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Author Topic: Very nice story about John Law  (Read 9909 times)
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July 27, 2013, 05:17:48 AM
Last edit: July 27, 2013, 01:01:14 PM by johnyj
 #1

I was researching for that Mississippi Bubble, but found out the whole thing are much more complicated than we usually heard, it is actually the failure of the central bank. So I read some lengthy story of John Law in Adam Smith's lecture collections,  starting from page 212

http://archive.org/details/lecturesonjustic00smituoft

Mr. Law, a Scotch merchant. He thought that national opulence consists in money, and that the value of gold and silver is arbitrary, and depends on constitution and agreement. He imagined that the idea of value might be brought to paper, and it preferred to money. If this could be done, he thought it would be a great convenience, as the government then might do what it pleased, raise armies, pay soldiers, and be at any expense whatever.

Mr. Law proposed his scheme to the Scotch parliament in 1701. It was rejected, and he went over to France, where his project was relished by the Duke of Orleans. In this book he agrees with the fore-mentioned writers that, the balance of trade being against a nation, it must soon be drained of its money. In order to turn the balance of trade in our favours, he proposed to the Scotch Parliament the following scheme :

As there was little gold or silver in this country he thought they might fall upon some other method of creating money, independent of it, to wit, by paper. On this account he proposed the erecting of a land bank at Edinburgh, in which it is to be observed, he falls into many blunders concerning tenures and the nature of property. At this bank they were to keep by them only twenty or thirty thousand pounds to answer small demands, and to give out notes for land. For two acres of arable land they were to issue out a note of equal value, and if any extraordinary demand was made upon them, they would pay so much of it in money, and so much in land. By this means in a very short time the whole land of Scotland would go from hand to hand, as a twenty-shilling note does.

As this project never was executed, it is hard to say what the consequence might have been ; it is, however, obviously liable to the following inconveniences. Taking the land rent of Scotland at five millions per annum, though it be much more, at twenty years purchase it amounts to an hundred millions; there would then be just so much currency in the country, and if one million was then necessary for circulation there would just be ninety-nine millions for no purpose, as none of it could go abroad ; they would not have been able to maintain one man more than formerly, as their food, clothes, and lodging would not have been increased, and every commodity would have risen to ninety-nine times its present value.

...

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Acutally I disagree with Adam Smith here, John Law's reasoning is: As long as a money is backed by something valueable, it can hold its value. So even the money supply increased by 99 times because of the newly issued money, as long as they can be used to redeem valueable land, they will hold their value, will not cause inflation, because people still have to work to get those money, these money only belongs to previous land owners

It's clear that most of the central banks in the world operated in a very similar way of Law's experiment, but the interesting thing is why Law's plan failed, and how we could use his failure to forecast the future of today's financial situation



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July 27, 2013, 05:53:11 AM
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So not to think too deeply given the time of day and week.

If the balance of trade being against a nation, and the money being a deed to the land then surely all the citizens of the country will be further impoverished by paying high rent to the foreign land owners.

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July 27, 2013, 12:25:48 PM
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Mr. Law, not meeting with the encouragement he expected, went over to France in the year 1714, and, as was before mentioned, found favour with the Duke of Orleans, then Regent, and got liberty to erect a bank there, which at first was only to the extent of six millions of livres or 32o,ooo sterling. From this beginning he carried it on to a very great height, issued out many notes, and in a short time engrossed the whole circulation of France

As Mr. Law s notes were received in payment of the revenue (tax), this contributed to the success of the scheme. This, too, had a greater effect in France than it could have had here, considering the number of taxes, and the manner in which they are levied. By this and other circumstances, his notes were always at par with gold and silver, especially as they were making continual changes in their coin. About that time twenty-eight livres, which were equal to eight ounces of pure silver, were raised to sixty, and as a diminution of coin is always the consequent of a sudden rise , this was daily expected. Mr. Law made his notes payable in what was called the money of the day. Instead of promising to pay his notes, as we would say, in pounds sterling, he did it in crowns and half-crowns (old gold coin), which was a very proper method to make them par with gold and silver. Suppose that our coin were raised to double, a half-crown would become a crown, and so in this manner the bank notes and money would rise and fall together

As Law wanted to make his notes above par, he fell upon the following scheme. He issued out his bank notes payable in livres tournois, by which, when the coin came to be diminished, he would not be obliged to pay above one-half crown worth of coins. This favoured his design, and kept the notes above par, by which the credit of his bank was established.

The next step Mr. Law fell upon was the relieving of the public debts, which amounted to 2oo millions . As he saw the diminution must needs come, he took another method to keep up his notes. He got a grant of the exclusive privilege of trading to Canada, and established the Mississippi Company. To this he joined the African, the Turkey, and the East India companies. He also farmed the tobacco and all the public revenues of France at 52 millions , for in France the whole revenue is farmed by one man, who undertakes it and levies it without excisemen, and the farmers there are the richest in the country, and must be skilled in the finances and public revenues.

Mr. Law undertook this, and, having the whole trade of the country monopolized, it was difficult to say what profits he would make. He wanted to lend the government 80 or 90 millions [sterling], which he could easily do by issuing notes to that value, but then he saw that they would soon return upon him. To prevent this, his invention was set on work, and we shall see how far he succeeded

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July 27, 2013, 12:28:44 PM
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As the company he erected seemed to be in a very flourishing condition, shares were purchased in it at a very considerable rate. He opened a subscription to it at 500 livres, so that a navy ticket or billet d etat purchased a share into it, which raised them to a par, as they had for a long time been far below it

The government of France was never in such a miserable condition as then. The interest of the money which should have paid the billets d etat was seized upon for other purposes. Never was monarch more degraded than Lewis XIV. After the treaty of Utrecht he had occasion to borrow 8 millions of livres from Holland, and not only to give them his bond for 32 millions, but to get some merchants to be security for him. Since that was the case, we need not be surprised that the billets d etat sold at great discount, as they bore no interest, and it was quite uncertain when they would be paid

Law published a declaration that one of these, which was granted for 500 livres, should purchase a share in the company, and thus they came again to par. The people still continuing in great expectations of profit, he in a few days opened a new subscription at 5000 livres, and afterwards another at 10,000. At this time he was enabled to lend the government 1600 millions of livres at 3 percent

Had he stopped here, it is probable that he would have answered all engagements, but his future proceedings ruined all. It was impossible that the value of shares could long continue at such a high rate. He thought, however, that it was necessary to do all that he could to keep them up, as the whole fortunes of many people were in the bank. He had issued out notes to double the circulation of the country, which raised the price of everything to an enormous pitch, and consequently the exchange was against France in all foreign trade. This was principally occasioned by his opening an office to purchase 500 livres shares at 9000 livres, which obliged him to issue out many notes. People of prudence who were concerned opposed this scheme, and indeed it was the first thing that made his bank lose credit, and occasioned its dissolution. As he was not obliged to pay the capital sums, only the annual dividend of 200 livres arising from the profits, he might have let them fall to their original 500 without any great loss but that of reputation; but his buying up the shares occasioned his issuing out so many notes that they must of necessity return upon him

This was so much the case that he was obliged to open offices in different parts of Paris for the payment of them. When in this manner oppressed, he was making continual changes on the coin, in order to dissuade people from returning on the bank, and disgust them at gold and silver coins. He cried up gold, but as coin cannot be kept much above the level of the metal, when it was so much depreciated, it was not taken. If a person had 20,000 Livre coins, as he was afraid that the coin would not continue at that value, he went to the bank and got it exchanged for notes. The same consideration prevented them from returning upon the bank, as they would there be paid in coin. By this means he not only prevented his notes from coming upon him, but filled his coffers with almost all the gold in the country

In order to accomplish this part of his scheme more perfectly, he most arbitrarily published an edict prohibiting any persons from keeping by them gold or silver, beyond a certain sum. He also took away the severe penalties that were in force against the exportation of coin, and every person was allowed to export money free from duty. By this means much of it went to Holland. He reasoned with himself, some instrument of change is necessary, paper, gold, and silver, at present are the medium; if gold and silver be utterly exported, paper only remains, and may be rendered the sole instrument of commerce. This he thought he had done effectually when by an edict he had swept a part into his coffers, and cleared the country of the remainder. They would therefore be obliged to take paper


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July 27, 2013, 12:30:23 PM
 #5

At last, however, after a great number of expedients, he found it was impracticable. By paying out great sums, he kept off ruin for some months, but at last published an edict that all bank notes were to be paid only in half of their original designated value: and indeed if he had stood to this, as some imagined he might have done, it would have been far better than to have suffered the after consequences. Upon this edict the credit of his bank was entirely broken, and the bank notes all on a sudden sunk to nothing. This ruined an immense number of people. Britain can never be much hurt by the breaking of a bank, because few people keep notes by them to any value. A man worth 40,000 will scarce ever have 500 of notes by him. But the breaking of this bank in France occasioned the most dreadful confusion. The greatest part of people had their whole fortunes in notes, and were reduced to a state of beggary. The only people who were safe were the stock-jobbers who had sold out in time, or with their bank notes had purchased all the valuable goods and a great deal of land, though at the highest prices. They made immense fortunes by it

The South Sea scheme incur own country was nothing to this. Nobody was under any obligations of going into it, the government had no share in it, and the loss was but a trifle in comparison. The clamour which Law's last edict made caused it soon to be rescinded, and the notes were again declared to be paid at value, but the bank never recovered its credit, and this had no effect. However, by raising the coin and other expedients, he kept it from May to October, and then was obliged to leave France, which with difficulty he accomplished ; his goods were confiscated and he died several years after

This amazing scheme was founded on these two principles, that public opulence consists in money, and that the value of money is arbitrary, founded upon the common consent of mankind. Consistent with these principles he thought he might easily increase the public opulence if he could annex the idea of money to paper, and the government could never be at any loss to produce any effect that money could do. This scheme of Mr. Law's was by no means contemptible; he really believed in it, and was the dupe of it himself. It was thought he had provided well for himself, but it was found to be otherwise. If the Duke of Orleans had lived only a few days longer it was agreed upon that he was to have been re-established. After his death it was not thought expedient to have it put in execution

This scheme of Law's was imitated all over Europe. It gave occasion to the South Sea Company in England, which turned out at last a mere fraud, and, could it have been carried to as great an extent as Law's, would have been productive of the same consequences. It was erected in the latter end of Queen Anne's reign, and the intention of it was to carry on a trade to the South Seas. For this purpose they bought up the greater part of the debts of the nation. Their stock, however, was not great, and the profits which could be expected from it were very inconsiderable ; the expectations of the people were never greatly raised, and its fall was not very prejudicial to the nation

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July 27, 2013, 12:58:17 PM
Last edit: July 27, 2013, 01:15:48 PM by johnyj
 #6

In my view, his failure largely due to two facts:

1. There were other transaction medium (Livre coins)

When his central bank issued too much paper notes, those paper notes will come back to his bank in exchange for livre coins (which made from gold and silver). To prevent this, he tried to devalue Livre coins constantly in order to discourage people to use Livre coins. He also published laws to prohibit people from holding too much gold at home. What he wanted to achieve was very clear: To make his paper note the only medium of transaction, thus increase the demand for those notes. But since the gold and silver coin still are the main stream transaction medium, he finally had a bank run


2. He tried to manipulate the stock price of Mississippi company by printing lots of money, thus made all those money flew into average household

He successfully exchanged back most of the government debt by the stock of Mississippi company - a state owned multinational enterprise, in order to attract the public's interest for this company's stock, he tried to produce lots of money to bid up the stock price of the company. He succeeded, butmany average household earned lots of money in the process, thus generated a national level of inflation and caused his paper money lose credit




If you look at how central banks are operated today, they are all doing the same as Law did 300 years ago. But they have learned from his lesson and improved at these two area:

1. They removed the gold and silver coin from circulation, thus the fiat money became the only medium of transaction, so no matter how much money they print, they won't get a bank run, in the worst case they just need to print more money

2. They tried to control the money flow more carefully so that it won't let average household receive the excessive amount of money supply. On the contrary, since there are no guaranteed way of making money (buying stocks of state owned Mississippi company), average household's income decreased over time due to centralization of production, no matter how much money they print, the inflation level for daily consumptions are kept minimal






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July 28, 2013, 06:40:37 AM
 #7

johnyj, I've been reading your post for some time now and I must say

They are the most consistently naive and misguided set of economic beliefs I have ever read, you seem to genuinely be searching for answers at times and are not too dogmatic about your beliefs which is a credit too you but your just completely backwards on everything, I suspect your foundations are weak.  I recommend you study the basics of economics more intently before trying to get into higher concepts, perhaps some kind of macro economics course at a local community college would be a good idea.

 
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July 28, 2013, 06:11:06 PM
Last edit: July 29, 2013, 06:09:33 AM by johnyj
 #8

johnyj, I've been reading your post for some time now and I must say

They are the most consistently naive and misguided set of economic beliefs I have ever read, you seem to genuinely be searching for answers at times and are not too dogmatic about your beliefs which is a credit too you but your just completely backwards on everything, I suspect your foundations are weak.  I recommend you study the basics of economics more intently before trying to get into higher concepts, perhaps some kind of macro economics course at a local community college would be a good idea.

Luckily I had a master degree in economics, but I have to say that all those I learned from school are not consistent with my real life experience/reasoning

If you are good at macro economics, please answer this question:

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

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July 29, 2013, 06:54:37 AM
Last edit: July 29, 2013, 12:42:24 PM by johnyj
 #9

I read again his recommendations made to the Scottish Parliament. He suggested to issue banknotes backed by lands, this practice is actually the same as today's money creation backed by MBS, just one more layer of complexity has been added in between

In fact, if anyone have some fixed assets, these assets can be used as collateral to issue money. It does not matter if those assets are gold, silver or land, factory. Therefore, government bonds also can be used as a collateral to issue money

Generally, once the money is issued, the collateral behind it must be freezed (value must remain fixed), because there is always a risk of demand for payment. Once these assets are devalued or lost, then the outstanding money will lose their collateral, if the user requires payment of assets, the money issuer will go bankrupt

But the interesting thing is, if the money in circulation reached widespread popularity, many businesses accept it as a means of payment, then the value of these money will be backed by all merchants that accept this payment medium

This is a very special character of money that Law found, namely: The value of money is actually a consensus, "depends on constitution and agreement", it can be completely decoupled from the value of original collateral, as long as everyone's consensus about its value don't change. This indicates that the value of money is more of a psychological phenomenon rather than an economic phenomenon




This consensus seldom changes with the money supply. For example, if manufacturer see a lot of orders coming in (increased money supply), they will increase the production in order to make more money, rather than increase the sale price to express their concern about the added money supply

Most manufacturers will only increase the price when the cost rise, not when the central bank's money supply increased. Because in the opinion of most people, money is issued by authorities such as the government and the central bank, it should be able to maintain its value

Based on such principle, it is not difficult to understand why 1% of people will have 99% of the wealth. Because money supply increased so much, but the value of money is a consensus and it did not change a lot. So 1% of people get 99% of the added money supply, and these money will naturally become their wealth. If they spend these money, it will certainly trigger serious inflation, so they prefer to hoard a large number of these money to keep the demand high (Tax havens account deposits up to $32 trillion, twice the U.S. GDP)

What will cause this consensus to change? Usually some kind of external factors, such as war or regime change, leading to a credit crisis of the government issued currency. Or, the added money supply released too much too fast and caused serious inflation. once people have expectations for inflation , they will begin to hoard physical goods, which will accelerate the pace of inflation

While science and technology advanced so much, money and banking basically had no change in 300 years

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July 29, 2013, 08:44:32 AM
Last edit: July 29, 2013, 09:21:34 AM by vokain
 #10

johnyj, I've been reading your post for some time now and I must say

They are the most consistently naive and misguided set of economic beliefs I have ever read, you seem to genuinely be searching for answers at times and are not too dogmatic about your beliefs which is a credit too you but your just completely backwards on everything, I suspect your foundations are weak.  I recommend you study the basics of economics more intently before trying to get into higher concepts, perhaps some kind of macro economics course at a local community college would be a good idea.

