What is Money? (Note: potentially wonkish)

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Dlaw
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What is Money? (Note: potentially wonkish)

Post by Dlaw » January 14th, 2018, 4:46 pm

I have beenb obsessed for years with the concept of money. It began when I looked at my economics text with its Supply and Demand graphs and suddenly realized that the supply of everything on every graph was implicitly measured against the supply of money.

I asked my professor: "Oh, so about how much money is there. How do we find that out".

He launched into a fifteen minute explanation that led to a 50-minute discussion that wasted the entire class period with increasingly confused and frustrated exchanges.

I will give you a taste of one side of a multi-sided issue. It happens to be my side:

"For millennia the concept of money was associated with the concept of a finite amount of precious metal. This concept is wrong and intrinsically misleading, even though there is no question that precious metal has been used as money. Yet, the concept 'infects' socio-economic theories from Marx to Anarcho-Capitalism."

Any opinions on what money really means. It seems to me very close to a truly practical, truly philosophical debate.

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 14th, 2018, 4:49 pm

Sorry, this is the proofread version.

I have been obsessed for years with the concept of money. It began when I looked at my economics text with its Supply and Demand graphs and suddenly realized that the supply of everything on every graph was implicitly measured against the supply of money.

I asked my professor: "Oh, so about how much money is there? How do we find that out?"

He launched into a fifteen minute explanation that led to a 50-minute discussion that wasted the entire class period with increasingly confused and frustrated exchanges.

I will give you a taste of one side of a multi-sided issue. It happens to be my side:

"For millennia the concept of money was associated with the concept of a finite amount of precious metal. This concept is wrong and intrinsically misleading, even though there is no question that precious metal has been used as money. Yet, the concept 'infects' socio-economic theories from Marx to Anarcho-Capitalism."

The essence of money seems to me very close to a truly practical, truly philosophical debate.

Steve3007
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Re: What is Money? (Note: potentially wonkish)

Post by Steve3007 » January 14th, 2018, 5:13 pm

I'm told that when currencies stopped being tied to the gold (precious metal) standard, they became fiat currencies. I'm also told that the total amount of money in the world is a negative number.

I'm interested to know, from anybody who knows anything about economics, whether that second one is true? And, if so, does it matter? Should I wake up at night in a cold sweat screaming that there's a negative quantity of money in the world and that we are therefore all doomed?
"When the seagulls follow the trawler, it is because they think sardines will be thrown into the sea." - Eric Cantona.

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 14th, 2018, 5:58 pm

Steve3007 wrote:
January 14th, 2018, 5:13 pm
I'm told that when currencies stopped being tied to the gold (precious metal) standard, they became fiat currencies. I'm also told that the total amount of money in the world is a negative number.

I'm interested to know, from anybody who knows anything about economics, whether that second one is true? And, if so, does it matter? Should I wake up at night in a cold sweat screaming that there's a negative quantity of money in the world and that we are therefore all doomed?
Compared to a gold-based "fully convertible" money system, the present concept of "Money is Debt" implies a "negative" amount of money, but only from that limited perspective.

(NB: Notes never really were fully convertible to gold, because mass conversion would have caused bank runs and insolvency).

Money is debt because the amount of money available represents a balance between (mostly) bank assets (which are debt) and bank liabilities (which are also debt). If the quality, maturity and hedges on the assets are better than those of the liabilities, we have a positive amount of money, which is actually very large and fluid.

Money is created and destroyed all the time with the issuance and extinguising of debt.

Steve3007
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Re: What is Money? (Note: potentially wonkish)

Post by Steve3007 » January 15th, 2018, 4:08 am

OK, thanks. I guess I won't lose any sleep then. At least not over that.

I think cryptocurrencies are an interesting development, because they don't really seem to be crypto currencies so much as crypto commodities. Hence the concept of mining them, and the fact they're designed in such a way that there is a finite quantity that it's possible to mine (for bitcoin I think it's 21 million or something isn't it?). My first reaction when learning about the way that Bitcoin is designed was to think that the whole concept is barking mad. The amount of computing power required to mine new bitcoins is deliberately made to get greater and greater as we get closer to that maximum quantity. It seems mad to unnecessarily devote all those expensive computing resources (with the consequent energy use and CO2 production) to an entirely artificial and inherently pointless mathematical problem. The only purpose of the problem is to be increasingly harder to solve (as I understand it).

