Inflation and Deflation of Price and Money Supply

[Linola]

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[dinofelis]

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

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

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

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

[dinofelis]

The Fed tradeoff is higher short run price and production stability for higher long run price stability and lower production stability.

By that graphic, one could say the Fed is actually improving at not destroying the economy so frequently.

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

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

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

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

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

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

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

[tee-rex]

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

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

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

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

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

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

[dinofelis]

Somehow you forgot to paste my whole quotation where I say just that. Though this doesn't change anything, namely, that apples have different economic values to different people, since in any case it is not you who created the benefit of apples if you just resell them.

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

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

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

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

[tee-rex]

Somehow you forgot to paste my whole quotation where I say just that. Though this doesn't change anything, namely, that apples have different economic values to different people, since in any case it is not you who created the benefit of apples if you just resell them.

I do.  If you value apples more than what you want to give me in exchange, and I agree with that, the value for you has increased (because you lost something you valued less, and you gained something you valued more, namely an apple)

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

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

[dinofelis]

Somehow you forgot to paste my whole quotation where I say just that. Though this doesn't change anything, namely, that apples have different economic values to different people, since in any case it is not you who created the benefit of apples if you just resell them.

I do.  If you value apples more than what you want to give me in exchange, and I agree with that, the value for you has increased (because you lost something you valued less, and you gained something you valued more, namely an apple)

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

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

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

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

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

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

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

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

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

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

[tee-rex]

Somehow you forgot to paste my whole quotation where I say just that. Though this doesn't change anything, namely, that apples have different economic values to different people, since in any case it is not you who created the benefit of apples if you just resell them.

I do.  If you value apples more than what you want to give me in exchange, and I agree with that, the value for you has increased (because you lost something you valued less, and you gained something you valued more, namely an apple)

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

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

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

Satisfaction doesn't exist without an object, and economic value is benefit you obtain from actually having it. I suggest a simple thought experiment which shows that you can't create benefit (economic value) if you just resell something. If I bought an apple not from you but from a guy who would sell it to you (and bought it cheaper than from you), would the benefit of this apple to me be the same or different?

[dinofelis]

Satisfaction doesn't exist without an object, and economic value is benefit you obtain from actually having it. I suggest a simple thought experiment which shows that you can't create benefit (economic value) if you just resell something. If I bought an apple not from you but from a guy who would sell it to you (and bought it cheaper than from you), would the benefit of this apple to me be the same or different?

There is more value creation for you (and none for me in this case) when you can buy your apple cheaper from the guy who sold it cheaper directly to you, because you value the apple the same (I suppose) and you have to give up less for it.  So the value creation for you is bigger.
The value creation for the guy selling it is the same (if he sells it at the same price he would have sold it to me, we can assume that his increase in satisfaction is the same).

The one not gaining any satisfaction is me, while I gained satisfaction in the first story where I was the intermediate apple owner.

But the thing gets more complicated, as our appreciations of value change over time.

If I buy the apple from the guy at t0, I may value an apple differently, then when I sell it to you at time t1.
When you buy the apple at t0, you may value it differently then when you buy it from me at t1.

So the two situations are only equivalent under the hypothesis that our respective valuations of possessing an apple do not change between t0 and t1.

[tee-rex]

Satisfaction doesn't exist without an object, and economic value is benefit you obtain from actually having it. I suggest a simple thought experiment which shows that you can't create benefit (economic value) if you just resell something. If I bought an apple not from you but from a guy who would sell it to you (and bought it cheaper than from you), would the benefit of this apple to me be the same or different?

There is more value creation for you (and none for me in this case) when you can buy your apple cheaper from the guy who sold it cheaper directly to you, because you value the apple the same (I suppose) and you have to give up less for it. So the value creation for you is bigger.

This means that you actually extract economic value from apples when you resell them! Do you now get it?

Strictly speaking, you are wrong even here, since the benefit of an apple would remain the same to me even if I bought it cheaper. But I leave it to you to think over why it is so.