Luckily I had a master degree in economics, but I have to say that all those I learned from school are not consistent with my real life experience/reasoning

If you are good at macro economics, please answer this question:

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

If money was created out of this air, to be fair, the ownership should go to everyone equilaterally if liquidity was that much of a "problem". this wouldn't do much in the long run, just simple inflation that wouldn't hurt savers.

BUT... in our case, when we "print money" to address perceived liquidity problems, money is borrowed from the future, right?  The ownership is given to whoever the Fed gives the money to, the bankers (who coincidentally are also the money printers). So when the fed lends money, i imagine it is given at a rate where it is cheaper to borrow that money than it is to not borrow it, either by zero to negative interest rates, or by a flow of money injection that perpetually outpaces interest costs, if there are not enough credit-worthy debtors. Or, when the Federal Reserve buys MSBs etc, banks get liquidity instead of worthless debt because the debt is then transferred to the Federal Reserve, of which we as citizens are responsible for in the long run as constituents of the US because that is what government debt is backed by, the taxpayers.

either way, debt inflates, but typically doesn't  really get a chance to deflate until it does (ouch). they can do this because they created an external body (Federal Reserve) that bubbles the bankers from the real cost of borrowing, whereby the costs are passed on to literally everyone.

hopefully at some point, people will refuse to trade bad paper money for good hard assets

*just took an online summer intro macro class for my university econ minor, how'd i do Cheesy though I wish I did before, I didn't read this topic at all until after  writing my attempt.
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July 29, 2013, 01:23:12 PM
 #11


If money was created out of this air, to be fair, the ownership should go to everyone equilaterally if liquidity was that much of a "problem". this wouldn't do much in the long run, just simple inflation that wouldn't hurt savers.


We all know that FED is printing 2.8 billion dollar every day, obviously most of the people have not even seen a dime of it. How come it will cause inflation if most of the people did not receive them in their pocket Wink



BUT... in our case, when we "print money" to address perceived liquidity problems, money is borrowed from the future, right?  The ownership is given to whoever the Fed gives the money to, the bankers (who coincidentally are also the money printers). So when the fed lends money, i imagine it is given at a rate where it is cheaper to borrow that money than it is to not borrow it, either by zero to negative interest rates, or by a flow of money injection that perpetually outpaces interest costs, if there are not enough credit-worthy debtors. Or, when the Federal Reserve buys MSBs etc, banks get liquidity instead of worthless debt because the debt is then transferred to the Federal Reserve, of which we as citizens are responsible for in the long run as constituents of the US because that is what government debt is backed by, the taxpayers.


Let's skip the interest rate for a while, just look at the principles

When you borrow money from someone else, he should have the ownership of those money, right? If those money do not belong to him, he should not be able to lend those money to you, that will be crime

Look at what happened in reality: When government borrow money from FED, they give bonds (IOU notes) to FED in exchange for money, which means the money they borrowed belongs to FED

But FED have not done any work to earn those money like anyone else in the society, they just print them and legally get the ownership of those money

This is very different than the government issuing money backed by their bonds, in that case, they have the ownership of both bonds and issued money. Of course if FED and government are the same entity, this will not be a problem, but in reality government changes from time to time and the FED do not have direct responsibility to government

The core question here is: Should someone get the ownership of money without doing any work, or money is the same as other commodities, you have to work to create it?

Notice that under a gold standard, every piece of gold is created by work, so the money is created by work from the beginning









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July 29, 2013, 08:06:43 PM
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If money was created out of this air, to be fair, the ownership should go to everyone equilaterally if liquidity was that much of a "problem". this wouldn't do much in the long run, just simple inflation that wouldn't hurt savers.


We all know that FED is printing 2.8 billion dollar every day, obviously most of the people have not even seen a dime of it. How come it will cause inflation if most of the people did not receive them in their pocket Wink

Is it because instead, the money will flow from the central bank versus directly into our hands? My proposition was ideally, the most fair way to inflate the money base is to give every USD holder the same amount.



BUT... in our case, when we "print money" to address perceived liquidity problems, money is borrowed from the future, right?  The ownership is given to whoever the Fed gives the money to, the bankers (who coincidentally are also the money printers). So when the fed lends money, i imagine it is given at a rate where it is cheaper to borrow that money than it is to not borrow it, either by zero to negative interest rates, or by a flow of money injection that perpetually outpaces interest costs, if there are not enough credit-worthy debtors. Or, when the Federal Reserve buys MSBs etc, banks get liquidity instead of worthless debt because the debt is then transferred to the Federal Reserve, of which we as citizens are responsible for in the long run as constituents of the US because that is what government debt is backed by, the taxpayers.

Quote
Let's skip the interest rate for a while, just look at the principles

When you borrow money from someone else, he should have the ownership of those money, right? If those money do not belong to him, he should not be able to lend those money to you, that will be crime

Look at what happened in reality: When government borrow money from FED, they give bonds (IOU notes) to FED in exchange for money, which means the money they borrowed belongs to FED

But FED have not done any work to earn those money like anyone else in the society, they just print them and legally get the ownership of those money

This is very different than the government issuing money backed by their bonds, in that case, they have the ownership of both bonds and issued money. Of course if FED and government are the same entity, this will not be a problem, but in reality government changes from time to time and the FED do not have direct responsibility to government

The core question here is: Should someone get the ownership of money without doing any work, or money is the same as other commodities, you have to work to create it?

Notice that under a gold standard, every piece of gold is created by work, so the money is created by work from the beginning


I do think that money should not be created without work because in essence it'd be stealing from all the preexisting work seeing as work is something typically exchanged for money. Can you explain the mechanism by which the FED is allowed to create more money in such a way?
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July 29, 2013, 11:37:26 PM
 #13

johnyj, I've been reading your post for some time now and I must say

They are the most consistently naive and misguided set of economic beliefs I have ever read, you seem to genuinely be searching for answers at times and are not too dogmatic about your beliefs which is a credit too you but your just completely backwards on everything, I suspect your foundations are weak.  I recommend you study the basics of economics more intently before trying to get into higher concepts, perhaps some kind of macro economics course at a local community college would be a good idea.

Luckily I had a master degree in economics, but I have to say that all those I learned from school are not consistent with my real life experience/reasoning

If you are good at macro economics, please answer this question:

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

The error I was referring too was your assumption that money that is backed by land (or any physical asset) will always retain value, this is incorrect, the underlying asset might drop in value relative to other goods (though in the case of land its unlikely to reach zero) which would cause the money to drop along with the underlying asset.  But your also neglecting that money even without any backing IS a demanded and has a value, the value is from it's liquidity any this is perfectly capable of giving money value without any underlying asset.

As for the ownership of newly created money, that profit (creating physical paper notes generally has some nominal cost which must be subtracted from the face value of the money to yield a profit) is called seigniorage.  I medieval Europe princes and kings aka 'sovereigns' would perform this function and yes they would simply spend this money as they saw fit, seemingly allowing unlimited inflation.  But these sovereigns already had taxing authority so seigniorage and indeed money in general was seen as nothing more then a line of credit between him and the public and it's stable valuation and circulation amongst the public was a benefit he provided and the sovereign was expected to manage the quantity properly.  When more was needed he could simply make it and spend it, but if money was in excess he would buy up the money (by selling goods) and simply destroy it to contract the supply.  The reciprocity is what makes it fair and makes it work, the upside of profit was balanced by a downside of future loss when contraction was necessary (and in an agrarian society the yearly harvest and volatile seasonal trade volumes required money to grow and shrink every single year).

 
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July 30, 2013, 12:04:24 AM
 #14


If money was created out of this air, to be fair, the ownership should go to everyone equilaterally if liquidity was that much of a "problem". this wouldn't do much in the long run, just simple inflation that wouldn't hurt savers.


We all know that FED is printing 2.8 billion dollar every day, obviously most of the people have not even seen a dime of it. How come it will cause inflation if most of the people did not receive them in their pocket Wink

Is it because instead, the money will flow from the central bank versus directly into our hands? My proposition was ideally, the most fair way to inflate the money base is to give every USD holder the same amount.

I once read a proposal that said the FED should get in the credit card business and just give everyone a 0% interest card, this would instantaneously inject thouse billions into the pockets of real people and cause inflation.  In essence this is how the euphemistic "helicopter drop" might actually be done by a central bank in a real world setting (when the IRS sends tax refunds it has a similar effect but it is the Treasury not the central bank that pays for it).

In any case the fair distribution of new money is a key question, if we need new money to create inflation and thus cause money to circulate then we must punish savers.  To distribute new money proportional to existing balances would do nothing to existing savers, just look at PPC, savers have no incentive to make that coin circulate, qite the opposite actually.

Simply giving everyone an equal sized check every time the money supply was increased it would indeed punish savers and encourage circulation but if or when the relative savings diminish and the society becomes more equal in wealth distribution the circulation compulsion would weaken.  This is why I and the others in Freicoin believe that demurrage is a superior mechanism to inflation, when all balances decline nominally over time the compulsion to circulate is maintained regardless of the wealth distribution and the underlying relative wealth distribution is unchanged.  New money created is given to charity, though it will never actually be very significant, roughly 1-2% of GDP because of high monetary velocity.

 
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July 30, 2013, 12:08:41 AM
 #15

I'm for 21m bitcoins
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July 30, 2013, 12:52:45 AM
 #16

...the value is from it's liquidity any this is perfectly capable of giving money value without any underlying asset.

Today thinking of money being a fixed unit of measure for value is akin to thinking of electricity as magic.

The sticky value of money in the marketplace is a measure of ignorance to how money works nothing else; my 5 year old has a concept of Money, and over 99% of the population thinks of it the same way.  

It is dishonest to manipulate the unit of measure based on that ignorance.  

Inflation and Deflation in the economy should be nothing more than market feedback to supply and demand, being able to spot the trend is the job of economists. Manipulating the Money supply to manage the trend is criminal. Holding the belief the money supply should grow and contract is akin to believing that reducing the supply or increasing supply of electricity to manage productivity is of benefit to all.

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July 30, 2013, 02:08:49 AM
 #17

The error I was referring to was your assumption that money that is backed by land (or any physical asset) will always retain value, this is incorrect, the underlying asset might drop in value relative to other goods (though in the case of land its unlikely to reach zero) which would cause the money to drop along with the underlying asset.  But your also neglecting that money even without any backing IS a demanded and has a value, the value is from it's liquidity any this is perfectly capable of giving money value without any underlying asset.

As for the ownership of newly created money, that profit (creating physical paper notes generally has some nominal cost which must be subtracted from the face value of the money to yield a profit) is called seigniorage.  I medieval Europe princes and kings aka 'sovereigns' would perform this function and yes they would simply spend this money as they saw fit, seemingly allowing unlimited inflation.  But these sovereigns already had taxing authority so seigniorage and indeed money in general was seen as nothing more then a line of credit between him and the public and it's stable valuation and circulation amongst the public was a benefit he provided and the sovereign was expected to manage the quantity properly.  When more was needed he could simply make it and spend it, but if money was in excess he would buy up the money (by selling goods) and simply destroy it to contract the supply.  The reciprocity is what makes it fair and makes it work, the upside of profit was balanced by a downside of future loss when contraction was necessary (and in an agrarian society the yearly harvest and volatile seasonal trade volumes required money to grow and shrink every single year).

I don't know what you are against, first you say money will lose its value with the underlying asset, and then you say money will keep its value without any underlying asset

You mentioned the seigniorage, so you think FED is like the old princes and kings, and your finance should better be managed by FED since they are expected to manage the quantity properly? Did you learned this by facts (financial crisis and huge gap in personal wealth) or by books?  Wink

Maybe you didn't pay enough attention to the real meaning of the answer to my question: If FED is the rightful owner of every newly created dollar, since all the money is created by FED, they essentially own everything in this financial system. This is not seigniorage, but 100% taxation, all your work belongs to FED (They claim all your work through money printing). But before, under a gold standard, they could only own the gold they have, and they have to pay equal value of goods/service to get those gold, so the banks are more or less the same as any other business. From when they changed from gold smith to king?

John Law's father were also gold smith and banker, and he tried this theory (money's value is decided by transaction demand) with the regent of France, but people seems were much wiser than today, they quickly recognized his scheme and exchaged his paper money for gold/siver coin, thus ruined his grand plan





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July 30, 2013, 02:44:26 AM
 #18

Today thinking of money being a fixed unit of measure for value is akin to thinking of electricity as magic.

The sticky value of money in the marketplace is a measure of ignorance to how money works nothing else; my 5 year old has a concept of Money, and over 99% of the population thinks of it the same way.

It is dishonest to manipulate the unit of measure based on that ignorance.  

Inflation and Deflation in the economy should be nothing more than market feedback to supply and demand, being able to spot the trend is the job of economists. Manipulating the Money supply to manage the trend is criminal. Holding the belief the money supply should grow and contract is akin to believing that reducing the supply or increasing supply of electricity to manage productivity is of benefit to all.


