not that it matters, but what you describe in 1) could not possibly work without debt.  I don't believe it is possible for more than one couple/family to live together without some notion of debt.  Way back in history, debt existed long before money was invented, and money was actually invented not to facilitate trade, but to normalize debt.

* Yes, dinofelis, I'm aware that you disagree.  I don't care, and I certainly don't need you to repeat your narrow definition.

** Not a specific claim to a specific thing from a specific person, but a claim still.

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dinofelis
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December 03, 2014, 07:10:30 PM
 #422

OK. Let's try different angle. Imagine this situation:
0.) We have an island with small community (~30 people). There is no money, there are no debts.
1.) People exchange things for things,  services for things, services for services ... maybe even such abstract concepts like "personal free time", "respect", "friendship", "self-confidence", "conscience" are exchanged one for other. ... This is (generalized) barter system.
2.) Someone finds good and tasty peanuts in small isolated (unexplored, unclaimed, difficult to access) place within the island. Peanuts are nutritious and tasty, therefore they are useful, they are beneficial. No debt was needed to create them or bring them to people.
3.) Most of the people (not all of them, not always, not immediately) start to accept the peanuts as means of exchange. So they accept them not because they want to eat them, but because they believe that someone in the future will also accept them.

Now... If you say that all money is debt or that creation of money requires debt then you either:
- do not consider above-mentioned peanuts as money
- can not imagine system in step 1) working without debts
- believe that there have to be (political) system that guarantees and enforces (at least partial) acceptance of peanuts and call peoples responsibility and duty to abide such claims as "being in debt".

Am I right?



Very well said.

In my opinion you perfectly illustrate the difficulty and the strange ways of thinking one has to go through to try to see money "as debt" ; while it is in fact such a simple notion if you just consider it as "an asset you essentially or solely acquire with the idea of trading it again later against something else".

One could add something.  What you describe here is the Menger view on the emergence of a monetary asset: it has to start out as a "normal useful commodity", but is then adopted as an intermediate good (and that's exactly what money is: a generally accepted intermediate asset).

This makes the final value mostly resulting from the demand for store of value, and has not much to do anymore with the initial market value of the commodity which was determined by its use as a normal commodity.  

But this allows in principle also to have money that has no initial use value.  Menger couldn't consider how such a non-existing commodity could become money through the process you described.  But once there are other monetary assets (which arrose probably in the way Menger, and you, decribed), such "value-less" commodities can just as well serve as store of value, and take over part or whole of the market of "demand for store of value".
This is what allows "value-less" assets such as fiat money or bitcoins to become money too, in principle.

Probably they cannot arise from scratch, and have to "eat" into the market of an existing "valued commodity money" first: like fiat did with gold.

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December 03, 2014, 07:24:15 PM
 #423

In my view, once the peanuts start being used as money, they behave in a very debt-like manner.*  Before money, barter is the exchange of wealth for wealth.  Once money shows up, the same barter transaction is virtualized in time and space.  One party gives wealth in exchange for a token that they expect to be able to redeem for wealth later.  When they actually get around to redeeming it, the barter is completed.

One key to this system is the value of the money.  In this hypothetical, peanuts-used-as-money are much more valuable than peanuts-used-as-food.  This is a general result throughout history, by the way.  If you don't see the peanut as a token representing a claim on wealth** you have to resort to silly handwaving to explain this premium in value.  (Note that I said "explain", not "name".)

Absolutely not, and this is an essential point in understanding monetary value.  There is no handwaving in the demand for store of value.

People find it hugely practical to use intermediate exchange: it allows you not only to split the barter trade into two steps (if I want eggs for apples, I do not have to find a single partner who is simultaneously interested in apples, and willing to offer eggs, but I can find a first partner interested in apples, and another partner interested in offering eggs) which reduces a N-square problem into an N-problem (N being the number of different kinds of commodities and services traded).  But it allows for two additional aspects:
1) the trade can be separated in time *without having to resort to an explicit debt* (which is what you still call "a debt" I start to figure).
2) very important: I don't have to decide already right away what I will be wanting in the future.  I can delay my choice for the second part of the trade to later.

These practical advantages of indirect trade make that people are having a DEMAND for storage of value, once the notion exists, and an asset allows one to do so (once money exists, in other ways).  That demand didn't exist before, but like i-phones, there was no demand for i-phones as long as they didn't exist.