[dinofelis]

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

Bad businesses fail all of the time.  Good businesses fail during recession.  I find nothing appealing about a decline in overall production.

Reductio ad absurdum, if a recession is more favorable to expansion then surely we must always want recession.

No, not always.  Now and then.  It is not a bad thing to kill even relatively good businesses.  That allows for change.  A good business is maybe hindering a better business to emerge.  A recession now and then "mixes the stuff" and allows change.

That doesn't mean that we want recessions ALL THE TIME.  But a recession every 5 - 10 years is maybe not a bad thing, to mix the cards, to overthrow habits, to allow renewal, and thinking things anew.

True, but a forest cannot have small patches of fire only on the worst trees.  It's all or nothing.

Sure. But even if good trees burn, it will make place for new species and new trees.  That's what I mean.

It is dangerous to want the instability of the gold period.  The Fed was the next revolution but is now made irrelevant by The Ideal Reserve.

Pre-Fed average annual growth is lower than post-Fed average annual growth.

Growth is an artificial number.  It has no meaning.  There's no way to determine economic growth in a changing economy.  The only thing you can do is to compare to baskets (to compute the inflation, from which you can determine a number you call "growth" based upon a monetary expressed GDP)  But in a changing economy, the baskets of yesterday have maybe no meaning any more today.  
And if you take the entire economy as a basket, you cannot distinguish inflation from growth any more.

If the "price of the whole economy" was X yesterday, and 1.2 X today, then I should conclude that the inflation was 20%.  Or was it growth that was 20% ?

The only way to find out "inflation" is to define a sub basket of the economy (say, 3 loafs of bread, a car, an appartment rent and 20 carrots).  But what is the economic value of that basket this year as compared to last year ?  Prices can fluctuate.  Maybe the price of bread, cars and carrots has plumbed because people now eat spaghetti, and take the train.  

[dinofelis]

Strictly speaking, you are wrong even here, since the benefit of an apple would remain the same to me even if I bought it cheaper. But I leave it to you to think over why it is so.

The value creation is the benefit of the apple MINUS what you had to give up for it, right.  If you give up less, you have more value creation.

[dinofelis]

This means that you actually extract economic value from apples when you resell them! Do you now get it?

If I'm an intermediate and all values of the apple are static, then of course I get part of the value creation.

But you can also see this differently.

Suppose that yesterday, I really wanted to possess an apple.  I bought an apple for 6 eggs, and I valued it 10 eggs.  So I had a value creation of 4 eggs for that.

However, today I realize that I don't like having an apple any more.  I value the apple today only 2 eggs.   I now sell that apple to you for 6 eggs.  I have AGAIN a value creation today of 4 eggs by this act.

If you have valued an apple all the time 8 eggs, then you could have bought it directly yesterday for 6 eggs (market price) and gained 2 eggs of value.  When you buy the apple from me you also pay 6 eggs, and you gain 2 eggs of value.

So if you directly buy the apple, you win 2 eggs and I, nothing.  "total gain 2 eggs"

If I buy the apple, and then sell it to you, I win 4 eggs yesterday, 4 eggs today, and you win 2 eggs in value.  "total gain 10 eggs".

You can say: yes, but your change in mood made you LOOSE 8 eggs.  No.  Value is only instantaneously and subjective.  I cannot compare value to me yesterday, with value to me today.  I can only say, at each instant, what I value and what I don't value.

Appreciation changes.  Subjective value changes.

[tee-rex]

This means that you actually extract economic value from apples when you resell them! Do you now get it?

If I'm an intermediate and all values of the apple are static, then of course I get part of the value creation.

Now, if we proceed to our original question, i.e. about speculation, you can easily discern between speculation and, say, investment. As I said before, in speculation you don't create new economic value, but, as my thought experiment has shown, could actually take some part of. Investment, on the contrary, is tightly connected with creation of new economic value, e.g. you buy land and grow apples.

[dinofelis]

This means that you actually extract economic value from apples when you resell them! Do you now get it?