But, thinking about it, I guess it's not worse than spending a large amount of resources mining a more traditional commodity like gold. Gold has some practical uses (for its electrical properties) but we can't eat it, live in it or make clothes from it. So it is primarily mined purely because it is valuable, and it is valuable purely because it is rare, and it is rare purely because it is difficult and expensive to mine, because there's not much of it (compared to, say, iron). So perhaps bitcoin mining is no more pointless than gold mining. We're willing to spend a lot of resources looking for gold because gold is valuable because it takes a lot of resources to look for it.
"When the seagulls follow the trawler, it is because they think sardines will be thrown into the sea." - Eric Cantona.

Londoner
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Re: What is Money? (Note: potentially wonkish)

Post by Londoner » January 15th, 2018, 6:23 am

Dlaw wrote:
January 14th, 2018, 4:49 pm

I have been obsessed for years with the concept of money. It began when I looked at my economics text with its Supply and Demand graphs and suddenly realized that the supply of everything on every graph was implicitly measured against the supply of money.
There is nothing special about money. You can also draw graphs that look at the supply and demand for the same for the various forms of money. The price of gold and silver changes (against each other, against currencies and against commodities), likewise the various currencies. And within a single currency there is a changing demand for one form against another. For example, if everyone wants to keep their money in a very liquid form, they will only exchange it for a less liquid form if they are paid a good price (e.g. get paid high interest)
I asked my professor: "Oh, so about how much money is there? How do we find that out?"
I think there is only a problem if we insist on seeing money as if it was all just one thing. There is no hard line to be drawn between money and property generally. If we treat something as a store of value, then it is a form of money.

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 15th, 2018, 1:06 pm

Steve3007 wrote:
January 15th, 2018, 4:08 am
OK, thanks. I guess I won't lose any sleep then. At least not over that.

I think cryptocurrencies are an interesting development, because they don't really seem to be crypto currencies so much as crypto commodities. Hence the concept of mining them, and the fact they're designed in such a way that there is a finite quantity that it's possible to mine (for bitcoin I think it's 21 million or something isn't it?). My first reaction when learning about the way that Bitcoin is designed was to think that the whole concept is barking mad. The amount of computing power required to mine new bitcoins is deliberately made to get greater and greater as we get closer to that maximum quantity. It seems mad to unnecessarily devote all those expensive computing resources (with the consequent energy use and CO2 production) to an entirely artificial and inherently pointless mathematical problem. The only purpose of the problem is to be increasingly harder to solve (as I understand it).

But, thinking about it, I guess it's not worse than spending a large amount of resources mining a more traditional commodity like gold. Gold has some practical uses (for its electrical properties) but we can't eat it, live in it or make clothes from it. So it is primarily mined purely because it is valuable, and it is valuable purely because it is rare, and it is rare purely because it is difficult and expensive to mine, because there's not much of it (compared to, say, iron). So perhaps bitcoin mining is no more pointless than gold mining. We're willing to spend a lot of resources looking for gold because gold is valuable because it takes a lot of resources to look for it.
I think that crypto currencies are potentially great things, but that Bitcoin, for example, is just the most cleverly-devised Ponzi scheme ever.

What bitcoin shows us, though, is that the function of "medium of exchange" is overhyped. It's the beginning of money but not money's most important function - which is credit.

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 15th, 2018, 1:12 pm

Londoner wrote:
January 15th, 2018, 6:23 am
Dlaw wrote:
January 14th, 2018, 4:49 pm

I have been obsessed for years with the concept of money. It began when I looked at my economics text with its Supply and Demand graphs and suddenly realized that the supply of everything on every graph was implicitly measured against the supply of money.
There is nothing special about money. You can also draw graphs that look at the supply and demand for the same for the various forms of money. The price of gold and silver changes (against each other, against currencies and against commodities), likewise the various currencies. And within a single currency there is a changing demand for one form against another. For example, if everyone wants to keep their money in a very liquid form, they will only exchange it for a less liquid form if they are paid a good price (e.g. get paid high interest)
I asked my professor: "Oh, so about how much money is there? How do we find that out?"
I think there is only a problem if we insist on seeing money as if it was all just one thing. There is no hard line to be drawn between money and property generally. If we treat something as a store of value, then it is a form of money.
Think about all the ingenuity applied over all the millennia by male, heterosexual, Homo sapiens to try and change the minds of female Homo sapiens who wouldn't have sex with them.

Then they invented pieces of paper with numbers on them and Viola! Problem solved.

That's a little different.

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 15th, 2018, 7:56 pm

Voila.

Clearly I meant to write "Voila".

Ok, legal marijuana may not be all good.