That extra demand for the commodity that became money makes that the price of the commodity rises.  THAT is that premium value of money: the demand for storage of value.  

There's no more handwaving in that than in the demand for i-phones once they exist.  

The commodity working as an intermediate asset has a NEW USAGE, and that new usage goes with a new demand, and that demand engenders a price (especially against "sound money" where there is no or very small offer).

It is exactly what you find in the monetary formula:

P x Q = M x V when you re-write T as 1/V and B (the value of the monetary asset) as 1/P:

B = Q x T / M

The price of the monetary asset is determined by "the value one wants to store" (Q - the stuff one wants to buy) and "the time one wants to store that value" (T, the harmonic average holding time), divided by the amount of monetary assets that are in circulation.

In other words: the demand for storage of value is nothing else but Q x T: the amount of value one wants to store, and the time one wants to store it.  That demand has to be satisfied with a finite amount of circulating monetary assets M.

I don't see what is so handwaving about that.  It is crystal-clear.

Now, I can see what you will say: you will say that this is a "debt" Q over a time T.   The point is: it is a GAMBLE.  The *demand* for storage in a monetary asset is not related to what *really* be bought with it, but with what the demander THINKS he will be able to buy with it.

If it turns out that his money will not be accepted anymore next year, but he doesn't know this right away, and he still *speculates* onto the idea that people are going to be *willing* to accept his money, then he bases his DEMAND for money right now on that idea.  
So that money now is going to be in demand, and will have a certain price right now, if those wanting the money speculate on being able to exchange it for goods in the future.

The demand is hence based upon the *desire to store value* and not on the actual value they will obtain when they will finally exchange it.

The important point is that the "price of money" is depending on this demand for store of value (in that particular monetary asset).  That demand will vary according to the mood of people, and also according to the kind of monetary asset that is mostly "in" (that is, what people speculate that others will still want to accept, and at what price, later when they will want to get the value back).
As such, the value stored in a monetary asset is normally fluctuating.  One day there may be a high demand for money, and money will be worth a lot ; the next day, there may be a much lower demand for that kind of money, and it may become almost worthless.
In a fiat system, this is mainly stabilized, essentially by imposing monetary monopoly (merchants are obliged to accept that type of money against their goods and services), and by introducing feedback mechanisms with the central bank, buffering the money offer against the money demand.

In a "sound money" system with open competition between monetary assets, one can expect much higher volatility in the value of money, especially if the competition is very open between different kinds of money. 
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December 03, 2014, 07:56:19 PM
 #424

* Yes, dinofelis, I'm aware that you disagree.  I don't care, and I certainly don't need you to repeat your narrow definition.

In what way can the theory "money is a debt" explain inflation and deflation ?

You would think that if I sold you a loaf of bread today, and the money I receive is "a debt of society towards me good for a loaf of bread which I'll be able to claim", that there would be fixed way to tell me how that claim can be executed later.
Trivially, I would then think that my claim is good for a loaf of bread.  Why is my claim then 10 years later worth maybe only half a loaf of bread while economy has grown ?

In what way is the "debt society has towards me for a loaf of bread for 10 years" then only worth half a loaf ?

The theory "money is a speculative asset" can explain that very well (essentially through debasement which alters the meetingpoint between demand and offer, with rising offer).

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December 03, 2014, 09:16:38 PM
 #425

* Yes, dinofelis, I'm aware that you disagree.  I don't care, and I certainly don't need you to repeat your narrow definition.

In what way can the theory "money is a debt" explain inflation and deflation ?

You would think that if I sold you a loaf of bread today, and the money I receive is "a debt of society towards me good for a loaf of bread which I'll be able to claim", that there would be fixed way to tell me how that claim can be executed later.
Trivially, I would then think that my claim is good for a loaf of bread.  Why is my claim then 10 years later worth maybe only half a loaf of bread while economy has grown ?

In what way is the "debt society has towards me for a loaf of bread for 10 years" then only worth half a loaf ?

The theory "money is a speculative asset" can explain that very well (essentially through debasement which alters the meetingpoint between demand and offer, with rising offer).

You keep responding with words that suggest that you've read what I wrote about abstracting away the specific who and what, but your brain appears to be winning what must be a mighty struggle to prevent itself from understanding the concept.

