Lest Ye be Vexed……..

Subsequent to my post: ‘If I had A Hammer’ some of the main points I made were discussed on a Maidsafe.org thread

 

(https://www.maidsafe.org/t/negative-interest-rates-and-when-robots-will-set-monetary-policy/3262/14)

 

probably via Dave Harrison @ TradeWIth Dave who contributes significantly to our overall understanding of new forms of money as they appear and evolve.

 

Despite the wise injunction not to ‘Listen at doors…’ I nevertheless proceeded to absorb and then respond to the comments I found there.

I am always keen to discuss my analysis since this is the best way I know to develop and deepen my own understanding of the Democratisation Of Money. Furthermore I am always in favour of the most robust kind of discussion on the basis of the premise that it is impossible to edge a knife on a block of butter. If you really want to sharpen your understanding sparks must fly!

 

The whole thread became increasingly unwieldy so I am anable to reproduce it in any kind of coherent order here. Obviously, you can see it all at the address above.

 

I have dealt with the points I think are most illuminating. I have put the points in bulleted quotation marks and my answers in italics.

 

From Janitor

 

  • ‘Duh… Worthless paper has no intrinsic value. That wasn’t too hard!’

 

Money is not paper or gold or anything else, it is a legal instrument recorded on a transferable object. Nothing is money until it is designated as such by the relevant legal authority. The mortgage on you house is written on paper, does that mean it is worthless because the paper is worthless? What nonsense! The value comes from what is printed on the piece of paper, not the paper itself.

  • ‘A real money is always worth something because even copper or iron money can’t ever be cheaper than the material it’s made from.’

 

I’m pretty sure this sentence doesn’t actually make sense; nevertheless refer to Greshams Law:

http://en.wikipedia.org/wiki/Gresham%27s_law

 

  • ‘I don’t know where he got the idea that money produces wealth. Money is wealth which produces nothing. That’s exactly what it’s supposed to do – be a medium of exchange and store of value. Money doesn’t “extract” anything, no clue where that Perry guy got those nonsensical ideas.’
  • ‘I don’t know where he got the idea that money produces wealth.’
  • ‘A currency of course doesn’t produce wealth’,

Capitalist economics claims that money produces wealth. If they do not:

What do Capitalists claim Capital is then?

What do Capitalists Capitalism is then?

What do Capitalists claim mean by ’ investment’?

What do Capitalists mean by ‘return on investment’?

 

  • ‘…it just helps it circulate. It doesn’t extract wealth,’

 

Even in its simplest terms, this statement is plainly self contradictory.

How can wealth ‘circulate’ unless it is extracted from one place so it can be ‘circulated’ to another?

In what form can wealth ‘circulate’ if not in the form of money?

What do you understand by the term ‘accountancy’?

What do you think accounts are for?

 

 

  • Because this post is about the nature of money, I think you should define “money” (it seems you mean “currency” rather than “money”?)

 

noun

noun: currency; plural noun: currencies

a system of money in general use in a particular country.

 

 

What do you imagine the difference is between ‘currency’ and ‘money’? Define this difference. If you know of any valid legal difference in the definition of currency and money please explain it. I used the term money specifically and advisedly.

 

  • Money (such as gold) has inherent value. You can coat airplane windows with it, enhance conductivity of connectors in your iPhone, etc. A currency can be intrinsically worthless, but then you could make it clear which one you are referring to to.(sic)

 

Gold can be used as money, but so can shells, pieces of paper etc. Money is a legal instrument. (see above). Aeroplane windows are irrelevant.

 

  • “It is a license, a legal permit, to extract value from within the society.”

But in a free society there’s no way to limit that. I don’t have to accept your money, I can pick any of several private currencies or forms of money that circulate around.

 

I also can (sic)

 

-(?) For some reason you have been unable to finish this sentence- were you confused? What did you mean to say?

 

Janitor says:’ I don’t have to accept your money’

This is simply wrong: You do have to accept my money in settlement of debt, legally ordered payments, in payment of taxes etc etc . Look up the meaning of ‘legal tender’. The government has mandated this. Your statement is evidence of painful ignorance.

  • “If there were an infinite number of possible profitable ways to utilise money what would the effect be on interest rates? Despite the fact that there would be little or no risk, interest rates would be high.  They’d be high because there’s more demand relative to supply. Money is supposed to be scarce, otherwise it’d be worthless or close to worthless and people would not want to hold on to it (or denominate their labour or products/services in it).

