The Star-Buck

I have described myself as “A recovering Keynesian” in that my training was substantially all in Keynesian Economics with “Honorable Mention” for Communist / Marxist Theory and a smattering of Economic Theory that reached back to Say and some of the French traditional economics and a bit of the Scholastics of Spain. Notice what is missing from that list? Yup. Austrian School.

There were occasional sideways comments about The Chicago School and I’d heard the name Austrian School (often in a disparaging remark that we ought not to waste our time on them.)

As I’ve slowly started going back to re-learn Economics with an Austrian Accent; and fill in the missing parts, I’ve occasionally had “interesting insights”. This often happens when I’m first wandering in a new field, so that it is happening when looking at The Austrian School tells me “there is some there there” worth continuing.

In this case, I was reading a general introduction to The Austrian School:

http://mises.org/etexts/austrian.asp

Along with suddenly being forced to learn some strange words, like “praxeology” ( the study of what makes people do things http://www.wordiq.com/definition/Praxeology ) I also ran into a different view on money.

At that first departure into “why folks do things”: The Austrian School bases insight on rumination about just that; why people do things. The non-Austrians critique this as ‘non-scientific’ and like instead to gather data and from it discover what the result might be. So Austrians say reality is too complex to observe and measure, while the others say “you are not scientific”. I’m left looking at it thinking Economics is just chock full of “Emergent Behaviour” and feedback loops. The economic models have been about as accurate as the climate science models in predicting results.

So while I can see a benefit in all the data gathering, measuring, and modeling, IMHO the Austrian School has the “common sense” sanity check on that analytical approach. My first suspicion is that these two methods are likely to work best as checks on each other. That will wait to be seen.

But it was the diversion into “why money forms” that caught my muse today.

My prior orientation to Money was largely as Historical Truth. – Money “just was”. The goal was to gather data about the kinds, the flows, the quantities. Lip service to the history of money as ‘funny stories’ about things like sea shells and large rock donuts and other “primative” money. All nice and all; but not very enlightening as to WHY money. Just “something we all agree has value.” The Austrians have a thesis that “makes sense”.

The dominant British tradition received its first serious challenge in many years when Carl Menger’s Principles of Economics was published in 1871. Menger, the founder of the Austrian School proper, resurrected the Scholastic-French approach to economics, and put it on firmer ground.

Together with the contemporaneous writings of Leon Walras and Stanley Jevons, Menger spelled out the subjective basis of economic value, and fully explained, for the first time, the theory of marginal utility (the greater the number of units of a good that an individual possesses, the less he will value any given unit). In addition, Menger showed how money originates in a free market when the most marketable commodity is desired, not for consumption, but for use in trading for other goods.

And a lightbulb came on for me.

I’ve been pondering how to make a usable “money” system that depended less on Central Banks and monetary authorities. A different kind of money that was not based on a precious metal, yet had fundamental limits on creation of money out of nothing from the same basic roots. Here was the key.

Pick some services and products that are widely desirable, very marketable, and make an easily transported and exchanged currency out of them

Immediately what comes to mind is stamps. They have been used almost forever as a way to collect taxes and send small values through the post (where coins can be problematic). The U.S. Post Office now issues “Forever Stamps”. I’ve often used the change in the value of the US Postage Stamp 1st Class as an inflation metric. When I was a kid, there was a great fuss as it rolled over to 5 Cents. It is now on the cusp of 50 Cents and the $US is “worth” about 10% of the value then (measured in my personal basket of goods that includes gasoline – 35 Cents / gallon to $3.50 / gallon and others). So simply by visiting the post office, you can turn $US into an inflation protected currency: The Forever Stamp.

As a first unit of currency, then, it fills in the 50 cent piece area.

What about something in the ‘couple of dollars’ range? What is ‘the most marketable commodity’? I’d suggest it is the nearly ubiquitous Starbucks Coffee. At present they issue gift cards denominated in $US. IFF they could be persuaded to issue a gift certificate for a specific drink, perhaps the standard Latte or Mocha, we would have an inflation protected unit of about $3 or $4 US. The Starbucks Star-Buck. In theory, anyone could create the Star-Buck via an arbitrage / fund creation. Take in $US and invest them. Issue ‘gift cards’ that have a Star-Buck unit and maintain the ‘exchange rate’ at the time the card is used. Rather like issuing a debit card in Euro’s and using it to buy in $US. I think it would be far easier for Starbucks to issue such a card themselves (and make a bundle on the ‘float’ of $US Cash taken in while the costs of providing that coffee have not yet arrived); but even if they don’t, anyone could do this.

The exact exchange rate between the Stamp and the Star-Buck might change from time to time as relative cost inflation has impacts, but it ought to be acceptable.

Moving on to the next larger “bill” in our wallet, I’d suggest the Tank Of Gasoline. In analogy to the Star-Buck, any or all gasoline makers could issue a ‘debit card’ denominated in gallons of gasoline (RUG – Regular Unleaded) before State and Local taxes. A “Tank” could be any size one wanted, but I’d suggest 10 gallons. That would make the “Tank” about $30 at present. A reasonable sized bill. A bit larger than the $20 bill that is now too small for many things (taking up to 3 of them to buy a Tank for a large car). But if folks like a 20 gallon $60 Tank, that would be just as reasonable. Then one could define the 1/2 Tank and 2, 5, or 10 Tank notes. Now we have another inflation protected unit of value and exchange. It will tend to bounce around more than the Star-Buck as oil is more volatile, but longer term is more stable and trustworthy than the $US. Besides, many of us will be using our Tanks up weekly…

Initially the ratio would be about 10 Stamps per Star-Buck and about 10 Star-Bucks / Tank. (Depending on just which standard coffee was used for the Star-Buck base.)

At that point, a 10 Tank Note would be worth about $300 US today.

This same method could be extended to even larger “Notes” if desired. The “Tiffany” would be a 1 carat of middle grade, that looks to be “I” x “SI1” on this chart: http://www.ajediam.com/diamond_price_index.html which IFF I have interpreted it correctly, runs out at 5985 “units” that are $US. So call it about $6000 at present, or 200 Tanks. 20 of the 10 Tank notes.

I’m pretty sure if we needed smaller units than the Stamp, we could come up with a value for the Gumball or the Pez or the Tic-Tac ;-)

So, in very simple manner, we can make an inflation protected currency, anchored in fundamental values of highly marketable things, that could readily be integrated into our “plastic” economy by anyone who wished to set it up. Just as one can have multiple currencies in an account (due to some English donations, I have both $US and Pounds Stirling in my PayPal for instance) the new Debit Card would have distinct quantities of Stamps, Star-Bucks, Tanks, and Tiffanys on it. The exact exchange between them set day to day. Anyone wishing to buy a product would use it just like any other international credit card with an exchange rate conversion. (The default assumption being that you want to spend the unit of currency closest in scale to the item being purchased. If buying $200 of groceries, the 6 Tanks would be spent first, then 5 Star-Bucks (and whatever Stamps were needed to make up the remainder and any slippage).

The really fun thing about this idea is that it generalizes. Folks can make a currency out of any and all commodities they like. If, for example, a Wheat Farmer wanted to set one up, they could have their account credited in Wheat Tons at the time they sold their wheat. A direct ton / ton exchange at the point of sale. Then, as desired, they could turn their Wheats into Tanks or Tiffanys and any other currency desired. They could easily even turn their Wheats into Nitrogens (Tons of Ammonium Nitrate fertilizer) and Diesels ( Tanks of Diesel – though likely a 100 Gallon Tank as combines are bit large ;-) as desired to hedge their expected future purchases.

The only limitation on the money supply is the supply of all stuff that folks wanted to turn into currency accounts. Each individual currency unit would be backed by a different agency (or set of agencies) so the failure of any one Central Currency Banker (such as Starbucks or Standard Oil) would not cause a generalized Financial Crisis. Any currency that tends to inflation problems (i.e. over printing and under delivering) would find itself rapidly ‘run off’ as folks moved to Tanks or Tiffanys, or LaborHours (1 unit of Minimum Wage). Heck, a Fast Food Chain could even pay their wages directly in units of “LaborHours” and keep some of their ‘cash’ in units of “Cows” and “Sugars” (ton of beef and ton of sugar). That worker could then pay LaborHours directly to their hairdresser or dentist (who could pay them to their employees directly).

In essence, the “money supply” becomes the economy.

I would expect that some “currencies” would be the most popular (the most widely used and desired, according to the theory above) but I would also expect that specific to vary by location (and perhaps by market segment).

For example, in 3 rd world countries, the units of currency that might be more desired could be the Rice and Bean ( a kg unit of each) and the Lamp ( a liter of kerosene).

In Conclusion

So that’s my proposal for a New Freedom Currency system. Anyone who wishes, creating a currency by monetizing a commodity. Market theory would dictate that the strongest currencies based on the most widely traded commodities would be the dominant ones. Interfaces would be needed between the major global commodity markets and new “countries” (the currency issuers) with their “national currencies” entered into the existing currency exchange system used at present for debit and credit cards. Ratings Agencies rating the various “providers” of any particular currency unit and the markets insured in the same way as present commodity exchanges. (Heck, this would be an ideal market for the commodity market makers).

Just take “money” and “currency” out of the hands of governments and central bankers and put them back in the hands of the folks conducting commerce and creating fundamental wealth. Facilitated by commodity exchanges and our plastic money infrastructure.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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91 Responses to The Star-Buck

  1. p.g.sharrow says:

    Sounds like back to the future. If I remember correctly we had something like that back in the old days before we settled on gold and silver coins! ;-) pg

  2. Laurence M. Sheehan, PE says:

    The proper word or phrase is “medium of exchange”. A “good” medium of exchange should be easily and cheaply transportable, valued as widely as possible, and darned difficult to counterfeit. It should be divisible into small enough parts so as to serve as the exchange unit for the smallest of items to be traded.

    “Money” is the term generally for coinage. Other “items” have been used successfully as a medium of exchange. There is a big difference between “worth” and “value”. Worth is what amount people in general will pay for something. Value is in the mind of the beholder.

    Very little in the way of coinage (and “paper” money represents the coinage units) is actually used as of now. Now, almost all “money” is in 1s and zeros in computer files (binary units).

    The largest difficulty is always . . . how to find an honest “banker” or controller of whatever units the medium of exchange consists. Someone has to be the holder and keeper, if there is to be anything but simple trading between individuals.

  3. adolfogiurfa says:

    The only bad thing about capitalism is StarBucks´”coffee” delivered in one pint plastic container :-)
    Every solar minimum there are political, social and economic changes. This time it is the same.
    Buy more popcorn!

  4. adolfogiurfa says:

    @E.M.: What you suggest I could translate it as: ” to each its own”, one country one currency: the higher the added value to raw materials the stronger the currency. In one word: As it was before a few wanted the capital gains of the hard working many.

  5. omanuel says:

    Laurence, the problem is finding “honest” bankers, politician, scientists, reporters, editors, etc. who is not just living in the ego cage.