You also keep inexplicably imagining that I'm calling your theory wrong, when I'm not.  If someone says that car are transportation, do you also create endless, pointless paragraphs explaining how cars can't be transportation because you can prove that cars are assets?  Do you have equations showing how the price of cars vary with the demand to store transportation?

If you trade something for an IOU for one loaf of bread, you'll (maybe) get one loaf of bread back later.  If you get an IOU for "One dollar's worth of value", you'll (maybe) get "One dollar's worth of value" back later, whatever that is.

You may notice that an IOU for a purely abstract value functions, in practice, exactly like an asset.  You trade it for however much wealth you can get for it, from whoever you can find that wants it.

Inflation is caused by people abusing privileged positions that allows them to game the system by creating new IOUs without doing anything to earn them.  Deflation is caused by human progress (I think I explained this in detail earlier in the thread).  Neither really needs a theory of "what money is" to explain.  What makes you think otherwise?

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December 03, 2014, 11:00:53 PM
 #426

Jesus f***** Christ.
Here it seems everyone is doing his own definitions. I have MA in macroeconomics btw. No, money is NOT commodity. Money is what people accept as money, period.

Quote
DEFINITION OF 'COMMODITY'
1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

2. Any good exchanged during commerce, which includes goods traded on a commodity exchange.

Money is a commodity because every unit is interchangeable with any other unit of the same type. Gold can be money because every coin is interchangeable with every other coin of the same type of size/weight.


When you say "money is what people accept as money" you are right, but beg the question "what does people accept as money?"
Individuals could accept anything as money one time, but what will they continue, in the long run, to accept as money?
What is the fitness function of money?
What people will accept as money in the long run is what have the best features to be money.

Being debt and relying on a third party is not a good feature for any form of money.
Fiat money have some features making up for this problem, albeit not completely.


Quote
What you are talking about is monetary base and you have some false assumptions about it as well. If everything what you write was true, fiat money would never existed, yet they exist based on thin air.

In fact, fiat money could not exist without being linked to something from the start.
Fiat money, initially, was linked to gold and/or silver.
When the link was removed (after the possibility to return to gold and silver coins was removed too) people had some past experience of the value of fiat money (E.G. how much 1 $ bill could buy). So it continued to work. Every other fiat currency created is always linked to something else at the time of its creation (E.G. the € was linked to a fixed exchange rate with the previous national currencies).

Any counterfactual example of a fiat currency established without any link to a previous currency or form of money?
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December 04, 2014, 04:36:08 AM
 #427

You keep responding with words that suggest that you've read what I wrote about abstracting away the specific who and what, but your brain appears to be winning what must be a mighty struggle to prevent itself from understanding the concept.

I think I understand perfectly well what you are saying, I even think I know where it comes from, and I'm trying to explain you that it is essentially a useless and confusing idea, and the only way to make it not even wrong is by undoing the concept you are trying to use from its basic meaning.

Quote
You also keep inexplicably imagining that I'm calling your theory wrong, when I'm not.  If someone says that car are transportation, do you also create endless, pointless paragraphs explaining how cars can't be transportation because you can prove that cars are assets?  Do you have equations showing how the price of cars vary with the demand to store transportation?

No, I'm rather the one saying that cars are a means of transportation.  You are saying something of the kind like "cars are friendship" or something, and you base your argument for that on the fact that in some cases, people use cars to go and see friends.
When it is pointed out to you that cars are not always used in the name of friendship, you start re-defining the concept of friendship.  And when asked how it comes that cars are used in bank robberies and how friendship can explain police cars running after cars with criminals in and so on, you start saying that sometimes policemen abuse of the concept of friendship.

My conclusion of that is that the statement "cars are friendship" is at best a useless concept to explain cars, most probably a wrong statement if one wants to keep the essential aspects of the definition of "friendship" and has no explanatory power to understand the behavior of cars in all its aspects.  While the statement "cars are a means of transport" can do that much better.

Quote
If you trade something for an IOU for one loaf of bread, you'll (maybe) get one loaf of bread back later.  If you get an IOU for "One dollar's worth of value", you'll (maybe) get "One dollar's worth of value" back later, whatever that is.

I know that that is the basic idea on which you base the statement "money is debt".  Like "tonight I'm going to see my friends with my car".

There's no point in repeating that there's no debt because nobody feels obliged I guess.

