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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 509542 times)
tee-rex
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February 08, 2015, 10:07:04 PM
 #461

That's not how most people use the word speculation.  Speculation usually means when people try to earn money from price increase being long an asset. (or price decrease in a short position)

To me, speculation is the bet that in the future, a certain asset you hold will be able to be traded for some value.
It is at first sight broader than your definition of speculation, but in fact it is the same, only you apply it in the case of a trader, who applies to his bet on the future, a discounted cash flow to today, and compares that to the current price.  If the current price is lower than what he estimates getting from it later, he buys the asset.  If not, he sells it if he holds some.

But the basic property of speculation is to bet on the value you will obtain from others in the future for a given asset.  Whether your purpose is to make a benefit, to cut your losses, or to "store value" is independent of it.  Betting on future exchange value is to me the core concept in "speculation".

Even production is a form of speculation: when you produce things, you make a bet that you will be able to trade it (sell it to customers) for a certain amount of value (usually in the form of money).  Investing in future production is hence also a form of speculation.

You only essentially have consumption and speculation in economic action.

This is too broad a definition for a notion or an idea, and as such this definition loses its focus and utility. As an economic term, speculation is set apart from investment, and they are to be necessarily distinguished. Would you call capital investment speculation (or rather consumption)?
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February 10, 2015, 10:09:53 PM
 #462

This is too broad a definition for a notion or an idea, and as such this definition loses its focus and utility. As an economic term, speculation is set apart from investment, and they are to be necessarily distinguished. Would you call capital investment speculation (or rather consumption)?

Speculation is for me, the bet on being able to sell an asset for something else you're interested in.
Anything which doesn't imply pleasure from its acquisition (= consumption) is probably speculation, that is, an indirect way of trying to get pleasure from acquisition later (which is the sole and ultimate goal of any economic interaction).
Production is a kind of speculation, capital investment is a kind of speculation, .... anything of which the economic interaction doesn't serve to be used to obtain pleasure, but which has a bet on the future economic interactions of others, is to me, speculation.

If you bake bread to eat it, that's consumption.  If you bake bread to sell it, that's speculation.  If you buy an oven to be able to bake bread to eat, that's (indirect) consumption.  If you buy an oven to be able to bake bread to sell it, that's speculation.

Why ?  Because in all the speculation examples, you are betting on a future economic interaction with others.  If you buy an oven to make your own bread next week, then you are not dependent on other people's desires to obtain your pleasure (eating your bread) next week.  It is a bet on the future (that you will succeed making bread, and that you will like that bread), but that bet doesn't involve other people's economic interactions.  However, if you will bake bread for others, you're betting on the idea that they will want your bread and pay for it (a certain amount).   That's what I call "speculation": betting on other people's economic will and ability to buy your stuff against stuff you want.

Speculation, to me, is the bet on the future of other people's needs and ability to offer you something you want.

Consumption is everything you do directly and indirectly to get pleasure.  Directly, that's evident, indirectly, that is, providing yourself with the means (independent of other people's desires in the future) to satisfy your needs in the future.

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February 11, 2015, 01:17:16 AM
 #463

This is too broad a definition for a notion or an idea, and as such this definition loses its focus and utility. As an economic term, speculation is set apart from investment, and they are to be necessarily distinguished. Would you call capital investment speculation (or rather consumption)?

Speculation is for me, the bet on being able to sell an asset for something else you're interested in.
Anything which doesn't imply pleasure from its acquisition (= consumption) is probably speculation, that is, an indirect way of trying to get pleasure from acquisition later (which is the sole and ultimate goal of any economic interaction).
Production is a kind of speculation, capital investment is a kind of speculation, .... anything of which the economic interaction doesn't serve to be used to obtain pleasure, but which has a bet on the future economic interactions of others, is to me, speculation.

If you bake bread to eat it, that's consumption.  If you bake bread to sell it, that's speculation.  If you buy an oven to be able to bake bread to eat, that's (indirect) consumption.  If you buy an oven to be able to bake bread to sell it, that's speculation.