  6. Jason Calley says:

    You have some good ideas, E.M.! How do I know they are good? Because there are real world examples where very similar solutions have been worked out. In much of Africa the instability of national currencies has led to a rather ingenious substitute which is fungible, stable, safe and which crosses national borders. The commodity in question? Pre-paid telephone cards! They can be charged to any given amount, they are useful in themselves, they work in many nations and the corporations which back them are more stable than the nations. Imagine a store with prices denoted in “minutes”.

    One small point on the use of words: in Austrian economic speech “money” is generally used to simply denote “the most liquid commodity” within any economy. In India it is a rupee note, in prison it is cigarettes, in the US it is Federal Reserve Notes.

  7. Sera says:

    Would you be able to ‘crush’ one commodity by using another commodity? Would it be possible to corner or dilute the commodity? Would it be possible to launder a commodity? I do prefer the theory of Austrian Econ, but politicians will find a way to screw up ham sandwich if you give them a chance. If everyone was honest, Keynesian would work (probably). I’m playing DA here: what are the drawbacks/unknowns of AE?

  8. E.M.Smith says:

    It occurs to me that in some parts of Latin America the units of currency could be the Baggie, the Coca and the Snort ;-)

    Probably work well in L.A. too ;-)

    @Sera:

    By “crush” do you mean crash the price? There are natural consumers of each commodity and there are limits on what can be produced in any one year. This limits the ability to flood the market with excess or remove an excessive amount from trade. It is possible to manipulate markets, but not easy for large volume commodities ( like oil, sugar, coffee, etc.)

    Still, I’d expect the usual level of “Anti Trust” enforcement to be applied.

    Can a commodity be ‘cornered’? Yes, depending on the commodity and the person trying the ‘corner’. By having several units in common use, any attempt to corner will be met by folks doing things like dumping Silver at $30 / ounce and moving to oil at $90/bbl…. Not like that happened…

    @P.G.Sharrow:

    Don’t forget the “Copper”! There have been many other currencies too…

    @Laurence M. Sheehan, PE:

    A “medium of exchange” can be anything. I’m particularly choosing to use the terms “money” and “currency” as “money” is both a “medium of exchange” and a “store of value” while a “currency” is a “medium of exchange” but can also be more symbolic (that is, the “Tiffany” might be exchanged as an electronic transaction via a plastic card and not as a physical 1 carat diamond; so it would be an electronic currency denominated in a physical commodity (that could also be a “medium of exchange”.) )

    So yes, they are ALL “medium of exchange” but some of them are also a currency and to the extent commodities are more stable than paper fiat currencies, they are better “money” too.

    BTW, “money” is not limited to coinage nor to any particular material. “Money” is simply “medium of exchange” AND “store of value”. “Currency” is just a method of having a “Medium of exchange”. So paper is “currency” as it tends to inflate (always…) while gold is “money” as it has a tendency to be a “store of value”.

    @Adolfo:

    You are not allowed to express an opinion about the coffee we get in North America as you, being in South America, undoubtedly get The Good Stuff (carefully sequestered in Latin America by the Evil Elite Coffee Barons). We, in the Yanquie North, are only sent Crap Coffee as an inside joke by the Latin Elite. We know this, but are unable to change it….
    ;-) of course ….

    BTW, the major point of the article is that ANY entity can make a currency today out of any commodity they have in large amounts. Thanks to the way credit and debit cards can automagically convert currencies, there is no requirement that any nation, State, or even region or person use any particularly currency for their money. So, for example, Peru could have cards issued in units of coffee, copper, wine, and / or wool. And any person could get a card denominated in “Tanks” and use it anywhere in the world.

    So no longer would there be a “National Currency”, but each individual could choose their own… Literally “To each their own”…

    @Omanuel:

    At least this method has many bankers, so the honest can have a shot at displacing the dishonest; and the dishonest have limited scope of impact.

    @Jason Calley:

    Well, thanks! Didn’t know about (and didn’t think of) the “minute”. That’s a nice one…

    Comforting to have the existence proof…

    Looks like all that is really needed is an automatic electronic exchange between “currencies”…

  9. p.g.sharrow says:

    @EMSmith says “Looks like all that is really needed is an automatic electronic exchange between “currencies”…”
    Now that concept is rattling around in my head like a BB in a trash can. A commodity fund that issues credits for electronic transfers of real wealth. WOW! 8-) pg

  10. Petrossa says:

    We have virtual money now. Why change anything? It’s all a farce from the day banks were allowed to create money. Everytime a bank loans out money it creates money out of thin air. So effectively money has no intrinsic value.

    Works for me. Money for nothing. Since it doesn’t exist as such but in a bank’s computer, you can do with it what you want. We have to step away from the archaic barter idea.

    We work, get paid in virtual money, with that we buy goods so we can work to build them. After the bank just cleans the slate every once in a while and we just go on.

    All banks do this on a global scale too and all is well for ever more.

  11. E.M.Smith says:

    @Petrosa:

    But all isn’t well.

    We have inflation in various degrees basically everywhere. Dollars put away for a couple of years shrink. It is precisely to make them “non-virtual” ( to make them actual “money” that has a ‘store of value feature’ as opposed to just a “medium of exchange” or currency) that is the goal.

    It is to make it not a farce.

    A large number of countries throughout history have had their currency blow up. (Substantially all of them if the time span is long enough; even the USD is now worth about 5% of the value in 1950, so it has just blown up very slowly, so far.)

    BTW, barter exists everywhere in the world, even in ‘advanced’ societies with ubiquitous currencies. “I’ll buy the soda, you get the popcorn”… It is not the dominate form largely because physically hauling around a bulky or perishable commodity is a pain and finding someone who wants to swap exactly one on one (what you want for what you have) takes effort.

    By putting the “commodity” on an electronic exchange and having the “trade” be done there via established systems used for currencies; the benefit of the barter system is preserved while at the same time, the convenience of electronic money is available. Two folks can each base their “wealth” in different commodities and yet trade that wealth between them; while preventing the central bankers of the world from inflating it away. In essence, the ability to have electronic exchanges allows all traded goods to be used as money; as a ‘highly marketable’ good, so money.

    It also ties the “velocity of money” more closely to natural market forces. Even if I am worried about the economy and want to stop spending my “Tanks”, the consumption of oil goes on and the velocity of oil trade through the market continues. The “Futures” for oil might drop on lower demand in a downturn, but that is basically the same effect as a central bank providing “easy money”. The difference is that later the “good times” will automatically pull back that “stimulus”.

    (During economic down turns, oil prices drop, so my Tanks would be of lower value. This is more likely to cause me to spend them, keeping the velocity of money high. During a boom, oil starts to rise in price. I’d be more likely to hang on to them reducing the velocity of money. Exactly what is wanted from a central bank as a result of monetary policy.)

  12. Back in ’86 I was in Bombay (now renamed Mumbai) and the small change coins were in short supply. The metal in them was worth more than the face value, so people used to melt them down and sell the metal. People therefore used bus-tickets as small-change. Bus-tickets expire, so if you got a bus-ticket that expires today, better take a bus-ride and use it rather than lose it.

    This idea of having a time-limit on the value of your paper money has an interesting effect – it must be spent before it expires. It could be fun working out the further ramifications of this if all your money had a fixed lifetime – in truth it has a half-life, as if left as money it diminishes in value through inflation. With fixed lifetime notes, you would of necessity get goods instead. It might increase the velocity somewhat.

  13. KevinM says:

    “So, in very simple manner, we can make an inflation protected currency” … by converting it into items that hold value as soon as we get it.

    I believe that IS the process that converts increase in money supply into inflation. People lose trust that the future currency will hold value, so they lock in value as soon as they can by spending it. If you double the amount of money 2:1 everywhere, you have zero effect on prices unless people react by spending some – yes of course thats what most of them have historically done. In fact they spend it all.

    Please consider this angle: Today most purchases, including McDonalds burgers, are made on credit. It is up to 30 days between when a pay-all-balance MasterCard customer eats the burger and pays for it. Our assumption above, based on history is that “most of them” spend all they get. In a high inflation environment, it is therefore optimal for them to buy all of their months needs the day after their last MC bill is paid and eschew the intermediary items. Stores of value are for savers, a small minority. Interest free 30-day loans are for spenders, the large majority.

    As one of those savers, you will be continuously churning your latte supply, and losing PEZ in your car seats as you try to preserve spending power with reliably liquid items. But you have demonstrated by this a capacity to plan – so you should know how much will be spent and how much must be protected. Therefore liquidity is less important than safety for the “no spend” and safety is less important than liquidity for the “spend”.

    So I propose a dual solution. Long term, potentially illiquid “I can’t eat gold, but thats my problem not yours” for inflation protected savings plus “free 30-day price locks from MasterCard” for inflation protected spending.

    Gold might not be your thing, but it is an example of an item that is:
    1) durable
    2) recognizable
    3) globally tradable
    4) generally available
    5) dense ($ per size/weight) in value at todays prices

    Starbucks does not mach 1 and 5.

  14. adolfogiurfa says:

    Then, the only way out: Let us return to a cash only economy, to abandon plastic and electronic money as produced by the “devil” (it´s the Devil, no doubt), with a central bank owned by the people of each country, with the pre-requisite of belonging to that country for at least several generations.

  15. Pascvaks says:

    Please be kind.. (I feel like a three year old stepping into a pool;-)… ahhhhhhh…

    Commodities have value and a “US First Class Postage Stamp for a letter up to 4″x9″ and Not Weighing more than ‘x’ Oz, etc, etc” tends to retain a set ‘value’, etc. Same for Star-Bucks ‘x’ sized whatever. Same for Tiffany’s ‘x’ sized diamonds of certain grades etc. So money tied to commocities is better than money tied to nothing and the whims of idiots is the Fed and other high offices. Here it comes… ahhhhhhh… Does limiting the size of a Nation’s Money Supply (like stock in a public corporation) accomplish anything? Would there be a ‘plus’ if we operated with only a specific, limited, locked in stone, cast in iron money supply and it took a 4/5 vote in both houses of congress to pass any change? OK, a 99% vote?

  16. p.g.sharrow says:

    Cash is currency and not a dependable store of wealth. Too much opportunity for the “Greedy Evil Bastards” to manipulate. An “EM Credit” must be rock solid and beyond the reach of “GEB”s. It is not necessary to create a currency, that is a local thing. pg

  17. Jason Calley says:

    @ E.M. “It occurs to me that in some parts of Latin America the units of currency could be the Baggie, the Coca and the Snort ;-) ”

    Or detergent… http://www.theatlantic.com/business/archive/2012/03/why-are-criminals-stealing-tide-detergent-and-using-it-for-money/254631/#

  18. Pascvaks – even if the currency was supposed to be set in stone, it isn’t. You can grow more corn for the corn-dollar (corn-dolly?) or more coffee for the Star buck. Presuming you want these things, that is really more wealth. In order to gain in this type of currency, you have to work to make some, and then not only yourself but everyone else is better off – you may end up with too much and give some away before it goes mouldy. As it happens, for friends I pay in guitars.