You see money as a kind of ticket "good for a loaf of bread".  The point is that a ticket "good for a loaf of bread" is a liability, and the one issuing it is supposed to make you a loaf of bread.   He's not going to give you that loaf of bread because he wants to get hold of the ticket, but because he needs to honor his liability when issuing the ticket, and will destroy the ticket upon receipt.
On the other hand, nobody is feeling obliged to do something against a dollar bill, and is certainly not going to destroy the bill after having "earned" it.

On the other hand, if you see a dollar bill as a token people desire to have, then all these behaviors become quite clear.  People are willing to do stuff because they desire to hold dollar bills.  They desire to hold dollar bills, because they hope/think/know/speculate that other people will also desire to hold dollar bills, and will, as such, also be willing to do stuff in order to obtain then.  Nobody's feeling guilty or liable.  Just greedy.  Much clearer.

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December 04, 2014, 05:44:21 AM
 #428

On the other hand, if you see a dollar bill as a token people desire to have, then all these behaviors become quite clear.  People are willing to do stuff because they desire to hold dollar bills.  They desire to hold dollar bills, because they hope/think/know/speculate that other people will also desire to hold dollar bills, and will, as such, also be willing to do stuff in order to obtain then.  Nobody's feeling guilty or liable.  Just greedy.  Much clearer.

See?  This is one of those moronic thoughts* that I've been saying can be avoided by developing a more complete understanding of money.  I guess I shouldn't have been surprised.  Just prior, you said:

If you trade something for an IOU for one loaf of bread, you'll (maybe) get one loaf of bread back later.  If you get an IOU for "One dollar's worth of value", you'll (maybe) get "One dollar's worth of value" back later, whatever that is.

You see money as a kind of ticket "good for a loaf of bread".

Derp.  You even quoted me explaining the opposite.

* Two moronic thoughts, actually.  If you didn't see the second one, ask yourself (or a dictionary) what a token is.

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December 04, 2014, 06:06:01 AM
 #429

Derp.  You even quoted me explaining the opposite.

I was trying to be nice and live myself into the "debt" paradigm you are proposing.   Consider that loaf of bread any inflationary slice of bread one may obtain from it.  But if you want to go into details:

It comes then down to an IOU whatever you will get for it, maybe even nothing.  Now that's a debt notion I would like my bank to consider too !
I have a mortgage, and my debt to them is whatever they will get from me, if anything, they'll find out the day they ask me :-)
Money is a debt for which you will get in return whatever you will get for it, if anything :-)

It is a debt of just whatever, or maybe nothing.  Now THAT's a useful view.
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December 04, 2014, 06:24:19 AM
 #430

Jesus f***** Christ.
Here it seems everyone is doing his own definitions. I have MA in macroeconomics btw. No, money is NOT commodity. Money is what people accept as money, period.

Quote
DEFINITION OF 'COMMODITY'
1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

2. Any good exchanged during commerce, which includes goods traded on a commodity exchange.

Money is a commodity because every unit is interchangeable with any other unit of the same type. Gold can be money because every coin is interchangeable with every other coin of the same type of size/weight.


When you say "money is what people accept as money" you are right, but beg the question "what does people accept as money?"
Individuals could accept anything as money one time, but what will they continue, in the long run, to accept as money?
What is the fitness function of money?
What people will accept as money in the long run is what have the best features to be money.

Being debt and relying on a third party is not a good feature for any form of money.
Fiat money have some features making up for this problem, albeit not completely.


Quote
What you are talking about is monetary base and you have some false assumptions about it as well. If everything what you write was true, fiat money would never existed, yet they exist based on thin air.

In fact, fiat money could not exist without being linked to something from the start.
Fiat money, initially, was linked to gold and/or silver.
When the link was removed (after the possibility to return to gold and silver coins was removed too) people had some past experience of the value of fiat money (E.G. how much 1 $ bill could buy). So it continued to work. Every other fiat currency created is always linked to something else at the time of its creation (E.G. the € was linked to a fixed exchange rate with the previous national currencies).

Any counterfactual example of a fiat currency established without any link to a previous currency or form of money?

Good. It is vital to fork debate to nonsense, only because you want money as commodity.

Quote
Commodities are most often used as inputs in the production of other goods or services.
While I can imagine the paper US dollar to serve as input for toilet paper, it is beyong my imagination what input can be digital money (botg cryptocurrencies and digital fiat).