Very well said! It is an illusion that money always have a fixed and stable value, but people like this, because it will make their daily counting easier, so all the FED is doing is trying to strengthen this illusion (FED's mandate of maintain price stability)

Anyway, the biggest problem now is not related to money supply, but the ownership. Under a gold standard, the reason that money supply can not increase very fast is not because lacking of gold, it is because banks have to work honestly to buy gold, and they just can't earn that much gold by normal business operation (Actually they could let gold freely flow into market to solve the liquidity problem, but they don't want to give up their monopoly position in money issuing)

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July 30, 2013, 04:39:42 AM
 #19

I don't know what you are against, first you say money will lose its value with the underlying asset, and then you say money will keep its value without any underlying asset

You mentioned the seigniorage, so you think FED is like the old princes and kings, and your finance should better be managed by FED since they are expected to manage the quantity properly? Did you learned this by facts (financial crisis and huge gap in personal wealth) or by books?  Wink

Maybe you didn't pay enough attention to the real meaning of the answer to my question: If FED is the rightful owner of every newly created dollar, since all the money is created by FED, they essentially own everything in this financial system. This is not seigniorage, but 100% taxation, all your work belongs to FED (They claim all your work through money printing). But before, under a gold standard, they could only own the gold they have, and they have to pay equal value of goods/service to get those gold, so the banks are more or less the same as any other business. From when they changed from gold smith to king?

John Law's father were also gold smith and banker, and he tried this theory (money's value is decided by transaction demand) with the regent of France, but people seems were much wiser than today, they quickly recognized his scheme and exchaged his paper money for gold/siver coin, thus ruined his grand plan

This kind of response is why I generally do not post on threads like this, the amount of bogus monetary propaganda in your head that I would need to break down to even begin to have my words understood without flippant responses or hyperbole is just beyond my attention span, nor do you show any kind of intellectual humility necessary to learn as demonstrated by your trotting out of a "masters degree in economics" a claim I find unbelievable and or a tragic inditement of our educational system.  I reiterate my recommendation that you do basic research rather then consume Austrian propaganda.

 
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July 30, 2013, 08:45:36 AM
 #20


This kind of response is why I generally do not post on threads like this, the amount of bogus monetary propaganda in your head that I would need to break down to even begin to have my words understood without flippant responses or hyperbole is just beyond my attention span, nor do you show any kind of intellectual humility necessary to learn as demonstrated by your trotting out of a "masters degree in economics" a claim I find unbelievable and or a tragic inditement of our educational system.  I reiterate my recommendation that you do basic research rather then consume Austrian propaganda.

Yes, you should blame the educational system, why none of the economy books tell you who get the ownership of those newly created money? They just keep repeating trivial technical details about everthing happened afterwards, if you find any economic book that tell you the answer of this basic question, please give me a reference. (You can not even find the answer on google, isn't it amazing?)

I just try to find the answer through my own observation and research. I'm not saying I'm 100% correct, but just like a bit in computer, things usually are extremely simple if you look from the right angle. Please give some facts and reasoning for a constructive discussion

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July 30, 2013, 08:48:15 AM
 #21

This kind of response is why I generally do not post on threads like this, the amount of bogus monetary propaganda in your head that I would need to break down to even begin.....

I'm very glad you guys do though and that we have at least some of this  discourse
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July 30, 2013, 01:13:29 PM
 #22


Today thinking of money being a fixed unit of measure for value is akin to thinking of electricity as magic.

The sticky value of money in the marketplace is a measure of ignorance to how money works nothing else; my 5 year old has a concept of Money, and over 99% of the population thinks of it the same way.  


I want to analyze a little bit deeper following this good observation

Mathematically, added money supply will correspond to added price level, (GDP increase by 2% per year but money supply increase by 100% per year, in principle there should be a 50x increase in price of everything),  but in reality it does not work like this, because people are all adaptive and short sighted

Even they know that FED has printed 4x more money, they still tends to believe that the value of money is a constant. As a result, when they see more money, they will work more and produce more products, instead of raising the price of their product. More products will increase the demand for transaction thus reduce the inflation pressure, so that added money supply indeed can generate some stimulative effect and create more wealth without causing heavy inflation, this is especially true in a recession

But there are 3 flaws in this approach

1. Efficiency problem
The effect of the money printing is dependant on who get those money and how do they spend it, if they just hoard all the newly added money, there will be no stimulus effect. Currently banks successfully unloaded their cheap MBS in exchange for money from FED, but their spending is heavily cut and they don't loan out much, so only banks' balance sheet were improved, not average people. For each 10 dollar banks receive, there might be only 1 dollar actually reached out to average people. If banks are cunning, they will limit the number of money flow into the market to artificially extend recession in order to receive more money from FED

2. Adaptive problem
As people adapt to the newly added fictive demand from money printing, their business will expand and reach a new balance. Once the stimulus is removed, they will fall back into an even deeper trouble. Because the original problem is caused by over invest, and now the problem become even worse. Once started, people become addicted to stimulus

3. Ownership problem
FED rightfully claimed the ownership of newly created money, bought countless assets and bonds, now federal reserve banks becomes the biggest owner of the country, but people do not own federal reserve banks, they belong to a small group of private person, that unfairness created a huge gap in personal wealth (If everyone can own FED through buying their shares, I'm sure the same thing as John Law's Mississippi company will happen again, because every dollar FED printed would become their profit, they would made a fortune in the process)

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July 30, 2013, 04:59:35 PM
 #23

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

This question is impossible to answer in any meaningful way.

Money, as it is really used in daily life, is hard to define.  If you walk in to a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it.  Which of those is money?  Was anything really created?  What was it, and when?

If you withdraw that $1000, that could be the moment that new money is created, because that is when the books no longer balance, and that $1000 is now in circulation.  On the other hand, the bank just physically moved ten $100 bills from their cash drawer into your hand.  Does this suggest that the actual money that was created is the debt?  Still, hard to say.

If your bank was previously at their reserve limit, they now need to borrow more reserves.  The fed can snap their fingers and add $100 to your bank's account (and a corresponding negative $100 loan).  Is that money?  Which one?  Is that the moment of creation?

How about when your bank orders physical banknotes to replenish their stock?  How about when the paper is actually printed?

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

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July 30, 2013, 05:37:17 PM
Last edit: July 31, 2013, 12:48:44 AM by Adrian-x
 #24

This kind of response is why I generally do not post on threads like this, the amount of bogus monetary propaganda in your head that I would need to break down to even begin to have my words understood without flippant responses or hyperbole is just beyond my attention span, nor do you show any kind of intellectual humility necessary to learn as demonstrated by your trotting out of a "masters degree in economics" a claim I find unbelievable and or a tragic inditement of our educational system.  I reiterate my recommendation that you do basic research rather then consume Austrian propaganda.

Impaler I can't tell if you are trolling or serious?

While I have read many of your debates with a few die hard Austrians, you have not yet provided a coherent argument to back up your position.

Are there any threads on this forum you can point me to where you feel you have presented your argument in clear and understandable way?

While I don't seem to see eye to eye with some die hard libertarians in this collective, I like to think of myself as open, and to be honest,  I have to say the loosely defined "Austrian" economic argument, is by far the most logically convincing and a far cry from propaganda.

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July 30, 2013, 11:28:22 PM
 #25

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

This question is impossible to answer in any meaningful way.

Money, as it is really used in daily life, is hard to define.  If you walk in to a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it.  Which of those is money?  Was anything really created?  What was it, and when?

If you withdraw that $1000, that could be the moment that new money is created, because that is when the books no longer balance, and that $1000 is now in circulation.  On the other hand, the bank just physically moved ten $100 bills from their cash drawer into your hand.  Does this suggest that the actual money that was created is the debt?  Still, hard to say.

If your bank was previously at their reserve limit, they now need to borrow more reserves.  The fed can snap their fingers and add $100 to your bank's account (and a corresponding negative $100 loan).  Is that money?  Which one?  Is that the moment of creation?

How about when your bank orders physical banknotes to replenish their stock?  How about when the paper is actually printed?


300 years ago, if you go to a goldsmith and borrow 1000 gold coin, he can't just write you some numbers and record your debt in his book, he must physically deliver the gold coins to your hand, it means he must OWN those coins at the first place

Although banking has evolved a lot, same principle still holds when you borrow from a commercial bank today. Commercial banks can not lend you some money they don't OWN. They can not just create some numbers and credit it to your account, that will be crime (counterfeiting), be it paper notes or digital numbers, since only central bank has the right to create money. Commercial banks only have the right to move money. If a commercial bank can lend you $1000, it means they must OWN that $1000, and after they lend it to you, they lose the ownership of these money, and you take over the ownership

If they could lend you some money that they do not OWN, then any people on the street could open a bank and start to loan out digital money that they don't have

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property

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July 30, 2013, 11:59:28 PM
 #26

300 years ago, if you go to a goldsmith and borrow 1000 gold coin, he can't just write you some numbers and record your debt in his book, he must physically deliver the gold coins to your hand, it means he must OWN those coins at the first place

Although banking has evolved a lot, same principle still holds when you borrow from a commercial bank today. Commercial banks can not lend you some money they don't OWN. They can not just create some numbers and credit it to your account, that will be crime (counterfeiting), be it paper notes or digital numbers, since only central bank has the right to create money. Commercial banks only have the right to move money. If a commercial bank can lend you $1000, it means they must OWN that $1000, and after they lend it to you, they lose the ownership of these money, and you take over the ownership

If they could lend you some money that they do not OWN, then any people on the street could open a bank and start to loan out digital money that they don't have

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property

Just out of curiosity, what makes you think this?

If the act of loaning happens at the point when you walk out the door with a wad of cash, then I would say that the bank does indeed need to own that much paper to make the loan.  But in reality, loans don't work that way.  Most loans never ever see physical paper.  They credit your account, you write a check, you deposit a check, you pay back the loan.  All done with numbers, no paper money at all.  Banks make loans first, and then seek reserves to cover afterwards. 

It sounds like you want to define money strictly as paper and coin.  You may choose to do so, but that is just masturbation, you might learn about the system that you made up, but you won't learn about reality.

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

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July 31, 2013, 12:40:06 AM
 #27

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property
 
Money is not property as such it is an IOU for property, to be produced in the future, you are confusing Hard Money for Fiat.
By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.
Welcome to the evil that is banking.
The riddle wasn't solved with the gold smith so it was allowed to persist. RFB is the method of creating new money, and instead of deflating when called apon, the FED is the lender of last resort they "hold the Gold Fiat"

There is a problem with the FED system in that it needs to hold hard money to maintain a balance of payments ... or does it? well not after 1971, If, as has been illustrated before you can get the public to use an IOU as money, then you can manage the whole thing without having to produce any wealth, and yes you are correct fiat doesn't come to you as property, it comes to you as trust that everything will be backed by the government and managed by the CB.  

While it is in God we trust, that trust is actually in people who earn huge bonuses and think of themselves as gods, but they're just people with the legal power to abuse.

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July 31, 2013, 01:02:24 AM
 #28



Just out of curiosity, what makes you think this?

If the act of loaning happens at the point when you walk out the door with a wad of cash, then I would say that the bank does indeed need to own that much paper to make the loan.  But in reality, loans don't work that way.  Most loans never ever see physical paper.  They credit your account, you write a check, you deposit a check, you pay back the loan.  All done with numbers, no paper money at all.  Banks make loans first, and then seek reserves to cover afterwards.  


Ownership is always the most important character for any property. It does not matter the money is in digital form or paper form, their ownership won't change with their form, this is simple accounting

I save some bank notes to my bank and there is some numbers added to my account, it changed from paper form into digital form, but the ownership of those money don't change, they are still mine. From banks point of view, they just did an exchange service for me, their paper money reserve increased but digital money reserve decreased by the same amount

Commercial banks can not loan out the money they don't have, it does not matter it is digital money or paper money


By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

True, FRB added some complexity into the picture, but the basic principle still holds

Gold smith must physically deliver 1000 gold coin to the borrower, so he must have the ownership of those coin at the first place. If he don't have those coin, he can steal some other customer's saving, as long as other customer did not withdraw

This is FRB, but the maximum number of coin he can steal at any time will not exceed all the coins he have at hand, the same 1000 gold coin might be again and again saved into gold smith's bank, and he recorded many savings from different customer, but that is just a checkbook count, the gold coin number is always 1000 at any time, if one customer take out 1000 coin and disappear, then rest of the customer will lose all their savings

FRB has nothing to do with money creation, it is just a trick of stealing from customer, it does not creat more gold coins, gold coins only increase because of mining. Same, modern fiat money only increase because of central bank's operation

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July 31, 2013, 01:15:43 AM
 #29

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property
 
Money is not property as such it is an IOU for property, to be produced in the future, you are confusing Hard Money for Fiat.

Maybe property is not the right term, but what I mean is that money is something of value, as long as it has value, the ownership will become an important character

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July 31, 2013, 05:41:59 AM
 #30

Impaler I can't tell if you are trolling or serious?

While I have read many of your debates with a few die hard Austrians, you have not yet provided a coherent argument to back up your position.

Are there any threads on this forum you can point me to where you feel you have presented your argument in clear and understandable way?

While I don't seem to see eye to eye with some die hard libertarians in this collective, I like to think of myself as open, and to be honest,  I have to say the loosely defined "Austrian" economic argument, is by far the most logically convincing and a far cry from propaganda.

No I am not trolling, I have seen how johnyj posts and it's just not worth trying to debate him, I have had debates with people who were far more capable of providing a lively debate (that guy with the kitten holding a rifle comes to mind, though I forget his name).

Finding an economic theory 'Logical' is about the lowest possible bar, people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate.  And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

 
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July 31, 2013, 11:43:38 AM
 #31

I save some bank notes to my bank and there is some numbers added to my account, it changed from paper form into digital form, but the ownership of those money don't change, they are still mine. From banks point of view, they just did an exchange service for me, their paper money reserve increased but digital money reserve decreased by the same amount

Commercial banks can not loan out the money they don't have, it does not matter it is digital money or paper money

I'm sorry, but you are just plain wrong about this.  There is no such thing as "digital money reserve".

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.
FRB has nothing to do with money creation, it is just a trick of stealing from customer, it does not creat more gold coins, gold coins only increase because of mining. Same, modern fiat money only increase because of central bank's operation

Money is not gold coins.  Modern fiat money is not a token representing something.  It really does get created out of thin air by your local bank down the street.

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July 31, 2013, 11:57:46 AM
 #32

Impaler I can't tell if you are trolling or serious?

While I have read many of your debates with a few die hard Austrians, you have not yet provided a coherent argument to back up your position.

Are there any threads on this forum you can point me to where you feel you have presented your argument in clear and understandable way?

While I don't seem to see eye to eye with some die hard libertarians in this collective, I like to think of myself as open, and to be honest,  I have to say the loosely defined "Austrian" economic argument, is by far the most logically convincing and a far cry from propaganda.

No I am not trolling, I have seen how johnyj posts and it's just not worth trying to debate him, I have had debates with people who were far more capable of providing a lively debate (that guy with the kitten holding a rifle comes to mind, though I forget his name).