    Have you noticed that when you have something it’s not worth much money, but if someone else is selling one it’s suddenly valuable? In real terms, money has flexible values and will buy different amounts on different days, and it depends on how much the seller wants to sell and how much the buyer wants to buy that sets the haggle-point of exchange. Whether the government decides how many there can be or not, the real value (and thus worth of the nation) will always fluctuate depending on perceived values at the time of the exchange.

    If you have land, then it will remain there unless washed away in landslides caused by AGW (!), so you would expect its value to remain the same in real terms. Unless it gets a sufficient amount of sun and rain it won’t grow crops so may only have value for building a house on rather than growing crops. Modifiers to that are that rain patterns are variable so some years better than others, and also that you can run with irrigation and lights if power is cheap enough, thus raising the value of the land. It’s complex – nothing remains constant.

  19. Jason Calley says:

    @ Simon Derricutt “Back in ’86 I was in Bombay (now renamed Mumbai) and the small change coins were in short supply. ”

    This problem is an old one. Governments — especially once they have begun the process of adulterating the amounts of precious metals in coins — find that the amount of profit in minting small coins does not make it worthwhile to do so. If the companies are not restricted from doing so, then private enterprise will step in and fill the need that merchants have for small coins. http://mises.org/daily/3072

    “This idea of having a time-limit on the value of your paper money has an interesting effect – it must be spent before it expires. ”

    I wish I could find the article right now, but this has been done in the past. I think it was perhaps one of the European attempts after WWI. Basically every note must be stamped with a date marker every month or so. Each stamp reduces its value by a fixed percentage amount — say 5%. The pressure to spend the money before the time expires pushes people to get out there and buy, buy buy! At least it does so just before the new stamp is applied. Sounds good… but it distorts the free market function of placing value on savings. Why should I save money to accumulate capital for future use when inflation is baked into the future? Of course the same factors are at work if the Fed creates more money. Every new dollar placed in the economy discourages someone from producing more than they consume; all their savings lose value. There is a reason why Americans do not save more. They have no reasonable expectation that their savings will be properly valuable in the future. So people do not save — and we need programs mandated like Social Security — and the government gains power. And since people do not save, they cannot purchase government debt — so the Fed creates more money to buy debt, and the problem is worsened. But some of the new debt is sold to other countries (which exports some of the inflation, which is a short term good for us but encourages politicians to do more of the same). The other countries want guarantees on their investment, so the US creates EPA and uses that authority to restrict logging and mineral rights so that they can be held off the market as collateral, and the US producers suffer, so that fewer people can produce savings… Wash, rinse and repeat. It is all connected.

  20. Petrossa says:

    Em, Inflation is also virtual. If the money doesn’t exist neither does inflation. At the end of each month all accounts are balanced by the computer.
    Money has no value so it can’t change.

    Not being facetious here. It is reality. Banks create virtual money, money without any backing of anything. What was the ratio? 1 to 10 in actual funds or something. But those ‘actual funds’ are just as virtual.

    Virtual money is virtual inflation. Very simple. If its virtual you just write it off in the computer and hey presto.

  21. Jason – I saw this erosion of money a long time back, so I put as much as I could into the land I live on. Currently I have very little savings, no debts but a nice view. If things get bad I could live easily on what I can grow here. At the moment it’s more useful for me to buy food and concentrate on doing other things, but that may change.

    The point here is that in the UK I also can’t see any benefit in saving – the system in place means that if you have a problem and have savings, you have to spend these before the State will help. It looks like much the same system here in France, plus of course any savings get subject to a tax as well as inflation losses. It’s amusing listening to the politicians exhorting people to save more, and then punishing them when they do.

    Thanks for the link to the “good money” page. I never knew about that.

  22. adolfogiurfa says:

    @Jason Calley: In Peru we could use METALLIC GOLD, as it has been historically, though now some environmental NGO´s from the first world are opposing to gold mining (curiously, here there is a Jesuit priest leading them:Curiously because if you google for the original shareholders of the Chicago Carbon Exchange, you find among them the “jesuit order of Santa Clara, Kalipornya).

  23. Ian W says:

    It may be that there are reasons to move to these ‘currency’ replacements – see an interesting piece here –> http://news.goldseek.com/LewRockwell/1340551901.php

  24. adolfogiurfa says:

    @Ian W: As from the article you give, then the solution to the EU crisis would be the restablishment of monarchies which would repudiate the debt. Then back to the political conditions existing before the “lenders´revolution” (a.k.a.French revolution) but having technology,etc.

  25. Kevinm says:

    The money with expiration date was last floated by greg mankiw, an MIT phd who blogs. Same guy proposed an outcome-equalization tax on being tall.

    Converting cash to commodities is inflationary… Backing cash with more than one commodity is price fixing, and will lead to shortages. If the gas station values his gas supply more than a one-tank note, then “pump empty” signs will ward off anyone not wiling to trade two tank notes for one tank… Which of course would be inflationary.

    Need government to step in and enforce the value of tank notes and mandate cacao content of matcha chinos? Oh brother, here we go again.

  26. adolfogiurfa says:

    So…………there is nothing left but BUY MORE POPCORN! (and some beans, dried meat, etc, too, just in case….)

  27. w.w.wygart says:

    I’m probably missing something here, but this sounds very much like it is supposed to function like the gold standard in its net effect, except nobody will really know how much/how many: postage stamps, cups of coffee, tanks of gas & etc. exist only on paper in China without a fleet of auditors keeping us all honest.

  28. Jason Calley says:

    @ Petrossa “Virtual money is virtual inflation. Very simple. If its virtual you just write it off in the computer and hey presto.”

    I could be confused, but it seems to me that the reason inflation remains is that the benefits of inflation accrue most strongly (not exclusively, but most strongly) to those who control the money supply, while the damage of inflation accrues most strongly (not exclusively, but most strongly) to the masses of ordinary people who do not control money creation. Even if we grant your point — and you are correct, I think — that most new money these days is virtual, the inflationary effects are still spread throughout the populace. If the money creating powers (i.e. not only the central banks, but the fractional reserve banks in general) chose to disappear all the virtual money, then yes, it would reverse some of the long term effects. However, we would still be stuck with the damage done while the “temporary money” had been working its way through the economy and distorting both the value of goods and the time related value of money, that is by its distortion of both the pricing of goods and services, and the distortion of interest rates.

    Maybe I misunderstand your point. If so, can you clarify?

  29. Jason Calley says:

    w.w.wygart “nobody will really know how much/how many: postage stamps, cups of coffee, tanks of gas & etc. exist only on paper in China without a fleet of auditors keeping us all honest.”

    And auditors to monitor the auditors…ad infinitum. :)

    I am not sure though, are you thinking about the problem of outright fraudulent counterfeited tokens and cards? Or the problem of companies over issuing cards for goods they may be unable to redeem? Or the problem of cards which are redeemed, but for substandard goods less than their purported worth?

    In all fairness, one reason why gold especially, was a global form of money is that it naturally solves all those problems by reason of its scarcity, its difficulty of faking, its portability and durability. There is no third party counter risk with gold; it is valued everywhere and you do not depend on the honesty of some vault owner in London who promises you that “yes, I really do have that commodity right here and will turn it over instantly on demand.”

  30. Jason Calley says:

    @ E.M. “I have described myself as “A recovering Keynesian” in that my training was substantially all in Keynesian Economics ”

    Just a quick personal comment here. I am mostly self educated, and for years tried to make sense of economics and never quite could. It just did not make sense! It did not take long to check out Marx and see several reasons why “that ain’t going to work!” When I looked at modern Keynesian style explanations though, I never saw any obvious flaws, but it just never seemed to gel together in a truly workable and clear structure. Physics, chemistry, biology — those made sense, and the more I studied, the finer the structure I was able to discern. Beautiful! But economics? No way. And there was the related problem. If these guys were so bright and had such deep understanding of the subject, why did economics so often dish out apparent inefficiencies and fiscal disasters?

    It was not until accidentally running across Austrian Economics that things started to fit together. What a relief! How amazing to see that the world of human marketplace interactions really does make sense. And equally important — at least for me — was to see that the most efficient markets are those that place high values on cooperation and honesty.

  31. Jason – If you had gold bars in the bank, you might want to go look at them, but it’s unlikely that you would actually cut them up to make jewellery. Not too long ago there was a nice little scam where someone had taken a stamped legal bar of Gold, drilled it and laid in some Tungsten. EM reported on it. Seems like you can’t trust nuttin’.

    Biting on a gold coin to prove it’s real is one response to forgeries going back many years – if it remained undamaged it was probably Gold, otherwise it was probably Lead with a Gold-plating on.

    The etymology of “many a mickle makes a muckle” was the Scottish habit of, when given a Gold sovereign, to shave a little bit off the edge. Such a fine shaving would not be noticed, but after a while you had a fair amount of Gold shavings.

    Natural items such as Wheat and Coffee have various grades of quality. Starbucks is generally very nice coffee and worth paying for if you happen to be in an airport – better value than the vending-machines since it actually tastes and smells nice. Quality is hard to pin down, but we know what it is (reference Zen and the art of Motorcycle maintenance). Much as the accountants would like to have real solid numbers, the way things are means that all values are relative and also depend on time, place, and who’s dealing.

  32. adolfogiurfa says:

    You guys, living in the world of Oz, where printing money like crazy and its inflation correlate cannot be perceived, experienced or sensed because it is being exported to China and other third countries, however any inflationary game ends in suffering, the sooner the better. This is the reason Jason cannot grasp economy, of course he can´t, as long as it is “managed” its unavoidable collapse. Then in a sudden “illumintaion” everyone will know what E.M. as an economist already knows. BTW Keynesianism can work, for a limited time, if all imports are forbidden, as chances are that all your imports will increase its prices as the US currency starts its exponential descent to the abyss. It´s their game kids….as it happened with Germany, before WWII, when the Deutsch Mark reached the exchage rate of 40 millions per US dollar.
    That is THE GAME, though this time it has taken too gigantic proportions, it has been played beyond rational limits. We all have the internal conviction that it has a simple solution: We know how, though it implies to take all those players out of our lives. All of us, normal people, know that each of us can contribute by applying our natural gifts to make our part in a real economy:
    Greek word οἰκονόμος (i.e. “one who manages a household”, a composite word derived from οἴκος (“house”) and νέμω (“manage; distribute”)) and οἰκονομία (“household management”).
    That´s it: Household management, a carpenter making furniture, the blacksmith at the forge, the baker making bread at the bakery, everyone on its place, in their towns, in their country…free from those who never worked but speculated with other people´s work. In the years to come such an activity will be considered immoral, unbecoming of a human being, as it always was.