There were many kinds of money in history like shells or stones, that were no way commodity (although such money is in very stupid way called commodity money and mixed for example with barley, which was commodity [and money]). The only purpose of those artefacts was...to serve as money. Same case as fiat money or BTC, the only difference is that fiat or BTC is not pshysical. And that was part of the monetary evolution. From physical money to something we can not touch.

Quote
Individuals could accept anything as money one time, but what will they continue, in the long run, to accept as money?
You still mix it up with the commodity. Money of course is the symbol that people gradually agree on, that serves as money in long term! If something - in your case commodity - is accepted as money one time, it does not mean it really is money. Money by definition need to be accepted by most and in the long run. Therefore BTC btw. is not money yet. Commodities on the other hand have big disadvatage to serve as money especially in modern societies. This is why states with fiat money won over the states based on gold.

I understand completely the mindfuck in human brains. We see that money is in the middle of all real economy, so brain does not want to accept that themoney can be somewhat less real. And if it is less real like the fiat, then it is evil. Unfortunately such approach is just the mindfuck.

Quote
Being debt and relying on a third party is not a good feature for any form of money.
Well it is necessary feature of any money. All money can be seen as debt and debt is the reason why money exist. Today I do my work as car washer for example and because of specialisation, I am not directly rewarded. I get money instead. Form of IOU in special way that everyone accepts. Later I will pay to third party. That is the basics of economy and even thousands years ago it worked like that.

Quote
In fact, fiat money could not exist without being linked to something from the start.
Fiat money, initially, was linked to gold and/or silver.
When the link was removed (after the possibility to return to gold and silver coins was removed too) people had some past experience of the value of fiat money (E.G. how much 1 $ bill could buy). So it continued to work. Every other fiat currency created is always linked to something else at the time of its creation (E.G. the € was linked to a fixed exchange rate with the previous national currencies).

Any counterfactual example of a fiat currency established without any link to a previous currency or form of money?

Do you think that teenagers think about some past link to gold? No. Most people accept money only because other people accept the same money..as money. Most people do not think even that deeply. Part of the people fall like you under very false rationalisation that there is or should be something behind money, but that is it. In the past people needed the false impression that money is backed more, but today, with complexity of the world, people just give up and use what works (it can be USD, smartphone or BTC). For money to exist it is not important why people believe in them. It is always some made-up mythology bullshit. The important thing aboutmoney is that people believe in it.

So that is why hopefully BTC can exist as currency. Postmodern people do not ask questions "how" or "why". Those questions make no sense by money. Money is 100% tautology. Money is money because it is money. If something is not money, then it is not money. Fortunatelly for BTC, most people now are so shallow, that they will swallow it and money can be freed from the quasi-state, where it had still pretend some pegging to gold or so.
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December 04, 2014, 07:04:16 AM
 #431

While I can imagine the paper US dollar to serve as input for toilet paper, it is beyong my imagination what input can be digital money (botg cryptocurrencies and digital fiat).

I can't speak for painlord, but I think he means by commodity "asset",  that is "object to which property can be assigned".  It doesn't need to be a material object, it can be a conceptual object too.

A commodity usually implies some materialisation.  But this is nitpicking.

Why does one desire to have property of an asset ?  Why is one ready to provide effort, to provide other assets in order to acquire property of the desired asset ?

There are 3 motivations:

1) the asset is a consumption good (education, joy, entertainment, food, objects to show off with...)

2) the asset is a capital good (with which it is possible to produce other assets)

3) it is speculated that the asset will be tradable for other assets

Of course, 2) and 3) are "indirect" desires in order to provide more with 1) in the future.  The desire for them is simply part of a plan.

Asset is the object of property, and one of the characteristics of property is the right or the power of denial of access to others.
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December 04, 2014, 07:35:14 AM
 #432

Well I just quoted his definition of commodity where he quoted.
Quote
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services.
It is his definition and he claims that money has to be THAT commodity.

And I am saying no, that is not right.

What you write might be perfectly true, but the discussion is about money. And money is nothing from real world, where belongs for example economy. The real economy indeed needs money, but no one should think about money in the common material way. Money can never be understood via materialism. Money is special kind of human symbol, which can be collectively imposed on asset, commodity or many other things like maybe even blokchain. Inner material value or usability or something like that (yes, nitpicking aside) is not needed. What is needed is the common belief in money and exactly that belief and nothing else creates money itself from Satoshi's joke or from cigarettes in prisons.