Finding an economic theory 'Logical' is about the lowest possible bar, people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate.  And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

Indeed, if anything reached a complex level as today's banking system, the debate of the underlying fundamentals becomes more difficult, each party will have enough theories, books and professors to support their opinion. That's the reason economics in recent centuries are closely related to politics

In order to avoid pointless politics debate, I prefer to study the early days of economics and a money system under a gold standard, things were much easier to understand that way. Even better, on an island with only a few people, I think 4 people is enough to represent any macro economy concept (Money creator, merchant, producer and consumer)

Just like a computer, if you look at it from an operative system point of view, you get endless confusion and many politics debate, but if you look at it from early days of computer, it's just a wire, a bubble, a switch and a relay. Although there are many layers of complexity up to OS level, each step is simple and clear, no debate required



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July 31, 2013, 12:50:30 PM
 #33

I save some bank notes to my bank and there is some numbers added to my account, it changed from paper form into digital form, but the ownership of those money don't change, they are still mine. From banks point of view, they just did an exchange service for me, their paper money reserve increased but digital money reserve decreased by the same amount

Commercial banks can not loan out the money they don't have, it does not matter it is digital money or paper money

I'm sorry, but you are just plain wrong about this.  There is no such thing as "digital money reserve".

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.
FRB has nothing to do with money creation, it is just a trick of stealing from customer, it does not creat more gold coins, gold coins only increase because of mining. Same, modern fiat money only increase because of central bank's operation

Money is not gold coins.  Modern fiat money is not a token representing something.  It really does get created out of thin air by your local bank down the street.

If so, anyone will raise 20 million dollar open a bank and immediately loan out 1 billion dollar to himself, spend them and declare bankrupt. You will see thousands of bank opening applications everyday Grin

Here is a deep analyze of this topic
http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

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July 31, 2013, 01:03:58 PM
 #34

No I am not trolling,

The classic stealth-trolling comeback!

people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate. 

All of recorded economic history was one long crash and burn? Not sure, but...

And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

They do, seems that you don't get exposed to the output of these types, or that they do not meet your definition of "conservative"?


Similar sentiments as yours to jonnyj, I see you talking alot, but the substance is very thin.

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July 31, 2013, 01:15:23 PM
 #35

If so, anyone will raise 20 million dollar open a bank and immediately loan out 1 billion dollar to himself, spend them and declare bankrupt. You will see thousands of bank opening applications everyday Grin

Nice strawman.  Good job ignoring banking regulations, fraud statutes, capitalization, etc.  A+


/sigh

You must've missed these before:

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

If you choose to define virtually everything used as money by real people as being not-money, then you are absolutely right.  The central bank does indeed hold the monopoly on creating the stuff that you call money: deposits in the federal reserve system, the stuff that does not circulate, the stuff that no one uses as money.

You may choose to do so, but that is just masturbation, you might learn about the system that you made up, but you won't learn about reality.

At first, I thought that you were interested in figuring out how the system that actually exists in the world today works.  Now it is clear that you just want an audience for your academic masturbation.  I'll leave you to it.

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July 31, 2013, 02:26:04 PM
 #36

If so, anyone will raise 20 million dollar open a bank and immediately loan out 1 billion dollar to himself, spend them and declare bankrupt. You will see thousands of bank opening applications everyday Grin
In order to spend them, they need to be accepted by the market as close substitutes to extant money. Most likely the transfers will not be accepted at all, because the clearing bank won't let them through, and they will be unspendable. This is in addition to the regulation issues mentioned by kjj.

The article is nonsense. That granting credit must have a corresponding debit entry in accounting in no way addresses the changes in the money supply. The debit record of a bank loan does not affect the money supply, but the credit entry does. It's kind of like saying that refrigerators or airconditioning can't really cool down anything because they just transport heat. It also confuses the velocity of circulation and the money supply, which are two different variables. Since the 2007- crisis, the money supply (in the US) has grown immensely, but the velocity has decreased, for example.
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July 31, 2013, 08:32:35 PM
 #37

Nice strawman.  Good job ignoring banking regulations, fraud statutes, capitalization, etc.  A+

Let's follow your reasoning that bank can just create a digital loan and give it to you without having any money: "If you walk into a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it."

You might get this impression with your side of double entry book keeping. For this single transaction the debit side on your current account will be increased by $1000, while the debit side on your loan account will have a -1000

But this is only what you see as a customer, what happened behind the scene is, the debit side of bank's liability account decreases by $1000 and the credit side on banks liability account increases by same amount. At the same time, the debit side on bank's current account should decrease by $1000 and the credit side of bank's current account should increase by $1000

In one word, your loan becomes bank's asset and your money becomes their liability, the loan is facilitated with current account. When their current account reaches zero, they won't be able to issue any more loans, that will be a liquidity problem

Actually loan is a bad example here since it involves several operations, a single debit action to your current account is better to understand how backoffice works in banks


In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

I don't follow you, why all of those things are money? In my opinion, there is only one kind of money: Those created by central bank. This is simple enough. If you regard all these different concept as money, then you won't be able to spot what is really happening, since what you see is just an illusion

The central bank does indeed hold the monopoly on creating the stuff that you call money: deposits in the federal reserve system, the stuff that does not circulate, the stuff that no one uses as money.

Deposits in the FED is only a small part of the created money. For every 10 dollar that banks get from FED, they only need to keep 1 dollar at FED as reserve, they are free to loan out the rest 9 dollar

At first, I thought that you were interested in figuring out how the system that actually exists in the world today works.  Now it is clear that you just want an audience for your academic masturbation.  I'll leave you to it.

I can simply throw this statement back to you or anybody with a different opinion, so it is universally working thus useless in proving anything  Wink

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July 31, 2013, 08:49:56 PM
 #38

The article is nonsense. That granting credit must have a corresponding debit entry in accounting in no way addresses the changes in the money supply. The debit record of a bank loan does not affect the money supply, but the credit entry does. It's kind of like saying that refrigerators or airconditioning can't really cool down anything because they just transport heat. It also confuses the velocity of circulation and the money supply, which are two different variables. Since the 2007- crisis, the money supply (in the US) has grown immensely, but the velocity has decreased, for example.

Have you read the article carefully? The author clearly distinguished the velocity of circulation and the money supply, saying that commercial banks can only affect velocity of circulation but not money supply. Since 2008, FED increased money supply a lot while commercial banks did not loan out enough money, causing velocity of circulation decreased, therefore no inflation, totally logical


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July 31, 2013, 08:56:14 PM
 #39

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

I don't follow you, why all of those things are money? In my opinion, there is only one kind of money: Those created by central bank. This is simple enough. If you regard all these different concept as money, then you won't be able to spot what is really happening, since what you see is just an illusion

If you desire to study the stuff that does not circulate and that no one uses as money, I've already given my blessing.

I would strongly disagree though on which of us is interested in what really happens.  We all live in the illusion.  The illusion is how the world really works.  By restricting your view to only the part that doesn't matter*, you miss out on the show.

The central bank does indeed hold the monopoly on creating the stuff that you call money: deposits in the federal reserve system, the stuff that does not circulate, the stuff that no one uses as money.

Deposits in the FED is only a small part of the created money. For every 10 dollar that banks get from FED, they only need to keep 1 dollar at FED as reserve, they are free to loan out the rest 9 dollar

Sigh.  No, you have this backwards and inside-out.  The bank lends 10 dollars out of thin air, and then borrows one FED-dollar from the federal reserve.  That FED-dollar sits in an account at the federal reserve.

You keep mixing up cause and effect because you refuse to learn how the system actually works.  The "reserve" in "federal reserve" is a metaphor.  It isn't actually a stockpile of something that people dip into.  It is an accounting fiction that tracks what has already happened.

*  The exact degree to which central bank money is unimportant in reality can be seen here

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July 31, 2013, 11:23:03 PM
 #40

Similar sentiments as yours to jonnyj, I see you talking alot, but the substance is very thin.

That's cause I'm not putting out my substance on this thread.  I'm leaving it to kjj to beat his head against this one.  And the bleeding forehead his is developing, and the lack of cracks in the brick-wall that is johnyj prove to me at least that I picked the right debate to avoid.

 
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July 31, 2013, 11:31:30 PM
 #41


Sigh.  No, you have this backwards and inside-out.  The bank lends 10 dollars out of thin air, and then borrows one FED-dollar from the federal reserve.  That FED-dollar sits in an account at the federal reserve.

You keep mixing up cause and effect because you refuse to learn how the system actually works.  The "reserve" in "federal reserve" is a metaphor.  It isn't actually a stockpile of something that people dip into.  It is an accounting fiction that tracks what has already happened.

*  The exact degree to which central bank money is unimportant in reality can be seen here

Do you also disagree with the M1 definition at WiKi?
https://en.wikipedia.org/wiki/Money_supply

M1 is not real money supply. Just as the wiki page's example of M1 showed, when there physically are only $1000 in M0, M1 could be  $9000, it is just the same $1000 counted multiple times, banks have to lend this $1000 out again and again (And it will take a long time to do this) to reach a M1 of $9000 (in reality it typically reaches $4000 to $5000)

The reason M1 is used is because from bank's point of view, M1 is easy to use, it is just a summarize of all their customer's saving account. But if 10% of those savings were withdrawed and never deposited back, all the rest of the saving account would have nothing to withdraw, so M1 is just a derivative of the M0, every change in M0 will be amplified 9 times in M1

If commercial banks indeed can create money out of nothing, why there were so many bank failures? They could just create some new money and lend to each other to cover their loss and they don't even need FDIC to protect their customer's saving account
http://www.fdic.gov/bank/individual/failed/banklist.html




lonelyminer (Peter Šurda)
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August 01, 2013, 05:10:05 AM
 #42

Have you read the article carefully? The author clearly distinguished the velocity of circulation and the money supply, saying that commercial banks can only affect velocity of circulation but not money supply. Since 2008, FED increased money supply a lot while commercial banks did not loan out enough money, causing velocity of circulation decreased, therefore no inflation, totally logical
Totally illogical. First of all, the velocity is not caused by banks, but by the preferences of the people who hold the money. Indeed, the alleged reason for QE was to prevent the velocity from dropping.

The article arbitrarily declares that commercial bank loans are not money. But what is and isn't a part of the money supply is an empirical issue. It follows from the behaviour of the holders of the balances. You cannot just get around it by redefining it by looking at whether there is a corresponding debit transaction to the credit one. I repeat, the debit transaction does not affect the money supply, so from the point of view of money supply, the difference between debit and credit account balances of banks is irrelevant. It's like saying that you cannot really create any product, such as a computer, because it must be offset by a corresponding consumption of input factors, and thus the end result is zero. It's a trick, redefining the money supply as a difference between debit and credit balances. But that's not what the money supply is.

The article does not prove anything, it just creates its own definitions to match the predetermined conclusion.
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August 01, 2013, 05:24:46 AM
 #43

M1 is not real money supply. Just as the wiki page's example of M1 showed, when there physically are only $1000 in M0, M1 could be  $9000, it is just the same $1000 counted multiple times, banks have to lend this $1000 out again and again (And it will take a long time to do this) to reach a M1 of $9000 (in reality it typically reaches $4000 to $5000)
Now you're contradicting yourself, because you previously said that commercial banks cannot create money, and now you claim they do.

The reason M1 is used is because from bank's point of view, M1 is easy to use, it is just a summarize of all their customer's saving account. But if 10% of those savings were withdrawed and never deposited back, all the rest of the saving account would have nothing to withdraw, so M1 is just a derivative of the M0, every change in M0 will be amplified 9 times in M1
It's not the banks' opinion, but the end-user opinion what determines the composition of money supply. Demand deposits are a part of the money supply (M1) because end-users use them as a medium of exchange and view it as a near perfect substitute to cash (M0). During a bank run, for example, people stop viewing demand deposits as a close substitute to cash, and this can cause bankruptcies.

If commercial banks indeed can create money out of nothing, why there were so many bank failures?
Because even though from the point of view of end users, demand deposits are a near perfect substitute to cash, from the point of view of bank's accounting, they aren't. The ability of a bank to create new loans does not automatically allow the bank to settle their own debt.

They could just create some new money and lend to each other to cover their loss and they don't even need FDIC to protect their customer's saving account
http://www.fdic.gov/bank/individual/failed/banklist.html
Because a commercial bank loan does not help the bank to meet their own debt.
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August 01, 2013, 12:22:36 PM
 #44

M1 is not real money supply. Just as the wiki page's example of M1 showed, when there physically are only $1000 in M0, M1 could be  $9000, it is just the same $1000 counted multiple times, banks have to lend this $1000 out again and again (And it will take a long time to do this) to reach a M1 of $9000 (in reality it typically reaches $4000 to $5000)
Now you're contradicting yourself, because you previously said that commercial banks cannot create money, and now you claim they do.

I said many times M1 is NOT money supply, commercial banks do not create money by lend it out again and again, although many people will have an illusion that their money stay in the bank, in fact it is lended out almost the same moment they deposited into a bank account. Move the same money between your left hand to right hand 10 times did not create 10 times more money, it just created a serial of transaction and bank add the number from those transactions together and call it M1, this is just a count

It's like, adding your income from last 10 years together and claim that your networth now is 10 times of your annual income

The reason M1 is used is because from bank's point of view, M1 is easy to use, it is just a summarize of all their customer's saving account. But if 10% of those savings were withdrawed and never deposited back, all the rest of the saving account would have nothing to withdraw, so M1 is just a derivative of the M0, every change in M0 will be amplified 9 times in M1
It's not the banks' opinion, but the end-user opinion what determines the composition of money supply. Demand deposits are a part of the money supply (M1) because end-users use them as a medium of exchange and view it as a near perfect substitute to cash (M0). During a bank run, for example, people stop viewing demand deposits as a close substitute to cash, and this can cause bankruptcies.

As I decribed before, if a large part of user withdraw from their demand deposits, banks will have no money, since most of these money are just some numbers on banks checkbook, the real liquid money never goes above M0. Cash is only a small part of M0, most part of M0 today is in digital form, and typically when large clients withdraw, they don't withdraw paper money, they withdraw digital money to be transferred to an account in another bank/country

They could just create some new money and lend to each other to cover their loss and they don't even need FDIC to protect their customer's saving account
http://www.fdic.gov/bank/individual/failed/banklist.html
Because a commercial bank loan does not help the bank to meet their own debt.

Correct, because a commercial bank loan can not create new money, it just moves existing money around

In reality, they turn to FED asking for more loans to support the payment of their own debt. That's why we call FED "Lender of last resort". Only FED can create new money and lend to them. Otherwise any bank could just create some money (which is backed by a long term loan) for themselves and payback their short term debt, no liquidity problem forever

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August 01, 2013, 02:01:17 PM
 #45

Hey Peter, long time no see.