  33. Jason Calley says:

    “Seems like you can’t trust nuttin’. ”

    Very true! In ordinary real life, of course we trust people and things all day long — but only to the point where the cost of trust is greater than the cost of verification. It is true that there have been gold bars circulated with tungsten inserts (unverified stories are that it was done primarily during the Clinton administration, but who knows?) but now that the scam has been uncovered and the method found out, there are relatively inexpensive available. But note that term “relatively inexpensive.” Again, we are looking for a balance between the cost trust and the cost of verification. For small amounts (the cost of a cup of coffee, the cost of a tank of gas) it would be far to expensive and time consuming to try to verify that the coffee and the gas were really available. Just as no one checks to see if one dollar bills are counterfeit, probably no one would bother to check and see if a coffee card was real. But for a bar of gold? The ratio between the cost of a bar and the cost of a test makes it very much worth doing.

    “Much as the accountants would like to have real solid numbers, the way things are means that all values are relative and also depend on time, place, and who’s dealing.”

    That desire for solid numbers may be one reason why so many academicians have fallen for Keynesianism. One of the wonderful things about the free market is that it is based on the very real fact that (as you say) values are relative. The fact that you value a doughnut more than you value a dollar, and I value a dollar more than a doughnut, is exactly why people will voluntarily exchange in a free market, and is why, at the end of the exchange, BOTH people will walk away better off than they were before. The free market is not only more efficient at satisfying the needs of the people involved, it is the ONLY form of market where every exchange is non-coerced and betters both parties. That is important. Ethics matter.

  34. George says:

    I would also suggest the “Chicago school” of Milton Friedman. If you haven’t read it, I would suggest reading “Free to Choose” by Milton Friedman and also this interview from the old Donahue show in two 45 minute segments on YouTube:


    The above was filmed in 1979. Prof. Friedman’s book is available on Amazon in Kindle format for about $8.

    http://www.amazon.com/Free-Choose-Statement-Milton-Friedman/dp/0156334607/

  35. adolfogiurfa says:

    “Free to choose”, really?, in a society where everyone has surrender their individuality to the governments and their money to the banks, having no land property at all and occupying an all the time a mortgaged “property”(a bank property and asset, of course)?. Come on!. You have free to choose when you got a gun in your hand and standing up on your own land, where your family helps you, your wife is at your side and no one would take your sons and daughters to “fight for freedom” (of course other peoples´businesses and interests).

  36. E.M.Smith says:

    @Simon:

    In prison, cigarettes are used as money. They get consumed, so “expire” in a way.

    The net effect is that it limits inflation (as currency is constantly withdrawn from circulation) and gives a benefit to the first issuer (who gets some full value for the issuance of the ‘money’) while reducing the value to the later persons in the ‘food chain’.

    When in Italy in the early ’80s they had a shortage of coins, too. The Lira was so devaluated that even aluminum coins cost too much to make. FWIW, in the USA the Nickel was briefly worth more melted down that as 5 cents us, just before the recession and nickel price drop. So in theory one could buy a bag of nickels now and be inflation protected… (Our penny is now copper washed zinc, any actual copper pennies you find are worth more for copper than one penny).

    @KevinM:

    Interesting point on differential valuation of safety and liquidity by personality type.

    Notice on the Star-Buck that I was NOT talking about carrying around a load of Latte! It is a UNIT of value (redeemable ‘in kind’) and carried / exchanged electronically on your “Commodity Card (c)”. As a unit of value, it does not expire and it is portable with ‘infinite’ density available on your card. ( What it doesn’t have, that gold coins do have, is zero dependency on a ‘bank’. For the Star-Buck, you are dependent on the issuer to not go bankrupt and be a reliable redeemer / exchange for the unit of value. At the same time, gold coins gradually wear down in use and that gold is lost forever. They are also subject to loss, theft, and counterfeit so are not perfect either.)

    The point is not to carry around tons of wheat or tanks of gasoline or cups of Starbucks coffee, but to tie the unit of value to a redeemable commodity and the quantity of “money” to a fixed asset base. Like Gold Notes redeemable in gold (or Silver Notes redeemable in silver); just with a different commodity behind them (and your choice of paper or plastic embodiment).

    @Adolfo:

    What is “Cash”? Yes, it is a trick question…

    I suggest looking up M1, M2, M3, M4, M5 etc. prior to biting …

    @Pascvaks:

    If you lock the quantity of money, you get a non-inflation guarantee, but also get a rate of DEflation that matches the rate of economic growth. Grow by 3% / year, you must have a 3% average deflation (so the fixed money supply covers the larger supply of goods).

    You also lose the ability to manage recessions and bubbles by manipulating the money supply (though some of us would assert we’ve not been good enough at that process to make any beneficial difference…)

    An ideal money supply would grow at exactly the rate of economic growth (if we could know what that really is…)

    @P.G.Sharrow:

    That’s where having multiple units of value and independent markets helps. Someone might try to corner or manipulate the Silver market, but it’s a lot harder to do to the wheat, Starbucks, oil, and diamond markets all at the same time. So folks can just get onto their account (perhaps even from their Smart Phone), and change their default unit to the Stamp and step aside if they think things are getting a bit odd.

    A “banker” trying to change the value of the “tank” has to take on OPEC and the US Strategic Petroleum Reserve… as just one example.

    @Simon:

    BINGO! The creation of “currency” is tied to the creation of real wealth… something of intrinsic value.

    @Jason:

    Fascinating story on private coinage…

    And “Tide”…

    Perhaps we can find some small country somewhere that would like to make a ton of money (literally ;-) and get them to be the legal entity that endorses the private mint of coins (in a variety of metals, semiprecious to precious), and the issuance of the Commodity Card (c) debit card… As cards are internationally usable, anyone in the world could get a Commodity Card and use it at ATMs and credit / debit card locations globally.

    I know I’d get one. (Probably use Platinum as my larger unit as I’m a bit shy of a Tiffany ;-)

    @Petrosa:

    Inflation isn’t virtual.

    Regardless of what currency you use, inflation is the amount of the value that goes to the government via the stealth tax of excess issuance. Doesn’t matter if the currency is virtual, or not. For example, during the Spanish conquest of South America, Spain had massive inflation from the influx of gold from the new colonies to the crown…

    @Ian W:

    Interesting article that does a good job of laying out “the problem”…. but don’t let Adolfo see it… all that New World Order talk will set him off again ;-) Oh dear, too late! ;-)

    ( FWIW I do think there IS a dominant controlling group in the world and that they cooperate. I just think they are far from fully in control, have a lot of competitors just below them in size, and have internal conflicts… but generally do an OK job of it with a major screw up and rampant destruction only every generation or so… 8-{ so there’s some hope.)

    @KevinM:

    It is only inflationary if the issuer does not honor the issuance. A Tank is exactly what it is and worth exactly what it is worth. IF a vendor of gasoline at the end of a long road in a national park wants to sell his gas at retail for $4 + taxes and the wholesale price is $3 (untaxed) the Tank on your card, set at wholesale nontaxed, will buy 3/4 of his gasoline. It is up to you to decide if you are willing to pay that price. Remember this is NOT barter, it is money based on barter. The Tank Note is a barter at wholesale on an exchange and THAT sets the value.

    In short, the gas station would simply put up a sign that said “Gasoline 4/3 Tank per tank plus taxes”… and you get to decide to pay that or not for the value added of delivery to the middle of nowhere… It isn’t in any way price fixing. ( It IS Value Setting…)

    No need for government enforcement nor for mandates.

    All it takes is an exchange that sets the value of the unit in an open market. How many of those units you choose to spend on any given retail item is entirely up to you and the seller. The standard value and standard quality of the underlaying asset is already determined on the commodity exchanges and enforced by their mechanisms. All government needs to do is be ready to enforce contract and bankruptcy law.

    Taking a coffee break, back in a mo…

  37. E.M.Smith says:

    @w.w.wygart:

    It does function just like the gold standard (but minus the Federal intervention). Commodity production is already one of the most closely tracked things on the planet. By choosing commonly traded commodities (in keeping with the Austrian thesis) all that infrastructure is leveraged.

    At the end of the day (or week…) that Park Gas Station that took 4/3 of my Tank credits can turn them in at the wholesale gasoline exchange for 4/3 tanks of gasoline and even take delivery if desired – though trading them to Shell or Standard Oil for actual fuel delivery to his location would likely be more efficient. It is that physical delivery link (the possibility of it) that stabilizes commodity contracts.

    In thinking about this, I realized I can sort of do this today (with some added personal intervention). The Schwab One account lets you trade any ticker AND you can get a debit card that draws from that account. I can have the “cash” set to most currencies (IIRC) not just my home currency (you just can’t change it very often). So I could set my default “cash” to be Swiss Francs and take any “excess” and use that to buy USO or JJG or GLD or… As I use my Debit Card, it will spend my “cash” first, then start selling the commodity ETFs.

    The difference, though, is that every sale of an ETF causes a commission and I have to place orders to buy / sell instead of just having a way to set my default preferences.

    Nobody gets all upset about the “virtual Chinese paper oil” in trading the USO… So I think there’s a bit of an existence proof for the viability of the process and the acceptability of the level of auditing.

    I’m looking for a bit more automated process and with inflows that can be stated not just in units of “cash” but in commodity units as well; so If I used my Schwab One card to buy a tank of gas, I could pay in units of UGA (gasoline contract) and that would flow into the account of the gas station AS UGA units (and then into whatever unit of default they wanted).

    To the extent there IS a significant “issue”, what I see are these:

    1) It still depends on the “Banking System” for doing the payment transfers.

    2) It still depends on the commodity exchanges to enforce contracts.

    3) It still has a loose end in getting ‘commission costs’ low enough. Clearly at $8 / ETF exchange on a Schwab One account, using ETFs to simulate this is too costly. Buy a Star Bucks coffee via selling a NIB or JO (cocoa and coffee) ETF and converting through dollars back to NIB and JO in the Starbucks account is just way too inefficient. We need to be closer to the “swipe fee” level of costs presently on debit cards, but for commodities instead. I could see the equivalent of a Visa or Master Card doing this, only going ‘outside’ for the daily net gain / loss in any given commodities contracts.

    The purpose is to get away from the Government setting value of money, and that it does do. (Real barter also avoids dependence on the banking and transaction processing systems; but has all those physicality problems…)

    In short, all the underling exchanges (other than Star-Bucks Mocha ;-) exist, and the various contract, auditing, and enforcement mechanism are already in use. It is just a transactional efficiency level on top of that which is missing.

    @Jason Calley:

    Inflation benefits accrue to the currency ISSUER and to debtors.

    Inflation costs mostly hit folks who hold currency or currency denominated debts.

    Take a bank with $1 Billion in the vault and $10 Billion of property loans 30 fixed.

    Inflation takes off. That $1 Billion in the vault is now shrinking and those future payments on those mortgages will NEVER buy what was originally contracted. Banks lose big in inflation (as does any mortgage issuer).