If I were Slavoj Zizek, I would compare money to God. He would say: of course God does not exist, but if people start to believe in the obviously stupid idea that God exists, they would create church and one day they would surprisingly find the God in that church. Thank God I am not Slavoj Zizek.
https://www.youtube.com/watch?v=80X0pbCV_t4

There is stupid joke of economists that describes perfectly what is money is and is the same what would Slavoj say:

What would be doing economy without money? Inventing money.
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December 04, 2014, 02:31:27 PM
 #433

What you write might be perfectly true, but the discussion is about money. And money is nothing from real world, where belongs for example economy. The real economy indeed needs money, but no one should think about money in the common material way. Money can never be understood via materialism. Money is special kind of human symbol, which can be collectively imposed on asset, commodity or many other things like maybe even blokchain. Inner material value or usability or something like that (yes, nitpicking aside) is not needed. What is needed is the common belief in money and exactly that belief and nothing else creates money itself from Satoshi's joke or from cigarettes in prisons.

Ok, I think I'm starting to see where you are coming from.  I think it is again a matter of semantics.  I think you are in fact calling "money" what I would call "price". 

Let me try to formulate it like this.
In a barter system with N different goods and services, there are of the order of N^2 markets and hence just as many prices (exchange rates).  However, one can assume that some transitivity is to hold, in that if A trades for 5 B in the (A-B) market, and B trades for 6 C in the (B-C market), then, although it would in principle be an independent market, A will probably trade for around 30 C in the (A-C) market, simply because of the arbitrage opportunity if it weren't.

As such, if there is transitivity, you can define a kind of "potential function" that expresses the exchange rates of everything with respect to a single reference.  That reference can be just anything.  It could be a commodity, or you could make it up.  It is the "unit of price" then.  Maybe that's what you understand then by "money": the fact that transitivity of prices implies a universal "price function" of which you can pick the unit (by convention).

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December 04, 2014, 03:57:09 PM
 #434

While I can imagine the paper US dollar to serve as input for toilet paper, it is beyong my imagination what input can be digital money (botg cryptocurrencies and digital fiat).

I can't speak for painlord, but I think he means by commodity "asset",  that is "object to which property can be assigned".  It doesn't need to be a material object, it can be a conceptual object too.

A commodity usually implies some materialisation.  But this is nitpicking.

Why does one desire to have property of an asset ?  Why is one ready to provide effort, to provide other assets in order to acquire property of the desired asset ?

There are 3 motivations:

1) the asset is a consumption good (education, joy, entertainment, food, objects to show off with...)

2) the asset is a capital good (with which it is possible to produce other assets)

3) it is speculated that the asset will be tradable for other assets

Of course, 2) and 3) are "indirect" desires in order to provide more with 1) in the future.  The desire for them is simply part of a plan.

Asset is the object of property, and one of the characteristics of property is the right or the power of denial of access to others.


Agree.

This is another definition of money

Quote
Quote
Quote
The four primary characteristics of money are: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. Although a number of items or assets have served as money, those that best match these four characteristics are the ones that best function as money, the ones that best operate as a medium of exchange.

Could a debt have these characteristics?
I think not.

Durability (1) is the main characteristic of money that debts lack because if the debtor die the debt die with him.
But a gold coin retain its value even if the people that coined it disappear. A gold coin retain its value even after 2000 years or more.
The same can not be said of paper currencies.
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December 04, 2014, 04:25:12 PM
 #435

Well I just quoted his definition of commodity where he quoted.
Quote
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services.
It is his definition and he claims that money has to be THAT commodity.

It must be a commodity in the sense every unit must be perfectly exchangeable with any other units.
It doesn't matter if it is a material good or an immaterial one.
It must have some specific properties in a degree high enough and the commodity with the higher degrees of these will be adopted, in the long term, as money.

Debt is not perfectly exchangeable for other debt. If you owe me a loaf of bread it is not the same as dinofelis owe me a loaf of bread. I must evaluate your ability to pay the same debt and one will be ranked higher than the other, so one debt will be worth more than the other debt even if they nominally they are identical.