You are wasting your time here.  I'll do my best to be charitable towards johnyj and attempt to describe the point of impasse in the most neutral terms possible.  I look at it like the fork in linguistics.  On one side, you have descriptive linguists that attempt to describe how language is actually used by real humans.  On the other side, you have proscriptive linguists that try to write rules about how language should be used.

In the same way, you and I are descriptive.  We view money as being that which is used as money and try to understand where it comes from and where it goes.*

Johnyj seems to be proscriptive.  He defines money as being a peculiar thing that no one actually encounters in real life, and has constructed a model to explain how it can appear to be in several places at once.  When money does things other than what he thinks it should do, he sees theft and fraud.

I have attempted to explain several times how the narrow view of money is simply not useful for understanding reality.  In short, even if it were true that there was "one true money", the world does not act as if it were true.  If I sell the same property twice, I'm committing fraud, but the second buyer is just shit out of luck, he doesn't have any claim to it because it isn't mine to sell after the first sale.  Money doesn't act this way (in reality).  Courts do not trace money back to the original title and tell everyone else to fuck off.**

As a side note, johnyj seems to be very heavily invested in the fiction that banks are constrained by reserves.  I made an error by posting the M1 chart before, when it would have been wiser to post the MB chart.  I remedy that error here, and this is just a bonus.  Sadly, I don't think they will help.  Understanding these charts requires an understanding of the mechanics of banking as it really works, but I do look forward to hearing what epicycles have been invented to shoehorn them into the proscriptive view.

*  I hope that I'm not oversimplifying your view here.  I know that you are an actual trained economist, and have a more nuanced view of money than what I'm describing.  But, based on our conversations at and around the conference, I feel fairly confident which side of this particular spectrum you are on.

**  If courts did this, the entire system would collapse into a puff of smoke the first time it happened.

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lonelyminer (Peter Šurda)
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August 01, 2013, 05:51:55 PM
 #46

I said many times M1 is NOT money supply, commercial banks do not create money by lend it out again and again, although many people will have an illusion that their money stay in the bank, in fact it is lended out almost the same moment they deposited into a bank account. Move the same money between your left hand to right hand 10 times did not create 10 times more money, it just created a serial of transaction and bank add the number from those transactions together and call it M1, this is just a count
You just arbitrarily declare your conclusion, without any discernible reasoning behind it.

As I decribed before, if a large part of user withdraw from their demand deposits, banks will have no money,
Yes, this is correct. The withdrawal decreases M1 (assuming the bank has fractional reserves).

.. since most of these money are just some numbers on banks checkbook, the real liquid money never goes above M0.
Now you're just arbitrarily declaring your conclusion again. There is no discernible coherent foundation for your position.

Cash is only a small part of M0, most part of M0 today is in digital form, and typically when large clients withdraw, they don't withdraw paper money, they withdraw digital money to be transferred to an account in another bank/country
If you look at the wikipedia article about money supply, you'll notice it says that M0 is "Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions)". You probably mean MB (Monetary Base). That does include digital components, the credit central banks grant to commercial banks. But normal people are not permitted to own this, only commercial banks.

Correct, because a commercial bank loan can not create new money, it just moves existing money around
This is again just arbitrary declaration. That commercial bank loans are not usable for settling bank debt does not affect the question of the money supply. Analogously to your position I could argue that if an online shop refuses cash payments, it means cash is not a part of the money supply.

In reality, they turn to FED asking for more loans to support the payment of their own debt. That's why we call FED "Lender of last resort". Only FED can create new money and lend to them. Otherwise any bank could just create some money (which is backed by a long term loan) for themselves and payback their short term debt, no liquidity problem forever
As I explained, the components of the money supply are not full substitutes of each other, they are just near substitutes. Some of the components are not usable for some types of transactions, for example cash is not usable for online payments, and commercial bank credit is not usable for settling inter-bank debt. And when there's a bank run, demand deposits are not usable for end-user payments and stop being a part of the money supply. The question of the composition of the money supply is an empirical issue specific to a particular scenario and cannot be deduced. It is the behaviour of the end users, not the accounting practices of a bank, that determine the composition of the money supply.
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August 01, 2013, 08:32:43 PM
 #47

In the same way, you and I are descriptive.  We view money as being that which is used as money and try to understand where it comes from and where it goes.*

Johnyj seems to be proscriptive.  He defines money as being a peculiar thing that no one actually encounters in real life, and has constructed a model to explain how it can appear to be in several places at once.  When money does things other than what he thinks it should do, he sees theft and fraud.
I think you're right, this is the core issue.
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August 01, 2013, 10:21:00 PM
Last edit: August 01, 2013, 10:31:21 PM by Adrian-x
 #48

No I am not trolling, I have seen how johnyj posts and it's just not worth trying to debate him, I have had debates with people who were far more capable of providing a lively debate (that guy with the kitten holding a rifle comes to mind, though I forget his name).

Finding an economic theory 'Logical' is about the lowest possible bar, people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate.  And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

I still have to catch up as this tread seems to have gotten a little longer since your post.  

My goal on the forum is not to debate but understand what and how other people think and reason, obviously debate ensues but being encumbered by a keyboard and the English language this isn't my communication method of choice.  (TL;DR  the joy is in engaging / enlightening not obstinance)  

While the likes of johnyj are just waking up to the fact that our monetary system is usury by another name, that doesn't negate his insight or invalidate his opinion because there is more to learn.

To your point in bold, "so am I", and to that point, I believe there are those who are not in with the GS crowd who feel they could XYZ if the playing field was levelled and as such promote the Austrian / Libertarian camp.  But that doesn't make Austrian's economic theory propaganda.  

I haven't yet seen empirically tested Austrian's economic model, and look forward to seeing one. While I have my concerns with Bitcoin, and have moved on from my Keynesian ideas, I can see for the first time the paradox of thrift in relation to adopting Bitcoin as the only obstacle to such an experiment.

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August 01, 2013, 10:45:54 PM
 #49

In the same way, you and I are descriptive.  We view money as being that which is used as money and try to understand where it comes from and where it goes.*

Johnyj seems to be proscriptive.  He defines money as being a peculiar thing that no one actually encounters in real life, and has constructed a model to explain how it can appear to be in several places at once.  When money does things other than what he thinks it should do, he sees theft and fraud.
I think you're right, this is the core issue.

Based on kjj's description, he defines money as being a peculiar thing (M1) that no one actually encounters in real life, and has constructed a model to explain how it can be used to explain money creation

M1 is not a good indicator of money supply since you can't even see all of it in real life, what you can see at any time is always part of M1, which is liquid and payable money. Only banks see M1 from their perspective, it is checkbook money recorded on their book

Some times ago we had this debate about money creation, if you think this page is all non-sense then just go ahead and modify it with your understanding
http://en.wikipedia.org/wiki/Money_creation

Actually the debate on this topic just showed how many different understandings there are when it comes to money creation. Due to lacking of authoritive and definitive answer on this topic, almost no one have the whole picture. But I suggest starting with a gold based monetary system, because things are much easier to understand in such a system. And since there was no dramatic change in society when we changed from a gold standard into fiat standard, I suppose the basic rules still hold

Under a gold standard, you create money by mining gold, and gold is the only valid medium of payment, a gold smith can't just write some numbers and lend it to customer as money, he must provide them with real gold. He can still practice FRB by lend out the same gold again and again, but the maximum amount of gold that he can lend out will decrease over time if his do not add some new mined gold

Isn't this much easier to understand than those M0 or M1 things? Mx is just a definition, but normally you don't want a definition that is made from higher layer to blind your view of how things going on fundamentally

Your logic is more like: Without a understanding of C++ language, you can't understand how a computer works. In fact, when computer was invented, there was no C++ language

There was no M0 or M1 definition when banks were oprated hundreds of years ago. Can't you forget about all those terms that banks invented? Just imagine that you are a central banker for a country and how you are going to organize the whole thing, that is what John Law's story about

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August 02, 2013, 12:06:03 AM
 #50

In the same way, you and I are descriptive.  We view money as being that which is used as money and try to understand where it comes from and where it goes.*

Johnyj seems to be proscriptive.  He defines money as being a peculiar thing that no one actually encounters in real life, and has constructed a model to explain how it can appear to be in several places at once.  When money does things other than what he thinks it should do, he sees theft and fraud.
I think you're right, this is the core issue.

Based on kjj's description, he defines money as being a peculiar thing (M1) that no one actually encounters in real life, and has constructed a model to explain how it can be used to explain money creation

I can't imagine where this idea would come from.  I have posted several times saying the exact opposite.  The stuff that people use as money, is money.  And the model that explains where it comes from is very simple, banks create it.  By an amazing stroke of luck, my model just happens to be what really happens every day, all around the world.

But I suggest starting with a gold based monetary system, because things are much easier to understand in such a system. And since there was no dramatic change in society when we changed from a gold standard into fiat standard, I suppose the basic rules still hold.

You can suppose what you want, but gold is nowhere used as money, and the rules governing gold very explicitly do not apply any more.

Under a gold standard, you create money by mining gold, and gold is the only valid medium of payment, a gold smith can't just write some numbers and lend it to customer as money, he must provide them with real gold. He can still practice FRB by lend out the same gold again and again, but the maximum amount of gold that he can lend out will decrease over time if his do not add some new mined gold

When goldsmiths invented FRB, they didn't do so by physically handing out gold, they did so by handing out claims for gold.  These claims circulated as money, and thus, in my view, they were money.  Not that it matters a whole lot any more.  The stuff we use as money isn't a claim on anything in particular, it is just a claim in general.

Just imagine that you are a central banker for a country and how you are going to organize the whole thing, that is what John Law's story about

His scheme is indeed useful as a warning.

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August 02, 2013, 04:19:14 AM
 #51


When goldsmiths invented FRB, they didn't do so by physically handing out gold, they did so by handing out claims for gold.  These claims circulated as money, and thus, in my view, they were money.  Not that it matters a whole lot any more.  The stuff we use as money isn't a claim on anything in particular, it is just a claim in general.


If you think FRB need paper money, consider such a FRB scheme on bitcoin:

I open a bitcoin storage service at my city, I lend 100 bitcoins to A in my city, and he in turn spend those coins and B in the city received those coins. Since my service is the only bitcoin storage service in the city, B will deposit his 100 coins to my storage service, and then I can keep 10 bitcoin as reserve and lend rest 90 coins to C. C will spend them and D will receive those 90 coins and deposit them to me... By doing so, I will lend the same 100 bitcoins again and again, each time keep a little bit more as reserve, thus B, D, F, H... more and more people will have bitcoin deposit at my place

Then if I add all those people's deposit numbers together, I will get a much larger number than 100 bitcoins, possibly 500 bitcoins, that will be the M1 in my city's bitcoin money supply(based on M1 definition). Notice that I never hand out "claims for bitcoin", I send real bitcoin to my clients wallet and record their debt seperately in my own checkbook, every transaction will be recorded in blockchain

This scheme will not work if B, D, F, H have their own bitcoin adress at my storage service, because they will through blockchain discover that their money being lended out by me. Therefore I will provide a single adress for all of them to deposit, so that all their bitcoin deposits are mixed together. By this way they can only see that single adress having lots of deposit and payout activities, but they won't be able to tell what's really happened with their bitcoins. As long as they don't come to me at the same time demand bitcoin withdraw, I won't have any problem

If you look at how localbitcoins.com or bitcoin exchanges operate, it is a similar fashion. Although you have one personal bitcoin adress for you to deposit at localbitcoins.com, as soon as you send coins to that adress, it will be immediately moved to their adress, while at the same time you get a number to show your balance


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August 02, 2013, 08:47:34 AM
 #52

To your point in bold, "so am I", and to that point, I believe there are those who are not in with the GS crowd who feel they could XYZ if the playing field was levelled and as such promote the Austrian / Libertarian camp.  But that doesn't make Austrian's economic theory propaganda.  

I haven't yet seen empirically tested Austrian's economic model, and look forward to seeing one. While I have my concerns with Bitcoin, and have moved on from my Keynesian ideas, I can see for the first time the paradox of thrift in relation to adopting Bitcoin as the only obstacle to such an experiment.

I'm not following you, dose "so am I" sounds like your agreeing with my statement about conservative business/finance elements promoting Austrian Economics, but you don't think that's propaganda?  I think your confused over the definition of Propaganda, so lets clear that up.  Here's a very complete definition I pulled off Wikipedia

 "Propaganda is neutrally defined as a systematic form of purposeful persuasion that attempts to influence the emotions, attitudes, opinions, and actions of specified target audiences for ideological, political or commercial purposes through the controlled transmission of one-sided messages (which may or may not be factual) via mass and direct media channels. A propaganda organization employs propagandists who engage in propagandism—the applied creation and distribution of such forms of persuasion."

I don't think anyone can argue that the pro-Austrian groups engage in this kind of activity, the goal is to persuade people as to political and ideological positions and even actions, and that they present a one sided argument.  Nothing more is required to demonstrate propaganda, though I personally think that much of what is said is so distorted and incomplete as to pass into the realm of falsehood too.  johnj is a classic example of the kind of hopelessly muddled and dogmatic thinking that is produced by this kind of propaganda.

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

 
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August 02, 2013, 10:06:57 AM
 #53

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

That makes zero sense coming from a freicoin proponent.

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August 02, 2013, 05:55:59 PM
 #54

I open a bitcoin storage service at my city, I lend 100 bitcoins to A in my city, and he in turn spend those coins and B in the city received those coins. Since my service is the only bitcoin storage service in the city, B will deposit his 100 coins to my storage service, and then I can keep 10 bitcoin as reserve and lend rest 90 coins to C. C will spend them and D will receive those 90 coins and deposit them to me... By doing so, I will lend the same 100 bitcoins again and again, each time keep a little bit more as reserve, thus B, D, F, H... more and more people will have bitcoin deposit at my place
This only increases the money supply of Bitcoin if Bitcoin users typically accept the balance the storage service shows as a near substitute to Bitcoin itself.

Then if I add all those people's deposit numbers together, I will get a much larger number than 100 bitcoins, possibly 500 bitcoins, that will be the M1 in my city's bitcoin money supply(based on M1 definition). Notice that I never hand out "claims for bitcoin", I send real bitcoin to my clients wallet and record their debt seperately in my own checkbook, every transaction will be recorded in blockchain
The sum of the claims will only affect M1 if the claims are typically accepted by Bitcoin users as a substitute to Bitcoin itself, i.e. if people use it as a medium of exchange and a final means of payment. With traditional banking, this happens because the claims the bank issue decrease transaction costs over the monetary base. With Bitcoin, it's much less likely to happen this way.