Why ?  Because in all the speculation examples, you are betting on a future economic interaction with others.  If you buy an oven to make your own bread next week, then you are not dependent on other people's desires to obtain your pleasure (eating your bread) next week.  It is a bet on the future (that you will succeed making bread, and that you will like that bread), but that bet doesn't involve other people's economic interactions.  However, if you will bake bread for others, you're betting on the idea that they will want your bread and pay for it (a certain amount).   That's what I call "speculation": betting on other people's economic will and ability to buy your stuff against stuff you want.

Speculation, to me, is the bet on the future of other people's needs and ability to offer you something you want.

Consumption is everything you do directly and indirectly to get pleasure.  Directly, that's evident, indirectly, that is, providing yourself with the means (independent of other people's desires in the future) to satisfy your needs in the future.



Investment and speculation is different.

If you but an oven to start a bakery that's an investment.  You can calculate future cash flows based on the investment.

Speculation is when you but something so you can sell it later at a higher price

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dinofelis
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February 11, 2015, 05:38:11 AM
 #464

Investment and speculation is different.

If you but an oven to start a bakery that's an investment.  You can calculate future cash flows based on the investment.

Speculation is when you but something so you can sell it later at a higher price

I know that these are the standard definitions.  I consider "investment" as a special kind of speculation, namely one where creation of value through production is considered.  But I will try to explain you why both are "speculative" and why the borderline between investment and speculation is not so evident.

I know that it is strange practice at first sight to redefine words which have a standard meaning.  But my aim is to go to a better understanding of the concepts and dynamics behind it, instead of thinking in pre-defined boxes.  I do not want to modify the meaning of the words radically, but I want them to represent a core concept, and not an "agreed-upon catalog" which misses, in my opinion, the core idea somewhat.

The core defining property of "speculation" is for me: "betting on future prices of assets".  Now, given that prices are the resultant of market forces, which include offer and demand, this means betting on the future capabilities and wishes of OTHERS.  To me, the core idea of speculation is the uncertain bet on other people's economic behavior in the future.

That bet is just as well the case when you produce as when you "speculate" (in the standard sense).  When you produce, you are betting upon a sales volume and a sales price.  Your current "acquisition price" (= the investment in the production) is estimated lower than the cash flow that you will obtain from it.  When you "speculate", you do the same: you acquire assets at a current price, with the idea of selling them at a higher price later.  In both cases, there has been a kind of value creation: in the first case, it comes from production, in the second case, it comes from appreciation.  This value creation (subjective value creation!) is a bet.  You are BETTING that the price of the oven, of the flower, of the labor, .... is going to be lower than the price of the sold bread.  It might be that tomorrow, nobody is eating bread anymore.  Then you have been buying expensive assets (ovens ...) today, to sell something worthless tomorrow.  If you are buying expensive bitcoins today, to sell them at a lower price tomorrow, you have been speculating too, but you also lost.  Because you've lost the bet.

However, it is true that "speculative" assets have no consumption value, so their only value is as a price.  As such, purely "speculative" actions are a zero-sum game (because on the price level, all forms of exchange are zero-sum - it is on the subjective value level that exchange brings value creation), and there is no value beyond the price concept with speculative assets, while production is not zero-sum because there is genuine consumption value produced.  This distinguishes the particular category of "investment" from the other (in my definition) kinds of speculation.

What I call speculation is to me what is the core idea behind speculation.  I would use the right economic word for it if it existed, but I don't think it does.  How do you call, in economy, "an economic acquisition of assets that has as sole purpose to be sold, or to help sell other assets in which one is not directly interested, on the speculation that those assets will be wanted more and can be traded for more than the price to pay now for it " ?

It is what I call "speculation" in the broad sense.

Again: buying an oven to make stuff FOR YOURSELF is not a speculative act.  You could call it an investment too, but it is an indirect way to obtain consumption (namely, eating the bread that you will bake with it).  The point is that no matter what happens, you will be able to make your bread with that oven.  Even if tomorrow, nobody likes bread anymore.  Even if tomorrow all prices change.  There is no betting on other people's economic intentions and interactions in the future when you buy an oven for your own bread.

I  redefine "speculation" in this way because in my opinion, it captures the essence of the act: namely betting on other people's future economic interactions.