    Take the Average Joe or Jane with a mortgage and owing $10,000 as a personal loan to the bank. Over the years, their mortgage evaporates in real terms as does the debt. ( My sister is just now finishing her home payments on a house bought for $25,000 about 30 years ago; now worth about $300,000. She pockets the inflation benefit…)

    If you are a “Screw the banks give money to the people” Socialist, you love inflation.

    BTW, much of microeconomics also makes a whole lot of sense. It is just the Keynesian stuff that goes off the rails… (and some of the stuff built on top of it since then…)

    So take the Guns And Butter problem. It just says that you can make some quantity of butter, or some quantity of guns, or a mix of both. The optimum is usually a mix of both as the resources used to make guns can’t make butter very well and vice versa. It also says that if you push to make a whole lot of guns, the butter supply is going to dry up…

    Or take supply and demand curves. Says that short supply will cause higher prices. Higher prices will cause more supply. More supply will cause lower prices… until you end up back at where the two curves cross. At equilibrium.

    Micro is basically just a whole lot of those kinds of understandings and they are all pretty simple to “get”.

    For Keynes, things are complicated in many ways. Not the least of which is that the popular press version of Keynes is NOT what he said. He was much more specific and limited in what he said. (So, for example, deficit spending in recession was to be offset by saving surpluses during bubbles). So you really get a 1/2 Keynesian story in the press with missing bits…

    Keynesian Economics would work if the whole thing were implemented… ( I did say I was a recovering Keynesian didn’t I? Can I get just a little sip of deficit spending? ;-)

    For Keynesian Economics, it mostly just comes down to that whole NominalValue = Velocity * QuantityOfMoney. Nv=V*M where M is the money supply. This is largely a tautology. You have some total transactions. Take the quantity of money and how many times it changed hands, that’s what you get.

    What Keynes did was notice that in recessions, V plunges, and in boom times, V rises a lot. He figured you could stabilize the “Nominal Value of Transactions” as a proxy for total economic activity via fiddling the M in the opposite direction from changes in V. V slows, Fed pumps cash and Congress spends. V picks up, Congress cuts back spending and The Fed tightens.

    In practice, Congress only ever spends more and The Fed does more pushing than pulling (and only when Reagan pushed them into it…)

    One fault in that system is just that Nominal Value Of Transactions is not a perfect proxy for actual economic production (creation of net wealth in my system…). So I can get higher Nv simply by inflating the prices… not making more goods. It’s that “Nominal” instead of “Real” value… and folks eventually notice…

    IMHO, the politicians just hear the “Government Spend More” and assume NOMINAL value is ACTUAL value; so they think they can create more value by spending more. They miss that what Keynes was saying is that you can make up for low V in the private sector for a while in nominal terms (that will fool most folks for a couple of years in a small business downturn but NOT in a longer term inflation cycle) PROVIDED you then withdraw that “stimulus” when the private V picks up AND in fact REDUCE government spending and liquidity to below equilibrium levels when a bubble forms ( i.e. in good times spend LESS and raise interest rates painfully high).

    Once all the caveats are in it, it isn’t so “wrong”. It is just the public form that politicians use minus all the qualifiers and all the “cut in good times” that’s grievously broken. (I’m still uncertain if basic Keynes is broken… Did I mention I’m a recovering Keynesian? ;-)

    @Simon:

    A non-destructive gold and silver coin check is the sound. They “ring”. Dropped on a counter, they have a pure note and nice pitch. The adulterants just don’t sound the same.

    Two metal interface would screw up the sound as well.

    Taught to me at about 8 years old by my Dad in the family restaurant when coins WERE silver and counterfeits were not. He had a bogus quarter someone had passed and used it to teach each of the waitresses about money quality… No biting needed…

    @Adolfo:

    That’s why I find the term “Home Economics” so funny… “Home Home Management” ;-)

    @George:

    My one saving grace as an Economist was that I was in school when Milton was rattling cages and some of his stuff was in classes I took (while other I read on my own). It was his stuff that let me grit my teeth and parrot the Keynesian Line to get my A’s while secretly thinking “The Chicago School has it right. Maybe I can go there for a Masters…”

    @Adolfo:

    Yes, free to choose. And we do.

    BTW, there is more to wealth than land. Land is but ONE productive asset. It is also entirely an individual choice to own land with a mortgage or pay cash. At one time I owned 3 houses all with no mortgage. (Not as impressive as it sounds. Inherited my Dad’s rentals in a very poor farm town. More trouble than they were worth as a remote landlord.) Frankly, I’d MUCH rather have shares of an S&P 500 ETF than title to land.

    So I was free to choose to dump that PITA land and buy liquid investments with better growth instead.

    Our military is an all volunteer military, BTW. But I do have guns and know how to use them.

    Haven’t needed to, though… It’s generally a peaceful place here. Spend more time in a lawn chair in the neighbors front yard drinking wine than worried about “defense” or oppression…

  38. Petrossa says:

    @EM
    “@Petrosa:
    Inflation isn’t virtual.”

    When the money is virtual it has no intrinsic value. Something without intrinsic value can’t change value, up or down.

    It’s a big sum that needs to end up zero when all balances across the nations are calculated. A virtual number in a computer.So each given time you tell the computer to make it so and all the sums are zeroed.

    Nothing goes lost because there was nothing to start with. Current currency is script money. No nation in the world currently has anything anywhere near the outstanding accounts.

    Talk about the holy grail of economy ‘growth’.

    If jezebel has a bar and gives drinks to jobless alcoholics on an IOU her ‘growth’ increases. Because her ‘growth’ increases her banker gives her a line of credit, and issues stock on jezebels business. It’s growing like crazy isn’t it. So people invest in it.

    Then when jezebel starts to collect her IOU’s all the jobless alcoholics can’t pay. Jezebel goes bust, the banker loses a fortune, the stock falls flat, and as a result jezebels employees are jobless and her suppliers go bankrupt.

    Growth is meaningless. It’s virtual.

  39. Pascvaks says:

    (SarcOn) OK, let’s see if I have this right, after everything’s all said and done, the TWO BIGGEST PROBLEMS we have are CONGRESS and THE FED. Right? I have an easy solution, can anyone guess what it might be? (SarcOff)

    While the solution is easy it’s going to take some time to dot all the i’s and cross all the t’s, elect me in November and I’ll make it as fast and painless as possible;-)

  40. E.M.Smith says:

    @Petrosa:

    Your thesis is flawed from the first assumption. Money isn’t a non-entity. It is symbolic, but it DOES have value. If it had zero value, then no trade would happen. That the value is based on little more than mutual agreement just does not matter.

    Gold as money has value due to agreement. I can make jewelery that is subjectively indistinguishable without instruments. The value today is not in the goods, but the shared value.

    Diamonds have value due to agreement. Synthetic diamonds are detected by looking for diamonds that are TOO PERFECT and lack natural flaws. The price kicker for natural diamonds is entirely by agreement, not physical superiority.

    http://www.intellectualtakeout.org/library/chart-graph/water-diamond-paradox

    Paper fiat money has value because the marginal use is a benefit.

    Inflation is NOT a non-entity ‘netted out’ with the flick of a computer key. I entered a contract to buy a home based on $US. Those have had large inflation. My mortgage is now about 1/6 the value of the home. I accrued that value. The contract said I get to in that the debt is fixed in dollars at the date of signing and the property value “risk” is mine while the money risk is “theirs”.

    I won this bet. The bank lost. That the method of keeping score is “virtual” and created by The Fed out of nothing does not change who won or lost nor the degree of the win and that win was from REAL inflation of a virtual currency. Had the inflation been “virtual” and non-real I’d not have less real value to deliver to pay off my mortgage.

    There are a lot of ways folks try to eliminate that REAL inflation. From TIPS Treasury Inflation Protected Securities to Gold bars to COALs in contracts. It is the inflation that is real and the currency that is virtual. (Were the currency ‘real money’ i.e. a store of value and medium of exchange) then the inflation would be non-existent.

    If a drug cartel issues a contract to kill someone based on who wins a fantasy football game, the game is virtual, but the contract and the death are very real. It is the impact of real inflation numbers on real contracts that matters; even if the game is based on virtual players.

  41. E.M.Smith says:

    @Pascvaks:

    I’d not say that. I’d say Politicians and Central Banks in general. It’s a global thing. ;-)

    http://www.economicpolicyjournal.com/2011/02/why-you-need-to-own-nickels-right-now.html

    Nickel has gone down in price since then, but look for the Nickel and Penny to end soon.

    I need to calculate the cost of the copper and nickel cladding in quarters and halves ;-0

  42. adolfogiurfa says:

    @E.M. I could see the equivalent of a Visa or Master Card doing this…
    Well, the fact is that there are already ID cards which will replace Credit Cards. (See the New Peruvian ID-in Spanish-):
    http://www.reniec.gob.pe/portal/acercaDni.htm#
    (translation curiously BLOCKED)
    The day will come when the UN will issue your ID then it would be the same as to have implanted under your skin, as you will be obliged to take it with you everywhere. If you don´t have you don´t exist. Of course, following the Brave New World model, it will be saved in its chip´s memory if you are a Gamma, or a Beta……..
    Cheers with Soma!

  43. Jason Calley says:

    @E.M. “Inflation takes off. That $1 Billion in the vault is now shrinking and those future payments on those mortgages will NEVER buy what was originally contracted. Banks lose big in inflation (as does any mortgage issuer).”

    Yes, absolutely they lose on that part, no argument! I am only saying that they benefit even greater than they lose! Let’s look at a simple case with numbers, and as always, if I am confused, please point me in the right direction – my friends tell me I am completely unafraid to charge off in the wrong direction! Suppose we have an economy with a trillion dollars in circulation. Suppose technology gains are such that we can expect a 2% gain in combined productivity and efficient use of materials each year. By itself, that advance in goods production would produce approximately a negative 2% change in the value of money. Suppose that my banker friends and I already hold a cool 20% of the money supply, $200 billion — either in dollars or in dollar denominated goods. Suppose that over the course of the year we decide to increase the money supply (by injecting a smaller amount of Fed created money which is then amplified by the actions of the fractional reserve banking system) by only 10% — a figure which is low compared to the real world — i.e. by a new $100 billion. By itself, the new money would create approximately a 10% rise after it had been circulated, but of course the early spenders of it would get full value for it. Of course the bankers know that the expected inflation in prices will be about 8% so they charge an interest of 10% or so on the new loans. At the end of the year, here is what we see: the consumer is looking at 8% price inflation and if they are very lucky, an 8% wage increase. It is true that they can look at their house loan and say “Ha! The banks are suckers! I am now paying them off with weaker dollars and every year hence I will continue to pay with cheaper and cheaper dollars. In another decade or two or three I will hardly even notice my house payments!” And the banks? Yes, all their portfolio – stocks, loans, cash on hand – everything has lost 8%. Is that a HUGE loss? Well, they started out with 200 billion in their pocket. They added another 100 billion. They collected about 10% from their new loans for another 10 billion. They would have gotten something from gains on their old properties – say 5% for another 10 billion. Then their actions decreased everything (old properties and newly created loans and investments) by 8%. Now they are down to 296 billion. Not bad. They started with 200 billion and have gained 48% on their holdings. Of course since they have expenses to run their business, things like physical offices, salaries, bribes to politicians, bad loans, etc, they have not netted a 48%. Still, the point is that since they created money from nothing – let me repeat that “they can create money from nothing!” through the process of issuing debt – the advantage they have is gigantic, enormous, so overwhelming that the losses they sustain from inflation are not really so painful to them. Consider also that when you do see really high figures for inflation, figures so high that you or I would be hurt by them, the main reason why the figure is so high is that the banks have created so much; high inflation indicates that they have gorged themselves in the money creation process. In other words, yes, you are absolutely correct that inflation hurts the banks, but the pain to them is much less than the immediate gain which they accrue. All they have to do is continue to make a somewhat larger creation of money next year, and next year, and so on. Which is exactly what have seen for almost 100 years. And every time they do it, the market gets bad signals on whether people prefer to spend or invest, over whether people are more interested in short term projects or long term projects, on whether it is wise to start a business or liquidate it. The damage adds up and the creation of money speeds up.

