economics - where to begin?

certainly it's very hard to exchange a commodity for money if the money is tied to the commodity

That's one reason why gold was such a good choice in the dim ages past. Not only is it a stable element that can't oxidize, but it's pretty damn useless for anything but looking pretty, so making it awkward as a useful commodity was no sacrifice.

you all forget BITCOINS!!!!!

gold-pressed latinum FTW

But modern US "conservatism" has inherited lot of Andrew Jackson's anti-centralism, hasn't it? The issue of greenbacks and the Fed, are both actually Republican creations: but they're not at all conservative in the strict sense -- they were innovations -- and in the anti-centralist Jacksonian sense.

no, totally! its just that dynamic eisbaer describes upthread is like my basic lens through which i think about the politics of economic policy its totally jarring to me to see tea party types trying to reintroduce the gold standard and carping about the fed all the time, but yeah that stuff has a long tradition on the right

It's tempting to equate monetarism with conservatism and Keynesianism with liberalism, since that's how the economists in those camps tend to line up. However, the reality is actually a lot messier, since politicians aren't very consistent in their economic reasoning. For example, take Cheney's famous line: "Reagan proved that deficits don't matter". In economics circles, the notion that deficits don't matter is associated with Modern Monetary Theory and lefty types like James K. Galbraith.

how are we meant to work out which is right

Obviously politics comes into it as well - right-wing economists have different priorities to left-wing or left-leaning ones. They have different ideas of what a positive outcome would be and you have to take that into account.

But it's also impossible to know who's right until it happens because events dear boy can knock any forecast off course. Predictions don't necessarily take into account a Middle Eastern dictator doing something mental that pushes up oil prices for example.

Thanks to this thread, I started reading The Great Crash again.

Great Crash is very entertaining. Like Mark S alluded to, Galbraith has a keen mordant wit.

this

"fiat money" is a real term and a real thing (and a pretty good thing IMHO). it's the people who rant about the "evils" of fiat money (almost always goldbugs or other fringe wackos) that gives discussions about it its particular repute.

― Friedrich das Wunderhahn hat den traurigen Clownporn sehr gern (Eisbaer), Wednesday, 17 August 2011 13:08 (3 hours ago) Bookmark Suggest Ban Permalink

and this

fiat money is currency that is backed by the full faith and credit of a government, and not (explicitly) by the government's reserves of a commodity (such as gold or silver). this is overall a good thing b/c it doesn't artificially retard economic growth and planning by pegging currency values on the value or availability of a given commodity. its drawback is that, yes, a government in a bind can turn on its printing press and spew out money like there's no tomorrow (like Weimar Germany). i think that the pluses outweigh the minuses, but some folks don't agree. such folks have lots bats in the belfry IMHO, one of them an overriding fear of "big government." by constricting the supply of money, they constrict the growth of government.

― Friedrich das Wunderhahn hat den traurigen Clownporn sehr gern (Eisbaer), Wednesday, 17 August 2011 13:23 (3 hours ago) Bookmark Suggest Ban Permalink

are ridiculous

as I said it takes the consent of the population for money to have value, or you end up like wiemar germany or in the south sea bubble. Governments can decree all they like and the people in one, loud concerted voice can shout "FUCK OFF". It is the market that sets the value of money, gold, fish, or anything else for that matter.

Governments can print money the market establishes value. "Fiat" is an assenine concept when it comes to economics.

This is why goldbugs piss me off so much. Gold only buys a certain amount of work or grain or whatever. it doesn't buy the same tomorrow as yesterday. It's all barter, if ten billionaires in mumbai have a wedding this weekend then it will cost less gold to buy more grain because there will be shortage of gold. If the US prints bunch of money I will be able to buy more dollars with my euro or my gramme of gold; it's all relative. No one get's to declare anything has value because we can all turn round and say BOLLOCKS I'll only give you less.

Ed, I hope you realize that by far the largest amount of "fiat" money in circulation today was not created by the federal government, but by banks. iow, it was created by markets. But it is still "fiat" money, by all accepted definitions of that term.

In fact, the federal government has no ability to "print money" in the sense you are using the phrase; it ceded that function to the Federal Reserve Board a very long time ago. All money spent by the US federal government must come from either tax revenues or the sale of bonds or bills, which must be repaid.

The Fed, otoh, has the option of buying whatever assets it wishes to buy, using money that it creates by fiat. Whenever it buys US Treasury bonds using fiat money, this is known as monetizing the federal debt, or in layman's terms "printing money".

The Fed has been out of the habit of monetizing US debt since Volcker was chairman (crica 1980, under Carter). But the Fed has done a huge amount of it since 2008, under Bernanke, along with, I should add, monetizing hundreds of billions of dollars worth of those crappy, worthless CDOs issued by the fucking stupid market you seem to honor so much.