Fiat money, indeed, is a commodity. It is just a very inflatable commodity. And the government is the agent able to inflate it at will.
It severely lack in the "noncounterfeitability" aspect. Gold, instead, it is better in the "noncounterfeitability".
The advantage of paper money is in "transportability" where gold is a lot more difficult to move around.
In fact, paper money was born when instead of moving the gold from a bank to another they simply exchanged the title of credit for that gold.

Fiat money keep its value if the government do not print more units that it take back. If it is a limited commodity.
Postage stamps and phone time can be money. They also are debt of a third party.
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December 04, 2014, 04:47:50 PM
 #436

Well it is necessary feature of any money. All money can be seen as debt and debt is the reason why money exist. Today I do my work as car washer for example and because of specialisation, I am not directly rewarded. I get money instead. Form of IOU in special way that everyone accepts. Later I will pay to third party. That is the basics of economy and even thousands years ago it worked like that.

I understood that that was the "debt based" view on money, and I also saw it like that earlier on.  When you receive money "society owes you something".  When you spend money, you owe society something.  Wait. No.  You already did something  for society !  If you give money to somebody, you have already earned it !  You don't have anything to do for him anymore !  Yes, you can argue that you just transmit the debt society owed YOU when you earned it.  I also understood money that way, long ago.

You could then think that money is just the accountant of all the partly indirect trades that are underway:

I would like apples for eggs.  I give you eggs.  You give me a piece of paper "good for apples from Joe".  With that paper, I go to Jack, and give him that paper, in return for eggs.  Jack gives the piece of paper to Jeff, to repair his car.  Now Jeff is entitled to obtain the apples from Joe.  But that piece of paper goes on and on and on.
As nobody really trusts Joe, we replace it by a "generally recognized piece of paper" that we call money.

That was my view on money long ago.  Money is the debt society owes you when you earn it, and the one giving it to you is just transmitting something society owed HIM, so it is not himself who is liable, but "society".

It sounds nice, and I saw it that way for a long time.

And then comes the problem: you cannot explain any behavior of money that way.  You cannot explain inflation or deflation.  You cannot explain exchange rates between different monetary assets.   If society owes me "a loaf of bread", but then they don't really owe me a loaf of bread, but rather whatever they are willing to give me in return for my unit of money, the concept of IOU with money goes beserk.  There is no possibility to have inflation or deflation with such a view, as what society owes you can only do two things:
- remain constant  (if society owes me a loaf of bread, then hell, it owes me a loaf of bread !)
- inversely change with economic growth (if society owes me a billionth worth of what is produced, hell, it owes me a billionth worth of what is produced).

There is no way in which one could "determine the price of money" by looking at it as a debt.
Hell, hyperinflation is not possible in that case: a debt is a debt !

By viewing money as an asset, of which the price is set by offer and demand, the behavior of money is much, much, much more understandable.  In other ways, it is a much more useful theory.  One can understand mechanisms concerning money which are well explained by price setting arguments, which are totally mysterious when seeing it as a debt.

"Debt" is the Ptolemaic theory of money ; "asset" is the heliocentric theory of money.  Both can explain why we see the planets move in the night sky.  However, the Ptolomaic theory falls on its face when we see the moons of Jupiter !

There are aspects of money that can be explained by both theories.  But the price setting of money can only be explained by money as an asset for which there is demand and offer.

When debt-based, you would then think that any form of inflation or deflation is "robbery".  It isn't if you understand that the price of money can be volatile.  That it depends on the desire of people to store value, or not (which can change according to mood).  That it depends on the production of it, and the eventual destruction of it.  That it depends on how much the asset is chosen as money over another asset or not.

You could explain the course of the west-German Mark circulating in Czechoslovakia in the good old Soviet days.  You can explain the course of cigarettes in a prison.  All that is not possible with the debt based view.  At a certain point, you have to recognize the superiority in explanatory power of the heliocentric model, even though you can add as many epicycles to the Ptolemaic system as you want.

 
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December 04, 2014, 07:29:32 PM
 #437

Yes, this is about semantics, but I am coming from completely useless Faculty of Economy, where the people fucked up everything, but the wiser can see what money is..

Money is the debt. The IOU that is widely accepted (as money). [Exactly as kjj wrote]
That is the essence of money and everything that will behave like that even in post_BTC future will be money.