You cannot calculate future cash flows of your bakery.  In order to do so, you have to bet on the price of bread tomorrow.  Now, that price is pretty stable, so your bet is not a very risky one.  But it is a bet nevertheless.  The calculated future cash flow of a bakery is IN PRINCIPLE not different from any technical analysis of the future price of bitcoin.  Except for the much much lower volatility.  You are doing "technical analysis" on a horizontal line essentially with a bakery.

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February 11, 2015, 08:04:42 AM
 #465

Yes you could estimate future cash flows of you had contracts or sales data.

For example I worked for a bakery that made 20K per month.  Then I decided to model my business after theirs but in a different past of town that didn't have a good bakery.  I could estimate that within a few years my business could possibly genstate similar income

Or if I snuck behind their backs and offered the same baguette to a distributor for 20% less and stole their contract

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February 11, 2015, 08:33:46 AM
 #466

Yes you could estimate future cash flows of you had contracts or sales data.

For example I worked for a bakery that made 20K per month.  Then I decided to model my business after theirs but in a different past of town that didn't have a good bakery.  I could estimate that within a few years my business could possibly genstate similar income

Or if I snuck behind their backs and offered the same baguette to a distributor for 20% less and stole their contract

All this is *speculating* on the bread market.

As I said, it is a stable market with very low volatility, so the risk is very small.  But it is BETTING on other people's future economic behaviour nevertheless, and to me that's the core concept in "speculation": betting on other people's future economic behaviour.

Your "estimating the behaviour of bread buying people in a different part of town" is your version of technical analysis, based upon extrapolation from the past and certain hypotheses about the general model of the bread market.

It might for instance very well be that there's no good bakery in that part of town simply because everybody there eats noodles in the morning Smiley  Then your speculative action of setting up a bakery there was a wrong bet, and your analysis of the cash flow failed.

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February 12, 2015, 02:15:37 AM
 #467

Yes you could estimate future cash flows of you had contracts or sales data.

For example I worked for a bakery that made 20K per month.  Then I decided to model my business after theirs but in a different past of town that didn't have a good bakery.  I could estimate that within a few years my business could possibly genstate similar income

Or if I snuck behind their backs and offered the same baguette to a distributor for 20% less and stole their contract

All this is *speculating* on the bread market.

As I said, it is a stable market with very low volatility, so the risk is very small.  But it is BETTING on other people's future economic behaviour nevertheless, and to me that's the core concept in "speculation": betting on other people's future economic behaviour.

Your "estimating the behaviour of bread buying people in a different part of town" is your version of technical analysis, based upon extrapolation from the past and certain hypotheses about the general model of the bread market.

It might for instance very well be that there's no good bakery in that part of town simply because everybody there eats noodles in the morning Smiley  Then your speculative action of setting up a bakery there was a wrong bet, and your analysis of the cash flow failed.



I still think you are using the term too broadly.  So what is investment according to you then?  Does it exist? Or should we throw away that word?


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February 12, 2015, 05:53:30 AM
 #468

I still think you are using the term too broadly.  So what is investment according to you then?  Does it exist? Or should we throw away that word?

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

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

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

Simplistic examples:

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

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

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

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

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

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

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

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February 19, 2015, 11:13:59 PM
 #469

This is too broad a definition for a notion or an idea, and as such this definition loses its focus and utility. As an economic term, speculation is set apart from investment, and they are to be necessarily distinguished. Would you call capital investment speculation (or rather consumption)?

Speculation is for me, the bet on being able to sell an asset for something else you're interested in.
Anything which doesn't imply pleasure from its acquisition (= consumption) is probably speculation, that is, an indirect way of trying to get pleasure from acquisition later (which is the sole and ultimate goal of any economic interaction).

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

If you redefine speculation as selling anything for something else (with the aim of getting richer), you still have to distinguish whether you are dealing with new value created or just a transfer of value. Your definition fails to do that and equals them, while the conventional understanding of speculation refers only to the latter. In other words, selling something with value created (added) is not speculation.
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February 20, 2015, 04:58:09 AM
 #470

Since price determines value, and price instability destroys wealth, quantity is subservient, used only to maintain a stable price level.

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

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February 21, 2015, 04:31:24 AM
 #471

Very close.  The price of all goods and services are stabilized through manipulation of the quantity of money.