Runs on banks are the clearest demonstration that there is no fiat that runs where money is concerned. This may be pure semantics but the only thing of importance when money is used in a transaction is that the parties to that transaction agree that the money exchanged has a certain amount of value. No government can ascribe any kind of value to currency, be it gold or paper, value is only assigned at the moment of exchange.

It doesn't matter who or what creates the money, value is bound in agreement. Banks are only able to "create" money because a loan transaction occurs where both parties agree a value, (in line with the collective valuation of the market)

No government can ascribe any kind of value to currency, be it gold or paper, value is only assigned at the moment of exchange.

the currency has an agreed value, the value being decided at any given transaction is that of the good being exchanged

exactly

i was disagreeing with you!

When customers make a run on a bank, the one and only thing they are seeking is that same currency that you seem to think they are showing no confidence in. On the contrary a bank run is evidence that the customers have no confidence in the bank, but boundless confidence in the value of the currency they deposited there.

Imagine the contrary situation where the value of the currency has been destroyed through inflation. In such a case, the customer knows that there will be plenty of money in the bank to cover their deposit. Bank runs don't happen in those circumstances. However, whatever money a person lays their hands on is almost certain to be spent quickly, rather than put in a bank.

It appears you have a somewhat confused knowledge on this subject.

It appears you have a somewhat confused knowledge on this subject.

this is such a disgusting sentence, how can you even live with yourself after typing it?

i really don't know why you think anything i said is "ridiculous," ed. i gave the definition of what fiat money is, i didn't say that the markets don't determine the value of currency at any given point of time. if anything, untethering the value of a currency from gold (or other commodity) actually aids markets in determining the true worth of currency.

this is such a disgusting sentence, how can you even live with yourself after typing it?

bit strong imo

also, aimless OTM regarding bank runs. those are really judgments about the soundness of the financial institution and not a judgment on the soundness of the currency deposited there. or at least not if you have something like the FDIC.

I stand by the sentence. That is exactly what Ed's posts reveal to me. otoh, it appears ogmor has a delicate stomach.

pfft, he's a physician now and all

He can palp my liver, but he ought not to prescribe in this area.

it appears i have a somewhat confused stomach.

not to get name-droppy and anecdotal here, but i was actually working (as a compliance consultant) at a (now-defunct) bank which went under because of a run by its depositors right after Lehman Bros. collapsed. this institution's failure had everything to do with a lack of confidence in the institution itself, and nothing to do with a lack of confidence in American currency.

this can either be through fiscal policy (govt spending and taxation) or monetary policy (interest rates/money supply)

what does monetary policy actually involve? (i don't really understand interest rates and don't know what you mean by money supply)

(quantitative easing)

i kept going to meetings a few months ago where this was brought up as a possible solution and people always said that it wasn't because no one fully understands it. what...is it? and...why does no one understand it?

prop up demand

like "confidence" and "risk", i'm slightly confused by "demand" as a quantifiable/predictable/concrete thing. a lot of economics seems to assume that people's desires can be manipulated? it doesn't seem to allow for much human irrationality?

i had other questions (those were from lamp's big post last night) but i started writing that a few hours then had to do other shit so thought it was best if i just post those questions for now

that's also why it is so hard for folks inclined to Keynesianism and strong fiscal policy have such a hard time convincing the lay public about the advantages of their proposed programs. on its face, it flies against "common sense" -- i.e., that in bad times one does not waste money, pays down debts and saves more. this is where all of this talk about "the government needs to balance its checkbook!" comes from and from which such rhetoric derives its strength. the GOP has made much political hay (and caused much economic damage) by using this misleading analysis (it is misleading because the government isn't a "household," and even in bad times households do take on increased debt [to pay for education or economically-productive products like computer software]).

― Friedrich das Wunderhahn hat den traurigen Clownporn sehr gern (Eisbaer), Wednesday, August 17, 2011 5:51 PM (Yesterday) Bookmark Suggest Ban Permalink

this rings totally true though! it's completely counter-intuitive and i don't understand why you're right, if you are. i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.

also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

Lamp's explained the demand bit after that though. If the economy is slowing or in recession then the government can (if it chooses) pump money into, say, infrastructure projects or construction of schools or hospitals. This creates demand for construction firms, architects, building materials, steel, whatever. The companies that provide those services are then getting work they wouldn't otherwise due to the private sector slowdown. This means they can keep workers on, or indeed hire new workers. Those people will be in a reasonably secure job for the duration of that project, if they're lucky, so they'll be more likely to spend their own cash, and so it continues through the system.

this is true - the question before "economics?" should be "what is money?"!