    If we had an economy based on grapes and I had a magic grape producing machine, how quickly would my grapes have to turn into raisins before I was really hurt by the raisins?

  44. Jason Calley says:

    @ E.M. “Once all the caveats are in it, it isn’t so “wrong”. It is just the public form that politicians use minus all the qualifiers and all the “cut in good times” that’s grievously broken. (I’m still uncertain if basic Keynes is broken… Did I mention I’m a recovering Keynesian? ;-)”

    Yes, believe it or not, even with all my pro-Austrian bias, I agree with you! If Keynes had been completely, 100% wrong, we would not even be discussing him. He actually did get some of correct, in fact, enough of it correct that the politicians and PTB saw it as a wonderful idea; it had to be wonderful since it basically prescribed that they (the politicians and PTB) do something that they really, really liked doing. “Well, of course I’m a drug addict, but my Doctor Keynes has given me a prescription that says I should take more methadone!” The PTB totally disregarded, I think, all the caveats and limitations which should have been put into place to limit their fiscal policies and went to full throttle on the parts which gave them more power. I suspect that were Keynes alive he would be shouting “STOP! That is NOT what I said!”

    It would be interesting to actually try limited and honest application of Keynes. Maybe we can get with the CAGW scientists and design a model… :)

  45. Jason Calley says:

    @ Pascvaks “While the solution is easy it’s going to take some time to dot all the i’s and cross all the t’s, elect me in November and I’ll make it as fast and painless as possible;-)”

    I wish that were the case, but electing people who promise to do the right thing does not seem to work. I think that for me, the thing that finally made me realize that I was a “Charley Brown” Republican was Gingrich’s 1994 Contract With America. “Sure, Charley Brown! I’ll hold the football and you come kick it! I mean it this time. This time I’m telling you the truth! Trust me!” I voted straight ticket that year and so did a lot of other Americans.

  46. E.M.Smith says:

    @Jason:

    I think you left out that during the ‘money expansion’ process the bank gets offsetting liabilities along with the assets.

    Get $100 from Fed (it is a loan, not a gift so a liability on the books that you must some day pay back). Lend to Fred (an asset created, a loan for $80. In this example I’m using 20% reserves to make the series manageably short…) You have $20 in your vault. That $80 gets spent by Fred at Mary’s Home Construction. She deposits it in your bank (a liability). You put $16 in the vault (as demanded by ‘reserves’ requirements) and loan out $48 ( a new asset). That $48 gets spent at Bobs Trinkets (for trinkets to sell at market) and Bob deposits it in your bank ( a liability on the books in that you have to give it back on demand) and put $9.6 in the vault for “reserves”. (Now up to $45.60 IF I’ve done the math right…) and loan out $38.40… repeat series to zeros…

    At each step, you get an Asset ( a loan) that shrinks in value with inflation and a Liability ( a deposit) on which you must pay interest and pay on demand. Net, not gaining anything other than the “spread” between the two rates MINUS the fact that the loan is smaller than the deposit so you have to have some of the higher rate cover that… The “reserves” are now shrinking in value with no offsetting inflating asset… but at least the loan from The Fed is also shrinking with it in real terms…

    As all the interest rates jigger around with inflation expectations, your “short term” deposits get higher and higher rates or folks walk with their money. Yet you are on the hook for those long term loans and can’t call the loan early (in most cases).

    So while the “expansion” of the money supply gives you more total loans and potential revenue from them, it also gives you higher inflation losses and exposes you to asymmetric rate changes that you can not control…

    At the end of the day, your assets and liabilities basically match. You don’t get net increase in wealth. It is just that you get more interest differential from more total loans from less total initial money input. Great… Right up until your long loans are fixed and low interest rates and inflation starts making your short term deposits cost more and more…

    Oh, and that’s why I’m a “Independent” and not affiliated with ANY party. The only difference between the R and the D is which set of Friends get the payolla and how they try to buy votes. (Military vs Greens and Drug Plan vs Obamacare and … )

    When I see SOME party, ANY party make government more than 5% smaller in REAL terms, I’ll sign up with them…

  47. Jason Calley says:

    @ E.M. Thanks, that makes more sense. I appreciate your explanations on this. This may be one of my more idiosyncratic ways of looking at things, but is almost like the banks are not marketing money per se, but a sort of monetary time machine. It is a situation where money is imagined temporarily into existence by snatching it from the future, and the time-shifted value of the money is marketed. Eventually, the money catches up with the future fiscal hole in the time-line and we have a sort of money plus anti-money reaction. In the mean time, we can treat it as real; it has real utility and real effects on people and things around it, and the banks receive real interest on its use. Also, if the power of the dollars are weakened over time (inflation of prices) it requires more dollars to fill up that hole in the future.

  48. Ed Forbes says:

    Humm…firms could issue “script” to pay employees and the firm could provide its own market to make it easy for their employees to redeem the script. If the script could only be redeemed at the company store, it would make the bookkeeping easy and make for a stable value.

  49. Jason Calley says:

    @ Ed Forbes LOL! Yes, I suppose something like that could possibly work… :)

  50. Gary says:

    Read what the late Jude Wanniski had to say about money (http://www.polyconomics.com/) and especially gold as the most monetary of commodities. Understand also that he relates the true value of gold (very stable for the last 5,000 years) back to actual labor. Governments don’t want people to own gold because it doesn’t let them steal through inflation.

  51. Jason Calley says:

    @ Gary “Governments don’t want people to own gold because it doesn’t let them steal through inflation.”

    Inflation is a form of self-harvesting taxes. In the bad old days, rulers had to send thugs with swords to confiscate taxes from the serfs. This produced ill will in the serfs, plus they often hid their goods, which diminished the tax take. Now our rulers are more sophisticated. They pass legal tender laws, then use those laws to force their monopoly fiat currency to become the most liquid commodity. Viola! Self harvesting taxes! Sure, the rulers still collect taxes, but not so much that the serfs find it worthwhile to fight the system. Now, though, there is a second hidden tax, the inflation tax, and the rulers do not even need to send collectors with swords or guns. Nor do they have to check the barns and cellars for hidden income. All they have to do is print more money. Every bit of old money is taxed and very few people ever even blame the rulers. No, instead they blame “the greedy businessman” because he raises prices. What a system!

  52. Jason Calley says:

    Speaking of the fact that Keynes has been greviously misinterpreted and misapplied, here is a video (go to 4:00) of Hayek quoting Keynes. Keynes to Hayek: “If inflation ever becomes dangerous, I’m going to turn public opinion on it around.” Six weeks later, Keynes was dead. Ouch. Bad timing…

  53. E.M.Smith says:

    @Jason:

    What a marvelous video…

  54. Petrossa says:

    EM
    “That the value is based on little more than mutual agreement just does not matter.”

    But it does… If you can mutually agree to just write off the differences in the accounts then all is well. We agree mutually that we trade goods, and we give symbolic paper or virtual money for it. As long as consumers buy, producers can sell. The current system only creates a virtual deficit that is unsurmountable by any stretch of the imagination. Which leads to consumers not buying and producers not selling whilst some nations have stacks of virtual money they can’t do much with.

    A total dead end.

    So, just mutually agree to reset the clock to zero and start all over. Till it again runs out of control and you do another reset.

    If you mutually agree one thing you can mutually agree another given that both don’t exist.

    Wasn’t there the scheme of the Americo to replace the dollar? So just do it. All debts in dollars are gone.

  55. adolfogiurfa says:

    The problem begins when something else apart from real stocks are exchanged: There it comes the “magic”, the “trick”…..
    It was the same with temperatures records, but in comparison those temperatures massagers those massaging “bonds” or interest rates (as the ones massaging the LIBOR), the first ones appear like angels. Capitalism is OK, as far as capital reflects and represents the real value of goods.

  56. Jason Calley says:

    @ Petrossa Maybe we could do a reset every 50 years. :)
    http://en.wikipedia.org/wiki/Jubilee_%28biblical%29

  57. Jason Calley says:

    @ E.M. in reference to Hayek speaking on Keynes, there is one video which I saw a couple of years ago but cannot now find. IIRC (and pardon my memory), Hayek recounted a conversation with Keynes, where Keynes gave his (Keynes’) reason for pushing the idea that monetary inflation was a good thing to restart an economy. During WWI, Britain needed all the industrial output it could manage, so the factories and labor forces were pushed hard. Simultaneously, the Brits were borrowing heavily and creating large monetary expansion (without the traditional gold backing) to finance the war. Predictably, the cost of labor underwent a sharp rise. After the war was over, the best solution would have been to go back to a solid gold standard, but the cat was already out of the bag. The new standards for labor wages were now quite high, and there was no way that people would be willing to see their wages return to the old standard just so that a gold standard could be restored. What to do? Keynes’ solution was to stay off the gold standard and inflate the currency, and tell the masses that the government was jump starting the economy. Prices during inflationary times are always more elastic than wages, and so, given a period of inflation, the cost of labor could be restored to its normal value relative to the costs of production, and the well-to-do (remember, Keynes was a Lord, not some chap from the middle classes) would resume their appropriate class of income.

  58. Petrossa says:

    @Jason
    :) Just call me visionary. Nice link. Never to old to learn.

  59. adolfogiurfa says:

    @Jason Calley: It looks nice….at the end of the day but who wins and who loses? The Magicians?

  60. E.M.Smith says:

    @Petrossa:

    You have completely missed the point…. ALL “value” is by mutual agreement.

    There is not one whit of difference between gold and paper money in that regard. Paper replaced Gold because more folks wanted it than didn’t. ALL money can drop to zero when that shared value evaporates. During a famine, wheat is worth more than gold. By mutual agreement.

    If you can’t get past that, there is little point in batting it back and forth further.

    @Jason:

    Sounds about like what I’d expect. Keynes knew his stuff, IMHO, but the limitations and specific application notes have been lost….