So in our thought experiment universe:

  • One hour of my best labor (which doesn't produce eggs or milk) can still demand 50 MØ
  • The price of milk skyrocketed to 2 MØ per gallon
  • The price of eggs collapsed to 0.50 MØ per dozen

We can make immediate decisions over time as individual prices change because the general price level has not.

My best labor can now buy only 25 gallons of milk per hour but now can overdose on eggs at 100 dozens.  No one in this universe will be happy about milk, but they also won't be complaining about eggs.

Over the time passed to bring this new circumstance, the relative value of the money in our pockets remains unchanged.

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

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

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

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February 21, 2015, 06:44:43 AM
 #472


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

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

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If you redefine speculation as selling anything for something else (with the aim of getting richer), you still have to distinguish whether you are dealing with new value created or just a transfer of value.

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

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

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Your definition fails to do that and equals them, while the conventional understanding of speculation refers only to the latter. In other words, selling something with value created (added) is not speculation.

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

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February 21, 2015, 07:01:29 AM
 #473

Since price determines value, and price instability destroys wealth, quantity is subservient, used only to maintain a stable price level.

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

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

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

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

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

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

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

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

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February 21, 2015, 10:38:14 AM
 #474

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Your definition fails to do that and equals them, while the conventional understanding of speculation refers only to the latter. In other words, selling something with value created (added) is not speculation.

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

You seem to be confusing price (exchange value) with economic value. Simply speaking, when you just buy something and then sell it, you don't create new value (benefit) but transfer one. You may make an endless number of new ad-hoc definitions, but they would only further confuse matters, not clarify them.
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February 22, 2015, 05:30:53 AM
 #475

If by sound you mean BTC, that is not it.  BTC's price instability is so destructive that any mom & pop store that has tried to price its products in BTC quickly found the harm that inflicts when BTC's price against the USD collapses, causing a rush by the informed to buy all of their inventory at a massive discount, ruining old mom & dad.

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

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

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

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

The price of sound money is then determined by the total economic activity and by the demand for store of value.
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February 22, 2015, 05:38:16 AM
 #476

It's those signals of production that a stable general price level, ie currency, make crystal clear.  Price inflation & deflation distort and degrade those signals.

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

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

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

Sound money has a lot of self-regulatory signals in it, and the huge advantage is that it avoids a huge financial sector which is only there to suck out the seigniorage caused by all central bank manipulation, pushing people to have "saving accounts" to get a little back of the stolen inflation, and hence giving monstrous amounts of money to banksters to play casino with.
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February 22, 2015, 05:49:05 AM
 #477

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Your definition fails to do that and equals them, while the conventional understanding of speculation refers only to the latter. In other words, selling something with value created (added) is not speculation.

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

You seem to be confusing price (exchange value) with economic value. Simply speaking, when you just buy something and then sell it, you don't create new value (benefit) but transfer one.

It seems that YOU are confusing both !

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

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

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

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

Value is individual satisfaction.

Price is the exchange rate of goods and services.

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

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

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

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February 22, 2015, 09:18:21 AM
 #478

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

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

I intentionally substituted benefit for value here, so that you wouldn't call price gains as an increase in economic value (i.e. benefit).
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February 22, 2015, 11:46:25 PM
 #479


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

More appropriately, it would be "the general price level" that's stabilized.

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

Back to the thought experiment, if I, alone in this universe, bought 2 gallons of milk for 1 MØ each & 2 dozens of eggs for 1 MØ each, later 1 gallon of milk for 2 MØ & 4 dozens of eggs for 0.5 MØ each, then the general price level has remained stable during large shifts of supply & demand of milk and eggs.

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

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

The Fisher Index has already mostly accounted for the shifting basket as in the above thought experiment.  The optimal correct inclusion of goods & services is still unknowable.

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

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

Of course, but that introduces new complexity into the thought experiment's universe; nevertheless, the quantity theory of money does account for increases in productivity.

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

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

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February 23, 2015, 08:53:44 AM
 #480


Yes, stable prices over the long run should be the norm for a product that's reached equilibrium demand with a fixed supply, but the gold/silver-years of the US were very chaotic compared to the Fed years. 



Aside from the 30s and 70s, the Fed has done a decent job despite its configuration.

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

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