― post, Wednesday, August 17, 2011 6:41 PM (Yesterday) Bookmark

yeah this thread nvr took off: What does money represent?

this rings totally true though! it's completely counter-intuitive and i don't understand why you're right, if you are. i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.

also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

No! If it's a choice between borrowing money and letting their children starve on the streets, most households would opt for borrowing the money, if they could. But a government isn't like a household because it can continue to borrow for longer and can never go bust, although it can get into a lot of trouble like eg Greece.

Also, no matter how big a government's debt or deficit is, they still need to keep the economy moving to stop tax revenues drying up even furher. If tax revenues dry up, then the debt or deficit will get bigger. So if consumers and businesses won't spend in sufficient quantities, the government has to in order to stop that happening. This is why a lot of economists are arguing that they shouldn't be austerity measures until the economy has recovered, because otherwise they'll make the situation and deficit worse not better.

i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.
also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

The basic idea is that if a household stops spending and saves instead, then it has more money - it has taken it out of the game

But if everyone stops spending and saves money - then not only are fewer things being sold so less jobs needed, but also there is less money in the game full stop

just as money appears when loans are made...it disappears when debts are paid off.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

Yes, it's worth mentioning that if there was no debt than virtually nothing would get done. No one would have the cash to buy a house, build a building, establish a business, anything, which means fewer jobs. No one except a few people who'd inherited money, and most of them would have had ancestors relying on debt at some point.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

― colby, Thursday, August 18, 2011 4:00 PM (2 seconds ago) Bookmark

this sort of presents the current distribution of property and power as not a problem!

the concept of debt - not its current manifestation

But a government isn't like a household because it can continue to borrow for longer and can never go bust, although it can get into a lot of trouble like eg Greece.

so why did greece get into trouble? i don't really understand exactly what greece's trouble is or why we're not in the same trouble.

This is why a lot of economists are arguing that they shouldn't be austerity measures until the economy has recovered

but isn't the only reason austerity measures are needed BECAUSE the economy is shit?

i have no idea what "the economy is shit" even means.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

owing tens of thousands of pounds in loans sounds like a problem to me! also i tend to thinking that mortgages are terrifying and the only way i ever want to pay for a house is if i have that amount of money in cash. you can't predict the future!

so our economy relies on

- debt
- money that isn't real
- borrowing money you don't have

WHAT THE FUCK

Once I tried to calculate how many times a dollar has to change hands every year for the US economy to be healthy, but I couldn't really figure out how to start and bogged down.

i have no idea what "the economy is shit" even means.

there's no growth, and a large gap between government revenue and government expenditure, necessitating borrowing, 'debauching the currency', etc. the second question relates to the 'household' meme. the growth question is more interesting.

The UK owes more than Greece, but we also bring more in in tax due to being a much bigger economy, so we can cope with paying off that debt. Also we are trusted by lenders to keep paying back, so they're okay with continuing to lend. The same isn't true of Greece.

owing tens of thousands of pounds in loans sounds like a problem to me!

Well the idea is that you have something (a house - a company - some shares - a big bag of diamonds) that you could sell to pay back that loan, if necessary

who are the lenders? why are we trusted? what happens if they capriciously (and UNPREDICTABLY) stop trusting us?

i wouldn't fucking trust us

also why isn't this taught in schools?

The lenders are the banks - who write the money into existence, they trust us because they know that people will work for the bulk of their lives to pay it back

If everyone wasn't in debt and didn't have to work to keep hold of their things and pay it all back...then people would take a different view of work and it wouldn't be a 40 year stretch

The lenders are banks. They trust people because a) they have enough data to know they can, or that the risk is lower than with other people, and because they have mechanisms in place to insure against the risk (some sensible, some utterly bonkers and useless as we've seen). They lend the money because they're reasonably sure they will get more back.

what happens if they capriciously (and UNPREDICTABLY) stop trusting us

This is what the credit crunch is. Lenders stopped trusting borrowers, initially banks stopped trusting other banks to be able to pay back the money they lent them, this meant banks stopped trusting the businesses they lent to, those businesses were more likely to go bust as a result, and the whole system started to collapse.

They lend the money because they're reasonably sure they will get more back

Well they also lent it because on an individual level there were personal incentives to do so - and if you know you're not necessarily going to be working for that institution when it all goes wrong, then why not? You only have to worry about what happens while you are working at that particular institution

this thread is making me oscillate between feeling really dumb and thinking everyone else is really dumb. that cessation of trust seems so obvious to me, like OF COURSE it was gonna happen. the entire system seems ridiculously flawed and fragile.