If I'm an intermediate and all values of the apple are static, then of course I get part of the value creation.

Now, if we proceed to our original question, i.e. about speculation, you can easily discern between speculation and, say, investment. As I said before, in speculation you don't create new economic value, but, as my thought experiment has shown, could actually take some part of. Investment, on the contrary, is tightly connected with creation of new economic value, e.g. you buy land and grow apples.

The hypothesis you need to make for that to hold, namely that value would be constant and immutable, can then also be extended to production. 

Indeed, if people value a car exactly the same as they value labor, oil and iron ore, then making a car is also not "creating economic value".  It is because some people value more a car at certain moments, than labor, oil and iron ore, that "making a car" creates value (that is, creates satisfaction).  If people wouldn't be any more satisfied by a car than by oil, labor and iron ore, making cars would do exactly what you describe as "value extraction": namely the car producer would be an intermediary between the digging up of ore and oil, and the production of labor, to the car owner, and would just "extract" value from extraction to consumption, like me with my apple.

It is because some people value a car MORE than the ore and oil in the ground, and the labor, that there is value creation when they acquire a car.  Two months later, maybe they would have preferred the oil and the iron ore and the labor, who knows.

It is by getting the iron ore, the labor and the oil *in the specific form of a car* *at the specific moment* *in the right hands of people valuing it* that there is value creation (that is: satisfaction). 

It is not the production of the car itself.  As I said, the car producer has strictly no use for his 2000th car.  It only takes room, it costs him to store it.  For him, it were better to have the ore and the oil and the labor (for instance, to clean his house or cook him a meal) rather than to transform ore and oil in a to him totally useless car.

It is the act of getting that car in the hands of someone who values that car, that creates the value (the satisfaction).

But he's betting on the fact that someone is going to value a car.

The day that we all have teletransporters style Star Trek, a car is a piece of rubbish.  Except maybe for a museum or so.

What I mean is that betting on finding someone valuing a car more than oil, ore and labor is just as well a bet on someone's economic wishes than betting on finding someone who will be valuing a bitcoin more later than now.

I do not deny that production is a particular form of speculation, where asset transformation takes place, while speculation in restricted sense doesn't do an asset transformation, but only an asset translation in time or space.  But there can be value creation in all of them.

The point being that purely speculative assets which have no other use than to be resold are the funny assets where their value is equal to their price projection of the future.  THAT gives you a zero-sum game on the short term, of course.  The only reason to value bitcoins, gold, or dollar bills, is their price projection in the future a part from some meta-aspects like being proud to have bitcoins or so which give them subjective value over the price.  But it doesn't even give you a zero sum game in the long run: if there is economic growth (whatever that precisely may mean), then you may obtain more useful assets in the future than today if the assets are collectibles, even though their price (expressed in other collectibles) didn't increase: collectibles in a growing economy can buy more satisfaction (value) because of the natural deflation.

On the other hand, inflationary assets like dollars loose value in a growing economy, if the inflation is larger than the growth (again, difficult to determine in a changing economy).  Even if dollars keep of course their value expressed in dollars and keeping dollars or dollar-expressed assets looks like a zero sum game.

So, in short: production is nothing else but a transformation of assets and labor with the bet that the new organisation of those things will be valued more to some than their original form (will a car be valued more than oil and iron ore ?).  It only creates value from the moment that it generates satisfaction with the consumer (because value is satisfaction). 
As satisfaction changes over time (in an essentially unpredictable way on the long term) just having assets changing hands by exchange is a way of continuously getting things in the hands of those appreciating those things most, which is just as well creating value (satisfaction).

If I appreciate a car today, and you appreciate a violin today, exchanging my violin for your car creates value today.
If tomorrow, I appreciate a violin more, and you appreciate a car more, exchanging AGAIN your (now) violin for my (now) car creates AGAIN value.

Because each time, we are more satisfied after the deal than before.

[dinofelis]

Under price instability, there is less growing back after the slaughter since the credit structure is in such chaos.  With price stability, liability production is much calmer while a large failure is occurring like an LTM, allowing everything to move smoothly.  