    @Adolfo:

    “The who dies with the most toys wins”…

  61. Jason Calley says:

    @ adolfogiurfa “The Magicians?”

    No, the Magicians don’t lose. That is why they are called “Magicians.” :)

  62. Petrossa says:

    @EM
    One last try for hell of it:

    Value being a consensus, you can have consensus to change it. If X debt floats around, you can agree to consolidate all debt of everyone and remove it from the virtual money pool.

    There is no natural law that says you can’t. Try and get past the concept of real value.

    Reset, start from zero.

  63. p.g.sharrow says:

    Someones’ debt is another s’ assets. Many peoples wealth is tied up as debt instruments. How would you wipe out debt and not wealth as well? A part of the present economic malaise is due to the reduction of private debit as well as a great increase in public debt and regulatory roadblocks to growth. pg

  64. Sera says:

    “However, many of the most learned and wise adhere to the new scheme of expressing themselves by things; which has only this inconvenience attending it, that if a man’s business be very great, and of various kinds, he must be obliged, in proportion, to carry a greater bundle of things upon his back, unless he can afford one or two strong servants to attend him. I have often beheld two of those sages almost sinking under the weight of their packs, like pedlars among us, who, when they met in the street, would lay down their loads, open their sacks, and hold conversation for an hour together; then put up their implements, help each other to resume their burdens, and take their leave.

    But for short conversations, a man may carry implements in his pockets, and under his arms, enough to supply him; and in his house, he cannot be at a loss. Therefore the room where company meet who practise this art, is full of all things, ready at hand, requisite to furnish matter for this kind of artificial converse.

    Another great advantage proposed by this invention was, that it would serve as a universal language, to be understood in all civilised nations, whose goods and utensils are generally of the same kind, or nearly resembling, so that their uses might easily be comprehended. And thus ambassadors would be qualified to treat with foreign princes, or ministers of state, to whose tongues they were utter strangers.”

    From Gulliver’s Travels, Part III

  65. Petrossa says:

    @p.g.sharrow

    You balance the books. He gets his virtual money and you get rid of the virtual debt. If you actually paid it or not is immaterial since the money you would pay is virtual, you don’t have it anyway even if you do. So he has his assets and you are debt free.

    This whole growth economy system is absurd. Growth ends. There are limits. And we have surpassed them longtime ago so now we have virtual growth. As in my jezebel’s bar analogue.

    Virtual growth, using virtual money with a virtual value. So just go the next step, pay virtually.

  66. p.g.sharrow says:

    @Petrossi; many times I have created wealth for others and have been promised payment and then been paid part or not at all. You feel that those that take or consume wealth without compensation to the creators should be forgiven because those that can create wealth can just create more. To just create more money to cover the debts just makes the money less valuable and cheats the wealth creators and savers to the benefit of the wealth consumers.
    Sounds like a communists’ dream come true. pg

  67. adolfogiurfa says:

    @P.G.: cheats the wealth creators …..You just made me remember I am selling the process I discovered to obtain metal nanoparticles. “They” have offered me many things…..but after a FREE “disclosure” (!!). BTW, the cost of obtention of metal nanoparticles, with my method, does not reach US$10.- per kilo (plus metal value).

  68. p.g.sharrow says:

    @Chuckles; great link about m-pesa digital money system. pg

  69. Petrossa says:

    P.G.
    Why is the concept so hard? You still have your virtual wealth. You are not losing out. Just the actual transfer of funds doesn’t happen. Since it doesn’t really happen now also, we are using virtual money, just skip the step of pretending to pay back and balance the books.

    What’s the difference between the central bank printing virtual money with nothing to back it up with and just skip that step altogether and just make the change directly in the computers.

    There is absolutely no way in a thousand hells that the US or Europe ever can really actually repay their debt. If you are loaning money to repay current outstanding debt you’ve passed the point of no return.

    Realize this:

    Europe has put in place a ‘rescue fund’. All Euro member states have to fund this by ratio of their population. At this moment 5 countries out 17 are getting money from that fund whilst at the same time being a guarantee for that fund. So when the debt gets called in, as in for example Greece folds, Greece has to pay the fund the money it loaned. And the other bankrupt nations as well. Isn’t going to happen now is it?

    So then you get the absurd situation that in theory Spain would have to loan at 23% to pay back the money it loaned at 3%.

    And the US is no better with it’s astronomical debt. It’s beyond any real possibility of ever being repaid. Humankind will be extinct by then.

    Virtual money.

  70. George says:

    Well, here we go. This is going to be the end of the French economy for a while. I have no idea who is going to bail them out of this:

    http://www.reuters.com/article/2012/07/04/us-france-budget-idUSBRE86307X20120704

    An extraordinary levy of 2.3 billion euros ($2.90 billion) on wealthy households and 1.1 billion euros in one-off taxes on large banks and energy firms were central parts of an amended 2012 budget presented to parliament.

    The law, which includes tax increases on stock options and dividends and the scrapping of an exemption on overtime, should easily receive approval by a July 31 deadline after the Socialists won a comfortable parliamentary majority at elections last month.

    Hollande says the rich must pay their share as France battles to cut its public deficit from 5.2 percent of GDP last year to an EU limit of 3 percent in 2013 despite a stagnant economy and rising debt.

    Hollande has just committed economic suicide.

  71. Petrossa says:

    You missed the part that says he also levies everyone else to the tune of 37 billion over 2 years. So as a true socialist he makes everyone pay.

  72. George says:

    And there’s nothing like “true socialism” to destroy an economy and create poverty.

  73. Chuckles says:

    pg, Yes, that’s the real world out there.
    Cell/mobile phone infrastructure is a great enabler in places where there is no traditional infrastructure, or where it has been neglected or abandoned.
    As the article shows, that infrastructure can be put to many novel uses.
    India has another interesting example with the networks there, and the ‘missed call ecosystem’.
    Shannon and information theory starts looming large – a missed call from a specific number can convey information. Lots of information. e.g. the movie is finished and your child will be at the collection point in 15 mins. Not bad.

    http://gigaom.com/mobile/indias-missed-call-mobile-ecosystem-2/

    http://mohansawhney.com/2011/07/12/communicating-with-%E2%80%9Cthe-missed-call%E2%80%9D-an-indian-innovation/

  74. p.g.sharrow says:

    @Petrossa says:
    4 July 2012 at 5:37 pm

    I understand the concept very well, as well as the eventual outcome. Over thousands of years of empire and ruin. The manipulation of fiat money always results with the same outcome, economic ruin. Always the argument is that the government creates money and therefor creates wealth. Anyone that makes this claim is foolish or worse. Only farmers, miners and manufactures create wealth. Everyone else tries to take a cut as it moves to the consumer. To pay for that wealth with “money” that has decreasing value is stealing. Trading “virtual” wealth for real wealth is attempting fraud as the “virtual” wealth can always be devalued by the debtors that created It. This is also known as “Acquiring wealth unearned.” Sharp operators from Wall-street do this by using legal methods and criminals use a gun. Politicians use both. pg

  75. Petrossa says:

    You haul 16 tonnes and what do you get….. Btw sharp Wall Street operators don’t do it by legal methods, They just murk the waters so nobody sees what they are doing till it’s too late. The real dark horse is the stock exchange. Get rid of that and you get rid of a lot of misery. Ah, ideals. Almost make me feel young(ish) again

  76. Sorry, but I agree with pg here – in order to generate real wealth you have to make something that is real. There are service jobs that are needed (doctors, dentists, police, shopkeepers etc.) but without that initial generation of stuff to eat or stuff as tools nobody gets anything at all.

  77. adolfogiurfa says:

    “Saint Peter don´t you call me…..I owe my soul to the company store”. The “fiat money” what it makes is to pump real money out from our pockets and give it to the ones who NEVER, really NEVER have worked. (.. And those are not in the Forbes´list).

  78. adolfogiurfa says:

    First step: To indentify them. Some say there are not more than 13 (their bad luck number). :-)

  79. George says:

    Petrossa says:
    4 July 2012 at 9:05 pm

    You haul 16 tonnes and what do you get….. Btw sharp Wall Street operators don’t do it by legal methods, They just murk the waters so nobody sees what they are doing till it’s too late. The real dark horse is the stock exchange. Get rid of that and you get rid of a lot of misery. Ah, ideals. Almost make me feel young(ish) again

    What are you, some sort of communist troll? Without these exchanges there would be no economic prosperity and the entire nation would be thrown into economic misery and left helpless to corrupt politicians. It is those exchanges that allow companies to raise capital to build factories and employ people. It is quite obvious from your postings in this thread that you have no idea how economies actually work and have your head filled with some nonsense pumped into it by people whose desire is to enslave populations to a ruling elite of politicians.

    I would rather say that getting rid of the UN and unelected bureaus, commissions, and departments of the various governments would be a better path to eliminating misery. Allow us to do things on our own. We collectively are better at it then these so-called “experts” who have their own power and wealth in mind.

    You sound like some nonsensical though idealistic teenager who has never owned a business and has no idea how things work in the real world. I will take the free market of a stock exchange over the decisions of some panel of unelected bureaucrats any day.

  80. George says:

    In case you haven’t noticed, I have just about had a belly full of these leftists who destroy economies and then point to that destruction as the failure of the capitalist system. The failure has been in our not keeping those idiots out of office.

  81. p.g.sharrow says:

    Those Idiots have to obtain government financed jobs as they can not create wealth, only consume it. This is why they are terrified of running out of stuff or wealth that they can not replace themselves. More and more of those of us that create excess wealth have decided to take a break, let the bastards starve. When government take exceeds 40% civilization ENDS.
    No amount of wishful thinking and bureaucratic jiggering can change that fact. pg

  82. Petrossa says:

    Dear George, i guess you missed a few of my comments. The gist of my comments is that due to the fact that money gets created out of thin air by individual banks all across the world it has lost its significance.

    It goes like this: Your local bank gives you a loan. Your bank types in the amount in their computer and suddenly your account has X $ more which came out of nowhere since the bank itself doesn’t have that money. Money is created.

    Multiply that by Y times for all the banks all over the world and you have a vast amount of non-existent money added to the pool every second.

    Thus money became virtual. Even the communists weren’t that stupid.

  83. E.M.Smith says:

    @P.G. Sharrow:

    That pretty much sums it up for how things end in an economic collapse at the end of too much “Democracy”. Oddly, same way Socialisms end (communist et. al.) except that the Fascist flavor of Socialism looks to generally end violently in wars as the need to absorb more production from others drives them into an acquisitive streak…

    @Chuckles:

    Hmmm…. Just make the “minutes” transferable and you have a new currency unit that has built in demand and utility… limited creation (size of network) and everyone wants them…

    @Petrossa:

    Not going to play that game. You start from a false premise, so the rest is wasted. Again: ALL value is by common agreement. If you toss out the agreement, you toss out the actual value as well. It is NOT a zero sum. Folks have entered into REAL contracts for future value. You deny them that value. That is a real harm and a real damage. Until you absorb that, the rest is a waste of space.