 

This does not in any way refute the point that interest rates are a product of demand, not risk; in fact you simply restate the first part of my point, albeit in a somewhat less elegant way.

 

Then you make the strange generalisation: ‘money is supposed to be scarce’. Based on what theory? Can you provide a definition of scarce? You suggest that people would not want to denominate goods and services in any particular money if it were not scarce. People within a given territory have no choice as to whether they have to hold the currency of that territory. They are required to hold that currency-in order to pay taxes for example, as I explained above. You either repeat what I say, in which case you are sort of on the right track, or else you deviate from my description and go into a ditch…

 

  • “And what would be the effect of an opposite environment of high risk and few profitable ways to utilise money? Then interest rates would be low because there would be little or no demand for money.I’m not sure this dual (high risk + few profitable ways to utilize it) hypothetical setup is valid.

 

Really? Because that is the setup we are in right now!

 

 

  • If risk is high, interest will be high. That’s regardless of how one wants to utilize money. If there are few investing opportunities, interest rates would be low because of a relative lack of demand.

 

You try to characterise ‘risk’ as some invisible abstract force of nature that cannot be located within concrete tangible reality. By conflating risk and interest you hope to glide past their supposed relationship: ‘If risk is high, interest will be high’. is a statement of religious faith dressed up as economics. There is no risk outside of investment opportunitiesor the lack of them. If there is, show me where it is!

 

  • Currently in the world there is too much capacity in most industries worldwide, so consequently although risk is small, there’s no demand for money (actually individual currencies, but since you didn’t make this distinction I’m playing along) simply because building another steel mill is likely to make that debt bad (i.e. you won’t make money from it).

 

‘Currently in the world there is too much capacity in most industries worldwide’ Another meaningless generalisation! Raw material producing industries and finished commodity industries to say nothing of services, cannot be lumped together in this way.

 

From Seneca

 

  • Interesting, but he doesn’t address the effect of inflation and deflation. In a deflationary period the value of money increases, so despite ZIRP/NIRP, which doesn’t increase the nominal value of a particular amount of money, the “real” value still increases over time through deflation. I think that undermines his entire argument? At least, if the deflation fully compensates the decrease in interest rate, then it does.

 

This goes right to the heart of my argument, which I am afraid you haven’t really understood. You cite the beneficial effects of deflation on the value of money as a way of offsetting the non-beneficial effects of ZIRP. You argue that in theory at least, deflation and ZIRP could effectively’ net-out’, meaning that there would be no losers in a system which would be in your terms, self regulating.

 

The first and most obvious problem with this is that it is highly unlikely that the people who are disadvantaged by ZIRP are the people who would be advantaged TO EXACTLY THE SAME EXTENT by deflation. When I put it in these terms I am sure you can see what I mean. In other words, if you are getting no interest on your savings, you are told you must take the money out of the bank and buy a boat with it, why?- because you will save a lot of money! But what happens if you don’t want to buy a boat?

 

From this it should be clear that even if ZIRP/Deflation could by some stretch of the imagination be described as OVERALL neutral, it has to be admitted that it causes massive wealth transfers from individuals within the system. Because it effects different MONEY FUNCTIONS differently.

 

The second problem with your suggestion flows directly from this:

Deflation and Inflation are in no sense ‘real, they are estimations based on aggregated information produced by governments. They are primarily political tools. I am sure you are aware that the methodology for calculating inflation/deflation figures has been regularly amended in every major economy, usually to suit the political requirements of the time. There is no clear, real and genuine way to calculate deflation, so the idea that this misty, indeterminate figure from the future can be used to offset the very real concrete lack of interest from today is a bit of a stretch….

 

The third problem is the main one I was trying to describe and it flows from the above two points I have made. You are describing monetary policy as a totality which is to say, you are concerned with the TOTAL amount of money netted out. But money is not like that. It is not a single contract that comes to maturity and is then paid out. Money is constantly being issued and retired, there is never a time when it is accounted for in totality. The amount of money and the ‘real’ value it represents is a constantly moving target. So there will never be a time when it will be possible to say what the discrete outcome of any action will be. The only way to understand money is as a series of ‘waves’ of contracts and the effect that these contracts have IMMEDIATELY. The effect of the money issued during the credit crunch was to save the lives of the banks. It does not matter what the ‘real’ value of this money was, in terms of the banks or the overall economy, without it the banks would have died. Just like a billionaire would die in the desert without a single bottle of water to keep him alive.

 

Money is not a totality- it is a collection of functions.

 

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