But what is that notion of price stability ?

After all, if we include in the price basket, everything that is bought with money, including "store of value", then with a constant amount of money, by definition we have price stability.  You only get price fluctuations with "sound money" if you leave out part of what is bought with it.

The price stability of a regulated money is only the stability of a certain basket, putting all the fluctuations in the complementary basket (usually speculative products, and store of value).

If you take the monetary formula,  P x Q = V x M, then all the price fluctuation comes from the fluctuation of V with sound money (M constant).

The point is that Q is only part of the economy: the other part is "store of value".  Now let V be precisely the "inverse of store of value": the higher V, the lower the demand for store of value (the lower the price of store of value).

So if you take the TOTAL economy, namely Q AND "store of value" then the price of that basket will only depend on M.

This is why sound money gives total price stability, and that the "price fluctuations" you observe are nothing else but price fluctuations between sub baskets, because they are related to changing offer and demand, which is exactly the price signal.

It is because one excludes the "store of value" aspect of the economy, that it seems that prices fluctuate.  By wanting to keep the price of a part constant, you increase the fluctuations in th "store of value aspect (also called "blowing speculative bubbles").  We have seen that with the dot-com bubble, with the housing bubble, and with the banking bubble.

THAT is the result of your "price stability".  You blow bubbles in the part that is not in your basket.

EDIT: let me illustrate that with a toy example.

Suppose that there is 100 credits in circulation and that at a certain point, the velocity is 2.
That means that in general, there has been bought for 200 credits, and that the demand for store of value is 50 credit-years (on average, the 100 credits are held half a year).

Now, suppose that the next year, the velocity is 1.  That means that there has been bought only for 100 credits (deflation!!).  If Q is constant, we have a deflation of a factor of 2 !  Help ! Price instability !!
But no.  In the mean time, it means that the demand for store of value has increased from 50 credit-years to 100 credit-years.

So although in the Q-basket, the price has lowered by a factor of two, the demand for store of value has doubled.  People have preferred to buy "store of value" instead of goods and services.  If you would have included the demand for store of value in the calculation of ALL the demand, then both balance out.  The economy is not just Q.  It is also "store of value".  That's part of people's demand, but doesn't show up anywhere (only in V).  So the basket simply shifted, from more Q and less store of value, to less Q and more store of value.  The price for Q and the amount of store of value are the signals indicating this change in aggregate demand.

If you want to keep P constant (which is the sub basket containing only the aggregate demand for goods and services, excluding the demand for store of value), then you screw up the market signals for "store of value", which is typically where a central bank fucks up.

Keynesianism is exactly based upon that notion: that we have to screw up the market for "store of value", because for Keynesians, storing value is a Bad Thing.  However, it is part of people's aspirations, of their demand, of what they value.  Keynesians start from the (correct) observation that the demand for store of value fluctuates and that this would lead, if unhampered, to price fluctuations of the aggregate demand (goods and services).  As Keynesians want people only to want goods and services, and deny them their right to want to store value (or to change their demand for store of value) they try to play with the store of value so as to counter act the people's demand fluctuations: if there is a lot of demand for store of value, which would lower V, lower prices, and increase interest rates, Keynesians devaluate money by printing some, to make the store of value in money unattractive, lower interest rates, and cause inflation.
On the other hand (although rarely done in practice) if people want to lower their stores of value, and spend the money, strict Keynesians would destroy money, make store of money more attractive, and increase interest rates.

As, however, nobody is stronger than the market, people try to find other ways to store value, which gives rise to a huge financial sector, which mainly exists to try to counter act the market distortion imposed by Keynesian denial of the fluctuating demand for store of value, and the doctrine of constant prices of goods and services.

This puts in place the machinery to blow speculative bubbles.

[dinofelis]

Resolution is lost with longer sampling periods.  If your sampling period could be almost continuous, like the Argus-Nemesis is capable of, accuracy & precision could skyrocket.