Just like, say, if people start viewing ebooks as near substitute of paper books, then the production of ebooks will increase the supply of books. Or if android tablets are viewed as a substitute to ipad, then the production of google nexi increases the supply of tablets.

It is the behaviour of the end users that determines the composition of the money supply, not the accounting and lending practices of a bank.
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August 03, 2013, 01:54:06 AM
 #55

Then if I add all those people's deposit numbers together, I will get a much larger number than 100 bitcoins, possibly 500 bitcoins, that will be the M1 in my city's bitcoin money supply(based on M1 definition). Notice that I never hand out "claims for bitcoin", I send real bitcoin to my clients wallet and record their debt seperately in my own checkbook, every transaction will be recorded in blockchain
The sum of the claims will only affect M1 if the claims are typically accepted by Bitcoin users as a substitute to Bitcoin itself, i.e. if people use it as a medium of exchange and a final means of payment. With traditional banking, this happens because the claims the bank issue decrease transaction costs over the monetary base. With Bitcoin, it's much less likely to happen this way.

Just like, say, if people start viewing ebooks as near substitute of paper books, then the production of ebooks will increase the supply of books. Or if android tablets are viewed as a substitute to ipad, then the production of google nexi increases the supply of tablets.

It is the behaviour of the end users that determines the composition of the money supply, not the accounting and lending practices of a bank.

The claims (e.g. the bitcoin balance for each client account) is accepted by bitcoin users as a substitute to bitcoin, because when any single client withdraw bitcoins to pay others, they will get bitcoins corresponding to their account balance, so they think that their bitcoins are safe in my storage service, those claims are real

But, if more than half of them (or some big clients) withdraw at the same time, that claim will show its fake nature: I don't have that amount of bitcoin to pay them all. Anyway through maintain loaned ratio, I can make sure 99.99% of time there will not be a liquidity problem, that is the nature of FRB, more like insurance, has nothing to do with money creation, I don't need to create any bitcoin to do  FRB

Seems that you still have the impression that private banks create money, but if you have read that article I mentioned before carefully, it listed many strange illogical things if that is the case:

1. They will be counterfeiting money (US constitution Article I, Section 8 prohibit any entity other than congress to create money)

2. They will create money and lend to each other to solve their own liquidity problem thus there will never be bank failure

3. Since all the digital money is convertible to paper notes, there will be huge amount of printing activities in treasury when they create new money, since part of those money will surely be converted to paper notes

4. They will fail to pass double entry book keeping

Historically under a gold standard, private commercial banks indeed create paper money based on their reserve of gold/silver, but since the establish of Federal Reserve in 1913, especially after the Monetary Control Act in 1980, all U.S. deposit institutions were brought under the Federal Reserve.

"Creation of money has ever since been by the Federal Reserve and wildcat banking—an extension of goldsmith banking, private banks creating money through loaning a multiple of their gold or silver reserves, which had not been practiced for decades—was officially relegated to history."


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August 03, 2013, 02:04:42 AM
 #56

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

That makes zero sense coming from a freicoin proponent.

It's entirely consistent, the paradox of thrift is that savings decrease monetary velocity, cause deflation and the deflation discourages economic activity.  Demurrage discourages savings, increases velocity and increases economic activity.

 
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August 03, 2013, 09:24:37 AM
 #57

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

That makes zero sense coming from a freicoin proponent.

It's entirely consistent, the paradox of thrift is that savings decrease monetary velocity, cause deflation and the deflation discourages economic activity.  Demurrage discourages savings, increases velocity and increases economic activity.

Sadly not. All the above stated is of course true, but it's expressed in a biased way. Deflation was invoked as an economic boogeyman during the 1930's as a pretence to force a paper money system on a world population that knew better. The paper money system of Bretton Woods was not introduced for the benefit of the economy or those acting in it. There lies your confusion. Are all statements either written or commonly believed, the truth? I think you'll find the answer is: no. And the deflationary boogeyman is precisely in that category. Sorry.

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August 03, 2013, 01:29:31 PM
 #58

The claims (e.g. the bitcoin balance for each client account) is accepted by bitcoin users as a substitute to bitcoin, because when any single client withdraw bitcoins to pay others, they will get bitcoins corresponding to their account balance, so they think that their bitcoins are safe in my storage service, those claims are real
This is not true. There are counterexamples from both sides, there are both claims that do not act as a part of the money supply (e.g. liquid credit that is not issued by banks), as well as components of the money supply that are not redeemable in the base money (e.g. some complementary currencies such as mutual credit). The substitutiveness does not lie in redeemability, but in the behaviour of market participants with respect to it (whether they use it as a medium of exchange and a final means of payment).

But, if more than half of them (or some big clients) withdraw at the same time, that claim will show its fake nature: I don't have that amount of bitcoin to pay them all. Anyway through maintain loaned ratio, I can make sure 99.99% of time there will not be a liquidity problem, that is the nature of FRB, more like insurance, has nothing to do with money creation, I don't need to create any bitcoin to do  FRB
It is true that too much withdrawals cause problems. But that does not address the question of the money supply.

Seems that you still have the impression that private banks create money, but if you have read that article I mentioned before carefully, it listed many strange illogical things if that is the case:
It seems that you have what is essentially a non-economic theory.

1. They will be counterfeiting money (US constitution Article I, Section 8 prohibit any entity other than congress to create money)
This is a matter of interpretation, it is up to the courts to determine whether some act is counterfeiting or not, and they decide based on historical context rather then deductive reasoning. Theft is illegal for example, yet courts do not oppose taxation, they just interpret it differently.

2. They will create money and lend to each other to solve their own liquidity problem thus there will never be bank failure
As I already explained, commercial bank loans are not accepted by the market as settlement of their own debt. This is simply an empirical issue, not all components of the money supply are accepted by all market participants in all situations. Just like google nexus is typically accepted on market as a tablet, but if you need an app that does not run on android, you will demand an ipad.

3. Since all the digital money is convertible to paper notes, there will be huge amount of printing activities in treasury when they create new money, since part of those money will surely be converted to paper notes
Currently, people mostly prefer to store large amounts in bank accounts rather than cash due to transaction costs. They do not redeem it just because they can. Redeeming would increase their transaction costs. But when they, for example, lose confidence in banks, they risk of insolvency might outweigh the potential savings in transaction costs, and their preferences with respect to the individual components can change. This causes a bank run and liquidity problem at a bank. This is an empirical issue, and an example when the composition of the money supply changes: market participants stop viewing a component as a close substitute to money, it ceases to be a part of money supply. If there are not enough reserves to cover the withdrawals, the money supply shrinks by the uncovered amount.

4. They will fail to pass double entry book keeping
As I already wrote, the debit component of the loan does not act as a part of the money supply, whereas the credit component does. This is again an empirical issue, people accept the credit as equivalent to money.

Your approach fails to explain the concept of the money supply, to you it is merely an arbitrary legal and accounting concept with no practical application. But this is irrelevant for an economic analysis. The economic concept of the money supply reflects the actions of market participants, what they use as a medium of exchange and final means of payment, not what a judge or an accountant thinks about it. Furthermore, the components of the money supply are not perfect substitutes, which confuses you, because it leads to not all of them being usable in all contexts as money.

TLDR:
  • money supply is an economic, not a legal or accounting concept
  • composition of money supply can change over time as a reaction to changed user preferences
  • the components of money supply are typically not perfect substitutes, just close enough
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August 03, 2013, 09:36:47 PM
 #59

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

That makes zero sense coming from a freicoin proponent.

It's entirely consistent, the paradox of thrift is that savings decrease monetary velocity, cause deflation and the deflation discourages economic activity.  Demurrage discourages savings, increases velocity and increases economic activity.

Sadly not. All the above stated is of course true, but it's expressed in a biased way. Deflation was invoked as an economic boogeyman during the 1930's as a pretence to force a paper money system on a world population that knew better. The paper money system of Bretton Woods was not introduced for the benefit of the economy or those acting in it. There lies your confusion. Are all statements either written or commonly believed, the truth? I think you'll find the answer is: no. And the deflationary boogeyman is precisely in that category. Sorry.

I still don't see why you find my original statement illogical, Freicoin is anti-hard-money anti-deflation and anti-savings-of-the-medium-of-exchange (savings should be done in physical goods only).  You may not agree with that position but that dose not make me internally contradictory. 

Also I think you are a bit confused about the Bretton Woods system, as it was effectively a gold standard in which the dollar was back by gold and all other currencies were backed by dollars.  You may be thinking of the truly fiat dollar post Nixon when the USD ceased to be back by gold.

 
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August 03, 2013, 10:59:09 PM
 #60

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

That makes zero sense coming from a freicoin proponent.

It's entirely consistent, the paradox of thrift is that savings decrease monetary velocity, cause deflation and the deflation discourages economic activity.  Demurrage discourages savings, increases velocity and increases economic activity.

Sadly not. All the above stated is of course true, but it's expressed in a biased way. Deflation was invoked as an economic boogeyman during the 1930's as a pretence to force a paper money system on a world population that knew better. The paper money system of Bretton Woods was not introduced for the benefit of the economy or those acting in it. There lies your confusion. Are all statements either written or commonly believed, the truth? I think you'll find the answer is: no. And the deflationary boogeyman is precisely in that category. Sorry.

I still don't see why you find my original statement illogical, Freicoin is anti-hard-money anti-deflation and anti-savings-of-the-medium-of-exchange (savings should be done in physical goods only).  You may not agree with that position but that dose not make me internally contradictory. 

Also I think you are a bit confused about the Bretton Woods system, as it was effectively a gold standard in which the dollar was back by gold and all other currencies were backed by dollars.  You may be thinking of the truly fiat dollar post Nixon when the USD ceased to be back by gold.

No, I do appreciate what Bretton Woods was, and how it was eventually reneged on by Nixon. My suggestion would be to read between the lines a little more. What if Nixon's decision had been made by Lyndon Johnson, or even Harry Truman? To only repeat the propaganda of the 1940's in 2013 in a sterile and uncritical manner does not do your credibility any favours. You delineate the problem rather well when you say "the dollar was back by gold and all other currencies were backed by dollars", making the US the sole arbiters of the most significant amount of the gold supply, gifted to the Federal Reserve as part of the agreement made in New Hampshire. Some nations continually agitated to have their gold repatriated, and it was this pressure that, less than 30 years later, forced Nixon's hand. It can only really be interpreted as a carefully timed power grab, a consolidation of influence, and nothing like the dry reasoning that was made publicly about the system.

Re: Freicoin, there is admittedly one aspect I didn't gather from what I've read, namely what the systemic fate of the demurred currency is: reallocated for mining, or permanently removed from the money supply? It still seems an odd approach to me, and encourages the same poor behaviour that our incumbent system does (designed obsolescence, artificial propensity to spend, unnecessarily hyper-competitive business environment). Freicoin seems somewhat analogous to people attempting to create a consensus around using fast corroding metals or foodstuffs as currency. And in history, no such currency was ever popular. Sorry again.

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August 04, 2013, 12:01:02 AM
 #61

Re: Freicoin, there is admittedly one aspect I didn't gather from what I've read, namely what the systemic fate of the demurred currency is: reallocated for mining, or permanently removed from the money supply? It still seems an odd approach to me, and encourages the same poor behaviour that our incumbent system does (designed obsolescence, artificial propensity to spend, unnecessarily hyper-competitive business environment). Freicoin seems somewhat analogous to people attempting to create a consensus around using fast corroding metals or foodstuffs as currency. And in history, no such currency was ever popular. Sorry again.

I'm really not interested in Bretton Woods as I don't consider it to be very relevant to Freicoin.  The current Freicoin software is designed to recycle all demurrage to miners to maintain a stable monetary supply.  But we are hopeful that a Proof-of-Stake voting system can be implemented that will allow the user base to direct some or all of the demurrage towards charities of their choice.   It dose encourage spending but we feel that this is merely canceling the artificial encouragement to save that interest causes.  If savings are desired then people should save the actually physical goods that they wish to consume in the future, no amount of stockpiled money can provide us with consumption if their are no goods to consume.

Your analogy to foodstuffs as currency is in fact spot on, before precious metal currency people used the normal consumable necessities as money, principally grains (as these are very fungible, did not have an excessive decay rate and was universally desirable).  In such a system no one earns interest on money and it circulates rapidly.  In a demurrage currency we try to recreate this kind of monetary system as we believe it reduces unemployment, wealth disparity and over-exploitation of natural resources.

 
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August 04, 2013, 12:55:40 AM
 #62

Re: Freicoin, there is admittedly one aspect I didn't gather from what I've read, namely what the systemic fate of the demurred currency is: reallocated for mining, or permanently removed from the money supply? It still seems an odd approach to me, and encourages the same poor behaviour that our incumbent system does (designed obsolescence, artificial propensity to spend, unnecessarily hyper-competitive business environment). Freicoin seems somewhat analogous to people attempting to create a consensus around using fast corroding metals or foodstuffs as currency. And in history, no such currency was ever popular. Sorry again.

The current Freicoin software is designed to recycle all demurrage to miners to maintain a stable monetary supply.  But we are hopeful that a Proof-of-Stake voting system can be implemented that will allow the user base to direct some or all of the demurrage towards charities of their choice.   It dose encourage spending but we feel that this is merely canceling the artificial encouragement to save that interest causes.  If savings are desired then people should save the actually physical goods that they wish to consume in the future, no amount of stockpiled money can provide us with consumption if their are no goods to consume.

This is a fairly original take in fairness, I'd not considered that saving could take the form of stockpiling other goods. Shifts the focus of economic interactions further to a medium of exchange only, and not to store value long term. And there is a logic to that when you consider that, historically, gold/silver had little practical purpose as metals for tools, it was only really the advent of chemistry, manufacturing and electronics that found out their practical purposes. And now that we have the next development in abstraction of money in cryptocurrencies, thinking through the true purpose of money from first principles seems to have led you to this model. The only trouble I see is convincing others of this curious balance of motivating factors, just Bitcoin can be a tough sell as it is. 

Your analogy to foodstuffs as currency is in fact spot on, before precious metal currency people used the normal consumable necessities as money, principally grains (as these are very fungible, did not have an excessive decay rate and was universally desirable).  In such a system no one earns interest on money and it circulates rapidly.  In a demurrage currency we try to recreate this kind of monetary system as we believe it reduces unemployment, wealth disparity and over-exploitation of natural resources.

Perhaps the only significant problem in the logic is that it would encourage positive hoarding of physical goods as the only means to becoming "rich", but even still, it's a different quality of "rich" to anything we understand it to mean today. Perhaps you might be thinking that people would regard natural resources differently in such a different environment, and foster their natural equilibrium more so than the inherently selfish incentives that having near-perfect long term value monies engender. But I don't think human nature would change so drastically, people would still want to be higher up the social ladder, and if that means using their wealth to buy huge storage facilities for their hoard, then that's what the Freicoin fat cats would do. Still, it's actually rather more interesting than I'd thought.