    @George:

    With France now firmly in the Socialist Steal and Spend group, IMHO, the EU is toast. Just a matter of time until Germany exits (along with a load of other northern countries and a few ex-Eastern Block too).

    One can only hope it happens fast enough for the USA to avoid the same path.

    @Chuckles:

    An INDIAN invention? Now wait a moment…. Back in about 1960 we had “codes” for dodging some long distance charges. “Person to Person Call for Mr. Boston” “Sorry, not here now.” meaning I arrived in Boston just fine…. and “Collect Call from Jimmy” “Sorry, decline to accept charges.” for “Yes, we’re home now, so you can head out to visit us any day now.” (or depending on originator “We are heading out to visit you now”.

    I’d guess, given that my family were using this when I was born; it was likely first invented shortly after the “Long Distance Rate Call” was invented…

    I also vaguely remember some other codes, like “2 rings and a hangup” or “one and done” meaning specific things on some occasions (like “pick me up” or “I got home OK” or “A yes or no on a prior agreed question”.

    I suspect the author of the article is just a wee bit too young…

    @P.G.Sharrow:

    I think there may be a couple of other forms of wealth creator too. But some of them can fit under “manufacture”… so, for example, a home builder. It isn’t what is normally classed as “manufacturer”, but is a kind of making.

    I’m also pretty sure that invention of a new method is creating a kind of wealth. Just like creating a book or novel (the writing part) has value. But there are complete wastes of wealth that look very similar ( like “Climate research” that doesn’t do anything of value). So I’m not sure how to draw a line between the Mann’s of the world and folks like FT and Haber who found new ways to make stuff. Or the folks who invented nuclear reactors. Clearly that process “creates new wealth creation methods”, so has some contribution to wealth creation. I’d also assert that Shakespeare was at least as valuable in creating the original works as Barns & Noble in the actual pressing of the books today… So there needs to be some category of Intellectual Property Manufacture… (But how to sort that out from things like AlGore Movies ;-)

    I’m also a bit unsure about how to classify some services. I can see having the cook at a cafe being called a ‘manufacturer’ of sorts, but the waitress who gets your coffee just right and knows to put double jam with your toast isn’t just a leech… they are making a pleasant experience for you. That has value, and is a kind of transitory wealth. (Like actors at a play performing Shakespeare… the “Manufacture a good”, but just one that evaporates as created…

    Generally, I’ve tried to sort things into physical wealth creation, and other value creation, and then the “rearrangers” and the wealth consumers… But it gets messy too quick…

    At any rate, I think there’s room for more than your short list; but I’m not settled on how to do it ;-)

    @Petrossa:

    Get rid of the stock exchange and you get rid of stock operators; but you also get rid of most of our ability to create wealth via large corporate structures. If stock can not be sold, it ends up as perpetual inheritance and any ‘new guy’ with a new idea gets ignored. (Who would provide start up capital knowing they could never sell out for their profit? How does a divorce settle? Each get 1/2 the stock, but nobody can ever sell it?)

    I think you have some serious limitations in understanding economics and trade…

    @Simon:

    I’d class dentists in with manufacture. They manufacture tiny usable sculptures inside your mouth ;-)

    @Adolfo:

    I say again: “What is money?” Or in this case “What is real money?” Metals? M1, M2, M3, M4? Money is not a simple concept… (Though the Austrian idea helps make it simpler…)

    @All:

    The creation of a currency is to enable the easy exchange of value between people. Money is to exchange value AND let you store value for future use. ALL Value is based on shared belief. Personally, I have no use at all for diamonds. Don’t even think they are very pretty. ( I’m a ruby, sapphire, and emerald kind of guy…) To me, if you gave me a cup of diamonds, I would have no use for them. My only use is as a medium of high density exchange. Their “value” is only in what value others share for them. Substantially the same as fiat money.

    That is the core problem of “money” and value. All money is a “rubber ruler”, just some more so than others. Most metals and stones have some industrial or decorative uses, so have some inherent value. But even they are not perfect stores of value.

    Gold was $300 / ounce not too many years back as central banks were dumping it. Then it shot up to about $2000. Then back down to $1500. Where is the “store of value” in that? Silver is even more volatile and worse. Platinum gets about a 50% swing with industrial production rate generally.

    Sapphires, rubies, and emeralds were precious stones when I was a kid. Then a clever guy figured out how to make them. Next thing you know, I bought a ‘star sapphire’ in the 5 & Dime for something like 25 Cents… (About $2.50 today as that quarter was silver IIRC). So where is the “Store of value” in them?

    Diamonds are now made synthetically that are so good it takes special machinery to tell them from natural. What “Value” is there in that false dichotomy?

    IMHO, the real “store of value” in an economy is the aggregate productive capacity. Shares in the Russel 2000 are more a ‘real store of value’ than anything else. Yet can drop 50% in a single crash.

    ALL value is from shared belief.

    So what is money? ( i.e. a store of value and medium of exchange)? It is whatever we all agree to share as a value.

    Goods with industrial demand have a floor under how low that shared value can drop due to their direct utility. Gems have a floor based on vanity and the desire for self decoration. Gold has similar uses, but most of the “shared value” in it comes from nothing more than the same thing that makes fiat money have value. People want to believe it has value. ( To me, I’d rather have a load of copper. It is more usable. And tin. Brass and bronze are much more usable and interesting materials than gold.)

    For fiat money, we share a contract. I will trade you a unit of value for this highly portable form of value. Repudiating that ‘debt’ is repudiation of that contract. Over time, governments dilute the value as a kind of stealth tax. IMHO, that, too, is a theft and repudiation of contract. Then again, it was those same governments that drove gold down to $300 selling it, and then up to $1600 buying it. (Central banks usually sell gold low and buy high… you’d think they would be smarter…)

    So to my mind, the answer is to go back to commodity based money that is not subject to government creation. Just enforcement of contracts and quality assurance / fraud prosecution.

    Day to day values more more relative to each other; but at least it doesn’t suffer from perpetual shrinkage….

  84. E.M.Smith says:

    @Petrossa:

    Please learn the Diamond Water Paradox:

    https://en.wikipedia.org/wiki/Paradox_of_value

    It is critical to understanding where you have gone off the rails.

    You clearly have no idea how banks “create” money. It is not as you describe. An individual bank can not just “wish up some bits” and put them in your account.

    Yes, it is done with bits and computers. No, it isn’t at the discretion of the bank. (They have to get their bits from The Fed or similar bank). There are strict controls on how the bit shoveling can be done.

    Again, revisit the points about contracts and all value being from shared belief. In the case of computer banking, there are contractual and legal limits on the bit creation that give a shared belief in the limits on creation and distribution of the bits. This allows folks to have shared belief in value.

    Any violation of those terms, breaks the contract and the shared value. So it is simply not possible for the bank to do what you say without collapse of the currency system. Even The Fed can’t just wish up the bits out of nothing. There are certain formalities to be followed that assure the value will not be destroyed by such capricious acts.

    In short, the currency system is SYMBOLIC but not VIRTUAL.

    Even paper money is SYMBOLIC. We depend on certain technological and legal barriers to creation of paper currency. The technology used has to be hard enough to prevent anyone but a few experts from creating the notes, then those creators are strongly policed. Paper money is clearly physical, but the value comes from the agreed value in the symbolic representation of value.

    Bits are just a different kind of symbolic method and the difficulty of creation comes from the programming of the computers, the digital signatures, the encryption and the auditing. It is no more VIRTUAL than paper. The contracts on shared value are just as real too.

    Break that trust. Break that ‘difficulty of creation’. Break that contract, and you break the currency.

    What you propose is nothing more nor less than putting out gold coins made from lead.

    Diamonds are not more expensive than water because their benefit is greater, nor their utility. They are worth more because the difficulty of creation or mining of them and the marginal utility. That’s the same reason all currency has value. Difficulty of creation ( even if from laws and rules instead of from mining costs) and marginal utility ( easy trading is a utility).

    (Hard money only has value because of the same shared value and trust. The “difficulty of creation” comes from the physical difficulty of mining. The same accounting and policing are needed to assure authentic coins are produced and not fraudulent ones. Hard money coins are in many ways just as symbolic as paper money, often having a nominal value different from the metal per ounce value.)

    Destroy the trust in the contract and shared value in any of them, and you destroy the money A counterfeit is a counterfeit in any of the systems of symbolic value. The only real difference is that hard money (when not adulterated) has a floor basic value from the metal content. At times during history, that can be significantly below the face value. (At all times it must not become much more than face, or the coin gets melted down).

  85. adolfogiurfa says:

    @E.M.: Money it is not the problem, FAKED money it is. As far as all we know nothing has happened to the counterfeiters. The last and more recent episode of this not ending tale, that of Barclays Bank and the LIBOR, of “massaging” interest rates, literally means the same: Money counterfeit….and NOTHING happens. This is the problem: All the time some “smart guys” are taking the capital gains out of the pockets of hard working people, the goods´makers. Such an action is inmoral, reprehensible and should be forbidden.
    Cool it down kids!….Can´t see the danger coming?

  86. Petrossa says:

    I propose only that what is being done already via a convoluted circuit directly. Creating money out of nothing, printing paper with the amount on it, spread that round so people can spend it, then saying: hey look we have growth! is a rather roundabout way.

    Whatever contract people once entered into has been rendered wastepaper. The company went bankrupt and all you have is pieces of paper.

    In any normal world where contracts where of any value if a company was in debt to the point that it would be loaning money to pay off debt outstanding the company would cease to be.

    So that’s not a valid argument. People gambled and lost. Their investments went down the drain. However what they propose, well order, us is to pay interest for the risk they take and carry the risk as well. That is what re-capitalizing banks is all about.

    So our governments create some more money out of nothing to re-capitalize banks and increase the virtual money load even more, thus pumping up the balloon. That might make sense to an economist, to me it doesn’t.

    Cut out the middle men, that already takes care of a lot of spurious cost, reset the clock to zero and restart. Tant pis for the investors. Take your loss and learn your lesson. Don’t loan money to someone to pay off their debt.

  87. adolfogiurfa says:

    @Petrossa: THEY will keep on doing it, as it is the only way a not working guy can get the money from a working man, without any effort whatsoever. This is made cyclically, exchanging each time from common peoples´ pockets capital gains into gold or other real assets. Now think: How can this peculiar “habit” can be radically removed from them?.

  88. Petrossa says:

    Looks like i have prognostic capabilities:
    “Some economists expect another cut in the main interest rate to 0.5 percent but after that the ECB must

    (remember who said it first) -> essentially employ its balance sheet to help the euro zone economy.

    That means buying government bonds — an option opposed by Germany’s Bundesbank, the ECB’s biggest stakeholder — or else offering more cheap loans and exposing the bank to risks that many of its policymakers already find worryingly high.”

    http://www.cnbc.com/id/48094098

  89. Petrossa says:

    Cute, very cute. Unfortunately they will grow up to be just like us.

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