Growth to me means that production in the final period is larger than the initial period.  It's not tangible, but I could compare it to my gross income and that of my friends' to come out with a very good approximation of overall growth as can be done with a personal sample of inflation.  I for damn sure know what percentage of my friends is out of a job at the least.

I always had difficulties with the concept of economic growth.  The only growth that makes sense is the growth in satisfaction (in value), and that is not globally definable, because you cannot add value of different subjects (you cannot even compare value to different subjects at different times: value is an ordinal for an individual at a given time).


The problem with the infinitesimal approach you indicate is that economic interaction is discrete.  It consists of a finite set of trades.  Suppose a toy economy where the first year, people grow apples and carrots.  The next year, they grow grain and they produce eggs with chicken.  How do even define growth in such a case ?
Of course, maybe the first year there are SOME eggs and some grain.  But the price of those eggs and that grain, which is a small market at that moment, doesn't indicate the value of eggs and grain versus apples and carrots in totally different proportions.  It is not because when an egg is rare, it has a high price (in carrots), that the next year, when eggs are abundant and carrots are rare, that you can do anything with that.  The basket with an egg and an apple is meaningless.
And there is no "infinitesimal change".  There was one harvest with apples and carrots, and the next year, there is one harvest of grain and a continuous production of eggs.  There is no "a bit less apples, and a bit more grain"  and "still a bit less apples, and a bit more grain".  And even if there were, because of the non-static (by definition) situation, the market is out of equilibrium, so the prices are not "static and stable" exchange prices, but dynamic quantities.

In this toy economy, there's no way of saying whether changing from apples and carrots to grain and eggs was an improvement in satisfaction (= economic growth) or something imposed by external conditions which worsened the level of individual satisfaction (= economic reduction).

Other considerations are:
maybe walking in the forest gives higher satisfaction than working in a factory, gaining money and buying big macs.  In that case, less employment means more satisfaction and hence economic growth.  This will not be measurable with the basket-GDP-and-inflation trick.

[tee-rex]

This means that you actually extract economic value from apples when you resell them! Do you now get it?

If I'm an intermediate and all values of the apple are static, then of course I get part of the value creation.

Now, if we proceed to our original question, i.e. about speculation, you can easily discern between speculation and, say, investment. As I said before, in speculation you don't create new economic value, but, as my thought experiment has shown, could actually take some part of. Investment, on the contrary, is tightly connected with creation of new economic value, e.g. you buy land and grow apples.

The hypothesis you need to make for that to hold, namely that value would be constant and immutable, can then also be extended to production.

Not necessarily. It just shouldn't change too fast overall. The benefit of apples changes depending on season (availability of substitutes), but the demand is usually high enough to make growing apples profitable on the whole.

Indeed, if people value a car exactly the same as they value labor, oil and iron ore, then making a car is also not "creating economic value".  It is because some people value more a car at certain moments, than labor, oil and iron ore, that "making a car" creates value (that is, creates satisfaction).  If people wouldn't be any more satisfied by a car than by oil, labor and iron ore, making cars would do exactly what you describe as "value extraction": namely the car producer would be an intermediary between the digging up of ore and oil, and the production of labor, to the car owner, and would just "extract" value from extraction to consumption, like me with my apple.

It is because some people value a car MORE than the ore and oil in the ground, and the labor, that there is value creation when they acquire a car.  Two months later, maybe they would have preferred the oil and the iron ore and the labor, who knows.

It is by getting the iron ore, the labor and the oil *in the specific form of a car* *at the specific moment* *in the right hands of people valuing it* that there is value creation (that is: satisfaction). 

It is not the production of the car itself.  As I said, the car producer has strictly no use for his 2000th car.  It only takes room, it costs him to store it.  For him, it were better to have the ore and the oil and the labor (for instance, to clean his house or cook him a meal) rather than to transform ore and oil in a to him totally useless car.

It is the act of getting that car in the hands of someone who values that car, that creates the value (the satisfaction).