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August 04, 2013, 03:49:11 AM
 #63



TLDR:
  • money supply is an economic, not a legal or accounting concept
  • composition of money supply can change over time as a reaction to changed user preferences
  • the components of money supply are typically not perfect substitutes, just close enough

Following your reasoning, many more strange things will happen, each step you try to make one logic right, the more loophole will pop up, but I'm not going further down this route just debate to prove that I'm right

I have a relative, his father had a bank many years ago. I'm quite sure he can't create money by just issue some loan, actually private banking is a very risky business, require huge start capital and robust backoffice infrastructure

That article has a very good point about why the economy books are telling people all those twisted concepts about the most simple money creation, because otherwise their scheme will be brought to light and everyone will understand how federal reserve banks claim people's work through printing money (notice that the money created by FED do not corresponding to any debt, it directly becomes the belonging of FED).

Now they say that money is backed by debt and they are for the good of economy, they will welcome economy theories that proves that money is created from some complex lending operations at private banks, more the better. You know that Swedish Riksbank even created the Nobel price of economy to specially promote those theories that suit their taste




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August 04, 2013, 06:22:38 AM
 #64


Perhaps the only significant problem in the logic is that it would encourage positive hoarding of physical goods as the only means to becoming "rich", but even still, it's a different quality of "rich" to anything we understand it to mean today. Perhaps you might be thinking that people would regard natural resources differently in such a different environment, and foster their natural equilibrium more so than the inherently selfish incentives that having near-perfect long term value monies engender. But I don't think human nature would change so drastically, people would still want to be higher up the social ladder, and if that means using their wealth to buy huge storage facilities for their hoard, then that's what the Freicoin fat cats would do. Still, it's actually rather more interesting than I'd thought.


I can certainly agree that human nature remains unchanged, and I don't harbor any illusion that a utopian society will emerge from a demurrage currency, I think it just fulfills the promises of what an economic and monetary system is clearly capable of doing and which they have all promised but failed to deliver, a sustainable stable full employment economy that is free of gross wealth disparity. 

We don't see holding physical goods as much of a problem, such activity become self limiting, goods have a cost to maintain and if too much is stored that maintenance cost will erode value faster then it can be added, also the glut of supply will likely cause the price to drop.  Storing goods is more an activity we see as economically harmless for thouse who wish to engage in it (and this desire to save is a perfectly natural one), so long as the medium of exchange is not hoarded no damage is done to the circulation of goods.

The activity that is even better then stockpiling is investing in something with longer term revenue generating potential (a business, an education, etc etc), as under demurrage owning source of revenue is more valuable then holding a lump sum, the opposite is true under interest bearing money (that's why people always take the lump-sum payment when they win the lottery).  This is also why it's sustainable, or at least incentivizes sustainable practices (assuming tragedy of the commons is avoided) as a source of renewable natural productivity is far more valuable if maintained then if harvested to depletion for a windfall.

 
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August 04, 2013, 09:18:04 AM
 #65


it just fulfills the promises of ... a sustainable stable full employment economy that is free of gross wealth disparity. 
....
The activity that is even better then stockpiling is investing in something with longer term revenue generating potential (a business, an education, etc etc), as under demurrage owning source of revenue is more valuable then holding a lump sum, the opposite is true under interest bearing money (that's why people always take the lump-sum payment when they win the lottery).

This is a little too inflected with economic assumptions from the last 100 years. It assumes that there is always some optimum amount of economic activity that should be taking place, and so your constants really matter here. Having a constant rate of of demurrage forces a base level of economic transfer on those using it, and could easily become a perverse incentive with people attempting to trade for it's own sake, hoping their hot money will eventually uncover some worthwhile investment. Using expressions like "full employment economy" implies the worst of this, as  even under present-day fiat, not everyone needs to be in constant 40+ hours a week employment in order to do what they are best at in the most efficient way. I'm picturing artists feverishly toiling away, making as much work as they can in the hope that they can sell work on a trial and error basis. They can't even take a holiday if 4.8% annual demurrage compels them not to.

This is also why it's sustainable, or at least incentivizes sustainable practices (assuming tragedy of the commons is avoided) as a source of renewable natural productivity is far more valuable if maintained then if harvested to depletion for a windfall.

This incentive exists just as powerfully under the fiat structured economy too, and yet fisherman still fish ocean stocks to near extinction, loggers still decimate wild rainforests, electricity consumption is a factor of desire/ability to pay instead of necessity. I don't think there's a good argument to say that demurrage would significantly alter sustainability practices.

I still like the system despite my misgivings, and it's fair to say that the only evidence of the realities of such a system exist too long ago in history (and in a very different world) that any projections about how it would actually manifest as an economy are pretty speculative. I will be watching Freicoin with more interest than most other alt-coins, it brings to the table something the others do not: a different economic model, instead of a different technical design.


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August 04, 2013, 12:40:23 PM
 #66

Following your reasoning, many more strange things will happen, each step you try to make one logic right, the more loophole will pop up, but I'm not going further down this route just debate to prove that I'm right
You fail to provide any coherent argument, you're just whining.
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August 04, 2013, 07:17:20 PM
 #67

Quote
This is also why it's sustainable, or at least incentivizes sustainable practices (assuming tragedy of the commons is avoided) as a source of renewable natural productivity is far more valuable if maintained then if harvested to depletion for a windfall.

Care to give us rigorous definition of "sustainable" as applied to the theory of economics?

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August 04, 2013, 11:07:55 PM
 #68

Overfishing through most of history as well as now has been a tragedy of the commons issue because fish are so mobile and the oceans are difficult to fence.  Demurrage isn't able to prevent this but it at least dose not add to the problem.  A better scenario is that of a forest or farm in which private ownership is clear.  The owner can harvest sustainably for a perpetual yearly yield, or rapidly for a high one time yield that destroys the potential for a future yield.  It is like the classic tale of the goose that laid the golden egg, keep the goose alive for a small yearly revenue stream, or kill it for a large one time lumpsum, how big of a lumpsum would make killing the goose the economically rational thing to do?

The economic formula used to deside this kind of question is called a "Net present value" calculation and it tells you what the value of future money is in the present allowing a apples-2-apples comparison.  The key piece of information needed to make the calculation is the "discount rate" the rate at which we discount the future.  The higher the discount rate the less we care about the future (both in receiving a future  benefit or suffering future losses).  Interest rates on money act as a discount rate as we can take a lumpsum of money and earn interest sufficient to replace the lost revenue stream.  Because demurrage acts to reduce and eliminate interest on money it lowers the discount rate, ideally to zero.

Perpetual income streams "perpetuity" are surprisingly easy to calculate, you merely divide the yearly payment by the discount rate.  So $20 a year at 5% discount rate has a present value of $400.  At 1% discount rate it would be $2000, and at zero it would be effectively infinite.  So for our golden goose analogy if the discount rate on money is 5% then it's rational to kill the goose if it has 20 or more eggs, if the discount rate is 1% it needs to have 100 eggs, and if the discount rate is zero then it would need to have an infinite number of eggs to be rational.  The morale of the story is of course that is is BAD to destroy perpetuity for a one time lump-sum, and demurrage encourage us to preserve them.

Now as for practical applications in today's world we can directly see the effect of discount rates in the renewable energy markets.  Most renewable energy takes a large upfront cost and then produces a reliable revenue stream for a long time (fossil fuels tend to be the opposite with higher ongoing costs).  The total value of that revenue stream is reduced by the discount rate and often this makes the investment non-viable (conversely the ongoing costs of fossil fuel get discounted so they cost less).  Reduced discount rates would immediately make this kind of investment more attractive.  Naturally this same economic logic applies to any kind of business activity even ones not related to 'green' stuff, if you can make an investment that reduces future costs such as getting a new piece of equipment to do a job you used to have outsourced, or investing money now to train employees for higher future productivity.

 
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August 05, 2013, 12:24:49 AM
 #69

So no rigorous definition for "sustainable" then?

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August 05, 2013, 12:55:31 AM
 #70

So no rigorous definition for "sustainable" then?

Seriously did that all just go over your head?  Sustainable per Wikipedia "Sustainable development refers to a mode of human development in which resource use aims to meet human needs while ensuring the sustainability of natural systems and the environment, so that these needs can be met not only in the present, but also for generations to come."  (emphasis mine)

If you can't see how demurrage changes to net present value which makes a perpetual income stream more valuable then short term income is encouraging sustainability then the failure is on your part not mine.

 
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August 05, 2013, 10:02:18 AM
Last edit: August 05, 2013, 05:50:20 PM by johnyj
 #71

Demurrage and inflation have same effect: Increase the money circulation. But people are adaptive, under such a system, people will try to take loan and purchase capitals like real-estate or gold/silver as a medium of saving, the saving money were pushed to somewhere else. Comparing to holding the money at hand, it created some more circulation around those saving medium.

Again, everything is relative, as soon as the society reached a newer money circulation speed, boom and bust would still happen. The only effect is the society is accelerating faster and faster like that spanish high speed train, lost the ability to maneuver when some dangers are ahead

All those talk about increased money circulation is good for society, it is just a view from the banks, since this will increase their profit potential. If a reduced money flow is good for economy, they will never promote it. In an investment conference 2004 I met a banker who was very interested in china just because this country has very high saving ratio for average household, for him that is a gold mine

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August 05, 2013, 11:36:26 AM
 #72

So no rigorous definition for "sustainable" then?

Seriously did that all just go over your head?  Sustainable per Wikipedia "Sustainable development refers to a mode of human development in which resource use aims to meet human needs while ensuring the sustainability of natural systems and the environment, so that these needs can be met not only in the present, but also for generations to come."  (emphasis mine)

If you can't see how demurrage changes to net present value which makes a perpetual income stream more valuable then short term income is encouraging sustainability then the failure is on your part not mine.

Oh I see, I'm the failure .... quite the contrary. I examined you words closely but did not see any rigorous definition for sustainable. You use it like it means something, in fact your whole model seems based on this ill-defined term. The wikipedia definition (rigorous?) is loose and pivots on the ill-defined way it uses "resources".

You probably shouldn't throw around your weight like you know what you are talking about if your house is built on sand. "Sustainable" and "resources", as you are using them, are ill-defined and your theories have no basis in any objective, quantifiable, reality. Fatally, they completely ignore the well-defined and experientially observed Law of Substitution, the failure appears to be on your part not mine.

http://theoryofeconomics.com/market-economy/law-of-substitution/

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August 06, 2013, 11:32:19 PM
 #73

I'm not following you, dose "so am I" sounds like your agreeing with my statement about conservative business/finance elements promoting Austrian Economics, but you don't think that's propaganda?  I think your confused over the definition of Propaganda, so lets clear that up.  Here's a very complete definition I pulled off Wikipedia

 "Propaganda is neutrally defined as a systematic form of purposeful persuasion that attempts to influence the emotions, attitudes, opinions, and actions of specified target audiences for ideological, political or commercial purposes through the controlled transmission of one-sided messages (which may or may not be factual) via mass and direct media channels. A propaganda organization employs propagandists who engage in propagandism—the applied creation and distribution of such forms of persuasion."

I don't think anyone can argue that the pro-Austrian groups engage in this kind of activity, the goal is to persuade people as to political and ideological positions and even actions, and that they present a one sided argument.  Nothing more is required to demonstrate propaganda, though I personally think that much of what is said is so distorted and incomplete as to pass into the realm of falsehood too.  johnj is a classic example of the kind of hopelessly muddled and dogmatic thinking that is produced by this kind of propaganda.

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

Yes I was agreeing with your statement. Thanks for the definition of propaganda, I often find myself redefining or restating my understanding based on more precise definition.

Propaganda as defined suggests we are constantly bombarded with propaganda even the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobe (Nobel Prize in Economic) is propaganda.

Not to defend the Austrian propaganda generally, but if taken critically I don't believe Austrian  economic theory presents a one sided argument, let alone any falsehoods. Moreover there are omissions, but that said, navigating the economic dogmas out there, it seems it is all omission based to propaganda.

On the point of agreement it is the Free Banking types and the Monetarists in the Austrian camp that are in my view the hypocrites, and could be guilty of speeding propaganda, but in general Hayek, presents a coherent argument for the theories in the absence of Free Banking and the Monetarists. (Although he is never critical - as it is their efforts that brought him to fame, he just advocates for freedom of choice thinking the free market will choose a viable system in the end.)

In defence of johnyj's position I have seen him, just short of, being ridiculed of being a victim of Austrian misinformation and dogma, while what I see is:  johnyj's  has identified an injustice in our monetary system, and is trying to identify or prove it within an the existing framework we have. This is in fact imposable as the system allows this practice propagate.

Distinctly put by :
  • money supply is an economic, not a legal or accounting concept
I'll add - so long as that is the case, he who controls it can ignore both.


Proving him wrong does not undo the injustice and the effect of usury or make the practice of FRB beneficial for the present or the future, it just serves to illustrate on which side of the fence you sit when it comes to economic rebirth.

All of johnyj's concerns are fully justified, (although as explained and outlined by his opponents they are perfectly permissible and accepted within our existing system. Provided you overlook the effect of usury the practice has, such as inflation.) The result is akin to slavery to all those who work to earn Fiat.

 The process of FRB while immeasurable will by default inflate the money supply and in so doing it will eventually cause price inflation. The net result of which is the movement of wealth from the last to earn the money to the first to have access the new money through the Cantillon Effect.

To illustrate producing a can of soda and providing it cold and at a location I would be willing to pay for is more efficient today than it has ever been in history. In my lifetime, that efficiency is not reflected in the price or the profit of the primary producers/service provider, but as the hidden tax of inflation in an increase from 10c to over a $1.00 today. 

What has actually happened, is the soda company has had to borrow money and constantly invest to become more profitable (and so have his suppliers the primary producers) as this has happened, the money supply has steadily increased, the net result of which is those businesses that took advantage of the newly created money had an advantage of investing pre inflation and profiting post inflation. Only those who grow survive those what don't become uncompetitive and are acquired. (A result of monetary driven growth and not market driven demand, all competitive behaviors and my consumption habits being equal.)  How this affects the average man on the street is he has to earn pre inflation and spend post inflation, over the decades this has had an impoverishing effect on the 99%, and a steroidal growth effect of corporations who have leveraged this phenomenon, to the point of the political / industry revolving door.   

Looking through the history books in the US one can see with an income of $0.05 per day one could afford to live a meager life but still be privy to the comforts of the day, pay 10% of one's income to tax and another 10% to charity and still remain debt free. By contrast, the practice of FRB and an all powerful lender of last resort has eroded the wealth from the people through the Cantillon Effect to the benefit of a few corporations and bankers and virtually eliminated the competition you would expect in a free market.