Then there are some physical attributes of money, like the ability to be easily divided, durability and all those things, that are, in fact quite uninteresting. The "ptolemaic" theory is the only interesting here. Because all the attributes from "heliocentric" are just some physical atrributes. It does not go after the essence of money.

The essence is the only important thing here. Nobody can define symbols literally. It is the same as reading Bible and either argue, that it is all nonsence, because the events described there could not happen, which is idiotic. Or trying to persude ourselves, that dead people can be resurrected into life, walk on water etc. That is the same idiocy. And such idiocy prevents people to understand the concept of money (or religion - so they become either orthodox idiots or the same atheistic idiots). The key to understanding to world is to understand what symbol is.

If this is close to anyone, read this: http://www.amazon.com/The-Power-Myth-Joseph-Campbell/dp/0385418868 . Campbell really hits the head of the nail with explaining what symbol is.
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December 04, 2014, 09:34:38 PM
 #438

Yes, this is about semantics, but I am coming from completely useless Faculty of Economy, where the people fucked up everything, but the wiser can see what money is..

Money is the debt. The IOU that is widely accepted (as money). [Exactly as kjj wrote]
That is the essence of money and everything that will behave like that even in post_BTC future will be money.

Then there are some physical attributes of money, like the ability to be easily divided, durability and all those things, that are, in fact quite uninteresting. The "ptolemaic" theory is the only interesting here. Because all the attributes from "heliocentric" are just some physical atrributes. It does not go after the essence of money.

The essence is the only important thing here. Nobody can define symbols literally. It is the same as reading Bible and either argue, that it is all nonsence, because the events described there could not happen, which is idiotic. Or trying to persude ourselves, that dead people can be resurrected into life, walk on water etc. That is the same idiocy. And such idiocy prevents people to understand the concept of money (or religion - so they become either orthodox idiots or the same atheistic idiots). The key to understanding to world is to understand what symbol is.

If this is close to anyone, read this: http://www.amazon.com/The-Power-Myth-Joseph-Campbell/dp/0385418868 . Campbell really hits the head of the nail with explaining what symbol is.

You need to have the last word, eh?

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December 05, 2014, 10:19:06 AM
 #439

Yes, this is about semantics, but I am coming from completely useless Faculty of Economy

visibly  Grin
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December 05, 2014, 12:24:47 PM
 #440

And then comes the problem: you cannot explain any behavior of money that way.  You cannot explain inflation or deflation.  You cannot explain exchange rates between different monetary assets.   If society owes me "a loaf of bread", but then they don't really owe me a loaf of bread, but rather whatever they are willing to give me in return for my unit of money, the concept of IOU with money goes beserk.  There is no possibility to have inflation or deflation with such a view, as what society owes you can only do two things:
- remain constant  (if society owes me a loaf of bread, then hell, it owes me a loaf of bread !)
- inversely change with economic growth (if society owes me a billionth worth of what is produced, hell, it owes me a billionth worth of what is produced).

You can accept abstract units when it suits you, but only when it suits you.  The dollar doesn't need to have a fixed exchange rate to bread, nor does it represent a fixed fraction of all production, but it can have an abstract value of "whatever I can get for it".  This does not depend on any particular concept of money.

If a mob boss owes you a favor, do you imagine that there is no debt because there is no fixed exchange rate between "a favor" and loaves of bread, or between favors and global production?  You could argue that this isn't a debt for whatever reason, but if you ask a bunch of random people, I'm sure you'll find that pretty much everyone considers this to be "debt".*

I actually covered this, long ago, so I'm just going to recap and skip to the end.  Debt is of the form "A owes B to C".  Where we disagree is that you think that the essence of debt is in the nouns A, B and C, while I think it is the verb, "owes".

Mortgage: A=homeowner, B=cash payment stream, C=bank (in reality C is usually investors via a MBS)
Mob favor: A=mob boss**, B=(ABSTRACT), C=poor shopkepper
Bearer bond: A=bond issuer, B=cash, C=(ABSTRACT)
Dollar: A=(ABSTRACT), B=(ABSTRACT), C=(ABSTRACT)

* You can define debt narrowly and declare everyone else to be wrong, but this is folly.  Economics is ultimately the study of people.  If you disregard them, you are just jerking yourself off.
** If the movies are accurate, A can be abstract here too, as a son may well honor a favor owed by his dead father, or an underling may attempt to extinguish the debt without letting it get to the top.

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