But he's betting on the fact that someone is going to value a car.

The day that we all have teletransporters style Star Trek, a car is a piece of rubbish.  Except maybe for a museum or so.

You needn't have written all this, I'm fairly well acquainted with the subjective theory of value.

What I mean is that betting on finding someone valuing a car more than oil, ore and labor is just as well a bet on someone's economic wishes than betting on finding someone who will be valuing a bitcoin more later than now.

As I said before, your definition of speculation is marginal at best. Its main drawback is that it doesn't make things more understandable or throws a new light but only washes out the notion thus further complicating things. The best you can do is think up a new term.

[dinofelis]

As I said before, your definition of speculation is marginal at best. Its main drawback is that it doesn't make things more understandable or throws a new light but only washes out the notion thus further complicating things. The best you can do is think up a new term.

You're entitled to that opinion, of course, but I find the definition of speculation as "betting on the future economic behaviour of others to value the acquisition of an asset" rather concentrated on its essential notion.  It distinguishes that part of the value estimation from the "usage" value estimation which is the core of all economic activity: creating value (that is, obtaining satisfaction).

To me, acquiring stuff based upon betting on selling a produced product to future customers, or betting on selling an asset to future buyers, has this speculative aspect in common, and is fundamentally different from buying stuff to consume (now or later) or to produce for yourself to consume (later).  Both aspects contribute in the value estimation of an asset.

The important concept, to me, is "betting on other people's economic behaviour in the future".  I find that it is the core idea in "speculation", and it contains the fundamental notion of "economic risk" (as compared to all other types of risk, such as a natural disaster, an accident, a engineering risk such as a production process not working out ...).

It is important to point out that that type of risk is also present in production (for selling).  If you produce for yourself, there is no economic risk, but you are still open to all other kinds of risks.  But you do not depend on the whims of the customer, competition and all that - which is the economic risk.

Whether you buy gold, dollars, Euros, swaps, futures, or whatever other financial product, or whether you are investing in a production of a new type of electronic device, or whether you are investing in a bakery, all these activities have one thing in common: betting on the future behaviour of buyers, with the idea to make a benefit between the cost of the acquisition today, and the sales you will make in the future.  It is that inherent taking economic risk, that betting, which I want to give a name, and I call it speculation.  Because in all these activities, all your acquisitions have a sole reason: that is selling stuff in the future.  Whether you sell the assets you bought, or whether you transform them before selling them.
Your acquisitions have no value to you apart from this betting on those future sales.
The only value comes from price differences.  Whether they are the price differences between your acquisition today, and the selling of it tomorrow (of a financial product), or whether it comes from the price of production factors today and the sales of the product tomorrow.

That's totally different when you buy chocolate or an apple to eat it, today, or tomorrow, or whether you buy tools and construction material to change something to your house to make it more comfortable to live in.  The value doesn't come from any price difference.  The value comes from your subjective value estimation, minus the price you had to pay for its acquisition.

In speculation, the only value comes from price differences.  In consumption (which is the alternative), the value comes from the difference between subjective value and the acquisition price.

Combinations can exist, such as buying a house (acquisition price), living in it (subjective value) and selling the house (sales price).

In speculation, the sales price is the important quantity.  In consumption, the subjective value is the important quantity.

[kjj]

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

The political policy that influences an economy are completely subjective.

Bitcoin represents a political/economic policy that is not subjective.  There is a fixed supply, known in advance, with no mechanism to ever create more.  Anything else will be abused.

You need to understand this.  It is very important.  Most of us do not want a money system that can be manipulated.  We do not care how well intentioned the manipulator is.  We do not care how hard the manipulator pretends that he is being objective.  We do not want the tyranny of the well intentioned any more than we want the tyranny of the evil.

A sample can represent a population.  Accuracy and precision is dependent upon the statistical method used.

Economic transactions are not fish in a lake.  You can't cast your net and collect a bunch of them at random.  You get the ones you go looking for, which is not how you collect a sample.  The only way out is to get them all, which is not possible.