:D

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LuckyR
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Re: What is Money? (Note: potentially wonkish)

Post by LuckyR » January 16th, 2018, 4:14 am

My understanding is that the world has a finite amount of things of value (goods and services), somewhat separate from that, governments make money as an artificial construct to ease commerce. There is as much money as a government wants to make, but the total value of the money is relatively fixed, so more money does not equal more value.
"As usual... it depends."

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 16th, 2018, 4:56 pm

LuckyR wrote:
January 16th, 2018, 4:14 am
My understanding is that the world has a finite amount of things of value (goods and services), somewhat separate from that, governments make money as an artificial construct to ease commerce. There is as much money as a government wants to make, but the total value of the money is relatively fixed, so more money does not equal more value.
Banks create the vast bulk of the money rather than the government through the multiplier effect. Governments can create money but it adds very little to the highly probabilistic sum which one could define something like : "That money which is likely at the margins to join or escape the economy".

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LuckyR
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Re: What is Money? (Note: potentially wonkish)

Post by LuckyR » January 16th, 2018, 5:03 pm

Dlaw wrote:
January 16th, 2018, 4:56 pm
LuckyR wrote:
January 16th, 2018, 4:14 am
My understanding is that the world has a finite amount of things of value (goods and services), somewhat separate from that, governments make money as an artificial construct to ease commerce. There is as much money as a government wants to make, but the total value of the money is relatively fixed, so more money does not equal more value.
Banks create the vast bulk of the money rather than the government through the multiplier effect. Governments can create money but it adds very little to the highly probabilistic sum which one could define something like : "That money which is likely at the margins to join or escape the economy".
Well if you want to label the Federal Reserve Bank as a generic "bank" and not part of the "government", you are free to do so. But it does not change the points within my post. Do you disagree with them?
"As usual... it depends."

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 16th, 2018, 5:13 pm

LuckyR wrote:
January 16th, 2018, 5:03 pm
Dlaw wrote:
January 16th, 2018, 4:56 pm


Banks create the vast bulk of the money rather than the government through the multiplier effect. Governments can create money but it adds very little to the highly probabilistic sum which one could define something like : "That money which is likely at the margins to join or escape the economy".
Well if you want to label the Federal Reserve Bank as a generic "bank" and not part of the "government", you are free to do so. But it does not change the points within my post. Do you disagree with them?
What I'm saying is that the Fed creates maybe 1/5 of the money supply. The European Central Bank (ECB) probably creates a little more now, but it's not clear. The Bank of Japan (BOJ) is in a money-printing frenzy and yet Japanese banks still create multiples of the money the BOJ creates.

My answers to your points depend on having a common understanding of that dynamic.

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LuckyR
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Re: What is Money? (Note: potentially wonkish)

Post by LuckyR » January 17th, 2018, 1:34 am

Dlaw wrote:
January 16th, 2018, 5:13 pm
LuckyR wrote:
January 16th, 2018, 5:03 pm


Well if you want to label the Federal Reserve Bank as a generic "bank" and not part of the "government", you are free to do so. But it does not change the points within my post. Do you disagree with them?
What I'm saying is that the Fed creates maybe 1/5 of the money supply. The European Central Bank (ECB) probably creates a little more now, but it's not clear. The Bank of Japan (BOJ) is in a money-printing frenzy and yet Japanese banks still create multiples of the money the BOJ creates.

My answers to your points depend on having a common understanding of that dynamic.
Regardless of who creates the money, money does not have inherent value, it is a placeholder for pre-existing value. Thus the more money exists in a given system, the overall value remains the same and the less each piece of the money is worth.
"As usual... it depends."

Dlaw
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Re: What is Money? (Note: potentially wonkish)

Post by Dlaw » January 17th, 2018, 1:10 pm

LuckyR wrote:
January 17th, 2018, 1:34 am
Dlaw wrote:
January 16th, 2018, 5:13 pm


What I'm saying is that the Fed creates maybe 1/5 of the money supply. The European Central Bank (ECB) probably creates a little more now, but it's not clear. The Bank of Japan (BOJ) is in a money-printing frenzy and yet Japanese banks still create multiples of the money the BOJ creates.

My answers to your points depend on having a common understanding of that dynamic.
Regardless of who creates the money, money does not have inherent value, it is a placeholder for pre-existing value. Thus the more money exists in a given system, the overall value remains the same and the less each piece of the money is worth.
That's a very important point of debate and I'm on the other side of it.

I think that credit creates value in and of itself. Consider: are you more productive when you know there is a real possibility of financing for your ideas?

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