On a side note.
While the paradox of thrift is alive, well and thriving when it comes to the adoption of Bitcoin, and how it affects the Bitcoin Economy,  its repercussions may go on for decades or even prevent Bitcoins growth altogether. The paradox of thrift as a catalyst to the boom bust of the business cycle, is a Keynesian misnomer, in contrast to you assumption proving "Austrian econ is flawed" it is actually the elasticity in the money supply that is out of sync with the auto correcting of the economy that is the cause of the dreaded "deflation" and concurrent economic downturn.   

TL;DR:
The FRB system backed by the FED, is robbing the productive workers in society via the Cantillon Effect.
As Austrians Economic theory as presented to me is the only sound theory bar a few dogmas it is inaccurate to call it Propaganda.
I concur Austrians advocating for FRB independent of the FED could be seen to be seen to be speeding Propaganda.  (no need to fear them as the light will cure one of their ills.)

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lonelyminer (Peter Šurda)
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August 07, 2013, 01:13:59 PM
 #74

Not to defend the Austrian propaganda generally, but if taken critically I don't believe Austrian  economic theory presents a one sided argument, let alone any falsehoods. Moreover there are omissions, but that said, navigating the economic dogmas out there, it seems it is all omission based to propaganda.
Economics is supposed to be value free and Austrians often emphasise this point. However, it is often very rare that even scholarly work manages to avoid all kinds of biases, even though it might not be intentional. You can find some sort of bias almost anywhere. The point is to identify it and separate purely positive statements from normative ones.

Austrian methodology of praxeology in particular is supposed to be a pure system of axioms and deductive reasoning, but it is very difficult to avoid any normative statement whatsoever. Also, implicit assumptions often manage to creep in.

One of the examples is the injustice in the monetary system. The concept of justice is not something that economics can address. However, economics can explain the Cantillon effect which you just mentioned. One might take the normative position that some types of wealth transfers are just and others are unjust, and thus favour a particular monetary system, but economics can only answer the question whether specific means would result in specific effects.

The Austrians tend to be libertarian. We might speculate why, but one plausible explanation is that the Austrian economic analysis leads to the conclusion that many effects commonly ascribed to the actions of the state do not follow from the premises. This creates a consistency between the belief system (that the state should not be performing these actions) and the economic analysis (the actions do not lead to the popularly believed effects).
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August 07, 2013, 10:14:40 PM
Last edit: August 07, 2013, 10:43:07 PM by johnyj
 #75

Thanks Adrian-x, I found out the story of Cantillon to be closely related to John Law, and it is even more exciting  Grin

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While details regarding Richard Cantillon's life are scarce, it is thought that he was born sometime during the 1680s in County Kerry, Ireland. He was son to land-owner Richard Cantillon of Ballyheigue. Sometime in the middle of the first decade of the 18th century Cantillon moved to France, where he attained French citizenship. By 1711, Cantillon found himself in the employment of British Paymaster General James Brydges, in Spain, where he organised payments to British prisoners of war during the War of Spanish Succession. Cantillon remained in Spain until 1714, cultivating a number of business and political connections, before returning to Paris. Cantillon then became involved in the banking industry working for a cousin, who at that time was lead-correspondent of the Parisian branch of a family bank. Two years later, thanks in large part to financial backing by James Brydges, Cantillon bought his cousin out and attained ownership of the bank. Given the financial and political connections Cantillon was able to attain both through his family and through James Brydges, Cantillon proved a fairly successful banker, specializing in money transfers between Paris and London.

At this time, Cantillon became involved with British mercantilist John Law through the Mississippi Company. Based on the monetary theory proposed by William Potter in his 1650 tract The Key of Wealth, John Law posited that increases in the money supply would lead to the employment of unused land and labor, leading to higher productivity. In 1716, the French government granted him both permission to found the Banque Générale and virtual monopoly over the right to develop French territories in North America, named the Mississippi Company. In return, Law promised the French government to finance their debt at low rates of interest. Law began a financial speculative bubble by selling shares of the Mississippi Company, using the Banque Générale's virtual monopoly on the issue of bank notes to finance his investors.

Richard Cantillon amassed a great fortune from his speculation, buying Mississippi Company shares early and selling them at inflated prices. Cantillon's financial success and growing influence caused friction in his relationship with John Law, and sometime thereafter Law threatened to imprison Cantillon if the latter did not leave France within twenty-four hours. Cantillon replied: "I shall not go away; but I will make your system succeed." To that end, in 1718 Law, Cantillon, and wealthy speculator Joseph Gage formed a private company centered on financing further speculation in North American real estate.

In 1719, Cantillon left Paris for Amsterdam, returning briefly in early 1720. Lending in Paris, Cantillon had outlying debt repaid to him in London and Amsterdam. With the collapse of the "Mississippi bubble", Cantillon was able to collect on debt accruing high rates of interest. Most of his debtors had suffered financial damage in the bubble collapse and blamed Cantillon—until his death, Cantillon was involved in countless lawsuits filed by his debtors, leading to a number of murder plots and criminal accusations.

On 16 February 1722, Cantillon married Mary Mahony, daughter of Count Daniel O'Mahony—a wealthy merchant and former Irish general—spending much of the remainder of the 1720s traveling throughout Europe with his wife. Cantillon and Mary had two children, a son who died at an early age and a daughter, Henrietta, who would go on to marry William Howard Earl of Stafford in 1743. Although he frequently returned to Paris between 1729 and 1733, his permanent residence was in London. In May 1734, his residence in London was burned to the ground, and it is generally assumed that Cantillon died in the fire. While the fire's causes are unclear, the most widely accepted theory is that Cantillon was murdered. One of Cantillon's biographers, Antoine Murphy, has advanced the alternative theory that Cantillon staged his own death to escape the harassment of his debtors, appearing in Suriname under the name Chevalier de Louvigny.

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Why such kind of story is much more believable than today's economic books? Because things are much easy to understand and they all showed many kinds of human nature lively

Today's economic books are full of charts and formulas, ignoring the most important fact (human) behind all the economy events (gaming theory getting a bit close to human factors, but still far away from how to limit central bank's power)

Even the best theory does not work if the central bank is operated by human, if human have that amount of power in controlling the whole society through creating money out of nothing, there will be heavy corruption in favor of their own good, they would promote any kind of theory that benefit them, at least you can not find a valid reason to rule out that possibility

John Law's scheme failed because people do not trust his fiat money, they still want gold and silver coin, even those coins contains less and less gold/silver. This is very natural reaction for any kind of human. But today all the people in the society trust fiat money by default, since they were born into such a system, it took some generations to change people's behavior




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August 07, 2013, 10:41:42 PM
 #76


One of the examples is the injustice in the monetary system. The concept of justice is not something that economics can address. However, economics can explain the Cantillon effect which you just mentioned. One might take the normative position that some types of wealth transfers are just and others are unjust, and thus favour a particular monetary system, but economics can only answer the question whether specific means would result in specific effects.


Economics can not answer the question whether specific means would result in specific effects, especially long term wise, those are all best guesses, just sounds right, never really worked, otherwise there will never be any crisis. Economy is not science, it is politics and psychology

So, instead of finding a scientific answer for most efficient means, we'd better start with eliminating corruption at the first place, since corruption usually cause the biggest inefficiency in the system

BTW, efficiency is no longer a big concern in today's society, but justice is always a concern

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August 07, 2013, 11:02:32 PM
 #77


It's simple like this:

If the money supply is fixed, if somebody work more and created more products, he would still be able to sell at roughly the same price for some time -- "Cantillon effect", so his income increased, while people will realize later that same money chase more goods, thus they will reduce their purchase price next time, but they have already paid some extra money to that guy that worked more first. Such a system always reward the people that work more. Although there is a general trend of deflation, those who work more will benefit from his work,the earlier he sell this products, the more money he can make

If the money is created by central banks, then central banks get all the newly created money and they will become the biggest buyer of everything: Government bonds, bank assets, etc... then governments and commercial banks will start to make money and then some other business will start to make money, etc... Such a system always reward the central bank with all the newly created money and their closest supplier will be the first one to enjoy the new order from central bank

First system encourage honest work, second system encourage people climbing the social ladder towards central bank, thus we will see more politicians and bankers in the society

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August 08, 2013, 01:52:02 AM
 #78

Economics can not answer the question whether specific means would result in specific effects, especially long term wise, those are all best guesses, just sounds right, never really worked, otherwise there will never be any crisis. Economy is not science, it is politics and psychology
While I agree that economics is not science, it is not because of lack of predictability of empirical data, but because ends are subjective. Economics, from the Austrian perspective, is not about the analysis of ends (what people want), but the connection between ends and means.

So, instead of finding a scientific answer for most efficient means, we'd better start with eliminating corruption at the first place, since corruption usually cause the biggest inefficiency in the system
Efficiency is a normative concept.

BTW, efficiency is no longer a big concern in today's society, but justice is always a concern
The question of economics must logically precede the question of ethics, similarly as the question of logic must logically precede the question of ethics. Just like you cannot create an argument about ethics without a logical connection between assumptions and conclusions, you cannot form one without a logical connection between ends and means either.
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August 08, 2013, 02:11:28 AM
 #79

John Law's scheme failed because people do not trust his fiat money, they still want gold and silver coin, even those coins contains less and less gold/silver. This is very natural reaction for any kind of human. But today all the people in the society trust fiat money by default, since they were born into such a system, it took some generations to change people's behavior
John Law's scheme failed due to a combination of hyperinflation and suspension of specie payments, not because people apriori trust precious metals more than fiat. Typically, liquidity is the main factor determining the choice of a medium of exchange, not whether it is fiat. This is recognised by all the economic schools that I know. We can see that even empirically, in recent historical examples in Kurdistan or Somalia, where after the legal tender laws become ineffective, people do not switch primarily to gold and silver, but to more liquid fiat (i.e. US dollar), and often even keep using the old paper fiat. A monetary reform requires a lot of logistics, otherwise people stick with what already exists. The concept of a unit of account is, in my opinion, even more difficult to migrate. I've lived through several monetary reforms and I noticed other people still occasionally use the pre-Euro fiat as a unit of account years after it has been discontinued.

In countries where large parts of the money supply are digital, the logistics of a reform are simpler (because a reform occurs at banks in a hierarchical fashion). This however makes it even more difficult for traditional commodity monies such as precious metals to compete.
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August 08, 2013, 02:40:36 AM
 #80


Austrian methodology of praxeology in particular is supposed to be a pure system of axioms and deductive reasoning, but it is very difficult to avoid any normative statement whatsoever. Also, implicit assumptions often manage to creep in.

One of the examples is the injustice in the monetary system. The concept of justice is not something that economics can address. However, economics can explain the Cantillon effect which you just mentioned. One might take the normative position that some types of wealth transfers are just and others are unjust, and thus favour a particular monetary system, but economics can only answer the question whether specific means would result in specific effects.

The Austrians tend to be libertarian. We might speculate why, but one plausible explanation is that the Austrian economic analysis leads to the conclusion that many effects commonly ascribed to the actions of the state do not follow from the premises. This creates a consistency between the belief system (that the state should not be performing these actions) and the economic analysis (the actions do not lead to the popularly believed effects).


An overwhelming Keynesian view I find disturbing, is the concept of the Economy as a thing to be managed, where in fact an Economy is merely just the result of economic relationships within a defined group. 

As we don't seek to manage the laws of physics, we seek to understand them to make more effective use of them, and so it should be with the science of economics.  As with the science of meteorology there are fundamental laws governing the direction of air flow from a high to a low pressure, so too has economics such laws like price governed by are the laws of supply and demand.   It is just the effects of human wants, happens to be the divergent point that takes the science of economics into the realm of social science of managing the wants of humans.

I would agree that if one saw Economics as the study of an economy, then justice is not addressed through the discipline, however I would argue that if you see the economy as something to be managed then a normative position that some types of wealth transfers are just and others are unjust, is a choice made at the will of the managers and then subject to the concept of justice.   

While I hold the utmost admiration for Keynes after understanding his motives, he marginalises the science of economics in favor of understanding it through the lens of social science. Only to have all his prescribed benefits eroded in favor of a Monetarists (Chicago school) approach to managing the economy. 

On review of on Mises's writings, it seems evident to me that fee markets are the most efficient way to address human needs, and given human nature, as he distinctly puts it macroeconomics models can be nothing but floored.   

I think I see you point and agree with the Austrians being Libertarian, and I believe your inevitable implication is easily seen in the presence of week state control, where power tends to favour the oppressors at the expense of the greater good and as such should be managed and offset by the checks and balances proposed by Keynesians.   

 On praxeology not having studied it but with my rudimentary understandings, I can imagine it to be an attempt at making a social science a more predictive model to allow for the use of scientific modeling to prove an economic theory. Your correction would be welcomed?

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August 08, 2013, 03:02:19 AM
Last edit: August 08, 2013, 02:53:42 PM by Adrian-x
 #81

The question of economics must logically precede the question of ethics...

This isn't the case for Keynes.

Keynes's economic theories are exactly intended to create the kinds of social and economic relationships that he believed would make a moral society.
i.e. he made economics fit his ethics.

If the quote is true, then there are no other options but to allow Laissez-faire markets.

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August 08, 2013, 01:22:49 PM
 #82

The question of economics must logically precede the question of ethics, similarly as the question of logic must logically precede the question of ethics. Just like you cannot create an argument about ethics without a logical connection between assumptions and conclusions, you cannot form one without a logical connection between ends and means either.

I used to believe this kind of talk in school, but now I have worked in 2 multinational enterprises over 10 years, I can say that the business ethics has been very low due to today's financial system. It is how you can grab more money decide your position, not your performance/achievements. To get more money you must have good contact with governments/banks and do many unethical things to satisfy those sponsors. And since these things require no special skills but just a low level of ethic to do, finally only villains occupy the higher management position Grin


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August 08, 2013, 06:23:06 PM
 #83

John Law's scheme failed due to a combination of hyperinflation and suspension of specie payments, not because people apriori trust precious metals more than fiat. Typically, liquidity is the main factor determining the choice of a medium of exchange, not whether it is fiat. This is recognised by all the economic schools that I know.

I don't think that liquidity is a problem with gold/silver. It's same as bitcoin, you can always use a fraction of gold/silver to present its previous value

People usually want to regard official money as an unit of count and that unit itself should be constant in value from convenience point of view. In that case the only way to increase money supply under a gold standard is to dig out more gold, like California gold rush

But to utilize people's impression about fiat money's constant value and create lots of fiat money for the banking class without causing inflation, that is another thing. If everyone can own the FED through buying their shares, then any extra profit they made from printing money will go into everyone's pocket, that will be a much better system

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